A warrant is essentially an option allowing the holder of the warrant the right to purchase shares of common stock at a predetermined price. Exercising a warrant causes the number of common shares outstanding to increase. This increase usually causes the company's earnings-per-share (EPS) to decrease, so warrants are dilutive securities.

When calculating EPS, warrants are treated as having been exercised at the earlier of the beginning of the accounting period, if the warrants were then outstanding, or the date of issuance. Both IFRS and GAAP require companies to use the treasury stock method for calculating the effect of warrants on EPS. An example of XYZ's use of the treasury stock method is shown below.

A key assumption underlying the treasury stock method is that the average market price of the stock is more than the exercise price, so the proceeds will purchase fewer shares than were issued from the warrants' exercise. The resulting weighted average is then used to calculate diluted EPS. An example of XYZ's use of the treasury stock method is shown below.