INDAS 33 –

EARNINGS PER SHARE

(TOTAL NO. OF QUESTIONS – 13)

INDEX
S.No. Particulars Page No.
1 RTP Questions 21.1
2 MTP Questions 21.7
3 Past Exam Questions 21.13

RTPs QUESTIONS
Q1. (MAY 18)
P Ltd. is a subsidiary company of ABC Ltd. It prepares both Separate financial statements (SFS) and
consolidated financial statements (CFS) for the year ending on 31st March, 20XI. It has net profit after tax
of Rs 20,00,000 as per SFS & Rs 16,00,000 as per CFS. Share capital of P Ltd. is 2,00,000 shares of Rs 10
each. ABC Ltd. has acquired 80% shares of P Ltd. Accountant of P Ltd. had calculated following Basic EPS
for its SFS:
Calculation of Basic EPS in its SFS
Net Profit after tax Rs 16,00,000
Number of Equity shares attributable to Parent company ABC 1,60,000 shares
Ltd. (2,00,000 x 80%)
Basic EPS Rs 10 per share

Examine the correctness of the above presentation of Basic EPS.

SOLUTION
(i) As per Ind AS 33 “Earnings per Share”, when an entity presents both consolidated financial statements
(cfs) and separate financial statements (sfs) prepared in accordance with Ind AS 110, Consolidated Financial
Statements, and Ind AS 27, Separate Financial Statements, respectively, the disclosures required by this
Standard shall be presented both in the cfs and sfs. In cfs, such disclosures shall be based on consolidated
information and in sfs such disclosures shall be based on information given in separate financial statements.
(ii) An entity shall not present EPS based on the information given in separate financial statements in cfs
and vice versa.

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(iii) Also, paragraph 9 of the standard states that an entity shall calculate basic earnings per share amounts
for profit or loss attributable to ordinary equity holders of the parent entity and, if presented, profit or loss
from continuing operations attributable to those equity holders.

(iv) Further, paragraph A1 of Appendix A of Ind AS 33 states that for the purpose of calculating earnings per
share based on the cfs, profit or loss attributable to the parent entity refers to profit or loss of the
consolidated entity after adjusting for non- controlling interests.
Hence, with inference from above mentioned points, in the given case, the presentation of Basic EPS by the
Accountant of P Ltd. on the basis of consolidated financial statements in its separate financial statements is
not correct. The correct presentation of Basic EPS would be as follows:
Calculation of Basic EPS of P Ltd. in SFS
Net Profit after tax Rs 20,00,000
No. of share issued 2,00,000 shares
Basic EPS Rs 10 per share

Q2. (RTP MAY 19 & MTP OCT. 20)

An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a three-year term, and
are issued at par with a face value of Rs 1,000 per bond, giving total proceeds of Rs 2,000,000. Interest is
payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any
time up to maturity into 250 ordinary shares. The entity has an option to settle the principal amount of the
convertible bonds in ordinary shares or in cash.
When the bonds are issued, the prevailing market interest rate for similar debt without a conversion option is
9 per cent. At the issue date, the market price of one ordinary share is Rs 3. Income tax is ignored.
Calculate basic and diluted EPS when
Profit attributable to ordinary equity holders of the parent entity Year 1 Rs 1,000,000
Ordinary shares outstanding 1,200,000
Convertible bonds outstanding 2,000

SOLUTION:
Allocation of proceeds of the bond issue:
Liability component (Refer Note 1) Rs 1,848,122
Equity component Rs 151,878
Rs 2,000,000
The liability and equity components would be determined in accordance with Ind AS 32. These amounts are
recognised as the initial carrying amounts of the liability and equity components. The amount assigned to the
issuer conversion option equity element is an addition to equity and is not adjusted.
Basic earnings per share Year 1:
Rs 1,000,000/ 1,200,000= Rs 0.83 per ordinary share

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Diluted earnings per share Year 1:
It is presumed that the issuer will settle the contract by the issue of ordinary shares. The dilutive effect is
therefore calculated in accordance with the Standard.
(Rs1,000,000 + Rs166,331)/(1,200,000 + 500,000) = Rs 0.69 per ordinary share

Notes:
1. This represents the present value of the principal and interest discounted at 9% – Rs 2,000,000 payable at
the end of three years; Rs 120,000 payable annually in arrears for three years.
[(1,20,000 x 2.53) + (20,00,000 x 0.772)] = 18,48,122
2. Profit is adjusted for the accretion of Rs 166,331 (Rs 1,848,122 × 9%) of the liability because of the
passage of time. However, it is assumed that interest @ 6% for the year has already been adjusted.
3. 500,000 ordinary shares = 250 ordinary shares x 2,000 convertible bonds

Q3. (MAY 20 & Newly Added in ICAI Module for May 22 onwards)
CAB Limited is in the process of preparation of the consolidated financial statements of the group for the
year ending 31st March, 20X3 and the extract of the same is as follows:
Particulars Attributable to CAB Non-controlling Total (Rs in ‘000)
Limited interest
Profit for the year 39,000 3,000 42,000
Other Comprehensive Income 5,000 Nil 5,000
Total Comprehensive Income 44,000 3,000 47,000

The long-term finance of the company comprises of the following:

1. 20,00,00,000 equity shares at the beginning of the year and the company has issued 5,00,00,000 shares on
1st July, 20X2 at full market value.
2. 8,00,00,000 irredeemable preference shares. These shares were in issue for the whole of the year ended
31st March, 20X3. The dividend on these preference shares is discretionary.
3. Rs 18 crores of 6% convertible debentures issued on 1st April, 20X1 and repayable on 31st March, 20X5 at
par. Interest is payable annually. As an alternative to repayment at par, the holder on maturity can elect
to exchange their convertible debentures for 10 crores ordinary shares in the company. On 1st April, 20X1,
the prevailing market interest rate for four-year convertible debentures which had no right of conversion
was 8%. Using an annual discount rate of 8%, the present value of Rs 1 payable in four years is 0.74 and
the cumulative present value of Rs 1 payable at the end of years one to four is 3.31. In the year ended
31st March, 20X3, CAB Limited declared an ordinary dividend of 0.10 paise per share and a dividend of
0.05 paise per share on the irredeemable preference shares.
Compute the following:
● The finance cost of convertible debentures and its closing balance as on 31st March, 20X3 to be
presented in the consolidated financial statements.

21. 3
 ● The basic and diluted earnings per share for the year ended 31st March, 20X3.
Assume that income tax is applicable to CAB Limited and its subsidiaries at 25%.

SOLUTION
1. Calculation of the liability and equity components on 6% Convertible debentures:
Present value of principal payable at the end of 4th year (Rs 1,80,000 thousand x 0.74)
= Rs 1,33,200 thousand
Present value of interest payable annually for 4 years (Rs 1,80,000 thousand x 6% x 3.31)
= Rs 35,748 thousand
Total liability component = Rs 1,68,948 thousand

Therefore, equity component = Rs. 1,80,000 thousand – Rs 1,68,948 thousand

= Rs 11,052 thousand
Calculation of finance cost and closing balance of 6% convertible debentures:
Year Opening Finance cost Interest paid Closing
balance Rs in @ 8% @ 6% balance Rs in
’000 Rs in ’000 Rs in ’000 ’000
a b = a x 8% C d=a+b-c
31.3.20X2 1,68,948 13,515.84 10,800 1,71,663.84
31.3.20X3 1,71,663.84 13,733.11 10,800 1,74,596.95

Finance cost of convertible debentures for the year ended 31.3. 20X3 is Rs 13,733.11 thousand and closing
balance as on 31.3. 20X3 is Rs 1,74,596.95 thousand.
Calculation of Basic EPS Rs in ’000
Profit for the year 39,000
Less: Dividend on preference shares (80,000 thousand x Rs 0.05)* (4,000)
Profit attributable to equity shareholders 35,000

* Only dividend on preference shares will be reduced because the net amount after all payments will be
available for distribution to equity shareholders.
Weighted average number of shares = 20,00,00,000 + {5,00,00,000 x (9/12)} = 23,75,00,000 shares or
2,37,500 thousand shares
Basic EPS = Rs 35,000 thousand / 2,37,500 thousand shares = Rs 0.147
Calculation of Diluted EPS Rs in ’000
Profit for the year 39,000
Less: Dividend on preference shares (80,000 x 0.05) (4,000)
35,000
Add: Finance cost (as given in the above table)* 13,733.11
Less: Tax @ 25% (3,433.28) 10,299.83
45,299.83

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* Note- if debentures are converted to equity shares, then the interest will not be payable. This saving of
interest payment will be available for equity holders. However, tax will be paid on this amount.

Weighted average number of shares = 20,00,00,000 + {5,00,00,000 x (9/12)} + 10,00,00,000 = 33,75,00,000

shares or 3,37,500 thousand shares
Diluted EPS = Rs 45,299.83 thousand / 3,37,500 thousand shares = Rs 0.134

Q4. (NOV 21)

Following information pertains to an entity for the year ending 31 st March 20X1:
Net profit for the year Rs. 12,00,000
Weighted average number of Equity shares outstanding during the year 5,00,000 shares
Average market price per share during the year Rs. 20
Weighted average number of shares under option during the year 1,00,000 shares
Exercise price per share under option during the year Rs. 15
Calculate basic and diluted earnings per share.

SOLUTION
Calculation of earnings per share
Earnings Shares Per share
Profit attributable to equity holders Rs. 12,00,000
Weighted average shares outstanding
during year 20X1 5,00,000
Basic earnings per share Rs. 2.40
Weighted average number of shares under 100,000
option
Weighted average number of shares that
would have been issued at average market
price: (1,00,000 × Rs. 15.00) ÷ Rs. 20.00 Refer Note (75,000)
Diluted earnings per share Rs. 1,200,000 525,000 Rs. 2.29

Note: Earnings have not increased because the total number of shares has increased only by the number of
shares (25,000) deemed to have been issued for no consideration, as shown below -

Total options = 1,00,000 @ Rs.15 each = 15,00,000

Equivalent to paid up shares = 15,00,000 / 20 = 75,000 shares
Therefore, paid element = 75,000 shares and bonus element = 25,000 shares.
To determine dilution, we consider only the bonus element .i.e. 25,000 shares.

21. 5
Q5. (RTP Nov. 22)
Company S is a subsidiary of Company P. Following facts are in respect of Company S:
 Company S has 10,000 ordinary shares and 1,000 options outstanding, of which Company P owns 9,000
shares and 500 options, respectively.
 The options have an exercise price of Rs. 40.
 The average market price of Company S’s ordinary share was Rs. 50 in 20X1.
 In 20X1, Company S’s profit was Rs. 30,000.

Following facts are in respect of Company P:

 Company P has 5,000 ordinary shares outstanding.
 In 20X1, Company P’s profit (excluding any distributed and undistributed earnings of subsidiaries) was Rs.
7,000.
 The options outstanding are dilutive at P’s level.
Determine the diluted EPS of Company P for the year 20X1. Ignore income tax.
SOLUTION
To determine the diluted EPS of Company P, the diluted EPS of Company S has to be calculated first.

Calculation of Company S’s diluted EPS:

Company S’s earnings for the period Rs. 30,000
Weighted average ordinary shares 10,000
Incremental shares (refer W.N.) 200
Company S’s diluted EPS Rs. 30,000/ (10,000 + 200)
Rs. 2.94
Calculation of Company P’s diluted EPS:

Company P’s earning for the period Rs. 7,000

Company P’s share of Company S’s earning Rs. 26,460
attributable to ordinary shares [(9,000 /10,000) x (2.94 x 10,000)]
Company P’s share of Company S’s earning attributable to options Rs. 294
[(500 /1,000) x (2.94 x 200)]
Company P’s weighted average ordinary shares outstanding 5,000
Company P’s diluted EPS = (7,000 + 26,460 + 294) / 5,000 Rs. 6.75

Working Note:
Computation of Incremental shares related to weighted average options outstanding:
All options are dilutive because their exercise price is below the average market price of Company S’s
ordinary shares for the period.
The incremental shares are calculated as follows:
Shares issued on assumed exercise of options 1,000
Less: Shares that would be issued at average market Price [(40 x 1,000)/50] (800)
Incremental shares 200

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 MTPs QUESTIONS
Q6. (APRIL 19 – 8 Marks)
Calculate Subsidiary’s and Group’s Basic EPS and Diluted EPS, when
Parent:
Profit attributable to ordinary equity holders of the Rs. 12,000 (excluding any earnings of, or
parent entity dividends paid by, the subsidiary)
Ordinary shares outstanding 10,000
Instruments of subsidiary owned by the parent 800 ordinary shares
30 warrants exercisable to purchase
ordinary shares of subsidiary
300 convertible preference shares
Subsidiary:
Profit Rs. 5,400
Ordinary shares outstanding 1,000
Warrants 150, exercisable to purchase ordinary
shares of the subsidiary
Exercise price Rs. 10
Average market price of one ordinary share Rs. 20
Convertible preference shares 400, each convertible into one ordinary
share
Dividends on preference shares Re 1 per share
No intercompany eliminations or adjustments were necessary except for dividends.
Ignore income taxes. Also, ignore classification of the components of convertible financial instruments
as liabilities and equity or the classification of related interest and dividends as expenses and equity
as required by Ind AS 32.

SOLUTION
Subsidiary’s earnings per share
Basic EPS = Rs.5.00 calculated as under:
[Rs. 5,400 (a) – Rs.400 (b)] / 1,000 (c)

Diluted EPS = Rs.3.66 calculated as under:

Rs. 5,400 (d) / [(1,000 + 75 (e) + 400(f))]
Notes:
(a) Subsidiary's profit attributable to ordinary equity holders.
(b) Dividends paid by subsidiary on convertible preference shares.
(c) Subsidiary's ordinary shares outstanding.

21. 7
(d) Subsidiary's profit attributable to ordinary equity holders (Rs. 5,000) increased by Rs. 400 preference
dividends for the purpose of calculating diluted earnings per share because after conversion, it will be
treated as ordinary shares.
(e) Incremental shares from warrants, calculated: [150 x 10 / 20]. We only add the bonus element because
that is the actual increase in no. of shares without any consideration.
(f) Subsidiary's ordinary shares assumed outstanding from conversion of convertible preference shares,
calculated: 400 convertible preference shares × conversion factor of 1.

Consolidated earnings per share

Basic EPS Rs. 1.63 calculated Rs. 12,000(a) + Rs. 4,300(b)
10,000 (c)
Diluted EPS Rs. 1.61 calculated: 12,000 + 2,928(d) + 55(e) + 1,098(f)
10,000
(a) Parent's profit attributable to ordinary equity holders of the parent entity.

(b)

Particulars Subsidiary Subsidiary share for CFS

Subsidiary EPS 5 per share 5 x 800 shares held = 4,000

Preference Dividend 1 per share 1 x 300 shares held = 300

additional earnings for Conso EPS 4,300

(c) Parent's ordinary shares outstanding.

(d) Parent's proportionate interest in subsidiary's earnings attributable to ordinary shares, calculated: (800 ÷
1,000) × (1,000 shares × Rs. 3.66 per share).

(e)

Particulars Subsidiary Subsidiary share for CFS

Total warrants 150 30

Equivalent shares from warrants 75

Earnings from warrants for conso EPS 75 x 3.66 x (30/150) = 55

(f) Parent's proportionate interest in subsidiary's earnings attributable to convertible preference shares,
calculated: (300 ÷ 400) × (400 shares from conversion × Rs. 3.66 per share).

21. 8
Q7. (OCT 19 – 5 Marks)
Mittal Motors Limited is preparing financials for the year ended March 31, 20X2. The Company had some
queries in preparation of certain data that is required to be presented in the financials. As the retainer of the
Company, please advise the company for the following issues:
(i) Mittal Motors has issued 10,00,000 numbers of 9% cumulative preference shares. The Company has arrears
of Rs. 15 crores of preference dividend as on March 31, 20X2, it includes current year arrears of Rs. 1.75
crores. The Company did not declare any dividend for equity shareholders as well as for preference
shareholders. What is the amount of dividend to be reduced from profit or loss for the year for calculating
basic Earnings Per Share?
(ii) Further Mittal Motors has also issued certain convertible debentures, which are outstanding as at the year
end. For the purpose of computation of weighted average number of shares (to arrive at diluted EPS) when
should the dilutive potential shares be deemed to have been converted into shares?
A. At the start of the period.
B. The date of issue of the potential shares
C. At the start of the period or, if later, the date of the issue of the potential shares
D. At the end of the period.

SOLUTION
(i) As per Ind AS 33 “Earnings per share”, “The after-tax amount of preference dividends that is deducted
from profit or loss is the after-tax amount of the preference dividends for cumulative preference shares
required for the period, whether or not the dividends have been declared. The amount of preference dividends
for the period does not include the amount of any preference dividends for cumulative preference shares paid
or declared during the current period in respect of previous periods”.
In the given case, the amount of preference dividends Rs.1.75 crores declared for the year ended March 31,
20X2 (i.e., the current period) is to be deducted from profit or loss for calculating EPS.

(ii) As per para 36 of Ind AS 33 “Earnings per share’, “For the purpose of calculating diluted earnings per
share, the number of ordinary shares shall be the weighted average number of ordinary shares plus the
weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential
ordinary shares into ordinary shares. Dilutive potential ordinary shares shall be deemed to have been converted
into ordinary shares at the beginning of the period or, if later, the date of the issue of the potential ordinary
shares”.

Q8. (MAY 20 – 4 Marks)

Explain why weighted average number of shares is used in the calculation of earnings per share and how it is
calculated.
Following is the data for company XYZ in respect of the number of equity shares during the financial year

21. 9
20X1-20X2. Find out the number of shares for the purpose of calculation of basic EPS.
S. No. Date Particulars Number of
shares
1 1-Apr-20X1 Opening balance of outstanding equity shares 1,00,000
2 15-Jun-20X1 Issue of equity shares 75,000
3 8-Nov-20X1 Conversion of convertible preference shares in Equity 50,000
4 22-Feb-20X2 Buyback of shares (20,000)
5 31-Mar-20X2 Closing balance of outstanding equity shares 205,000

SOLUTION
As per para 20 of Ind AS 33, Earnings per share, the weighted average number of ordinary shares outstanding
during the period reflects the possibility that the amount of shareholders’ capital varied during the period as a
result of a larger or smaller number of shares being outstanding at any time. The weighted average number of
ordinary shares outstanding during the period is the number of ordinary shares outstanding at the beginning of
the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a
time-weighting factor. The time weighting factor is the number of days that the shares are outstanding as a
proportion of the total number of days in the period; a reasonable approximation of the weighted average is
adequate in many circumstances.

Formula
The weighted average number of shares is calculated as follows:
Number of shares x (number of days the shares were held during the year / 365)
Following the above formula, the weighted average number of shares for calculation of EPS for the year
20X1-20X2 will be as follows:
Sr. Date Particulars No of No of days Weighted
No. shares shares were average no of
outstanding shares
1 1 April 20X1 Opening balance of outstanding equity 1,00,000
shares 365 1,00,000
2 15 June 20X1 Issue of equity shares 75,000 290 59,589
3 8 November Conversion of convertible preference
20X1 shares in Equity 50,000 144 19,726
4 22 February Buy back of shares
20X2 (20,000) (38)* (2,082)
5 31 March 20X2 Closing balance of outstanding equity
shares 2,05,000 1,77,233
*These shares had already been considered in the shares issued. The same has been deducted assuming that
the bought back shares have been extinguished immediately.

21. 10
Q9. (MARCH 21 – 5 Marks)
ABC Ltd. has 1,000,000 Rs. 1 ordinary shares and 1,000 Rs. 100 10% convertible bonds (issued at par), each
convertible into 20 ordinary shares on demand, all of which have been in issue for the whole of the reporting
period.
ABC Ltd.’s share price is Rs. 4.50 per share and earnings for the period are Rs. 500,000. The tax rate
applicable to the entity is 21%.
Calculate basic EPS, earnings per incremental share for the convertible bonds and diluted EPS

SOLUTION
Basic EPS is Rs. 0.50 per share (ie 500,000/1,000,000)
The earnings per incremental share for the convertible bonds is calculated as follows:
Earnings effect = No. of bonds x nominal value x interest cost x (1 – applicable tax rate)
= 1,000 x 100 x 10% x (1- 0.21) = Rs. 7,900.
(interest saved, net of tax)

Incremental shares calculation

Assume all bonds are converted to shares, even though this converts Rs. 100 worth of bonds into 20 shares
worth only Rs. 90 and is therefore not economically rational.
This gives 1000 x 20 = 20,000 additional shares.
Earnings per incremental share = Rs. 7,900 / 20,000 = Rs. 0.395
Diluted EPS = (Rs. 500,000 + Rs. 7,900) / (1,000,000 + 20,000) = Rs. 0.498 per share.

Q10. (OCTOBER 21 – 7 Marks)

Sohan has been recently hired in Zio Life Limited. Since he is facing difficulty in computation of EPS as per
Ind AS 33, guide him by discussing the steps for the calculation of Basic EPS and Diluted EPS alongwith the
necessary computations for EPS of Year 1.
The following basic facts relate to Company Zio Life Limited.
● Net profit for Year 1 is Rs. 46,00,000.
● The number of ordinary shares outstanding on 1st April Year 1 is 30,00,000.
The following facts are also relevant for Year 1.
● On 1st April, Zio Life Limited issues 20,00,000 three-year term convertible bonds for Rs. 1 each.
● Zio Life Limited has an option to settle the principal amount in ordinary shares (every 10 bonds are
convertible into one ordinary share) or cash on settlement date.
● The principal amount of the bonds is classified as an equity instrument and the interest is classified as a
financial liability.
● The interest expense relating to the liability component of the bonds is Rs. 1,800.
● The interest expense is tax-deductible. The applicable income tax rate is 40%.

21. 11
SOLUTION
The EPS computations for Year 1 as per Ind AS 33 are as follows.
Basic EPS Diluted EPS
1. Determine the numerator 1. Identify Potential Ordinary Shares (POSs)
No adjustment is necessary until the The convertible bonds are the only POSs.
convertible bonds are converted and
ordinary shares are issued. The
numerator is net profit ie.
Rs. 46,00,000.
2. Determine the denominator 2. For each POS, calculate Earnings per Incremental Share (EPIS)
There is no change in the number of Since Zio Life Limited has the choice of settlement, for the purpose of
outstanding shares during the year. The determining the EPIS, it assumes the share-settlement assumption.
denominator is therefore 30,00,000. Potential adjustment to the numerator for EPIS:
The convertible bonds, when settled in ordinary shares, would increase
profit or loss for the year by the post-tax amount of the interest
expense:
(Interest expense on the convertible bonds) x (1 - income tax rate) =
(Rs. 1,800) x (1 - 40%) = Rs. 1,080
Potential adjustment to the denominator for EPIS:
The convertible bonds, when settled in ordinary shares, would increase
the number of outstanding shares by 2,00,000 (20,00,000 / 10).
EPIS is calculated as follows:
EPIS = 1,080 / 2,00,000 = 0.01
3. Determine basic EPS 3. Rank the POSs
Basic EPS = 46,00,000 / 30,00,000 This step does not apply, because the
= 1.53 convertible bonds are the only class of POSs.
4. Identify dilutive POSs and determine diluted EPS
The potential impact of convertible bonds is determined as follows. (Refer
W.N. below)
Accordingly, Zio Life Limited includes the impact of the convertible bonds in
diluted EPS.
Diluted EPS = Rs. 1.44

Working Note:
Calculation of Diluted EPS
Earnings (Rs.) Weighted average Per Share (Rs.) Dilutive?
number of shares
Basic EPS 46,00,000 30,00,000 1.53
Convertible bonds 1,080 2,00,000
Total 46,01,080 32,00,000 1.44 Yes

21. 12
 QUESTIONS PAST EXAM PAPERS

Q11. (NOVEMBER 20)

The following information is available relating to Space India Limited for the Financial Year 2019-20.
Net profit attributable to equity shareholders ₹ 90,000
No. of equity shares outstanding 16,000
Average fair value of one equity share during the year ₹ 90
Potential Ordinary Shares:
Options 900 options with exercise price of ₹ 75
Convertible Preference Shares 7,500 shares entitled to a cumulative dividend of ₹ 9 per share.
Each preference share is convertible into 2 equity shares.
Applicable corporate dividend 8%
tax
10% Convertible Debentures of ₹ 10,00,000 and each debenture is convertible into 4 equity
₹ 100 each shares
Tax rate 25%
You are required to compute Basic and Diluted EPS of the company for the Financial Year 2019-20.

SOLUTION
i. Basic Earnings per share
Year ended
31.3.2020
Net profit attributable to equity shareholders (A) Rs. 90,000
Number of Equity shares outstanding (B) 16,000
Earnings per share (A/B) Rs. 5.625

ii. Diluted earnings per share

Options are most dilutive as their earnings per incremental share is nil. Hence, for the purpose of computation
of diluted earnings per share, options will be considered first. 10% convertible debentures being second most
dilutive will be considered next and thereafter convertible preference shares will be considered (as per W.N.).
Net profit No. of Net Profit
attributable equity attributable
to equity shares per share
shareholders Rs.
Rs.
Net profit attributable to equity 90,000 16,000 5.625
shareholders
Options 150
90,000 16,150 5.572 Dilutive
10% Convertible debentures 75,000 40,000
1,65,000 56,150 2.939 Dilutive

21. 13
 Convertible Preference Shares 72,900 15,000
2,37,900 71,150 3.344 Anti-Dilutive

Since diluted earnings per share is increased when taking the convertible preference shares into account (Rs.
2.939 to Rs. 3.344), the convertible preference shares are anti- dilutive and are ignored in the calculation of
diluted earnings per share for the year ended 31 March 2020. Therefore, diluted earnings per share for the
year ended 31 March 2020 is Rs. 2.939.

Working Note:
Calculation of incremental earnings per share and allocation of rank
Increase in Increase in Earnings per Rank
earnings number of incremental
(1) equity shares Share (3) = (1)
(2) ÷ (2)
Rs. Rs.
Options
Increase in earnings Nil
No. of incremental shares issued for no
consideration 150 Nil 1
[900 x (90-75)/90]
Convertible Preference Shares
Increase in net profit attributable to equity 72,900
shareholders as adjusted by attributable
dividend tax *
[(Rs. 9 x 7,500) + 8% (Rs. 9 x 7,500)]
No. of incremental shares (2 x 7,500) 15,000 4.86 3

10% Convertible Debentures

Increase in net profit 75,000
[(Rs. 10,00,000 x 10% x (1 – 0.25)]
No. of incremental shares (10,000 x 4) 40,000 1.875 2

Note: Grossing up of preference share dividend has been ignored here. At present dividend distribution tax has
been abolished. However, the question has been solved on the basis of the information given in the question.

*Alternatively,
Increase in earnings for equity holders = saving due to non payment to preference shareholders (net of tax)
= 9 x 7,500 = 67,500 - 8% = 62,100
Incremental no. of shares = 15,000
Hence, Incremental EPS = 4.14

21. 14
Q12. (JULY 21)
On 31st March, 2019 the issued share capital of SB Limited consisted of 20,00,000 ordinary shares of Rs. 1
each. On 1st July 2019, the Company issued Rs. 25,00,000 of 8% convertible loan stock for cash at par. Each
Rs. 100 nominal of the loan stock may be converted, at any time during the years ended 2024 to 2027, into
the number of ordinary shares set out below:
● 31st March, 2024: 135 Ordinary Shares
● 31st March, 2025: 130 Ordinary Shares
● 31st March, 2026: 125 Ordinary Shares
● 31st March, 2027: 120 Ordinary Shares
If the loan stock is not converted by 2027, they would be redeemed at par.
It is assumed that the written equity conversion option is accounted for as a derivative liability and marked to
market through profit or loss. The change in the options fair value reported on 31st March 2020 and 31st
March 2021 amounted to losses of Rs. 5,000 and Rs. 5,300 respectively. Further, it is assumed that there are
no tax consequences arising from these losses.
The profit before interest, fair value movements and taxation for the year ended 31st March, 2020 and 2021
amounted to Rs. 16,50,000 and Rs. 17,90,000 respectively and relate wholly to continuing operations. The rate
of tax for both the periods is 33% (including cess and surcharge if any).
Calculate Basic and Diluted EPS for 31st March 2020 & 31st March 2021.

SOLUTION
Calculation of PAT (earnings) 2021 2020
Trading results Rs. Rs.
A. Profit before interest, fair value movements and tax 17,90,000 16,50,000
B. Interest on 8% convertible loan stock (2,00,000) = (1,50,000) =
25,00,000 x 8% 9/12 × 2,00,000
C. Change in fair value of embedded option (5,300) (5,000)
Profit before tax 15,84,700 14,95,000
Taxation @ 33% on (A-B) (5,24,700) (4,95,000)
Profit after tax 10,60,000 10,00,000

Calculation of basic EPS

Number of Equity shares outstanding 20,00,000 20,00,000
Earnings 10,60,000 10,00,000
Basic EPS 53 paise 50 paise

Calculation of diluted EPS

Test whether convertibles are dilutive:
The saving in after-tax earnings, resulting from the conversion of Rs. 100 nominal of loan stock, amounts to

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[25,00,000 x 8% x (1 - 0.33) / 25,000] + [5,300 / 25,000] = 5.57
Here, we add back 5,300 also because if the loan stock is considered as ordinary shares, there will be no fair
value measurement and hence, no such loss needs to be recognized.
There will then be 135 extra shares in issue.
Therefore, the incremental EPS is 4 paise (ie. Rs. 5.57 / 135). As this incremental EPS is less than the basic
EPS at the continuing level, it will have the effect of reducing the basic EPS of 53 paise. Hence the
convertibles are dilutive.
2021 2020
Adjusted earnings Rs. Rs.
Profit for basic EPS 10,60,000 10,00,000
Add: Interest and other charges on earnings (2,00,000 + (1,50,000 +5,000)
saved as a result of the conversion 5,300) = 2,05,300 = 1,55,000
Less: Tax relief on interest portion (66,000) = (49,500) =
2,00,000 x 33% 1,50,000 x 33%
Adjusted earnings for equity 11,99,300 11,05,500

Adjusted number of shares

From the conversion terms, it is clear that the maximum number of shares issuable on conversion of Rs.
25,00,000 loan stock after the end of the financial year would be at the rate of 135 shares per Rs. 100
nominal (that is, 33,75,000 shares) = 25,00,000 x 135 / 100.
DEPS calculation 2021 2020
Number of equity shares for basic EPS 20,00,000 20,00,000
Maximum conversion at date of issue (33,75,000 × 9/12) - 25,31,250
Maximum conversion after balance sheet date 33,75,000 –
Adjusted shares 53,75,000 45,31,250
Adjusted earnings for equity 11,99,300 11,05,500
Diluted EPS (approx.) 22 paise 24 paise

Q13. (Dec 21)

From the following information you are asked to calculate (a) Basic and Diluted EPS of Duck Ltd and (b)
Diluted EPS of Swan Ltd:
Duck Ltd Swan Ltd
Amount (Rs) Amount (Rs)
Income from continuing operations 2,52,000 (1,80,000)
Loss from discontinued operations (4,20,000) 1,45,920
Net loss (1,68,000) 34,080
Weighted average Number of shares outstanding 80,000 96,000
Incremental common shares outstanding relating to stock 16,000 25,600
options

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Suggested Solution:
A) For Duck Ltd:
Step 1:
Basic EPS = Profit for the year / Weighted average Number of shares outstanding Basic EPS (Continued
Operations) = Profit from continued operations / Weighted average
Number of shares outstanding
= Rs 2,52,000 / 80,000 = Rs 3.15
Basic Loss per share (Discontinued operations) = Loss from discontinued operations / Weighted average
Number of shares outstanding
= Rs (4,20,000) / 80,000 = (Rs 5.25)
Overall Basic Loss per share = (Rs 1,68,000) / 80,000 = Rs (2.10) (i)

Step 2: Calculation of Diluted EPS

Diluted EPS =Profit for the year / Adjusted Weighted average Number of shares outstanding EPS (Continued
Operations) = Profit from continued operations / Adjusted Weighted average Number of shares outstanding
= Rs 2,52,000 / 96,000 = Rs 2.625
Loss per share (Discontinued operations) = Loss from discontinued operations / Adjusted weighted average
number of shares outstanding
= Rs (4,20,000) / 96,000 = (Rs 4.375)
Overall Diluted Loss per share = Rs 1,68,000 / 96,000 = Rs (1.75) (ii)
Reporting Status:
The income from continuing operations is the control number, there is a dilution in basic EPS for income from
continuing operations (reduction of EPS from Rs 3.15 to Rs 2.625). Therefore, even though there is an anti-
dilution [Loss per share reduced from Rs 2.10 (i) to Rs 1.75 (ii) above], diluted loss per share of Rs 1.75 is
reported.

B) For Swan Ltd:

Treatment of potential shares:
In case of loss from continuing operations, the potential shares are excluded since including those shares would
result into anti-dilution effect on the control number (loss from continuing operations).
Step 1:
Basic EPS = Profit for the year / Weighted average Number of shares outstanding Basic EPS (Continued
Operations) = Profit from continued operations / Weighted average
Number of shares outstanding
= Rs (1,80,000) / 96,000 = Rs (1.875)
Basic Loss per share (Discontinued operations) = Loss from discontinued operations / Weighted average
Number of shares outstanding

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 = Rs 1,45,920 / 96,000 = Rs 1.52
Overall Basic Profit per share = Rs 34,080 / 96,000 = Rs 0.355 (i)

Step 2: Calculation of Diluted EPS

Diluted EPS =Profit for the year / Adjusted Weighted average Number of shares outstanding EPS (Continued
Operations) = Profit from continued operations / Adjusted Weighted average Number of shares outstanding
= Rs (1,80,000) / 1,21,600 = Rs (1.48)
Loss per share (Discontinued operations) = Loss from discontinued operations / Adjusted weighted average
number of shares outstanding
= Rs 1,45,920 / 1,21,600 = Rs 1.20
Overall Diluted Loss per share = Rs 34,080 / 1,21,600 = Rs 0.28 (ii)
Reporting Status:
The dilutive effect of the potential common shares on EPS for income from discontinued operations and net
income would not be reported because of the loss from continuing operations.

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