IAS 33 – Earnings Per Share

Earnings
EPS =
Number of Shares

It is a tool to assess the performance of the company

It is calculated only for Why not calculated for preference shareholder ?

Is ko sab se pehle paisa milna

hai means is k preference hai
ORDINARY SHAREHOLDER ordinary shareholder par
 Earnings

Types of Share Holders

Preference Shareholders Ordinary Shareholders

• Return is fixed • Return is not fixed
• Has preference over the earnings of • Return is given after payment of
the company in respect to ordinary return to preference shareholders
shareholders

We have to calculate Profit attributable to ordinary share holder only

 Preference Shareholders

Redeemable Preference Shares Irredeemable Preference Shares

• Debt/loan for the company
• Return → Interest Expense
• Is already deducted from profit so it
Cumulative Non-Cumulative
is ignored
• Equity for the company • Equity for the company
• Return is accumulated • Return is given only
Profit Attributable to Ordinary Shareholder irrespective of any when declared
declaration ↓
Profit after tax xxx ↓ Deducted from profit after
Deducted from profit after tax only when declared
Cumulative Preference Dividend (xxx) tax every year irrespective
Non-Cumulative Preference Dividend (xxx) of declaration
(If declared)
Profit Attributable To Ordinary Shareholder xxx
 Illustration
Profit after tax is Rs.1,000,000 for the year ended December 31, 2019
Details of Capital Structure
10% Irredeemable Cumulative Preference Share of Rs. 100 each Rs.2,000,000
15% Irredeemable Non-Cumulative Preference Share of Rs. 100 each Rs.1,500,000
Ordinary shares of Rs.10 each Rs.500,000
Further Information
- No dividend is declared on preference shares during the year
- Interim dividend of Rs.0.5 per share declared during the year for ordinary shareholders
Required
Calculate EPS for the year ended Decemeber 31 ,2019

Profit Attributable to Ordinary Shareholder

Profit after tax 1,000,000 800,000

EPS = = Rs.16
Cumulative Preference Dividend (200,000) 50,000
Profit Attributable To Ordinary Shareholder 800,000
 Number of Shares
Weighted Average Outstanding Number of Ordinary Shares

Change In Capital Structure

• Further Issue When the company issues new shares to the public at market price

• Buy Back Of Shares When the company repurchases shares already issue

• Bonus Issue Dividend to ordinary shareholders in the form of shares

When the company issues new shares to EXISTING SHAREHOLDERS at a

• Right Issue price below market value
 Change In Capital Structure

Further Issue Buy Back Of Shares

When shares are issued during the year, they will be time When shares are bought back, the time prorated number
prorated accordingly as shareholders were taking the risk of shares is deducted as the shareholders are no longer a
of the business only after they acquired the shares part of the risk of the business

Illustration Solution
Opening shares on January 1, 2015 200,000 shares 01-Jan-15 Opening Shares (200,000 * 12/12) = 200,000
Further issue on April 1, 2015 150,000 shares
Further issue on July 1, 2015 200,000 shares 01-Apr-15 Further Issue (150,000 * 9/12) = 112,500
Buy back of shares on October 1, 2015 75,000 shares
01-Jul-15 Further Issue (200,000 * 6/12) = 100,000
Required
Calculate wieghted average number of shares 01-Oct-15 Buy Back (75,000 * 3/12) = (18,750)

Weighted Average Number of Shares 393,750

 Change In Capital Structure Bonus Issue
It is given to ALL the share holders present at the time of declaration of bonus

01-Jan-15 01-Apr-15 30-Jun-15 01-Oct-15 31-Dec-15

Opening Closing
Bonus issue Further issue Bonus issue
balance balance

There is no change in economic resources

Normal Issue Bonus Issue

Cash xxx Retained earnings xxx
Share Capital xxx Share Capital xxx
 Illustration Solution Gadha Mazdoori Approach
Opening
01-Jan-15 300,000 shares 01-Jan-15 Opening Shares (300,000 * 12/12) = 300,000
balance
01-Apr-15 Bonus Issue (300,000*5%* 12/12) = 15,000
01-Apr-15 Bonus issue 5%
01-Jul-15 Further Issue (150,000 * 6/12) = 75,000
30-Jun-15 Further issue 150,000 shares
01-Oct-15 Bonus Issue
01-Oct-15 Bonus issue 10%
On Op. shares (300,000*10%*12/12) = 30,000
Required
On Bonus Shares (15,000*10%*12/12) = 1,500
Calculate wieghted average number of shares
On Further issue (150,000*10%*6/12) = 7,500
Weighted Average Number of Shares 429,000

Factor Approach
- Calculate bonus factor by “1 + Bonus %”
- Multiply all line items on which bonus is to be 01-Jan-15 Opening Shares (300,000*12/12*1.05*1.1) = 346,500
given by the bonus factor 01-Jul-15 Further Issue (150,000*6/12*1.1) = 82,500
Weighted Average Number of Shares 429,000
Bonus Factor of April = (1+5%) = 1.05
Bonus Factor of October = (1+10%) = 1.1
 Change In Capital Structure Right Issue

Whenever there is a right issue, there are some shares that are issued free of cost
i.e. there is a bonus element in every right issue

Market Price 25 Right Issue 20 Working For Right Issue Impact on EPS
Shares issued 10,000 Shares issued 10,000
Cash should have been Step 1: Calculate Ex-Right Price
250,000 Cash Received 200,000
received Wo price jo right issue k bad ho jae gi

Discount Step 2: Calculate Right Adjustment Factor

RAF =
Worth of shares issued for free Rs.50,000
= 2,000 shares
Market value of the shares Rs.25 Step 3: Multiply RAF with all line items on
Issue For Free which right is being given
↓ Step 4: Calculate Wtd. Avg. Right Shares by
Bonus element in Actual Number
right issue Exercise Price
of shares * Right % *
Ex-Right Price
before right
 Illustration
Company has opening share capital on January 1, 2019 of Rs.400,000. On April 1, 2019 the company made a further issue
of 150,000 shares. On July 1, 2018 company made a right issue of 25% at an exercise price of Rs.25 each. Market price just
before right issue was Rs.40
Required
Calculate weighted average number of shares

Calculation of Ex-Eight Price Calculation Of Weighted Average Number Of Shares

1 * 40 = 40 01-Jan-15 Opening Shares (400,000*12/12*40/37) = 432,432
0.25 * 25 = 6.25
1.25 46.25 01-Apr-19 Further Issue (150,000*9/12*40/12) = 121,622
46.25 01-Jul-19 Right Issue (550,000*25%*25/37*6/12) = 46,453
Ex-Right = = 37
1.25
Weighted Average Number of Shares 600,507
Right Adjusstment Factor

Market Price 40
RAF = =
Ex-Right Price 37
 Diluted Earnings Per Share
It is calculated due to “Potential Ordinary Shares”

Those instruments that have a potential to be converted into

Ordinary Shares

It is calculated to inform the shareholders of the possibility of reduction in Basic EPS (A What If Scenario)

Potential Ordinary Shares

Convertible Debt Convertible Pref. Shares Options

 Convertible Debt

Loan

Shares

Illustration
- Opening share capital on Janaury 1, 2018 = 500,000 shares - Profit for 2018 was Rs.2,500,000
- Company made further issue of 350,000 shares on July 1, 2018 - Tax Rate is 25%
- Company made 25% Right issue on October 1, 2018. Market price was Rs.35 and exercise price was Rs.25
- Company issued 10,000 debentures of Rs.100 each with a return of 15%. Each debenture can be converted in 50 shares
 Illustration
- Opening share capital on Janaury 1, 2018 = 500,000 shares - Profit for 2018 was Rs.2,500,000
- Company made further issue of 350,000 shares on July 1, 2018 - Tax Rate is 25%
- Company made 25% Right issue on October 1, 2018. Market price was Rs.35 and exercise price was Rs.25
- Company issued 10,000 debentures of Rs.100 each with a return of 15%. Each debenture can be converted in 50 shares

Calculation of Ex-Eight Price Calculation Of Weighted Average Number Of Shares

1 * 35 = 35 01-Jan-18 Opening Shares (500,000*12/12*35/33) = 530,303
0.25 * 25 = 6.25 01-Jul-18 Further Issue (350,000*6/12*35/33) = 185,606
1.25 41.25 01-Oct-18 Right Issue (850,000*25%*25/33*3/12) = 40,246
Weighted Average Number of Shares 756,155
41.25
Ex-Right = = 33
1.25 2,500,000 3.31
Basic EPS = =
756,155
Right Adjustment Factor
Market Price 35 Calculation of Diluted EPS
RAF = =
Ex-Right Price 33 Earnings Shares EPS
Basic 2,500,000 756,155 3.31
Dilution impact 112,500 500,000
(10,000*100*15%*75%)
(10,000*50 shares)

2,612,500 1,256,155 2.08

 Diluted Earnings Per Share
It is calculated due to “Potential Ordinary Shares”

Those instruments that have a potential to be converted into

Ordinary Shares

It is calculated to inform the shareholders of the possibility of reduction in Basic EPS (A What If Scenario)

Potential Ordinary Shares

Convertible Debt Convertible Pref. Shares Options

 Convertible Pref. Shares

Redeemable Preference Shares Irredeemable Preference Shares

Liability Equity

Cumulative Non-Cumulative

Interest savings Number of shares Dividend Savings

Added back in earnings
Net of Tax
increase Add back only if
Added in wht. avg. declared
number of shares without tax impact
Number of shares
Dividend Savings Number of shares increase
Always add back in increase Added in wht. avg.
earnings of ordinary Added in wht. avg. number of shares
shareholders without number of shares
tax impact
 Diluted Earnings Per Share
It is calculated due to “Potential Ordinary Shares”

Those instruments that have a potential to be converted into

Ordinary Shares

It is calculated to inform the shareholders of the possibility of reduction in Basic EPS (A What If Scenario)

Potential Ordinary Shares

Convertible Debt Convertible Pref. Shares Options

 Options
It is an offer to employees to purchase the shares of companies at a price lower
than market value if they satisfy certain conditions

No Savings Increase in Number of Shares

Share khareedney k baad bhi
hamey salary pay karni hi hai
Illustration
- Opening number of shares 2015 250,000 - Profit for the year 2015 2,000,000
- 12,000 share options were given to employee on 1 Jan 2015. Against every option one
share can be availed. Market price of shares is Rs.25/share and Exercise price is Rs.15/share

Gadha Mazdoori Approach Formula Approach

Shares to be issued 120,000
Market Price - Exercise Price
Exercise price 15 Formula = * Options
Market Price
Cash received 1,800,000
Market Price ÷ 25 25 - 15
= * 120,000 = 48,000
25
120,000
Less 72,000
Free Shares 48,000
 Illustration
- Opening number of shares 2015 250,000 - Profit for the year 2015 2,000,000
- 12,000 share options were given to employee on 1 Jan 2015. Against every option one
share can be availed. Market price of shares is Rs.25/share and Exercise price is Rs.15/share

Gadha Mazdoori Approach Formula Approach

Shares to be issued 120,000
Market Price - Exercise Price
Exercise price 15 Formula = * Options
Market Price
Cash received 1,800,000
Market Price ÷ 25 25 - 15
= * 120,000 = 48,000
25
120,000
Less 72,000
Calculation of Diluted EPS
Free Shares 48,000
Earnings Shares EPS
Basic 2,000,000 250,000 8.00
Dilution impact 48,000
2,000,000 298,000 6.71