MFRS133: EARNINGS PER

SHARE
Prof Dr Erlane K Ghani
Fakulti Perakaunan
Universiti Teknologi MARA Selangor
Malaysia
 Introduction
• Follow MFRS133
• Applicable for financial periods beginning or after
1 January 2006
• For listed companies (where ordinary shares or
potential ordinary shares [POS] are publicly
traded) – Disclosed its EPS
• The EPS is used to measure the performance of
the companies as it is an accounting ratio

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 Definition
• Ordinary shares (OS) = is an equity instruments
that is subordinate to all other classes of equity
instruments
• Potential ordinary shares (POS) is a financial
instrument or other contract that may entitle its
holder to own OS in the future (e.g: convertible
bonds, convertible PS, options and warrants)
• Options, warrants and their equivalents are
financial instruments that give the holder right to
purchase OS

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 Definition (cont….)
• Contingently issuable OS are OS issuable for
little or no cash consideration upon the
satisfaction of specified conditions by the
potential shareholders in a contingent share
agreement

• Contingent share agreement is an agreement

to issue shares that is dependent on the
satisfaction of a specified conditions

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 Definition (cont….)
• Dilution is a reduction in EPS or an increase in loss per
share resulting from the assumption that convertible
instruments are converted, that options or warrants
are exercised, or that OS are issued upon the
satisfaction of specified conditions
• Antidilution is an increase in EPS or a reduction in
loss per share resulting…..(as above)
• Company with NO POS – only basic EPS required
• Company with POS – basic EPS and diluted EPS
required

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 Importance of EPS
• Measures of an entity’s performance.

• Improve performance comparison between

different entities in the same accounting period.

• Comparison between different reporting period.

• Share price can be measured by PE ratio (PE

ratio = market price per share /EPS)

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Different circumstances of basic EPS
• Simple capital structure
• Capital structure with cumulative PS and non
cumulative PS
• Changes in capital structure:
• Issue of new shares at full market price
• Shares buy back
• Bonus issue
• Share split
• Reverse share split (shares consolidation)
• Rights issue

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 Formula of EPS
(NO changes in share capital)
• Basic EPS :
Profit after tax attributable to OS
Number of equity shares in issue

OR

Profit after tax – NCI – Preference dividend

Number of equity shares in issue

• Preference dividend -use GROSS amount

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 Cumulative preference shares vs
Non-cumulative preference shares

• Cumulative PS div ~ deducted from PAT

regardless of whether dividends have been
declared during the year. At the same time the
div in arrears b/f will not be included in computing
EPS.

• Non cumulative PS div ~ deducted from PAT only

if declared during the year.
 Example– Preference Dividend
• At 31 December 20X8, BZ Bhd has 50,000 8%
cumulative preference shares, 25,000 10% non-
cumulative PS and 400,000 ordinary shares. All shares
have a par value of RM 1 each. Preference dividends
are two years in arrears. In the current year, BZ Bhd
declares dividends for the PS based on the coupon
rate and 2% dividends for the OS. Profit after tax for
the company for the year ended 31 December 20X8
amounted to RM60, 000.

• Assuming a tax rate of 28%, determine the basic EPS of

BZ Bhd for the year ended 31 December 20X8.

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 Answers:
• CPS (50,000 x RM 1 X 8%) = RM4,000
• NCPS (25,000 x RM1 X 10%) = RM2,500

• Basic EPS = 60,000 – 6,500

400,000
= 0.13 sen

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 Formula of EPS
(Changes in share capital)
• ↑ or ↓ in issued share capital
1.New shares issued at market price
2.New shares issued at mkt. price & some shares
repurchased (share buy-back)

EPS = PAT – Preference dividend

Weighted average number of OS (WANOS)

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 Example - WANOS
• ABC’s accounting year end is 31 December every year.
For the year ended 31 December 20X7, the following
transactions took place:

1 January OS in issue 1,000,000

1 March 100,000 shares issued 100,000
1 June 300,000 shares issued 300,000
1 Dec 20,000 shares repurchased (20,000)

• The profit attributable to the ordinary shareholders as at

31 December 20X7 is RM600, 000.

Determine the basic EPS of BZ Bhd for the year ended 31

December 20X7.
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 Answer: The WA number of shares is:
WANOS
1 Jan – 28 Feb 1,000,000 x 2/12 166,667
1/3 issue 100,000
1 Mar – 30 May 1,100,000 x 3/12 275,000
1/6 issue 300,000
1 June – 30 Nov 1,400,000 x 6/12 700,000-
1/12 buy back (20,000)
1 Dec – 31 Dec 1,380,000 x 1/12 115,000

As at 31 Dec 1,380,000 1,256,667

The profit attributable to ordinary shareholders as at 31 Dec 20X7 is
RM600,000.
Therefore EPS = 600,000
1,256,667 = 48 sen
 Formula of EPS (Changes in share capital)

• ↑ or ↓ in issued share capital

3.New shares issued without corresponding
increase or inflow of net assets :
• Bonus issue = example 6 (pg 199)
• Share split = example 7 (pg 199)
• Reverse share split (share consolidation) =
example 8 (pg 200)

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 Formula of EPS (Changes in
share capital)
• Step 1 – calculate the EPS after the bonus
issue/share split/share consolidation
EPS = PAT – Preference dividend
WANOS (after the adjustment)

• Step 2 – calculate the EPS for the previous year’s

comparative
EPS = EPS reported in previous period X
reciprocal of the bonus factor

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 Example - BONUS ISSUE
• ABC Bhd has 5 million OS in issue at 1January
20X7. On 31 July, the company made a bonus
issue of 1 for 4. Earnings for the year ended 31
December 20X7 were RM2,000,000. The EPS for
20X6 was 30 sen.

• Calculate the basic EPS for 20X7 and the 20X6

comparative.

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• For a bonus issue, this is done by multiplying
the original share capital by the bonus factor.
• Eg: if the bonus issue is 1:4 (1 share given for
every 4 held), then the bonus factor is 5/4.
• This is irrespective of the date when the bonus
issue is made.
• The previous year EPS figures also must reflect
the new changes (recomputed)
 Solution - BONUS ISSUE
Bonus issue of 1 for 4 = bonus fraction 5/4

Date Transactio No. of shares Time Bonus WANOS

ns factors fraction
1/1 – Opening 5,000,000 - 5/4 6,250,000
31/7 issue

31/7 – BI of 1:4 1,250,000 - -

31/12
For basic EPS 6,250,000 6,250,000

EPS 2007= RM2,000,000 Restated EPS 2006

6,250,000 = 30 sen x 4/5 = 24 sen
= 32 sen 19
 Example - SHARE SPLIT
ABC Bhd has 5,000 OS in issue at 1 January 20X7.
On 31 July, the company split the shares 1:4.
Earnings for the year ended 31 December 20X7
were RM2,000. The EPS for 20X6 was 30 sen.

•Calculate the basic EPS for 20X7 and the 20X6

comparative.

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• Example 5: ABC Bhd has 5,000 OS in issue as at 1
Jan 20X7. On 31 July, the company split shares 1:4.
Earnings for the year ended 31 Dec 20X7 were
RM2,000. The EPS for 20X6 was 30 sen.

• The number of shares outstanding after the share

split would be:
5,000 x 4 = 20,000
EPS would be: RM2,000/20,000 = 10 sen
• The EPS for the previous period i.e 20X6 is restated
using the inverse split factor:
30 sen x ¼ = 8 sen (rounded to nearest sen)
 Example– SHARE
CONSOLIDATION

• ABC Bhd has 5 million OS in issue at 1 January

20X7. On 31 July, the company made a decision
to consolidate the shares 4:1. Earnings for the
year ended 31 December 20X7 were
RM2,000,000. The EPS for 20X6 was 30 sen.

• Calculate the basic EPS for 20X7 and the 20X6

comparative.

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• Example 6: ABC Bhd has 5 million OS in issue as at 1
Jan 20X7. On 31 July, the company made a decision
to consolidate the shares 4:1. Earnings for the year
ended 31 Dec 20X7 were RM2,000,000. The EPS for
20X6 was 30 sen.

• The number of shares outstanding after the consolidation would

be:
5,000,000/4 = 1,250,000
EPS would be: RM2,000,000/1,250,000 = RM1.60
• The EPS for the previous year comparative i.e 20X6 is restated
using the inverse of consolidation fraction:
30 sen x 4 = RM1.20
 Formula of EPS (Changes in share
capital)
• ↑ or ↓ in issued share capital
• Right issue
• In calculating basic EPS, 2 factors to be consider:
1.Bonus fraction
2.Weighted average number of OS after right issue

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 • EPS = PAT - Preference dividend
WANOS before RI + WANOS after RI
Steps:
Theoretical ex-rights price

Bonus fraction FV of shares prior to exercise of rights

= Theoretical ex-rights price

WANOS before RI No. of shares before RI X Time factor X Bonus

= fraction

WANOS after RI No. of shares after RI X Time factor

=

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 Example – RIGHT ISSUE
XYZ has 5,000,000 ordinary share in issue at 1 Jan
20x7. On 31 July 20x7, a right issue of 1 for 4 at
50 sen per share was made. The market price of
the shares prior to the issue was RM1 per share.
Earnings for the year ended 31 December 20x7
were RM2,000,000. The EPS for 20x6 was 30 sen
per share.

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 Solution
Theoretical ex-rights price

Mkt value before RI 4 shares x RM1.00 = RM4.00

Proceeds from RI 1 share x RM0.50 = RM0.50
5 shares RM4.50

Therefore TERP = RM4.50

5 shares
= RM 0.90

Bonus fraction = 1.00

0.90

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 Solution
Date Transactio No. of shares Time Bonus WANOS
ns factors fraction
1/1 – Opening 5,000,000 7/12 1.00/0.9 3,240,741
31/7 issue 0

31/7 – RI of 1:4 1,250,000

31/12
6,250,000 5/12 2,604,167
For basic EPS 5,844,908

EPS = RM2,000,000 Restated EPS 20x6 = 30 sen x 0.90

5,844,908 1.00
= 34.2 sen = 27 sen

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 Diluted EPS
• A company may have issue certain types of
financial instruments that give rights to OS
at a future date = Issue of potential OS
• Share warrants and Options
• Issue of convertible preference shares
• Issue of convertible debentures
• Not actual but potential (may or may not
occur in future)
• To present the ‘worst’ situation

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 Diluted EPS
• An enterprise with POS that are dilutive in nature
is required to present both basic EPS and diluted
EPS.

• Dilution only take place only when size of EPS

becomes smaller.

• If increase EPS, then anti dilutive in nature and the

effect are ignored in calculating diluted EPS

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 Share Warrants and Options
• Special rights given to certain people to acquire OS
directly from company.

• Holders of option will be inclined to exercise their

rights only if exercise price is lower than current
market price.

• No adjustment to numerator (PAT)

• Adjust denominator only

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 Formula of Diluted EPS for
Share Warrants and Options
• Diluted EPS (DEPS):
PAT – Preference dividend
WANOS as per basic EPS + Wt avg no of
additional shares issued for no
consideration
↓
Option shares X difference between FV and
exercise price
FV
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Example
JKL Bhd has issued share options where the holders have the rights to subscribe for 1,000,000 RM 1 OS at RM 5 per
share. The fair value per share during the year was RM 7. The PAT during the year amounted to RM 20,000,000.
The WANOS in issue during the year was 100,000,000.

Date Transactio No. of shares Time Bonus WANOS

ns factors fraction

For basic EPS 100,000,000 - 100,000,000

POS
Options (Shares issued for no consideration) 285,714

[1 mill X (RM 7 –RM 5)]

RM 7
For diluted EPS 100,285,714

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• JKL Bhd has issued share options where the holders have
the rights to subscribe for 1,000,000 RM 1 OS at RM 5 per
share. The fair value per share during the year was RM 7.
The PAT during the year amounted to RM 20,000,000. The
WANOS in issue during the year was 100,000,000.

• Basic EPS = RM20,000,000 = RM0.20 @ 20 sen

100,000,000

• Diluted EPS = RM20,000,000

100,285,714
= RM0.1994 @ 19.94
sen

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 Convertible financial instruments
• Convertible financial instruments that give
holders the right to convert securities into OS.
• B4 conversion, company pay interest on
debenture or dividend on PS
• Its necessary to adjust both numerator and
denominator of basic EPS formula
• Computation of diluted EPS requires
assumption about conversion date and
savings of interest

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Adjust Numerator for Convertible
financial instruments
• The PAT should be adjusted by adding back:
 Interest on debenture for convertible debenture
 since convertible debenture deemed to have been
converted into OS, interest on debenture would not
have to be paid
 Preference dividend for convertible preference
shares
 Need not deduct preference dividend because
convertible PS deemed to have been converted into
OS.

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 Adjust Denominator for
Convertible financial instruments
• Assumption of conversion date is important
because it effects calculation of WANOS

• Assumptions of conversion date:

If issued earlier than current period,
assume conversion on the first day of
period
If issued during current period, assume
conversion on date of issue

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 Formula of Diluted EPS – for
convertible financial
instruments
• Diluted EPS (DEPS):

Earnings per basic EPS + Adjustment for dilutive POS

No. of shares per basic EPS + Adjustment for dilutive POS

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 Example
ABC Bhd has RM4 million 8% convertible debentures in issue
during the year ended 31 December 20X7. The following are
the terms of conversion for every RM100 of debentures:
31 December 20X7 125 ordinary shares
31 December 20X8 122 ordinary shares
31 December 20X9 120 ordinary shares
The WANOS in issue during the year was 200,000,000 while
RM50,000,000 profits are available to ordinary shareholders
during the year.
Assuming a tax rate is 30%, calculated the diluted EPS

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 Example
• Adjustment on Numerator:
PAT = 50,000,000
+ Interest on convertible debenture = 224,000
(8% X 4,000,000 X 0.7)
= 50,224,000

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 Example
Date Transactions No. of shares Time Bonus WANOS
factors fractio
n
For basic EPS 200,000,000 - 200,000,000

POS

8% convertible debenture 5,000,000

[4,000,000 X 125]
100

For diluted EPS 205,000,000

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• Diluted EPS (DEPS):

Earnings per basic EPS + Adjustment for dilutive PO

No. of shares per basic EPS + Adj. for dilutive POS

= 50,224,000
205,000,000

= 0.245 @ 24.5 sen

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 Limitations of EPS
• It is based on historical results
• Comparisons maybe meaningless due to
• Single line of business compare with multiple line of
business
• Different business may use different accounting
conventions
• Interpreting trends in a single ratio may be difficult
because of the effect of unknown economic or
competitive forces on the organization
• When the company manipulate or misrepresent
their financial statements
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 Presentation of EPS
• An entity shall present basic and diluted EPS for
profit or loss from continuing operations
attributable to the ordinary equity holders of the
parent entity.

• An entity shall present basic and diluted EPS

even if the amounts are negative (i.e. loss per
share)

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 Disclosure requirements of
MFRS 133
• An entity should disclosed the following:
• Basic earnings per share and diluted earnings per
share; and
• The weighted average number of ordinary shares
used for basic and diluted EPS.

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 Determining the order in which to
include dilutive instruments

• Entity may have more than one POS.

• According to MFRS 133, Paragraph 44 each issue or series

of POS is considered separately rather than in aggregate.

• Find out which financial instruments has the most dilutive

to the least dilutive (Ranking No.)

• Which means, find out the dilutive POS with the lowest
earnings per incremental share
 Example
• Ardani Co has 5,000,000 OS of 25 sen each in
issue, and also had in issue in 20X9:
a) RM1,000,000 of 14% Convertible loan stock,
convertible in three years’ time at the rate of 2
shares per RM10 of stock
b) RM2,000,000 of 10% Convertible loan stock,
convertible in one years’ time at the rate of 3
shares per RM5 of stock.
Total earnings in 20X9 were RM1,750,000,
EPS = 1750000/5000000 = 35 sen
Income tax rate is 35%
 Incremental EPS
Increase in Increase in no. of Increment Ranking
earnings Ordinary shares al EPS

14 % 14% X 1 MILL 1,000,000 x 2/10 RM0.455@ 2

CLS X65% = RM91,000 = 200,000 shares 45
.5 sen

10% 10% X 2 mill X 65% = 2,000,000 x 3/5 RM0.108 @ 1

CLS RM130,000 = 1,200,000 shares 10.8 sen
 Diluted EPS
PAT WANOS EPS Effect
attributable
to ord.
shareholders
RM
As reported 1,750,000 5,000,000 35 sen

10% loan 130,000 1,200,000

stock
1,880,000 6,200,000 30.32sen Dilutive
14% loan 91,000 200,000
stock
1,971,000 6,400,000 30.79 sen Anti-dilutive
(30.79 > 30.32)

Diluted EPS = 30.32 sen

• For Share Options = do not affect the numerator
of the calculation and therefore, it will be the
first (1st) ranking.