EARNINGS PER SHARE
standard need be presented only on the of
Definition
-Figure is the amount attributable to every
ordinary outstanding share during the
period.
- pertains to only ORDINARY SHARE. It is
not necessary for preference share because
there is a definite rate of return for such
share.
The computation of earnings per share is
covered by PAS 33 which requires 2
presentation of earnings per share namely:
1. Basic Earnings Per Share (BEPS)
2. Diluted Per Share (DEPS)
PUBLIC ENTITIES ARE REQUIRED
TO PRESENT EARNINGS PER SHARE.
Nonpublic entities are not required but
encouraged to present earnings per share.
PRESENTATION
- Basic and Diluted EPS for income or
loss from continiuing operations –
presented on the face of the income
statement.
Basic and Diluted EPS for a discontinued
operation shall disclose either on the
1. Face of the income statement
2. Or in the notes to the statement
When an entity present both consolidated
financial statements and separate financial
statements; the disclosure required by the
the consolidated information.
An entity that chooses to disclose EPS in the
separate financial statements shall present
EPS information only on the face of the
separate income statement. It shall not
present such EPS information in the
consolidated financial statements.
BASIC EARNINGS PER
SHARE
Consideration in computing “profit or
loss”
- Profit or loss should be net of
income tax expense.
- Profit or loss should be adjusted for
the tax amounts of preference
dividends, differences arising on the
settlement of preference shares, and
other similar effects of preference
shares classified as equity.
Adjustment for preference shares
- If the preference shares are
cumulative, one year dividend is
deducted from profit or loss whether
declared or not.
- If the preference shares are non-
cumulative, only the dividend
declared is deducted from profit or
loss.
Determination of Weighted Average
 - Shares are usually included in the issue is the number of ordinary
weighted average number of shares shares outstanding prior to the
from the date consideration is rights issue multiplied by an
receivable (Which is generally the adjustment factor.
date of their issue).
- Treasury Shares acquired is
excluded when the acquisition is
recognized. Treasury shares
reissued are included when
reissuance is recognized.
The market value of the share right-on is
- Subscribed ordinary shares or
the market value of the share immediately
partly shares are included to the
prior to the exercise of rights.
extent of their participation
dividends. The theoretical market value of the share-ex
- Ordinary shares issued as Dividends right is
or share split are included from the
time the original shares, on which
the share dividends or share splits
are based, were originally issued.
The number of ordinary shares
outstanding before the event is
adjusted for the proportionate change DILUTED EARNINGS PER
in the number of ordinary shares
SHARE
outstanding as if the event had
occurred at the beginning of the
earliest period reported.
- where the capital structure of an
RIGHT ISSUE entity is complex in the sense that it
consists of ordinary shares and
- The Philippine term for a right issue
potential ordinary shares or
is “stock right” and the legal term is
Potential diluters, the computation
“right of preemption”.
of the earnings per share becomes a
- When rights are issued to
little complicated.
shareholders most often the exercise
price is less than the fair value of the
shares.
Potential Ordinary share
- Accordingly, such a rights issue
includes a bonus element, meaning A potential ordinary share is a financial
shares issued for no consideration. instrument or other contract that may
- Application Guide 2 of PAS 33 entitle its holder to ordinary share. In
provides that “the number of other words, a potential ordinary share is
ordinary shares to be used in a financial instrument that represents
calculating basic earnings per share future issuance of ordinary shares.
for all periods prior to the rights
 Three major types of potential
ordinary shares are:
1. Convertible bonds payable
2. Convertible preference share
3. Share option and warrant.
DILUTION AND
ANTIDILUTION
Dilution arises when the inclusion of
potential ordinary shares decreases the
basic earnings per share or increases the
basic loss per share.
In this case the potential ordinary shares are
dilutive securities.
On the other hand, Antidilution arises
when the inclusion of the potential
ordinary shares increases basic earnings
per share or decreases basic loss per
share.
In this case the potential ordinary shares are
considered as Antidilutive and therefore
ignored in computing the diluted earnings
per share.
The computation of diluted earnings per
share is based on the “as if scenario:
1. as if convertible bonds payable is
converted into ordinary share.
2. As if the convertible preference share
is converted into ordinary share
3. as if the share option and warrants
are exercised.
Convertible Bonds Payable
the computation of diluted earnings per
share assumes that the bond payable is
converted to ordinary share.
Accordingly, adjustments shall be made both
to net income and to the number of ordinary
shares outstanding.
- The net income is adjusted by
adding back the interest expense
on the bond payable, net of tax.
- the number of ordinary shares
outstanding is increased by the
number of ordinary shares that would
have been issued upon conversion of
the bonds payable
Convertible Preference Shares
- if there is a convertible preference
share the computation of diluted
earnings per share also assumes that
the preference share is converted into
ordinary share.
- Accordingly, the net income is not
reduced anymore by the amount of
preference dividend.
- The number of ordinary shares
outstanding is increased by the
number of ordinary shares that
would have been issued-upon
conversion of the preference share.
Option and Warrants
- option and warrants are dilutive if
the exercise price or option price is
less than the average market price
of the ordinary share.
- If the exercise price is less than the
average market price of the ordinary
share, the option and warrants
probably would be exercised and
therefore their effect would be
dilutive.
- Options and Warrants are included in
the EPS computation through the
treasury share method. However this
does not imply that the entity has
entered into a transaction to purchase
its own shares. The treasury share
method is used to simplify the
computation of incremental ordinary
shares that are assumed to be issued
for no consideration as a result of
options and warrants.
Treasury Share Method
- The following procedures shall be
followed in the computation of
incremental ordinary shares/ arising
from issuance of options and
warrants:
1. the options and warrants are
assumed to be exercised at the
beginning of the current year at
the date they are issued during the
year.
2. The proceeds from the exercise of
options and warrants are assumed
to be used to acquire treasury
shares at average market price.
3. The number of incremental ordinary
shares is equal to the option shares
minus the assumed treasury shares
acquired.
- The incremental ordinary share
represents the issue of ordinary
shares for no consideration.
- Accordingly, these are the potential
ordinary shares that are included in
the computation of diluted earnings
per share.
- The assumed proceeds from the
options and warrants shall be
considered to have been received
from the issue of shares at fair value
or average market price.
Multiple Potential Ordinary
shares
- A problem arises where the entity
has two or more dilutive potential
ordinary shares
- in considering whether potential
ordinary shares are dilutive or
antidilutive, each issue or series of
potential ordinary shares shall be
considered separately, rather than
aggregate.
- In order to maximize the dilution of
the basic earnings per share, each
issue is considered in sequence from
the most dilutive to the least dilutive.
- In other words, the potential ordinary
shares shall be ranked based on
their contribution in terms of
incremental EPS.
- The potential ordinary shares with
the lowest incremental EPS is
Ranked first.
Test for dilution - If the incremental EPS is lower than
the basic EPS, the convertible bond
payable is convertible is probably
dilutive if this incremental EPS is
1. Options and Warrants higher that the basic EPS, the
- The options and warrants are dilutive convertible bond payable is
if the option price or exercise price is antidilutive.
lower than the average market price.
the option or warrants are the most
dilutive because they have no impact
on net income. Thus, the options and
warrants are ranked first in
computing diluted earnings per
share.
2. Convertible preference share
- The Contribution of the preference
shares to net income is the amount of
preference dividend that is avoided
because of the conversion.
- The incremental EPS for convertible
preference share is equal to the
amount of preference dividend by
the number of ordinary shares into
which the preference share is
convertible.
- If the incremental EPS is lower than
the basic EPS the convertible
preference share is probably dilutive.
If this incremental EPS is higher than
the basic EPS, the preference share is
antidilutive.
3. Convertible bonds payable
- The contribution of bonds payable to
net income is the amount of interest
expense that is avoided because of
the conversion.
- The incremental EPS for the
convertible bond payable is equal to
the interest expense, net tax
divided by the number of ordinary
shares into which the bond payable
is convertible.