TOPIC 8.

ACCOUNTING STANDARD – 20

“Earnings per Share”

REQUIRMENT as per ‘AS – 20’: 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.
AS – 20 requires to present BEPS and DEPS even if the amounts disclosed are Negative (a
loss per share).

REQUIRMENT as per ‘PART II of the SCHEDULE III’ to the COMPANIES ACT:

Every company should calculate and disclose Earnings per Share in accordance with AS –
20, whether its equity shares or potential equity shares are listed on a recognized stock
exchange in India or not.

NOTE: Since all companies are required to disclose earnings per share as per Schedule III of Companies
Act, 2013, therefore AS – 20 in effect is mandatory for all companies.

CALCULATION OF BASIC EPS:

Basic EPS = Net Profit/Loss for the period attributable to the equity shareholders
Weighted Avg. No. of equity shares outstanding during the period

Calculation of Net Profit/Loss as above (Numerator) -

Net Profit/Loss for the period including Prior period items & Extraordinary items as per AS – 5
Less: Tax Expense
Less: *Preference Dividend and CDT on Preference Dividend
Net Profit/Loss attributable to the ESH

*Note: Dividend on Cumulative preference shares is deducted whether provided (declared) in the books
or not. However Dividend on Non – Cumulative preference shares is deducted only if provided in the
books. Dividend paid during the current year in respect of previous periods not to be deducted.

7.1
Calculation of Weighted Avg. Number of Equity shares outstanding during the period
(Denominator) -
 Consider the no. of equity shares outstanding in the beginning of the year, adjusted by the no.
of equity shares issued and bought back during the period multiplied by the time – weighting
factor.
 Partly paid equity shares are treated as fraction and should be adjusted accordingly.
 Equity shares having difference nominal values but with the same dividend rights should be
calculated by converting all such equity shares into equivalent number of shares of the same
nominal value.
 No time weight shall be given in case of Bonus issue, Shares Split and Share Consolidation
since no additional earnings arises due to this.
 However, if bonus, split or consolidation takes place then in that case prior period EPS
should be adjusted accordingly and presented also in current year.
 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 (Contingently Issuable shares)

Deciding the date for making Weighted Avg.

Shares are usually included in the weighted average number of shares from the date consideration is
receivable (which is generally the date of their issue), for example:

The above mentioned provisions are summarised in the following table:

Sr. No Nature of transaction Effective Date when
1 General Rule Consideration is receivable
2 Exchange for cash Cash is receivable
3 Voluntary reinvestment of dividend Dividend are reinvested
4 Conversion of debt instrument Accrual of interest is stopped
5 In lieu of interest / principal Accrual of interest is stopped
6 Exchange of liability Settlement Date
7 Consideration for acquisition of asset Acquisition is recognised in books
8 Rendering of services Services are rendered
9 Amalgamation in the Nature of Purchase Acquisition date
10 Amalgamation in the Nature of Merger Beginning of the Year
11 Mandatory convertible instrument Date of contract
12 Bonus Issue of Shares From the Beginning of Year
13 Contingently issuable shares When all necessary conditions for
conversion are satisfied

7.2
 Question 1 (ICAI Module)
Date Particulars Purchased Sold Balance
1st Jan Balance at Beginning 1800 - 1800
31 May
st
Issue of Shares for Cash 600 - 2400
1st Nov. Buy Back of shares - 300 2100

Calculate Weighted Number of Shares.

Solution
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

Question 2 (ICAI Module)

Date Particulars No. of Face Paid up
Shares Value Value
1 Jan
st
Balance at Beginning 1800 10/- 10/-
31st Oct Issue of Shares 600 10/- 5/-

Calculate Weighted Number of Shares.

Solution
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:
(1,800 x 12/12) + (300 x 2/12) = 1,850 shares.
Note:
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 or by converting all the equity shares into Weighted Avg. Paid Up
Equity Capital to calculated Earnings Per Rupee (EPR)

Question 3 (ICAI Module)

Net profit for the year 2016 18,00,000/-
Net profit for the year 2017 60,00,000/-
No. of equity shares outstanding until 30th September 2017 20,00,000

7.3
Bonus issue 1st October 2017 was 2 equity shares for each equity share outstanding at 30th September,
2017
Calculate Basic Earnings Per Share.
Solution
No. of Bonus Issue 20,00,000 x 2 = 40,00,000 shares
Earnings per share for the year 2017= Rs. 1.00
Rs.60,00,000
(20,00,000+40,00,000)
Adjusted earnings per share for the year 2016= Rs. 0.30
Rs.18,00,000
(20,00,000+40,00,000)
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 2016, the earliest period reported.

Question 4 (RTP Nov. 10)

Net Profit after Tax including extraordinary profit/losses for the year ended 31st Dec, 2009 = 2,00,000/-
10% Cumulative Preference Shares of Rs. 5,00,000/-
Number of Equity shares = 5,000 of Rs. 100/- each.
Equity dividend declared @ 18%. Corporate Dividend tax 15%
Compute EPS assuming that out of 5,000 equity shares, 2,000 shares were issued on 1.07.09.
(Answer: EPS = Rs. 35.29/-)

RIGHT ISSUE:
A rights issue usually includes a bonus element.
Treatment of Right Shares:
Following steps are applied
Step 1: Calculate TMP[ER] if not available. Such price is IV of shares
Formula
[Fair Value (before right) x No. of share (pre-right)] + Right issue proceeds
Total shares post right
Step 2: Calculate paid-up part in Right issue
Right Issue Proceeds
Paid – up Part =
Market Price as per Step 1

Step 3: Calculate Bonus part in Right

Bonus * Right Share - paid part as per Step 2

7.4
Step 4:
 Paid part should be adjusted from the date of receipts of amount.
 Bonus part should be considered price beginning
 Previous Year EPS will be readjusted because of Bonus elements.

Question 5 (ICAI Module & MTP March19)

The following information is available for TON Ltd. for the accounting year 2015-16 and 2016-17:
Net profit for Rs
Year 2016 11,00,000
Year 2017 15,00,000

No of shares outstanding prior to right issue 5,00,000 shares.

Right issue : One new share for each 5 shares outstanding i.e. 1,00,000 shares.
: Right Issue price Rs 15
: Last date to exercise rights 1st March, 2017
Fair value of one equity share immediately prior to exercise of rights on 31.07.2016 is Rs 21/-
You are required to compute Basic Earnings Per share for both years.
Solution:
1. Computation of Basic Earnings per Share
Year 2016 Year 2017
(Rs) (Rs)
(i) EPS for the year 2016 as originally reported 2.20 -
= Net profit for the year attributable to equity share holder
/ weighted average number of equity shares outstanding
during the year
Rs 11,00,000/ 5,00,000 shares
(ii) EPS for the year 2016 restated for the right issue Rs 2.10 -
11,00,000/(5,00,000 shares x 1.05)
(iii) EPS for the year 2016-17 (including effect of right issue) Rs - 2.55
15,00,000 / [(5,00,000x1.05 x 2/12) + (6,00,000x10/12)]

Working Notes:
1. 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 x5,00,000) + (Rs 15 x 1,00,000)] / (5,00,000 + 1,00,000) = Rs 20.00
2. Computation of adjustment factor
Fair value per share prior to exercise of rights Theoretical ex-rights value per share = Rs 21 /20
= 1.05 (approx.)

7.5
 DILUTED EARNINGS PER SHARE:
(Theory might come, Pls refer it before exam)

 Diluted EPS is calculated when the enterprise is having Potential Equity shares.
 Potential Equity shares are those securities which entitles the holders the right to convert
their securities into equity shares such as Convertible Debentures, Convertible Preference
Shares etc.
 Potential Equity shares are diluted if their conversion into equity shares reduces the earnings
per share. Hence, DEPS should always be less than BEPS.
 If DEPS is more than BEPS then it is not dilutive, it is Anti – dilutive EPS and hence in that
case, DEPS will be equal to BEPS, Since DEPS cannot be higher than BEPS.
Examples of Potential Equity Shares which may be diluted:
1. Convertible Debentures
2. Convertible Preference Shares
3. Share Warrants
4. ESOPs
5. Share Application Money pending allotment (not statutorily required to be kept separately and
utilized in the business)
6. Partly paid Equity shares to the extent of unpaid amount (not entitled for Dividend)

DILUTIVE OR NON DILUTIVE

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.
Note 1: DEPS calculation requires only the “Net profit from continuing ordinary activities” (i.e. Extra-
Ordinary Items and Discontinuing Activities are avoided)
The net profit from continuing ordinary activities is the net profit from ordinary activities after
deducting preference dividends and any attributable tax thereto and after excluding items relating to
discontinued operations.
Note 2: 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 formula can be mathematically expressed as follows:

Profit/Loss attributed to Equity share holder when dilutive potential shares are converted into ordinary shares
Weighted average number of equity shares + Weighted average number of dilutive potential ordinary shares

7.6
 How to Calculated DEPS – Following calculation is required:
1. Identify Potential Equity Shares first. (Whether any security which is pending for
conversion is outstanding and resources thereof have been used in the business)

2. Identify Dilutive potential equity shares by applying following steps:

Step 1 - Calculate Incremental EPS for every single potential equity share

Step 2 - Arrange IEPS in Increasing Order

Step 3 - Apply Test for Dilution. Test each potential equity share on BEPS from
continuing ordinary operations. If ratio EPS declines from preceding calculation then it
is called Diluted EPS and if ratio increases from previous calculation then it is called
Anti – Diluted EPS

Why we are following above steps:

To maximise the dilution of basic earnings per share, each issue or series of potential
ordinary shares is considered in sequence from the most dilutive to the least dilutive, ie
dilutive potential ordinary shares with the lowest ‘earnings per incremental share’ are
included in the diluted earnings per share calculation before those with a higher earnings
per incremental share. Options and warrants are generally included first because they do
not affect the numerator of the calculation.

Note: Anti Diluted EPS shall not be presented in the Statement of P&L, in that case
Diluted EPS shall be equal to BEPS

Question 6 (ICAI Module)

From the following information given by Sampark Ltd., Calculate Basic EPS and Diluted EPS as per AS
20:
Net profit for the current year Rs. 1,00,00,000
No. of Equity shares outstanding 50,00,000
No. of 12% convertible debentures of Rs. 100 1,00,000
each (Each debenture is convertible into 10
equity shares)
Interest on debenture for the current year Rs. 12,00,000
Tax Saving relating to interest expense (30%) Rs. 3,60,000
Compute Diluted Earnings Per Share

7.7
Solution:
Adjusted net profit for the current year (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 Shares
No. of equity shares used to compute diluted EPS: (50,00,000 + 10,00,000) = 60,00,000 Shares
Diluted earnings per share: (1,08,40,000/60,00,000) = Rs. 1.81

Question 7 (ICAI Module)

Net Profit for the year 2020 Rs. 12,00,000
Weighted Avg. number of equity shares outstanding during 5,00,000 shares
the year 2020
Avg. Fair Value of one equity share during the year 2020 Rs. 20.00
Weighted Avg. number of equity shares under option during 1,00,000 shares
the year 2020
Exercise price for shares under option during the year 2020 Rs. 15
Compute Basic and Diluted Earnings Per Share.
Solution
Particulars Earnings Shares EPS
Net Profit for the Year 2020 12,00,000 -
Weighted avg. no. of shares 2020 - 5,00,000
Basic EPS 2.40/-
No. of Shares under options - 1,00,000
Number of Shares that would have been issued - (75,000)
at Fair Value (100000 x 15) / 20
Diluted EPS 12,00,000 5,25,000 2.29/-
Note: 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.

Question 8
(Exam Nov.18)
From the following information given by Sampark Ltd., Calculate Basic EPS and Diluted EPS as per AS
20:
Net profit for the current year Rs. 2,50,00,000
No. of Equity shares outstanding 50,00,000
No. of 12% convertible debentures of Rs. 100 50,000
each (Each debenture is convertible into 8
equity shares)
Interest on debenture for the current year Rs. 6,00,000
Tax Saving relating to interest expense (30%) 1,80,000

7.8
Solution:
Calculation of Basic Earning Per Share
Basic EPS = Net profit for the current year
No. of Equity Shares
2,50,00,00
= 50,00,000

Basic EPS per share = Rs.5

Calculation of Diluted Earning Per Share

Diluted EPS = Adjusted net profit for the current year
Weighted average no. Equity Shares

Adjusted net profit for the current year Rs

Net profit for the current year 2,50,00,000
Add: Interest expenses for the current year 6,00,000
Less: Tax saving relating to Tax Expenses (1,80,000)
2,54,20,000
No. of equity shares resulting from conversion of debentures: 4,00,000 Shares

Weighted average no. of equity shares used to compute diluted EPS-

(50,00,000 +4,00,000) = 54,00,000 Equity Shares
Diluted earnings per share: (2,54,20,000/54,00,000) = Rs 4.71 (Approx.)

7.9
Student Notes:-

7.10