PSAK 56

Earnings Per Share

Scope of PSAK 56 – Earnings Per Share
This standard shall apply to:
a. The separate or individual financial statements of an entity:
i. whose ordinary shares or potential ordinary shares are traded in a public market
(a domestic or foreign exhange or an over-the-counter market, including local and
regional markets) or
ii. that files, or is in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing ordinary
shares in a public market; and

b. The consolidated financial statements of a group with a parent:

i. Whose ordinary shares or potential ordinary shares are traded in a public market
(a domestic or foreign stock exchanage or an over-the-counter market, including
local and regional markets) or
ii. That files, or is in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing ordinary
shares in a public market.
Basic Earnings Per Share (EPS)
Basic EPS should be calculated by dividing the profit or loss for the period
attributable to the parent entity’s ordinary equity holders by the weighted
average number of ordinary shares outstanding during the period.

Computation of Earnings
For the purpose of calculating basic EPS, the profit or loss from continuing
operations and the profit or loss for the period attributable to the parent entity’s
ordinary equity holders are the profit or loss after tax and non-controlling
interest and after adjusting for the tax effects of preference shares classified as
equity under PSAK 50.
Basic Earnings Per Share (EPS) – cont’d.
Preference Shares
Where preference shares carry the right to a fixed dividend, then, those
dividends can either be cumulative or non-cumulative. If the preference
dividends are cumulative, the dividend for the period should be taken into
account, whether or not it has been declared. Thus, in a year in which a
company is unable to pay or declare a cumulative preference dividend,
because of insufficient distributable profits, the undeclared amount of the
cumulative preference dividend (net of tax, if applicable) should still be
deducted in arriving at earnings for the purposes of EPS calculation. In the year
in which these arrears of preference dividends are paid, they should be ignored
in the EPS calculation for the year.
If the preference dividends are non-cumulative, only the amount of
dividends declared in respect of the year should be deducted in arriving at the
profit attributable to ordinary shareholders.
Basic Earnings Per Share (EPS) – cont’d.
Example – Treatment of Preference Shares in the EPS Calculation
An entity has the following preference shares in issue at the end of 2014:

 5% Redeemable, non-cumulative preference shares, IDR 100,000

these shares are classified under PSAK 50. During
the year, a dividend was paid on.
 Increasing rate, cumulative, non-redeemable IDR 200,000
preference shares issued at a discount in 2010 with
a cumulative dividend rate from 2015 of 10%. The
shares were issued at a discount to compensate the
holders, as dividend payments will not commence
until 2015. The accrual for the discount in the
current year, calculated using the effective interest
method amounted to, say, IDR 18,000. These
shares are classified as equity under PSAK 50.
Basic Earnings Per Share (EPS) – cont’d.
Example – Treatment of Preference Shares in the EPS Calculation -
cont’d.

 8% Non-redeemable, non-cumulative preference shares. At IDR 50,000

the beginning of the year, the entity had IDR 100,000 8%
preference shares outstanding, but at June 30, 2014, it
repurchased IDR 50,000 of these at a discount of IDR 1,000.
 7% Cumulative, convertible preference shares (converted in IDR Nil
the year). These shares were classified as equity, until their
conversion into ordinary shares at the beginning of the year.
No dividend was accrued in respect of the year, although the
previous year’s dividend was paid immediately prior to
conversion. To induce conversion, the terms of conversion of
the 7% convertible preference shares were also amended
and the revised terms entitled the preference shareholders to
an additional 100 ordinary shares on conversion with a fair
value of IDR 300.
Basic Earnings Per Share (EPS) – cont’d.
Example – Treatment of Preference Shares in the EPS Calculation -
cont’d.
The profit attributtable to ordinary equity holders for the year 2014 is IDR
150,000. Adjustments for the purpose of calculating EPS are made as follows:

IDR IDR
Profit for the year attributtable to the
ordinary equity holders. 150,000
Amortization of discount on issue or
increasing rate preference shares
Discount on repurchase of 8% (18,000) (a)
preference shares 1,000 (b)
(17,000)
Profit attributable to ordinary equity
holders for basic EPS 133,000
Basic Earnings Per Share (EPS) – cont’d.
Notes:
a. The original discount on issue of the increasing rate preference shares has been
amortized to retained earnings, so must be treated as preference dividends for EPS
purposes and adjusted against profit attributable to the ordinary equity holders (PSAK
56 paragraph 15). There is no adjustment in respect of dividends as these do not
commence until 2015. Instead, the finance cost is represented by amortization of the
discount in the dividend-free period. In future years, the accrual fro the dividend of
IDR 20,000 will be deducted from profits (PSAK 56 paragraph 14 (b)).
b. The discount on repurchase of the 8% preference shares has been credited to equity.
So, it must be added to profit (PSAK 56 paragraph 18).
c. The dividend on the 5% preference shares has been charged to the profit or loss
statement as the preference shares are treated as liabilities, so no adjustment is
necessary to profit.
d. No accrual for the dividend on the 8% preference shares is required as they are non-
cumulative. Had a dividend been declared for the year it would have been deducted
from profit for the purpose of calculating basic EPS as the shares are treated as
equity and the dividend would have been charged to equity in the financial statements
(PSAK 56 paragraph 14 (a)).
Basic Earnings Per Share (EPS) – cont’d.
Notes – cont’d:
e. As the 7% preference shares were converted at the beginning of the year, there is no
adjustment in respect of the 7% preference shares as no dividend is accrued in
respect of the year. The payment of the previous year’s cumulative dividend is
ignored for EPS purposes as it will have been adjusted for in the prior year (PSAK
56 paragraph 14(b)). Similarly, the excess of the fair value of additional ordinary
shares issued on conversion of the convertible preference shares over fair value of
the ordinary shares to which they would have been entitled under the original
conversion terms would already have been deducted from profit attributable to the
ordinary shareholders and no further adjustment is required.
Computation of Number of Ordinary Shares
 The denominator of the basic EPS is calculated using the weighted average
number of those ordinary shares that are outstanding during the period
under review (PSAK 56 paragraph 19).
 Where there have been no changes in the capital structure during the year,
the relevant denominator is the number of ordinary shares outstanding at
year end.
Shares Treasury Shares
issued Shares Outstanding
1 Jan 2011 Balance at beginning of year 2,400 - 2,400

31 May 2011 Issue of new shares for cash 800 - 3,200

1 Dec. 2011 Purchase of new shares for cash - (200) 3,000

31 Dec. 2011 Balance at end of year 3,200 (200) 3,000

Computation of Number of Ordinary Shares – cont’d.
Computation of weighted average:
(2,400 x 5/12) + (3,200 x 6/12) + (3,000 x 1/12) = 2,850 shares
Or
(2,400 x 12/12) + (800 x 7/12) – (200 x 1/12) = 2,850 shares

The general rule that shares should be included in the basic EPS calculation
from the date consideration is receivable does not apply to shares that are
issued in partly paid form. Partly paid shares are treated as fractions of shares
(payments received to date as a proportion of the total subscription price) and
included in the averaging calculation only to the extend that they participate in
dividends for the period (PSAK 56 paragraph A15). Partly paid shares that do
not participate in dividends are excluded from the basic EPS calculation, but
included in the calculation of diluted EPS.
Computation of Number of Ordinary Shares – cont’d.
Example:
A company issues 100,000 ordinary shares of IDR 1 each for a consideration of
IDR 2.50 per share. Calls amounting to IDR 1.75 per share were received by
the balance sheet date. The partly paid shares are entitled to participate in
dividends for the period in proportion to the amount paid. The number of
ordinary share equivalents that would be included in the basic EPS calculation
on a weighted basis is as follows:
100,000 x IDR 1.75 = 70,000 shares
IDR 2.50
Purchase and Holding of Own Shares and Employee
Stock Option Plan (ESOP)
 Where a company has purchased its own ordinary shares during the year,
there will be lesser number outstanding after the repurchase. Such
repurchases should be reflected in the weighted average number of shares
outstanding during the period from the date shares are repurchased. Any
premium payable on the purchase of a company’s own ordinary shares will
be charged against reserves and will not affect earnings for the year if the
shares are acquired for their market price. No adjustments should made to
the prior year’s EPS.

 A company may sometimes hold its own shares in treasury. Shares held
uncancelled in treasury are accounted for as a deduction from shareholders’
funds (PSAK 50 paragraph 33; PSAK 56 paragraph 20). Another not
uncommon group situation is where a subsidiary continues to hold the
shares in the parent that were acquired before it became a group member.
Since shares are no longer available in the market, they are excluded from
Purchase and Holding of Own Shares and Employee
Stock Option Plan (ESOP) – cont’d.
the weighted average number of ordinary shares for the purpose of
calculating EPS.

 Another common situation where a company holds its own shares arises
where it operates an ESOP for the benefit of its employees. For the
purpose of calculating EPS, these outstanding shares should also be
excluded from the calculation to the extent that they have not vested
unconditionally in the employees.
Contingently Issuable Shares
Contingently issuable shares are ordinary shares that are issuable for little or
no cash or other consideration if and when specified conditions in a contingent
share agreement have been met (PSAK 56 paragraph 5).
A typical example is contingent consideration on an acquisition payable in
shares.
 Contingently issuable shares are considered to be outstanding and included
in the calculation of basic EPS from the date when all the necessary
conditions have been satisfied, that is, the events have occurred.
 Shares that are issuable solely after the passage of time are not
contingently issuable shares, because the passage of time is a certainty
and should, therefore be included in the calculation from the inception of hte
contract.
 Outstanding ordinary shares that are contingently returnable (that is, subject
to recall) are not treated as outstanding, that is they are excluded from the
calculation of basic EPS until the date when the shares are no longer
subject to recall (PSAK 56 paragraph 24).
Shares Issued as Consideration in a Business
Combination
Where ordinary shares are issued during the financial year as part of the cost
of business combination (for example, in exchange for a majority interest in the
equity of another company) – that is, as non-cash consideration, the results of
the new subsidiary are included in the consolidation from the acquisition date.

Mandatorily Convertible Instruments

Ordinary shares that are issuable on conversion of a mandatorily convertible
instrument should be included in basic EPS from the date that the contract is
entered into (PSAK 56 paragraph 23).
On the other hand, debt that is convertible at the option of the holder contains
an obligation to issue a fixed number of shares if the conversion option is
exercised. Such shares are included on the calculation of Diluted EPS.
Mandatorily Convertible Instruments – cont’d.
Example – Mandatorily Convertible Instruments
A company has issued debt that is mandatorily convertible into a fixed number
of shares in five years’ time. Neither the issuer nor the holder has any option to
require settlement in cash. Interest is payable (in cash) until conversion. How
does it affect the EPS?

Answer:
For the purpose of EPS, the potential ordinary shares that would be issued on
conversion are included in the weighted average number of ordinary shares
used in the calculation of basic EPS (and, therefore also diluted EPS) from the
date of issue of the instrument, since their issue is solely dependent on the
passage of time. There is no adjustment to the profit or loss attributable to the
ordinary equity holders for consequential interest savings, because the shares
are treated as if they had already been issued. The interest relates to a
separate liability for the interest payments that remain payable.
Mandatorily Convertible Instruments – cont’d.
An entity may have preference shares that are mandatorily convertible when
the entity’s ordinary share price increases to a specified level. As the
conversion is contingent on this uncertain event occuring, the issuable shares
are treated in the same ways as an option that is convertible at the option of the
issuer or holder. Hence, they are treated as outstanding and are included in
the calculation of basic EPS only from the date when all the necessary
conditions are satisfied (that is, when the ordinary shares have reached the
specified share price (PSAK 56 paragraph 24).
Bonus Issue (Stock Dividends), Share Split and Share
Consolidation
 The weighted average number of ordinary shares outstanding during the
period and for all periods presented should be adjusted for events, other
than the conversion of potential ordinary shares, that have changed the
number of ordinary shares outstanding, without a corresponding change in
resources (PSAK 56 paragraph 26).
 Where an entity issues new shares by way of a bonus issue or stock
dividend during the period, the effect is to increase only the number of
shares outstadning after the issue. There is no effect on earnings as there is
no flow of funds as a result of the issue. Consequently, the shares should
be treated as outstanding as if the issue had occurred at the beginning of
the earliest period reported. This means that the earnings for the year
should be apportioned over the number of shares after the
capitalization. The EPS figure disclosed for the previous year should be
recalculated using the new number of shares in issue (PSAK 56 paragraph
28).
Bonus Issue (Stock Dividends), Share Split and Share
Consolidation – cont’d.
Example: The impact on the EPS figure of a bonus issue of shares is illustrated below
On December 31, 2017, the issued share capital of a company consisted of C1,000,000 in ordinary
shares of 25c each and C500,000 in 10% cumulative preference shares of C1 each. On October 1,
2018, the company issued 1,000,000 ordinary shares fully paid by way of capitalization of reserves in
the proportion of 1:4 for the year ended December 31, 2018.

Calculation of Earnings 2018 2017

(C’000) (C’000)
Profit for the year 550 450
Less: preference dividend (50) (50)
Earnings 500 400
Number of Ordinary Shares No (000) No (000)
Shares in issue for full year 4,000 4,000
Capitalization issue at October 1, 2018 1,000 1,000
Number of Shares 5,000 5,000
Earnings per ordinary share of 25c 10.0c 8.0c
Bonus Issue (Stock Dividends), Share Split and Share
Consolidation – cont’d.
Example: The impact on the EPS figure of a bonus issue of shares is illustrated below –
cont’d.
The comparative earnings per share for 2017 can also be calculated by adjusting the previously
disclosed EPS in 2017, in this example 10C, by the following factor:

Number of shares before the bonus issue

Number of shares after the bonus issue

Adjusted EPS for 20x7: 10c x 4,000 = 8.0c

5,000
Rights Issue
Where ordinary shares are issued during the year by way of a rights issue at a
discount to the market price, the weighting calculation must reflect the fact that
the discount is effectively a stock dividend given to the shareholders in the form
of shares for no consideration and must, therefore, be taken into account in
calculating the weighted average number of shares (PSAK 56 paragraph A2).
The notional capitalization issue reflects the bonus element inherent in the
rights issue and is measured by the following fraction:
Fair value per share immediately before the exercise of rights
Theoretical ex-rights fair value per share
The fair value per share immediately before the exercise of rights is the actual
closing price at which the shares are quoted on the last date inclusive of the
right to subscribe for the new shares.
The “ex-rights price” is the theoretical price at which, in a perfrect market and
without any external influences, the shares would trade after the exercise of the
rights.
Rights Issue – cont’d.
Example:
At December 31, 20x7, the issued capital of a company consisted of 1.8m ordinary shares of 10c
each, fully paid. The profit for the year ended December 31, 20x7 and 20x8 amounted to C630,000
and C875,000, respectively. On March 31, 20x8, the company made a rights issue on a 1 for 4 basis
at 30c. The market price of the shares immediately before the rights issue was 60c.

Calculation of theoretical ex rights price

No. C
Initial Holding 4 Market value 240
Rights taken up 1 Cost 30
New holding 5 Theoretical price 270
Theoretical ex rights price 270 54c

The market price is the fair value of the shares immediately prior to the exercise of rights, that is,
the actual cum-rights price of 60c.

Cost is the amount payable for each new share under the rights issue.
Rights Issue – cont’d.
Calculation of Bonus Element
The bonus element of the rights issue is given by the fraction:

Market price before rights 60 = 10

issue
Theoretical ex-rights price 54 9
Diluted Earnings Per Share
Potential Ordinary Share is defined as a financial instrument or other contract
that may entitle its holder to ordinary shares (PSAK 56 paragraph 5). Examples
are as follows:
 Financial liabilities or equity instruments, including preference shares, that
are convertible into ordinary shares.
 Options (including employee share options) and warrants.
 Shares that would be issued on satisfaction of certain conditions that result
from contractual arrangements, such as the purchase of a business or other
assets (PSAK 56 paragraph 7).
The effect of the conversion into ordinary shares may be to dilute the future
EPS. It should be noted that not all potential ordinary shares in issue will have
a diluting effect. Potential ordinary shares should be treated as dilutive when,
and only when, their conversion of ordinary shares would decrease profit or
increase loss per share from continuing operations attributable to ordinary
equity holders (PSAK 56 paragraphs 41 and 43).
Diluted Earnings Per Share – cont’d.
For the purpose of calculating diluted EPS, the profit or loss for the period
attributable to ordinary equity holders adjusted for the effect of all dilutive
potential ordinary shares should be divided by the sum of the weighted average
number of ordinary shares used in the basic EPS calculation and the weighted
average number of shares that would be issued on the conversion of all the
dilutive potential ordinary shares into ordinary shares (PSAK 56 paragraphs 30
to 32, 36).

For the purpose of calculating diluted EPS, the profit or loss attributable to the
parent entity’s ordinary equity holders should be adjusted for the after-tax effect
of:
• Dividends or other items related to dilutive potential ordinary shares that
have been deducted in arriving at profit attributable to ordinary equity
holders for the purpose of calculating basic EPS, such as dividends on
dilutive convertible preference shares.
Diluted Earnings Per Share – cont’d.
• Interest recognized in the period on dilutive potential ordinary shares, such
as interest on dilutive convertible debt.
• Any other changes in income or expense that would result from the
conversion of the dilutive potential ordinary shares. (PSAK 56 paragraphs
32 (a), 33)

Example:
Entity A has in issue 25,000 4% debentures with a nominal value of C1. The
debentures are convertible to ordinary shares at a rate of 1:1 at any time until
20x9. The entity’s management receives a bonus based on 1% of profit before
tax.
Entity A’s results for 20x2 showed a profit before tax of C80,000 and a profit
after tax of C64,000 (for simplicity a tax rate of 20% is assumed in this
example).
Diluted Earnings Per Share – cont’d.
For the purpose of calculating diluted EPS, the earnings should be adjusted for
the reduction in the interest charge that would occur if the debentures were
converted and for the increase in the bonus payment that would arise from the
increased profit. This is illustrated below:
C

Profit after tax 64,000

Add: Reduction in interest cost

25,000 x 4% 1,000

Less tax expense 1,000 x 20% (200)

Less: increase in management bonus

80,000 x 1% (800)

Add tax benefit 800 x 20% 160

Earnings for the purposes of diluted EPS 64,160

Diluted Earnings Per Share – cont’d.
Note that for simplification, this example does not illustrate the classification of
the components of the convertible debenture as liabilities and equity as
required by PSAK 50.

Restatement of EPS Data

Diluted EPS of any prior period presented should not be restated for changes in
the assumptions used (such as for contingently issuable shares) or for the
conversion of potential ordinary shares (such as convertible debt) outstanding
at the end of the previous period (PSAK 66 paragraph 65). However, in some
circumstances, prior period’s EPS data should be restated. These
circumstances include certain post balance sheet changes in capital and prior
period adjustments.
Diluted Earnings Per Share – cont’d.
Restatement of EPS Data – cont’d.
Post balance sheet changes in capital
Basic and diluted EPS for all periods presented should be restated for:
• Bonus issues
• Share splits
• Share consolidations
• Other similar events occurring during the period that change the number of
shares in issue without a corresponding change in the resources of the
entity

Prior Period Adjustments

EPS for all periods presented should be adjusted for the effects of errors and
adjustments resulting from changes in accounting policies accounted for
retrospectively in accordance with PSAK 25.
Diluted Earnings Per Share – cont’d.

CASE STUDY ON DILUTED EPS

Refer to Appendix 1
Presentation and Disclosure
 An entity should present both basic and diluted EPS on the face of the
statement of profit or loss and other comprehensive income or if an entity
presents the components of profit or loss in a separate statement, it
presents the basic and diluted EPS in that separate statement.
 The basic and diluted EPS should be presented for profit or loss from
continuing operations attributable to the entity’s ordinary equity holders and
for profit or loss for the period attributable to the entity’s ordinary equity
holders.
 Disclose discontinued operations on the face of the statement of profit or
loss and other comprehensive income or in the notes to financial statements
the basic or diluted EPS
 The amounts used as the numerators in calculating the basic and diluted
EPS figures. These amounts should be reconciled with the profit or loss for
the period.
Presentation and Disclosure – cont’d.
 The weighted average number of ordinary shares used as the denominator
in calculating the basic and diluued EPS figures.
 Entities are required to disclose details of all material ordinary share
transactions or potential ordinary share transactions entered into after the
reporting period, other than those describe in the preceding paragraph.
Disclaimer
The content of this presentation is based on the current status of Pernyataan
Standar Akuntansi Keuangan (PSAK), its exposure drafts, interpretations, and
best practice.
The information, comments and material presented in this document are
provided for information purposes only and are not to be used or considered as
specific advice to account for transactions. When determining the proper
accounting treatment the specific circumstances of each entity or transaction
need to be taken into account. The presentation is not addressing all possible
technical aspects and does not claim to be complete or exhaustive.
HLB will not accept any liability related to the information provided in this
presentation and its interpretation.
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without prior written consent of HLB.