Earnings Per Share

(PAS 33)
 This standard…
 Prescribes the principles in computing and

presenting earnings per share to promote inter-

and intra-comparability of performance of
entities

 Requires publicly listed entities, including those

on the process of enlisting, to present EPS

information.

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 Earnings Per Share

 Is a computation made for ordinary

shares. It is a form of profitability ratio

which provides a measure of how much
profit(loss) each ordinary share has
earned( incurred) during the period.

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 ORDINARY SHARE
O Is “an equity instrument that is
subordinate to all other classes of equity
instruments”
O Participate in profit for the period after
all other classes of shares (e.g.,
preference shares) have participated.
 PREFERENCE SHARE
O Is one that has preference over
other classes of shares, such as
preference over dividends or
preference over net assets in
case of liquidation, but typically
does not have voting rights.
 Simple Capital Structure

 A company with a simple capital structure

can only have ordinary shares (C.S.) and
preference shares.
 It may not have any potentially dilutive
securities (i.e. stock options, warrants,
convertible bonds, convertible preferred
stock).
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 The presentation of earnings
per share is required for:
O Entities whose ordinary shares are
publicly traded.
O Entities that are in the process of
issuing ordinary shares or potential
ordinary shares in the public
securities market.
 Basic Earnings Per Share

 Basic earnings per share (EPS) computation is:

Profit (Loss) – Preference dividends

Weighted average number of outstanding ordinary shares

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Outstanding ordinary shares

O Are those that are entitled to

participate in dividends.
Outstanding shares are
issued shares + subscribed
shares – treasury shares
 Example

Entity A had 50,000, ₱10, 6% cumulative

preference shares outstanding all throughout
2001.
Entity A reported profit after tax of ₱1,200,000
for the year ended December 31.2001. the
movements in the number of ordinary shares
are as follows:
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1/1/2001 Ordinary shares outstanding 180,000

4/1/2001 Shares issued for cash 30,000

6/30/200 Subscribed shares 10,000

1
10/1/200 Reacquisition of treasury shares (20000)
1
Outstanding shares at the end of period 200,000
 The weighted average number of ordinary shares outstanding is
computed as follows:

Date Number of shares Months Weighted

(a) outstanding (b) Average
(c)= a x b

1/1/2001 180000 12/12 180,000

4/1/2001 30000 9/12 22,500

6/30/2001 10000 6/12 5,000

10/1/2001 (20000) 3/12 (5,000)

202,500
 The basic earnings per share is computed as
follows:

1,200,000−(50,000 𝑥₱ 10 𝑥 6%)
Basic EPS=
202,500

Basic EPS= (1,200,000-30,000)/ 202, 500= ₱5.78

 Bonus Share (capital Dividends) or Splits

 Retroactive recognition is given to the events of capital

dividend and share split for all comparative income
statement presented.
 The purpose of the retroactive adjustment is to result in
comparable EPS for all periods presented in terms of the
most recent capital structure.
 This is because such share transaction do not result in
change in net assets (revenue generating capacity)

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Examples of issuance of ordinary shares without
a corresponding change in resources include:

O Share or stock
dividend(capitalization or bonus
issue)
O A bonus element in any other issue
O Share split or stock split-up
O Reverse share split or stock split-
down
 Rights issue
O Are issued to shareholders in conformance with their
preemptive right, the exercise price is normally less than
the fair value of the shares.
O Number of outstanding shares for all periods before the
rights issue is multiplied by the following factor:

𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘𝑠 𝑖𝑚𝑚𝑒𝑑𝑖𝑎𝑡𝑒𝑙𝑦 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡ℎ𝑒 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠

=
𝑇ℎ𝑒𝑜𝑟𝑒𝑡𝑖𝑐𝑎𝑙 𝑒𝑥 − 𝑟𝑖𝑔ℎ𝑡𝑠 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
 Earnings Per Share Subtotals
 EPS is presented by the components of net
income.
 Each of these EPS is based on the same
weighted average number of shares and the
components are summed to disclose the EPS
of net income.
 The intent is to show the contribution of each
component of net income to EPS.

 The components include profit or loss from

continuing operation and total profit
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 Complex Capital Structure

 The capital structure of some companies

includes convertible securities, stock
options and warrants.
 Since conversion of these securities into
ordinary shares may decrease EPS, these
securities are referred to as potentially
dilutive share.

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 Complex Capital Structure
(contd.)
 These potentially dilutive securities are also
referred to as common shares equivalents
(CSE).
 A CSE is a security that is not a ordinary share
now, but contains a provision enabling its
holders to acquire ordinary shares at
predetermined terms which, at issuance,
makes it, in substance, equivalent to a
ordinary shares.
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 Example of Potential Ordinary Share:
a. Convertible preference shares-
convertible into the issuer’s ordinary
shares.
b. Convertible bonds
c. Options, warrants and their
equivalents- financial instruments that
give the holder the right to purchase
ordinary shares.
 Presentation of EPS

Companies with complex capital

structures are required to present
both basic (no consideration of CSE)
and diluted earnings per share
(consider the potential impact of
CSE) .
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 Diluted Earnings Per Share

 In computing diluted EPS (DEPS), the

potential impact (i.e., the assumed
conversion) of CSE is considered in
addition to the weighted average shares.
 The impact of assumed conversion of
CSE on EPS will be on both numerator
and denominator of EPS computation.
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 Diluted EPS is computed as follows:

Profit (Loss) + After tax interest expense on convertible bonds

Weighted average number of outstanding ordinary
shares + Incremental shares arising from the
assumed conversion or exercise of dilutive potential
ordinary shares
 Diluted Earnings Per Share
 To be included in the diluted EPS calculation, the
CSE must have dilutive effect on EPS .
 That is, the assumed conversion of the CSE has a
negative impact on the EPS (i.e., reduce the EPS)

 Note CSE with antidilutive potential are not

considered (holders have no incentive to convert
/ it violate prudence)

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Convertible preference shares
O -are assumed to have already been
converted into additional ordinary
shares. Thus, there is no adjustment
to profit or loss for any dividends.
O Incremental shares are added in the
denominator of the diluted EPS
formula
 Convertible Bonds
O Are assumed to have been converted
into additional ordinary shares. Thus, the
after tax interest expense incurred on
the bonds is added back to profit or loss
O Incremental shares are added in the
denominator of the diluted EPS formula
 Diluted Earnings Per Share

O Stock options and warrants are always considered

to be CSE
O Stock options and warrants are first to be
included in the computation of DEPS if they are
dilutive.
O This is because the increase shares and have no
effect on earnings
O Note if warrants and option are exercisable at
prevailing market prices they are not CSE and
have no dilutive potential
 Share warrants and options

 the options and warrants are assumed to

have been exercised at the beginning of the
period (or at the time of issuance of the
options if it is later).
 If the option are exercisable at a price but
lower than the market price compute the
bonus element to the equivalent CSE.

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 Share warrants and options

 Therefore, warrants or option causes

dilution if the market price is greater
(less) than the option price for a firm
with profit (loss).

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When computing for diluted EPS, the Treasury
share method is used for computing
incremental shares. This method assumes that:
1. The options or warrants are exercise; and
2. The proceeds received from the exercise are
used to purchase treasury shares at the
average market price.
3. The difference between the treasury shares
are assumed to have been purchased and
the option shares represents the
incremental shares.
 Other CSE

 If CSE in the form of convertible bonds or convertible

preference shares were also outstanding, the DEPS which
included only the dilutive options, would be “tentative”
and subject to the possible inclusion of the convertible
securities.
 Other CSE (i.e., convertible securities) would be included
in DEPS after stock options only if their inclusion has a
dilutive effect on the EPS.
 The earnings will be increased and the average shares
will also be increased (due to the decrease in after tax
interest expense or the savings on preference dividends).

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Importance of ranking (Multiple potential
ordinary shares)

 A CSE may appear to be individually dilutive may be

anti-dilutive in combination with other CSE.
 Therefore, a ranking is performed to determine the
sequence in which the CSE (other than options)
should be included in the DEPS computation.
 This ranking is determined by comparing the impact
on the EPS from the assumed conversion of each
CSE at the beginning of the earliest period reported
(or at the date of issuance of the CSE, if later).

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 Notes (EPS)

O If conversion rate is different for different period,

choose the highest conversion rate.
O Anti-dilutive convertible securities or warrants
should NOT be included in the computation of
DEPS.
O Contingent issue agreement (contingently
issuable shares): if all conditions for issuing
additional shares are met, these shares should
be included in the diluted EPS computation.
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O Partial year applies to the assumed
conversion of convertible securities
and the assumed exercise of options.
O Retrospective adjustment of
comparative figures only applies to
issues of shares for no consideration
such as shares split and bonus issues.
 PRESENTATION
O Basic and Diluted EPS are presented even if
the amounts are negative (i.e., loss per
share)
O If an entity reports discontinued operations,
it presents:
a. Profit or loss from continuing operations
An entity is not
b. Results of discontinued operations, andto present
required
EPS on Other
c. Profit or loss for the year Comprehensive
Income and Total
Comprehensive
Income
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