As 20

Accounting Standard-20

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

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

3. WHAT IS TO BE MEASURED ?WHAT IS TO BE MEASURED ?

Basic EPS.
oDiluted EPS
 Concept of Dilution
Anti-dilutive potential shares
J.P., KAPUR & UBERAI

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

5. SCOPE AND APPLICATIONSCOPE AND APPLICATION

oEnterprises with Equity Shares / Potential Equity
Shares, listed
oOther enterprises which disclose EPS
oFinancial Periods Commencing on/after
01.04.2001
oIn CFS, EPS on the basis of consolidation
information
J.P., KAPUR & UBERAI

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

7. MEASUREMENTMEASUREMENT
J.P., KAPUR & UBERAI
Matters How Addressed
Basic - Per Share
o Equity Shares o/s during
the period vary
o 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)

8. MEASUREMENTMEASUREMENT
J.P., KAPUR & UBERAI
Matters
How Addressed
o When to include
in weighted
average
o 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

9. ILLUSTRATION OF COMPUTATION OF ILLUSTRATION OF COMPUTATION OF
WEIGHTED AVERAGEWEIGHTED AVERAGE
NUMBER OF SHARESNUMBER OF SHARES
J.P., KAPUR & UBERAI
(Accounting year 01-01-20XI to 31-12-20XI)
Date Particulars IncreaseDecreaseBalance
1.1.20X1Opening bal. 1800
1.6.20X1Conversion of Debt 600 2400
1.11.20X1Buy back of shares 300 2100
Computation of weighted average:
(1800 X 5/12) + ( 2400 X 5/12) + (2100 X 2/12) = 2100 shares

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

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

12. RIGHTS ISSUERIGHTS ISSUE
(Accounting year 01-01-20X1 to 31-12-20X1)(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. 15.00
 Last date to exercise rights : 1
st
March 20 X 1
Fair value of one equity share immediately prior to exercise of rights on 1
st
March 20 X 1 :
Rs. 21.00
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. 21.00 x 5,00,000 shares) + (Rs. 15.00 x 1,00,000 shares)
 5,00,000 shares + 1,00,000 shares
Theoretical ex-rights fair value per share = Rs. 20.00J.P., KAPUR & UBERAI

13. RIGHTS ISSUE (CONTD.)RIGHTS ISSUE (CONTD.)
Computation of adjustment factor
= Fair value per share prior to exercise of rights= Rs. 21.00 = 1.05
Theoretical ex-rights value per share Rs. 20.00
Computation of earnings per share
Year 20 X 0 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 rightsRs. 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 issueRs. 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. MEASUREMENTMEASUREMENT
J.P., KAPUR & UBERAI
Matters How Addressed
Earnings – Basic
o Preference
Dividends
Earnings – Diluted
o Effect of dilution
®Deduct from earnings (Add to loss)
®Non cumulative P. Shares dividend
provided
®Cumulative P. Shares … full
dividend for the current period
o Adjusted Earnings

15. COMPUTATION OF DILUTED EARNINGSCOMPUTATION OF DILUTED EARNINGS
(Accounting year 01-01-20XX to 31-12-20XX)(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. 1,00,00,000 + 12,00,000 – 3,60,000) = Rs.
1,08,40,000
No. of equity shares resulting from conversion 10,00,000
of debentures
No. of equity shares used to compute50,00,000 + 10,00,000 = 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. MEASUREMENTMEASUREMENT
J.P., KAPUR & UBERAI
Matters How Addressed
Diluted – Per
Share
o What shares to
be included?
o Convert at what
rate?
o What about
contingently
issued potential
shares?
o Wt. Average Equity Shares as per
basic, plus
o Conversion of all dilutive potential
equity shares
o most advantageous rate/exercise price
to the holder
o if contract fulfilled, already under basic
oif contract not fulfilled then dilutive.

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

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

19. DISCLOSUREDISCLOSURE
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