As you know, a firm with multiple potentially dilutive securities must individually determine the effect of each security’s incremental per-share contribution and include those securities with the smallest incremental contribution to the point where diluted EPS is less than the next security’s incremental contribution. At that point, the remaining potentially dilutive securities become anti-dilutive because including them would cause diluted EPS to increase.
Another option would be to (1) determine whether a security is potentially dilutive and then (2) include the effects of all potentially dilutive securities. While including those convertible securities that would have a large positive effect on EPS may cause diluted EPS to increase, at least one would not have to worry about a potentially dilutive security suddenly becoming anti-dilutive.
Is there merit to this alternative? What reasons can you think of as to why the FASB does not allow this approach?