Ind AS 33, Earnings Per Share, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams
Question 1 –
P Ltd. is a subsidiary company of ABC Ltd. It preparing both Separate financial statement (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 Ltd. (2,00,000 x 80%) shares | 1,60,000 |
| Basic EPS | Rs.10 per share |
Examine the correctness of the above presentation of Basic EPS.
Solutions –
As per Ind AS 33 “Earnings per Share”, when an entity presents both consolidated financial statements and separate financial statements 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 consolidated financial statements and separate financial statements. In consolidated financial statements such disclosures shall be based on consolidated information and in separate financial statements such disclosures shall be based on information given in separate financial statements.
Hence, 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 in its SFS | |
| Net Profit after tax | Rs.20,00,000 |
| No. of share issued | 2,00,000 shares |
| Basic EPS | Rs.10 per share |
Question 2 –
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:
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.
Notes:
- 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.
- 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.
- 500,000 ordinary shares = 250 ordinary shares × 2,000 convertible bonds.
Question 3 –
At 30 June 20X1, the issued share capital of an entity consisted of 1,500,000 ordinary shares of Rs. 1 each. On 1 October 20X1, the entity issued Rs. 1,250,000 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 20X6 to 20X9, into the number of ordinary shares set out below:
30 June 20X6: 135 ordinary shares;
30 June 20X7: 130 ordinary shares;
30 June 20X8: 125 ordinary shares; and 30 June 20X9: 120 ordinary shares.
If the loan stocks are not converted by 20X9, they would be redeemed at par.
This illustration assumes 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 in 20X2 and 20X3 amounted to losses of Rs. 2,500 and Rs. 2,650 respectively. 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 30 June 20X2 and 20X3 amounted to Rs. 825,000 and Rs. 895,000 respectively and relate wholly to continuing operations. The rate of tax for both periods is 33%.
Calculate Basic and Diluted EPS.
Solution –
| 20X3 | 20X2 | |
| Trading results | Rs. | Rs. |
| A. Profit before interest, fair value movements and tax | 895,000 | 825,000 |
| B. Interest on 8% convertible loan stock (20X2: 9/12 × Rs.100,000) | (100,000) | (75,000) |
| C. Change in fair value of embedded option | (2,650) | (2,500) |
| Profit before tax | 792,350 | 747,500 |
| Taxation @ 33% on (A-B) | (262,350) | (247,500) |
| Profit after tax | 530,000 | 500,000 |
| Calculation of basic EPS | ||
| Number of equity shares outstanding | 1,500,000 | 1,500,000 |
| Earnings | Rs. 530,000 | Rs. 500,000 |
| Basic EPS | 35 paise | 33 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 Rs. 100 × 8% × 67% + Rs. 2,650/12,500 = Rs. 5.36 + Rs. 0.21 = Rs. 5.57.
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 35 paise. Hence the convertibles are dilutive.
|
|
20X3 | 20X2 |
| Adjusted earnings | Rs. | Rs. |
| Profit for basic EPS | 530,000 | 500,000 |
| Add: Interest and other charges on earnings saved as a result of the conversion | 102,650
(100,000 + 2,650) |
77,500
(75000+ 2500) |
| Less: Tax relief thereon | (33,000) | (24,750) |
| Adjusted earnings for equity | 599,650 | 552,750 |
Adjusted number of shares
From the conversion terms, it is clear that the maximum number of shares issuable on conversion of Rs. 1,250,000 loan stock after the end of the financial year would be at the rate of 135 shares per Rs. 100 nominal (that is, 1,687,500 shares).
| 20X3 | 20X2 | |
| Number of equity shares for basic EPS | 1,500,000 | 1,500,000 |
| Maximum conversion at date of issue 1,687,500 × 9/12 | – | 1,265,625 |
| Maximum conversion after balance sheet date | 1,687,500 | |
| Adjusted capital | 3,187,500 | 2,765,625 |
| Adjusted earnings for equity | Rs. 599,650 | Rs. 552,750 |
| Diluted EPS (approx.) | 19 paise | 20 paise |
Question 4 –
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 Limited | Non-controlling interest | Total (Rs.in ‘000) |
| 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:
- 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.
- 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.
- 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.
- 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 –
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 balance Rs. in ’000 | Finance cost @ 8% Rs. in ’000 | Interest paid @ 6% Rs. in ’000 | Closing balance Rs. in ’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 |
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 |
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
Question 5 –
At 31 December 20X7 and 20X8, the issued share capital of an entity consisted of 4,000,000 ordinary shares of Rs. 25 each. The entity has granted options that give holders the right to subscribe for ordinary shares between 20X6 and 20Y9 at Rs. 70 per share. Options outstanding at 31 December 20X7 and 20X8 were 630,000. There were no grants, exercises or lapses of options during the year. The profit after tax, attributable to ordinary equity holders for the years ended 31 December 20X7 and 20X8, amounted to Rs. 500,000 and Rs. 600,000 respectively (wholly relating to continuing operations).
Average market price of share:
Year ended 31 December 20X7 = Rs. 120
Year ended 31 December 20X8 = Rs. 160
Calculate basic and diluted EPS.
Solution –
| Calculation of basic EPS | 20X8 | 20X7 |
| Profit after tax | Rs. 600,000 | Rs. 500,000 |
| Number of share | 4,000,000 | 4,000,000 |
| Basic EPS (approx.) | 15 paise | 13 paise. |
| Calculation of diluted EPS | ||
| Adjusted number of shares | ||
| Number of shares under option: | ||
| Issued at full market price: | ||
| (630,000 × 70) ÷ 120 | 367,500 | |
| (630,000 × 70) ÷ 160 | 275,625 | |
| Issued at nil consideration — dilutive | 354,375 | 262,500 |
| Total number of shares under option | 630,000 | 630,000 |
| Number of equity shares for basic EPS | 4,000,000 | 4,000,000 |
| Number of dilutive shares under option | 354,375 | 262,500 |
| Adjusted number of shares (A) | 4,354,375 | 4,262,500 |
| Profit after tax (B) | Rs. 600,000 | Rs. 500,000 |
| Diluted EPS (B/A) | 14 paise | 12 paise |
Note: If options had been granted or exercised during the period, the number of ‘nil consideration’ shares in respect of these options would be included in the diluted EPS calculation on a weighted average basis for the period prior to exercise.