BASIC EARNINGS PER SHARE

BASIC CONCEPTS
Earnings per share (EPS) represents the amount expected to be received by an ordinary shareholder each
year as a return on investment. Basically, EPS is a profitability ratio computed to show the profit or loss
earned or incurred by each ordinary share.

Based from the definition, EPS applies only to ORDINARY SHARES. Normally, no EPS is computed
for preference shares since they have a fixed return.

The presentation of earnings per share is required for entities whose ordinary shares or potential ordinary
shares are publicly traded and by entities that are in the process of issuing ordinary shares or potential
ordinary shares in the public securities market. Simply stated, presentation of EPS is required for
PUBLIC ENTITIES. Non-public entities are not required but ENCOURAGED to present earnings per
share for comparability purposes.

USES OF EARNINGS PER SHARE (EPS)

1) Assessment of value of the shares
2) Promotion of comparability
3) Basis for dividend policy

TYPES OF EARNINGS PER SHARE (EPS).

NOTE: Both types of EPS are presented in the financial statements with equal prominence.

BASIC EARNINGS PER SHARE (BASIC EPS)

Basic earnings per share is computed using the following formula:

Basic Earnings Per Share = Profit or (Loss) less Preferred Dividends

Weighted Average Ordinary Shares Outstanding

NOTES FOR THE USE OF FORMULA:

 Profit or loss should be after tax.

 Preferred dividends are to be deducted as follows:
  If the preference shares are CUMULATIVE, ONE YEAR DIVIDEND is deducted, WHETHER
DECLARED OR NOT.
 If the preference shares are NON-CUMULATIVE, only the DIVIDENDS DECLARED during
the period is deducted.

DIVIDEND IN ARREARS are ignored for EPS computation purposes.

 Outstanding shares = Issued shares + Subscribed shares - Treasury shares.

 The denominator used is the WEIGHTED AVERAGE number of shares outstanding. This means,
a time-weighted factor is applied to compute the weighted average amount. Shares are usually
time-weighted from the date the consideration is receivable (generally the date of issue)
 Treatment of the following items:
 When ordinary shares are issued without a corresponding change in resources, the basic EPS as
well as diluted EPS and the weighted average number of shares outstanding during the period and
all periods presented are adjusted for retrospectively. (as if the event had occurred at the
beginning of the earliest period reported.)
 Issuance of stock rights also create a bonus element because usually, when rights are issued to
shareholders most often the exercise price is less than the fair value of the shares. Thus, for basic
and diluted EPS computation, the number of shares outstanding for all periods before the rights
issue is multiplied with the following adjustment factor:
Adjustment Factor = FV of shares right-on
FV of shares ex-right
The FV of shares ex-right is computed as: FV of Shares Right-on less Theoretical Value of
Rights.
Theoretical Value of 1 right = FV of shares right-on – Subscription Price
No. of rights needed to purchase one share + 1
NOTE: The adjustment factor is applied only to outstanding shares BEFORE the exercise date.