University of San Carlos

School of Business and Economics

Department of Accountancy

PART - FAR Atty. Cymon P. Argawanon, CPA

Earnings per share JULY 20, 2023

Earnings Per Share (PAS 33)

Scope

This applies to applies to entities whose securities are publicly traded or that are in the
process of issuing securities to the public and other entities who choose to present EPS.

Definitions

Potential ordinary share: a financial instrument or other contract that may entitle its
holder to ordinary shares. (Ex. Convertible debt, convertible preferred shares, share
warrants, share options, etc.)

Dilution: a reduction in earnings per share or an increase in loss per share resulting from
the assumption that convertible instruments are converted, that options or warrants are
exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

Antidilution: an increase in earnings per share or a reduction in loss per share resulting
from the assumption that convertible instruments are converted, that options or warrants
are exercised, or that ordinary shares are issued upon the satisfaction of specified
conditions.

Basic and diluted EPS must be presented even if the amounts are negative. If an entity
reports a discontinued operation, basic and diluted earnings per share must be disclosed
for the discontinued operation either on the face of the comprehensive income or in the
notes to financial statements.

Basic Earnings per Share

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of
the parent entity (the numerator) by the weighted average number of ordinary shares
outstanding (the denominator) during the period. The numerator should refer to earnings
after deducting all expenses, including taxes, minority interests, and preference dividends.
The denominator (number of shares) is calculated by adjusting the shares in issue at the
beginning of the period by the number of shares bought back or issued during the period,
multiplied by a time-weighting factor. Potential Ordinary shares shall not be considered
unless the contingency has been met.

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Diluted Earnings per Share

Diluted EPS is calculated by adjusting the earnings and number of shares for the effects
of dilutive options and other dilutive potential ordinary shares. The effects of anti-dilutive
potential ordinary shares are ignored in calculating diluted EPS.

a. Convertible securities - 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. The denominator should include shares that would be
issued on the conversion.
b. Options and warrants. In calculating diluted EPS, assume the exercise of
outstanding dilutive options and warrants. The assumed proceeds from exercise
should be regarded as having been used to repurchase ordinary shares at the
average market price during the period. 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.
c. 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
d. Contingently issuable shares. Contingently issuable ordinary shares are treated as
outstanding and included in the calculation of both basic and diluted EPS if the
conditions have been met. If the conditions have not been met, the number of
contingently issuable shares included in the diluted EPS calculation is based on the
number of shares that would be issuable if the end of the period were the end of
the contingency period. Restatement is not permitted if the conditions are not met
when the contingency period expires.

Increases as a result of a Capitalization, Bonus Issue, or Share Split, or decreases as

a result of a Reverse Share Split.

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 capitalisation, bonus issue, or share split, or decreases as a result
of a reverse share split. If such changes occur after the balance sheet date but before the
financial statements are authorised 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.

Disclosures

• the amounts used as the numerators in calculating basic and diluted EPS, and a
reconciliation of those amounts to profit or loss attributable to the parent entity
for the period

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 • the weighted average number of ordinary shares used as the denominator in
calculating basic and diluted EPS, and a reconciliation of these denominators to
each other
• instruments (including contingently issuable shares) that could potentially dilute
basic EPS in the future, but were not included in the calculation of diluted EPS
because they are antidilutive for the period(s) presented
• a description of those ordinary share transactions or potential ordinary share
transactions that occur after the balance sheet date and that would have changed
significantly the number of ordinary shares or potential ordinary shares
outstanding at the end of the period if those transactions had occurred before
the end of the reporting period. Examples include issues and redemptions of
ordinary shares issued for cash, warrants and options, conversions, and exercises

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QUIZZER

1. Strauch Company had one class of ordinary share capital outstanding and no other
securities that are potentially convertible into ordinary shares. During 2011,
100,000 shares were outstanding. In 2012, two distributions of additional ordinary
shares occurred: On April 1, 20,000 shares of treasury were sold, and on July 1, a 2-
for-1 share split was issued. Net income was P410,0000 in 2012 and P350,000 in
2011. What amount should Strauch report as basic earnings per share in its
comparative income statement?

2012 2011

a. 1.78 3.50

b. 1.78 1.75

c. 2.34 1.75

d. 2.34 3.50

2. On January 1, 2011, Gina Company had 300,000 ordinary shares outstanding, P100
par or total par value of P30,000,000. During 2011, Gina issued rights to acquire
one ordinary share at P100 in the ratio of one share for every 5 shares held. The
rights are exercised on March 31, 2011. The market value of each ordinary share
immediately prior to March 31, 2011 was P160. The net income for 2011 was
P6,000,000.

What amount should be reported as basic earnings per share?

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 a. 17.14
b. 16.67
c. 18.75
d. 17.39

3. Excel Company had 600,000 ordinary shares outstanding on January 1, 2011.

During 2011, Excel issued rights to acquire one ordinary share at P10 in the ratio
of one new share for every 4 shares outstanding.

The market value of the ordinary share immediately prior to the rights issue is P35.
The rights were exercised on October 1, 2011. The net income of Excel Company
for the year is P8,550,000.

What amount should be reported as basic earnings per share?

a. 11.40
b. 12.00
c. 14.25
d. 13.41

Croatia Company provided the following data on December 31, 2011.

Operating revenue 5,600,000

Operating expenses 3,000,000

Income tax rate 30%

Ordinary shares outstanding during the 200,000

entire year

On January 1, 2011, there were options outstanding to purchase 40,000 ordinary

shares at P25 per share. The average market price during the year was P20 per
share. The statement of financial position reported P2,000,000 of 10%
nonconvertible bonds on December 31, 2011. Interest expense is included in
operating expenses.

4. What is the amount of basic earnings per share?

a. 13.00
b. 10.83
c. 7.42
d. 9.10

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5. What is the amount of diluted earnings per share?

a. 9.10
b. 8.89
c. 9.58
d. 7.58

6. Riselle Company is calculating earnings per share for inclusion in the annual report
to shareholders. Riselle Company has obtained the following information from the
controller’s office:

Net income from January 1 to 125,000

December 31
Number of outstanding shares:

January 1 to March 31 15,000

April 1 to May 31 12,000

June 1 to December 31 18,000

In addition, Riselle has issued 10,000 incentive share options with an exercise price
of P30 to its employees and a year-end market price of P25 per share. What is the
amount of diluted earnings per share for the year?

a. 4.63
b. 4.85
c. 6.94
d. 7.69

7. Pagsanjan Company’s capital structure was as follows:

2010 2011

Ordinary shares 500,000 500,000

Convertible preference 100,000 100,000

shares
10% convertible bonds P3,000,000 P3,000,000
payable

During 2011, Pagsanjan paid the annual dividend of P5 per share on its preference
share. The preference shares are convertible into 200,000 ordinary shares and the
10% bonds are convertible into 100,000 ordinary shares. Net income for 2011 was

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 P5,000,000. The tax rate is 30%. What amount should be reported as diluted
earnings per share?

a. 6.51
b. 7.85
c. 6.25
d. 9.00

8. Information relating to the capital structure of Camiguin Company on December

31, 2011 is as follows:

Ordinary share capital 110,000 shares

Convertible noncumulative preference share 20,000 shares

capital
10% convertible bonds payable P2,000,000

Share options to purchase 20,000 shares at P15 were outstanding. Market price of
Camiguin share was P22 at December 31, 2011 and averaged P20 during the year.
No value was assigned to the share options.

Camiguin Company paid the annual dividend of P5 on its preference share. The
preference shares are convertible into 40,000 ordinary shares. The convertible
bonds
are convertible into 30,000 ordinary shares. The net income for the year ended
December 31, 2011 is P650,000. The income tax rate is 30%.

What amount should be reported as diluted earnings per share?

a. 5.00
b. 4.78
c. 4.19
d. 4.27

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