CHAPTER

BLUE NOTES
39 S
L
The earnings per share figure is the amount attributable to every ordinary share outstanding during the period. Thus,
the earnings per share information pertains only to ordinary shares. It is not necessary for preference share because
there is a definite rate of return for such share.

Two Presentations of EPS

1) Basic earnings per share
2) Diluted earnings per share

 Public entities are required to present earnings per share.

 An entity shall present basic and diluted earnings per share on the face of the income statement with equal
prominence for all periods presented.
 When an entity presents both consolidated financial statements and separate financial statements, the disclosures
required by the standard need be presented only on the basis of the consolidated information.
 An entity that chooses to disclose EPS on its separate financial statements shall present such EPS information only
on the face of its separate income statement. An entity shall not present such EPS information on the consolidated
financial statement.

Use of EPS
a. It is a determinant of the market price of ordinary share, thus indicating the attractiveness of the ordinary share as
an investment.
b. It is ”measure of performance” of management in conducting operation.
c. It is the basis of dividend policy of the entity.

Examples of potential ordinary shares

a. Financial liabilities or equity instruments, including preference shares, that are convertible into ordinary shares.
b. Share warrants
c. Share options or employee plan that allow employee to receive ordinary shares as part of their remuneration.
d. Shares that would be issued upon satisfaction of certain conditions resulting from contractual arrangements
such as purchase of a business or assets.

Basic EPS
 Formula
Net Income ,
Basic EPS= Ordinary shares outstanding

 The net income is equal to the amount after deducting dividends on preference share.

Note: If the, PS is cumulative, the preference dividend for the current year only is deductible from the net income, whether such dividend is
declared or not.
If the PS is noncumulative, the dividends for the current year is deductible from the net income only if there is declaration

Theory of Accounts Practical Accounting 1

150 USL Blue Notes Chapter 39 – Earnings per Share

Illustration
An entity provided the following information for the current year:
Preference share capital, P100 par 10% cumulative
10,000 shares 1,000,000
Ordinary share capital, P100, 50,000 shares 5,000,000
Net income for the year 2,000,000

The Basic EPS shall be computed as follows:

Net income 2,000,000
Less: Preference share dividend for current year
(10% x P1,000,000) 100,000
Net income to ordinary share 1,900,000
Basic EPS (1,900,000 / 50,000 shares) 38

 If there is a significant change in the ordinary share capital during the year, the weighted average number of
ordinary
Shares outstanding during the period should be used as denominator.

Comprehensive Illustration
The following activities affect ordinary shares during the current year:
January 1 100,000 shares issued and outstanding
April 1 Issued 50,000 new shares
June 1 Shares split 2 for 1
July 1 Purchase 20,000 treasury shares
October 1 20% stock dividend
December 31 Share split 5 for 1

Date Shares months outstanding Peso months

Jan. 1 1,200,000 12 14,400,000
April 1 600,000 9 5,400,000
July 1 (120,000) 6 ( 720,000)
19,080,000
Average shares(19,080,000 / 12) 1,590,000

Shares
Jan 1 (100,000 x 2 x 1.2 x 5) 1,200,000
April 1 (50,000 x 2 x 1.2 x 5) 600,000
July 1 (20,000 x 1.2 x 5) (120,000)

Note: Where stock dividends or share splits create a change in the capital structure, the increase or decrease in the number of shares shall
recognized retroactively, meaning the stock dividends or split shall be treated as a change from the date the original shares were issued.

Practical Accounting 1 Theory of Accounts