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

ACCOUNTING STANDARD - 20

EARNINGS PER SHARE

J.P., KAPUR & UBERAI

EARNINGS PER SHARE – A EARNINGS PER SHARE – A PERFORMANCE INDICATORPERFORMANCE INDICATOR

A Measurement Standard

Numerator : ‘Earnings’

Denominator : ‘Shares’

Predominantly Denominator Focused


WHAT IS TO BE MEASURED ?WHAT IS TO BE MEASURED ?

Basic EPS.

o Diluted EPS

Concept of Dilution

Anti-dilutive potential shares


OBJECTIVE OF STANDARDOBJECTIVE OF STANDARD

o Comparability enhancement

Different enterprises, same period

Different periods, same enterprise


SCOPE AND APPLICATIONSCOPE AND APPLICATION o Enterprises with Equity Shares / Potential Equity

Shares, listed

o Other enterprises which disclose EPS

o Financial Periods Commencing on/after 01.04.2001

o In CFS, EPS on the basis of consolidation information


PRESENTATIONPRESENTATION

o Basic and Diluted EPS to be shown on P/L with equal prominence for all periods presented

o Basic and Diluted EPS to be shown even for negative amounts.


MEASUREMENTMEASUREMENT


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)




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

ILLUSTRATION OF COMPUTATION OF ILLUSTRATION OF COMPUTATION OF WEIGHTED AVERAGEWEIGHTED AVERAGENUMBER OF SHARESNUMBER OF SHARES


(Accounting year 01-01-20XI to 31-12-20XI)

Date Particulars Increase Decrease Balance1.1.20X1 Opening bal. 18001.6.20X1 Conversion of Debt 600 24001.11.20X1 Buy back of shares 300 2100Computation of weighted average:

(1800 X 5/12) + ( 2400 X 5/12) + (2100 X 2/12) = 2100 shares




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




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

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 : 1st March 20 X 1 Fair value of one equity share immediately prior to exercise of rights on 1st 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. 20.00


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 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)





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

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 compute 50,00,000 + 10,00,000 = 60,00,000 diluted earnings per share Diluted earnings per share 1,08,40,000 / 60,00,000 = Re. 1.81




Matters How AddressedDiluted – 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.




oFair value vs Option Value

oDetermination of Fair Value

o Shares issued for no consideration

o Simple average, last 6 months weekly closing prices, generally



Matters How AddressedPotential 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

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


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

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