IAS 33- EARNING

PER SHARE
DILUTED EARNING PER SHARE
BY CPA KIBHULI MWITA, BAF(MU),
CPA(T), CPB(IP).
Recall sessions
Basic Earning
Per Share
 Test your understanding 1

• A company issued 20,000 ordinary shares at their market

price of TZS500 per share on 1 July 20X7. Its share capital
prior to the issue was 200,000 and its profits after tax were
TZS 5,000,000 for the year to December 20X6 and TZS
7,000,000 for the year to 31 December 20X7.

• Required:

• Calculate basic earning per share in each year

 Test your understanding 2

• At 1 January 20X7 a company had 100,000 TZS100 shares in

issue, of which 80,000 are fully paid up. The rest of the
shares in issue were paid up to TZS75. The remaining TZS25
on the partly-paid shares was collected on 30 June 20X7.

• Required:

• Calculate the weighted average number of ordinary shares to

be used in calculation of earnings per share.
 Test your understanding -3

• A company has a share capital of 400,000 ordinary

shares, when it decides to make a bonus issue of 1
for 4 on 1 April 20X6. Its profits for the year to 31
December 20X5 were TZS 6,000,000 and its
profits for the year to 31 December 20X6 were
TZS 6,500,000
• Required:
• Calculate the basic earning per shares
 Test your understanding-4
• Entity L had 36,000,000 shares in issue on 1 January Year 2. It made
a 1 for 4 rights issue on 1 June Year 2, at a price of TZS 400 per
share. The share price just before the rights issue was TZS500.
• Total earnings in the financial year to 31 December Year 2 were TZS
2,512,500,000. The reported EPS in Year 1 was TZS 64.
• Required
• Calculate the EPS for the year to 31 December Year 2, and the
adjusted EPS for Year 5 for comparative purposes.
 Introduction

• Dilution refer to a reduction in earnings per share or increase in loss

per share resulting from assumption that convertible instruments are
converted, that options or warrants are exercised or that ordinary
share are issued upon fulfillment of specified condition.

• Dilution refers to a reduction in earnings per share or increase in

loss per share resulting from assumption that potential ordinary
shares are converted or excised upon fulfillment of specified
condition.
 Introduction

• Potential ordinary shares refer to financial instruments or

other contract that may entitle its holder to ordinary shares.

• Potential ordinary shares will be treated as dilutive only if

their conversion to ordinary shares would decrease earnings
per share from continuing operation.
 Why is diluted EPS
calculated?
• Diluted EPS is calculated because it is very useful to both existing
shareholders as well as potential shareholders.

• The later wants to decide either to buy the shares or not while the
former are interested what the earnings per share could be in the
future on the share held by them.
DEPS- when convertible debts
exist
 Adjust the profit attributable to ordinary shareholder and weighted
average number of shares outstanding for the effect of all dilutive
potential ordinary shares.

 The diluted earning per share is calculated using: -

o A new number of shares

o New earnings figure

DEPS- when convertible debts
exist
• A new number of shares is obtained by taking basic weighted
average number of shares plus average number of shares which
could be issued on the conversion of dilutive potential ordinary
shares.

• If there is more than one options, always presumes that the

maximum number of ordinary shares issued on conversion (choose
the option giving you a maximum number of ordinary shares in
conversion).
DEPS- when convertible debts
exist
• New earning figure is obtained by taking basic
earning attributable to ordinary shareholders plus
incremental incomes from conversion convertible
debts into equity shares net of tax payable
 Example

• Kinax company is a public limited company listed in Dar es salaam stock exchange with
issued and full paid up capital of TZS 100,000,000 equity shares divided into a face
value of TZS 100. The profit for the year ending 2019 stood at TZS 200,000,000. On
31st March 2019, the company issued TZS 200,000,000 6% convertible bonds and the
terms of conversion were: -

 100 shares per TZS 100,000 if converted within five years

 110 shares per TZS 100,000 if converted after five years

 Tax rate is 30%

• Required: Calculate diluted earnings per share.

 DEPS- when convertible debt
exist
• Where there has been actual conversion of the dilutive potential
ordinary shares into ordinary shares in the period, a further
adjustment is required.

• New shares will be included in calculation of Basic earning per

share from the date of conversion and at the same time these
shares must be included in calculation of the diluted earning per
share up to the date of conversion .
 Example 2

• The financial structure of Kinax company as at 1 st January 2017 stood as follows:

• Equity shares capital, each TZS 50 TZS 50,000,000

• 5% convertible bonds (converted to 120 ordinary shares per TZS 100) TZS
100,000,000

• Kinax made a profit of TZS 200,000,000 for the year ending 31 st December 2017. On
31st March 2017, holder of TZS 25,000,000 5% convertible bonds converted to
ordinary shares. The corporate tax rate of Kinax is 30%

• Required:

• Calculate basic and diluted earnings per shares

 DEPS- when share options
exist
 An entity should assume the exercise of dilutive options and other
dilutive potentials ordinary shares of the entity. Any proceed from
those issue should be considered to be received from the issue of
shares at fair value

 The difference between number of shares issued under option and

number of shares which would have been issued at fair value should
be treated as an issue of ordinary shares for no consideration.
 DEPS- when share options
exist
 Share option stipulates two elements:

a) A contract to issue a number of shares at fair value- anti-

dilutive and not included in calculation of diluted earnings per
shares.

b) A contract to issue the remaining ordinary shares granted

under option for no consideration- Dilutive and will be
included in calculation of diluted earnings per share.
 Example 3

• The following information has been obtained from Kinax company limited: -

• Equity shares outstanding at the beginning of the year - 1,000,000

• Profit for the current year ending 31 December 2018- TZS 10,000,000

• Average fair value – TZS 800 per share

• The company has a share option to purchases 200,000 ordinary shares at TZS 600.

• Required:

• Calculate diluted earnings per shares

 Limitation of Earning Per
Share
• Earning per share may be affect by a lot of factor hence
limit its useful a better measure of performance. Some
of these factors are:-

• Choice of the accounting policies

• Prediction of the future earnings
• Its not the only measure of performance
Thank you for listening