TMI BlogEarnings Per ShareX X X X Extracts X X X X X X X X Extracts X X X X ..... er share calculation. Even though earnings per share data has limitations because of different accounting policies used for determining earnings , a consistently determined denominator enhances the quality of financial reporting. Scope 1. This Standard should be applied by all companies. However, a Small and Medium Sized company, as defined in the Notification, may not disclose diluted earnings per share (both including and excluding extraordinary items). 2. In consolidated financial statements, the information required by this Statement should be presented on the basis of consolidated information. [1] 3. In the case of a parent (holding enterprise), users of financial statements are usually concerned with, and need to be informed about, the results of operations of both the enterprise itself as well as of the group as a whole. Accordingly, in the case of such enterprises, this Standard requires the presentation of earnings per share information on the basis of consolidated financial statements as well as individual financial statements of the parent. In consolidated financial statements, such information is presented on the basis of consolidated information. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngements (contingently issuable shares), such as the acquisition of a business or other assets, or shares issuable under a loan contract upon default of payment of principal or interest, if the contract so provides. Presentation 8. An enterprise should present basic and diluted earnings per share 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. An enterprise should present basic and diluted earnings per share with equal prominence for all periods presented. 9. This Standard requires an enterprise to present basic and diluted earnings per share, even if the amounts disclosed are negative (a loss per share). Measurement Basic Earnings Per Share 10. Basic earnings per share should be calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. Earnings - Basic 11. For the purpose of calculating basic earnings per share, the net profit or loss for the period attributable to equity shareholders should be the net profit or loss for the peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted average is adequate in many circumstances. Illustration I attached to the Standard illustrates the computation of weighted average number of shares. 17. In most cases, shares are included in the weighted average number of shares from the date the consideration is receivable, for example: (a) equity shares issued in exchange for cash are included when cash is receivable; (b) equity shares issued as a result of the conversion of a debt instrument to equity shares are included as of the date of conversion; (c) equity shares issued in lieu of interest or principal on other financial instruments are included as of the date interest ceases to accrue; (d) equity shares issued in exchange for the settlement of a liability of the enterprise are included as of the date the settlement becomes effective; (e) equity shares issued as consideration for the acquisition of an asset other than cash are included as of the date on which the acquisition is recognised; and (f) equity shares issued for the rendering of services to the enterprise are included as the services are rendered. In these and other cases, the timing of the inclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of equity shares outstanding, without a corresponding change in resources. 23. Equity shares may be issued, or the number of shares outstanding may be reduced, without a corresponding change in resources. Examples include: (a) a bonus issue; (b) a bonus element in any other issue, for example a bonus element in a rights issue to existing shareholders; (c) a share split; and (d) a reverse share split (consolidation of shares). 24. In case of a bonus issue or a share split, equity shares are issued to existing shareholders for no additional consideration. Therefore, the number of equity shares outstanding is increased without an increase in resources. The number of equity shares outstanding before the event is adjusted for the proportionate change in the number of equity shares outstanding as if the event had occurred at the beginning of the earliest period reported. For example, upon a two-for-one bonus issue, the number of shares outstanding prior to the issue is multiplied by a factor of three to obtain the new total number of shares, or by a factor of two to obtain the number of additional shares. Illustration III attached to the St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utable change in tax expense for the period; (ii) increased by the amount of interest recognised in the period in respect of the dilutive potential equity shares as adjusted for any attributable change in tax expense for the period; and (iii) adjusted for the after-tax amount of any other changes in expenses or income that would result from the conversion of the dilutive potential equity shares. (b) the weighted average number of equity shares outstanding during the period is increased by the weighted average number of additional equity shares which would have been outstanding assuming the conversion of all dilutive potential equity shares. 28. For the purpose of this Standard, share application money pending allotment or any advance share application money as at the balance sheet date, which is not statutorily required to be kept separately and is being utilised in the business of the enterprise, is treated in the same manner as dilutive potential equity shares for the purpose of calculation of diluted earnings per share. Earnings - Diluted 29. For the purpose of calculating diluted earnings per share, the amount of net profit or l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued on the conversion of all the dilutive potential equity shares into equity shares. Dilutive potential equity shares should be deemed to have been converted into equity shares at the beginning of the period or, if issued later, the date of the issue of the potential equity shares. 33. The number of equity shares which would be issued on the conversion of dilutive potential equity shares is determined from the terms of the potential equity shares. The computation assumes the most advantageous conversion rate or exercise price from the standpoint of the holder of the potential equity shares. 34. 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 both the basic earnings per share and diluted earnings per share from the date when the conditions under a contract are met. If the conditions have not been met, for computing the diluted earnings per share, contingently issuable shares are included as of the beginning of the period (or as of the date of the contingent share agreement, if later). The number of contingently is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Standard illustrates the effects of share options on diluted earnings per share. 38. To the extent that partly paid shares are not entitled to participate in dividends during the reporting period they are considered the equivalent of warrants or options. Dilutive Potential Equity Shares 39. 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. 40. An enterprise uses net profit from continuing ordinary activities as the control figure that is used to establish whether potential equity shares are dilutive or anti-dilutive. The net profit from continuing ordinary activities is the net profit from ordinary activities (as defined in AS 5) after deducting preference dividends and any attributable tax thereto and after excluding items relating to discontinued operations [2] . 41. Potential equity shares are anti-dilutive when their conversion to equity shares would increase earnings per share from continuing ordinary activities or decrease loss per share from continuing ordinary activities. The effects of anti-dilutive potential equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that fact should be disclosed. 45. An enterprise does not restate diluted earnings per share of any prior period presented for changes in the assumptions used or for the conversion of potential equity shares into equity shares outstanding. 46. An enterprise is encouraged to provide a description of equity share transactions or potential equity share transactions, other than bonus issues, share splits and reverse share splits (consolidation of shares) which occur after the balance sheet date when they are of such importance that non-disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions. Examples of such transactions include: (a) the issue of shares for cash; (b) the issue of shares when the proceeds are used to repay debt or preference shares outstanding at the balance sheet date; (c) the cancellation of equity shares outstanding at the balance sheet date; (d) the conversion or exercise of potential equity shares, outstanding at the balance sheet date, into equity shares; (e) the issue of warrants, options or convertible securities; and (f) the satisfaction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss. Basic and diluted per share amounts should be disclosed with equal prominence. 51. An enterprise may wish to disclose more information than this Standard requires. Such information may help the users to evaluate the performance of the enterprise and may take the form of per share amounts for various components of net profit. Such disclosures are encouraged. However, when such amounts are disclosed, the denominators need to be calculated in accordance with this Standard in order to ensure the comparability of the per share amounts disclosed. Illustrations Note.- These Illustrations do not form part of the Accounting Standard. Their purpose is to illustrate the application of the Accounting Standard. Illustration I Example - Weighted Average Number of Shares (Accounting year 01-01-20X1 to 31-12-20X1) No. of Shares Issued No. of Shares Bought Back No. of Shares Outstanding 1st January, 20X1 Balance at beginning of year 1,800 - 1,800 31st May, 20X1 Issue of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had occurred prior to the beginning of the year 20X0, the earliest period reported. Illustration IV Example - Rights Issue (Accounting year 01-01-20XX to 31-12-20XX) Net profit Year 20X0 : ₹ 11,00,000 Year 20X1 : ₹ 15,00,000 No. of shares outstanding prior to rights issue 5,00,000 shares Rights issue One new share for each five outstanding (i.e. 1,00,000 new shares) Rights issue price : ₹ 15.00 Last date to exercise rights: 1st March 20X1 Fair value of one equity share immediately prior to exercise of rights on 1st March 20X1 ₹ 21.00 Computation of theoretical ex-rights fair value per share Fair value of all outstanding shares immediately prior to exercise of rights + total amount received from exercise Number of shares outstanding prior to exercise + number of shares issued in the exercise (Rs. 21.00 5,00,000 shares) + (Rs. 15.00 1,00,000 shares) 5,00,000 shares + 1,00,000 shares Theoretical ex-rights fair value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of Share Options on Diluted Earnings Per Share (Accounting year 01-01-20XX to 31-12-20XX) Net profit for the year 20X1 ₹ 12,00,000 Weighted average number of equity shares outstanding during the year 20X1 5,00,000 shares Average fair value of one equity share during the year 20X1 ₹ 20.00 Weighted average number of shares under option during the year 20X1 1,00,000 shares Exercise price for shares under option during the year 20X1 ₹ 15.00 Computation of earnings per share Earnings Shares Earnings per share Net profit for the year 20X1 ₹ 12,00,000 Weighted average number of shares outstanding during year 20X1 5,00,000 Basic earnings per share ₹ 2.40 Number of shares under option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et profit attributable to equity shareholders as adjusted by attributable tax [(Rs.8 x 8,00,000)+ 10%(8 x 8,00,000)] ₹ 70,40,000 No. of incremental shares {2 x 8,00,000} 16,00,000 ₹ 4.40 12% Convertible Debentures Increase in net profit {Rs. 10,00,00,000 x 0.12 x ( 1 - 0.30)} ₹ 84,00,000 No. of incremental shares {10,00,000 x 4} 40,00,000 ₹ 2.10 It may be noted from the above that options are most dilutive as their earnings per incremental share is nil. Hence, for the purpose of computation of diluted earnings per share, options will be considered first. 12% convertible debentures being second most dilutive will be considered next and thereafter convertible preference shares will be considered (see para 42). Computation of Diluted Earnings Per Share Net Profit Attributable (Rs.) No. of Equity Shares Net profit attributable Per Share (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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