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Quick Reference on Accounting Standard (AS) 20

Download Quick Reference on Accounting Standard (AS) 20 Earnings Per Share (EPS)

AS 20 prescribes principles for the determination and presentation of earnings per share which will improve comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise.

Presentation of Basic and Diluted EPS (BEPS and DEPS)

BEPS and DEPS to be presented 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.

In consolidated financial statements, the information required by this Standard should be presented on the basis of consolidated information.

BEPS and DEPS to be presented:

  • with equal prominence for all periods presented
  • even if the amounts disclosed are negative (a loss per share)

BEPS

Net Profit/loss Available to Equity Shareholders (A)
Weighed Average Number of Shares (B)

A B
Earnings

  • Profit/Loss After Tax less Preference Dividend and Tax thereon
  • In case of more than one class of equity shares, net profit or loss is apportioned in accordance with dividend right for each class

Preference Dividend

  • Non-cumulative- Deduct if provided for
  • Cumulative- Deduct whether provided or not
Number of shares outstanding at the beginning of the period adjusted for increases and decreases during the period

Weight = Number of days shares were outstanding during the period as a proportion of the total number of days in the period

Diluted Earnings per Share

For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares.

Potential equity shares are financial instruments or other contracts that entitle or may entitle their holders to equity shares. Examples are convertible preference shares and debentures, share warrants, etc.

Potential equity shares should be treated as dilutive when, and only when, their conversion to equity shares would decrease net profit per share from continuing ordinary operations.

Diluted Earnings Revised Weighed Average Number of Shares
Profit Available to Equity Shareholders plus preference dividend deducted and interest recognised on dilutive potential shares adjusted for tax expense plus or minus after-tax amount of any change in expense or income that would result on conversion of dilutive potential equity shares Weighted average number of shares plus weighted average of additional equity shares outstanding assuming conversion of all dilutive potential equity shares

Further considerations:

BEPS

Partly paid equity shares

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

Bonus shares

Affects number of shares without changing resources, hence, number of shares to be adjusted without assigning weightage to time of issue
Adjusted EPS reported for the earliest period presented assuming the bonus issue had occurred at the beginning of the earliest period presented
The above principles are equally applicable for share split, reverse share split, etc.
For bonus issue, share split or reverse share split, both basic and diluted EPS for all periods presented should be based on new number of shares, even if that event takes place after the balance sheet date but before the date of approval of the financial statements by the board of directors.

Rights issue

Involves bonus element since rights issue is generally made at price lower than fair value
Number of shares for the purpose of EPS calculation for all periods prior to the rights issue is number of shares outstanding prior to rights issue multiplied by the following factor:

Fair value per share immediately prior to the exercise of rights
Theoretical ex-rights fair value per share

The above adjustment has the effect of restating EPS for all the periods prior to the rights issue for the effect of bonus element in the rights issue.
Number of shares from the period of rights issue should be increased by the number of shares issued under the rights issue.

Contingently issuable shares

Equity shares which are issuable upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares) are considered outstanding, and included in the computation of basic earnings per share from the date when all necessary conditions under the contract have been satisfied.

DEPS

For calculating diluted EPS, an enterprise should assume the exercise of dilutive options and other dilutive potential equity shares. The assumed proceeds from these issues should be considered to have been received from the issue of shares at fair value. The difference between number of shares issuable and the number of shares that would have been issued at fair value should be treated as issue of equity shares for no consideration.
Dilutive potential equity shares are deemed to have been converted into equity shares at the beginning of the period or, if issued later, the date of issue of such shares.
Contingently issuable shares are considered outstanding, and included in the computation of diluted earnings per share from the date when all necessary conditions under the contract have been satisfied. If the conditions are not met, for calculating diluted EPS, they are included as of the beginning of the period (or as of the date of the contingent share agreement, if later). In this case, the number of contingently issuable shares is based on the assumption that end of the reporting period is the end of the contingency period. Restatement is not permitted, if the conditions are not met when the contingency period actually expires subsequent to the end of the reporting period.
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 EPS only for 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 EPS 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 EPS.

Disclosure of Diluted EPS (both including and excluding extraordinary items) is not mandatory for SMCs and non- company SMEs falling in Level II and Level III. Non-Company SMEs falling in Level III are exempted from additional disclosure requirements also.

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