Earnings Per Share

Determination
Earnings Per Share
Determination

Basic Earnings Per Share

Diluted Earnings Per Share
Earnings Per Share
are publicly
traded and by enterprises that are in the
process of issuing ordinary share or
potential ordinary shares in public
securities market or any enterprise which
discloses earnings per share.

PAS 33 prescribes the principles for the
determination and presentation of EPS for
enterprises whose ordinary shares or
potential ordinary share
Earnings Per Share
(Presentation)
Face of the
Income statement

Continuing
Operation
Discontinued
Operation
Either on the Face
of the income
Statement or notes
to FS
EPS (Presentation)

Notes to FS

Consolidated FS
Face of the
Separate Income
Statement
Separate FS
Uses of Earnings Per Share
Determinant of Market
Price
Measure of Performance
Basis of Dividend Policy
Basic Earnings Per Share
The Basic Equation:
Net Income(Loss) attributable to OS
Weighted-Average
Common Shares Outstanding
The Complications:
Issuance or reacquisition of
common stock
Stock dividends or stock splits
Guidelines to be observed in
applying the formula

For the purpose of calculating basic
earnings per share, the net income or
loss for the period attributable to
ordinary shareholders should be the
net income or loss for the period after
deducting preferred dividends.
Guidelines to be observed in
applying the formula
The amount of preferred dividends
that is deducted from the net income
for the period
Noncumulative preference share
Cumulative preference share
Basic Earnings Per
Share(Illustration 1)
Preference share capital, P100 par, 10%
cumulative P1,000,000
Ordinary Share capital, P100 par, 50000
shares P5,000,000

Income From Continuing Operation P1,500,000
Income From Discontinued Operation P500,000

Compute for BEPS.

Computation of BEPS
Income From Continuing Operation P1,500,000
Preference dividends for current year P 100,000
Income to ordinary share P1,400,000

BEPS
Income From Continuing Operation P28
Income from Discontinued Operation P10
Net income P38
Illustration 2 Compute for BEPS
Preference share capital, P50 par, 40000
shares outstanding,10% cumulative and
fully participating* P2,000,000

Ordinary Share capital, P100 par, 80000
shares outstanding** P8,000,000
Net Income for the year P3,000,000

**Dividend declared to ordinary P20/share
*pro rata basis
Computation
Basic dividend Preference Ordinary
Pref(2Mx10%)
Ordinary
Balance
Total dividends
BEPS:

200,000
1,600,000
240,000 960,000
440,000 2,560,000
Pref Share (440,000/40000)
11.00
Ord. Share
(2.56M/80000)
32.00
Guidelines to be observed in
applying the formula
The number of ordinary share should
be the weighted number of ordinary
shares outstanding during the period
Basic Earnings Per Share
Shares Outstanding January 1: 10,000
New Shares Issued May 1: 5,000
Shares Repurchased November 1: 2,000
Weighted-Average Number of Shares
Jan. 1 to May 1 10,000 x 4/12 = 3,333
May 1 to Nov. 1 15,000 x 6/12 = 7,500
Nov. 1 to Dec. 31 13,000 x 2/12 = 2,167
Dec. 31 Weighted-average shares 13,000
Guidelines to be observed in
applying the formula
The weighted average number of
ordinary shares outstanding during
the period and for all periods
presented should be adjusted for
events, other that the conversion of
potential ordinary shares, that have
changed the number of ordinary
shares outstanding, without a
corresponding change in resources.
Illustration 4 comparative
income statement
Net income 2011 7,200,000
Net income 2012 6,000,000
Ordinary shares Outstanding on
Jan.1,2011 200,000
On Oct 1, 2012 entity implemented
bonus issue in the ratio of two ordinary
shares for each original ordinary share.
Compute for BEPS.
Computation
Ordinary share Outs.-Jan.1,2011 200,000
Bonus Issue on October1, 2012 400,000
Total ordinary shares Outs. 600,000

BEPS
2011(7,200,000/600,000) 12
2012(6,000,000/600,000) 10
Guidelines to be observed in
applying the formula

Stock dividend and Share Split
Stock Dividends and Stock
Splits
Shares outstanding January 1.. 2,600
Shares issued for exercise
of options on February 1. 400
Shares issued for 10% stock
dividend on May 1.. 300
Shares sold for cash on September 1.. 1,200
Shares repurchased on November 1 400
Shares issued for 3-for-1 stock split
on December 15 8,200
Stock Dividends and Stock
Splits
1/1 to 2/1 2,600
2/1 Option 400
2/1 to 5/1 3,000
No. of Stock Stock Portion of Weighted
Date Shares Dividend Split Year Average
Stock Dividends and Stock
Splits
No. of Stock Stock Portion of Weighted
Date Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.10
2/1 Option 400
2/1 to 5/1 3,000 x 1.10
5/1 Dividend 300
5/1 to 9/1 3,300
Stock Dividends and Stock
Splits
No. of Stock Stock Portion of Weighted
Date Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.10
2/1 Option 400
2/1 to 5/1 3,000 x 1.10
5/1 Dividend 300
5/1 to 9/1 3,300
9/1 Sale 1,200
9/1 to 11/1 4,500
Stock Dividends and Stock
Splits
No. of Stock Stock Portion of Weighted
Date Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.10
2/1 Option 400
2/1 to 5/1 3,000 x 1.10
5/1 Dividend 300
5/1 to 9/1 3,300
9/1 Sale 1,200
9/1 to 11/1 4,500
11/1 Purchase (400)
11/1 to 12/1 4,100


Stock Dividends and Stock
Splits
No. of Stock Stock Portion of Weighted
Date Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.10
2/1 Option 400
2/1 to 5/1 3,000 x 1.10
5/1 Dividend 300
5/1 to 9/1 3,300
9/1 Sale 1,200
9/1 to 11/1 4,500
11/1 Purchase (400)
11/1 to 12/1 4,100
12/1 Split 8,200
12/1 to 12/31 12,300
Stock Dividends and Stock
Splits
No. of Stock Stock Portion of Weighted
Date Shares Dividend Split Year Average
1/1 to 2/1 2,600 x 1.10 x 3.0 x 1/12 = 715
2/1 Option 400
2/1 to 5/1 3,000 x 1.10 x 3.0 x 3/12 = 2,475
5/1 Dividend 300
5/1 to 9/1 3,300 x 3.0 x 4/12 = 3,300
9/1 Sale 1,200
9/1 to 11/1 4,500 x 3.0 x 2/12 = 2,250
11/1 Purchase (400)
11/1 to 12/1 4,100 x 3.0 x 1/12 = 1,025
12/1 Split 8,200
12/1 to 12/31 12,300 x 1/12 = 1,025
Weighted-average number of shares 10,790
Stock Dividends and
Stock Splits
All stock splits and stock
dividends must be
incorporated into the
computation of weighted
average shares outstanding.
This must done for all
periods presented in
the financial
statements.
Current EPS figures may
have to be changed in the
future as a result of stock
splits or dividends.
Guidelines to be observed in
applying the formula
Rights Issue

Fair value per share immediately prior
to the exercise of rights
Theoretical ex-rights fair value per
share
Illustration 5 Compute for
BEPS
Net Income
2011 P1,375,000
2012 P1,762,000

Ordinary Outs. prior to rights issue 50,000
Rights issue during 2011-one new ordinary
share for each 5 outs. Or a total of 10,000
Date of exercise April 1, 2012
MV of share Right-on P110
Exercise or subscription price P50

Theoretical Market value of share
Ex-right
MV of Ordinary shares
outstanding(50,000xP110) 5,500,000
Proceeds from Exercise of
rights(10,000xP50) 500,000
Total 6,000,000

Theoretical Market value of share Ex-right
(6,000,000/60,000) 100
Computation for Adjustment
Factor

Adjustment factor: 1.10
Fair value per share immediately
prior to the exercise of rights
Theoretical ex-rights fair value per
share
110
100
Computation of BEPS
2011
Ordinary share outs. 50,000
Multiply by adj.factor 1.10
Adjusted ordinary shares 55,000

BEPS
1,375,000/55,000 25
Computation of BEPS 2012
January1 (50,000x1.10x3/12) 13,750
April1 (60,000x9/12) 45,000
Total ave.ordinary shares 58750

BEPS
1,762,500/58,750 P30
Computation for Basic Loss
per share
Net loss (5,000,000)
Preference Share capital,100 par, 10%
cumulative, 20,000 shares convertible into
40,000 ordinary shares P2,000,000
Ordinary Share capital, 100 par,
100,000 shares P10,000,000

Compute for Basic loss per share.
Computation
Net Loss (5,000,000)
Preference dividend(2Mx10%) (200000)
Total Loss to OS (5,200,000)
Ordinary share outstanding 100,000
Basic Loss Per Share P(52)
Diluted Earnings Per Share

Net income attributable to OS as
adjusted
Weighted average number of OS and PD
Three Major Types of
Potential Ordinary Shares
Convertible Bond Payable
Convertible Preference Share
Share option and Warrant
Simple and Complex Capital
Structures
Dilutive Securities- Securities whose
assumed exercise or conversion
results in a reduction in earnings per
share.
Antidilutive Securities:- Securities
whose assumed conversion or exercise
results in an increase in earnings per
share.

Simple and Complex Capital
Structures

Considers only
common shares
issued and
outstanding.


Basic
Simple and Complex Capital
Structures

Considers only
common shares
issued and
outstanding.


Basic
Reflects the
maximum
potential dilution
from all possible
stock conversions
that would have
decreased EPS.
Diluted
Capital Structures
Simple Capital
Structure- The
corporation has only
common and
nonconvertible
preferred stock and
has no convertible
securities, stock
options, warrants, or
other rights
outstanding.
Complex Capital
Structure- The
corporation has one
or more instruments
outstanding that
could result in
issuance of additional
common shares. For
example, a firm with
potential for per
share dilution.
Diluted Earnings per Share-
Options, Warrants, and Rights
Dilution occurs if inclusion of a potentially
dilutive security reduces the basic EPS or
increases the basic loss per share.
Proceeds from conversion are assumed to
be used for purchase of treasury stock at
current market price.
Treasury stock is assumed to be reissued to
option or warrant holders.
Any additional shares issued, over treasury
stock, are added to weighted- average
shares outstanding.
Exercise is assumed to occur on the first
day of the year unless issue date is later.

Guidelines to be observed in
applying the formula
1. Adjustments may include on an
after-tax basis the ff:
a. Dividends on dilutive potential ordinary
share.
b. Interest recognized in the period for the
dilutive potential
c. Any other changes in income or
expenses that would result from the
conversion of dilutive potential OS.
Illustration
An entity had the following securities outstanding on
January 1, 2011:
10% convertible bonds payable, each P1000 bond
convertible into 10 OS 4,000,000
Ordinary share capital, P100 par, 250,000 shares
authorized, 100,000 shares issued 10,000,000
Net Income 5,000,000
Income Tax Rate 30%

Compute for BEPS and DEPS.
Basic earnings per share
Net Income 5,000,000
OS actually outstanding 100,000
BEPS 50

Diluted Earnings Per share
Net Income 5,000,000
Interest expense 400,000
Income tax (120,000) 280,000
Adjusted net income 5,280,000
OS actually outstanding 100,000
Assumed Issued OS 40,000 140,000
DEPS 37.71
Guidelines to be observed in
applying the formula
Dilutive potential ordinary shares
should deemed to have been converted
into ordinary shares at the beginning of
the period, if later, the date of issue of
the potential ordinary shares.
Guidelines to be observed in
applying the formula
For the purpose of computing diluted
earnings per share, an enterprise
should assume the exercise of dilutive
options and other dilutive potential
common shares of the enterprise.
Options and Share warrants
Illustration
Net Income 5,000,000
Ordinary share capital,100 par, 100,000
shares 10,000,000
Employee share option:
Option shares 30,000
Fair value of each share option 20
Option price 130
Average market price 250
Computation
BEPS(5M/100,000shares) 50
DEPS:
Net income 5,000,000
Option shares 30,000
Total option price 150
Proceeds from assumed exercise 4,500,000
Average market price 250
Assumed treasury shares 18,000
Computation
Ordinary Share 100,000
Incremental OS:
Option shares 30,000
Assumed TS (18,000) 12,000
Total ordinary shares 112,000

DEPS(5M/112,000) 44.64
Guidelines to be observed in
applying the formula
To the extent that partly paid shares are
not entitled to participate in dividends
during the financial period they are
considered equivalent of warrant or options.
Potential ordinary shares should be treated
as dilutive when, and only when, their
conversion to ordinary shares would
decrease net income per share from
continuing common operations
Multiple Potential Ordinary
Share (illustration)
An entity provide the following data for the current year.
Income from continuing operation 5,000,000
Loss from discontinued operation (1,000,000)
Ordinary share Actually outstanding 500,000
Option shares
Option Price(including FV of stock option of P10) 60
Average market Price 75
Preference share capital, P100 par 5,000,000
Bond payable 5,000,000
Income Tax rate 30%
The preference share capital is 5% cumulative and convertible
into 25,000 ordinary shares
The bond payable has nominal rate of 10% and convertible into
40,000 OS.
BEPS
Income from continuing operation 5,000,000
Preference dividends (250,000)
Income to OS 4,750,000
OS actually outstanding 500,000
BEPS 9.50

BEPS for discontinued operation (2.00)
DEPS
INCOME ORDINARY
SHARE
EPS
Basic EPS 4,750,000 500,000 9.50
Options 0 10,000
Diluted EPS 4,750,000 510,000 9.31
Convertible bond 350,000 40,000
Diluted EPS 5,100,000 550,000 9.27
Convertible PS 250,000 25,000
Diluted EPS 5,350,000 575,000 9.30
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