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Statements of Accounting Standards
(AS 20)
Earnings Per Share
(In this Accounting Standard,
the standard portions have been set in bold italic
type. These should be read in the context of the background material
which has been set in normal type, and in the context of the ‘Preface
to the Statements of Accounting Standards'.)
Accounting Standard (AS)
20, ‘Earnings Per Share’, issued by the Council of the Institute
of Chartered Accountants of India, comes into effect in respect
of accounting periods commencing on or after 1-4-2001 and is mandatory
in nature, from that date, in respect of enterprises whose equity
shares or potential equity shares are listed on a recognised stock
exchange in India. An enterprise which has neither equity shares
nor potential equity shares which are so listed but which discloses
earnings per share, should calculate and disclose earnings per
share in accordance with this Standard from the aforesaid date.
The following is the text of the Accounting Standard.
Objective
The objective of this Statement is
to prescribe principles for the determination and presentation
of earnings per share which will improve comparison of performance
among different enterprises for the same period and among different
accounting periods for the same enterprise. The focus of this
Statement is on the denominator of the earnings per share calculation.
Even though earnings per share data has limitations because of
different accounting policies used for determining `earnings',
a consistently determined denominator enhances the quality of
financial reporting.
Scope
1. This Statement should
be applied by enterprises whose equity shares or potential equity
shares are listed on a recognised stock exchange in India. An
enterprise which has neither equity shares nor potential equity
shares which are so listed but which discloses earnings per share
should calculate and disclose earnings per share in accordance
with this Statement.
2. In consolidated financial
statements, the information required by this Statement should
be presented on the basis of consolidated information.
3. This Statement applies to enterprises
whose equity or potential equity shares are listed on a recognised
stock exchange in India. An enterprise which has neither equity
shares nor potential equity shares which are so listed is not
required to disclose earnings per share. However, comparability
in financial reporting among enterprises is enhanced if such an
enterprise that is required to disclose by any statute or chooses
to disclose earnings per share calculates earnings per share in
accordance with the principles laid down in this Statement. In
the case of a parent (holding enterprise), users of financial
statements are usually concerned with, and need to be informed
about, the results of operations of both the enterprise itself
as well as of the group as a whole. Accordingly, in the case of
such enterprises, this Statement requires the presentation of
earnings per share information on the basis of consolidated financial
statements as well as individual financial statements of the parent.
In consolidated financial statements, such information is presented
on the basis of consolidated information.
Definitions
4. For the purpose of
this Statement, the following terms are used with the meanings
specified:
An equity share is a share other than a preference share.
A preference share is a share carrying preferential rights
to dividends and repayment of capital.
A financial instrument is any contract that gives rise
to both a financial asset of one enterprise and a financial liability
or equity shares of another enterprise.
A potential equity share is a financial instrument or other
contract that entitles, or may entitle, its holder to equity shares.
Share warrants or options are financial instruments
that give the holder the right to acquire equity shares.
Fair value is the amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties
in an arm's length transaction.
5. Equity shares participate in the
net profit for the period only after preference shares. An enterprise
may have more than one class of equity shares. Equity shares of
the same class have the same rights to receive dividends.
6. A financial instrument is any contract
that gives rise to both a financial asset of one enterprise and
a financial liability or equity shares of another enterprise.
For this purpose, a financial asset is any asset that is
- cash;
- a contractual right to receive cash or another
financial asset from another enterprise;
- a contractual right to exchange financial instruments
with another enterprise under conditions that are potentially
favourable; or
- an equity share of another enterprise.
A financial liability is any liability that
is a contractual obligation to deliver cash or another financial
asset to another enterprise or to exchange financial instruments
with another enterprise under conditions that are potentially unfavourable.
7. Examples of potential equity shares
are:
- debt instruments or preference shares,
that are convertible into equity shares;
- share warrants;
- options including employee stock option plans
under which employees of an enterprise are entitled to receive
equity shares as part of their remuneration and other similar
plans; and
- 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 Statement 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:
- the amount of any preference dividends on non-cumulative
preference shares provided for in respect of the period; and
- the full amount of the required preference dividends
for cumulative preference shares for the period, whether or
not the dividends have been provided for. The amount of preference
dividends for the period does not include the amount of any
preference dividends for cumulative preference shares paid or
declared during the current period in respect of previous periods.
14. If an enterprise has more than
one class of equity shares, net profit or loss for the period
is apportioned over the different classes of shares in accordance
with their dividend rights.
Per Share - Basic
15. For the purpose of
calculating basic earnings per share, the number of equity shares
should be the weighted average number of equity shares outstanding
during the period.
16. The weighted average number of
equity shares outstanding during the period reflects the fact
that the amount of shareholders' capital may have varied during
the period as a result of a larger or lesser number of shares
outstanding at any time. It is the number of equity shares outstanding
at the beginning of the period, adjusted by the number of equity
shares bought back or issued during the period multiplied by the
time-weighting factor. The time-weighting factor is the number
of days for which the specific shares are outstanding as a proportion
of the total number of days in the period; a reasonable approximation
of the weighted average is adequate in many circumstances.
Appendix I illustrates the computation
of weighted average number of shares.
17. In most cases, shares are included
in the weighted average number of shares from the date the consideration
is receivable , for example:
- equity shares issued in exchange for cash are
included when cash is receivable;
- equity shares issued as a result of the conversion
of a debt instrument to equity shares are included as of the
date of conversion;
- equity shares issued in lieu of interest or
principal on other financial instruments are included as of
the date interest ceases to accrue;
- equity shares issued in exchange for the settlement
of a liability of the enterprise are included as of the date
the settlement becomes effective;
- equity shares issued as consideration for the
acquisition of an asset other than cash are included as of the
date on which the acquisition is recognised; and
- 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 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.
Appendix II 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 are 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:
- a bonus issue;
- a bonus element in any other issue, for example
a bonus element in a rights issue to existing shareholders;
- a share split; and
- 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.
Appendix III 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.
Appendix IV 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:
- the net profit for the period attributable
to equity shares is:
- increased by the amount of dividends recognised
in the period in respect of the dilutive potential equity
shares as adjusted for any attributable change in tax expense
for the period;<>
- increased by the amount of interest recognised
in the period in respect of the dilutive potential equity
shares as adjusted for any attributable change in tax expense
for the period; and
- adjusted for the after-tax amount of any
other changes in expenses or income that would result from
the conversion of the dilutive potential equity shares.
- the weighted average number of equity shares
outstanding during the period is increased by the weighted average
number of additional equity shares which would have been outstanding
assuming the conversion of all dilutive potential equity shares.
28. For the purpose of this Statement,
share application money pending allotment or any advance share
application money as at the balance sheet, which is not statutorily
required to be kept separately and is being utilised in the business
of the enterprise, is treated in the same manner as dilutive potential
equity shares for the purpose of calculation of diluted earnings
per share.
Earnings - Diluted
29. For the purpose of calculating
diluted earnings per share, the amount of net profit or loss for
the period attributable to equity shareholders, as calculated
in accordance with paragraph 11, should be adjusted by the following,
after taking into account any attributable change in tax expense
for the period:
- any dividends on dilutive potential equity
shares which have been deducted in arriving at the net profit
attributable to equity shareholders as calculated in accordance
with paragraph 11;
- interest recognised in the period for the
dilutive potential equity shares; and
- 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.
Appendix V 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:
- a contract to issue a certain number of equity
shares at their average fair value during the period. The shares
to be so issued are fairly priced and are assumed to be neither
dilutive nor anti-dilutive. They are ignored in the computation
of diluted earnings per share; and
- 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.
Appendix VI 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.
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.
Appendix VII 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:
- the issue of shares for cash;
- the issue of shares when the proceeds are used
to repay debt or preference shares outstanding at the balance
sheet date;
- the cancellation of equity shares outstanding
at the balance sheet date;
- the conversion or exercise of potential equity
shares, outstanding at the balance sheet date, into equity shares;
- the issue of warrants, options or convertible
securities; and
- the satisfaction of conditions that would result
in the issue of contingently issuable shares.
47. Earnings per share amounts are
not adjusted for such transactions occurring after the balance
sheet date because such transactions do not affect the amount
of capital used to produce the net profit or loss for the period.
Disclosure
48. In addition to disclosures as
required by paragraphs 8, 9 and 44 of this Statement, an enterprise
should disclose the following:
- the amounts used as the numerators in calculating
basic and diluted earnings per share, and a reconciliation of
those amounts to the net profit or loss for the period;
- the weighted average number of equity shares
used as the denominator in calculating basic and diluted earnings
per share, and a reconciliation of these denominators to each
other; and
- 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 Statement.
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 Statement. 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 Statement 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, e.g., profit from ordinary activities. Such disclosures
are encouraged. However, when such amounts are disclosed, the
denominators need to be calculated in accordance with this Statement
in order to ensure the comparability of the per share amounts
disclosed.
Appendices
Note: These appendices are illustrative
only and do not form part of the Accounting Standard. The purpose
of the appendices is to illustrate the application of the Accounting
Standard.
Appendix 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< |
| 1st January, 20X1 |
Balance at beginning
of year |
1,800 |
- |
1,800 |
| 31st May, 20X1 |
Issue of shares
for cash |
600 |
- |
2,400 |
| 1st Nov., 20X1 |
Buy Back of shares
|
- |
300 |
2,100 |
| 31st 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
|
Appendix II
Example - Partly paid shares
(Accounting year 01-01-20X1 to 31-12-20X1)
| |
|
No. of
shares issued |
Nominal
value of shares |
Amount
paid |
| 1st January, 20X1 |
Balance at beginning
of year |
1800 |
Rs. 10 |
Rs. 10 |
| 31st October, 20X1 |
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:
(1800x12/12) + (300x2/12) = 1850 shares.
|
Appendix 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 30th September 20X1 |
20,00,000 |
| Bonus issue 1st
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 = Re. 1.00
( 20,00,000 + 40,00,000 ) |
| Adjusted earnings
per share for the year 20X0 |
Rs. 18,00,000 = Re. 0.30
(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 20X0, the earliest period reported. |
Appendix IV
Example - Rights Issue
(Accounting year 01-01-20XX to 31-12-20XX)
| Net profit |
Year
20X0 : Rs. 11,00,000
Year 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: 1st March 20X1
|
| Fair value of one
equity share immediately prior to exercise of rights on
1st 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 |
| Theoretical
ex-rights fair value per share = Rs. 20.00 |
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 |
Appendix 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 |
Appendix 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 |
Shares |
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)} |
Appendix 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 number 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.8x8,00,000)+10%(8x8,00,000)] |
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.
|
