In accounting the opposite of dilutive has two names, and which one applies depends on whether you are forecasting a transaction or reporting a period that has closed. Accretive is the transaction sense: a deal or a financing is accretive when the acquirer’s earnings per share come out higher after it and dilutive when they come out lower. Antidilutive is the reporting sense, defined as an increase in earnings per share amounts or a decrease in loss per share amounts (FASB Statement No. 128, Appendix E).
Used outside accounting the word only means watered down, and its everyday antonyms, concentrated and undiluted, do no work in a set of financial statements.
Accretive: A Forecast About a Deal
Accretive describes the expected direction of a per share result, not a recorded balance. It sets the acquirer’s reported earnings per share against the same figure recomputed for the combined business, so it rests on the purchase price, the funding mix and the target’s contribution, all of which stay assumptions until the deal closes.
It is practice vocabulary rather than standard-setter vocabulary, and it appears nowhere in FASB Statement No. 128, the earnings per share standard, which defines dilution and antidilution instead.
The comparison itself takes a disciplined form in one place, the pro forma per share presentation an SEC filing requires.
Antidilutive: An Exclusion Test on a Closed Period
Antidilutive is a verdict a preparer reaches about a security once the period’s numbers are in. It applies to 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), which the standard’s scope spells out as securities such as options, warrants, convertible securities or contingent stock agreements (FASB Statement No. 128, paragraph 6).
The computation of diluted earnings per share keeps out any of those whose assumed conversion, exercise or contingent issuance would have an antidilutive effect on earnings per share (FASB Statement No. 128, paragraph 13).
The same paragraph settles what happens when such a security actually converts: the shares issued are included as outstanding common shares from the date of conversion, exercise or satisfaction of the conditions (FASB Statement No. 128, paragraph 13). Being antidilutive keeps a security out of the assumed count; it never keeps the real shares out once they exist.
The sequencing rule for several issues at once, the loss rule and the two computation methods are in diluted earnings per share.
Three Words That Get Swapped
Accretive, antidilutive and accretion get swapped for one another because they sound alike, not because they do the same job.
Accretive is a forward-looking forecast about a transaction, and the figure it moves has not been reported yet.
Antidilutive is a backward-looking test on a period that has closed, and its only consequence is whether a security enters the diluted denominator.
Accretion is neither, because it is the increase in a carrying amount that comes from the passage of time on a discounted balance rather than a forecast or an exclusion test, and accretion works it through.
Where accretion does reach a per share figure it reaches the numerator rather than the share count. For redeemable preferred stock, dividends on the preferred stock and accretions of their carrying amounts cause income or loss available to common stockholders, the earnings per share numerator, to be less than reported income (FASB Statement No. 128, Appendix F, SAB 64, Topic 3C).
Where a Preparer Meets the Word
Antidilutive arrives as a schedule rather than as an adjective. For each period an income statement covers, an entity discloses the securities that could dilute basic earnings per share in future but were left out of the diluted computation because including them would have been antidilutive for the periods presented (FASB Statement No. 128, paragraph 40(c)). That subsection frames the exclusion by period, so a security kept out last year is not permanently excluded and the test gets run again on this period’s numbers.
Accretive lands in the transaction file instead, beside the pro forma per share comparison, and it produces no journal entry.
Common Questions
In the reporting sense, 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 (FASB Statement No. 128, Appendix E). In the transaction sense it is the forecast that a deal would lower the acquirer’s earnings per share.
In plain English, concentrated or undiluted. Where an income statement reports both figures, the pair is basic and diluted earnings per share, so the one that is not diluted is basic earnings per share, computed without assuming any conversion or exercise.
Not every income statement carries both. An entity with a simple capital structure, meaning only common stock outstanding, presents basic per-share amounts alone (FASB Statement No. 128, paragraph 36).
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