Standard 20: Earnings Per Share

Standard 20: Earnings Per Share · Complied AI

(d)

shares which would be issued upon the satisfaction of certain conditions resulting from contractual

arrangements (contingently issuable shares), such as the acquisition of a business or other assets, or shares

issuable under a loan contract upon default of payment of principal or interest, if the contract so provides.

Presentation

8 An enterprise should present basic and diluted earnings per share on the

face of the statement of profit and loss for each class of equity shares that has a different right to share in the

net profit for the period. An enterprise should present basic and diluted earnings per share with equal prominence

for all periods presented.

9 This Standard requires an enterprise to present basic and diluted earnings per share, even if the

amounts disclosed are negative (a loss per share).

Measurement

Basic Earnings Per Share

10 Basic earnings per share should be calculated by dividing the net profit or loss for the period

attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

Earnings - Basic

11 For the purpose of calculating basic earnings per share, the net

profit or loss for the period attributable to equity shareholders should be the net profit or loss for the period

after deducting preference dividends and any attributable tax thereto for the period.

12 All items of income and expense which are recognised in a period, including tax

expense and extraordinary items, are included in the determination of the net profit or loss for the period unless

an Accounting Standard requires or permits otherwise (see Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and

Changes in Accounting Policies). The amount of preference dividends and any attributable tax thereto

for the period is deducted from the net profit for the period (or added to the net loss for the period) in order to

calculate the net profit or loss for the period attributable to equity shareholders.

13 The amount of preference dividends for the period that is deducted from the net

profit for the period is:

(f)

equity shares issued for the rendering of services to the enterprise are included as the services are

rendered.

In these and other cases, the timing of the inclusion of equity shares is determined by the specific terms and

conditions attaching to their issue. Due consideration should be given to the substance of any contract associated

with the issue.

18 Equity shares issued as part of the consideration in an amalgamation in the nature of purchase are included in the

weighted average number of shares as of the date of the acquisition because the transferee incorporates the results

of the operations of the transferor into its statement of profit and loss as from the date of acquisition. Equity

shares issued during the reporting period as part of the consideration in an amalgamation in the nature of merger

are included in the calculation of the weighted average number of shares from the beginning of the reporting period

because the financial statements of the combined enterprise for the reporting period are prepared as if the combined

entity had existed from the beginning of the reporting period. Therefore, the number of equity shares used for the

calculation of basic earnings per share in an amalgamation in the nature of merger is the aggregate of the weighted

average number of shares of the combined enterprises, adjusted to equivalent shares of the enterprise whose shares

are outstanding after the amalgamation.

19 Partly paid equity shares are treated as a fraction of an equity share to the extent that they were entitled to

participate in dividends relative to a fully paid equity share during the reporting period.

Illustration II attached to the Standard illustrates the computations in respect of partly paid equity shares.

20 Where an enterprise has equity shares of different nominal values but with the same dividend rights, the number of

equity shares is calculated by converting all such equity shares into equivalent number of shares of the same

nominal value.

21 Equity shares which are issuable upon the satisfaction of certain conditions resulting from contractual

arrangements (contingently issuable shares) are considered outstanding, and included in the computation of basic

earnings per share from the date when all necessary conditions under the contract have been satisfied.

22 The weighted average number of equity shares outstanding during the

period and for all periods presented should be adjusted for events, other than the conversion of potential equity

shares, that have changed the number of equity shares outstanding, without a corresponding change in resources.

23 Equity shares may be issued, or the number of shares outstanding may be reduced, without a corresponding change in

resources. Examples include:

(d)

a reverse share split (consolidation of shares).

24 In case of a bonus issue or a share split, equity shares are issued to existing shareholders for no additional

consideration. Therefore, the number of equity shares outstanding is increased without an increase in resources. The

number of equity shares outstanding before the event is adjusted for the proportionate change in the number of

equity shares outstanding as if the event had occurred at the beginning of the earliest period reported. For

example, upon a two-for-one bonus issue, the number of shares outstanding prior to the issue is multiplied by a

factor of three to obtain the new total number of shares, or by a factor of two to obtain the number of additional

shares.

Illustration III attached to the Standard illustrates the computation of weighted< average number of equity shares

in case of a bonus issue during the period.

25 The issue of equity shares at the time of exercise or conversion of potential equity shares will not usually give

rise to a bonus element, since the potential equity shares will usually have been issued for full value, resulting

in a proportionate change in the resources available to the enterprise. In a rights issue, on the other hand, the

exercise price is often less than the fair value of the shares.

Therefore, a rights issue usually includes a bonus element. The number of equity shares to be used in calculating

basic earnings per share for all periods prior to the rights issue is the number of equity shares outstanding prior

to the issue, multiplied by the following factor:

Fair value per share immediately prior to the exercise of rights

Theoretical ex-rights fair value per share

The theoretical ex-rights fair value per share is calculated by adding the aggregate fair value of the shares

immediately prior to 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. Where the rights themselves are to be publicly traded

separately from the shares prior to the exercise date, fair value for the purposes of this calculation is

established at the close of the last day on which the shares are traded together with the rights.

Illustration IV attached to the Standard illustrates the computation of weighted average number of equity shares in

case of a rights issue during the period.

Diluted Earnings Per Share

26. For the purpose of calculating diluted earnings per share, the net profit or loss for the period

attributable to equity shareholders and the weighted average number of shares outstanding during the period should

be adjusted for the effects of all dilutive potential equity shares.

27 In calculating diluted earnings per share, effect is given to all dilutive potential equity shares that were

outstanding during the period, that is:

(c)

any other changes in expenses or income that would result from the conversion of the dilutive potential

equity shares.

30 After the potential equity shares are converted into equity shares, the dividends, interest and other expenses or

income associated with those potential equity shares will no longer be incurred (or earned). Instead, the new equity

shares will be entitled to participate in the net profit attributable to equity shareholders. Therefore, the net

profit for the period attributable to equity shareholders calculated in accordance with paragraph 11 is increased by

the amount of dividends, interest and other expenses that will be saved, and reduced by the amount of income that

will cease to accrue, on the conversion of the dilutive potential equity shares into equity shares. The amounts of

dividends, interest and other expenses or income are adjusted for any attributable taxes.

Illustration V attached to the standard illustrates the computation of diluted earnings in case of convertible

debentures.

31 The conversion of some potential equity shares may lead to consequential changes in other items of income or

expense. For example, the reduction of interest expense related to potential equity shares and the resulting

increase in net profit for the period may lead to an increase in the expense relating to a non- discretionary

employee profit sharing plan. For the purpose of calculating diluted earnings per share, the net profit or loss for

the period is adjusted for any such consequential changes in income or expenses.

Per Share - Diluted

32 For the purpose of calculating diluted earnings per share, the number of equity shares should be the

aggregate of the weighted average number of equity shares calculated in accordance with paragraphs 15 and 22 , and the

weighted average number of equity shares which would be issued on the conversion of all the dilutive potential

equity shares into equity shares. Dilutive potential equity shares should be deemed to have been converted into

equity shares at the beginning of the period or, if issued later, the date of the issue of the potential equity

shares.

33 The number of equity shares which would be issued on the conversion of dilutive potential equity shares is

determined from the terms of the potential equity shares. The computation assumes the most advantageous conversion

rate or exercise price from the standpoint of the holder of the potential equity shares.

34 Equity shares which are issuable upon the satisfaction of certain conditions resulting from contractual

arrangements (contingently issuable shares) are considered outstanding and included in the computation of both the

basic earnings per share and diluted earnings per share from the date when the conditions under a contract are met.

If the conditions have not been met, for computing the diluted earnings per share, contingently issuable shares are

included as of the beginning of the period (or as of the date of the contingent share agreement, if later). The

number of contingently issuable shares included in this case in computing the diluted earnings per share is based on

the number of shares that would be issuable if the end of the reporting period was the end of the contingency

period. Restatement is not permitted if the conditions are not met when the contingency period actually expires

subsequent to the end of the reporting period. The provisions of this paragraph apply equally to potential equity

shares that are issuable upon the satisfaction of certain conditions (contingently issuable potential equity

shares).

35 For the purpose of calculating diluted earnings per share, an enterprise should assume the exercise

of dilutive options and other dilutive potential equity shares of the enterprise. The assumed proceeds from these

issues should be considered to have been received from the issue of shares at fair value. The difference between the

number of shares issuable and the number of shares that would have been issued at fair value should be treated as an

issue of equity shares for no consideration.

36 Fair value for this purpose is the average price of the equity shares during the period. Theoretically, every

market transaction for an enterprise’s equity shares could be included in determining the average price. As a

practical matter, however, a simple average of last six months weekly closing prices are usually adequate for use in

computing the average price.

37 Options and other share purchase arrangements are dilutive when they would result in the issue of equity shares

for less than fair value. The amount of the dilution is fair value less the issue price. Therefore, in order to

calculate diluted earnings per share, each such arrangement is treated as consisting of:

(b)

a contract to issue the remaining equity shares for no consideration. Such equity shares generate no

proceeds and have no effect on the net profit attributable to equity shares outstanding. Therefore, such shares

are dilutive and are added to the number of equity shares outstanding in the computation of diluted earnings per

share.

Illustration VI attached to the Standard illustrates the effects of share options on diluted earnings per share.

38 To the extent that partly paid shares are not entitled to participate in dividends during the reporting period

they are considered the equivalent of warrants or options.

Dilutive Potential Equity Shares

39. Potential equity shares should be treated as dilutive when, and only when, their conversion to

equity shares would decrease net profit per share from continuing ordinary operations.

40 An enterprise uses net profit from continuing ordinary activities as “the control figure” that is used to

establish whether potential equity shares are dilutive or anti-dilutive. The net profit from continuing ordinary activities is the net profit from ordinary activities (as

defined in AS 5) after deducting preference dividends and any attributable tax thereto and after excluding items

relating to discontinued operations 3 .

41 Potential equity shares are anti-dilutive when their conversion to equity shares would increase earnings per share

from continuing ordinary activities or decrease loss per share from continuing ordinary activities. The effects of

anti- dilutive potential equity shares are ignored in calculating diluted earnings per share.

42 In considering whether potential equity shares are dilutive or anti- dilutive, each issue or series of potential

equity shares is considered separately rather than in aggregate. The sequence in which potential equity shares are

considered may affect whether or not they are dilutive. Therefore, in order to maximise the dilution of basic

earnings per share, each issue or series of potential equity shares is considered in sequence from the most dilutive

to the least dilutive. For the purpose of determining the sequence from most dilutive to least dilutive potential

equity shares, the earnings per incremental potential equity share is calculated. Where the earnings per

incremental share is the least, the potential equity share is considered most dilutive and vice-versa.

Illustration VII attached to the Standard illustrates the manner of determining the order in which dilutive

securities should be included in the computation of weighted average number of shares.

43 Potential equity shares are weighted for the period they were outstanding. Potential equity shares that were

cancelled or allowed to lapse during the reporting period are included in the computation of diluted earnings per

share only for the portion of the period during which they were outstanding. Potential equity shares that have been

converted into equity shares during the reporting period are included in the calculation of diluted earnings per

share from the beginning of the period to the date of conversion; from the date of conversion, the resulting equity

shares are included in computing both basic and diluted earnings per share.

Restatement

44 If the number of equity or potential equity shares outstanding

increases as a result of a bonus issue or share split or decreases as a result of a reverse share split

(consolidation of shares), the calculation of basic and diluted earnings per share should be adjusted for all the

periods presented. If these changes occur after the balance sheet date but before the date on which the financial

statements are approved by the board of directors, the per share calculations for those financial statements and any

prior period financial statements presented should be based on the new number of shares. When per share calculations

reflect such changes in the number of shares, that fact should be disclosed.

45 An enterprise does not restate diluted earnings per share of any prior period presented for changes in the

assumptions used or for the conversion of potential equity shares into equity shares outstanding.

46 An enterprise is encouraged to provide a description of equity share transactions or potential equity share

transactions, other than bonus issues, share splits and reverse share splits (consolidation of shares) which occur

after the balance sheet date when they are of such importance that non- disclosure would affect the ability of the

users of the financial statements to make proper evaluations and decisions. Examples of such transactions include:

(c)

the nominal value of shares along with the earnings per share figures.

49 Contracts generating potential equity shares may incorporate terms and conditions which affect the measurement of

basic and diluted earnings per share. These terms and conditions may determine whether or not any potential equity

shares are dilutive and, if so, the effect on the weighted average number of shares outstanding and any consequent

adjustments to the net profit attributable to equity shareholders. Disclosure of the terms and conditions of such

contracts is encouraged by this Standard.

50 If an enterprise discloses, in addition to basic and diluted earnings per share, per share amounts

using a reported component of net profit other than net profit or loss for the period attributable to equity

shareholders, such amounts should be calculated using the weighted average number of equity shares determined in

accordance with this Standard. If a component of net profit is used which is not reported as a line item in the

statement of profit and loss, a reconciliation should be provided between the component used and a line item which

is reported in the statement of profit and loss. Basic and diluted per share amounts should be disclosed with equal

prominence.

51 An enterprise may wish to disclose more information than this Standard requires. Such information may help the

users to evaluate the performance of the enterprise and may take the form of per share amounts for various

components of net profit. Such disclosures are encouraged. However, when such amounts are disclosed, the

denominators need to be calculated in accordance with this Standard in order to ensure the comparability of the per

share amounts disclosed.

Illustrations

Note: These illustrations do not form part of the Accounting Standard. Their purpose is to

illustrate the application of the Accounting Standard.

Illustration I

Example - Weighted Average Number of Shares

(Accounting year 01-01-20X1 to 31-12-20X1)

No. of Shares Issued

No. of Shares Bought Back

No. of Shares Outstanding

1 st January, 20X1

Balance at beginning of year

1,800

31 st May, 20X1

Issue of shares for cash

600

2,400

1 st Nov., 20X1

Buy Back of shares

300

2,100

31 st Dec., 20X1

Balance at end of year

2,400

300

2,100

Computation of Weighted Average:

(1,800 x 5/12) + (2,400 x 5/12) + (2,100 x 2/12) = 2,100 shares.

The weighted average number of shares can alternatively be computed as follows:

(1,800 x12/12) + (600 x 7/12) - (300 x 2/12) = 2,100 shares

Illustration II

Example – Partly paid shares

(Accounting year 01-01-20X1 to 31-12-20X1)

No. of shares issued

Nominal value of shares

Amount paid

1 st January,

20X1

Balance at beginning of year

1,800

Rs. 10

31 st October,

Issue of Shares

600

Rs. 10

Rs. 5

Assuming that partly paid shares are entitled to participate in the dividend to the extent of amount

paid, number of partly paid equity shares would be taken as 300 for the purpose of calculation of

earnings per share.

Computation of weighted average would be as follows:

Illustration III

Example - Bonus Issue

(Accounting year 01-01-20XX to 31-12-20XX)

Net profit for the year 20X0

Rs. 18,00,000

Net profit for the year 20X1

Rs. 60,00,000

No. of equity shares outstanding until

30 th September 20X1

20,00,000

Bonus issue 1 st October 20X1

2 equity shares for each equity share outstanding at 30th September, 20X1

20,00,000 x 2 = 40,00,000

Earnings per share for the year 20X1

Rs. 60,00,000 ( 20,00,000 +

40,00,000 )

= Re. 1.00

Adjusted earnings per share for the year 20X0

Rs. 18,00,000

( 20,00,000 + 40,00,000 )

= Re. 0.30

Since the bonus issue is an issue without consideration, the issue is treated as if it had occurred

prior to the beginning of the year 20X0, the earliest period reported.

Illustration IV

Example - Rights Issue

(Accounting year 01-01-20XX to 31-12-20XX)

Net profit

Year

20X0 :

Rs. 11,00,000

20X1 :

Rs. 15,00,000

No. of shares outstanding prior to rights issue

5,00,000 shares

Rights issue

One new share for each five outstanding (i.e. 1,00,000 new shares)

Rights issue price : Rs. 15.00 :

Last date to exercise rights 1 st March 20X1

Fair value of one equity share immediately prior to exercise of rights on 1 st March 20X1

Rs. 21.00

Computation of theoretical ex-rights fair value per share

Fair value of all outstanding shares immediately prior to exercise of rights+total amount received

from exercise

Number of shares outstanding prior to exercise + number of shares issued in the exercise

(Rs. 21.00 x 5,00,000

shares) + (Rs. 15.00 x 1,00,000 shares)

5,00,000 shares + 1,00,000 shares

Computation of adjustment factor

Fair value per share prior to exercise of rights = Rs. (21.00) = 1.05

Theoretical ex-rights value per share Rs. (20.00)

Computation of earnings per share

Year 20X0

Year 20X1

EPS for the year 20X0 as originally reported: Rs.11,00,000/5,00,000 shares

Rs. 2.20

EPS for the year 20X0 restated for rights issue: Rs.11,00,000/ (5,00,000 shares x 1.05)

Rs. 2.10

EPS for the year 20X1 including effects of rights issue

Rs. 15,00,000

(5,00,000 x 1.05 x 2/12)+ (6,00,000 x 10/12)

Rs. 2.55

Illustration V

Example - Convertible Debentures

(Accounting year 01-01-20XX to 31-12-20XX)

Net profit for the current year

Rs. 1,00,00,000

No. of equity shares outstanding

50,00,000

Basic earnings per share

Rs. 2.00

No. of 12% convertible debentures of Rs. 100 each

Each debenture is convertible into 10 equity shares

1,00,000

Interest expense for the current year

Rs. 12,00,000

Tax relating to interest expense (30%)

Rs. 3,60,000

Adjusted net profit for the current year

Rs. (1,00,00,000 + 12,00,000 -

3,60,000) = Rs. 1,08,40,000

No. of equity shares resulting from conversion of debentures

10,00,000

No. of equity shares used to compute diluted earnings per share

50,00,000 + 10,00,000 = 60,00,000

Diluted earnings per share

1,08,40,000 / 60,00,000 = Re. 1.81

Illustration VI

Example - Effects of Share Options on Diluted Earnings

Per Share

(Accounting year 01-01-20XX to 31-12-20XX)

Net profit for the year 20X1

Rs. 12,00,000

Weighted average number of equity shares outstanding during the year 20X1

5,00,000 shares

Average fair value of one equity share during the year 20X1

Rs. 20.00

Weighted average number of shares under option during the year 20X1

1,00,000 shares

Exercise price for shares under option during the year 20X1

Rs. 15.00

Computation of earnings per share

Earnings

Earnings per share

Net profit for the year 20X1

Rs. 12,00,000

Weighted average number of shares outstanding during year 20X1

5,00,000

Basic earnings per share

Rs. 2.40

Number of shares under option

1,00,000

Number of shares that would have been issued at fair value: (100,000 x 15.00)/20.00

(75,000)

Diluted earnings per share

Rs. 12,00,000

5,25,000

Rs. 2.29

*The earnings have not been increased as the total

number of shares has been increased only by the number of shares (25,000) deemed for the purpose of

the computation to have been issued for no consideration {see para 37(b)}

Illustration VII

Example - Determining the Order in Which to Include Dilutive Securities in the

Computation of Weighted Average Number of Shares

(Accounting year 01-01-20XX to 31-12-20XX)

Earnings, i.e., Net profit attributable to equity shareholders

Rs. 1,00,00,000

No. of equity shares outstanding

20,00,000

Average fair value of one equity share during the year

Rs. 75.00

Potential Equity Shares

Options

1,00,000 with exercise price of Rs. 60

Convertible Preference Shares

Attributable tax, e.g., corporate dividend tax

8,00,000 shares entitled to a cumulative dividend of Rs. 8 per share. Each preference share is

convertible into 2 equity shares.

10%

12% Convertible Debentures of Rs. 100 each

Nominal amount Rs. 10,00,00,000. Each debenture is convertible into 4 equity shares.

Tax rate

30%

Increase in Earnings Attributable to Equity Shareholders on Conversion

of Potential Equity Shares

Increase in Earnings

Increase in no. of Equity Shares

Earnings per Incremental Share

Options

Increase in earnings

Nil

No. of incremental shares issued for no consideration

{1,00,000 x (75 - 60) / 75}

20,000

Nil

Convertible Preference Shares

Increase in net profit attributable to equity shareholders as adjusted by attributable tax

[(Rs.8 x 8,00,000)+ 10%(8 x 8,00,000)]

Rs. 70,40,000

No. of incremental shares {2 x 8,00,000}

16,00,000

Rs. 4.40

12% Convertible Debentures

Increase in net profit {Rs. 10,00,00,000 x 0.12 x ( 1 -0.30)}

Rs. 84,00,000

No. of incremental shares {10,00,000 x 4}

40,00,000

Rs. 2.10

It may be noted from the above that options are most dilutive as their earnings per incremental share is nil. Hence,

for the purpose of computation of diluted earnings per share, options will be considered first. 12% convertible

debentures being second most dilutive will be considered next and thereafter convertible preference shares will be

considered (see para 42).

Computation of Diluted Earnings Per Share

Net Profit Attributable (Rs.)

No. of Equity Shares

Net profit attributable Per Share (Rs.)

As reported

1,00,00,000

20,00,000

5.00

Options

20,000

1,00,00,000

20,20,000

4.95

Dilutive

12% Convertible Debentures

84,00,000

40,00,000

1,84,00,000

60,20,000

3.06

Dilutive

Convertible Preference Shares

70,40,000

16,00,000

2,54,40,000

76,20,000

3.34

Anti- Dilutive

Since diluted earnings per share is increased when taking the convertible preference shares into account (from Rs.

3.06 to Rs 3.34), the convertible preference shares are anti-dilutive and are ignored in the calculation of diluted

earnings per share. Therefore, diluted earnings per share is Rs. 3.06.

Footnotes

* A limited revision to this Standard was made in 2004,

pursuant to which paragraphs 48 and 51 of this Standard were revised. The Standard was earlier notified as part of