EARNINGS PER SHARE

Objectives
• to prescribe principles for the determination and presentation of earnings per share (EPS)
amounts in order to improve performance comparisons between different enterprises in the
same period and between different accounting periods for the same enterprise.
Scope
• IAS 33 applies to entities whose securities are publicly traded or that are in the process of
issuing securities to the public.
• Other entities that choose to present EPS information must also comply with IAS 33.
• If both parent and consolidated statements are presented in a single report, EPS is required
only for the consolidated statements.
Significance of EPS
1. Measure firm's profitability
2. Denominator in price-earnings ratio (PE ratio)
- PE ratio is widely used as a basis for comparing share-valuation with peers
3. Basis of dividend policies of the company.
Required to Present EPS
• An entity whose securities are publicly traded (or that is in process of public issuance) must
present, on the face of the income statement, basic and diluted earnings per share for:
o a profit or loss from continuing operations attributable to the ordinary equity
holders of the parent entity; and
o a profit or loss attributable to the ordinary equity holders of the parent entity for the
period for each class of ordinary shares that has a different right to share in profit
for the period.
• Basic and diluted earnings per share must be presented with equal prominence for all
periods presented.
• Basic and diluted EPS must be presented even if the amounts are negative (that is, a loss
per share).
• If an entity reports a discontinued operation, basic and diluted amounts per share must be
disclosed for the discontinued operation either on the face of the income statement or in
the notes to the financial statements.
Basic vs. Diluted EPS
Simple Capital Structure Complex Capital Structure
Does not include potential ordinary shares Includes potential ordinary shares, when
exercised, would decrease earnings per
ordinary share
Report basic EPS only Report basic and diluted EPS
Potential ordinary shares
• convertible debt
• convertible preference shares
• share warrants
• share options
• share rights
• employee stock purchase plans
• contractual rights to purchase shares
• contingent issuance contracts or agreements (such as those arising in business combination)

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑜𝑓 𝑝𝑎𝑟𝑒𝑛𝑡 𝑒𝑛𝑡𝑖𝑡𝑦

Basic EPS = 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑟𝑒𝑝𝑜𝑟𝑡𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑

Numerator:
• After deducting amounts due to preference shareholders in respect of:
o Preference dividends (33:14)
o Gains/ losses arising on the repurchase or early conversion of preference shares
(33:16-17)
o Amortization of discount on increasing rate preference shares (33:15)
Definition of Different Types of Preference Shares
• Cumulative preference shares require the issuer to pay dividends, even if in arrears.
• Increasing rate preference shares are shares that are issued at a discount and that provide a
low initial dividend to compensate the issuer for selling at a discount. (33:15)
Adjusting for Preference Dividends
Scenario Treatment
Non-cumulative preference shares Deduct when declared
Cumulative Preference Shares Deduct when due (declared or not)
Increasing rate preference shares Amortization of discount treated as part of
preference dividend
Preference shares repurchased in a tender offer Excess deducted from net profit attributable
(FV > carrying value) to ordinary equity holders of parent entity
Early conversion of preference shares This is a loss to the issuer and shares a return
(Consideration > FV of ordinary shares to the preference shareholders. Deduct loss
issuable) from net profit attributable to ordinary equity
holders of parent entity
Illustration 1: Preference Share and Basic EPS
ABC's capital structure comprises the ff:
• 500,000 ordinary shares;
• P200,000 non-cumulative 6% preference share; and P100,000 4.5% cumulative preference
shares
Net profit: 2018 - P300,000; 2019 - P500,000
No dividend was declared or paid in 2018. In 2019, dividends were declared and paid on preference
shares. During 2019, 50,000 cumulative preference shares were repurchased at premium of P0.50
over their carrying value. Assume that preference dividends and gains or losses on repurchase of
preference shares have no tax effects. Calculate basic earnings per share for 2018 and 2019.
2019 2018
Net Profit 500,000 300,000
Preference Dividends
Non-cumulative (200,000 x 6%) -12,000
Cumulative (100,000 x 4.5%) -4,500 -4,500
Repurchase of PS (50,000 x 0.50) -25,000
Net Profit Attributable to ordinary shareholders 458,500 295,500
Ordinary Shares Outstanding 500,000 500,000
Basic Earnings Per Share 0.92 0.59

Illustration 2: Increasing Rate Preference Shares

Entity D issued non-convertible, non-redeemable class A cumulative preference shares of P100
par value on Jan. 1, 2016. The preference shares are entitled to a cumulative annual dividend of
P7 per share starting 2019. At the time of issue, the market rate dividend yield on the class A
preference share was 7% per year In consideration of the dividend payment terms, the class A
preference shares were issued at P81.63.
Discount = P100 - P81.63 = P18.37
NOTE:
• Discount is amortized to retained earnings using the effective interest method
• Treated as a preference dividend for earnings per share purposes
• Imputed dividend is deducted to determine the profit or loss attributable to ordinary equity
holders
Year CV, Jan. 1 Imputed Dividend CV, Dec. 31 Dividend Paid
2016 81.63 5.71 87.34 0
2017 87.34 6.12 93.46 0
2018 93.46 6.54 100.00 0
Thereafter 100.00 7.00 107.00 -7.00
Basic EPS
• Denominator (examples):
o The term "weighted average" refers to time-weighting, when there are changes in
the number of ordinary shares during the financial year.
• General rule:
o Shares are time-weighted from the date consideration is receivable (usually the date
of share issue) (33.21)
o Time-weighting is only performed when there is an inflow of resources

Scenario Date to use for time-weighting

Shares issued for acquisition/ Business combination Date of acquisition
Conversion of mandatorily convertible instrument Date of contract
Contingently issuable shares are issued Date when all necessary conditions are
satisfied

Calculating Basic EPS

Situation 1: New shares are issued for cash/ other assets

Illustration 3:
Company A had issued share capital of 3,000,000 ordinary shares at the beginning of the year. On
June 30, it issued 1,000,000 shares at fair market value for cash. Net profit attributable to ordinary
shares was P300,000 for the first 6 months and P800,000 for the full year.

800,000
Basic EPS = 6 6 = 𝑃0.23
(3,000,000 𝑥 )+(4,000,000 𝑥 )
12 12

Note: Time weighting is proportionate to the periods when the resources are made to the firm

Situation 2: Issue of bonus shares (share dividends (33:27)

• Bonus shares are issued out of reserves, such as capital reserves or retained earnings.
• Share capital increases, total number of shares increase, reserves decrease, total
shareholders' equity remains unchanged
o No inflow of resources -> not time-weighted
• Treatment:
o Any bonus issues taking place in a period are assumed to be issued at the beginning
of the period. (no time-weighting)
o Retroactively restate previous year's EPS comparatives based on new number of
shares.
Illustration 4:
Jobs Corp. had the following transactions during the year:
January 1 Ordinary shares outstanding, 400,000 shares
March 30 Issued 80,000 ordinary shares
June 30 Reacquired 120,000 shares
October 1 Issued a 20% share dividend
Determine Job's weighted average number of shares outstanding.
Date Shares Bonus Issue TW Factor WANOS
Jan. 1 400,000 1.20 12/12 480,000
Mar. 30 80,000 1.20 9/12 72,000
Jun. 30 -120,000 1.20 6/12 -72,000
Total 480,000

Situation 3: Share splits

• An existing share is split into 2 or more shares
• No inflow of resources > not time-weighted
• Retroactive restatement of comparative EPS
Situation 4: Consolidation of existing shares through reverse splits
• 2 or more shares are consolidated into one share
• No inflow of resources -> not time-weighted.
• Retroactive restatement of comparative EPS
Illustration 5:
Travis Inc. had 100,000 ordinary shares issued and outstanding at Jan. 1, 2019. During the current
year, Travis also had the ordinary share transactions as follows:
March 31 Issued 20,000 additional shares
June 30 Reacquired 40,000 shares
October 1 Reissued 20,000 of the previously reacquired shares
October 31 Implemented a 3-for-1 share split
December 1 Reissued the remaining previously reacquired shares
Determine Travis's weighted average number of shares outstanding.
Share TW
Date Shares Split Factor WANOS
Jan. 1 100,000 3 12/12 300,000
Mar. 31 20,000 3 9/12 45,000
Jun. 30 -40,000 3 6/12 -60,000
Oct. 1 20,000 3 3/12 15,000
Dec. 1 60,000 3 1/12 5,000
Total 305,000
Situation 5: Rights Issue
No. of shares issued = No. of shares if issue was at market price + No. of shares in the "bonus
element" (33:27b)
Appendix A2, rights issue includes a bonus element. If a rights issue is offered to all existing
shareholders, the number of ordinary shares to be used in calculating basic and diluted earnings
per share for all periods before the rights issue is the number of ordinary shares outstanding before
the issue, multiplied by the following factor:
𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑖𝑚𝑚𝑒𝑎𝑑𝑖𝑎𝑡𝑒𝑙𝑦 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡ℎ𝑒 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠
𝑇ℎ𝑒𝑜𝑟𝑒𝑡𝑖𝑐𝑎𝑙 𝑒𝑥 𝑟𝑖𝑔ℎ𝑡𝑠 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Illustration 6
On June 30, 2019, Atlantic Co. made a one-for-two rights issue at a subscription price of P1.50
per share to existing shareholders. The market price immediately before the exercise of rights issue
was P3.00. Atlantic Co's paid-up capital consisted of 10,000,000 shares as at Jan 1, 2019. The
company reported net profit attributable to ordinary shareholders of P2,500,000 for the year ended
Dec. 31, 2019. Determine the adjustment factor and BEPS.
𝐹𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟 =
𝐹𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 − 𝑠𝑢𝑏𝑠𝑐𝑟𝑖𝑝𝑡𝑖𝑜𝑛 𝑝𝑟𝑖𝑐𝑒
𝐹𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 −
# 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠 + 1
3 3 3 3
𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟 = = = = = 1.20
3 − 1.50 1.50 3 − 0.50 2.50
3− 2+1 3− 3

Net Profit to ordinary 2,500,000

From 1/1/19 to 6/30/19 (10,000,000 x 1.2 x 6/12) 6,000,000
From 7/1/19 to 12/31/19 (15,000,000 x 6/12) 7,500,000
Weighted average number of shares 13,500,000
Basic Earnings Per share 0.19

Situation 6: New issue of shares from the conversion of debt

• No inflow of cash, but reduction of debt -> which increases net assets of issuer.
• Interest expense on debt is saved -> Earnings increase
• Therefore, time-weighting should be applied.
Situation 7: Contingently issuable shares
• IAS 33:5 These are ordinary shares issuable for little/ no cash or other consideration upon
the satisfaction of specified conditions in a contingent share agreement
• When contingent events have occurred, such shares are time-weighted, even if the shares
have yet to be issued.
Illustration 7
On Jan. 1, 2019, Beta Co. acquired Alpha Corp., a franchisor for a reputable brand of sportswear.
The considerable was payable entirely in cash. The terms of acquisition included in the contingent
share. agreement that required Beta to issue 10,000 additional new shares to the shareholders of
Alpha Corp. for each franchise contract secured in 2019. One contract was secured on June 1, 2019
and another on Dec. 1, 2019. Beta's share capital is comprise solely of 100,000 ordinary shares.
There had been no issue of new ordinary shares during the year. Net profit attributable to ordinary
shareholders:
First half - year 138,000
Second half - year 250,000
Full year 388,000
Determine 2019 BEPS
Net Profit 388,000
Weighted Average number of shares
Beg. Balance 100,000
Incremental Shares
June 1 - 10,000 x 7/12 5,833
Dec. 1 - 10,000 x 1/12 833 106,667
BEPS 3.64

DILUTED EARNINGS PER SHARE

• It is EPS under the assumption of full conversion or exercise of potential ordinary shares
or issuance on satisfaction of specified conditions
• It is the "worst-case scenario" EPS
• What is the purpose of presenting diluted EPS?
o Enhance comparability for firms with complex capital structures
▪ Focuses on profitability rather than timing of actual conversions
o Provides indication of dilutive impact of existing potential ordinary shares
Anti-dilution
• If a conversion exercise of potential ordinary shares cause EPS to increase, anti-dilution
occurs
• IAS 33:41 - Potential ordinary shares that are anti-dilutive are excluded from the
calculation of diluted EPS
Is diluted EPS from continuing operations > basic EPS from continuing operations?

YES NO
Anti-dilution occurs. No anti-dilution.
Diluted EPS for (overall) profit loss attributable Include the potential ordinary shares in the
to ordinary shareholders is equal to basic EPS. computation of diluted EPS for (overall)
profit / loss attributable to ordinary
shareholders.

Scenario Impact on numerator

Dividends on convertible preference shares Not deducted from net profit
After-tax interest and amortization expenses on Added back to net profit after tax
convertible bond
Other expense (income) relating to potential Added back (deducted from) NPAT
ordinary shares

Adjustment to denominator
Potential ordinary shares are included in the denominator at the beginning of reporting period or
date of issue of potential ordinary shares, whichever is the later

Calculating Diluted EPS

1. Options/Warrants
• Call options and warrants are only dilutive if they are "in-the-money"
• Use the treasury method to calculate dilutive EPS
o assumed proceeds from exercise should be regarded as having been used to
repurchase ordinary shares at the average market price during the period.
o the difference between the number of ordinary shares assumed issued on
exercise and the number of ordinary shares assumed repurchased shall be
treated as an issue of ordinary shares for no consideration. [IAS 33.45]
Illustration 1 - Options and warrants
On Jan. 1, 2019, Maharlika Corp. had 400,000 ordinary shares outstanding with P100 par value.
The company also had 50,000 share options which entitle the holder to purchase one ordinary share
at P150. The fair value of the options is P10. The average market price of the ordinary share is
P250. Net income for the year was P2,500,000. Determine the entity's basic and diluted earnings
per share given the following independent situations:

1. None of the options were exercised throughout the year

Option Shares 50,000
Assumed Treasury Shares
Proceeds from exercise (50,000 x 160) 8,000,000
Average Market Price 250 -32,000
Incremental Shares 18,000
Outstanding Shares 400,000
WANOS for DEPS 418,000

BEPS (2,500,000/400,000) 6.25

DEPS (2,500,000/ 418,000) 5.98

2. The options were issued on July 1, 2019

NI WANOS EPS
BEPS 2,500,000 400,000 6.25
Options (18,000 x 6/12) 9,000
DEPS 2,500,000 409,000 6.11

3. The options were exercised on Oct. 1, 2019.

NI WANOS EPS
BEPS 2,500,000 412,500 6.06
Options (18,000 x 6/12) 13,500
DEPS 2,500,000 409,000 6.11

WANOS - BEPS = 400,000 + (50,000 x 3/12)

Incremental Shares = 18,000 x 9/12
 2. Convertible Instruments
• Use the "if-converted" method.
o The numerator should be adjusted for the after-tax effects of dividends and
interest charged in relation to dilutive potential ordinary shares and for any
other changes in income that would result from the conversion of the potential
ordinary shares. [IAS 33.33]
o The denominator should include shares that would be issued on the conversion.
[IAS 33.36]
Illustration 2: Convertible preference shares
Terpsichore Co. had 200,000 ordinary shares outstanding on Jan. 1, 2019. In addition, 100,000,
10%, P20 par convertible, cumulative preference shares were also outstanding. Each preference
share is convertible into 5 ordinary shares. Net income for the year was P1,500,000. Dividends on
the preference shares were declared and paid. Compute for the company's basic and diluted
earnings per share provided the following independent assumptions:
1. None of the preference shares were converted throughout the year.
NI WANOS EPS
BEPS 1,300,000 200,000 6.50
Preference Shares 200,000 500,000
DEPS 1,500,000 700,000 2.14

Preference = 100,000 x 20 x 10% = 200,000

Net Income for Ordinary = 1.5M – 200K = 1.3M

2. The preference shares were issued on Apr. 1, 2019.

NI WANOS EPS
BEPS 1,300,000 200,000 6.50
Preference Shares 200,000 375,000
DEPS 1,500,000 575,000 2.61

Converted Shares = 500,000 x 9/12 = 375,000

3. The preference shares were converted on Oct. 1, 2019.

NI WANOS EPS
BEPS 1,300,000 325,000 4.00
Preference Shares 200,000 375,000
DEPS 1,500,000 700,000 2.14

WANOS - BEPS = 200,000 + (500,000 x 3/12)

Converted Shares = 500,000 x 9/12 = 375,000
Illustration 3: Convertible bonds payable
The following data pertain to Mitzi Inc. for the calendar year 2019:

Net income 1,500,000

12% Convertible bonds 1,000,000
Ordinary shares 150,000
Tax rate 30%
Each P1,000 bond is convertible into 100 ordinary shares.
Determine the basic and diluted earnings per share of the entity given the following independent
situations:
1. None of the bonds were converted.
NI WANOS EPS
BEPS 1,500,000 150,000 10
Bonds Payable 84,000 100,000
DEPS 1,584,000 250,000 6.34

Interest = 1,000,000 x 12% x 70% = 84,000

Converted Shares = (1,000,000/1,000) x 100 = 100,000

2. The bonds were converted on June 30, 2019

NI WANOS EPS
BEPS 1,500,000 200,000 7.50
Bonds Payable 42,000 50,000
DEPS 1,542,000 250,000 6.17

Interest = 1,000,000 x 12% x 6/12 x 70% = 42,000

WANOS - BEPS = 150,000 + (100,000 x 6/12) = 200K
Converted Shares = 100,000 x 6/12 = 50,000

3. The bonds were issued on Oct. 1, 2019.

NI WANOS EPS
BEPS 1,500,000 150,000 10
Bonds Payable 21,000 25,000
DEPS 1,521,000 175,000 8.69

Interest = 1,000,000 x 12% x 3/12 x 70% = 21,000

Converted Shares = 100,000 x 3/12 = 25,000
2nd test for anti-dilution
• If earnings per preference share without conversion > earnings per preference share
with conversion, deemed anti-dilutive and excluded from calculation of diluted EPS

3. Contingently Issuable Shares

• If the contingent events are met, these shares are included in the calculation of diluted
EPS, from beginning of period or date of agreement, if later
• If the contingent events are not met, we take the number of shares issuable if the end
of the period is the end of the contingency period
• Restatement is not permitted if the conditions are not met when the contingency period
expires. [IAS 33.52]

4. Contracts that may be settled in ordinary shares or cash

• Presume that the contract will be settled in ordinary shares, and include the resulting
potential ordinary shares in diluted EPS if the effect is dilutive. [IAS 33.58]

Anti-dilution Sequencing
• Purpose of reporting diluted EPS is to report maximum dilution
• A potential ordinary share may be dilutive on its own, but may be anti-dilutive when
included with other potential ordinary shares
• There are so many permutations and combinations, so we need to find an order of
inclusion
o Start with the most dilutive. Process stops when the inclusion of a potential
ordinary share increases the diluted EPS

Approach to calculate diluted EPS:

1. Compute basic EPS
2. Compute earnings per incremental share (EPIS) for each class of potential ordinary shares
Increase in earnings from assumed conversion or exercise
EPIS =
Incremental number of shares from assumed conversion or exercise

The class of shares with the lowest impact on the numerator (earnings) and the highest
impact on the denominator (the no. of shares) has the lowest EPIS and is the most dilutive.
3. Rank them from the most dilutive to the least dilutive and include the most dilutive first in
diluted EPS calculation.
4. The process stops when all the potential ordinary shares have been included or when the
inclusion of the next ranked potential ordinary share results in a higher diluted EPS than
the previous provisional diluted EPS.
Note: The reported diluted EPS is the lowest possible figure and must never be higher than the
basic EPS.
Illustration 4
Information relating to the capital structure of Dervish Co. on Dec. 31, 2019 is as follows:

Ordinary share capital, P50 par P5,000,000

10% Preference share, P100 par 2,500,000
8% Convertible bonds payable 4,000,000

Share options to purchase 80,000 shares at P60 were outstanding. Market price of Dervish's shares
was P100 on Dec. 31 and averaged P80 during the year. The fair value of the options was
negligible. The cumulative preference shares are convertible into 100,000 ordinary shares. The
bonds are convertible into 80,000 ordinary shares. Tax rate is 30%. Net income for the year ended
Dec. 31, 2019 was P600,000. Determine BEPS and DEPS
Net Income WANOS EPS
BEPS 350,000 100,000 3.50
Options 0 20,000 0 1st
PS (2,500,000 x 10%) 250,000 100,000 2.50 2nd
BP (4,000,000 x 8% x 70%) 224,000 80,000 2.80 3rd

NI WANOS EPS
BEPS 350,000 100,000 3.50
Options 20,000
DEPS 350,000 120,000 2.92
Preference
Shares 250,000 100,000
DEPS 600,000 220,000 2.73
Bonds Payable 224,000 80,000
DEPS 824,000 300,000 2.75

Ignore the DEPS after considering bonds payable because the DEPS increased. We need to have
the lowest amount.

Retrospective Adjustments
• The calculation of basic and diluted EPS for all periods presented is adjusted
retrospectively when the number of ordinary or potential ordinary shares outstanding
increases as a result of a capitalization, bonus issue, or share split, or decreases as a result
of a reverse share split.
• If such changes occur after the statement of financial position date but before the financial
statements are authorized for issue, the EPS calculations for those and any prior period
 financial statements presented are based on the new number of shares. Disclosure is
required. [IAS 33.64]
• Basic and diluted EPS are also adjusted for the effects of errors and adjustments resulting
from changes in accounting policies, accounted for retrospectively. [IAS 33.64]
• Diluted EPS for prior periods should not be adjusted for changes in the assumptions used
or for the conversion of potential ordinary shares into ordinary shares outstanding. [IAS
33.65]
Presentation and Disclosures
• Basic and diluted EPS to be presented in income statement, in respect of:
o Profit attributable to ordinary shareholders of parent company from continuing
operations
o Profit attributable to ordinary shareholders of parent company for the period
• Where there are discontinued operations, basic and diluted EPS for discontinued operations
must be disclosed in the income statement or in the notes
• Other information that should be in the notes (IAS 33:70):
o Earnings used in numerator of EPS, as well as a reconciliation of earnings to the
income statement. (Include individual earnings effect of each class of instruments
on EPS)
o Denominator in calculating basic and diluted EPS and a reconciliation of both
denominators. (Include individual denominator effect of each class of instruments
on EPS)
o Potential ordinary shares that were not included in the calculation of diluted EPS,
because they were anti-dilutive
o Post-SFP events - description of transactions which would have significantly
changed the no. of ordinary shares potential ordinary shares outstanding at the end
of period