Earning Per Share (EPS)
AS – 20
Contents
Ø Applicability & Nature
Ø Objective
Ø Types of EPS & Important Points
Ø Basic EPS calculation
v Meaning of Basic Earning
v Meaning of No. of Shares
v Buy Back of Shares
v Partly Paid up Shares
v Different Nominal Shares
v Bonus Shares
v Right Shares
v Amalgamation
Ø Diluted EPS Calculation
Ø Disclosures
Ø Difference between International Accounting Standard / AS / US
Applicability of Nature
Ø Applicable 01.04.2001 onwards
Ø Nature Mandatory for Level I Enterprises
* As per the provisions of AS, if any enterprise calculates EPS which is not covered under mandatory requirements then provisions of AS – 20 should be applied as mandatory requirements on the basis of above explanations, it can be said that calculation of EPS can be made only by the provisions of AS – 20.
Objective
The main objective of the AS is only to prescribe principles in relation to Calculation & Disclosures of Earning per Share. Such calculation & Disclosures shall improve the comparison of the performance of two different period of the enterprise.
Types of EPS & Important Points
(i) Types of EPS: - As per AS two types of EPS should be calculated as follows: -
(a) Basic EPS
(b) Diluted EPS
(ii) Important Points
a. Calculation of EPS should be made even if enterprise is having NIL earning or Negative earning. It means that level of earning is totally is immaterial for the purpose of EPS calculation otherwise objective of comparison will not be fulfill.
b. Calculation of EPS (Basic & Diluted) should be made with equal prominence.
Basic Earning per Share
Basic EPS = Earning Available for Equity Shareholders
Weighted Avg. No of Shares
Meaning of Earning
Earning for Equity Share holders should be calculated & disclosed by a separate working note as follows.
Statement showing Earning
All Incomes (Total) xxxx
Less: All Expenses (Excluding tax) xxxx
PBT xxxx
Less: Income Tax xxxx
PAT xxxxLess: Pref Dividend + CDT xxxx
Earning for Equity Shareholders xxxxWhile preparing income statement for the purpose of earning calculation, the following important points should be considered.
(i) Any transferred to mandatory reserve or non mandatory reserve should not be deducted out of earning for the purpose of Basic EPS is calculated from the point of view of total earning.
(ii) If any prior period item is recorded in the accounting records of the current year then such prior period should be taken as a part of basic earning of current year. Such item can not be excluded in the calculation of Basic EPS.
(iii) If any extra ordinary activity has been occurred during the period & also included in the financial statements then such extra ordinary amount should also be included as a part of basic earning of the current period.
(iv) Pref Dividend:- Preference Dividend of every year should be deducted out of profit after tax if such dividend is related cumulative preference shares whether declared by the company or not. But in case of non-cumulative shares dividend can be deducted only if declared by the company.
(v) If any company is having outstanding of previous years on cumulative preference shares then such outstanding amount should not be deducted in the calculation of basic earning of current year. Because dividend on preference shares are provided out of earning on current year basis.
Weighted Average No. of Shares = No. of Shares o/s during the period
X
Period of outstanding of Shares
Ex 1. Calculate weighted average of shares assuming accounting year is calendar year.
Op. Balance = 1,00,000 Shares (01-01-2005 )
New Issue = 50,000 Shares (01-08-2005 )
Ans: Alternative I
a) Opening Balance = 1,00,000 x 12/12 = 1,00,000
b) New Issue = 50,000 x 5/12 = 20,833
1,20,833
Alternative II
a) 01-01-2005 to 01-08-2005 = 1,00,000 x 7/12 = 58,333
b) 01-08-2005 to 31-12-2005 = 1,50,000 x 5/12 = 62,500
1,20,833
Ex 2. Accounting year - Calendar year
Opening Bal. (01-01-06 ) - 10,000 Shares
New Issue (01-04-06 ) - 2,000 Shares
Profit after tax - Rs. 1,00,000
10% Preference Shares - Rs. 2,00,000
Transferred to General Reserve - Rs. 20,000
Calculate Basic EPS.
Ans: W.N.1 Calculation of Basic Earning
Profit after Tax 1,00,000
Less: Pref Dividend (20,000)
Basic Earning 80,000
W.N.2 Calculation of Weighted Avg. No of Shares
11,500
Buy Back of Shares
In the situation of buy back shares, weighted average no of shares shall reduce with reference to date of Buy back.
Ex 3. Accounting year - Calendar year
Opening Bal. (01-01-07 ) - 5,00,000 Shares
New Issue (01-04-06 ) - 1,00,000 Shares
Buy back - 50,000 Shares
Basic Earning - Rs. 40,00,000
Calculate Basic EPS.
Ans: W.N. Calculation of Weighted Avg. No of Shares
5,54,167
Basic EPS = 4,00,0000 X 7.22
5,54,167Amalgamation
If any company has issued new equity shares for business taken over then weighted avg of new issue should be calculated with reference to nature of amalgamation. The following points may be considerable.
(i) Amalgamation in the nature of Purchase: - If any business taken over is in the nature of purchase then new issue share should be taken as normal issue & to be taken in the weighted avg calculation with reference to date of issue.
(ii) Amalgamation in the nature of Merger: - If any business taken over is in the nature of merger then new issue of shares should not be included in the weighted avg with reference to date but it will be assumed that new issue of shares was made in the beginning of the year. The main reason of the specified provision is only taking over the reserve & surplus of Vendor Company by purchasing company. The following equation should be applied for the purpose of basic earning calculation of purchasing company.
Calculation of Basic Earning (Purchasing Co. )
Purchasing Company profit during the period xxxxx
Add: Profits of vendor Company of current year xxxxx
Basic Earning xxxxx |
Ex 4. Accounting year - Calendar year
Opening Bal. A Ltd (01-01-06 ) - 2,00,000 Shares
Basic Earning - Rs. 20,00,000
Opening Bal. B Ltd (01-01-06 ) - 1,00,000 Shares
Profits of B Ltd (01-06-06 ) - Rs. 4,00,000
On 01-07-2006 A Ltd has taken over business of B Ltd. Purchase consideration was satisfied by purchasing co. by issue 1 equity share of B Ltd.
Calculate Basic EPS in both the situations of merger & Purchase.
Sol: Purchase
W.N.1 Weighted Average Calculation
(01-01-06 to 30-06-06 ) 2,00,000 x 6/12 = 1,00,000/-
(01-07-06 to 31-12-06 ) 2,50,000 x 6/12 = 1,25,000/-
2,25,000/-
Basic EPS = 20,00,000 = 8.89/-
2,25,000
Merger
Basic EPS = 20,00,000 + 4,00,000 = 9.60/-
2,00,000 + 50,000
Ques 4
W.N.1 Calculation of No. of shares to be issued by A Ltd
Value of Business of B Ltd (200 x 30) = 6000 Lakh
Value per share of Purchasing Co. = 120/-
No of shares new issue = 50 Lakh
Purchase
Weighted Average Calculation
(01-04-01 to 01-10-01 ) 500 x 6/12 = 250/-
(01-10-01 to 31-03-02 ) 550 x 6/12 = 275/-
525/-
Basic EPS = 1,200 = 2.29/-
525
Merger
Basic EPS = 1200 + 350 = 2.82/-
500 + 50
Partly Paid up Shares
The following steps should be applying situation of partly paid up shares.
Step1: First of all, all the shares should be converted into equal basis.
Step2: After calculating equal shares equal EPS should be calculated but after calculation of weighted average no of shares with reference to period of investment.
Equal EPS = Basic Earning
Weighted Avg of Equal Shares
Step 3: After calculating equal EPS, reconversion according to paid up value of such EPS should be made.
Example: Accounting Year is calendar year.
Op. Bal (01-01-2006 ) = 10,000 shares @ 10 fully paid up
10,000 shares @ 10 but 8 paid up
Basic Earning = 1,80,0000
Calculate Basic EPS.
Sol.
W.N.1 Calculation of Equal Shares (All Shares = 10/-)
(a) 10000 x 10/10 = 10,000 Shares
(b) 10000 x 8/10 = 8,000 Shares
18,000 Shares
Basic EPS = 1,80,000 / 18,000 = Rs 10/-
Statement showing Reconversion
(a) Rs 10 paid up = 10 x 10 / 10 = Rs 10/-
(b) Rs 8 Paid up = 10 x 8/10 = Rs 8/-
Example: Accounting Year is calendar year.
Op. Bal (01-01-2006 ) = 10,000 shares @ 100 each
New Issue (01-07-2006 ) = 5,000 shares @ 100, 50 paid up
Basic Earning = 20,00,0000
Calculate Basic EPS.
Sol:
W.N.1 Calculation of Equal Shares (All Shares = 10/-)
(a) 10000 x 100 / 100 = 10,000 Shares
(b) 5000 x 50 / 100 = 2,500 Shares
12,500 Shares
W.N. 2 Weighted Average Calculation
(01-01-06 to 01-07-06 ) 10,000 x 6/12 = 5,000/-
(01-07-06 to 31-12-06 ) 12,500 x 6/12 = 6,250/-
11,250/-
Basic EPS = 20,00,000 / 11,250 = Rs 177.78/-
Statement showing Reconversion
(a) Rs 100 paid up = 177.78 x 100 / 100 = Rs 177.78/-
(b) Rs 50 Paid up = 177.78 x 50 / 100 = Rs 88.89/-
Different Nominal Values (Same Dividend Rights)
If any company is having different face value of different no of shares then calculation of EPS will be same as in case of different paid up values.
All the steps should be applied as it is which are specified under the heading of partly paid up shares.
Example: Accounting Year is calendar year.
Op. Bal (01-01-2006 ) = 10,000 shares @ 100 each
15,000 shares @ 80 each
20,000 shares @ 50 each
Basic Earning = 22,00,0000
Calculate basic EPS assuming that same dividend rights are specified for all the same.
Sol.
W.N.1 Calculation of Equal Shares (All shares 100/-)
(a) Rs. 100 = 10000 x 100 / 100 = 10,000 Shares
(b) Rs. 80 = 15000 x 80 / 100 = 12,000 Shares
(c) Rs 50 = 20000 x 50 / 100 = 10,000 Shares
32,000 Shares
Equal Basic EPS = 22,00,000 / 32,000 = 68.75/-
Statement showing Reconversion
(a) Rs 100 Paid up = 68.75 x 100 / 100 = Rs 68.75/-
(b) Rs 80 Paid up = 68.75 x 80 / 100 = Rs 55/-
(c) Rs 50 Paid up = 68.75 x 50 / 100 = Rs 34.37/-
Different Nominal value (Different Dividend Rights)
If any company is having different nominal values with different dividend rights then the following points may be considerable.
1) Calculation of weighted average no. of shares will be same as in above example.
2) In addition to weighted average, equal basic earning should also be calculated by deducting extra dividend out of total earning.
3) Equal EPS should be calculated on the basis of equal basic earning and thereafter reconversion of equal EPS should be made.
4) Extra dividend per share should be added additionally to the reconverted EPS for the purpose for class wise basic EPS.
Example Accounting Year is calendar year.
Op. Bal = 1,00,000 shares @ 10 each
2,00,000 shares @ 5 each
5,00,000 shares @ 1 each
Basic Earning = 50,00,0000
Calculate basic EPS on the assumption that 5% dividend is payable on 1 Lakh shares additionally in compare to normal rate.
Sol.
W.N.1 Calculation of Equal Shares (All shares 10/-)
(a) Rs. 10 = 100000 x 10 / 10 = 1,00,000 Shares
(b) Rs. 5 = 200000 x 5 / 10 = 1,00,000 Shares
(c) Rs. 1 = 500000 x 1 / 10 = 50,000 Shares
2,50,000 Shares
W.N.2 Basic Earning = 50,00,000
Less: Extra Dividend
(1,00,000 x 5%) = 50,000
49,50,000
Equal Basic EPS = 49,50,000 / 2,50,000 = 19.80/-
Statement showing Reconversion
(a) Rs 10 Paid up = 19.80 x 10 / 10 = Rs 19.80/-
(b) Rs 5 Paid up = 19.80 x 5 / 10 = Rs 9.90/-
(c) Rs 1 Paid up = 19.80 x 1 / 10 = Rs 1.98/-
Statement showing total Basic EPS
Normal EPS Extra Dividend per share Total EPS
a) 19.80 0.50 (50,000/1,00,000) 20.30/-
b) 9.90 - 9.90/-
c) 1.98 - 1.98/-
Ques 7
Calculation of Equal EPS
Rs. 10 = 2,00,00,000 x 10 / 25 = 80,00,000
Rs. 25 = 1,00,00,000 x 25 / 25 = 1,00,00,000
Rs. 5 = 6,00,00,000 x 5 / 25 = 1,20,00,000
3,00,00,000
Basic EPS = 15,00,00,000 / 3,00,00,000
Statement showing Reconversion
(a) Rs 10 Paid up = 5 x 10 / 25 = Rs 2/-
(b) Rs 25 Paid up = 5 x 25 / 25 = Rs 5/-
(c) Rs 5 Paid up = 5 x 5 / 25 = Rs 1/-
Ques 8
W.N.1 Calculation of Equal Shares
Class A = 2,00,00,000 x 10 / 25 = 80,00,000
Class B = 1,00,00,000 x 25 / 25 = 1,00,00,000
Class C = 6,00,00,000 x 5 / 25 = 1,20,00,000
3,00,00,000
Calculation of Equal Earning
Basic Earning = 15,00,00,000
Less: Extra Dividend
Class B (1,00,00,000 x 25 x 1%) = 25,00,000
Class C (6,00,00,000 x 5 x 2%) = 60,00,000
14,15,00,000
Equal Basic EPS = 14,15,00,000 / 3,00,00,000 = 4.72/-
Statement showing Reconversion
(a) Rs 10 Paid up = 4.72 x 10 / 25 = Rs 1.89/-
(b) Rs 25 Paid up = 4.72 x 25 / 25 = Rs 4.72/-
(c) Rs 5 Paid up = 4.72 x 5 / 25 = Rs 0.94/-
Statement showing total Basic EPS
Normal EPS Extra Dividend per share Total EPS
Class A 1.89 - 1.89/-
Class B 4.72 0.25 (25,00,000 /1,00,00,000) 4.97/-
Class C 0.94 0.10 (60,00,000 /6,00,00,000) 1.04/-
Ques 17
W.N.1 Calculation of Equal Shares (All shares 10/-)
(a) Rs. 5 = 1,00,000 x 5 / 10 = 50,000 Shares
(b) Rs. 2 = 1,00,000 x 2 / 10 = 20,000 Shares
(c) Rs. 3 = 1,00,000 x 3 / 10 = 30,000 Shares
W.N. 2 Weighted Average Calculation
(01-04-01 to 01-07-01 ) 5,00,000 x 3 / 12 = 1,25,000
(01-07-01 to 30-09-01 ) 5,50,000 x 3 / 12 = 1,37,500
(01-10-01 to 31-12-01 ) 5,70,000 x 3 / 12 = 1,42,500
(01-01-02 to 31-03-02 ) 6,00,000 x 3 / 12 = 1,50,000
Ques 18
Statement showing calculation of Equal Shares on the basis of Class ‘A’ Shares
Class A 1,00,000
Class B 30,000 x 3 / 2 45,000
Class C 30,000 x 5 / 2 75,000
Class D 40,000 x 3 / 1 1,20,000
3,40,000
Basic EPS equal = 8,00,000 / 3,40,000 = 2.35/-
Statement showing Reconversion
Class A = Rs 2.35/-
Class B 2.35 x 3 / 2 = Rs 3.53/-
Class C 2.35 x 5 / 2 = Rs 5.87/-
Class D 2.35 x 3 / 1 = Rs 7.05/-
Comment: As per AS – 20, Basic earning per share in the situation of Different nominal values should be calculated by calculation of Equal Shares, Equal EPS, Reconversion of EPS.
In the given situation the company has not followed the specified steps which are mentioned in the accounting standard because profits are distributed between the shares on the basis of assumed ratio on any basis in place of specified provisions.
On the basis of above explanation, it can be said that EPS calculation is totally incorrect as per the provisions.
Ques 5
Calculation of Equal Shares (All Rs. 10 base)
a) Capital of Rs 99,00,000 = 99,00,000 / 10 = 9,90,000 shares
b) Call in Arrears Rs 50,000 = = 50,000 shares
c) New shares (partly) = 75,00,000 / 10 = 7,50,000 shares
d) Call in Arrears Rs 50,000 = = 50,000 shares
Weighted Average Calculation
13,69,583
Calculation of Basic Earning
EBIT 2,62,00,000
Less: Interest -
EBT 2,62,00,000
Adjustment of Extra ordinary items (2,00,000)
Tax Provision (30,00,000)
EAT 2,30,00,000
Less: Preference Dividend
(20,00,000 x 10 % x 9 /12) 1,50,000
Dividend Distribution Tax (1,50,000 x 10%) 15,000
2,28,35,000
Basic EPS = 2,28,35,000 / 13,69,583 = 16.67/-
Note on Preference Dividend: Preference shares were issued by company on 1st July. So we have considered preference dividend only for 9 months.
Bonus Shares
If any company has given bonus shares to its shareholders out of accumulated profit, then no weighted average should be applied on these shares but it will be assumed that bonus shares were outstanding in the beginning of year as opening balance.
As per Company Act 1956, Bonus shares should be given out of accumulated profit first and only thereafter the current profit can be used. It means that opening amount of reserve and surplus can be assumed under the heading of share capital.
Example: Accounting year is current year
Profit (98-99) Rs 20,00,000/-
Op balance of shares 10,000 shares of Rs 100 each
Bonus Issue during the
the period (01-07-98 ) 1 : 1
Calculate Basic EPS for current year.
Sol:
Basic EPS = 20,00,000 (10,000 + 10,000)
Restatement of Basic EPS of previous year
As per AS – 20, if any company has made bonus issue during the period, then it is very necessary to adjust Basic EPS of previous year assuming that these bonus shares were also outstanding in the beginning of previous year.
The main reason of the specified provision is only to complete comparison of two years performance.
Ques 10
Basic EPS of 2001
Basic Earning Rs 60,00,000/-
No of shares (20,00,000 + 40,00,000) 60,00,000
Basic EPS = 60,00,000 = Rs 1.00 60,00,000
Restatement of EPS (2000)
Basic Earning Rs 18,00,000/-
No of shares (20,00,000 + 40,00,000) 60,00,000
Basic EPS = 18,00,000 = Rs 0.30 60,00,000
Ques 2
W.N.1 Weighted Average Calculation (Year 2000)
41,16,666
Notes on Share Warrants: No. of shares of share warrants should not be included in the calculation of weighted average because date of conversion of share warrants is not related to current year.
W.N.2 Calculation of Basic Earning
Net Income 1,14,00,000
Less: Interest (1,00,00,000 x 12% x 3 / 12) 3,00,000
Less: Pref. Dividend
a) 1,00,000 x 12 (p.a.) 12,00,000
b) 5,00,000 x 3 (per quarter completed) 15,00,000
Basic Earning 84,00,000
Basic EPS = 84,00,000 / 41,16,666 = 2.04
Notes:
1. Income tax rate is not specified in the question so we have ignored amount of income tax.
2. CDT on preference dividend is also not specified in the question so we have also ignored amount of CDT.
3. Payment of Preference Dividend is to be made on quarter basis. So we have calculated dividend of 1st quarter on 5,00,000 shares.
Right Shares
As per AS – 20, if any company has made right issue then following required steps should be applied.
Step1: First of all, Ex-theoretical right price should be calculated.
Ex price = No of share before X Mkt price per share + No of Right X Right Price
Right Issue before Right Issue Total no of Shares (Original + Right)
Step 2: After calculating Right Price, calculate Right Adjustment Factor (R.A. Factor)
R.A. Factor = Market Price before Right issue
Ex Right Price
Step 3: Value of R.A. factor should be applied on no of shares according to the period which were outstanding before right issue. Such working is specified by the AS only to exclude variation of investment amount of the shareholders in the company because investment was higher before right issue due to higher market price in compare to ex-theoretical price.
Ex: Accounting year is Calendar year.
Op Bal (01-01-06 ) = 100000 shares
Right Issue (01-07-06 ) = 50000 shares
Right price offered = Rs 50/-
Mkt price on the date of right issue = Rs 80/-
Calculate weighted average no of shares.
Ans:
W.N.1 Calculation of Ex Right price = 100000 x 80 + 50000 x 50 = Rs 70/-
100000 + 50000
W.N.2 Calculation of R.A. Factor = 80 / 70 = 1.14%
Statement showing Weighted Average
132000 Shares
Note: Application of R.A. Factor should be made only on no of shares which were outstanding before right issue because variation of investment can be analyzed only before right issue. After right issue all the shares should be classified of equal shares and no variation after right issue can be analyzed.
Ques 12
W.N.1 Calculation of Ex price = 500000 x 21 + 100000 x 15 = Rs 20/-
600000
W.N.2 Calculation of R.A. Factor = 21 / 20 = 1.05%
Statement showing Weighted Average
587500 Shares
Basic EPS = 15,00,000 / 587500 = Rs 2.55/-
Restatement of EPS under Right Issue
As per the provisions every company shall restate EPS of previous year in the situation of right issue because it is assumed by the statement market price before right issue was also same in the previous year.
By such assumption variation in investment shall also arise in the previous year. So no of shares should be adjusted by RA factor to exclude variations in investment.
Basic EPS in 2000 (Original) = 11,00,000 / 500000
Rs 2.20/-
Basic EPS (re-stated) = 11,00,000 / (500000 x 1.05)
Rs 2.09/-
Diluted Earning Per Share
Meaning of EPS
Diluted EPS is calculated only for potential equity shares. As per AS, Potential Equity Shares are those shares which are not existing equity shares but expected equity shares on balance sheet date.
These expected shares should be analyzed out of convertible items such as convertible debentures, preference shares, ESOP or any other similar item of convertible nature.
The following equation should be applied for the calculation of diluted EPS:-
Diluted EPS = Adjusted Basic Earning / Adjusted no of shares
Calculation of Adjusted no of shares
Weighted Average (used in Basic EPS) xxxx
Add: Increase in shares due to converted debentures xxxx
Add: Increase in shares due to converted Pref. shares xxxx
Add: Increase in shares due to ESOP xxxx
Adjusted No of Shares XXX
Calculation of Basic Earning (Adjusted)
Basic Earning (used in Basic EPS) xxxx
Add: Saving in Interest (Net of Tax) xxxx
Add: Saving in Pref. Dividend & Corporate Dividend Tax xxxx
Adjusted Basic Earning XXX
Note: Diluted EPS is calculated only to analyze maximum reduction in Basic EPS on the assumption of conversion of all potential shares.
If any calculated amount is higher than the Basic EPS, such amount should be recognized as Anti-Diluted EPS. (As per the provisions of AS 20, disclosure of Anti Diluted EPS is not required)
Ex Basic Earning Rs 2,00,000
No of Shares 20000 Shares
Basic EPS Rs 10/-
10% Convertible Debentures (Rs 100 each) Rs 10,00,000
Conversion Ratio 1 debenture into 5 equity shares
Tax rate 30%
Calculate Diluted EPS.
Sol.
Adjusted Earning Adjusted Shares
Basic Earning 2,00,000 Weighted Average 20000
Add: Interest Add: Increase
(10 Lakh x 10%) 1,00,000 (10000 x 5) 50000
Less: Tax on Int saving (30,000) 
2,70,000 70000 Diluted EPS = 2,70,000 / 70000
= Rs 3.86/-
Ex. Basic Earning Rs 5,00,000
Weighted Average 50000 Shares
Basic EPS Rs 10/-
20% Pref. Shares of Rs 100 each(Convertible) Rs 20,00,000
Conversion Ratio 1 Pref Share into 2 Equity Shares
CDT Rate 10%
Sol.
Adjusted Earning Adjusted Shares
Basic Earning 5,00,000 Weighted Average 50000
Add: Saving in Add: Increase
Pref Dividend 4,00,000 (20000 x 2) 40000
Add: Saving in CDT 40,000 9,40,000 90000 Diluted EPS = 9,40,000 / 90000 = Rs 10.44/-
Comment: In the given example calculated EPS can’t be defined as Diluted EPS because such EPS is higher than basic EPS. Disclosure of such EPS should not be made.
Multiple Potential Shares
It may be possible that company is having multiple potential shares which are outstanding on balance sheet date. In such case the following steps should be applied.
Step1: First of all incremental EPS should be calculated for every type of potential shares.
Step2: After calculating incremental EPS, ranks should be provided to every EPS on lower to higher basis.
Step3: Adjustment in earning and shares should be made rank wise and diluted EPS should be calculated on every step of adjustment.
Ex. Basic EPS Rs 4/-
Basic Earning Rs 4,00,000
No of shares 1,00,000 shares
a) 10% Convertible Debentures of Rs 100 each = Rs 10,00,000
b) 15% Convertible Pref Shares of Rs 100 each = Rs 15,00,000
Calculate Diluted EPS assuming 1 Pref share and 1 Debenture are convertible into 2 Equity shares.
Sol.
W.N.1 Calculation of Incremental EPS
a) Debenture = 1,00,000 / 20000 = Rs 5/-
b) Pref Share = 2,25,000 / 30000 = Rs 7.5/-
Statement showing Diluted EPS
Particulars Adjusted Basic Earning Adjusted Shares Diluted EPS
Basic Earning
& Shares 4,00,000 100000 4
Add: Debenture 1,00,000 20000
5,00,000 120000 4.16
Comment: As per AS disclosure of Anti Diluted EPS is not required so complete calculation of anti diluted EPS should not be made.
Employee Stock Option Plan (ESOP)
If any company is having ESOP which are outstanding on Balance Sheet date then following steps should be applied for the purpose of diluted EPS calculation.
Step1: First of all % of discount should be calculated by the difference of offered price and market price on balance sheet.
% of Discount = (Market Price – Offered Price) / Market Price x 100
Step2: % of discount should be applied on total no of shares covered by ESOP for the purpose of free shares.
Free Shares = ESOP x % of Discount
Step3: Due to free shares there will be no increase in the earning but no of shares will only be increased. It means that incremental EPS for these shares will always be zero.
Incremental EPS = Saving due to free shares / Free Shares
Note: Incremental EPS for the ESOP will be always be zero due to which these shares will always be 100% Diluted.
Ques 20
W.N.1 % of Discount = (20-15) / 20 = 25%
W.N.2 Free Shares = 100000 x 25% = 25000 shares
Calculation of Shares
Earning Shares EPS
Basic 12,00,000 500000 2.40
Add: ESOP 0 25000 0 12,00,000 525000 2.29
Ques 21
W.N.1 Calculation of Incremental EPS
(a) Pref Share = 64,00,000 / 16,00,000 = Rs 4/- Rank I
(b) Debentures = 12,00,000 / 4,00,000 x 70% = Rs 2.10 Rank II
(c) ESOP = 0 / 20000 = Rs 0 Rank III
Calculation of Diluted EPS
Particulars Earning Share EPS
Basic 1,00,00,000 20,00,000 Rs 5.00
ESOP 0 20,000
1,00,00,000 20,20,000 Rs 4.95
Debentures 8,40,000 4,00,000 1,08,40,000 24,20,000 Rs 4.48
Pref. Shares 64,00,000 16,00,000
1,72,40,000 40,20,000 Rs 4.29
Comment: Maximum reduction in basic EPS is calculated after adjustment of Pref shares. Diluted EPS of Rs 4.29 should be disclosed because provisions of AS – 20 requires maximum reduction in basic EPS.
Ques 28
W.N.1 Ex-price = (10,00,000 x 25 + 2,50,000 x 20) / 12,50,000
= Rs 24
W.N.2 R.A. Factor = 25 / 24 = 1.04
W.N.3 Weighted Average calculation
11,97,500
Basic EPS (2003) = 30,00,000 / 11,97,500 = Rs 2.51
Basic EPS (2002 Restated) = 20,00,000 / (10,00,000 x 1.040 = Rs 1.92
Ques 27
As per the provisions of AS – 20, if any company has issued bonus shares during the period then no weighted average with reference to date of issue is recognized because it is the assumption of AS that these shares are always issued out of old profits.
In addition to above provisions, basic EPS of previous years should also be restated by assuming that these bonus shares were also outstanding in the previous year.
In given situation, company has calculated accurate basic EPS of current year but basic EPS of previous year is not adjusted by the company as per the specified.
On the basis of above explanation basic EPS for the year ending 31-03-2003 should be adjusted by bonus issue. After such adjustment it will be Rs 4.25 per share (Rs 8.50 crore / 2 crore Shares).
Ques 28
In the given situation is having negative profit. As per the provisions of AS – 20, basic EPS and diluted EPS should be calculated equal prominence irrespective of level of earning so calculation of diluted EPS should be made as follows:
W.N.1 Calculation of Free Shares
Free Shares = (100-60) x 400 shares / 100 = 160 Shares
Earning Shares EPS
Basic EPS (12,00,000) 2000 (600)
ESOP 0 160
(12,00,000 2160 (555.56) [Anti Diluted]
Comment: In the above statement basic EPS as well as diluted EPS are calculated by the available information. Diluted EPS should not be disclosed in the financial statements because it is Anti diluted. The calculated amount is the reduction in loss not in profits.
Ques 25
As per the provisions of AS – 20, Diluted EPS is calculated for all potential equity shares outstanding on the date of Balance sheet. Period of conversion of the potential equity shares is totally immaterial.
In the given situation, the company has ignored the total option but considered only vested options. Treatment of the company is not accurate as per the provisions.
On the basis of above discussion the company should include total options in the calculation of diluted EPS.
Ques 23
W.N.1 Calculation of Incremental EPS
Saving Shares EPS
Pref. Share 950 600 1.58 III
Debentures 1845 2000 0.92 II
ESOP 0 25 0 I
Calculation of Diluted EPS
Earning Share EPS
Basic 1500 1000 1.5
ESOP 0 25 1500 1025 1.46
Debenture 1845 2000 3345 3025 1.11
Pref. 950 600 4295 3625 1.18 Anti Diluted
Ques 15
As per the provisions of AS – 20, Basic EPS should be calculated with reference to basic earning and weighted average no of shares.
Further basic earning should not be effected by transfer to reserve because requirement of AS is related to disclosure of earning not the available distribution of amount.
In the given situation the company has transferred appropriate amount to sinking fund which is a mandatory reserve as per section 117C of Companies Act 1956. Such matter is not relevant for the purpose of basic EPS because such transfer is also to be included as a part of shareholders fund after redemption of debentures.
On the basis of above explanation, transfer to sinking fund should not be deducted out of basic earning for the purpose of basic EPS.
Applicability of AS - 20
If any company is required to present information in part IV of Schedule VI then calculation of EPS will be mandatory and all the provisions of AS should be applied even if the company is not covered under the heading of Level 1 Enterprise.
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