CHAPTER 19 & 20

EARNINGS per SHARE

Earnings per share (EPS) is a computation made for
ordinary shares. It is a form of profitability ratio which
represents how much was earned by each ordinary share
during the period. No EPS is presented for preference
shares because these shares have a fixed return represented
by their dividend rates.

TYPES OF EARNINGS per SHARE

1. Basic earnings per share
2. Diluted earnings per share

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Basic Earnings Per Share

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Considerations in computing “Profit or
loss”

a. Profit or loss should be net of income tax expense

b. Profit or loss should be adjusted for the after-tax
amounts of preference dividends, differences
arising on the settlement of preference shares, and
other similar effects of preference shares classified
as equity.

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Adjustments for preference dividends

a. If the preference shares are cumulative, one-year

dividend is deducted from profit or loss whether
declared or not.
b. If the preference shares are non-cumulative, only
the dividend declared is deducted from profit or
loss.

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Weighted average number of outstanding
ordinary shares

Shares are usually time-weighted from the date

consideration is receivable (which is generally the date
of their 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
i. as 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

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Restatement of EPS
EPS in previous periods are adjusted
retrospectively when an entity issues any of the
following:
a. A capitalization or bonus issue (e.g., share dividend);
b. A bonus element in any other issue, for example a bonus
element in a rights issue to existing shareholders (also
referred to as preemptive stock rights);
c. A share split (increase in number of shares with
corresponding decrease in par value); and
d. A reverse share split (consolidation of shares or decrease
in number of shares with corresponding increase in par
value).

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Rights issue

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Diluted earnings per share
 Diluted earnings per share is the amount of profit for the
period per share, reflecting the maximum dilutions that
would have resulted from conversions, exercises, and
other contingent issuances that individually would have
decreased earnings per share and in the aggregate
would have had a dilutive effect.
 Only basic earnings per share is presented if an entity
has no dilutive potential ordinary shares (i.e., simple
capital structure). 

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The computation of diluted earnings per 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 on the date the potential ordinary
shares became outstanding, regardless of the date
of actual conversion or exercise.

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Options, warrants and their equivalents
When computing for diluted earnings per share,
the “treasury share method” shall be used in
computing for the incremental shares. This method
assumes that:
1. The options or warrants are exercised and
2. The proceeds received from the exercise are used
to purchase treasury shares at the average market
price.
3. The difference between the treasury shares
assumed to have been purchased and the option
shares represents the incremental shares.
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Treasury share method

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Financial statement Presentation

 Basic and Diluted earnings per share are computed on the

following:
1. Profit or loss from continuing operations
2. Profit or loss from discontinued operations, if the entity reports a
discontinued operation.
3. Profit or loss for the year

 EPS is not computed on other comprehensive income and total

comprehensive income.

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Financial statement Presentation
(Continuation)

EPS computed on profit or loss from continuing

operations and profit or loss for the year are
presented on the face of the statement of profit or
loss and other comprehensive income. If the entity
uses a two-statement presentation, EPS is
presented only on the separate income statement.

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