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ACCOUNTING STANDARD - 20 EARNINGS PER SHARE J.P., KAPUR & UBERAI
EARNINGS PER SHARE – A PERFORMANCE INDICATOR <ul><li>A Measurement Standard </li></ul><ul><li>Numerator : ‘Earnings’ </li>...
WHAT IS TO BE MEASURED ? <ul><li>Basic EPS. </li></ul><ul><li>Diluted EPS </li></ul><ul><li>Concept of Dilution </li></ul>...
OBJECTIVE OF STANDARD <ul><li>Comparability enhancement </li></ul><ul><li>Different enterprises, same period </li></ul><ul...
SCOPE AND APPLICATION <ul><li>Enterprises with Equity Shares / Potential Equity Shares, listed </li></ul><ul><li>Other ent...
PRESENTATION <ul><li>Basic and Diluted EPS to be shown on P/L with equal prominence for all periods presented </li></ul><u...
MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Basic  - Per Share </li></ul><ul><li>Equity Shares o/s duri...
MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>When to include in weighted average </li></ul><ul><li>Share...
ILLUSTRATION OF COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES J.P., KAPUR & UBERAI ( Accounting year 01-01-20XI to 31-1...
MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Shares issued in Amalgamation </li></ul><ul><li>In the natu...
MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Equity Shares - Different nominal value </li></ul><ul><li>-...
RIGHTS ISSUE (Accounting year 01-01-20X1 to 31-12-20X1) <ul><li>Net profit Year 20 x 0 : Rs. 11,00,000 </li></ul><ul><li>Y...
RIGHTS ISSUE (CONTD.) <ul><li>Computation of adjustment factor </li></ul><ul><li>=  Fair value per share prior to exercise...
MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Earnings – Basic </li></ul><ul><li>Preference Dividends </l...
COMPUTATION OF DILUTED EARNINGS (Accounting year 01-01-20XX to 31-12-20XX) <ul><li>Net profit for the current year Rs. 1,0...
MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Diluted – Per Share </li></ul><ul><li>What shares to be inc...
MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Fair value vs Option Value </li></ul><ul><li>Determination ...
MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Potential Equity Shares </li></ul><ul><li>Anti- Dilutive Wh...
DISCLOSURE <ul><li>Numerator reconciliation to P/L </li></ul><ul><li>Basic – diluted – Wt. Average </li></ul><ul><li>Denom...
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As 20

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Accounting Standard-20

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  1. 1. ACCOUNTING STANDARD - 20 EARNINGS PER SHARE J.P., KAPUR & UBERAI
  2. 2. EARNINGS PER SHARE – A PERFORMANCE INDICATOR <ul><li>A Measurement Standard </li></ul><ul><li>Numerator : ‘Earnings’ </li></ul><ul><li>Denominator : ‘Shares’ </li></ul><ul><li>Predominantly Denominator Focused </li></ul>J.P., KAPUR & UBERAI
  3. 3. WHAT IS TO BE MEASURED ? <ul><li>Basic EPS. </li></ul><ul><li>Diluted EPS </li></ul><ul><li>Concept of Dilution </li></ul><ul><li>Anti-dilutive potential shares </li></ul>J.P., KAPUR & UBERAI
  4. 4. OBJECTIVE OF STANDARD <ul><li>Comparability enhancement </li></ul><ul><li>Different enterprises, same period </li></ul><ul><li>Different periods, same enterprise </li></ul>J.P., KAPUR & UBERAI
  5. 5. SCOPE AND APPLICATION <ul><li>Enterprises with Equity Shares / Potential Equity Shares, listed </li></ul><ul><li>Other enterprises which disclose EPS </li></ul><ul><li>Financial Periods Commencing on/after 01.04.2001 </li></ul><ul><li>In CFS, EPS on the basis of consolidation information </li></ul>J.P., KAPUR & UBERAI
  6. 6. PRESENTATION <ul><li>Basic and Diluted EPS to be shown on P/L with equal prominence for all periods presented </li></ul><ul><li>Basic and Diluted EPS to be shown even for negative amounts. </li></ul>J.P., KAPUR & UBERAI
  7. 7. MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Basic - Per Share </li></ul><ul><li>Equity Shares o/s during the period vary </li></ul><ul><li>Determine weighted average of equity shares o/s </li></ul><ul><li>Adjust for buy-backs/issues </li></ul><ul><li>Multiply by time weighting factor (No. of days outstanding as a proportion of total days) </li></ul>
  8. 8. MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>When to include in weighted average </li></ul><ul><li>Shares generally included when considerations receivable. </li></ul><ul><ul><li>For equity issued for Cash… When cash is receivable </li></ul></ul><ul><ul><li>On conversion of debt…On date of Conversion </li></ul></ul><ul><ul><li>In settlement of liability…Effective date of settlement </li></ul></ul><ul><ul><li>For acquisition of assets…When acquisition is recognised </li></ul></ul><ul><ul><li>For rendering Services… When services are rendered </li></ul></ul><ul><ul><li>For interest/principal on Financial Instruments… When interest ceases to accrue </li></ul></ul>
  9. 9. ILLUSTRATION OF COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES J.P., KAPUR & UBERAI ( Accounting year 01-01-20XI to 31-12-20XI) Computation of weighted average: (1800 X 5/12) + ( 2400 X 5/12) + (2100 X 2/12) = 2100 shares
  10. 10. MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Shares issued in Amalgamation </li></ul><ul><li>In the nature of purchase </li></ul><ul><li>Iin the nature of a merger </li></ul><ul><li>Partly paid Equity Share </li></ul><ul><li>Included in weighted average: </li></ul><ul><li>As on date of acquisition </li></ul><ul><li>From the beginning of the reported period </li></ul><ul><li>Treated as a fraction of the Equity Share </li></ul>
  11. 11. MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Equity Shares - Different nominal value </li></ul><ul><li>- Same dividend rights </li></ul><ul><li>Contingently issuable shares </li></ul><ul><li>Bonus issues etc. (where resources are not changed) </li></ul><ul><li>Bonus element in right issue </li></ul><ul><li>Conversion of equivalent number of shares of same nominal value </li></ul><ul><li>Included in Basic EPS when all contractual conditions fulfilled </li></ul><ul><li>Adjust weighted average to earliest period reported, as if the event had occurred at the beginning of the earliest reported period. </li></ul><ul><li>Illustration </li></ul>
  12. 12. RIGHTS ISSUE (Accounting year 01-01-20X1 to 31-12-20X1) <ul><li>Net profit Year 20 x 0 : Rs. 11,00,000 </li></ul><ul><li>Year 20 x 1 : Rs. 15,00,000 </li></ul><ul><li>No. of shares outstanding prior to rights issue: 5,00,000 </li></ul><ul><li>Rights issue One new share for each five outstanding (i.e. 1,00,000 new shares) Rights issue price: Rs. 15.00 </li></ul><ul><li> Last date to exercise rights : 1 st March 20 X 1 </li></ul><ul><li>Fair value of one equity share immediately prior to exercise of rights on 1 st March 20 X 1 : Rs. 21.00 </li></ul><ul><li>Computation of theoretical ex-rights fair value per share </li></ul><ul><li>Fair value of all outstanding shares immediately prior to exercise of rights + total amount received from exercise </li></ul><ul><li>Number of shares outstanding prior to exercise + number of shares issued in the exercise. </li></ul><ul><li>= (Rs. 21.00 x 5,00,000 shares) + (Rs. 15.00 x 1,00,000 shares ) </li></ul><ul><li> 5,00,000 shares + 1,00,000 shares </li></ul><ul><li>Theoretical ex-rights fair value per share = Rs. 20.00 </li></ul>J.P., KAPUR & UBERAI
  13. 13. RIGHTS ISSUE (CONTD.) <ul><li>Computation of adjustment factor </li></ul><ul><li>= Fair value per share prior to exercise of rights = Rs. 21.00 = 1.05 </li></ul><ul><li> Theoretical ex-rights value per share Rs. 20.00 </li></ul><ul><li>Computation of earnings per share </li></ul><ul><li> Year 20 X 0 Year 20 x 1 </li></ul><ul><li>EPS for the year 20 x 0 as originally reported : Rs. 2.20 </li></ul><ul><li>[Rs. 11,00,000 / 5,00,000 shares] </li></ul><ul><li>EPS for the year 20 x 0 restated for rights Rs. 2.10 </li></ul><ul><li>[Issue : Rs. 11,00,000 / (5,00,000 shares x 1.05)] </li></ul><ul><li>EPS for the year 20 x 1 including effects of rights issue Rs. 2.55 </li></ul><ul><li>Rs. 15,00,000 </li></ul><ul><li>(5,00,000 x 1.05 x 2/12) + (6,00,000 x 10/12) </li></ul>J.P., KAPUR & UBERAI
  14. 14. MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Earnings – Basic </li></ul><ul><li>Preference Dividends </li></ul><ul><li>Earnings – Diluted </li></ul><ul><li>Effect of dilution </li></ul><ul><ul><li>Deduct from earnings (Add to loss) </li></ul></ul><ul><ul><li>Non cumulative P. Shares dividend provided </li></ul></ul><ul><ul><li>Cumulative P. Shares … full dividend for the current period </li></ul></ul><ul><ul><li>Adjusted Earnings </li></ul></ul>
  15. 15. COMPUTATION OF DILUTED EARNINGS (Accounting year 01-01-20XX to 31-12-20XX) <ul><li>Net profit for the current year Rs. 1,00,00,000 </li></ul><ul><li>No. of equity shares outstanding 50,00,000 </li></ul><ul><li>Basic earnings per share Rs. 2.00 </li></ul><ul><li>No. of 12% convertible debentures of Rs. 100 each 1,00,000 </li></ul><ul><li>Each debenture is convertible into 10 equity shares </li></ul><ul><li>Interest expense for the current year Rs. 12,00,000 </li></ul><ul><li>Tax relating to interest expense (30%) Rs. 3,60,000 </li></ul><ul><li>Adjusted net profit for the current year (Rs. 1,00,00,000 + 12,00,000 – 3,60,000) = Rs. 1,08,40,000 </li></ul><ul><li>No. of equity shares resulting from conversion 10,00,000 </li></ul><ul><li>of debentures </li></ul><ul><li>No. of equity shares used to compute 50,00,000 + 10,00,000 = 60,00,000 </li></ul><ul><li>diluted earnings per share </li></ul><ul><li>Diluted earnings per share 1,08,40,000 / 60,00,000 = Re. 1.81 </li></ul>J.P., KAPUR & UBERAI
  16. 16. MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Diluted – Per Share </li></ul><ul><li>What shares to be included? </li></ul><ul><li>Convert at what rate? </li></ul><ul><li>What about contingently issued potential shares? </li></ul><ul><ul><li>Wt. Average Equity Shares as per basic, plus </li></ul></ul><ul><ul><li>Conversion of all dilutive potential equity shares </li></ul></ul><ul><ul><li>most advantageous rate/exercise price to the holder </li></ul></ul><ul><ul><li>if contract fulfilled, already under basic </li></ul></ul><ul><ul><li>if contract not fulfilled then dilutive. </li></ul></ul>
  17. 17. MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Fair value vs Option Value </li></ul><ul><li>Determination of Fair Value </li></ul><ul><ul><li>Shares issued for no consideration </li></ul></ul><ul><ul><li>Simple average, last 6 months weekly closing prices, generally </li></ul></ul>
  18. 18. MEASUREMENT J.P., KAPUR & UBERAI Matters How Addressed <ul><li>Potential Equity Shares </li></ul><ul><li>Anti- Dilutive When? </li></ul><ul><li>Process of Determination of Dilutive / Anti-Dilutive </li></ul><ul><ul><li>If conversion increases earnings / decreases loss </li></ul></ul><ul><ul><li>Consider each series separately </li></ul></ul><ul><ul><li>Sequence such consideration in descending order of dilution </li></ul></ul>
  19. 19. DISCLOSURE <ul><li>Numerator reconciliation to P/L </li></ul><ul><li>Basic – diluted – Wt. Average </li></ul><ul><li>Denominator reconciliation </li></ul><ul><li>Nominal Value of Shares along with EPS figures </li></ul><ul><li>For any other component of net profit reporting </li></ul><ul><li>Denominator must be the same </li></ul><ul><li>Numerator must be / reconciled to line item (P/L) </li></ul><ul><li>Basic and Diluted EPS must be disclosed with equal prominence </li></ul>J.P., KAPUR & UBERAI
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