FINANCIAL ACCOUNTING & REPORTING

FAR.0740_Earnings Per Share FAR 740-Online

LECTURE NOTES
Key definitions
Ordinary share - Also known as a common share or common stock. An equity
instrument that is subordinate to all other classes of equity shares.

Potential ordinary share - A financial instrument or other contract that could result
in its holder getting ordinary shares. Such as:
 convertible debt;
 convertible preference shares;
 share warrants;
 share options;
 share rights;
 employee stock purchase plans;
 contractual rights to purchase shares; and
 contingent issuance contracts or agreements (such as those arising in business
combination).

Dilution - A reduction in earnings per share or an increase in loss per share

resulting from the assumption that convertible instruments are converted, that
options or warrants are exercised, or that ordinary shares are issued upon the
satisfaction of specified conditions.

Antidilution - An increase in earnings per share or a reduction in loss per share

resulting from the assumption that convertible instruments are converted, that
options or warrants are exercised, or that ordinary shares are issued upon the
satisfaction of specified conditions.

Requirement to Present EPS

An entity whose securities are publicly traded (or that is in process of public
issuance) must present, on the face of the income statement, basic and diluted
earnings per share for:
 profit or loss from continuing operations attributable to the ordinary equity
holders of the parent entity; and
 profit or loss attributable to the ordinary equity holders of the parent entity for
the period for each class of ordinary shares that has a different right to share in
profit for the period.

Basic and diluted earnings per share must be presented with equal prominence for
all periods presented.

Basic and diluted EPS must be presented even if the amounts are negative (that is,
a loss per share).

If an entity reports a discontinued operation, basic and diluted amounts per share
must be disclosed for the discontinued operation either on the face of the income
statement or in the notes to the financial statements.

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Basic EPS
Basic EPS is calculated by dividing profit or loss attributable to ordinary equity
holders of the parent entity (the numerator) by the weighted average number of
ordinary shares outstanding (the denominator) during the period.

The earnings numerators (profit or loss from continuing operations and net profit or
loss) used for the calculation should be after deducting all expenses including taxes,
minority interests, and preference dividends.

The denominator is calculated by adjusting the shares in issue at the beginning of

the period by the number of shares bought back or issued during the period,
multiplied by a time-weighting factor.

Contingently issuable shares are included in the basic EPS denominator if the
contingency has been met.

Diluted EPS
Diluted EPS is calculated by adjusting the earnings and number of shares for the
effects of dilutive options and other dilutive potential ordinary shares. The effects
of anti-dilutive potential ordinary shares are ignored in calculating diluted EPS.

Rights issue
If a rights issue is offered to all existing shareholders, the number of ordinary
shares to be used in calculating basic and diluted earnings per share for all periods
before the rights issue is the number of ordinary shares outstanding before the
issue, multiplied by the following factor:

FV per share immediately before the exercise of rights

Theoretical ex-rights fair value per share

The theoretical ex-rights fair value per share is calculated by adding the aggregate
market value of the shares immediately before the exercise of the rights to the
proceeds from the exercise of the rights, and dividing by the number of shares
outstanding after the exercise of the rights.

Guidance on Calculating Dilution

Convertible securities
The numerator should be adjusted for the after-tax effects of dividends and interest
charged in relation to dilutive potential ordinary shares and for any other changes in
income that would result from the conversion of the potential ordinary shares.

Options and warrants

In calculating diluted EPS, assume the exercise of outstanding dilutive options and
warrants. The assumed proceeds from exercise should be regarded as having been
used to repurchase ordinary shares at the average market price during the period.
The difference between the number of ordinary shares assumed issued on exercise
and the number of ordinary shares assumed repurchased shall be treated as an
issue of ordinary shares for no consideration.

Contingently issuable shares

Contingently issuable ordinary shares are treated as outstanding and included in the
calculation of both basic and diluted EPS if the conditions have been met. If the

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conditions have not been met, the number of contingently issuable shares included
in the diluted EPS calculation is based on the number of shares that would be
issuable if the end of the period were the end of the contingency period.
Restatement is not permitted if the conditions are not met when the contingency
period expires.

Contracts that may be settled in ordinary shares or cash

Presume that the contract will be settled in ordinary shares, and include the
resulting potential ordinary shares in diluted EPS if the effect is dilutive.

Retrospective Adjustments
The calculation of basic and diluted EPS for all periods presented is adjusted
retrospectively when the number of ordinary or potential ordinary shares
outstanding increases as a result of a capitalization, bonus issue, or share split, or
decreases as a result of a reverse share split. If such changes occur after the
balance sheet date but before the financial statements are authorized for issue, the
per share calculations for those and any prior period financial statements presented
are based on the new number of shares. Disclosure is required.

Basic and diluted EPS are also adjusted for the effects of errors and adjustments
resulting from changes in accounting policies, accounted for retrospectively.

Diluted EPS for prior periods should not be adjusted for changes in the assumptions
used or for the conversion of potential ordinary shares into ordinary shares
outstanding.

- done -

REVIEW QUESTONS

REVIEW QUESTION: PROBLEMS

1. Strauch Co. has one class of ordinary shares outstanding and no other securities
that are potentially convertible into ordinary shares. During 2015, 100,000
ordinary shares were outstanding. In 2016, the following distributions of
additional ordinary shares occurred:
 On April 1 – Sold 20,000 treasury shares
 July 1 - 2-for-1 share split

Profit was P410,000 in 2016 and P350,000 in 2015.

What amounts should Strauch report as basic earnings per share in its 2016 and
2015 comparative income statements, respectively?
a. P1.78; P3.50 b. P1.78; P1.75 c. P2.34; P1.75 d. P2.34; P3.50

2. Lapasan Company had the following capital during 2015 and 2016:

Preference share capital, P100 par, 10% cumulative, 100,000

shares P10,000,000
Ordinary share capital, P100 par, 400,000 shares 40,000,000

Lapasan reported profit of P8,000,000 for the year ended December 31, 2016.
Lapasan paid no preference share dividends during 2015 and paid P1,500,000

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preference share dividends during 2016. On January 31, 2017, prior to the date
that the financial statements are authorized for issue, Lapasan distributed 10%
ordinary share dividend.

In its 2016 statement of profit or loss, what amount should Lapasan report as
basic earnings per share?
a. P17.50 b. P15.91 c. P16.25 d. P14.77

3. Entity B’s profit available for ordinary shareholders’ for the year ended December
31, 2015 and 2016 were P2,100,000 and P3,500,000, respectively.

The ordinary shares in issue on January 1, 2016 were 800,000.

Entity B offered existing shareholders’ a rights issue of one for five shares at a
price of P6 per share to be exercised on April 1, 2016. The market value of
Entity B’s shares on that date was P10 per share.

What amounts should Entity B report as basic earnings per share in its 2016 and
2015 comparative income statements, respectively?
a. P7.80; P2.63 b. P3.75; P2.45 c. P7.80; P2.45 d. P3.75; P2.63

4. West Co. had earnings per share of P15.00 for 2016 before considering the
effects of any convertible securities. No conversion or exercise of convertible
securities occurred during 2016. However, possible conversion of convertible
bonds, not considered ordinary share equivalents, would have reduced earnings
per share by P0.75. The effect of possible exercise of share options would have
increased earnings per share by P0.10.

What amount should West report as diluted earnings per share for 2016?
a. P14.25 b. P14.35 c. P15.00 d. P15.10

5. Faith Co. had 200,000 ordinary shares, 20,000 convertible preference shares,
and 1,000,000 of 10% convertible bonds outstanding during 2016. The
preference share is convertible into 40,000 ordinary shares. During 2016, Faith
paid dividends of P1.20 per share on ordinary shares and P4.00 per share on
preference shares. Each P1,000 bond is convertible into 45 ordinary shares if
converted before 2018 and 40 shares if converted after 2018. The profit for 2016
was P800,000 and the income tax rate was 30%.

Diluted earnings per share for 2016 is

a. P2.77 b. P3.05 c. P2.81 d. P3.08

6. Kai Company provides the following data for the entire year:
Profit P10,000,000
Ordinary share capital, P100 par, 400,000 shares 40,000,000

Options and warrants outstanding during the entire year:

Option shares 40,000
Exercise price 200
Average market price 250
Ending market price 400

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Diluted earnings per share should be

a. P25.00 b. P24.51 c. P22.72 d. P23.81

Use the following information for the next two questions.

The information below pertains to Prancer Company.

Profit for the year P1,200,000

8% convertible bonds issued at par (P1,000 per bond). Each bond 2,000,000
is convertible into 40 ordinary shares
6% convertible cumulative preference shares, P100 par value. Each 3,000,000
share is convertible into 3 ordinary shares
Ordinary shares, P10 par value 6,000,000
Share options (granted in a prior year) to purchase 50,000 ordinary 500,000
shares at P20 per share
Tax rate 40%
Average market price of ordinary shares P25 per share

There were no changes during the year in the no. of ordinary shares, preference
shares, or convertible bonds outstanding. There is no treasury share.

7. Compute basic earnings per share.

a. P2.00 b. P1.70 c. P1.82 d. P1.07

8. Compute diluted earnings per share.

a. P1.70 b. P1.62 c. P1.66 d. P1.26

9. The income statement of Pastel Company shows a net loss of P10,000,000 for
the year ended December 31, 2016. The company had share as follows:

Ordinary share capital, P100 par, 400,000 shares P40,000,000

Preference share capital, P100 par 10% cumulative, 100,000
shares convertible into 100,000 ordinary shares 10,000,000

The basic loss per share should be

a. P27.50 b. P25.00 c. P22.00 d. P22.50

Use the following information for the next two questions.

Edmund Halvor of the controller’s office of East Aurora Corporation was given the
assignment of determining the basic and diluted earnings per share values for the
year ending December 31, 2016.

Additional information:
a. The company is authorized to issue 8,000,000, P10 par value ordinary shares. As
of December 31, 2015, 3,000,000 shares had been issued and were outstanding.
b. The per share market prices of the ordinary shares on selected dates were as
follows:
Price per Share
July 1, 2015 P20.00
January 1, 2016 21.00
April 1, 2016 25.00
July 1, 2016 11.00
August 1, 2016 10.50

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November 1, 2016 9.00

December 31, 2016 10.00

c. A total of 700,000 shares of an authorized 1,200,000 shares of convertible

preferred shares had been issued on July 1, 2015. The share was issued at its
par value of P25, and it has a cumulative dividend of P3 per share. The share is
convertible into ordinary shares at the rate of one share of convertible preference
for one share of ordinary. The rate of conversion is to be automatically adjusted
for share splits and share dividends. Dividends are paid quarterly on September
30, December 31, March 31, and June 30.
d. East Aurora Corporation is subject to a 40% income tax rate.
e. The after tax profit for the year ended December 31, 2016 was P13,550.000.

The following specific activities took place during 2016:

a. January 1 – A 5% ordinary share dividend was issued. The dividend had been
declared on December 1, 2015, to all shareholders of records on December 29,
2015.
b. April 1 – total of 200,000 preference shares was converted into ordinary shares.
The company issued new ordinary shares and retired the preference shares.
c. July 1 – A 2-for-1 ordinary share split became effective on this date. The board
of directors had authorized the split on June 1.
d. August 1 –A total of 300,000 ordinary shares were issued to acquire a factory
building.
e. November 1 – A total of 24,000 ordinary shares were purchased on the open
market at P9 per share. These shares were to be held as treasury shares and
were still in the treasury as of December 31, 2016.
f. Ordinary shares cash dividend – Cash dividend to ordinary shareholders were
declared and paid as follows.
April 15 – P0.30 per share
October 15 – P0.20 per share
g. Preference share cash dividends – Cash dividends to preference shareholders
were declared and paid as scheduled.

10. Determine the number of shares used to compute basic earnings per share for
the year ended December 31, 2016.
a. P6,736,000 b. P6,367,000 c. P6,763,000 d. P6,637,000

11. Determine the number of shares used to compute diluted earnings per share
for the year ended December 31, 2016.
a. P7,891,000 b. P7,981,000 c. P7,836,000 d. P7,286,000

REVIEW QUESTION: THEORIES

1. Which statement is incorrect regarding the objective of PAS 33?
a. The objective is to prescribe principles for the determination and presentation
of earnings per share, so as to improve performance comparisons between
different entities in the same reporting period and between different reporting
periods for the same entity.
b. Even though earnings per share data have limitations because of the different
accounting policies that may be used for determining ‘earnings’, a consistently
determined denominator enhances financial reporting.
c. The focus of PAS 33 is on the numerator of the earnings per share calculation.
d. None of the above.

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2. EPS disclosures are

a. Encouraged for all entities
b. Required for all entities
c. Encouraged for public entities and required for nonpublic enterprises.
d. Required for public entities and encouraged for nonpublic enterprises.

3. Dilution is
a. An increase in earnings per share resulting from the assumption that
convertible instruments are converted, that options or warrants are exercised,
or that ordinary shares are issued upon the satisfaction of specified conditions.
b. A reduction in loss per share resulting from the assumption that convertible
instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of specified conditions.
c. Either a or b.
d. Neither a nor b.

4. Which statement is incorrect regarding requirement to present EPS?

a. An entity whose securities are publicly traded (or that is in process of public
issuance) must present, in the statement of comprehensive income, basic and
diluted earnings per share.
b. Basic and diluted earnings per share must be presented with equal
prominence for all periods presented.
c. Basic and diluted EPS must be presented even if the amounts are negative.
d. If an entity reports a discontinued operation, basic and diluted amounts per
share must be disclosed for the discontinued operation on the face of the
income statement.

5. Which statement is incorrect regarding presentation of basic and diluted EPS?

a. Earnings per share is presented for every period for which a statement of
comprehensive income is presented.
b. If diluted earnings per share is reported for at least one period, it shall be
reported for all periods presented, even if it equals basic earnings per share.
c. If basic and diluted earnings per share are equal, dual presentation can be
accomplished in one line in the statement of comprehensive income.
d. None of the above.

6. If an entity presents items of profit or loss in a separate statement of profit or

loss, it presents earnings per share
a. Only in the statement of profit or loss.
b. Only in the statement of profit or loss and other comprehensive income.
c. Only in the statement of changes in equity.
d. Only in the notes to the financial statements.

7. EPS should always be shown separately for

a. Net income and gross profit.
b. Net income and pretax income.
c. Income from continuing operations.
d. Discontinued operations and prior period adjustments.

8. Which statement is incorrect regarding basic EPS?

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a. An entity shall calculate basic earnings per share amounts for profit or loss
attributable to ordinary equity holders of the parent entity and, if presented,
profit or loss from continuing operations attributable to those equity holders.
b. Basic earnings per share shall be calculated by dividing profit or loss
attributable to ordinary equity holders of the parent entity (the numerator) by
the number of ordinary shares outstanding (the denominator) at the end of
the period.
c. The objective of basic earnings per share information is to provide a measure
of the interests of each ordinary share of a parent entity in the performance of
the entity over the reporting period.
d. None of the above.

9. Earnings per share is calculated before accounting for which of the following
items?
a. Preference dividend for the period c. Taxation
b. Ordinary dividend d. Minority interest

10. For the purpose of calculating basic earnings per share, the amounts
attributable to ordinary equity holders of the parent entity shall be adjusted for
the after-tax amounts of preference dividends. The after-tax amount of
preference dividends that is deducted from profit or loss does not include:
a. The after-tax amount of any preference dividends on non-cumulative
preference shares declared in respect of the period.
b. The after-tax amount of the preference dividends for cumulative preference
shares required for the period, whether or not the dividends have been
declared.
c. The amount of any preference dividends for cumulative preference shares paid
or declared during the current period in respect of previous periods.
d. None of the above.

11. Which statement is incorrect regarding increasing rate preference shares?

a. Increasing rate preference shares provide for a low initial dividend to
compensate an entity for selling the preference shares at a discount.
b. Increasing rate preference shares provide for an above-market dividend in
later periods to compensate investors for purchasing preference shares at a
premium.
c. Any original issue discount or premium on increasing rate preference shares is
amortized to profit or loss using the effective interest method.
d. Any original issue discount or premium on increasing rate preference shares is
treated as a preference dividend for the purposes of calculating earnings per
share.

12. The following are deducted in calculating profit or loss attributable to ordinary
equity holders of the parent, except
a. The after-tax amount of preference dividends.
b. The excess of the fair value of the consideration paid to the preference
shareholders over the carrying amount of the repurchased preference shares.
c. The excess of the fair value of the ordinary shares or other consideration paid
over the fair value of the ordinary shares issuable under the original
conversion terms in relation to induced early conversion of convertible
preference shares.

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d. Any excess of the carrying amount of preference shares over the fair value of
the consideration paid to settle them.

13. Which of the following is incorrect regarding inclusion of shares in the

weighted average number of shares?
a. Ordinary shares issued as a result of the conversion of a debt instrument to
ordinary shares are included from the date that interest ceases to accrue.
b. Ordinary shares issued in exchange for the settlement of a liability of the
entity are included from the settlement date.
c. Ordinary shares issued for the rendering of services to the entity are included
as the services are rendered.
d. Ordinary shares issued in exchange for cash are included when cash is
received.

14. Ordinary shares issued as part of a business combination are included in the
EPS calculation in the case of the "purchase" method from
a. The beginning of the accounting period.
b. The date of acquisition
c. The end of the accounting period.
d. The midpoint of the accounting year.

15. At what point are dilutive potential shares deemed to have been converted
into ordinary shares?
a. At the start of the period.
b. At the end of the period.
c. The date of the issue of the dilutive shares.
d. At the start of the period or, if later, the date of the issue of the potential
shares.

16. If a stock option is converted on March 31, 2014, then

a. The potential ordinary shares (stock option) are included in diluted EPS up to
March 31, 2014, and in basic EPS from the date converted to the year-end
(both weighted accordingly).
b. The ordinary shares are not included in the diluted EPS calculation but are
included in basic EPS.
c. The ordinary shares are not included in the basic EPS but are included in
diluted EPS.
d. The effects of the stock option are included only in previous year's EPS
calculation.

17. Entity A has an ordinary "A" class, non- voting share, which is entitled to a
fixed dividend of 6% per annum. The "A" class ordinary share will
a. Be included in the "per share" calculation after adjustment for the fixed
dividend.
b. Be included in the "per share" calculation for EPS without adjustment for the
fixed dividend.
c. Not be included in the "per share" calculation for EPS.
d. Be included in the calculation of diluted EPS.

18. The weighted average number of ordinary shares outstanding during the
period and for all periods presented shall be adjusted for events that have

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changed the number of ordinary shares outstanding without a corresponding

change in resources. Examples include, except
a. Capitalization or bonus issue (sometimes referred to as a stock dividend)
b. Bonus element in a rights issue to existing shareholders
c. Share split
d. Conversion of potential ordinary shares

19. Potential ordinary shares do not include

a. Share warrants and options
b. Employee plans that allow employees to receive common shares as part of
their renumeration and other share purchase plans
c. Shares which would be issued upon the satisfaction of certain conditions
resulting from contractual arrangements, such as the purchase of a business
or other assets
d. Debt or equity instruments, including preference shares, that are not
convertible into ordinary shares

20. When an enterprise makes a bonus issue/stock split/stock dividend or a rights

issue, then
a. The previous year's EPS is not adjusted for the issue.
b. The previous year's EPS is adjusted for the issue.
c. Only a note of the effect on the previous year's EPS is made.
d. Only the diluted EPS for the previous year is adjusted.

21. If a bonus issue occurs between the year-end and the date that the financial
statements are authorized, then
a. EPS both for the current and the previous year are adjusted
b. EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted

22. In determining earnings per share, interest expense, net of applicable income
taxes, on convertible debt which is dilutive should be
a. Ignored for diluted earnings per share.
b. Added back to net income for diluted earnings per share.
c. Deducted from net income for diluted earnings per share.
d. None of the above.
 - end - 

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