Accounting Standards

Accounts and Finance
Accounts Theory

Earning Per Share (EPS) is a financial ratio that gives the information regarding earning available to each equity share.  There are two types of EPS which are to be reported by the enterprises on the face of statement of profit & loss account

1. Basic EPS
2. Diluted EPS

It can be understand well by below examples

Case 1:    Basic EPS     =    Profit available for equity share holders

Weighted Average nos. Of shares

Illustration : Sales Rs.10,00,000  Expenses : 6,00,000  Profit Rs.4,00,000  Tax @ 30%   Rs.1,20,000   Now Profit after Tax (PAT) Rs.2,80,000  . Company has share capital of Rs.1,00,000 (10000 share of Rs.10 each).  Earning per share ?

BEPS   =      280000/10000   =   Rs.28 Earning per share

Case 2 :  As per AS-20 , while calculating Profit for EPS  dividend paid to Equity share holders will not be considered.

Illustration : Sales Rs.10,00,000  Expenses : 6,00,000  Profit Rs.4,00,000  Tax @ 30%   Rs.1,20,000   Now Profit after Tax (PAT) Rs.2,80,000  . Less : Preference share dividend Rs.80,000 Equity share dividend Rs.50,000  After paying dividend Retained Profit 1,50,000 . Company has share capital of Rs.1,00,000 (10000 share of Rs.10 each).  Earning per share ?

In this case profit available for equity share will be = 280000 – 80000  = 200000

BEPS  =  200000 / 10000   =  Rs.20 Earning per share

Case3 :   As per AS-20, Weighted average nos of equity share should be calculated by adjusting the  changes in equity share

Illustration : suppose in case 2 , company had 6000 shares of 10 each at beginning of year 1 April 2013. Company introduced 4000 shares of 10 each on 1 July 2013.   EPS ?

BEPS        =    200000 / (6000 X 12/12 ) + (4000 X9/12)

BEPS        =    Rs.22.22

Case 4 :   As per AS-20, Partly paid up equity share should be counted in the ratio of amount paid up to Face value (Amount paid / Face value)

Illustration : suppose in case 2, company had 6000 shares of 10 each on 1 April. It introduced 4000 shares of 5 each on 1  July.  EPS ?

BEPS     =   200000 / (6000X  12/12) + (4000 X  9/12  X 5/10)

BEPS    =     Rs.26.67

Case 5 :   As per AS-20, when bonus shares are issued during the year , It should be included in weighted average from the beginning of reporting period irrespective of  issue date

Illustration : Suppose in case 2, Company had 6000 shares of 10 each on 1 April and It introduced 4000 bonus shares of 10 each on 1 July.  EPS ?

BEPS  =  200000 / 10000  =  Rs.20

Case 6 : As per AS-20, when shares are issued at premium , premium will not be considered. It will be treated as fully paid up share capital

Illustration : Suppose in case 2 , company had 6000 shares of Rs.10 each and it introduced 4000 shares of 10 each  (issued at Rs.15 each ) on july

BEPS        =    200000 / (6000 X 12/12 ) + (4000 X9/12)

BEPS        =    Rs.22.22

Case 7 :     Adjusted  BEPS is calculated for the previous year after adjusting changes occurred in Nos. Of shares in current year

Illustration : Suppose in case 2, in next financial year company issued one bonus equity share for each share outstanding at the beginning of the year. Calculated adjusted BEPS for previous year

Adjusted  Basic EPS  = 200000 / (10000+10000) = Rs.10

Case 8 :   A s per AS-20, when right shares are issued during the year, adjustment factor is calculated

Illustration : On 01-04-2013 Co. Had  5000 equity share and on 01-06-2013 it issued one new equity share for each 5 share at Rs.15. Fair value before issuing right shares was Rs.21. Net profit for the year was Rs.15000. BEPS ?

Computation of fair value per share (Ex right) = (5000 × 21) + (1000 × 15) / 5000 + 1000  =  Rs.20

Computation of adjustment factor or right factor = fair value before right issue / fair value including right issue

=  21 / 20 =  1.05

Basic EPS    =  15000 / (5000 × 1.05 × 2/12) + (6000  × 10/12)   = Rs.2.55

Diluted Earning Per share : Diluted earning per share is calculated in the case of potential equity shares like convertible debentures, convertible preference shares, options, warrants etc. Potential equity shares are diluted if their conversion into equity shares reduces the earning per share, if it increases, potential equity share are not to be considered dilutive.

Case 1  :   As per AS-20,  pending allotment should not be included while calculating Basic EPS, It should be included  while calculating Diluted EPS

Illustration : Suppose in case 2, Company had 6000 shares of 10 each at beginning . It received Rs.40000 share as application money for 4000 shares of Rs.10 each. Till 31 march it had not issued shares

Basic EPS  =   200000 / 6000    =   Rs.33.33

Diluted EPS  =  200000 / (6000+4000)  =  Rs.20

Case 2 :   As per AS – 20, when debentures are converted into equity shares , interest on debenture is added in profit and tax on interest is lessed while calculating diluted EPS. It is because Co. do not have to pay interest to debenture holders.

Illustration   :  Co. Had equity share of 50000 on 1.4.13 . net profit for the year is Rs.1,00,000 . It had 12%  1000 convertible debenture of Rs.100 each to be converted into 10 equity shares. Tax Rate 30%. EPS ? Diluted EPS ?

Basic EPS       =   100000 / 50000    = Rs.2

Dilutive EPS

We have to take out adjusted profit for equity share holders. Interest on debenture will be added and tax on interest will be lessed

Diluted EPS  =   100000 + 12000 – 3600 / 50000 + 10000

=    1.81

Case 3 : Co. had 5000 equity shares on 01.04.13  Net profit for the year was Rs.12000. Average fair value per share during the year was Rs.20 and Co has given option to its employee of 1000 shares at option price of Rs.15. Calculate EPS and Dilutive EPS

Basis EPS  =  12000 / 5000   =   2.40

Dilutive earning per share

Nos of shares under option                                                           1000

Nos of shares that would have been issued at fair value

(1000 X 15 /20)                                                                            (750)

Weighted nos of shares (5000 + 250)                                          5250

DEPS    =  12000 / 5250   =   Rs.2.29

Case 4 :   Co. had equity shares of  20000 on 1.4.13 . average value per equity share during the year was Rs.75, potential equity shares are as under :

1. Options 1000 shares price Rs.60
2. 8% convertible preference share of 8000 shares to be converted into 2 equity shares. Dividend tax 10%
3. 12% convertible debenture of Rs.100, nominal value of Rs.10 lac convertible into 4 equity share

Tax rate 30%, net profit Rs.100000. Calculate diluted EPS

 Options Increase in earning 0 Nos of incremental shares issued for no consideration 1000 X (75-60) / 75 200 EPS on increased share 0 8% convertible preference share Increase in net profit (8 X 8000) + 10% (8 X 8000) 70400 Nos of incremental shares (2 X 8000 ) 16000 EPS on increased share   (70400 / 16000) 4.40 12%  convertible debenture Increase in net profit 10 lac X 12%  = 120000 Less : tax 30%  = 36000 84000 Nos of incremental share 40000 EPS on increased share 2.10

It may noted  from the above that OPTIONS are most dilutive as their earning per incremental share is nil. Hence for the purpose of computation of diluted earning per share , option will be considered first. Debenture will be second and after preference share.

Computation of diluted Earning Per Share

 Net Profit Nos of Equity share Net profit per share As reported 100000 20000 5.00 Option 200 100000 20200 4.95 Dilutive Debenture 84000 40000 184000 60200 3.06 Dilutive Preference share 70400 16000 254400 76200 3.34 Anti-dilutive

Since diluted earning per share are increased when taking the convertible preference share into account from 3.06 to 3.34 , the convertible preference shares are anti dilutive and are ignored in the calculation of diluted earning per share.

Therefore, diluted earning per share is Rs.3.06