Earnings Per Share

EARNINGS PER SHARE statements; the disclosure required by the
standard need be presented only on the of

Definition the consolidated information.
-Figure is the amount attributable to every

ordinary outstanding share during the An entity that chooses to disclose EPS in the
period. separate financial statements shall present
- pertains to only ORDINARY SHARE. It is EPS information only on the face of the
not necessary for preference share because separate income statement. It shall not
there is a definite rate of return for such present such EPS information in the
share. consolidated financial statements.
The computation of earnings per share is BASIC EARNINGS PER

covered by PAS 33 which requires 2 SHARE
presentation of earnings per share namely:
1. Basic Earnings Per Share (BEPS)

2. Diluted Per Share (DEPS)
PUBLIC ENTITIES ARE REQUIRED Consideration in computing “profit or
TO PRESENT EARNINGS PER SHARE. loss”
Nonpublic entities are not required but - Profit or loss should be net of
encouraged to present earnings per share. income tax expense.
- Profit or loss should be adjusted for
the tax amounts of preference
dividends, differences arising on the
PRESENTATION settlement of preference shares, and
other similar effects of preference
shares classified as equity.
- Basic and Diluted EPS for income or
Adjustment for preference shares
loss from continiuing operations –
presented on the face of the income - If the preference shares are
statement. cumulative, one year dividend is
deducted from profit or loss whether
Basic and Diluted EPS for a discontinued
declared or not.
operation shall disclose either on the
- If the preference shares are non-
1. Face of the income statement cumulative, only the dividend
2. Or in the notes to the statement declared is deducted from profit or
loss.
When an entity present both consolidated
financial statements and separate financial Determination of Weighted Average
- Shares are usually included in the issue is the number of ordinary
weighted average number of shares shares outstanding prior to the
from the date consideration is rights issue multiplied by an
receivable (Which is generally the adjustment factor.
date of their issue).
- Treasury Shares acquired is
excluded when the acquisition is
recognized. Treasury shares
reissued are included when
reissuance is recognized.
The market value of the share right-on is
- Subscribed ordinary shares or
the market value of the share immediately
partly shares are included to the
prior to the exercise of rights.
extent of their participation
dividends. The theoretical market value of the share-ex
- Ordinary shares issued as Dividends right is
or share split are included from the
time the original shares, on which
the share dividends or share splits
are based, were originally issued.
The number of ordinary shares
outstanding before the event is
adjusted for the proportionate change DILUTED EARNINGS PER
in the number of ordinary shares SHARE
outstanding as if the event had
occurred at the beginning of the
earliest period reported.
- where the capital structure of an
RIGHT ISSUE entity is complex in the sense that it
consists of ordinary shares and
- The Philippine term for a right issue
potential ordinary shares or
is “stock right” and the legal term is
Potential diluters, the computation
“right of preemption”.
of the earnings per share becomes a
- When rights are issued to
little complicated.
shareholders most often the exercise
price is less than the fair value of the
shares.
Potential Ordinary share
- Accordingly, such a rights issue
includes a bonus element, meaning A potential ordinary share is a financial
shares issued for no consideration. instrument or other contract that may
- Application Guide 2 of PAS 33 entitle its holder to ordinary share. In
provides that “the number of other words, a potential ordinary share is
ordinary shares to be used in a financial instrument that represents
calculating basic earnings per share future issuance of ordinary shares.
for all periods prior to the rights
Three major types of potential Convertible Bonds Payable
ordinary shares are:
1. Convertible bonds payable
2. Convertible preference share the computation of diluted earnings per
3. Share option and warrant. share assumes that the bond payable is
converted to ordinary share.
DILUTION AND
ANTIDILUTION Accordingly, adjustments shall be made both
to net income and to the number of ordinary
shares outstanding.
Dilution arises when the inclusion of
potential ordinary shares decreases the
- The net income is adjusted by
basic earnings per share or increases the
adding back the interest expense
basic loss per share.
on the bond payable, net of tax.
In this case the potential ordinary shares are - the number of ordinary shares
dilutive securities. outstanding is increased by the
number of ordinary shares that would
have been issued upon conversion of
On the other hand, Antidilution arises the bonds payable
when the inclusion of the potential
ordinary shares increases basic earnings Convertible Preference Shares
per share or decreases basic loss per
share.
In this case the potential ordinary shares are - if there is a convertible preference
considered as Antidilutive and therefore share the computation of diluted
ignored in computing the diluted earnings earnings per share also assumes that
per share. the preference share is converted into
ordinary share.
- Accordingly, the net income is not
The computation of diluted earnings per reduced anymore by the amount of
share is based on the “as if scenario: preference dividend.
1. as if convertible bonds payable is - The number of ordinary shares
converted into ordinary share. outstanding is increased by the
2. As if the convertible preference share number of ordinary shares that
is converted into ordinary share would have been issued-upon
3. as if the share option and warrants conversion of the preference share.
are exercised.
Option and Warrants minus the assumed treasury shares
acquired.
- option and warrants are dilutive if
the exercise price or option price is - The incremental ordinary share
less than the average market price represents the issue of ordinary
of the ordinary share. shares for no consideration.
- If the exercise price is less than the - Accordingly, these are the potential
average market price of the ordinary ordinary shares that are included in
share, the option and warrants the computation of diluted earnings
probably would be exercised and per share.
therefore their effect would be - The assumed proceeds from the
dilutive. options and warrants shall be
- Options and Warrants are included in considered to have been received
the EPS computation through the from the issue of shares at fair value
treasury share method. However this or average market price.
does not imply that the entity has
entered into a transaction to purchase Multiple Potential Ordinary
its own shares. The treasury share shares
method is used to simplify the
computation of incremental ordinary
shares that are assumed to be issued
for no consideration as a result of - A problem arises where the entity
options and warrants. has two or more dilutive potential
ordinary shares
Treasury Share Method - in considering whether potential
ordinary shares are dilutive or
- The following procedures shall be antidilutive, each issue or series of
followed in the computation of potential ordinary shares shall be
incremental ordinary shares/ arising considered separately, rather than
from issuance of options and aggregate.
warrants: - In order to maximize the dilution of
1. the options and warrants are the basic earnings per share, each
assumed to be exercised at the issue is considered in sequence from
beginning of the current year at the most dilutive to the least dilutive.
the date they are issued during the
year.
- In other words, the potential ordinary
2. The proceeds from the exercise of shares shall be ranked based on
options and warrants are assumed their contribution in terms of
to be used to acquire treasury incremental EPS.
shares at average market price. - The potential ordinary shares with
3. The number of incremental ordinary the lowest incremental EPS is
shares is equal to the option shares Ranked first.
Test for dilution - If the incremental EPS is lower than
the basic EPS, the convertible bond
payable is convertible is probably
dilutive if this incremental EPS is
1. Options and Warrants higher that the basic EPS, the
- The options and warrants are dilutive convertible bond payable is
if the option price or exercise price is antidilutive.
lower than the average market price.
the option or warrants are the most
dilutive because they have no impact
on net income. Thus, the options and
warrants are ranked first in
computing diluted earnings per
share.
2. Convertible preference share
- The Contribution of the preference
shares to net income is the amount of
preference dividend that is avoided
because of the conversion.
- The incremental EPS for convertible
preference share is equal to the
amount of preference dividend by
the number of ordinary shares into
which the preference share is
convertible.
- If the incremental EPS is lower than
the basic EPS the convertible
preference share is probably dilutive.
If this incremental EPS is higher than
the basic EPS, the preference share is
antidilutive.
3. Convertible bonds payable
- The contribution of bonds payable to
net income is the amount of interest
expense that is avoided because of
the conversion.
- The incremental EPS for the
convertible bond payable is equal to
the interest expense, net tax
divided by the number of ordinary
shares into which the bond payable
is convertible.

Earnings Per Share

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Earnings Per Share

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EARNINGS PER SHARE statements; the disclosure required by the

standard need be presented only on the of

-Figure is the amount attributable to every

The computation of earnings per share is BASIC EARNINGS PER

1. Basic Earnings Per Share (BEPS)

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