What is the antidilution rule in relation to EPS calculations?

The antidilution rule in relation to earnings per share (EPS) calculations ensures that only the conversion of securities that would not decrease EPS is considered when calculating diluted EPS. This rule is rooted in the principle that the financial statements should provide a true and fair view of the company's performance.

In practice, this means that if the conversion of certain securities—such as stock options, convertible bonds, or preferred shares—would result in a lower EPS compared to basic EPS, those securities are excluded from the diluted EPS calculation. The rationale is to prevent the misleading impression that the company's earnings are spread over a larger number of shares when in fact the earnings per share would be negatively impacted, which could confuse investors and users of the financial statements.

Consequently, the antidilution rule is crucial for accurately representing a company's earnings potential and ensuring that investors are not misled by a dilution of EPS that occurs due to instruments that could potentially decrease the value of each share's earnings.