EARNINGS PER SHARE (EPS)

PAS 33
The earnings per share figure is the amount attributable to every share of ordinary
share outstanding during the period.
The objective of the basic earning earnings per share information is to provide a
measure of the interest of each ordinary share of a parent entity in the performance of
the entity over the reporting period.
Two presentations of earnings per share:
1. Basic earnings per share
2. Diluted earnings per share
Enterprises required to disclose earnings per share:
1.

The presentation of earnings per share is required for enterprises whose

ordinary shares or potential ordinary shares are publicly traded and by
enterprises that are in the process of issuing ordinary shares or potential
ordinary shares in the public securities market.
Note: Nonpublic enterprises are not required to present earnings per share.

Uses of earning per share:

a. It is a determinant of the market price of ordinary share.
b. It is a measure of performance.
c. It is the basis of dividend policies of the company.
Simple Capital Structure VS Complex Capital Structure
1. Simple Capital Structure means that the corporation has only ordinary and
nonconvertible preference share.
2. Complex Capital Structure means that the corporation has one or more
instruments outstanding that could result in issuance of additional ordinary shares.

BASIC EARNINGS PER SHARE

1. Basic EPS considers only ordinary shares issued and outstanding.
2. The Basic Equation:

Net Income
Ordinary Shares Outstanding
or
Net Income Dividend on Preference Share
Weighted Average Ordinary Shares Outstanding
Notes:

The net income is equal to the amount after deducting dividends on preference
stock.

If the preference share is cumulative, the preference dividend for the current
year only is deducted from the net income, whether such dividend is declared or
not.

If the preference share is noncumulative, the preference dividend for the current
year is deducted from the net income only if there is a declaration.

The share split and bonus issue (stock dividend) are recognized retroactively,
meaning, it is treated as a change from the date the original shares are issued.

Proforma computations of Weighted Average Shares:

1.
Date

Shares Months Outstanding

Weighted Average = Total Month-Shares / 12

2.
Date

Date

Shares

Shares

Bonus
Issue

Bonus Issue or
Share Split

Months
Outstanding

Months
Share Split Outstanding
2

MonthShares

MonthShares

Month-Shares

3.

DILUTED EPS
It reflects the maximum potential dilution from all possible share conversions that would
have decreased EPS. This occurs if inclusion of a potentially dilutive security reduces
the basic EPS or increases the basic loss per share.
Dilutive Securities Securities whose assumed conversion or exercise results in a
reduction in earnings per share.
Antidilutive Securities Securities whose assumed conversion or exercise results in
an increase in earnings per share.
Two major types of potential ordinary shares
1. Convertible bond payable and convertible preference share
2. Ordinary share options and warrants.
The computation of the diluted earnings per share is based on the as if
scenario:
a. As if the convertible bonds payable is converted into ordinary share.
b. As if the convertible preference share is converted into ordinary share.
c. As if the share options and warrants are exercised.
DILUTED EARNINGS PER SHARE CONVERTIBLE BONDS PAYABLE
If there is a convertible bonds payable, the computation of diluted earnings per share
assumes that the bond payable is converted into ordinary stock.
Adjustments should be made both to net income and to the number of ordinary shares
outstanding.
The net income is adjusted by adding back the interest expense on the bond payable,
net of tax.
The number of ordinary shares outstanding is increased by the number of ordinary
shares that would have been issued upon conversion of the bond payable.
Proforma Computation:
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Net Income
Add: Interest expense on the bonds payable
Less: Income tax (Interest expense x tax rate)
Adjusted net income

XXX
XXX
XXX

XXX
XXX

Ordinary shares actually outstanding

Add : Incremental shares Assumed issued ordinary shares
through conversion of Bond Payable

XXX

Total shares assumed issued

XXX

Diluted earnings per share =

XXX

Adjusted net income

Total Shares assumed issued

Notes :
1. If a convertible bond payable is outstanding during the entire year, it is assumed
that the conversion takes place at the beginning of the year.
2. If the bond payable is issued during the year. All conversion computations will be
made for the number of months from date of issuance until the end of the year.
DILUTED EARNINGS PER SHARE CONVERTIBLE PREFERENCE SHARE
If there is a convertible preference share, the computation of diluted earnings per share
also assumes that the preference share is converted into ordinary share.
The net income is not reduced anymore by the amount of preference dividend.
The number of ordinary shares outstanding is increased by the number of ordinary
shares that would have been issued upon conversion of the preference share.
Notes:
1. If a convertible preference share is outstanding during the entire year, it is
assumed that the conversion takes place at the beginning of the year.
2. If the preference share is issued during the year. All conversion computations
will be made for the number of months from date of issuance until the end of the
year.
Proforma Computation:
Diluted earnings per share =

*Net income
Total Shares assumed issued
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* The preference dividend is no longer deducted from the net income

Ordinary shares actually outstanding
Add : Incremental shares Assumed issued ordinary shares
through conversation of preference share

XXX

Total shares assumed issued

XXX

XXX

DILUTED EARNINGS PER SHARE OPTIONS AND WARRANTS

1. Proceeds from assumed exercise of options are to be used for purchase of treasury
share at current market price.
2. Treasury share is assumed to be reissued to option or warrant holders.
3. Any additional shares issued, over treasury share are added to weighted average
shares outstanding.
4. Exercise is assumed to occur on the first day of the year unless issue date is later.
5. The options and warrants are included in DEPS computations only when they are
dilutive.
6. No effect on net income.
7. For employee share options, the exercise price or option price shall include the fair
value of any services to be supplied to the entity in the future under the option plan.
8. If the exercise price is less than the average market price of the ordinary share, the
options and warrants probably would be exercised and therefore their effect would
be would be dilutive.
9. If the exercise price is more than the market value of the ordinary share, the options
and warrants would not be exercised and therefore there would be no dilution.

TREASURY SHARE METHOD

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PAS 33 provides the following procedures in the computation of incremental ordinary

shares arising from the issuance of options and warrants.

The options and warrants are assumed to be exercised at the beginning of the
current year or the date they are issued during the current year.

The proceeds from the exercise of the options and warrants are assumed to be
used to acquire treasury share at average market price.

The assumed proceeds from the options and warrants shall be considered to
have been received from issue of shares at the fair value or market price.

The number of incremental ordinary shares is equal to the option shares minus
the assumed treasury shares acquired.
Proforma Computation:
Ordinary shares actually outstanding
Add : Incremental Ordinary Shares
Option shares
Less: Assumed treasury shares
Total Shares assumed issued

XXX
XXX
XXX

Options shares
Multiply by total option price
Proceeds from assumed exercise of options
Divide by average market price
Assumed treasury shares by average market price
Option price / exercise price
Add : Fair value of each stock option
Total option price

XXX
XXX

XXX
XXX
XXX
XXX
XXX
XX
XX
XX

EFFECTS OF ACTUAL EXERCISE OF OPTIONS AND WARRANTS

The option shares or covered shares actually issued are averaged from the
date of exercise to the end of the current year. Example: If options are exercised
on March 1 of the current year, it means the option shares are averaged by
multiplying the number of shares exercised by 10/12.

The incremental ordinary shares are averaged from the beginning of the current
year to the date of exercise of options and warrants. Example: Again if options
are exercised on March 1, it means the incremental shares are averaged by
multiplying the incremental shares by 2/12.

Incremental shares could be computed by subtracting assumed treasury shares

from the options shares.

Options shares X total option price = Proceeds from assumed exercise of options

Assumed treasury shares = Proceeds from assumed exercise options / price

on actual exercise date if given, in the absence of that use the average market
price. (This procedure is only applicable to actual exercise of options or warrants)

Basic earnings per share would be affected due to increase in outstanding

shares.

Proforma Computation:
Ordinary shares actually outstanding beg
Add: Number of shares converted (covered shares)
Ordinary shares actually outstanding - BEPS

XXX
XXX
XXX

Ordinary shares actually outstanding beg

Add: Number of shares converted (covered shares)
Add: Incremental ordinary shares
Ordinary shares outstanding - DEPS

XXX
XXX
XXX
XXX

Reminder: The ordinary shares are always averaged in computing

BEPS and DEPS.

EFFECTS OF ACTUAL CONVERSION OF BONDS PAYABLE AND PREFERENCE

SHARE TO ORDINARY SHARE
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The shares issued from bond conversion and preference share conversions are
averaged from the date of conversion to the end of the current year.

The incremental ordinary shares or ordinary shares to be issued for the

conversion of preference share & the ordinary shares to be issued for bond
conversion are averaged from the beginning of the current year to the date of
conversion of bonds payable and preference share.

BASIC LOSS PER SHARE

If the enterprise has a net loss, only the basic loss per share is computed. The reason
is that the potential diluters would always decrease the loss per share and therefore
would be antidilutive.
Formula:
Net Loss + Preference Dividend
Weighted Average Ordinary Shares Outstanding
MULTIPLE POTENTIAL ORDINARY SHARES
In considering whether potential ordinary shares are dilutive or antidilutive, each issue
or series of potential ordinary shares should be considered separately or individually,
rather than in the aggregate.
The potential ordinary shares should be ranked based on their contribution in terms of
incremental EPS. The potential ordinary share with the lowest incremental EPS is
ranked first.
Test for dilution
A. Options and warrants are dilutive if the option price or exercise price is lower
than the average market price.
B. The contribution of the preference share to net income is the amount of preferred
dividend that is avoided because of the conversion.

Incremental EPS =

Preference Dividend
Incremental ordinary shares from conversion
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Incremental EPS < Basic EPS = Dilutive

Incremental EPS > Basic EPS = Antidilutive
C. The contribution of the bond payable to net income is the amount of interest
expense that is avoided because of the conversion.

Incremental EPS =

Interest expense, net of tax

Incremental ordinary shares from conversion

CONTINGENTLY ISSUABLE SHARES

Contingent ordinary shares
are ordinary shares issuable for little or no cash or other consideration upon
satisfaction of specified conditions in a contingent share agreement.
are treated as outstanding and;
- included in the computation of basic earnings per share from the date
conditions are met, and
- included in the computation of diluted earnings per share from the
beginning of the period or from the date of the contingent share
agreement, if later.
- if conditions are not met during the period, the number of contingently
issuable share assumed to be issued is the number of shares that will be
issuable if the end of the period is the end of the contingency period.
Contingent share agreement is an agreement to issue shares that is dependent on
the satisfaction of specified condition.
CONTRACTS THAT MAY BE SETTLED IN ORDINARY SHARES OR CASH

Issued contract by the entity that may be settled in ordinary shares or cash at the
entitys option, the entity shall presume that the contract will be settled in
ordinary shares, and the resulting potential ordinary shares shall be included in
diluted earnings per share if the effect is dilutive.

If the option settlement lies with holder of the instrument, the more dilutive of
cash settlement and share settlement shall be used in calculating diluted
earnings per share.
Presentation
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a. An entity shall present on the face of the income statement basic and diluted
earnings per share fro income or loss from continuing operations.
b. An entity that reports a discontinued operation shall disclose the basic and
diluted amounts per share for the discontinued operation either on the face of
the income statement or in the notes to the statements.
c. An entity shall present basic and diluted earnings per share even if the amounts
are negative, meaning, basic loss and diluted loss per share.

July 2009

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