Earnings per share
AS- 20 is mandatory in nature for all those enterprises which fall under purview of Level- I enterprises.
Objective and scope –
Of this standard is to prescribe principles for determination and presentation of earnings per share [EPS]
which will improve comparison of performances among different enterprises and among different
accounting periods. The focus of AS-20 is on the denominator of the earnings per share.
Following terms are used in the standard as defined-
An equity share is a share other than a preference share
A preference share is a share carrying preferential right to dividends and repayment of capital
A financial instrument gives rise to both a financial asset of one enterprise and financial liability or
equity shares of another enterprise
Fair value is the amount for which an asset could be exchanged between knowledgeable parties
dealing in arm’s length transaction
A potential equity share-
Is a financial instrument that entitles, or may entitle its holders to equity shares.
Potential equity shares may arise in different cases as follows:
Debt instruments or preference shares , that are convertible into equity shares
Share warrants
Employees stock option plans under which employees of an enterprise are entitled to receive
equity shares
Shares which would be issued in a situation such as the acquisition of business or other assets or
shares issuable under a loan contract upon default of payment of principal or interest
TYPES OF EARNINGS PER SHARE
As a rule there are two types of earnings per share –
Basic earnings per share and diluted earnings per share
Basic earnings per share [BPS] – should be computed by dividing the net profits or loss for the period
attributable to equity shareholders by the weighted average number of equity shares outstanding
during the period.
Net profit for this purpose means profit available after tax and preference dividend.
The amount of preference dividend to be deducted is as follows-
The full amount of preference dividend in case of cumulative preference shares, whether or not
the preference dividend has been proposed for the period.
In case of non- cumulative preference shares, amount of preference dividend is deducted if it is
provided for the period.
If the company has different classes of equity shares, net profit or loss for the period is apportioned over
different classes with reference to the dividend right of different classes.
For the purpose of calculation of basic EPS, the number of equity shares means the weighted average
number of equity shares outstanding during the period.
The weighted average is calculated by considering the number of days for which the specific number of
shares was outstanding. The number of days, for this purpose, starts in different cases as follows:
In case of issue of shares for cash The day when cash is receivable
In case of conversion of loan or debt into equity The day when such loan or debt is converted
shares
In case of issue of equity share in lieu of interest The day when the interest ceases to accrue
In case of issue of equity shares in settlement of a The day when the settlement becomes effective
liability
In case of issue of equity shares for acquiring an The day when such acquisition is recognised in the
asset books of accounts
In case of issue of equity shares for rendering The day when such services are rendered
services
In case of amalgamation in the nature of merger The beginning of reporting period
In case of amalgamation in the nature of purchase The day when the acquisition becomes effective
In certain cases equity shares are issued without a corresponding change in resources, such as –
A bonus issue
Share split and
Consolidation of shares.
In these cases, the number of equity shares changes without change in economic resources of the
enterprise. The number of outstanding shares, before any of these events, is adjusted for the issue of
shares as a result of the event, and is considered as if the event has taken place in the beginning of the
earliest reported period.
For example Bonus-dene-wala Limited has issued bonus shares in the current year – 2011 and financial
results of the two previous years 2009 and 2010 have also been reported, and then the bonus shares
issued will be taken into account as if such shares were issued in the beginning of year 2009.
Partly paid equity shares are treated as fraction of an equity shares. If the company has issued equity
shares of different denominations, the number of equity shares is calculated by converting all such shares
into equivalent number of equity shares of same par value.
Right shares –
Are generally issued at a price less than market / fair value, so, there is an element of bonus in issue of
right shares. For the purpose of Basic EPS, the number of equity shares to be used is as follows –
Number of equity shares prior to Right Issue x Cum- Right Price
Ex- Right Price
Diluted earnings per share – DEPS
Is calculated by dividing the net profit or loss for the period by the weighted average number of shares
outstanding including the dilutive potential equity shares. Important point worth noting in this regard are-
Profit attributable of equity shares is equal to
Net profit attributable to equity shares
+ Preference dividend payable to convertible preference shares
+ Corporate dividend tax payable on preference dividend
+ Interest paid on the convertible loan or debts
- Tax savings
Weighted average number of equity shares for the purpose of DEPS includes both the existing shares
as on the date of calculation as well as the potential equity shares which shall be issued out of
conversion of preference shares , loan or stock options schemes.
Share application money received but allotted by the company and is being used by it is treated as
dilutive potential equity shares for the purpose of computing DEPS.
Dilutive and anti- dilutive shares –
The potential equity shares are treated as dilutive when conversion results in decrease in EPS while on
the other hand when conversion results in increase in EPS, potential equity shares are treated as anti-
dilutive.
Issue of equity shares under stock option at a price less than fair value-
Quite often a company issues equity shares at a price, which is less than the fair value, on the exercise of
stock option by employees. The proceeds per share by the company is less than the fair value of the
equity share. In this case, total proceeds receivable by the company shall be divided by the fair value per
share. The resultant figure is the number of shares that should have been issued. The difference between
the actual number of shares issued and the number of shares that should have been issued is treated as
issue of shares for no consideration. Such equity shares generate no proceeds but are dilutive in nature.
Disclosure –
AS-20 requires that an enterprise should disclose the following –
The amounts used as the numerators in calculating basic and diluted earnings per share and a
reconciliation of those amounts to the net profit or loss for the period
The weighted average number of equity shares used as denominator in calculating BEPS and DEPS
The nominal value of shares along with the earnings per shares figures
Question - 1
Winsome Limited has 10,000 equity shares outstanding on 1.1.2008. Find out the weighted average
number of equity shares for the year 2008, for the purpose of calculation of Basic EPS in each of the
following cases –
I]
The company issued 2,000 equity shares for cash on 1.1.08
Shares outstanding on 1.1.04 10,000
Shares issued on 1.1.04 2,000
W.A 12,000
ii]
Issue of 2000 shares for cash on 1.4.2008
Shares outstanding on 1.1.2008 = 10,000
Shares issued on 1.4.08 – 2000 x9/12 = 1500
WA = 11,500
iii]
Company issued 2000 equity shares on 1.10.08, 50% paid up
Outstanding in the beginning = 10000
Issued = 2000 x 50% x 3/12 = 250
WA = 10250
Iv]
Issue of shares as Bonus shares 2000 on 1.4.08
Shares in the beginning = 10,000
Bonus shares = 2,000
WA = 12,000
Question - 2
Find out the EPS for the year 2008 from the following particulars:
Shares outstanding on 1.1.08 = 500,000
Issue of shares for cash on 1.7.08, fully paid = 170,000
Bonus shares on 1.4.08 in the ratio of 1:2
Profit for the year = Rs. 15,00,000
Solution
Shares outstanding on 1.1.08 = 500,000
Bonus issue on 1.4.08 = 250,000
Fresh issue on 1.7.08 = 170,000 x 6/12 = 85,000
Weighted average = 835.000
Basic EPS = 15,00,000 / 835,000 = 1.80
Question- 3
Number of Equity Shares in the beginning 6,00,000
12% Preference share capital in the beginning Rs.15,00,000
10% Debentures Rs.20,00,000
Fresh issue of shares at the end of third month 1,20,000
Profit for the year after tax Rs. 21,00,000
Solution -
Weighted average number of shares 600,000 + 120,000 x 9/12 = 690,000
Net Profit for the year Rs. 21,00,000
Less 12% Preference Dividend 180,000
Profit for Equity share holders 19,20,000
Number of equity shareholders 6,90,000
Basic EPS 19,20,000 / 690,000 Rs. 2.78
Question -4
In April, 2004 a Limited Company issued 1,20,000 equity shares of Rs. 100 each, Rs. 50 per share was
called up on that date which was paid by all the shareholders. The remaining Rs. 50 was called up on
1.9.2004. all shareholders paid the sum in September, 2004, except one shareholder having 24,000
shares. The net profit for the year ended 31.3.2005 is Rs. 2,64,000 after dividend on preference shares
and dividend distribution tax of Rs. 2,64,000. Compute basic EPS for the year ended 31.3.2005 as per
required standard.
Solution :
Weighted average no. of shares
1,20,000 1,20,000 x 5/ 12 x 50/100 25,000
96,000 96,000 x 7 / 12 x 100 / 100 56,000
24,000 24,000 x 7/ 12 x 50 / 100 7,000
88,000
EPS = 2,64,000 / 88,000 = Rs. 3.00 per share
Question -5
From the following information relating to Y Limited, calculate Earning per share [ EPS]:
Rs. In Crores
Profit before VRS Payments but after depreciation 75
VRS payments 32.10
Provision for taxation 10
Fringe benefit tax 5
Paid up share capital – [share of 10 each] 93
Depreciation 10
Solution:
Rs. In Crores
Profit before VRS Payments but after depreciation 75
Less: VRS payments 32.10
Provision for taxation 10
Fringe benefit tax 5
Net earnings 27.90
Number of shares 3.00
EPS Rs. 3 per share
Question - 6
From the following information relating to X Limited, calculate Diluted Earning per share [ EPS]:
Net profit for the year Rs. 2,00,00,000
Number of equity shares outstanding 40,00,000
Basic earning per share Rs. 5.00
Number of 11 % convertible debentures of Rs. 100 each. 50,000
Each debenture is convertible into 8 equity shares.
Interest expense for the year Rs. 5,50,000
Tax saving relating to interest expense – 30% Rs. 1,65,000
Solution:
Adjusted net profit for the current year = 2,00,00,000 + Interest Expense of Rs. 5,50,000 – Tax savings of
Rs. 1,65,000 = Rs. 2,03,85,000
Number of equity shares resulting from conversion of debentures + 50,000 x 8 = 4,00,000 Equity shares
Total number of equity shares resulting from conversion = Rs. 44,00,000
Diluted earnings per share = 2,03,85,000 / 44,00,000 = Rs. 4.63 per share
Question – 7
Find out the Basic EPS for the year 2010 from the following particulars:
Shares outstanding on 1.1.2011 5,00,000
Issue of shares for cash on 1.07.2011 1,70,000
Bonus shares on 1.04.2011 in the ratio of 1:2
Profits for the year Rs. 15,00,000
Answer – Rs. 1.80
Solution -
Number of bonus shares = 5,00,000 x 1 / 2 = 2,50,000
Thus EPS = 15,00,000 / 5,00,000 + 2,50,000 + 1,70,000 x 6 / 12
= 15,00,000 / 8,35,000 = 1.796 approximately i.e. Rs. 1.80
Question – 8
Profits and Gains Limited has 5,00,000 shares outstanding in the beginning of the year. The fair value of
the share was Rs. 45. It issued Right Shares in the ratio of 2:5 @ Rs. 36 per share midway during the
year. Find out the Basic EPS for the year given that the company earned a net profit of Rs. 25,00,000 for
the year.
Answer- EPS- Rs. 4.13
Computation :
1)Theoretical ex-right fair value per share:
[(Rs 45 x 5,00,000) + (Rs 36 x 2,00,000)] / (5,00,000 + 2,00,000) i.e. = 297,00,000 / 7,00,000 = Rs 42.42.
2) Adjustment factor:- fair value prior to exercise of rights/theoretical ex-right value. i.e. 45/42.42= 1.06
EPS as originally reported
Rs. 25.00,000/5,00,000 shares 5.00
EPS restated for right issue
Rs. 25,00,000/(5,00,000×Rs 1.06) 4.71
Question – 9
Godavari Gold Fertilizers’ Limited has 1,00,000 shares outstanding the beginning of the year. The fair
value of the share was Rs.30. It issued Right Shares in the ratio of 1:5 @ Rs. 20 per share midway during
the year. Find out the Basic EPS for the year given that the company earned a net profit of Rs. 18,00,000
for the year. Also compute Re-stated EPS for previous year if profits of the previous year are Rs.
14,00,000
Answer- EPS- Rs. 15.53 Re-stated EPS Rs. 13.22
Computation :
1)Theoretical ex-right fair value per share:
[(Rs 30 x 1,00,000) + (Rs 20 x 20,000)] / (1,00,000 + 20,000) i.e. = Rs 28.33.
2) Adjustment factor:- fair value prior to exercise of rights/theoretical ex-right value. i.e. 30/28.33= 1.05
EPS as originally reported
Rs. 14.00,000/1,00,000 shares 14.00
EPS restated for right issue
Rs. 14,00,000/(1,00,000×Rs 1.06) 13.20
EPS-for current year including rights
Rs. 18,00,000/(1,00,000× 1.06 x 6/12) + (1,20,000 × 6/12) 15.92
Question – 10
Adaa and Nazaakat Limited has given option to its employees to subscribe 1,00,000 Equity shares @ Rs.
15 within a period of one year. At present, the fair value of the share is Rs. 25. Company has 5,00,000
Equity shares outstanding and the net profits for the current year is Rs. 16,00,000. Find out the Basic and
the diluted EPS for the year.
Solution
Earnings shares Earnings per share
Net profit for the year 16,00,000
Weighted av. No. of sh. 5,00,000
Basic EPS 30 lacs / 12 lacs 3.20
Number of shares under stock option 1,00,000
Number of shares that would have (60,000)
been issued at fair value 1,00,000 x
15 / 25
5,40,000
DEPS 16 lacs / 5.40 lacs 2.96
Answer - Basic EPS Rs. 3.20, Diluted EPS Rs. 2.96
Question – 11
Fifty-Five Limited provides the following information for the year:
Number of shares outstanding 5,00,000
Net profit for the year [after tax] Rs. 11,00,000
The company had 1,00,000 15% debentures of Rs. 100 each. These debentures are compulsorily
convertible into 4 equity shares per debentures. Find out the Basic EPS and diluted EPS given the tax
rate 35%.
Answer - Basic EPS Rs. 2.20, Diluted EPS Rs. 2.305
Solution:
Adjusted net profit for the current year = 11,00,000 + int. on Deb. Rs. 15,00,000 - tax savings 5,25,000
(35% of 15,00,000) = Rs. 20,75,000
Number of equity shares resulting from conversion of Debentures = 4,00,000 Equity shares
Total number of equity shares resulting from conversion = Rs. 9,00,000
Diluted earnings per share = 20,75,000 / 9,00,000 = Rs. 2.305 per share
Question – 12
The flight of all Season’s Limited has 10,00,000 Equity shares outstanding and the net profit attributable
to these shares is Rs. 35,00,000. The average fair value of the share during the year is Rs. 75. The
company has 1,00,000 10% preference Shares of Rs. 100 each to be converted into 2 Equity Shares.
Compute Basic and the diluted EPS for the year.
Answer - Basic EPS Rs. 3.50, Diluted EPS Rs. 3.83
Solution:
Adjusted net profit for the current year = 35,00,000 + preference dividend of Rs. 10,00,000 = Rs.
45,00,000
Number of equity shares resulting from conversion of Preference Share = 2,00,000 Equity shares
Total number of equity shares resulting from conversion = Rs. 12,00,000
Diluted earnings per share = 45,00,000 / 12,00,000 = Rs. 3.75 per share
Question – 13
All Season’s Limited has 12,00,000 Equity shares outstanding and the net profit attributable to these
shares is Rs. 30,00,000. The average fair value of the share during the year is Rs. 25.company has
options to subscribe 2,00,000 equity Shares at Rs. 15 each. Compute Basic and the diluted EPS for the
year.
Answer - Basic EPS Rs. 2.50, Diluted EPS Rs. 2.40
Earnings shares Earnings per share
Net profit for the year 30,00,000
Weighted av. No. of sh. 12,00,000
Basic EPS 30 lacs / 12 lacs 2.50
Number of shares under stock option 2,00,000
Number of shares that would have (1,20,000)
been issued at fair value 2,00,000 x
15 / 25
12,80,000
DEPS 30 lacs / 12.80 lacs 2.40
Question – 14
Season’s Limited has 10,00,000 Equity shares outstanding and the net profit attributable to these shares
is Rs. 35,00,000. The average fair value of the share during the year is Rs. 75. Company has 2,00,000,
12% convertible Debentures of 100 each to be converted into 2 Equity shares. Compute Basic and the
diluted EPS for the year.
Answer - Basic EPS Rs. 3.50, Diluted EPS Rs. 4.21
Solution:
Adjusted net profit for the current year = 35,00,000 + int. on Deb. Rs. 24,00,000 = Rs. 59,00,000
Number of equity shares resulting from conversion of Debentures = 4,00,000 Equity shares
Total number of equity shares resulting from conversion = Rs. 14,00,000
Diluted earnings per share = 59,00,000 / 14,00,000 = Rs. 4.21 per share
Question – 15
Compute EPS:
a) Net profit for 2006 Rs 11,00,000
Net profit for 2007 Rs 15,00,000
b) Nos. of shares outstanding prior to Right Issue: 5,00,000 shares
c) Right Issue: one new share for 5 outstanding i.e. 1,00,000 new shares
d) Right price: Rs 15/-
e) Last date of right option: 1st March 2007
f) Fair value prior to the right option on 1st march 2007: Rs 21/- per equity share
Answer -
Computation :
1)Theoretical ex-right fair value per share:
[(Rs 21 x 5,00,000) + (Rs 15 x 1,00,000)] / (5,00,000+ 1,00,000) i.e. 1,20,00,000/6,00,000 = Rs 20/
2) Adjustment factor:- fair value prior to exercise of rights/theoretical ex-right value. i.e. 21/20=1.05
Year 2006 Year 2007
EPS as originally reported
Rs. 11.00,000/5,00,000 shares 2.20
EPS restated for right issue
Rs. 11,00,000/(5,00,000×Rs 1.05) 2.10
EPS-for 2007 including rights
Rs. 15,00,000/(5,00,000× 1.05x2/12)+(6.00,000× 1 0/12) 2.25
Question – 16
Compute EPS:
a) Net profit for 2009-10 Rs 25,00,000
Net profit for 2010-11 Rs 40,00,000
b) Nos. of shares outstanding prior to Right Issue: 12,00,000 shares
c) Right Issue: one new share for 3 outstanding i.e. 4,00,000 new shares
d) Right price: Rs 22/-
th
e) Last date of right option: 30 June 2010
f) Fair value prior to the right option on 30-6-2010 is Rs. 28
Answer -
Computation :
1)Theoretical ex-right fair value per share:
[(Rs 28 x 12,00,000) + (Rs 22 x 4,00,000)] / (12,00,000 + 4,00,000) i.e. = Rs 26.50.
2) Adjustment factor:- fair value prior to exercise of rights/theoretical ex-right value. i.e. 28/26.50= 1.06
Year 2009 -10
EPS as originally reported
Rs. 25.00,000/12,00,000 shares 2.08
EPS restated for right issue
Rs. 25,00,000/(12,00,000×Rs 1.06) 1.97
EPS-for 2010-11 including rights
Rs. 40,00,000/(12,00,000× 1.06 x 3/12) + (16.00,000 × 9/12) 2.64
Question -17
From the following information to X Limited, calculate Basic Diluted Earnings per share [ EPS]:
Net profit for the year Rs. 24,00,000
Weighted Average number of equity shares outstanding 2012 10,00,000
Average Fair value of one Equity Share during 2012 Rs. 25
Weighted average number of shares under option during the year 2,00,000
2012
Exercise price for shares under option during the year 2012 Rs.20
Ipcc- May – 2013 – 5 marks
Solution:
Earnings Shares Earnings per share
Net profit for the year 24,00,000
Weighted av. No. of sh. 10,00,000
Basic EPS 30 lacs / 12 lacs 2.40
Number of shares under stock option 2,00,000
Number of shares that would have (1,60,000)
been issued at fair value 2,00,000 x
20 / 25
10,40,000
DEPS 24 lacs / 10.40 lacs 2.3076
