Final Lecture 3

Earnings per Share

Cyra Mae M. Lanestosa , CPA

LEARNING OBJECTIVES:
1. Compute for the basic earnings per share
2. Compute for diluted earnings per share (Part 2)
What is Earnings per
Share Is a computation made for ordinary shares. It is
form of profitability ratio which provides a
measure of how much profit (loss) each
ordinary share has earned (incurred) during
the period.

Types of Earnings per Share:

PAS 33 requires the following two presentations of EPS:
1. Basic earnings per share
2. Diluted earnings per share

Basic Earnings per Share

Basic EPS is computed as follows: 1 2

Basic EPS = Profit (Loss) less preferred dividends

Weighted average no. of outstanding ordinary shares

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The presentation of earnings per share is
required for entities whose ordinary shares or
potential ordinary shares are publicly traded
and by entities that are in the process of issuing
ordinary shares or potential ordinary shares in
the public securities market.

Public entities – required to present

Nonpublic entities – not required
Uses of earnings per share
a. It is a determinant of the market price of
ordinary share , thus indicating the
attractiveness of the ordinary share as an
investment.
b.It is “measure of performance” of
management in conducting operations
c. It is the basis of dividend policy of an entity
Considerations in computing “Profit or loss”

a. Profit or loss should be net of income tax expense

b. Profit or loss should be adjusted for the after-tax amounts of
preference dividends, differences arising on the settlement of
preference shares, and other similar effects of preference
shares classified as equity.

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Adjustments for preference dividends

a. If the preference shares are cumulative, one-year

dividend is deducted from profit or loss whether
declared or not.
b. If the preference shares are non-cumulative, only the
dividend declared is deducted from profit or loss.

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Illustration: Basic EPS – cumulative preference sh.
ABC Co. had the following capital structure during 20x1 and 20x1:

Preference share, 6% cumulative, 50,000 share

issued and outstanding 500,000
Ordinary share, 10 par, 200,000 shares issued
and outstanding 2,000,000

ABC reported profit after tax of 1,200,000 for the year ended Dec. 31, 20x2. ABC paid no preferred
dividends during 20x1 and paid 15,000 in preferred dividends during 20x2.

Requirement: In its Dec. 31, 20x2 statement of profit or loss, what amount should ABC report as
basic earnings per share?

Solution:

Basic EPS = Profit (Loss) less preferred dividends

Weighted average no. of outstanding ordinary shares

Basic EPS = 1,200,000 – (500,000 x 6%)

200,0000
Basic EPS = (1,200,000 – 30,000)/200,000 = 5.85

One year dividend (whether declared or not) is deducted from profit or loss because the
preference shares are cumulative.
Illustration: Basic EPS – Noncumulative preference sh.
ABC Co. reported profit for the year amounting to 1,000,000. ABC Co. has the
following equity instruments:

1. 10,000, 10%, cumulative preference shares issued and outstanding with par value
of 100 per share.
2. 20,000, 5%, non cumulative preference shares issued and outstanding with par
value of 20 per share.
3. 11,000 ordinary shares issued and outstanding with par value of 5 per share.

ABC Co. declared the following dividends during the year:

 150,000 to cumulative preference share
 25,000 to noncumulative shares
 27,500 to ordinary shares

Dividends in arrears on cumulative preference share as of the beginning of the year

amounted to 200,000. There were no issuance or acquisitions of ordinary shares
during the period.

Requirement: compute for the basic earnings per share for the period.
1. 10,000, 10%, cumulative preference shares issued and outstanding with par value of
100 per share.
2. 20,000, 5%, non cumulative preference shares issued and outstanding with par value
of 20 per share.
3. 11,000 ordinary shares issued and outstanding with par value of 5 per share.
Net income = P1,000,000

Basic EPS = Profit (Loss) less preferred dividends

Weighted average no. of outstanding ordinary shares

Basic EPS = 1,000,000 – (10,000 x 100 x 10%) – 25,000

11,000

Basic EPS = (1,000,000 – 100,000 – 25,000)/11,000 = 79.55

Participating preference shares

Illustration: - NonCumulative and participating

ABC Co.’s year-end shareholders’ equity consists of the following:

Preference share, 10% noncumulative, fully participating,

50 par, 40,000 shares 2,000,000
Ordinary share, 100 par, 80,000 shares issued 8,000,000
Net income 3,000,000
After the ordinary share has been paid a dividend of P20 per share . The preference share shall
participate in any additional dividends on a prorate basis
Solutions:
Preference Ordinary shares Totals

13,000,000
Aggregate par values 2,000,000 8,000,000 10,000,000
Allocation: 3,000,000
Dividends
PS (2M X 10% ) 200,000 200,000
OS (80,000 x 20) 1,600,000 1,600,000
Balance for participation 1,200,000
PS (1.2M x 2/10) 240,000 240,000
OS ( 1.2M x 8/10) 960,000 960,000
Dividends as allocated 440,000 2,560,000 -
Divide by: No. of shares OS 40,000 80,000
Basic earnings per share 11.00 32.00
Solutions:
Preference Ordinary shares Totals

13,000,000
Aggregate par values 2,000,000 8,000,000 10,000,000
Allocation: 3,000,000
Dividends
PS (2M X 10% ) 200,000 200,000
OS (80,000 x 20) 1,600,000 1,600,000
Balance for participation 1,200,000
PS (1.2M x 2/10) 240,000 240,000
OS ( 1.2M x 8/10) 960,000 960,000
Dividends as allocated 440,000 2,560,000 -
Divide by: No. of shares OS 40,000 80,000
Basic earnings per share 11.00 32.00
Weighted average number of outstanding ordinary shares

Shares are usually included in the weighted average number of shares

from the date consideration is receivable (which is generally the date of
their issue), for example:
1. Ordinary shares issued in exchange for cash are included when cash
is receivable.
2. Ordinary shares issued in exchange for non-cash assets are
included as of the date on which the acquisition is recognized.
3. Ordinary shares issued in exchange of services received are
included as the services are rendered.
4. Ordinary shares issued to settle a liability are included from the
settlement date.
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Weighted average number of outstanding ordinary shares
(Continuation)

5. Ordinary shares issued as a result of the conversion of a debt

instrument to ordinary shares are included from the date that
interest ceases to accrue.
6. Treasury shares acquired are excluded when the acquisition is
recognized. Treasury shares reissued are included when the
reissuance is recognized.
7. Subscribed ordinary shares or partly paid shares are included to
the extent of their participation in dividends.
8. Ordinary shares issued as share dividends or share splits are
included from the time the original shares, on which the share
dividends or share splits are based,
CM were originally issued.
Illustration 1 – Average shares outstanding
January 1 Beginning balance 100,000 shares
May 1 Additional issue 150,000 shares
September 1 Additional issue 150,000 shares

Computation:

Date Shares Month outstanding Peso months

January 1 100,000 12 1,200,000
May 1 150,000 8 1,200,000
September 1 150,000 4 600,000
3,000,000
Average shares (3,000,000/12) 250,000

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Illustration 1 – Average shares outstanding
January 1 Beginning balance 100,000 shares
May 1 Additional issue 150,000 shares
September 1 Additional issue 150,000 shares

Computation:

Date Shares Fraction Average shares

January 1 100,000 12/12 100,000
May 1 150,000 8/12 100,000
September 1 150,000 4/12 50,000
Average shares 250,000

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Illustration 2 – Average shares outstanding
January 1 100,000 shares issued and outstanding
April 1 Issued 50,000 new shares
June 1 Share split 2 for 1
July 1 Purchased 20,000 treasury shares
October 1 20% stock dividend
December 31 Share split 5 for 1

Computation:

Shares
Jan 1 ( 100,000 X 2 X 1.20 X 5 ) 1,200,000
April 1 (50,000 X 2 X 1.20 X 5) 600,000
July 1 (20,000 X 1.20 X 5) (120,000)

Shares Fraction Average

Jan 1 1,200,000 12/12 1,200,000
April 1 600,000 9/12 450,000
July 1 (120,000) 6/12 (60,000)
Average shares 1,590,000
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Loss per share
presented when an entity reports loss for the year. The diluted loss per share is
not presented because potential ordinary shares generally decrease the loss per
share and, therefore, are antidilutive.

Illustration 1: Loss per share

Entity A had the following capital structure during 20x1 and 20x2:

Convertible preference share, 10 par, 6% cumulative, 50,000 share

issued and outstanding 500,000
Ordinary share, 10 par, 200,000 shares issued
and outstanding 2,000,000

ABC reported loss of 1,200,000 for the year ended Dec. 31, 20x2. ABC paid no
dividends during 20x1. Each preference share is convertible into two ordinary
shares.

Requirement: In its Dec. 31, 20x2 income statement, what amount(s) should ABC
Solutions:
Requirement (a) Basic loss per share

Basic EPS = Profit (Loss) less preferred dividends

Weighted average no. of outstanding ordinary shares

Basic EPS = -1,200,000 – (500,000 x 6%)

200,000

Basic loss per share = (-1,200,000 –30,000)/200,000

Basic loss per share = -1,230,000 /200,000= (5.85)

 The preferred dividend is “added” to the loss for the period

because a deduction from a negative amount results to an
addition.
Rights issue
When stock rights are issued to shareholders in conformance with their
preemptive right, the exercise price is normally less than the fair value of
the shares. This type of rights issue includes a bonus element. Thus, for
basic and diluted EPS computation, the number of shares outstanding for
all periods before the rights issue is multiplied by the following factor:

Adjustment factor = Fair value of stock immediately before the exercise of rights
Theoretical ex-rights fair value per share
Adjustment factor = Fair value of stock immediately before the exercise of rights
Theoretical ex-rights fair value per share

Or MV of share right on
MV of share ex right

MV of share right on = usually given

MV of share ex right = Total MV of shares outstanding + proceeds from the exercise
of the rights .
Number of shares outstanding after the exercise of the rights
ILLUSTRATION
Net income
Year 2016 1,375,000
Year 2017 1,762,500
Year 2018 2,400,000

Ordinary shares outstanding prior to rights issue 50,000

Rights issue during 2016 – one new ordinary share 10,000
for every five outstanding shares or a total of
Date of exercise of rights April 1, 2017
MV of share immediately prior to exercise of rights or
Market value of share right on 110
Exercise or subscription price 50
Ordinary shares outstanding prior to rights issue 50,000
Rights issue during 2016 – one new ordinary share 10,000
for every five outstanding shares or a total of
Date of exercise of rights April 1, 2017
MV of share immediately prior to exercise of rights or
Market value of share right on 110
Exercise or subscription price 50

Adjustment factor = MV of share right on

MV of share ex right

MV of share right on = usually given

MV of share ex right = Total MV of shares outstanding + proceeds from the exercise
of the rights .
Number of shares outstanding after the exercise of the rights
 Ordinary shares outstanding prior to rights issue 50,000
Rights issue during 2016 – one new ordinary share 10,000
for every five outstanding shares or a total of
Date of exercise of rights April 1, 2017
MV of share immediately prior to exercise of rights or
Market value of share right on 110
Exercise or subscription price 50

MV of share ex right = Total MV of shares outstanding + proceeds from the exercise

of the rights .
Number of shares outstanding after the exercise of the rights
Compute the numerator :
MV of shares outstanding (50,000 shares X P110) 5,500,000
Proceeds from exercise of rights (10,000 shares X 50) 500,000
Total 6,000,000
Compute for denominator :
Ordinary shares outstanding before rights issue 50,000
Ordinary shares issued through exercise of rights 10,000
Total ordinary shares outstanding 60,000

MV of share ex right = 6,000,000 / 60,000 = 100

Ordinary shares outstanding prior to rights issue 50,000
Rights issue during 2016 – one new ordinary share 10,000
for every five outstanding shares or a total of
Date of exercise of rights April 1, 2017
MV of share immediately prior to exercise of rights or
Market value of share right on 110
Exercise or subscription price 50

Adjustment factor = MV of share right on

MV of share ex right
= 110/ 100
= 1.10
Net income BEPS = Net income – PD
Year 2016 1,375,000 Adjusted OS
Year 2017 1,762,500 = 1,375,0000
Year 2018 2,400,000
55,000
Year 2016 = 50,000 X 1.10 = 55,000 = 25
Ordinary shares outstanding prior to rights issue 50,000
Rights issue during 2016 – one new ordinary share 10,000
for every five outstanding shares or a total of
Date of exercise of rights April 1, 2017
MV of share immediately prior to exercise of rights or
Market value of share right on 110
Exercise or subscription price 50

Adjustment factor = MV of share right on

MV of share ex right
= 110/ 100
= 1.10
Net income
Year 2016 1,375,000 BEPS = Net income – PD
Year 2017 1,762,500
Adjusted OS
Year 2018 2,400,000
= 1762,500
Year 2017 58,750
Jan. 1 = 50,000 X 1.10 X 3/ 12 = 13,750
= 30
60,000 X 9/12 = 45,000
58,750
Ordinary shares outstanding prior to rights issue 50,000
Rights issue during 2016 – one new ordinary share 10,000
for every five outstanding shares or a total of
Date of exercise of rights April 1, 2017
MV of share immediately prior to exercise of rights or
Market value of share right on 110
Exercise or subscription price 50

Adjustment factor = MV of share right on

MV of share ex right
= 110/ 100
= 1.10
Net income BEPS = Net income – PD
Year 2016 1,375,000
Adjusted OS
Year 2017 1,762,500
Year 2018 2,400,000 = 2,400,000
60,000
Year 2018
= 40
Jan. 1 = 60,000 X 12/ 12 = 60,000
 QUESTIONS????
REACTIONS!!!!!

CM
 END
Of Final Lecture 3

CM