Earnings per share (EPS) is widely regarded as the most important indicator of

a company’s performance. It is important that users of the financial statements:

• are able to compare the EPS of different entities and

• are able to compare the EPS of the same entity in different accounting
periods.

IAS 33 Earnings per Share achieves comparability by:

• defining earnings
• prescribing methods for determining the number of shares to be included
in the calculation of EPS
• requiring standard presentation and disclosures.

Note IAS 33 applies to entities whose ordinary shares are publicly traded.
Publicly traded entities which present both parent and consolidated
financial statements are only required to present EPS based on the
consolidated figures

Basic EPS Earnings

Shares

• Earnings: group profit after tax, less non-controlling interests (see group
chapters) and irredeemable preference share dividends.

• Shares: weighted average number of ordinary shares in issue during the

period.

i) Issue of shares at full market price

Example

2007 2008
 Earnings per share = 460000 550000 Earning Avalaible for ESH / WA of
800000 900000

BEPS = 0.575 0.611

weighted average number of ordinary shares

No of shares 800000
1/1/2007
1/1/2008 800000

Issue of shares
7/1/2008
200000*6/12 100000 200000 *6/12
800000 900000

Questions Gerard's earnings for the year ended 31 December 20X4 are $2,208,000.
On 1 January 20X4, the issued share capital of Gerard was 8,280,000
ordinary shares of $1 each. The company issued 3,312,000 shares at full
market value on 30 June 20X4.
Calculate the EPS for Gerard for 20X4.

Answer 2004
Earnings per share = 2208000
9936000

BEPS = 0.222222

weighted average number of ordinary shares

No of shares 8280000
1/1/2004
1/1/2005

Issue of shares 1656000

6/30/2007
3312000*6/12
9936000
Sales
less Cost
PBT
Tax
PAT
less : PSD
Earning for OSH
valaible for ESH / WA of ES
 A bonus issue (or capitalisation issue or scrip issue):

• does not provide additional resources to the issuer

• means that the shareholder owns the same proportion of the business
before and after the issue.

In the calculation of EPS:

• in the current year, the bonus shares are deemed to have been
issued at the start of the year

• comparative figures are restated to allow for the proportional

increase in share capital caused by the bonus issue. Doing this treats
the bonus issue as if it had always been in existence.

Question

Answer 2007 2008

Earnings per share = 460000 550000
1000000 1200000

0.4600 0.4583

Earnings per share = 460000

comparative 1000000+200000

460000
1200000

0.38

weighted average number of ordinary shares

No of shares 1000000
1/1/2007
1/1/2008 1000000
 Bounus shares 200000
1000000*1/5 200000

1000000 1200000

Question

Answer 2002 2003

Earnings per share = 750000 1150000
8000000 8000000

0.09 0.14

weighted average number of ordinary shares

No of shares 7000000
1/1/2007
1/1/2008 8000000

Bounus shares
7000000*1/7 1000000 0

8000000 8000000
 • Apply the bonus fraction from the start of the year up until the date of the
bonus issue

• Time apportion the number of shares to reflect the cash being received
from the market issue.

Question

Answer 2001
Earnings per share = 220000
1465000

BEPS= 0.15

weighted average number of ordinary shares

1/1/2001 No of shares 1000000

4/1/2001 Issue of Shares 150000

200000*9/12

8/1/2001 Bounus shares

1200000*1/5 240000

10/1/2001 Issue of Shares 75000

300000*3/12
1465000
Step-1

Ex Right Price = ( No of shares (before right)* MP (Cum-Right)) + ( No of Right Shares * Right Price )
Total No of Shares

Step-2

Paid Part = No of right Issue * Right Price / Ex Right Price

Step-3

Bonus Part = Right Shares - Paid part

Question

Solution 2007 2008

Earnings per share = 460000 550000
800000 1080000

0.5750 0.5093

Earnings per share = 460000

comparative 800000+160000

460000
960000

0.48

weighted average number of ordinary shares

No of shares
1/1/2007 800000
 1/1/2008 800000

Right Shares
Paid part 240000*6/12 120000

Bonus Part 160000*12/12 160000

800000 1080000

Step-1

Ex Right Price = ( No of shares (before right)* MP (Cum-Right)) + ( No of Right Shares * Right Price )
Total No of Shares

800000*3 + 400000*1.5 3000000 2.5

1200000 1200000
Step-2

Paid Part = No of right Issue * Right Price / Ex Right Price

400000*1.5/2.5
240000

Step-3

Bonus Part = Right Shares - Paid part

400000-240000
160000

Question
Solution 2001 2002
Earnings per share = 320000 425000
4000000 4722222

0.0800 0.0900

Earnings per share = 320000

comparative 4000000 + 444444

320000
4444444

0.072

weighted average number of ordinary shares

No of shares
1/1/2001 4000000
1/1/2002 4000000

Right Shares
Paid part 555556*6/12 277778

Bonus Part 444444*12/12 444444

4000000 4722222

Step-1

Ex Right Price = ( No of shares (before right)* MP (Cum-Right)) + ( No of Right Shares * Right Price )
Total No of Shares

4000000*1 + 1000000*.5 4500000 0.9

5000000 5000000
Step-2

Paid Part = No of right Issue * Right Price / Ex Right Price

1000000*.5/.9
555555.6

Step-3
Bonus Part = Right Shares - Paid part
1000000-555556
444444
* Right Price )
Equity share capital may increase in the future due to circumstances which exist
now. When it occurs, this increase in shares will reduce, or dilute, the earnings
per share. The provision of a diluted EPS figure attempts to alert shareholders
to the potential impact on EPS of these additional shares.

Examples of dilutive factors are:

• the conversion terms for convertible bonds/convertible loans etc.

• the exercise price for options and the subscription price for warrants.

DEPS is calculated as follows:

Earnings + notional extra earnings
Number of shares + notional extra shares

Importance of DEPS

The basic EPS figure calculated as above could be misleading to users if

at some future time the number of shares in issue will increase without a
proportionate increase in resources. For example, if an entity has issued
bonds convertible at a later date into ordinary shares, on conversion the
number of ordinary shares will rise but no fresh capital will be received by
the entity. However earnings will rise by the savings in interest no longer
payable on the bonds. Often the earnings increase is less,
proportionately, than the increase in the shares in issue. This effect is
referred to as ‘dilution’ and the shares to be issued are called ‘dilutive
potential ordinary shares’.

IAS 33 therefore requires an entity to disclose the DEPS, as well as the

basic EPS, calculated using current earnings but assuming that the
maximum future dilution has already happened. Existing shareholders
can look at the DEPS to see the effect on current profitability of
commitments already entered into. 'For the purpose of calculating
DEPS, the number of ordinary shares shall be the weighted average
number of ordinary shares calculated as for basic EPS, plus the
weighted average number of ordinary shares that would be issued
on the conversion of all the dilutive potential ordinary shares into
ordinary shares. Dilutive potential ordinary shares shall be deemed
to have been converted into ordinary shares at the beginning of the
period or, if later, the date of the issue of the potential ordinary
shares' (IAS 33, para 36)

Convertible instruments
 The principles of convertible bonds and convertible preference shares are
similar and will be dealt with together.

If the convertible bonds/preference shares had been converted:

• the interest/dividend would be saved therefore earnings would be

higher

• the additional earnings would be subject to tax

• the number of shares would increase.

Question

Solution
2001 BEPS EARING FOR ESH 591772.6 0.15
WA OF ES 4000000

WN-1 EARING FOR ESH

EBIT 991,818.00 991,818.00

(-_) Interest 1250000*8%*9/12 75,000.00 -
pbt 916,818.00 991,818.00
 (-) Tax @30% 916818*30% 275,045.40 297,545.40
EAT 641,772.60 694,272.60
(-) PSD 500000*10% 50,000.00 50,000.00
Earning for ESH 591,772.60 644,272.60

52500

DEPS
EARING FOR ESH WA OF ES
BEPS 591772.6 4000000 0.148
Converable laon 52500 1162500
DEPS 644272.6 5162500 0.125

2002
BEPS EARING FOR ESH 650,000.00 0.163
WA OF ES 4000000

WN-2 EARING FOR ESH

EBIT 1,100,000.00
(-_) Interest 1250000*8% 100,000.00
pbt 1,000,000.00
(-) Tax @30% 300,000.00
EAT 700,000.00
(-) PSD 500000*10% 50,000.00
Earning for ESH 650,000.00

DEPS
EARING FOR ESH WA OF ES
BEPS 650000 4000000 0.163
Converable laon 70000 1550000
DEPS 720000 5550000 0.130

Question
Answer BEPS EARING FOR ESH 2,208,000.00 0.267
WA OF ES 8280000

WN-1 EARING FOR ESH

EBIT
(-_) Interest
pbt
(-) Tax @30%
EAT
(-) PSD
Earning for ESH 2,208,000.00

DEPS
EARING FOR ESH WA OF ES
BEPS 2,208,000.00 8280000 0.267
Converable 161000 2070000
loan
DEPS 2369000 10350000 0.229

Options and warrants to subscribe for shares

An option or warrant gives the holder the right to buy shares at some time in the
future at a predetermined price.
Cash is received by the entity at the time the option is exercised, and the DEPS
calculation must allow for this.

The total number of shares issued on the exercise of the option or

warrant is split into two:

• the number of shares that would have been issued if the cash
received had been used to buy shares at fair value (using the
average price of the shares during the period)
 • the remainder, which are treated like a bonus issue (i.e. as having
been issued for no consideration).

The number of shares issued for no consideration is added to the number of

shares when calculating the DEPS.

A formula for DEPS with an option can be used to work out the number of free
shares:

No. of options × Fair value – exercise price

Fair value

Question On 1 January 20X7, a company has 4 million ordinary shares in issue

and issues options for a further million shares. The profit for the year is
$500,000.
During the year to 31 December 20X7 the average fair value of one
ordinary share was $3 and the exercise price for the shares under option
was $2.
Calculate basic EPS and DEPS for the year ended 31 December
20X7.

Answer Basic EPS = $500,000 0.125

4,000,000

Step-1

Paid Part = No of options Issue * EP / fair Price

1000000*2/3
666666.67

Step-2

Bonus Part = Options Shares - Paid part

1000000-666666.67
333333.33

DEPS
EARING FOR ESH WA OF ES
BEPS 500,000.00 4,000,000 0.125
Options 0 333333.33
DEPS 500000 4333333.33 0.115
Question

Answer Basic EPS = 2208000 0.267

8,280,000

Step-1 No of options Issue * EP / fair Price

920000*1.70 / 1.80
Paid Part = 868889

Step-2 Options Shares - Paid part

920000 - 868889
Bonus Part = 51111

DEPS
EARING FOR ESH WA OF ES
BEPS 2,208,000.00 8,280,000 0.267
Options 0 51111
DEPS 2208000 8331111 0.265
Interes (1-t)

Loan 1250000
1 loan Note 100
no of loan notes 12500
124
1550000 1162500 Potential Equity shre
4000000 4000000
5550000 5162500
75000
-22500 Extra Earning 52500

Extra Earning I(1-t)

52500

Extra Earning I (1-T)

100000(1-.30)
70000
Loan 2300000
1 loan Note 100
no of loan notes 23000

No of potential Equity share 2070000

Extra Earning I(1-T)

230000*(1-.30)
161000
Price earnings ratio

The EPS figure is used to compute the major stock market indicator of
performance, the price earnings ratio (P/E ratio). The calculation is as follows:

P/E ratio = Market value of share

EPS

Trend in EPS

Although EPS is based on profit on ordinary activities after taxation, the trend in
EPS may be a more accurate performance indicator than the trend in profit.

EPS measures performance from the perspective of investors and potential

investors and shows the amount of earnings available to each ordinary
shareholder, so that it indicates the potential return on individual investments.

Importance of DEPS

DEPS is important for the following reasons:

• it shows what the current year’s EPS would be if all the dilutive potential
ordinary shares in issue had been converted

• it can be used to assess trends in past performance

• in theory, it serves as a warning to equity shareholders that the return on

their investment may fall in future periods.
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