Dilutive describes a contract, a transaction or a financing that shrinks what an existing share represents, either a per-share result such as earnings per share or an existing holder’s proportionate ownership. In financial reporting the adjective has a fixed definition: dilution is a reduction in earnings per share resulting from the assumption that convertible securities were converted, that options or warrants were exercised, or that other shares were issued upon the satisfaction of certain conditions, and antidilution is an increase in earnings per share amounts or a decrease in loss per share amounts (FASB Statement No. 128, Appendix E). The codified home of that guidance is ASC Subtopic 260-10, Earnings Per Share, and FASB has amended it since 1997 (FASB Accounting Standards Update 2020-06). The word carries two looser senses off the income statement, one for deals and one for funding rounds.
Which Contracts Are Dilutive Under the Standard
The test runs on potential common stock, a security or other contract that may entitle its holder to obtain common stock during the reporting period or after the end of it (FASB Statement No. 128, Appendix E), and the standard’s own examples of those securities are options, warrants, convertible securities and contingent stock agreements (FASB Statement No. 128, paragraph 6).
A contract qualifies only where assuming it happened would lower the per-share result, and the standard reaches that verdict one contract at a time. Each issue or series of issues of potential common shares is considered separately rather than in the aggregate (FASB Statement No. 128, paragraph 13).
So the adjective works as a sorting rule, deciding which contracts enter the diluted computation and which get named in the disclosure as kept out, and a contract that fails the test still has to be tracked rather than dropped. For each period for which an income statement is presented an entity discloses the securities, including those issuable under contingent stock agreements, that could potentially dilute basic earnings per share in future but were not included in the computation of diluted earnings per share because doing so would have been antidilutive (FASB Statement No. 128, paragraph 40).
Everything downstream of that verdict is worked through elsewhere: the ranking that applies when several issues are outstanding, the loss rule that shuts all of them out, the control number that fixes one answer for every reported per-share line, and the methods that convert a qualifying contract into added shares, all in diluted earnings per share. The same test read from the other side is in opposite of dilutive.
Accretive or Dilutive in a Deal
In transaction work the word is a forecast rather than a measurement. A deal is dilutive where the acquirer’s earnings per share would come out lower after it and accretive where they would come out higher, and what an SEC filing has to put on the face of its pro forma statement for that comparison is in accretion.
Dilutive and Non-Dilutive Funding
In a funding conversation the word is about ownership rather than earnings. Dilutive capital is raised by issuing new equity, so each existing holder’s proportionate stake, which is what equity ownership measures, becomes a smaller share of a larger whole. Non-dilutive capital leaves that percentage alone, and the federal Small Business Innovation Research and Small Business Technology Transfer programs are the plainest official example, awarding what they call non-dilutive funding and equity free funding (America’s Seed Fund, About SBIR and STTR).
A registered offering narrows the word again. Where common equity securities are being registered by a registrant that has had losses in each of its last three fiscal years and there is a material dilution of the purchasers’ equity interest, the filing discloses the net tangible book value per share before and after the distribution, the increase in that figure attributable to the cash payments made by purchasers of the shares being offered, and the amount of the immediate dilution from the public offering price which will be absorbed by those purchasers (eCFR, section 229.506, Item 506, Dilution). That is dilution measured against book value for the incoming buyer, not a statement about any existing holder’s percentage.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own recurring close and workpaper preparation through a trial task before committing a client file.
