Financial Accounting & Reporting

 RELATED STANDARD: IAS 33 – Earnings per Share

 Definition of Terms
Antidilution - An increase in earnings per share or a reduction in loss per share resulting from the assumption that
convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued
upon the satisfaction of specified conditions.
Contingent share agreement - An agreement to issue shares that is dependent on the satisfaction of specified
conditions.
Contingently issuable ordinary shares - Ordinary shares issuable for little or no cash or other consideration upon
the satisfaction of specified conditions in a contingent share agreement.
Dilution - A reduction in earnings per share or an increase in loss per share resulting from the assumption that
convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued
upon the satisfaction of specified conditions.
Options, warrants and their equivalents - Financial instruments that give the holder the right to purchase ordinary
shares.
Ordinary share - An equity instrument that is subordinate to all other classes of equity instruments.
Potential ordinary share - A financial instrument or other contract that may entitle its holder to ordinary shares.
Put options on ordinary shares - Contracts that give the holder the right to sell ordinary shares at a specified price
for a given period.

I. Earnings per share (IAS 33)

 Scope
 IAS 33 applies to entities whose securities are publicly traded or that are in the process of issuing securities
to the public.
 Other entities that choose to present EPS information must also comply with IAS 33.
 If both parent and consolidated statements are presented in a single report, EPS is required only for the
consolidated statements.

 Requirement to present EPS

 An entity whose securities are publicly traded (or that is in process of public issuance) must present, on the
face of the statement of comprehensive income, basic and diluted EPS for:
a. Profit or loss from continuing operations attributable to the ordinary equity holders of the parent
entity; and
b. Profit or loss attributable to the ordinary equity holders of the parent entity for the period for each
class of ordinary shares that has a different right to share in profit for the period.
 If an entity presents the components of profit or loss in a separate income statement, it presents EPS only
in that separate statement.
 Basic and diluted EPS must be presented with equal prominence for all periods presented.
 Basic and diluted EPS must be presented even if the amounts are negative (that is, a loss per share).
 If an entity reports a discontinued operation, basic and diluted amounts per share must be disclosed for
the discontinued operation either on the face of the comprehensive income (or separate income
statement if presented) or in the notes to the financial statements.

 Basic EPS
 Basic EPS is calculation
EPS(basic) = (Net Income – Preference dividend) ÷ Ordinary shares outstanding
 If the preference shares is cumulative, dividends is deducted whether declared or not.
 The denominator (number of shares) is calculated by adjusting the shares in issue at the beginning of the
period by the number of shares bought back or issued during the period, multiplied by a time-weighting
factor.
 Contingently issuable shares are included in the basic EPS denominator when the contingency has been
met.
 Weigthed average outstanding shares:
a. Shares issued shall be averaged from the time of issuance.
b. Conversion into ordinary shares shall be accounted from date of conversion.
c. Options and warrants shall be accounted from the exercise date.
d. If there are stock rights outstanding, outstanding ordinary shares is multiplied by adjustment factor.
(Adjustment factor = FV of share rights on ÷ FV of share ex-rights)
e. Stock dividends and share split shall be recognized retroactively.
 Financial Accounting & Reporting

f. The subscribed shares are included in the denominator since they are entitled to receive full dividends
per Corporation Code.
g. For mandatory convertible instrument, ordinary shares are included from the date the contract is
entered into.

 Diluted EPS
 Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive
options and other dilutive potential ordinary shares.
 If the EPS will be antidilutive instead of dilutive, diluted EPS is ignored. Only the basic EPS shall be
presented.
 Common examples of potential ordinary shares:
a. convertible debt
b. convertible preferred shares
c. share warrants, options and rights
d. employee stock purchase plans
e. contractual rights to purchase shares
f. contingent issuance contracts or agreements (such as those arising in business combination)

 Effects of dilution and antidilution

Basic earnings per Basic loss per
share share
Dilution Decrease Increase
Antidilution Increase Decrease

 Guidance on calculating dilution

Potential Numerator Denominator
Ordinary Shares
1. Convertible Interest expense (net o Include potential shares if the convertible security is
debt of tax) added back to outstanding at the beginning of the year (whether
net income. converted or not during the year).
2. Convertible Dividends not
preferred deducted from net
shares income.
3. Options and o Incremental shares added = Potential shares
warrants (options/warrants) minus assumed treasury shares.
o Assumed treasury shares = (Potential shares x Issue
price) ÷ Ave. price of ordinary shares
*Issue price includes FV of option/warrant.
o Incremental shares are averaged if issued during the
year.
4. Written put o Incremental shares added = Shares assumed issued
options minus Ordinary shares repurchased under put options
o Shares assumed issued = Put obligation ÷ Ave. market
price per share
o Put obligation = Written put options x exercise price
o Ordinary shares repurchased = outstanding written
put options
5. Contingently o Contingently issuable shares are included in the
issuable outstanding ordinary shares
shares o Restatement is not permitted if the conditions are not
met when the contingency period expires.
*Potential shares are averaged if the convertible security is issued during the year.
**If there are various sources of potential shares, use the one with the most dilutive effect on EPS

 Retrospective adjustments
 The calculation of basic and diluted EPS for all periods presented is adjusted retrospectively when the
number of ordinary or potential ordinary shares outstanding increases as a result of a capitalization,
bonus issue, or share split, or decreases as a result of a reverse share split.
 Financial Accounting & Reporting

 If such changes occur after the balance sheet date but before the financial statements are authorized
for issue, the EPS calculations for those and any prior period financial statements presented are based
on the new number of shares. Disclosure is required.
 Basic and diluted EPS are also adjusted for the effects of errors and adjustments resulting from
changes in accounting policies, accounted for retrospectively.
 Diluted EPS for prior periods should not be adjusted for changes in the assumptions used or for the
conversion of potential ordinary shares into ordinary shares outstanding.

II. Book Value per Share

 Basic principles
 Book value per share (BVPS) is the amount that that would be paid on each share assuming the entity is
liquidated.
 The total amount available to shareholders is exactly the amount reported as shareholders’ equity.

 Calculation
 One class of share capital
BVPS = Total shareholders’ equity ÷ Outstanding shares
 Two classes of share capital
a. BVPS (preference share) = Preference shareholders’ equity ÷ Outstanding preference shares
b. BVPS (ordinary shares) = Ordinary shareholders’ equity ÷ Outstanding ordinary shares

 Accounting procedures
 Apportionment between preference share and ordinary share:
a. The aggregate par or stated value is allocated to the preference share and ordinary share.
 This includes issued share capital, subscribed share capital, less treasury shares (at par)
 Treasury shares are considered retired. Gain on retirement is credited to share premium while loss
on retirement is first charged to share premium and then to retained earnings.
b. Balance of shareholders’ equity in excess of par or stated value is apportioned taking into account the
liquidation value and dividend rights of the preference shareholders.
o The following are assumed to be available for dividends: retained earnings, share premium and
revaluation surplus.

 Liquidation value (preference as to asset)

 Liquidation value is the amount which the preference shareholders normally receive upon the liquidation
of the corporation.
 In the absence of liquidation value, preference shareholders shall receive an amount equal to the par or
stated value.
 Call price is ignored per book value computation.
 Preference shareholders shall share on a prorata basis, the deficit with the ordinary shareholders.

 Dividend right (preference as to dividend)

 When dividends are declared, preference shareholders have the right to receive dividends first before
ordinary shareholders.
 Types of dividend right of preference shareholders
a. Noncumulative – The preference share is entitled only to current year dividends. Undeclared
dividends on previous periods are forfeited.
b. Cumulative – The preference share is entitled to all dividends in arrears. Undeclared dividends
accumulate each year until paid.
c. Nonparticipating – The preference share is entitled to receive only the dividend based on fixed rate.
d. Participating – The preference share is entitled to receive dividends in excess of the fixed rate.

 Notes on computation of BVPS

 Initial amount allocated to preference shares is the liquidation value or the par value plus liquidation
premium.
 Preference share is assumed to be noncumulative and nonparticipating if there is no designation.
 Dividends in arrears include current dividends.
 Preference shares may be fully participating or participating only to a certain amount or percentage.
 Financial Accounting & Reporting

 Before preference share can participate, the ordinary share shall receive first an amount equal to the
preference fixed rate.
 If there are more than one class of preference share with more than one fixed rate, the lower/lowest
rate shall be used for ordinary share.
 If preference share has preference as to asset, the preference share shall be entitled to all dividends in
arrears.
 Financial Accounting & Reporting

MULTIPLE CHOICE QUESTIONS

1. Defined by IAS 33 as a financial instrument or other contract that may entitle its holder to ordinary shares.
A. Potential ordinary share C. Convertible ordinary shares
B. Diluted ordinary share D. Ordinary share

2. Defined by IAS 33 as an increase in earnings per share or a reduction in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of specified conditions.
A. Dilution C. Antidilution
B. Saturation D. Antisaturation

3. Defined by IAS 33 as a reduction in earnings per share or an increase in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of specified conditions.
A. Dilution C. Antidilution
B. Saturation D. Antisaturation

4. Total shareholders’ equity divided by the number of shares outstanding represents the
A. Return on equity C. Accounting value per share
B. Earnings per share D. Book value per share

5. In the absence of liquidation value, the preference share shall receive what amount in the event of
liquidation?
A. Book value C. Fair value
B. Par value D. Recoverable amount

6. When the right to receive dividend is forfeited in any one year in which dividend is not declared, the
preference share is said to be
A. Participating C. Noncumulative
B. Nonparticipating D. Cumulative

7. Preference share participate proratably with ordinary shareholders in any profit distribution beyond the
prescribe preference rate.
A. Noncumulative feature C. Cumulative feature
B. Nonparticipating feature D. Participating feature

8. If there are two classes of participating preference share with two different fixed rates, the rate that shall be
used by ordinary share before participation is the
A. Higher rate C. Average rate
B. Lower rate D. The rate of the older class of preference share

9. IAS 33 requires disclosure on the face of the statement of comprehensive income the
A. Basic EPS C. Neither basic nor diluted EPS
B. Diluted EPS D. Both basic and diluted EPS

10. EPS disclosures are

A. Required for all publicly traded entities and nonpublic entities.
B. Required for all publicly traded entities and encouraged for nonpublic entities.
C. Encouraged for all publicly traded entities and required for nonpublic entities.
D. Encouraged for all publicly traded entities and nonpublic entities.

11. Potential ordinary share do not include

A. Convertible bonds C. Redeemable preference shares
B. Share warrants D. Contractual rights to purchase shares

12. In computing basic EPS, the full amount of the required dividends on the cumulative preference shares for
the period should be
A. Ignored
 Financial Accounting & Reporting

B. Deducted from net income only when declared

C. Deducted from net income whether declared or not
D. Added to net income whether declared or not.

13. In computing basic EPS, the full amount of the dividends on the noncumulative preference shares for the
period should be
A. Ignored
B. Deducted from net income only when declared
C. Deducted from net income whether declared or not
D. Added to net income whether declared or not.

14. Dilution will

A. Increase basic earnings per share and basic loss per shares.
B. Decrease basic earnings per share and basic loss per shares.
C. Increase basic earnings per share and decrease basic loss per shares.
D. Decrease basic earnings per share and increase basic loss per shares.

15. Antidilutive effects of potential ordinary shares shall be

A. Included in computing diluted loss per share.
B. Included in computing diluted earnings per share.
C. Included in computing diluted earnings/loss per share.
D. Ignored in computing diluted earnings/loss per share.

16. In computing the diluted EPS, interest expense on convertible bond payable shall be
A. Added to net income at gross C. Deducted from net income, net of tax
B. Added to net income, net of tax. D. Ignored

17. In computing the diluted EPS, dividend on convertible preference share shall be
A. Added to net income at gross C. Deducted from net income, net of tax
B. Added to net income, net of tax D. Ignored

18. EPS shall be computed on the basis of

A. Ordinary shares outstanding at the end of the year.
B. Ordinary shares outstanding at the beginning of the year.
C. Ordinary shares outstanding at the middle of the year.
D. Average ordinary shares outstanding during the year.

19. Under the treasury stock method, the number of incremental ordinary shares of the potential ordinary share
is equal to
A. Option shares.
B. Option shares minus assumed treasury shares acquired.
C. Option shares plus assumed treasury shares acquired.
D. Option shares actually issued during the year.

20. Assumed exercise of warrants and options is considered dilutive (only when)
A. Exercise price is less than market price C. Exercise price is equal to market price
B. Exercise price is more than market price D. Regardless of the market price

21. What will be the effect on earnings per share and shareholders’ equity with the acquisition of entity’s own
shares?
A. Decrease in EPS and decrease in shareholders’ equity
B. No effect on EPS and decrease in shareholders’ equity
C. Increase EPS and decrease in shareholders’ equity
D. Decrease in EPS and increase in shareholders’ equity

22. Oven Company had 100,000 ordinary shares and 10,000 of 5%, P100 par, cumulative preference shares. No
dividends were declared last year and this year. Net income for the current year is P900,000. What is the
basic EPS?
A. 8.50 B. 9.50 C. 9.00 D. 5.00
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23. Refer to preceding problem. Assume that the preference share is noncumulative. What is the basic EPS?
A. 8.50 B. 9.50 C. 9.00 D. 5.00

24. Inihaw Company has 200,000 outstanding ordinary shares and 50,000 outstanding preference shares as of
January 01, Year 1. On October 01, Year 1, the company issued 10% stock dividends on ordinary shares and
paid annual cash dividend of P200,000 on its preference share. Net income for the year was P1,920,000?
What is the basic EPS?
A. 8.20 B. 8.72 C. 9.36 D. 7.82

25. Tag-araw Company has the following ordinary share transactions for the current year:
Jan 01 Shares outstanding 44,000
Feb 01 Issued for cash 56,000
May 01 Acquired for treasury 25,000
Aug 01 Stock dividends 25%
Sep 01 Reissue treasury 10,000
Nov 01 Split up 3 for 1
What is the weighted average number of shares for EPS computation?
A. 307,500 B. 305,000 C. 103,750 D. 311,250

26. Pawis Company had 200,000 ordinary shares outstanding and 20,000 of its 6%, P100 par, cumulative
convertible preference share at year end of the current year. Each preference shares is convertible into 5
ordinary shares. Net income for the year is P840,000. What is the basic EPS?
A. 2.40 B. 2.80 C. 3.60 D. 4.20

27. Refer to preceding problem. What is the diluted EPS?

A. 2.40 B. 2.80 C. 3.60 D. 4.20

28. Tostado Company had 200,000 ordinary shares outstanding as of January 01, Year 1. Also on January, 1, Year
one, P4 million convertible 10% bonds were issued. The bonds were converted into 160,000 ordinary shares
on October 1, Year 1. Net income is P5 million and tax rate is 30%. What is the basic EPS?
A. 25.00 B. 13.80 C. 15.62 D. 20.83

29. Refer to preceding problem. What is the diluted EPS?

A. 14.47 B. 21.65 C. 14.72 D. 14.61

30. On January 1, Year 3, Burnt Co. had 60,000 ordinary shares outstanding, P100 par, or a total par value of
P6,000,000. During Year 3, the entity issued rights to acquire one ordinary share at P100 in the ratio of one
share for every 5 shares held. The rights are exercised on March 31, Year 3. The market value of each share
immediately prior to March 31, Year 3 was P160. The net income for Year 3 was P4,000,000. What amount
should be reported as basic earnings per share for Year 3?
A. 57.14 B. 55.55 C. 57.97 D. 66.67

31. Tagaktak had 300,000 ordinary shares outstanding on January 1 of the current year. On July 1, an additional
50,000 shares were issued for cash. The entity had also unexercised share options to purchase 40,000 shares
at P15 per share outstanding at the beginning and end of the current year. The average market price of a
share was P20 and the ending market price was P30. What is the number of shares that should be used in
computing diluted earnings per share?
A. 325,000 B. 335,000 C. 345,000 D. 365,000

32. Flaming Inc. reported the following information on December 31, Year 5:
Ordinary share capital 110,000 shares
Convertible noncumulative preference share capital 20,000 shares
10% convertible bonds payable P2,000,000
Share options to purchase 60,000 shares at P15 were outstanding. Market price of ordinary share was P22 on
December 31, Year 5 and averaged P20 during the year. No value was assigned to the share options. The
entity paid preference dividends of P5 per share. The preference shares are convertible into 40,000 ordinary
shares. The 10% bonds are convertible into a total of 30,000 ordinary shares. The net income for Year 5 is
 Financial Accounting & Reporting

P650,000. The income tax rate is 30%. What amount should be reported as diluted earnings per share for
Year 5?
A. 5.00 B. 4.40 C. 4.05 D. 3.94

33. Hot company has the following data at year end:

5% cumulative preference shares capital, P100 par, 25,000 issued and outstanding shares P2,500,000
Ordinary share capital, P35 par, 100,000 issued and outstanding shares 3,500,000
Share premium 1,250,000
Retained earnings 3,000,000
Dividends in arrears totaled P250,000 and liquidation premium of preference shares is P500,000. What is the
book value per share – preference?
A. 130.00 B. 110.00 C. 120.00 D. 135.00

34. Refer to preceding problem. What is the book value per share – ordinary?
A. 77.50 B. 75.00 C. 72.50 D. 70.00

35. Fire company has the following data at year end:

 10% noncumulative preference shares capital, P1,000 par, P1,400 liquidation value, 500 issued and
outstanding shares
 Ordinary share capital, P500 par, 5,000 issued and outstanding shares
 Total shareholders’ equity of 3,600,000
No dividends in arrears. What is the book value per share – preference?
A. 1,000.00 B. 1,400.00 C. 1,200.00 D. 1,600.00

36. Refer to preceding problem. What is the book value per share – ordinary?
A. 510.00 B. 520.00 C. 580.000 D. 818.00

37. Summer company has the following data at year end:

8% cumulative preference shares capital, P100 par,
5,000 issued and outstanding shares P 500,000
Ordinary share capital, P100 par 1,100,000
Share premium 200,000
Retained earnings 260,000
Treasury shares – ordinary, 1,000 shares 150,000
Two years dividends in arrears. What is the book value per share – preference?
A. 100.00 B. 116.00 C. 124.00 D. 120.00

38. Refer to preceding problem. What is the book value per share – ordinary?
A. 125.00 B. 191.00 C. 133.00 D. 141.00

39. Init company has the following data at year end:

6% cumulative & fully participating preference shares capital
P100 par, 10,000 issued and outstanding shares P1,000,000
Ordinary share capital, P20 par, 200,000 issued and outstanding shares 4,000,000
Dividend for the two prior years were unpaid. For the current year, P900,000 dividends were declared. What
is the total dividends for preference shareholders?
A. 276,000 B. 220,000 C. 324,000 D. 180.000

40. Refer to preceding problem. What is the total dividends for ordinary shareholders?
A. 576,000 B. 672,000 C. 720,000 D. 624,000