1. ACCOUNTING STANDARD - 20
EARNINGS PER SHARE
J.P., KAPUR & UBERAI

2. EARNINGS PER SHARE – A PERFORMANCE INDICATOR
A Measurement Standard
Numerator : ‘Earnings’
Denominator : ‘Shares’
Predominantly Denominator Focused
J.P., KAPUR & UBERAI

3. WHAT IS TO BE MEASURED ? Diluted EPS Concept of Dilution
Basic EPS.
Diluted EPS
Concept of Dilution
Anti-dilutive potential shares
J.P., KAPUR & UBERAI

4. OBJECTIVE OF STANDARD Comparability enhancement
Different enterprises, same period
Different periods, same enterprise
J.P., KAPUR & UBERAI

5. SCOPE AND APPLICATION
Enterprises with Equity Shares / Potential Equity Shares, listed
Other enterprises which disclose EPS
Financial Periods Commencing on/after
In CFS, EPS on the basis of consolidation information
J.P., KAPUR & UBERAI

6. PRESENTATION
Basic and Diluted EPS to be shown on P/L with equal prominence for all periods presented
Basic and Diluted EPS to be shown even for negative amounts.
J.P., KAPUR & UBERAI

7. MEASUREMENT Matters Basic - Per Share
How Addressed
Determine weighted average of equity shares o/s
Adjust for buy-backs/issues
Multiply by time weighting factor (No. of days outstanding as a proportion of total days)
Basic - Per Share
Equity Shares o/s during the period vary
J.P., KAPUR & UBERAI

8. MEASUREMENT Matters How Addressed J.P., KAPUR & UBERAI
Shares generally included when considerations receivable.
For equity issued for Cash… When cash is receivable
On conversion of debt…On date of Conversion
In settlement of liability…Effective date of settlement
For acquisition of assets…When acquisition is recognised
For rendering Services… When services are rendered
For interest/principal on Financial Instruments… When interest ceases to accrue
When to include in weighted average
J.P., KAPUR & UBERAI

9. ILLUSTRATION OF COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES
(Accounting year XI to XI)
Computation of weighted average:
(1800 X 5/12) + ( 2400 X 5/12) + (2100 X 2/12) = 2100 shares
J.P., KAPUR & UBERAI

10. MEASUREMENT How Addressed Matters Shares issued in Amalgamation
In the nature of purchase
Iin the nature of a merger
Partly paid Equity Share
Included in weighted average:
As on date of acquisition
From the beginning of the reported period
Treated as a fraction of the Equity Share
J.P., KAPUR & UBERAI

11. MEASUREMENT Matters How Addressed J.P., KAPUR & UBERAI
Equity Shares - Different nominal value
- Same dividend rights
Contingently issuable shares
Bonus issues etc. (where resources are not changed)
Bonus element in right issue
Conversion of equivalent number of shares of same nominal value
Included in Basic EPS when all contractual conditions fulfilled
Adjust weighted average to earliest period reported, as if the event had occurred at the beginning of the earliest reported period.
Illustration
J.P., KAPUR & UBERAI

12. RIGHTS ISSUE (Accounting year 01-01-20X1 to 31-12-20X1)
Net profit Year 20 x 0 : Rs. 11,00,000
Year 20 x 1 : Rs. 15,00,000
No. of shares outstanding prior to rights issue: 5,00,000
Rights issue One new share for each five outstanding (i.e. 1,00,000 new shares) Rights issue price: Rs
Last date to exercise rights : 1st March 20 X 1
Fair value of one equity share immediately prior to exercise of rights on 1st March 20 X 1 : Rs
Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediately prior to exercise of rights + total amount received from exercise
Number of shares outstanding prior to exercise + number of shares issued in the exercise.
= (Rs x 5,00,000 shares) + (Rs x 1,00,000 shares)
5,00,000 shares + 1,00,000 shares
Theoretical ex-rights fair value per share = Rs
J.P., KAPUR & UBERAI

13. RIGHTS ISSUE (CONTD.) J.P., KAPUR & UBERAI
Computation of adjustment factor
= Fair value per share prior to exercise of rights = Rs = 1.05
Theoretical ex-rights value per share Rs
Computation of earnings per share
Year 20 X Year 20 x 1
EPS for the year 20 x 0 as originally reported : Rs. 2.20
[Rs. 11,00,000 / 5,00,000 shares]
EPS for the year 20 x 0 restated for rights Rs. 2.10
[Issue : Rs. 11,00,000 / (5,00,000 shares x 1.05)]
EPS for the year 20 x 1 including effects of rights issue Rs. 2.55
Rs. 15,00,000
(5,00,000 x 1.05 x 2/12) + (6,00,000 x 10/12)
J.P., KAPUR & UBERAI

14. MEASUREMENT Matters How Addressed J.P., KAPUR & UBERAI
Deduct from earnings (Add to loss)
Non cumulative P. Shares dividend provided
Cumulative P. Shares … full dividend for the current period
Adjusted Earnings
Earnings – Basic
Preference Dividends
Earnings – Diluted
Effect of dilution
J.P., KAPUR & UBERAI

15. COMPUTATION OF DILUTED EARNINGS (Accounting year 01-01-20XX to 31-12-20XX)
Net profit for the current year Rs. 1,00,00,000
No. of equity shares outstanding 50,00,000
Basic earnings per share Rs. 2.00
No. of 12% convertible debentures of Rs. 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expense for the current year Rs. 12,00,000
Tax relating to interest expense (30%) Rs. 3,60,000
Adjusted net profit for the current year (Rs. 1,00,00, ,00,000 – 3,60,000) = Rs ,08,40,000
No. of equity shares resulting from conversion 10,00,000
of debentures
No. of equity shares used to compute 50,00, ,00,000 = 60,00,000
diluted earnings per share
Diluted earnings per share 1,08,40,000 / 60,00,000 = Re. 1.81
J.P., KAPUR & UBERAI

16. MEASUREMENT Matters How Addressed J.P., KAPUR & UBERAI
Diluted – Per Share
What shares to be included?
Convert at what rate?
What about contingently issued potential shares?
Wt. Average Equity Shares as per basic, plus
Conversion of all dilutive potential equity shares
most advantageous rate/exercise price to the holder
if contract fulfilled, already under basic
if contract not fulfilled then dilutive.
J.P., KAPUR & UBERAI

17. MEASUREMENT How Addressed Matters Fair value vs Option Value
Determination of Fair Value
Shares issued for no consideration
Simple average, last 6 months weekly closing prices, generally
J.P., KAPUR & UBERAI

18. MEASUREMENT Matters How Addressed Potential Equity Shares
Anti- Dilutive When?
Process of Determination of Dilutive / Anti-Dilutive
If conversion increases earnings / decreases loss
Consider each series separately
Sequence such consideration in descending order of dilution
J.P., KAPUR & UBERAI

19. DISCLOSURE Numerator reconciliation to P/L
Basic – diluted – Wt. Average
Denominator reconciliation
Nominal Value of Shares along with EPS figures
For any other component of net profit reporting
Denominator must be the same
Numerator must be / reconciled to line item (P/L)
Basic and Diluted EPS must be disclosed with equal prominence
J.P., KAPUR & UBERAI