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Accounting Standard (AS) 20 Notes

Accounting Standard (AS) 20: Earning Per Share (EPS)

Objectives

The objective of this standard is to prescribe Principles for the determination and presentation of earnings per share so as to improve the performance comparisons between:

  • Different entities in the same reporting period, and
  • Different reporting periods for the same entity

Basic EPS

Definition

Basic earnings per share shall be calculated by dividing profit or loss attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

Formula

Net Profit (Loss) attributable to equity shareholders
Weighted average number of equity shares outstanding during the period

Earnings

The earnings should be the consolidated net profit or loss for the year after adjusting:

  • Tax
  • Returns to preference shareholders that are not already included in net profit.

Weighted average number of equity shares

Equity shares outstanding at the beginning xxxx
Less: Equity shares bought back* xxxx
Add: Equity shares* xxxx
Equity shares outstanding during the period xxxx

*to be multiplied by 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. Equity shares issued in exchange for cash are included when cash is receivable;

b. Equity shares issued as a result of the conversion of a debt instrument to equity shares are included as of the date of conversion;

c. Equity shares issued in lieu of interest or principal on other financial instruments are included as of the date interest ceases to accrue;

d. Equity shares issued in exchange for the settlement of a liability of the enterprise are included as of the date the settlement becomes effective;

e. Equity shares issued as consideration for the acquisition of an asset other than cash are included as of the date on which the acquisition is recognised; and

f. Equity shares issued for the rendering of services to the enterprise are included as the services are rendered.

In these and other cases, the timing of the inclusion of equity shares is determined by the specific terms and conditions attaching to their issue. Due consideration should be given to the substance of any contract associated with the issue.

Equity shares issued as part of the consideration in an amalgamation in the nature of purchase are included in the weighted average number of shares as of the date of the acquisition because the transferee incorporates the results of the operations of the transferor into its statement of profit and loss as from the date of acquisition.

Equity shares issued as part of the consideration in an amalgamation in the nature of merger are included in the calculation of the weighted average number of shares from the beginning of the reporting period because the financial statements of the combined enterprise for the reporting period are prepared as if the combined entity had existed from the beginning of the reporting period.

Equity shares may be issued, or the number of shares outstanding may be reduced, without a corresponding change in resources. Examples include:

  • A bonus issue;
  • A bonus element in any other issue, for example a bonus element in a rights issue to existing shareholders;
  • A share split; and
  • A reverse share split (consolidation of shares).

Partly paid equity shares are treated as a fraction of an equity share to the extent that they were entitled to participate in dividends relative to a fully paid equity share during the reporting period.

Where an enterprise has equity shares of different nominal values but with the same dividend rights, the number of equity shares is calculated by converting all such equity shares into equivalent number of shares of the same nominal value.

Bonus shares

Bonus issues: These are treated as if the new shares have been in issue for the whole of the period.

Stock split

  • Issue of new shares with proportionate reduction in par value
  • These are treated similar to bonus issue

Rights issue

A rights issue has features in common with a bonus issue and with an issue at fair value

  • The company will receive a consideration which is available to boost earnings (like an issue at fair value) and
  • The shareholder receives part of the share for no consideration (like a bonus issue).

Rights issue – formula

Formula for bonus fraction:

Fair Value per share immediately before the exercise of right
Theoretical ex-rights fair value per share

Theoretical ex-rights fair value per share:

Fair value of all outstanding shares before exercise of right + Total amount received from exercise of rights
Number of shares outstanding before exercise + Number of shares issued in the exercise

Diluted EPS

Definition

For the purpose of calculating diluted earnings per share, an entity shall adjust profit or loss attributable to equity shareholders, and the weighted average number of shares outstanding, for the effects of all dilutive potential ordinary shares.

Formula

Profit (Loss) attributable to equity shareholders adjusted for the effects of all dilutive potential ordinary shares
Weighted average number of equity shares outstanding adjusted for the effects of all dilutive potential ordinary shares

Dilutive Potential Equity Shares

Potential equity shares are anti-dilutive when their conversion to equity shares would increase earnings per share from continuing ordinary activities or decrease loss per share from continuing ordinary activities. The effects of anti-dilutive potential equity shares are ignored in calculating diluted earnings per share.

Potential Equity Shares

Potential equity shares are weighted for the period they were outstanding. Potential equity shares that were cancelled or allowed to lapse during the reporting period are included in the computation of diluted earnings per share only for the portion of the period during which they were outstanding.

Potential equity shares that have been converted into equity shares during the reporting period are included in the calculation of diluted earnings per share from the beginning of the period to the date of conversion; from the date of conversion, the resulting equity shares are included in computing both basic and diluted earnings per share.

Restatement

If the number of equity or potential equity shares outstanding increases as a result of a bonus issue or share split or decreases as a result of a reverse share split (consolidation of shares), the calculation of basic and diluted earnings per share should be adjusted for all the periods presented.

If these changes occur after the balance sheet date but before the date on which the financial statements are approved by the board of directors, the per share calculations for those financial statements and any prior period financial statements presented should be based on the new number of shares. When per share calculations reflect such changes in the number of shares, that fact should be disclosed.

Presentation

An enterprise should present basic and diluted earnings per share on the face of the statement of profit and loss for each class of equity shares that has a different right to share in the net profit for the period. An enterprise should present basic and diluted earnings per share with equal prominence for all periods presented.

AS 20 requires an enterprise to present basic and diluted earnings per share, even if the amounts disclosed are negative (a loss per share).

Disclosures

An enterprise should disclose the following:

  • Where the statement of profit and loss includes extraordinary items (as defined is AS 5), basic and diluted EPS computed on the basis of earnings excluding extraordinary items (net of tax expense);
  • 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 the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other; and
  • The nominal value of shares along with the earnings per share figures.

If an enterprise discloses, in addition to basic and diluted earnings per share, per share amounts using a reported component of net profit other than net profit or loss for the period attributable to equity shareholders, such amounts should be calculated using the weighted average number of equity shares determined in accordance with AS 20.

If a component of net profit is used which is not reported as a line item in the statement of profit and loss, a reconciliation should be provided between the component used and a line item which is reported in the statement of profit and loss. Basic and diluted per share amounts should be disclosed with equal prominence.

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