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Accounting Standard-20

Accounting Standard-20

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    As 20 As 20 Presentation Transcript

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