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69
ACCOUNTING STANDARDS (AS 20 - EARNINGS PER SHARE)
Illustrations
Q. 1
Given below is the capital structure of S Ltd. as on 31st March, 2004.
Particulars (` in thousands)
Equity share capital (Shares of `10 each) 40,000
Share premium 30,000
General reserve 40,000
Revaluation reserve 40,000
14% Fully convertible debentures 40,000
14% convertible debentures are of `100 each and as per agreement those debentures will be converted into
5 equity shares (for each debenture). The company earned profit after tax amounting (‘000) `20,000 during
2003-2004. You are required to calculate EPS of the company as well as the fully diluted EPS.
Solution:
Statement showing calculation of EPS
(Amount / ` ‘000 where applicable)
(a) Number of fully convertible debentures (400 lac/100) 4,00,000
(b) Number of equity shares to be issued (4,00,000 x`5) 20,00,000
(c) Capital structure after diluted FCD
(i) Equity share capital (60 lac shares x`10 each) 60,000
(ii) Share premium (30,000 + 20,000) 50,000
(iii) General reserve 40,000
(iv) Revaluation reserve 40,000
(d) Total 1,90,000
(e) EPS (20,000/ 4,000) `5.00 per share
(f) Fully diluted EPS (20,000/ 6,000) `3.33 per share
Q. 2
As a statutory auditor for the year ended 31st March, 2005, how would you deal with the following?
As on 31st March, 2004, the equity share capital of Q Ltd. is 10 crores divided into shares of `10 each. During
the financial year 2004-2005, it has issued bonus shares in the ratio 1 : 1. The net profit after tax for the years
31st March, 2004 and 31st March, 2005 is `8.50 crores and `11.50 crores respectively. The EPS disclosed in
the accounts for two years is `8.50 and `5.75 respectively.
Solution:
Paragraph 24 of AS-20 states as follows:
“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.”
31st March, 2005 31st March, 2004
(a) Net profit (` in lakhs) 1,150 850
(b) Share capital (Nos. in lakhs) 200 100
(c) Adjusted share capital to give bonus effect 200 200
(d) EPS per share 5.75 4.25
70
ACCOUNTING STANDARDS (AS 20 - EARNINGS PER SHARE)
Q. 3
In April, 2004 a Limited Company issued 1,20,000 equity shares of `100 each. `50 per share were called up
on that date which was paid by all shareholders. The remaining `50 were called up on 1.9.2004. All
shareholders paid the sum in September, 2004, except one shareholder having 24,000 shares. The net profit
for the year ended 31.3.2005 is `2,64,000 after dividend on preference shares and dividend distribution tax
of `64,000. Calculate basic earnings per share.
Solution:
3"( #•*.•( •((••4!(•4•" (* "5!•() $%••"%*•'"•$
Basic earnings per share (EPS) =
6"•0%("' ••0. 8*. *. "5.$%••"$ *!($(•8'•80 '!••80 (%" )"••
Q. 4
Net profit for the current year `1,00,00,000
No. of equity shares outstanding 50,00,000
Basic earnings per share `2.00
No. of 12% convertible debentures of `100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expense for the current year `12,00,000
Tax relating to interest expense (30%) `3,60,000
Compute Diluted Earnings per Share.
Solution:
Adjusted net profit for the current year = (1,00,00,000 + 12,00,000 – 3,60,000) = ` 1,08,40,000
No. of equity shares resulting from conversion of debentures: 10,00,000 Shares
No. of equity shares used to compute diluted EPS: (50,00,000 + 10,00,000) = 60,00,000 Shares
Diluted earnings per share: (1,08,40,000/60,00,000) = `1.81
71
ACCOUNTING STANDARDS (AS 20 - EARNINGS PER SHARE)
Q. 5
ABC Ltd., had reported a net profit of `80,00,000 for the year ended 31st March, 2008 on which date the
company is having 25,00,000 equity shares of `10 each outstanding.
The average fair value of one equity share during the year 2007-08 is `32. The details of exercisable option
are given below:
Weighted average no. of sh. under stock option scheme during the year 2007-08 5,00,000
Exercise price for shares under stock option during the year ended 31.3.2008 `25
You are required to calculate (a) Basic EPS, and (b) Diluted EPS.
Solution:
(i) Calculation of Basic EPS
Net profit for the year ended 31-3-2008 `80,00,000
No. of equity shares outstanding 25,00,000
Basic EPS (`80,00,000/25,00,000 shares) `3.20
Q. 6
While calculating diluted earnings per share, effect is given to all dilutive potential equity shares that were
outstanding during that period. Explain. Also calculate the diluted earnings per share from the following
information:
Net profit for the current year 85,50,000
No. of equity shares outstanding 20,00,000
No. of 8% convertible debentures of 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expenses for the current year 6,00,000
Tax relating to interest expenses 30%
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ACCOUNTING STANDARDS (AS 20 - EARNINGS PER SHARE)
Solution:
"In calculating diluted earnings per share, effect is given to all dilutive potential equity shares that were
outstanding during the period." As per AS 20 'Earnings per Share', the net profit or loss for the period
attributable to equity shareholders and the weighted average number of shares outstanding* during the
period should be adjusted for the effects of all dilutive potential equity shares for the purpose of calculation
of diluted earnings per share.
•••••• • " • #$%&'• &%$ •( )•$$ "• * +$
Computation of diluted earnings per share =
, '-(• • +. $+- "•/0 $ %& 1•'•* •(+$ •
Weighted average number of equity shares used to compute diluted earnings per share
= 20,00,000 + 10,00,000 = 30,00,000 shares
Q. 7
Goverdhan Ltd. has equity capital of `20,00,000 consisting of fully paid equity shares of `10 each. The net
profit for the year 2009-10 was `30,00,000. It has also issued 18,000, 10% convertible debentures of `50 each.
Each debenture is convertible into five equity shares. The tax rate applicable is 30%. Compute the diluted
earnings.
Solution:
Calculation of diluted earnings
`
Interest on debentures @ 10% for the year (18,000 debentures x `50 x 10%) 90,000
Less: Tax on interest @ 30% (27 ,000)
63,000
Add: Net profit for the year 2009-2010 30,00,000
Diluted earnings 30,63,000
73
ACCOUNTING STANDARDS (AS 20 - EARNINGS PER SHARE)
2).
A Ltd. had 6,00,000 equity shares on April 1, 2007. The company earned a profit of `15,00,000 during the year
2007-08. The average fair value per share during 2007-08 was `25. The company has given share option to its
employees of 1,00,000 equity shares at option price of `15. Calculate basic EPS and diluted EPS.
3).
Explain the concept of 'Weighted average number of equity shares outstanding during the period'.
State how would you compute, based on AS-20, the weighted average number of equity shares in the
following case:
No. of Share
st
1 April, 2011 Balance of Equity Shares 4,80,000
31st August, 2011 Equity shares issued for cash 3,60,000
1st February, 2012 Equity shares bought back 1,80,000
31st March, 2012 Balance of equity shares 6,60,000
4).
Compute adjusted earnings per share and basic earnings per share based on the following information:
Net Profit 2010-11 `11,40,000
Net Profit 2011-12 `22,50,000
st
No. of equity shares outstanding until 31 December, 2011 5,00,000
Bonus issue on 1st January, 2012, 1 equity share for each equity share outstanding as at 31st
December, 2011
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