A potential is a financial instrument or other contract that may entitle its holder to ordinary interest in the reporting period or subsequent periods.
Potential common shares mainly include: convertible corporate bonds, and stock options.
There are two characteristics of potential common stock: first, potential common stock is not common stock, but may be converted into common stock in the future (it is for this reason that it is called potential common stock);
Second, whether the potential common stock can be converted into common stock in the future is uncertain.
Because the underlying common stock is an option for the holder, the holder may or may not convert in the future, depending on whether the conversion is beneficial to the holder.
If it is advantageous, the holder switches; if it is not advantageous, the holder does not switch.
Potential common stock, if converted into common stock, will have an impact on earnings per share.
In THE GUIDELINES, THE underlying COMMON STOCK that would result in a reduction in earnings per share through CONVERSION is called diluTIVE underlying COMMON stock.
The concept of diluted underlying common stock was followed by the concept of diluted earnings per share.
Diluted earnings per share (EPS) is the earnings per share calculated after taking into account the dilution effect of dilutive potential common shares on EPS.