OPENING PRAYER Oratio Imperata

for the people who are sick because of the COVID19 coronavirus
(SARS-CoV-2) and for the prevention of a global outbreak

God our Father, we come to you in our need We implore you to stop the spread of this
to ask your protection against the COVID 19, virus and to save us from our fears. Grant this
that has claimed lives and has affected many. through our Lord, Jesus Christ, your Son, Who
lives and reigns with You, in the unity of the
We pray for your grace, for the people tasked Holy Spirit, God forever and ever. Amen.
with studying the nature and cause of this
virus and its disease and of stemming the We fly to Your protection, oh Holy Mother of
tide of its transmission. God. Do not despise our petition in our
necessities, but deliver us always from all
Guide the hands and minds of medical dangers, oh Glorious and blessed Virgin.
experts that they may minister to the sick Amen.
with competence and compassion, and of
those governments and private agencies that Our Lady, health of the sick, pray for us.
must find cure and solution to this epidemic. St. Raphael the Archangel, pray for us.
St. Roch, pray for us.
We pray for those afflicted. May they be St. Lorenzo Ruiz, pray for us.
restored to health soon. Protect those who St. Pedro Calungsod, pray for us.
care for them. Grant eternal rest to those who
have died. Grant us the grace to work for the
good of all and to help those in need.
Basic Earnings per Share
Partnership and Corporation Accounting
Second Semester • Fourth Grading
Learning Objectives
1. Define earnings per share
2. Know the proper presentation of earnings per
share
3. Know the formula of earnings per share
4. Determine the weighted average number of
ordinary shares
5. Understand the accounting treatment of
share dividend, share split and right issue in
EPS computation
Definition
• Earnings per share is the amount
attributable to every ordinary share
outstanding during the period
• The corporation’s net profit divided by the
number of ordinary shares it has
outstanding
• Indicates how much money the corporation
makes for each share of its shares and is a
widely used metric to estimate corporate
value
Definition
• Applicable only to ordinary shares
• Philippine Accounting Standard 33:
requires two presentations:
1. basic earnings per share
2. diluted earnings per share
• Ordinary share is an equity instrument that
is subordinate to all other classes of equity
instrument
• Corporation code: common stock
Definition
• Required for:
− Entities whose ordinary shares are publicly
traded.
− Entities that are in the process of issuing
ordinary shares or potential ordinary shares in
the public securities market
• Public entities are required to present
earnings per share
• Nonpublic entities are not required but are
encouraged to present earnings per share
Presentation
• Face of the income statement basic and
diluted earnings per share for income or
loss from continuing operations
• An entity that reports a discontinued
operation shall disclose the basic and
diluted amounts per share for the
discontinued operation either on the face
of the income statement or in the notes
to the statements
Presentation
• An entity shall present basic and diluted
earnings per share even if the amounts are
negative, for example, basic loss per share.
• When the entity presents both consolidated
and separate: present only in the
consolidated statements
• If the entity chooses to disclose in separate
financial statements, present in the face of
the separate income statement…do not
present the earnings per share in the
consolidated financial statements
Uses of Earnings per
Share
• It is a determinant of the market price of
ordinary share, thus indicating the
attractiveness of ordinary share as an
investment
• It is “measure of performance” of
management in conducting operations
• It is the basis for dividend policy of the
entity
Definitions
Equity instrument – any contract that evidences a
residual interest in the assets of an entity after
deducting all of its liabilities
Potential ordinary share – is a financial instrument
or other contract that may entitle the holder to
ordinary shares
Financial instrument – is any contract that give rise
to both a financial asset of one entity and a financial
liability or equity instrument of another entity
Warrants or options – financial instruments that
give the holder the right to purchase ordinary shares
Basic Earnings per Share

𝑁𝑁𝑁𝑁𝑁𝑁 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝐸𝐸𝐸𝐸𝐸𝐸 =
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜

The net income is equal to the amount after deducting

dividends on preference share.
Preference share is cumulative – preference dividend is
equal to current year only whether declared on not
Preference share is noncumulative – preference
dividend is equal to current year only is deducted only if
there is a dividend declaration
Basic Earnings per Share

𝑁𝑁𝑁𝑁𝑁𝑁 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝐸𝐸𝐸𝐸𝐸𝐸 =
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜

If there is significant changes in the ordinary share

capital during the year, the weighted average number
of ordinary shares outstanding during the period should
be used as denominator.
Illustration
An entity provided the following information for the current year:
Preference share capital ₱100 par, 10% cumulative 1,000,000
Ordinary share capital, ₱100 par, 50,000 shares 5,000,000

Income from continuing operations 1,500,000

Income from discontinued operation 500,000
Net income 2,000,000

Basic earnings per share

Income from continuing operations 1,500,000
Preference dividend for current year (10% x P1,000,000) (100,000)
Income to ordinary share 1,400,000

Income from continuing operations

(1,400,000 / 50,000 shares) 28
Income from discontinued operations
(500,000 / 50,000 shares) 10
Net income 38
Illustration – Participating
Preference Share
An entity had the following capital structure at the end of
the current year:
Ordinary share capital, ₱100 par, 80,000 shares
issued and outstanding 8,000,000
Preference share capital ₱50 par, 40,000 shares
issued and outstanding 2,000,000
Net income for the year 3,000,000

The preference dividend rate is 10% and the preference

share is nonconvertible but cumulative and fully
participating.
Computation
Preference Ordinary
Basic dividends
Preference (10% x 2,000,000) 200,000
Ordinary (8,000,000 x 10%) 800,000
Balance for participation 400,000 1,600,000
Total dividends 600,000 2,400,000

Net income 3,000,000

Basic dividend (200,000 + 800,000) (1,000,000)
Basic participation 2,000,000

Amount Fraction Participation

Preference share 2,000,000 2/10 400,000
Ordinary share 8,000,000 8/10 1,600,000
10,000,000 2,000,000

Basic earnings per share

Preference share (600,000 / 40,000) 15.00
Ordinary shares (2,400,000 / 80,000) 30.00

The “participating” preference share can be treated as a special ordinary share.

Determination of
Weighted Average
Shares are usually included in the weighted number of
shares from the date of consideration is receivable,
which is usually the date of issue.
a. Ordinary shares in exchange for cash are included
when cash is receivable.
b. Ordinary shares issued as a result of the conversion
of debt instrument to ordinary shares are included
from the date that interest ceases to accrue.
c. Ordinary shares issued in place of interest or
principal on other financial instruments are included
from the date that interest ceases to accrue.
Determination of
Weighted Average
d. Ordinary shares issued in exchange for the
settlement of a liability of the entity are included from
the settlement date.
e. Ordinary shares issued as consideration for the
acquisition of an asset other than cash are included
as of the date on which acquisition is recognized.
f. Ordinary shares issued for the rendering of services
to the entity are included as services are rendered.
g. Ordinary shares issued as part of the purchase
consideration of a business combination that is an
acquisition are included in the weighted average
number from the date of acquisition.
Determination of
Weighted Average
h. Ordinary shares that will be issued upon conversion
of a mandatory convertible instrument are included
in the calculation of basic earnings per share from the
date the contract is entered into.
i. Under IFRS, subscribed ordinary shares or partly
paid shares are included in EPS to the extent that
they are entitled to participate in dividends.
‒ Under the Philippine jurisdiction, subscribed shares are
entitled to participate fully in dividends.
Illustration 1 – Average Shares Outstanding
Jan. 1 Beginning balance 100,000 shares
May 1 Additional issuance 150,000 shares
Sept. 1 Additional issuance 150,000 shares
Total shares outstanding 400,000 shares

COMPUTATION
(b)
(a) Months (a) x (b)
Date Shares outstanding Peso months
Jan. 1 100,000 12 1,200,000
May 1 150,000 8 1,200,000
Sept. 1 150,000 4 600,000
3,000,000

Average shares (3,000,000 / 12) 250,000

Another approach
(a) (b) (a) x (b)
Date Shares Fraction Average shares
Jan. 1 100,000 12/12 100,000
May 1 150,000 8/12 100,000
Sept. 1 150,000 4/12 50,000
250,000
Illustration 2
Jan. 1 Beginning balance 100,000 shares
Mar. 1 Issued for cash 50,000 shares
July 1 20% share dividend 30,000 shares
Nov. 1 Treasury shares (15,000) shares
Total shares outstanding 165,000 shares

COMPUTATION
(b)
(a) Months (a) x (b)
Date Shares outstanding Peso months
Where share dividends or
Jan. 1 120,000 12 1,440,000
Mar. 1 60,000 10 600,000
share spits create a change
Nov. 1 (15,000) 2 (30,000) in the capital structure, the
2,010,000 increase or decrease in the
number of shares shall be
Average shares (2,010,000 / 12) 167,500 recognized retrospectively.

Another approach
(a) (b) (a) x (b) The share dividends or share
Date Shares Fraction Average shares splits shall be treated as a
Jan. 1 120,000 12/12 120,000 change from the date the
Mar. 1 60,000 10/12 50,000 original shares were
Nov. 1 (15,000) 2/10 (2,500) issued.
167,500
Illustration 3
Jan. 1 100,000 shares issued and outstanding
Apr. 1 Issued 50,000 new shares
June 1 Share split 2 for 1
July 1 Purchase 20,000 treasury shares
Oct. 1 20% share dividend
Dec. 31 Share split 5 for 1

COMPUTATION
(b)
(a) Months (a) x (b)
Date Shares outstanding Peso months
Jan. 1 1,200,000 12 14,400,000
Apr. 1 600,000 9 5,400,000
Jul. 1 (120,000) 6 (720,000)
19,080,000

Average shares (19,080,000 / 12) 1,590,000

SHARES:
Jan. 1 (100,000 x 2 x 1.20 x 5) 1,200,000
Apr. 1 (50,000 x 2 x 1.20 x 5) 600,000
Jul. 1 ( -20,000 x 1.20 x 5) (120,000)
Bonus Issue
• Ordinary shares are issued to existing
shareholders for no consideration.
• Number of ordinary shares is increased without
increase in resources.
• Bonus issue = share dividend

The number of ordinary share outstanding is

adjusted for the proportionate change in the number
of ordinary shares outstanding as if the bonus issue
has occurred at the beginning of the earliest period
presented.
Illustration
Net income – 2017 7,200,000
Net income – 2018 6,000,000
Ordinary share outstanding on January 1, 2017 200,000
On October 1, 2018, the entity implemented a bonus issue of ordinary
shares in the ratio of two ordinary shares for each original ordinary shares.

SOLUTION:
Ordinary shares outstanding – January 1, 2017 200,000
Bonus issue on October 1, 2018 (200,000 x 2) 400,000
Total ordinary shares outstanding 600,000

Basic earnings per share:

2017 (7,200,000 / 600,000) 12.00
2018 (6,000,000 / 600,000) 10.00
Rights Issue
• Most often the exercise price is less than the
fair value of the shares
• Rights issue include a bonus element,
meaning shares issued for no consideration
• Rights issue = stock right = right of
preemption
• Computation: basic earnings per share for all
periods prior to the rights issue is the number
of shares outstanding prior to the rights issue
multiplied by an adjustment factor.
Rights Issue
• Adjustment factor: the ratio of the market
value of the share right-on to the theoretical
market value of the share ex-right.
• The market value of the share right-on is
actually the market value of the share
immediately prior to the exercise of rights.
• Theoretical market value of the share ex-
right is equal to the total market value of
shares outstanding plus the proceeds from the
exercise of rights divided by the number of
shares outstanding after the exercise of rights.
Illustration
Net income:
2017 1,375,000
2018 1,762,500
2019 2,400,000
Ordinary share outstanding prior to rights issue 50,000
Rights issue during 2017 – one new ordinary share
for every 5 outstanding shares of a total of 10,000
Date of exercise of rights April 1, 2018
Market value of share immediately prior to exercise of
rights or market value of share rights-on 110
Exercise or subscription price 50
Illustration
Theoretical market value of share ex-right
Market value of ordinary shares outstanding
(50,000 shares x ₱110) 5,500,000
Proceeds from exercise of rights (10,000 shares x ₱50) 500,000
Total 6,000,000

Ordinary shares outstanding before rights issue 50,000

Ordinary shares issued through exercise of rights 10,000
Total ordinary shares outstanding 60,000

Theoretical market value of share ex-right

(6,000,000 / 60,000) 100

Adjustment factor (₱110 / ₱100) 1.10

Illustration
ANOTHER APPROACH
The theoretical value of a right is computed as follows:

Market value of share right-on

minus subscription price
= Value of one right
Number of rights to purchase
one share plus 1

110 - 50 60
= = ₱10 per right
5+1 6

Market value of share rights-on 110

Theoretical value of right (10)
Market value of share ex-right 100

Adjustment factor (110 / 100) 1.10

Illustration
2017
Net income 1,375,000

Ordinary shares outstanding 50,000

Multiply by adjustment factor 1.10
Adjusted ordinary shares 55,000

Basic EPS (1,375,000 / 55,000) 25

2018
Net income 1,762,500

Jan. 1 (50,000 x 1.10 x 3/12) 13,750

Apr. 1 (60,000 x 9/12) 45,000
Total average ordinary shares 58,750

Basic EPS (1,762,500 / 58,750) 30

2019
Net income 2,400,000

Ordinary shares outstanding before the exercise of rights 50,000

Ordinary shares issued through exercise of rights 10,000
Total ordinary shares 60,000

Basic EPS (2,400,000 / 60,000) 40

Basic Loss per Share
Net loss (5,000,000)
Ordinary share capital, ₱100 par, 100,000 shares 10,000,000
Preference share capital, ₱100 par, 10%
cumulative, 20,000 shares convertible into
40,000 ordinary shares 2,000,000

Computation:

Net loss (5,000,000)

Preference dividend (10% x 2,000,000) (200,000)
Total loss to ordinary shareholders (5,200,000)
Divide by ordinary shares actually outstanding 100,000
Basic loss per share (52.00)

If noncumulative:
Net loss (5,000,000)
Divide by ordinary shares outstanding 100,000
Basic loss per share (50.00)
End of
Presentation!
Comments, Questions, Suggestions…