TOPIC FIVE

EARNINGS PER SHARE – IAS 33

CLASSIFICATION OF EPS
EPS can be classified basically into two:
Basic EPS: This is the EPS calculated by dividing the profit or loss from continuing
operations by the weighted average number of ordinary shares in issue during the accounting
period in which the profit or loss was generated.
Diluted EPS: This is the EPS calculated by adjusting the profit or loss from continuing
operations due to ordinary shareholders and the weighted average number of shares in issue
during the accounting period for the effect of dilutive potential ordinary shares. The adjusted
earnings will be divided by adjusted weighted average number of shares in issue during the
period.
EPS Dilution: involves taken a futuristic look at what is likely to happen to EPS if all
potential ordinary shares are converted to ordinary shares in future. This is to know whether
the EPS will increase or decrease. Thus, EPS so computed making this assumption of
possible conversion of potential ordinary shares is referred to as Diluted EPS.
Computation of Basic EPS
Basic EPS = Net profit or loss after tax attributable to ordinary shareholders during the period
Weighted average number of ordinary shares in issue during the period and
ranking for dividend.
Weighted average number of shares: This is the total number of shares calculated based on
time weighting factor, that is, the number of days the shares were outstanding compared with
the total number of days during the accounting period.
Illustration one
Mario plc had issues 13,000,000 ordinary shares of ₦1 each on 1 January 20x2. The company
makes up accounts to 31st December every year. Additional shares were issued at full market
price during the year as follows:
1 April 20x0: 2,000,000 ordinary shares @ ₦5
1 August 20x0: 600,000 ordinary shares @ ₦3
31 October 20x0: 800,000 ordinary shares @ ₦7
Required:
i. Calculate the weighted average number of shares outstanding for the year ended 31 Dec
20x0
ii. Calculate the company’s earnings per share if its profit after tax is ₦5,500,000.
Illustration Two
Kalakuta Plc ha: s the following information in respect of its ordinary shares during the
period ended 31 March, 20X5
1st April 20X4 Balance of number of ordinary shares in issue, 300,000
31st July 20X4 Number of ordinary shares issued for cash, 120,000
31st March 20X5 Balance of number of ordinary shares at year end 420,000
Required: Determine the weighted average number of shares outstanding for the computation
of EPS.
Illustration Three
The following information was extracted from the books of Ajeyalemi Plc.
20X3 20X2
# #
Ordinary shares in issue:
At 1st January, of 50k each 4,000,000 4,000,000
10% cumulative preference shares of 50k each,
At 1st January 1,000,000 1,000,000
5,000,000 5,000,000
Profit before tax on continuing operations 31st Dec. #500,000 #3,100,000
Additional Information:
i. The company issued additional ordinary shares on 30th September 20X3 at full
market price (#10.00).
ii. The company accounting year runs from January to December.
iii. Company income tax is 30%.
Required: Compute basic EPS.

TREATMENT OF PREFERENCE SHARES

Illustration Four
The following financial data had been extracted from the books of Omoreghe Motors Plc for
the accounting year ended 30th June, 20X7.
Net Income #10,000,000
10% Cumulative preference shares of #20 each on 30th June, 20X7 #900,000
Ordinary shares of #25 each on 30th June, 20X7 #12,000,000
The number of ordinary shares and preference shares are the same as they were on 1st July
20X6.
Required: Compute the basic EPS of the company for the accounting year ended 30th June,
20X7.

Illustration Five
Extracts from the financial statements of Okokomaiko Plc for the period ended 31st
December revealed the following information.
#
Profit from operating activities before interest and tax 2,700,000
Taxation @ 30%
15% redeemable preference shares of 50k each 400,000
Ordinary share capital of 25k each 250,000
The profit from operations include #200,000 from discontinued operations.
Calculate basic EPS for the year under the following assumptions:
a) If the preference shares were classified as liabilities
b) If the preference shares were classified as equity.
 BONUS ISSUE
Illustration Six
MEG Plc had ₦2,000,000 ordinary shares of 50 kobo in issue, until on 30 September 20x2. It
made a bonues issue of 1,000,000 shares. The reported profit for the period were ₦800,000 in
20x2 and ₦750,000 in 20x1. The company’s accounting periods from 1st January to 31st Dec.
Illustration Seven
Maqwa plc has in issue 10,000,000 ordinary shares of ₦1 each on 1 January 20x7. On 1 April
20x7 the company issued 4,000,000 ordinary shares at full market price of ₦2.50. Finally, on
1 August 20x7, the company made a bonue issue of one for four to all shareholders on
register as at 31 July 20x7. The profit for the year ended on 31 December 20x7 amounted to
₦6,000,000 while the reported earnings per share for the year ended 31 December 20x6 was
30 kobo.
Required: Calculate EPS for Maqwa plc.
RIGHT ISSUES
Illustration Eight
Binta Plc had in issue 600,000 equity shares of ₦1 each on 1 January 20x6. On 1 September
20x6, the directors of Binta plc made a right issue of 2 for every 5 at ₦1.5. The current
market price of the right is ₦2.5 per share.
The reported EPS for the period ended 31 December 20x5 was 40 kobo. The company earned
a profit before tax of ₦350,000 for the period ended 31 December 20x6 and the income tax
rate applicable to Binta plc is 30%.
Required: Calculate the EPS for the period ended 31 Dec 20x6 and the restated EPS for the
year ended 31 Dec 20x5.
DILUTED EARNINGS PER SHARE
All our previous illustrations had been made on the basis of actual shares in issue and
ranking for dividends, which is called Basic EPS. We shall now examine diluted EPS.
Diluted EPS is calculated based on consideration of both basic ordinary shares and
potential ordinary shares. Basic EPS is based on ordinary shares currently issued while
diluted EPS is based on ordinary shares currently in issue plus potential ordinary shares.
When calculating diluted earnings per share, profit from continuing operations attributable
to ordinary shareholders and weighted average number of shares outstanding should be
adjusted for the effects of all dilutive potential ordinary shares.
This implies that both earnings and number of shares used may need to be adjusted from
the amounts that appear in the statement of profit or loss and comprehensive income as
well as statements of financial position. Dilutive means that earnings may be spread over a
large number of ordinary shares. Potential ordinary shares on the other hand are financial
instruments that may entitle the holders to ordinary shares. IAS 33 requires publicly
quoted company to calculate diluted EPS in addition to calculating basic EPS. Diluted
EPS can be said to be an EPS calculated peeping into the future as regards what is likely to
happen to EPS if all potential ordinary shares are converted to ordinary shares at a future
date. Dilution occurs if holders of potential ordinary shares exercise their entitlements at a
future date, EPS would be reduced, if this happens, in accounting terminologies, the EPS
will have been diluted.
Earnings and weighted average number of shares used for diluted EPS
Number of shares used for diluted EPS whenever the holders of potential ordinary shares
exercise their rights will increase. In the same vein earnings will increase as a result of
post tax effects of amounts recognize in the period relating to dilutive potential ordinary
shares that will no longer be incurred on their conversion to ordinary shares. Example that
readily comes to mind is the interest on convertible loans which will no longer be paid
after conversion and earnings will be increased by the post tax amount of such interest.
Diluted EPS: Convertible preferential shares, convertible loans and bonds
The following procedures should be followed when calculating diluted EPS in the case of
convertible preference shares and convertible loans and bonds:
1. Adjust the total earnings after tax:
 Add back preference dividend paid in the accounting year.
 Add back interest charged on loans and bonds after deducting tax relief
relating to that interest
 Add/less any other charges in income and expenses that would result from
the conversion.
2. Adjust the ordinary shares currently in issue by adding the maximum number of
new shares that would be created if all the potential ordinary shares were converted
in to actual ordinary shares.
3. Now compute both basic and diluted EPS.
Ordinary shares that will rank for dividend in future.
Where ordinary shares are issued in an accounting year and such shares would not rank for
dividend in the year of issue, but in subsequent years, it is necessary to compute basic and
diluted EPS.
Illustration Nine
The issued and fully paid shares of Bulldog Plc on 31 December, 20X8 comprised of:
#
Ordinary share of 25k each 3,000,000
On 1st January20X9, the company issued additional ordinary shares of N1,000,000 of 25k
per share. These additional shares will not rank for dividend until 20X0. Profit from
continuing operations after tax for the year was N744,000. Calculate basic and diluted
EPS.
Illustration Ten
The capital structure of Crowther Plc on 31 December, 20X3 comprised:
#
600,000 8% preference shares of N1 per share 600,000
2,000,000 Ordinary shares of N1 per share 2,000,000
6% convertible loan inventory 1,200,000
The profit after tax for the financial year to 31 December was #36,000,000.
The 6% convertible loan inventory are convertible per #100 of loan inventory into
ordinary shares at the following rates.
31 December 20X3 = 120 shares
31 December 20X4 = 115 shares
31 December 20X5 = 110 shares
31 December 20X6 = 105 shares
31 December 20X7 = 100 shares
On 30th September, 20X3, the company converted N500,000 of the convertible loan
inventory into ordinary shares of N1 each. The company income tax rate of 35%.
Required: Calculate EPS
a. If the N500,000 convertible will not rank for dividend in 20X3
b. If it will rank for dividend in 20X3.