What happens to interest expense for convertible securities when determining EPS?

When calculating earnings per share (EPS) for a company that has issued convertible securities, the interest expense associated with those securities is added back to earnings. This adjustment is made because the interest expense would not exist if the convertible securities were converted into equity. By adding this expense back to earnings, the calculation reflects a scenario in which the convertible securities have been converted, thus portraying a more accurate representation of profitability attributable to common shareholders.

This process aligns with the dilution concept in EPS calculations. If the convertible securities are assumed to be converted into shares, the earnings available to common shareholders increase since the fixed cost of interest is no longer applicable to the new equity structure. Therefore, to ensure that the EPS reflects this potential dilution effect accurately, the interest expense related to the convertible securities is added back to the net income before sharing it across the increased number of shares.