sornings pr Stare mon - 341 PAS 33 Earnings per Share earning Objectives 1, Explain how basic EPS is computed. Explain how cited EPS s compute Introduction pas 33 prescribes the principles in computing and presenting earnings per share (EPS) to promote inter- and intra-comparability of performance of entities. Because of differing accounting policies, PAS 33 recognizes that EPS data may have limitations - particularly on “eamings” which is the numerator in the EPS calculation. Therefore, the focus of PAS 33 is on the consistent determination of the denominator of the EPS calculation. PAS 33 requires publicly listed entities, including those in the process of enlisting, to present EPS information. A publicly listed entity is one whose ordinary shares or potential ordinary shares are traded in a public market (e.g., Philippine Stock Exchange ‘PSE’). Non-publicly listed EPS information. However, toapply PAS 33. If both consolidated and separate financial statements are Prepared, EPS is required only for the consolidated financial statements. entities are not required to present if they choose to do so, they will need Earnings per Share / Earnings ye share (EPS) is @ computation made for ordinary shares, It is a form of profitability ratio which provides a measure of how much profit (loss) each ordinary share has earned (incurred) during the period:342 Se = —— ES Normally, no EPS is computed for preference sh; because they have a fixed return, as represented by their divideng rates. In some cases, however, EPS may be computed fog preference shares when they are also entitled to a Variable retum, lates, in addition to their fixed return (e.g. participating Preference shares). Such preference shares are considered spec cial ordinary shares tor purposes of EPS computation. * Ordinary share —is “an equity instrument that is subordinate to all other classes of equity instruments.” (Pas 33.5) Ordinary shares participate in profit for the period after all other classes of shares (e.g., preference shares) have participated. An entity may have more than one type of ordinary shares, often referred to as “alphabet shares.” For example, an entity may have “Class A” and “Class B” ordinary shares. One class, called the “super voting shares,” has more voting rights than the other. One purpose of issuing “super voting” shares is to give key company insiders (e.g,, founders and executives) greater control over the company’s voting rights. This enables them to control corporate policies and management decisions. » Preference share — is one that has preference over other classes of shares, such as preference over dividends or preference over net assets in cases of liquidation, but typically does not have voting rights. Types of Earnings per Share PAS 33 requires the following two presentations of EPS: 1. Basic earnings per share 2. Diluted earnings per share If the entity does not have dilutive potential ordinary shares, it presents basic earnings per share only.gasic Earnings per Share PS is computed as follows: Basic asic EPS ee es) less Preferred dividends s y Earnings @ Profit (loss) is net of income tax expense. It includes any exceptional, unusual or infrequent gains or losses. @ Preferred dividends are deducted as follows: a. If the preference shares are cumulative, one-year dividend is deducted, whether declared or not. b. If the preference shares are non-cumulative, only the dividend declared during the period is deducted. Dividends in arrears (ie. those pertaining to prior periods) are ignored in the computation of EPS. The numerator (or the difference between © and ©) ibutable to ordinary shareholders. This represents the profit or loss attri amount is also adjusted for the following, which are treated like preferred dividends: a, Amortization of discount oF premium on increasing rate preference shares. Discount amortization is deducted from, while premium amortization is added to, profit or loss. b. Any gain or loss (that is recognized directly in retained earnings) arising from settling oF repurchasing preference shares. Loss is deducted from, while gain is added to, profit or ire in rl version of rtible preference ” an ii early conversion 0! conve! i duced or ly : i f ord: shares, the excess of fait value ©: i additional consideration paid over the fair value of the ler the: original conversion terms ordinary shares issuable344 Bisy ~ ——— ane (loss) is deducted from profit or loss. Conversely, a ‘gain added to profit or loss. Shares © The denominator is the weighted average number Of shares outstanding. This is computed by applying a time-weighting factor to the number of ordinary shares at the beginning of the Period and to all issuances and reacquisitions during the period. The time-weighting factor is the number of days that the Shares are outstanding over the total number of days in the period. However, a reasonable approximation of the weighted average (e.g., months outstanding) is allowed > Outstanding shares are those that are entitled to Participate in dividends. Outstanding shares are (1) issued shares plus (2) subscribed shares minus (3) treasury shares. Shares are usually time-weighted from the date consideration is receivable (which is generally the date of theit issue). Thus: a. Shares issued outright are averaged from the issuance date. b. Subscribed shares are averaged from the subscription date. c. Treasury shares are averaged Las reduction to the number of outstanding shares from the reacquisition date; or ii, as addition to the number of outstanding shares from the reissuance date Other events: ¢ Shares issued in a business combination are averaged from the acquisition date. * Shares issuable upon the conversion of a mandatorily convertible instrument are averaged from the date the contrat is entered into. * Contingently issuable shares are averaged when tt conditions have been satistied:= f oo 345 y Contingently issuable ordinary. shai — issuable for little Y shares are “ordinary shares or no cas ‘ the SitSIaDHOH OF medics or other consideration upon ified conditions e1 share agreement.” (Pas 335) 8 Ina ‘contingent artly paid shares are treated as .? oar res eated as fractional shares to the extent of their participation in dividends. Partly paid shares that are not entitled to dividends are treated as equivalent of warrants or options in the calculation of diluted earnings per share. * Under the Philippine Corporation Code, subscribed shares are entitled to participate in dividends in full. Accordingly, subscribed shares are treated as fully outstanding in EPS computation. In some countries where partly paid shares are entitled to partial dividends only, the subscribed shares are treated as partly outstanding. For example, a 50% paid subscribed shares that are entitled to only 50% dividends are treated as 50% outstanding. Illustration: Entity A had 50,000, P10 par, 6% cumulative preference shares outstanding all throughout 20x1. Entity A reported profit after tax of 1,200,000 for the year ended December 31, 20x1. The movements in the number of ordinary shares are as follows: 1/1/20x1. Ordinary shares outstanding 180,000 4/1/20x1 Shares issued for cash 30,000 6/30/20x1 Subscribed shares 10,000 (20,000) 10/1/20x1 Reacquisition of treasury shares _ Outstanding shares at the end of period 200,000 > The weighted average number of ordinary shares outstanding is computed as follows: - , Date No. of sh. Months outstanding Weighted average ‘@ @) O=@x® W1/20x1 180,000 12/12" Tang 4M1/20x1 30,000 ona ae iganl ~ Game Co (6,000) q | 0/1/20. (20,000) om ——_———PAS 346 co + 12: months from Jan. 1 to Dec. 31 divided by 12 sone ayear. =49 months from April 1 to Dec. 31 divided by 12 months in a year. > The basic earnings per share is computed as follows: Profit (Loss) I. oss Preferred dividends Basic d : EPS _~_ Weighted average number of outstanding ordinary shares Basic 1,200,000 - (50,000 x #10 x 6%) EPS 202,500 78 Basic EPS = (1,200,000 — 30,000) + 202,500 = One-year dividend (whether declared or not) is deducted from profit or loss because the preference shares are cumulative. Retrospective adjustments When ordinary shares are issued without a corresponding change in resources (assets), the basic and diluted EPS and the weighted average number of ordinary shares outstanding during the period and for all periods presented are adjusted retrospectively. Examples of issuance of ordinary shares without a corresponding change in resources include: a. Share or stock dividend (capitalization or bonus issue) b. A bonus element in any other issue (e.g., preemptive stock rights) c. Share split or stock split-up (i.e., increase in number of shares with corresponding decrease in par value); and d. Reverse share split or stock split-down (consolidation of shares or decrease in number of shares with corresponding increase in par value). The aforementioned do not affect the entity's ass because they are issued for free.tgs PET Share poitsn 347 lustration: “yA had 100,000 ordi : gntity A inary shares outstandi goxt. Entity A reported profit of ante pap jecordingly, the basic earnings per share was 972 7. OM 00 " 9 pe di. ‘ vf . rT In 20x2, three distributions of additional ordi ie a ordinary shares On April 1, a 10% bonus issue ( ivi ‘share divid s + On July 1, 10,000 treasury shares were _ in ‘esas + On September 1, a 2-for-1 share split was issued yy Profit in 202 was P9,250,000 > The weighted average number of ordinary shares outstanding are adjusted retrospectively as follows: 20x1 20x2, TA (100,000 x 110% x 2) 220,000 | (100,000 x 110% x 2 x 12/12) 220,000 af | . 7 | (10,000 x 2 x 6/12) 10,000 ofl | : Weighted average 220,000 230,000 aS —_— Bonus issues are retrospectively adjusted as of the earliest date that the related shares are outstanding. Thus: | © The 10% share dividends are adjusted to all outstanding, | shares prior to April 1, 20x2. Accordingly, the share dividends do not affect the treasury shares that were sold on July 1, 20x2. * The 2-for-1 share split is adjusted to all outstanding shares prior to September 1, 20x2. > The restated basic earnings pet share are computed as follows: 20x2 20x71 ~ 9,250,000 7,200,000 Profit aft atenlax 730,000 __ 220,000 Rife epee of outstanding sh. Basic EPSMtg Notice that the share dividends and share s, resulted to a restatement of the 20x1 EPS from P72 ( problem) to #32,73. lit in 09 See Biven in the Rights issue When stock rights are issued to shareholders in conformance with their preemptive right, the exercise price is normally less than the fair value of the shares. This type of rights issue includes a bonus element. Thus, for basic and diluted EPS com putation, the number of shares outstanding for all periods before the tights issue is multiplied by the following factor: at Fair value of stocks immediately before the = exercise of rights Theoretical ex-rights fair value per share Adjustment factor Theoretical ex-rights fair value per share is “calculated by adding the aggregate market value of the shares immediately before the exercise of the rights to the proceeds from the exercise of the rights, and dividing by the number of shares outstanding after the exercise of the rights.” (PAS 33 AG.A2) Alternatively, the theorelical ex-rights fair value per share may also be computed as follows: Fair value of shares selling right-on xx Less: Value of 1 right (x Theoretical ex-rights fair value per share XX, Where: : ight-on - iption price Value of right - —Faitvalue of share right-on — Subscr No. of rights needed to purchase one share +?Share giaing vere e—_ ne 49 alsstratio® is 100,000 ord ity A has , ordinary shares A we Enity A offers rights ite ils Sane a a seat enable them to anguine: 1 ordinary share at a ee joins that 990 for every 4 rights held. The rights are creel on Apel 1 goxi. The market price of one ordinary share immediatel eh : exercise is 120. Entity A reported profit after tax of pet 0) in px. , y The adjustment factor is computed as follows: 1. Using the definition above: Aggregate mkt. value of shares before exercise of rts. (100,000 sh. x #120) 12,000,000 Add. Proceeds from exercise of rts. [(100,000 rts. +4) x P80] __ 2,000,000. Total 14,000,000 Divide by: Outstanding shares after exercise of ris. {100,000 sh. before exercise + (100,000 rts. + 41ts. per sh.)] 125,000 Theoretical ex-rights fair value per share 112 . Fair value of stocks immediately before the Aa eERE exercise of rights factor Theoretical ex-rights fair value per share % The adjustment factor is 120/112. 2. Alternative solution: Fair value of shares selling right-on (given) a Less: Value of 1 right (see below) ( Ine per share a2 Theoretical ex-rights fair v4! Where: : i f share right-on — Subscription price Value of 1 right = Fair value o! anes No. of right needed to pur350 ————— — 120 — 80 Value of right = ———————guq — Value of Lright =(40+5)=8 a ~ Fair value of stocks immediately before the Adjustment = exercise of rights nator “Theoretical exrights fair value per share “+ The adjustment factor is 120/112. The adjustntent factor can also be stated as “FV of share right-on + FV of share ex. right.” > The weighted average number of ordinary shares outstanding is computed as follows: Jan. 1: (100,000 x 120/122 x 3/12) 26,786 Apr. 1: (125,000 x 9/12) 93,730 Weighted average no. of outstanding ordinary shares 120536 Notes: @ The adjustment factor is applied only to the outstanding shares before the exercise date (i.e., April 1, 20x1). @ The number of outstanding shares on April 1, 20x1, immediately after the exercise of the rights, is computed as follows: Ordinary shares before the exercise of rights 100,000 Shares issued on the exercise of rights (100,000 rights « 4 rights needed to purchase one share) __ 35000 Outstanding shares after the exercise of rights 125,000 > The basic earnings per share is computed as follows:sp Shave we profit for the year rte by: Weighted average . 900,000 ont Be no. of outstanding sh, (see above) _ 120,536 gasic earings per share 120,536 747 piluted Earnings per Share anentity with dilutioe potential ordinary shares (i.e., complex capital eructute) presents diluted EPS in addition to basic EPS. An entity with no dilutive potential ordinary shares (i — i sructure) presents basic EPS only, (er simple capil y» A potential ordinary share is “a financial instrument or other contract that may entitle its holder to ordinary shares.” (PAS 335) Examples of potential ordinary share: Convertible preference shares — are preference shares that are convertible into the issuer's ordinary shares. b, Convertible bonds Options, warrants and their equivalents — are “financial instruments that give the holder the right to purchase ordinary shares.” (PAS 33.5) .s are considered when computing ive. Potential ordinary decrease basic earnings Potential ordinary share: for diluted EPS only when they are diluti shares are dilutive if, when exercised, they pershare or increase basic loss per share. ; Antidilutive potential ordinary shares are : ignored. Potential ordinary shares are antidilutive if, when exercised, they increase basic earnings per share Or convertible preference shares are dilutive if ses basic EPS or increases in basic loss decrease basic loss per share. ” Convertible bonds and their conversion decrea: Per share.352 cpg en ARS > Options, warrants and their equivalents are dilutive jg their exercise price is less than the market value of the Otdinary shares, making the exercise favorable on the part of the holder The computation of diluted earnings ee share is based on the assumption that the dilutive potential ordinary shares Were converted or exercised. It is: 1. “As if’ the convertible preference shares or convertible bonds have been converted; or 2. “As if” the options or warrants have been exercised. The conversion or exercise is assumed to have taken place ow the date the potential ordinary shares first became outstanding, regardless of the date of actual conversion or exercise, For example, convertible bonds outstanding as of January 1 are assumed to have been converted on January 1. Options issued on April 1 are assumed to have been exercised on April 1. Diluted EPS is computed as follows: Profit (Loss) plus After tax interest expense on convertible bonds Weighted average number of Outstanding ordinary shares plus Incremental shares arising from the assumed conversion or exercise of dilutive potential ordinary shares Diluted EPS Convertible preference shares When computing for diluted EPs, convertible preference shares are assumed to have alread : ly been converted into additional ordinary shares. Thus, there is no adjustment to profit or loss fot any dividends on the convertible Preference shares, The incremental shares arising from the assumed conversion of the convertible Preferen, ce shares are added j nator of the diluted EPS formula, added in the denominaper Share parE a 8. ion: Diluted EPS - ¢ il istration onvertible : ‘ Preferen. sntity A had the following capital structure cee convertible preference shares, P10 par, 6% cumulative, 50,000 shares issued and outstandin ; g ordinary shares, P10 par, 200,000 shates issued mm and outstanding 2 fach preference share is convertible into two ordi: profit after tax in 20x1 is 1,200,000. ordinary shares. y» Entity A presents two EPS, basic and diluted, in its 20x1 statement of profit or loss. Basic EPS | Basic _ Profit (Loss) less Preferred dividends EPS Weighted ave. no. of outstanding ordinary shares | _ 1,200,000 - (500,000 x 6%) Basic EPS 200,000 Basic EPS = (1,200,000 — 30,000) + 200,000 = 5.85 Diluted EPS Profit (Loss) plus After tax interest expense on convertible bonds Diluted Weighted average number of outstanding ordinary EPS ~ shares plus Incremental shares arising from the of dilutive potential assumed conversion or exercise ordinary shares . 1800,0004 9 Diluted EPS = 700,000 + (50,000 x 2) Diluted EPS = 1,200,000 + 300,000 = 4,00