aa a

sIC EAIGs PER SHR

ai E ae

d it - e
ehtre

e ttite

d= Ee utd a aat
ordinare shares
 SHARE
EARNINGS PER

The earnings per share figure

is the amount
every ordinary share outstandingduring the period.
attributableto
Ordinary share is an equityinstrument
that is
to all other classes of equity
instruments subordinate
Thus, the earnings per share information pertainsonly to
ordinary share.

It is not necessary for preference share because there

is a
definite rate of return for such share.

The computation of earnings per share is coveredby

PAS
33 which requires two presentations of earnings per share,
namely:

a. Basic earnings per share

b. Diluted earnings per share

The presentation of earnings per share is required for:

a. Entities whose ordinary shares are publicly traded.

b. Entities that are in the process of issuing ordinary shares
or potential ordinary shares in the public securities
market.

In other words, public entities are required to present

earnings per share.

Nonpublic entities are not required but are encouraged to

present earnings per share.

Uses of earnings per share

It is a determinant of the
a.
market price of ordinary share,
thus indicating the attractiveness of the ordinary share
as an investment.

It is measure of performance of management in

conducting operations.
C.
It is the basis of dividend policy of an entity.

480
presentation

-
ntt the discontinned ention shn

An entiey ahall present baeie and dilufed earninge per shere

share.

et p b sd
e et

i aarnings Ber share

et aeem

rdnary erares outtaniine

- iaz eE
ee

e oez saz is ma e
e de eea es ea da
ee s e ee

e s am e e
ed
tr s 7

a st das e s ee

enemine ter

A3
Illustration

An entity provided
the following information for the
year:

10% cumulative
Preference share capital, P100 par,
1,000 Do.
Ordinary share capital, P100 par, 50,000 shares 11000,000
5,000 000
3000,000
Income from continuing operations
Income from discontinued operation ,000,000
500 no
000,000
Net income
2,000,00
3000,000
Basic earnings per share

Income from continuing operations

Preference dividend for current year (10% x P1,000,000) -,500,000
100,000)
Income to ordinary share
1,400,000
Income from continuing operations
(1,400,000 / 50,000 shares)
28
Income from discontinued operation
(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, P100 par, 80,000 shares issued

and outstanding 8,000,000
Preference share capital, P50 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.

482
computation

ShaTe

referene
Basi: Jvidend Ordinar
z 2tt
äizar eeex20
ln r Par opaon 00 00
0
iid

eze
L
imnz
fr
200 00
Amovn actio
tc t.
s star
aareaar O00 o
e
0006 00
20o 0e

.i earaass eer etare

- e0o0 C
inarear sq

*e e e..
peCial Or dinary share

A2
Determination of weighted average
Shares are usually included in isthe weighted numbo. of s
from the date consideration receivable, whicr Shar..
issue. is mattres
the date of their

a. Ordinary shares in exchange for cash are include

cash is receivable. When
b. Ordinary shares issued as a result of the
conversion
ordinary
debt instrument to
shares are includson of a
the date that interest ceases to accrue. from

C. Ordinary shares issued in place of interest

or princing
on other financial instruments are included frome-incipal
the
that interest ceases to accrue. data

d. Ordinary shares issued in exchange for the Settlem

of a liability of the entity are included from thesettlement
settlemon
date.

e. Ordinary shares issued as consideration for

acquisition of an asset other than cash are included the
the date on which the acquisition is recognized. as of

f. Ordinary shares issued for the rendering of serviced

to
the entity are included as the services are rendered

g. Ordinary shares issued as part of the Purchase

consideration of business
a
combination that is an
acquisition are included in the weighted average number
of shares from the date of the acquisition.

h. Ordinary shares that will be issued upon the 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 Philippine jurisdiction, subscribed shares are

entitled to participate fully in dividends.

484
 Beginning balance
January 1 Issued for cash 100,000
March 20% share dividend 50,000
July
Treasury shares 30,000
15,000)
Total shares outstanding
165.000
computation

(a) (b)
Shares (a x b)
Date Months outstanding Peso months
January
120,000 12
60,000 1,440,000
March 10
15,000) 600,000
November 1
30,000)

2,010,000

Average shares (2,010,000/12)

167,500

Another approach

Date Shares Fraction

Average
January 120,000 12/12
120,000
March 60,000 10/12
50,000
November 1 2/12
2,500)

167,500

Where share dividends or share splits create a change in

the capital structure, the increase or decrease in the
number of shares shall be
recognized retroactively.
In other words, the share dividends or share split shall be
treated as a
change from the date the original shares were
issued.

Thus, in the illustration, the share dividends of 30,000 shares

are identified as 20,000 with the original shares of 100,000
on January 1, and 10,000 with the original shares of 50,000
on March 1.

485
 Illustration 2

1 100,000shares issued and

January
April
Isued 50,000 new shares
Share split 2 for 1
outstanding
Purchased 20,000 treasuryshares
.June
July
20% share dividend
October
Share split 5 for 1
December 31

Computation

(a) (b)
(a x b)
Shares Months outstanding
Date Peso
12
montha
January 1,200,000
600,000 14,400,000
April
5,400,000
July
720,000)
19,080,000
Average shares (19,080,000/12)
1,590,000
Shares

January 1 (100,000 x 2 x 1.20 x 5)

1,200,000
April 1
600,000
July
120,000)
The shares are multiplied by 2 because of the 2 for 1 split,
by
1.20 because of the 20% share dividend and by 5
because of
the 5 for 1 split.

The July 1 treasury shares are not multiplied by 2 because

the shares are purchased after the 2 for 1 split on June 1.

Another approach

(a) (b) (a x b)
Date Shares Fraction Average shares
January 1 1,200,000 12/12 1,200,000
April 600,000 9/12 450,000
July 6 /12 60,000)

1,590,000

486
Bonus issue
bonus issue, ordinary shares are
a
In
shareholders
for no
consideration. issued to
existing

Therefore, the number of

ordinary shares is
increase in resources.
without increased

issue is actually share

A bonus
a
dividend.
number of ordinary shares
The outstanding is adjusted for
the proportionate change in the number
of ordinary shares
outstanding as if the bonus issue has
occurred at the
of the
earliest period presented. beginning

Illustration
Net income - 2019
7,200,000
Netincome 2020
-
6,000,000
Ordinary shares outstanding on January 1, 2019
200,000

On October 1, 2020, the

entity implemented bonus issue of
ordinary shares in the ratio
of two ordinary shares for each
original ordinary share.

If a comparative income statement is presented, the basic

earnings per share will be shown as follows:

Ordinary shares outstanding - January 1, 2019 200,000

Bonus issue on October 1, 2020 (200,000 x 2) 400,000
Total ordinary shares outstanding 600,000

Basic earnings per share

2019 (7,200,000 / 600,000) 12.00

2020 (6,000,000 / 600,000) 10.00

The bonus issue is treated as if it had occurred at the

beginning of 2019, the earliest period presented.

487
Rights issue

When rights are issued to shareholders most

exercise price is less than the fairvalue of the often
shares. the
includes bonus
Accordingly, sucha rights issueconsideration. a

meaning shares issued for no element,

Application Guidance 2 of PAS 33 provides that 'the
of ordinary shares to be used in number
share for all periods prior to the rights
per issue
number of ordinary shares outstanding prior to the
rights issue
multiplied by an adjustment factor".

The adjustment factor is the ratio of the market

value ofthe
share right-on to the market value of the share
ex-right.
The market value of the shareright-onis actually
market value of the share immediately prior the
to the
exercise
of rights.

The market value of the share ex-right is equal tothe

market value of the share right-on minus the theoretical
value
of right.

The problem is the determination of the theoretical market

value of the right.

Formula - Theoretical value of right

Thankfully, the mathematician invented a formula for the

computation of theoretical value of a right.

Market value
of share right-on
minus
subscription price
=
Value of one right
Number of rights to purchase
one
share plus 1

488
en
5 C
6250

s es n rie riti i
0
nghis issne during 2013–one new ordinary shar
esses
60
a fezersise ef rani ANT)A.2N
eeezzebes e
rg r r va r r
i f

ae e

sa ze
inus ubaerpfonpric
ae ooze ziza
zb o g t paza
one ahare plus 1

ee e
10= 50
a
-

e -. ae e eare ee

e - ee * ete. -eates
eae eae es eea

e. e-. ee. O

een c:

A2
 Computation
2019
1,375
Net income

Ordinary shares outstanding

factor 00,000
Multiply by adjustment
Adjusted ordinary shares 05,000

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

2020
1,762.50
31104,500
Net income
1.10 x 3 /12) 13,750
January 1 (50,000 x
April
(60,000 x 9/12) 45,000

shares
Total average ordinary
58,750

Basic EPS
(1.762,500 /58,750) 30

the fraction is 3/12 because the rights are

On January 1, 2020.
exercised on April 1,
actually

three months from January

1 to
April 1, 2020
The period is
already 60,000 shares
On April 1, 2020, there are
on January 1, 2020 plus 10,000
outstanding, 50,000 shares
exercise of rights on April 1, 2020.
shares issued through
nine months from April 1 to December 31, 2020
The period is

2021
2,400,000
Net income
50,000
Ordinary shares outstanding before excrcise
exercise of rights
of rights 10,000
Ordinary shares issued through 60,000
shares
Total ordinary
40
Basic EPS (2.400,000 / 60,000)

490
 ie l9ss per nare
e 500
300000
aes

emmpatation
b
a0o
r
e a20
0o00
Basi:Iss per share

heere hat ae preferenes ahare is eumaiative-

Ee
e

2 ...
de e
a no deolarafon since there is a net Toss

B l --

aees
iiteadaas aaaeeutadia 0000

A2
uTED EAlNNGs Pa8 sHA8

OE

i
=ei --
--ta =
l i
e i ia
e
nd share options or uarrants
Diluted earnings per share
The computation of
the diluted
the 'as if' scenario: earnings per share is
on based
"As if' the convertible bond
ordinary share payable is converted
into
"As if' the convertible
b.
ordinary share.
preference share is converted
into
"As if" the share options and
C.
warrants are exercised.
Convertible bond payable
The computation of diluted earnings per share assumes
the bond payable iS that
converted into ordinary share
Accordingly, adjustments shall be made
both to net income
and to the number of ordinary shares
outstanding.
The net income is adjusted by adding
on the bond payable, net of tax.
back the interest
expense

The number of ordinary shares outstanding is increased by

the
number of ordinary shares that would have been issued
upon conversion of the bond payable.

Illustration

An entity had the following securities outstanding at the

beginning of the current year:
10% convertible bonds payable, each P1,000 bond
convertible into 10 ordinary shares 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%

Basic earnings per share

Net income 5,000,000

100,000
Divide by ordinary shares actually outstanding
50
Basic earnings per share

509
 share
Diluted earnings per

5,000 0
1000,000
Net income on bonds payable
Add:
Interest expense 400,000
(10% x 4,000,000) (120,000)
400,000)
Income tax (30% X 400,00n

income 5,280.00
Adjusted net

Ordinary shares actually outstanding 100,000

Ordimed issued ordinary shares through
uneersion of bonds payable (4,000 x 10) 40,000
shares 140,000
Total ordinary

Diluted EPS (5,280,000/140,000) 37.71

Observe that if a convertible bond payable is outstanding

it is assumed that the conversion
during the entire year,
takes place at the beginning of the year.

Bond payable issued during the year

Assume that the convertible bond payable is issued on April
of the current year. In this case, all conversion computations
will be made for nine months only, from April
1 to December

31 of the current year.

Accordingly, the diluted earnings per share would be

modified.

Net income 5,000,000

Add: Interest expense on bonds payable
(4,000,000 x 10% X 9/12) 300,000
Income tax (30% x 300,000) 90,000) 210,000

Adjusted net income 5,210,000

Ordinary shares actually outstanding 100,000

Assumed issued ordinary shares through conversion
of bonds payable (4,000 x 10 = 40,000 x 9/12) 30,000

Total ordinary shares 130,000

Diluted EPS (5,210,000 x 130,000) 40.08

Needless to say, the basic earnings per share would remain

the same.

510
 Bonds
actually converted
-

had the following

Anentity of the current securities outstanding
beginning year: at the
Convertible bonds payable 10%, each P1,000
bond convertible into 40
ordinary shares
Ordinary share capital, P100 par, 500,000
shares authorized, 200,000sharesissued 4,000,000
Netincomefor the year 20,000,000
rate
Income tax 5,000,000
bonds were converted 30%
All of the of the into ordinary
October 1 current year. shares on

Basic earnings per share

January 1 Outstanding
October 1 Conversion (4,000 x 40 x 3/12) 200,000
40,000
Average ordinary shares
240,000
Basic EPS (5,000,000 /240,000)
20.83
Diluted earnings per share

January 1 Outstanding
October 1 Conversion (4,000 x 40) 200,000
160,000
Total ordinary shares
360,000
The issuance of ordinary shares on October - is not
"averaged" anymore because the convertible bonds are
outstanding on January 1.

Net income
Interest on bonds net of tax from January 5,000,000
to
October 1 (4,000,000 x 10% x 9/12 70%)
210,000
Adjusted income
Divide by ordinary shares 5,210,000
360,000
Diluted EPS
14.47

The after-tax
actual interest paid on the bonds up to the
date of conversion on October 1 is added back to net
income.

511
Convertible preference share
convertible preference share, the
If there is a computation
also assumesthatthe
of diluted earnings pershare
share is converted
into ordinary share. preference
is not reduced anymore
Accordingly, the net income by the
amount of preference dividend.

The number of ordinary shares outstanding is increased

the number of ordinary shares
that would have been Dy
conversion of the preference share. issued
upon

Illustration

10% convertible cumulative preference share capital,

P100 par, 30,000 shares - - one preference share
is convertible into two ordinary shares
3,000,000
Ordinary share capital, P100 par, 250,000 shares
authorized, 100,000 shares issued 10,000,000
Net income
6,000,000
Basic earnings per share

Net income 6,000,000

Preference dividend (10% x 3,000,000) 300,000)
Adjusted income 5,700,000
Divide by ordinary shares actually outstanding 100,000
Basic earnings per share 57

Diluted earnings per share

Net income
6,000,000

Ordinary shares actually outstanding 100,000

Assumed issued ordinary shares through conversion
of preference share (30,000 x 2) 60,000

Total ordinary shares 160,000

Diluted EPS (6,000,000 / 160,000) 37.50

Observe that the conversion is assumed to be made at the

beginning of the year because the convertible preference
share is outstanding
during the entire year.

512
 share issued during the year
convertible preference share is issued on
the
current year, the
September
of the conversion computation will only
from September 1
be
for four months, to December 31 of the
year.
current
;. income
Net incoure 6,000,000

shares actually outstanding

Ordinary 100,000
Assumed issued ordinary shares through conversion
of preference share (30,000 x 2 = 60,000 x 4/12) 20,000

Total ordinary shares 120,000

Diluted EPS (6,000,000/120,000) 50

The basic earnings per share would remain the same.

Illustration - Preference shares actually converted

An entity had the following securities outstanding at the
of the current year:
beginning
Preference share capital - 10%, 50,000 shares,
P100 par, cumulative and convertible into
100,000 ordinary shares 5,000,000
Ordinary share capital, 200,000 shares issued 10,000,000
Net income for the year 4,000,000

The preference shares were all converted into ordinary shares

on October 1 of the current year. The preference dividends
for the entire year were paid in full before the conversion.

Basic earnings per share

January 1 Outstanding 200,000
October 1 Conversion (100,000 x 3/12) 25,000

Average ordinary shares 225,000

Net income 4,000,000

Preference dividend (10% x 5,000,000) 500,000)

Net income to ordinary shares 3,500,000

Basic EPS (3,500,000/225,000) 15.56

Note that the preference dividends are deducted from net

income because the preference dividends were paid in full
before the actual conversion. Otherwise, the preference
dividends are ignored.

513
 share
Diluted earnings per

January 1 Outstanding
October 1 Conversion 100,000
100,00
Total ordinary shares
500,000
The issuance of ordinary shares on Octobo™
because the convertible 1 is
"averaged" anymore
shares are outstanding on January 1.

Net income
4,000 0

Diluted EPS (4,000,000/300,000)

13.33

Whether the preference dividends were paid or not before

the actual conversion, the diluted earnings per share
Would
be the same.

Options and warrants

Share options are granted to employees enabling them

to
acquire ordinary shares of the entity at a
specified price
during a definite period of time.

Share warrants are granted to shareholders enabling them

to acquire ordinary shares of the entity at a specified price
during a definite period of time.

By definition, options and warrants have no cash yield but

they derive their value from the right to obtain ordinary
shares at a specified price that is usually lower than the

prevailing market price.

Options and warrants are dilutive if the exercise price or

option price is less than the average market price of the
ordinary share.

However, for employee share options, the exercise price or

option price shall include the fair value of any services to be
supplied to the entity in the future under the option plan.

514
 share method
Treasury

and warrants are included in

Options the EPS computation
the treasury share method.
through

this does not imply that the entity has entered

However,
transaction to purchase treasury shares.
into a

share method is used to

The treasury simplify the computation
incremental ordinary shares that are assumed to be issued
of increment
consideration as a result of options and warrants.
for no

The following procedures shall be followed in the

computation of incremental ordinary shares arising from
issuance of options and warrants:

a.
The options and warrants are assumed to be exercised
atthe beginning of the current year or at the date issued
during the current year.

b. The proceeds from the exercise of the options and

warrants are assumed to be used to acquire treasury
shares at average market price.

C. The number of incremental ordinary shares is equal to the

option shares minus the assumed treasury shares acquired.

The incremental ordinary shares represent the issue of

ordinary shares for no consideration.

Accordingly, these the potential ordinary shares that

are

are included in the computation of diluted earnings per

share.

The assumed proceeds from the options and warrants shall

be considered to have been received from issue of shares at

fair value or average market price.

515
 astates

eeace
0000o
O,tionshar t

eeeewaeten

.i eaniłg Per Share

s ee ,00000
ais atutid 0000
.i.i ar

i eisss e aar

s aea 000 00

,tion srares
ii te etaieataa aziea
. d ased eeis dos 0o
ivid avs aark ere

AsSued asurSnar a0

O,tionpri
3
a tadeteaaaaaseoaea
ienaeazs
5

e te e i e eo e :i
ahatl inctude the fair val ne of share option in accordan
t Da o 2

inanaar aa,md
neementai erdinary shares
Optionstares
000
A3SuEAEaSuXShaX Es 2ee
eaesaiaasss aese
200

ieedas 6t0 t0a t0 e

e
ions issued during the year
i t * = =i i a

e ee i
aiez H(

a e ani 0000
000

000

iiad EE5 6800e8 1000 . d.

eedess i sar, he bosie eorzings per shore uould endi

e 2ae

ema ezercie of optione and arane

a =i t
t aae a aan
tt sa s a sta asaat-
eagad fon te do of eade t te ed o i
uent ear

m inemr ordisr ar r
he bnne e ie eeve a e deee.
ntions tnd tarTanfs

statos

e e 000 00
-da erar .-t Pioe-a 1eeeeeeha- 0.000 000
hare ontions
,tionsrare
aenae

o vane ia asiened t the abaze ontons On aori 1 of te

urrant vear tae ontione are actuale ezereiaad. Oa thia date
aaea eee eee

1
 share
Basic earnings per

Net income
6,000,000
Ordinary shares actually outstanding:
January 1 Outstanding
1 Exercise of share options (30,000 X 9/12)
100,000
April
22,500
Total
122,500
Basic EPS (6,000,000/ 122,500)
48.98
Diluted earnings per share

Net income
6,000,000
Option shares 30,000
Multiply by exercise price 150
Proceeds from assumed exercise of options
4,500,000
Option shares 30,000
Assumed treasury shares (4,500,000/250)
(18,000)
Incremental ordinary shares 12,000
Multiply by three months from January 1 to April - 3/12
Weighted average incremental shares 3,000

Note that the market price on the "date of actual exercise"

is used in computing the assumed treasury shares.

In this case, the market price is P250 on April 1 which is the

date of exercise.

Ordinary shares actually outstanding:

January 1 Outstanding 100,000

April 1 Exercise of share options (30,000 x 9 /12) 22,500
Weighted average incremental shares 3,000
Total
125,500

Diluted EPS (6,000,000/125,500) 47.81

518
 net loss
Illustration.
provided the following data for
An entity
the current
year:

Net loss share capital, P100 par, 5,000,000)

100,000 shares
Ordinary sharecapital, P100 10,000,000
Preference par, 10% cumulative.
20,000 sharesconvertible into 40,000
ordinaryshares 2,000,000
share
Basic lossper
Net loss 5,000,000)
Preference dividend (10% x 2,000,000) 200,000)
shareholders
Total loss to ordinary 5,200,000)
shares actually outstanding
Divide by ordinary 100,000

Basic loss per share 52)

Observe that the preference dividend is added to the net

total loss to the ordinary shareholders because
loss to get
share is cumulative.
the preference

Diluted loss per share

Net loss (5,000,000)

Ordinary shares actually outstanding 100,000

Assumed ordinary shares issued through conversion
40,000
of preference shares
140,000
Total ordinary shares

35.71)
Diluted loss per share (5,000,000/140,000)
lower than the
Observe that the diluted loss per share is
basic loss per share.
basic loss per share is
If the entity has a net loss, only the
computed and reported.
the as the basic loss per
per share is
same
The diluted loss
share but not reported anymore.
reason is that the potential
ordinary shares would
The the
always decrease the loss per share and therefore
antidilutive.
is always
assumed conversion
effect of the

519
CHAPTER 21

DILUTED EARNINGS PER SHARE

Multiple potential ordinary shares

TECHNICAL KNOWLEDGE

To determine diluted earnings per share where

there
is combination of multiple potential
ordinary shares.

To apply the test for dilution of potential ordinary

shares.

To know the accounting treatment of contingent

ordinary shares in EPS computation.

537
 ordinary shares
Multiple potential

If there is only one dilutive potentialordinaryshare,there

is no accounting problem.
the entity has two or more
A problem arises where dilutive
shares.
potential ordinary

In considering whether potential ordinary shares are

dilutive or antidilutive, each issue
or series of
potential
ordinary shares shall be considered separately or
individually, rather than in the aggregate.

In order to maximize the dilution of the basic earnings per

share, each issue is considered in sequence from the most
dilutive to the least dilutive.

In other words,the potential ordinary shares shall be ranked

based on their contribution in terms of incremental EPS.

The potential ordinary share with the lowest incremental

EPS is ranked first.

538
Test for dilution
warrants
Options and
and warrants are dilutive if the
The options option price or

exercise price is lower than the average market price.

The options
and
warrants are the most dilutive because
no impact on
options and warrants have net income.

Thus, the options

and warrants are ranked first in
computing
diluted earnings per share.

share
Convertible preference

The
contribution of the preference share to net income is
the amount of preference dividend that is avoided because
conversion.
of the

The incremental EPS for convertible preference share is equal

to the
amount of annual preference dividend divided by the
number of ordinary shares into which the preference share is
convertible.
incremental EPS is lower than the basic EPS, the
If this
convertible preference share is probably dilutive. If this
incremental EPS is higher than the basic EPS, the preference
share is antidilutive.

Convertible bond payable

income is the
The contribution of the bond payable to net
that is avoided because of the
amount of interest expense
conversion.

The incremental EPS for

the convertible bond payable is equal
of
to the interest expense, net of tax divided by the number
convertible.
ordinary shares into which the bond
payable is

lower than the basic EPS, the

If this incremental EPS is
convertible bond payable is
probably dilutive. If this
incremental EPS is higher than the basic EPS, the convertible
bond payable is antidilutive.
539
Illustration
data for the current
the following year
An entity provided
operations 5,000,000
Income from continuing (1,000,000)
Toss from discontinued operations
outstanding 500,000
shares actually
Ordinary 50,000
Option shares 60
Option price
15
Average market price 5,000,000
Preference share capital, P100 par 5,000,000
Bond payable 30%
Income tax rate

share capital 18 5% cumulative and

The preference shares.
convertible into 25,000 ordinary
of 10% and is convertible
The bond payable has nominal rate
into 40,000 ordinary shares.

Procedures

The first step is to compute the basic earnings per share.

Income from continuing operations 5,000,000

Preference dividends (5% x 5,000,000) 250,000)

Income to ordinary share 4,750,000

Divide by ordinary shares actually outstanding 500,000

Basic EPS 9.50

In calculating whether potential ordinary shares are

dilutive, the income figure used as the "control number" is

the income from continuing operations.

The second step is to determine whether the potential

ordinary shares are dilutive or antidilutive.

540
est for Bton
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atinshare 0 00(
es
etoar sa
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itissmiisas at. -e
-EPs 066

tt s ieaaa.
heieemenial EPsis hishe than thebasi. ees ee s
Convertible bene pavahe

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eavatb bead eaat i eatataie aia

asause the inerementl EPe is Jouer than the basin PPe

te eeta aiaar sa stai t :ke i

computation of the diluted E atartimg wth the low e st
aeresent ) EPS

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 -ie ootet od

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o
,es -s Ps ven n pn mi an inn
aee e
neremmental
aae Paeen sae va
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.ss EO C U O0
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Corvertibe Ps

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e es eeten e* aaedto

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neoa aoaeaaaaeoao xs. s
sfOn dson e 0peraton (000000r0000o(0
et eee S

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etc-e

A
written options
Written put

Put options on ordinary shares are contracts

that give the
the right to sell ordinary shares
holder at a
specified price
for a given period.
Contracts that require the entity to repurchase its own
shares,
such aswritten put options and forward
reflected in the
purchase
contracts are calculation of diluted earnings
share if the effect is dilutive.
per

If these contracts are "in the money",

meaning the exercise
settlement price is higher than the average market
or price,
the potential dilutive effect on earnings per share shall be
calculated as follows:

a. It is assumed that at the beginning of the period sufficient

ordinary shares will be issued at the average market
price.

b. It is assumed that the proceeds from the issue are used

to satisfy the contract or buy back the ordinary shares
covered by the written put options.

C. The difference between the number of ordinary shares

assumed issued and the number of ordinary shares
repurchased under the written put options represents
the incremental ordinary shares.

d. The incremental ordinary shares shall be included in the

calculation of diluted earnings per share.

543
Illustration

written
An entity has outstanding 12,000
put options
on
exercise price of P350. the
ordinary shares with an

This means that the entity must repurchase its own

share or a total 12,000
ordinary shares at P350 per put
of P4,200,000. The average market price is P280 V0 gation

The question is how many ordinary shares would be iSSued

by the entity in order to raise the put obligation of P4,200,000

In this case, it is assumed that the entity shall issue

ue ordinary
shares at the average price of P280 per share.

Accordingly, the total ordinary shares assumed issued

would be equal to P4,200,000 divided P280
or 15,000 shares

The number of incremental ordinary shares to te included

in computing diluted earnings per share is determined as
follows:

Ordinary shares assumed issued 15,000

Ordinary shares repurchased under the written put options 12,000
Incremental ordinary shares 3,000

544
Contingent ordinary shares
critrar ythemy aoe enti
aneremeconditions contingent
little
hungy
consideration
cash or other
shares issuable for
upon satisfaction of
specified in a share agreement.

A contingent share agreement is an agreement to issue

ordinary shares that is dependent on the satisfaction of
specified conditions.
Contingent ordinary shares are treated as outstanding and
included in the computation of both basic and diluted
earnings per share if the conditions are satisfied.

The difference lies in the number of contingent shares that

would be included in the computation of earnings per share.

Contingent ordinary shares are included in the calculation

of basic earnings per share from the date the condition is
satisfied.

Contingent ordinary shares are included in the computation

of diluted earnings per share from the beginning of the

period or from the date of the contingent agreement, if later.

545
 Illustration

Net income for the year

Ordinary shares outstanding on January 1, 2019 12,000,000
500,000
An agreement on January 1, 2019 related to a
combination provides for the issue of business
additionalordinary
shares based on the following conditions:

a. 15,000 additional ordinary shares for each new retail

site
opened during 2019.

Retail sites were opened on May 1, 2019 and

2019.
October 1,

b. 10,000 additional ordinary shares for every P1,000,000

net income in excess of P10,000,000 for 2020.

Basic earnings per share

Ordinary shares - January 1, 2019

500,000
Retail site condition satisfied:
May 1 2019 (15,000x 8/12)
October 1, 2019 (15,000 x 3/12)
10,000
3,750
Total ordinary shares
513,750
Basic earnings per share (12,000,000 /513,750) 23.36

Note that the second condition about

has no effect
earnings contingency
basic earnings per share because it is not
on

certain that the condition is satisfied until the end of the

contingency period on December 31, 2020.

546
Dilutedearnings per share

Ordinary shares outstanding-January 1.2019

condition:
Retail site 500,000
May 1, 2019
October 1, 2019
15,000
Earnings condition (10,000 x 2) 15,000
Total ordinary shares 20,000

Diluted earnings per share

550,000
(12,000,000/550,000)
21.82
As stated earlier,
in the computation of
contingent ordinary shares are included
diluted earnings per share from
beginning of the period or from the the
date of
if later. agreement,
Thus, the full ordinary shares
from theretail
and earnings condition are site condition
recognized.
Note that the
earnings condition must be satisfied on
December 31, 2020 but
already
diluted earnings per share. considered in computing

PAS 33, paragraph 58, provides that if a specified amount of

earnings is a condition for a contingent issue and that arot of
is already attained at the end of the current period, the
contingent
ordinary shares are included in the
computation of the diluted earnings per share.
It is as if the amount of earnings at the end of the current
period is the amount
of earnings at the end of the contingency
period.

Restatement is not permitted if the conditions are not met

when the contingency expires on December 31, 2020.

547
 shares cash
Convertible bonds settled in
or

bonds payable that may be

When an entity has issued the issuer's option,the
settled
in ordinary shares or cash at will
entity
be settled in ordinary
shall presume that the bonds
shares.

shall be
The resulting potential ordinary shares share includedmn
if the
the calculation of diluted earnings per effect is
dilutive.

Convertible bonds arecompound instrument and accounted

for as partly liability and
partly equity.

The interest expense, net

of tax, on the liability component
is added back to the net income.

Illustration

At the beginning of the current year, an entity issued 3-year

convertible bonds with face value of P5,000,000.
The issue price is equal to the face value and the interest
is
payable annually at the rate of 6%.

Each P1,000 bond is convertible into 200 ordinary shares.

The entity has the option to settle the principal amount of
bonds payable in ordinary shares or cash.
When the bonds are issued, the prevailing market interest
rate for similar bonds without the conversion feature is 9%.

The following data are available for the current year:

Net income 10,000,000
Bonds payable 5,000,000
Ordinary shares outstanding 2,500,000
Potential ordinary shares, each P1,000 bond is
convertible into 200 shares (5,000 x 200) 1,000,000
Income tax rate 30%

The convertible bonds shall be accounted for as partly

liability and partly equity.

Thus, the proceeds of P5,000,000 should be allocated first to

the liability component and the remainder to the equity
component.

548
6. In computing basic earnings per share, if the preference
shares are cumulative, the amount that should be deducted
an adjustment to the numerator is the

Preference dividends in arrears

Preference dividends paid during the year
Annual preference dividend
c. Annual ordinary dividend
7. In computing basic earnings per share, the amount of
preference dividends on noncumulative preference
shares should be

Deducted from net income whether declared or not

Deducted from net income only when declared
Added to net income only when declared
d. Ignored

8. In computing basic earnings per share, the full amount

of the required preference dividends on cumulative
preference shares for the period should be

a. Ignored
b. Deducted from net income only when declared
Deducted from income whether declared or not
net
©. Added to net income whether declared or not

9. In computing basic loss per share, the annual preference.

dividend on cumulative preference shares should be

a. Ignored
Deducted from the net loss whether declared or not
b.
0 Added to the net loss whether declared or not
d. Added to the net loss only when declared

ANSWER 60-11

1. d 6.
2. b 7. b
3. c 8.
4. C 9.
5. d

783
 choice (IFRS)
Multiple
QUESTION 60-12
calculated before accounting
share shall be
1. Earnings per
the following?
of
for which

Preference
dividend for the period
dividend
Ordinary
Taxation
d. Minority interest
and the
If a bonus
issue occurs hetween the year-end date
2.
that the Bnancial statements are authorized for issue
the previous year
The EPS for both the current and are

adjusted only is adjusted

b. The EPS for the currenttoyear
No adjustment is made EPS
c. Diluted EPS only is adjusted

of shares for cash is made between the

3. If a new issue
year-end and the date that the financial statements
are

authorized for issue

The EPS for both the current and the previous year are
adjusted.
The EPS for the current year only is adjusted.
adjustment is made to EPS.
No
d. Diluted EPS only is adjusted.
4. The weighted average number of shares outstanding during
than the conversion of
the period for all periods other
potential ordinary shares should be adjusted for
number of ordinary shares without a
D Any change in the
change in resources.
b. Any prior period adjustment.
Any new issue of shares for cash.
convertible instruments settled in cash.

5. Which figure for earnings does EPS information use?

a. Profit attributable to ordinary equity holders and
preference shareholders of the parent
b. Profit before taxation
Profit from operations
the
Profit attributable to ordinary equity holders of
parent

784
6. Ordinary shares issued as part of a business combination
are included in the EPS calculation from

The beginning of the accounting period.

The date of acquisition.

C. The end of the accounting period.

d. The midpoint of the accounting year.

which are issued to settle a liability are included in

7. Shares
the EPS calculation from

a. Date of the contract for services

b. Halfway through the rendering of services
C. The completion of services

) The settlement date

8. Shares which are to be issued upon the conversion of a
mandatorily convertible instrument are included in the
calculation of basic earnings per share from

? That cate on he contrane foue

The date of the contract for the shares

c. The date of conversion

d. The issue of the share certificate

9. Under IFRS, where ordinary shares are issued but not fully
paid, the ordinary shares are treated in the calculation of
basic EPS

In the same way a8 fully paid ordinary shares.

As a fraction of an ordinary share to the extent that the

shares are entitled to participate in dividends.

C. In the same way as warrants or options and are included
only in diluted EPS.
d. Are ignored.

ANSWER 60-12

b
6. b
7. d
a
b
d

785
 Multiple choice (LAA)
QUESTION 60-13
statements should basic and
financial diluted
1. Where in the
EPS be reported?

In the accompanying notes

discussion and analysis
In management c
In the income statement
cash flows
d. In the statement of

2. An entity that reports a discontinued operation shall

present
basic and diluted earnings per share for the

discontinued operation

a. Only on the face of the income statement.

b. Only in the notes to financial statements.
© Either on the face of the income statement
or in the

notes to financial statements.

d. Only if management chooses to do so.

3. What is the correct treatment of a share dividend issued

in mid-year when computing the weighted average number
of ordinary shares outstanding for earnings per share
purposes?

a. The share dividend should be weighted by the length of

time that the additional shares are outstanding during
the period.
b. The share dividend should be included
in the weighted
average number of shares outstanding only if the
additional shares result in a decrease of three percent
or more in earnings per share.
(ex The share dividend should be weighted as if the
additional shares weré issued at the beginning of the
year.
d. The share dividend should be ignored since no additional
capital was received.

786
4. of weighted average number of shares
In the computation
outstanding when there is a share split, the additional
shares are

Weighted by the number of days outstanding.

b. Weighted by the number of months outstanding.
Considered outstanding at the beginning of the year.
Considered
& year outstanding at the beginning of the earliest
reported.

5. Earnings per share should be computed on the basis of

Preference shares
Voting ordinary shares
Voting and nonvoting ordinary shares
d. Voting ordinary shares and participating preference
shares

6. Undeclared preference dividends are deducted from net

income in the earnings per share computation for which
type of preference shares?

Noncumulative
Cumulative
c. Neither cumulative nor noncumulative
d. Both cumulative and noncumulative

7. Earnings per share should always be reported for

a. Gross profit
b. Income before tax

© Income from continuing operations

Prior period error

ANSWER 60-13

5. b
6. b
7. c

787
QUESTION 60-14 Multiple choice (PAS 33)
of the
1. Potential ordinary shares include all following.
except
that
Financial liabilities
or equity instruments are

nonconvertible into ordinary shares

b. Share warrants

C. Share options or employee plans that allow employees

to receive ordinary shares as part of their remuneration
d. Shares which would be issued upon the satisfaction of
certain conditions resulting from contractual
of a business
arrangements, such as purchase

2. Options and warrants are dilutive if

The exercise price is lower than the average market price.
2 The exercise price is higher than the average market price.
to the average market price.
C. The exercise price is equal
option shares represent 20% of the ordinary
shares
d. The
actually outstanding.

3. When applying the treasury share method for diluted

earnings per share, the market price of the ordinary share
used for the assumed acquisition of treasury shares is
the

or Market price at the end of the year

g Average market price during the year
C. Market price at the beginning of the year
d. Average market price over a two-year period

4. Under the treasury ½hare method, the number of potential

ordinary shares is equal to

Option shares
shares
Option shares minus assumed treasury
acquired
C. Assumed treasury shares acquired
d. Option shares actually issued during the year

788
 5. In
determining dilutedearnings
income tax,
expense,should
net of per
dilutive share, interest
on

payable be
convertible bond
Added back to weighted
8.
for diluted earnings per
averuge shares
share. outstanding
Added back to net
income for diluted
share.
earnings per
Deducted from net income for
diluted earnings
C.
share.
per
d. Deducted
from
weighted average
for diluted earnings per
share.
shares outstanding

6. In computing diluted EPS,

dividends
cumulative preferenceshares should be on convertible

@ Ignored
Deducted from net income. whether
Deducted from net income declared or not
C. only when declared
d. Added to net income net of tax

7. A written put option is a contract that

repurchase its own ordinary shares required an entity to
at a
Which statement specified price.
is incorrect if the written put options
are "in the money"?
It is
assumed that at the beginning of the
sufficient ordinary shares will be issued at the period
average
market price to raise the proceeds to satisfy the contract.
b. It is assumed that the proceeds from
the issue are used
to
buy back the ordinary shares covered by the written
put options.
The
resulting incremental ordinary shares shall be
C.

included in
The
computing diluted earnings per share.
resulting incremental ordinary shares shall be
included in
computing basic earnings per share.
ANSWER 60-14
1. 8
5. b
2. a
a. b 6.
4. b 7. d

789
 (IFRS)
Multiple choice
QUESTION 60-15 relation to
following must be disclosed in earnings
1. All of the
per share, except
per share for the following year.
E Forecast earnings dilute basic earnings
b. but not included in the diluted
the future
per share in the current period.
they are antidilutive in
EPS because number of ordinary shares used.
The weighted average EPS.
C.
d. The earnings figures used in calculating
of EPS is defined a9
2. Dilution
share when any financial
a. Decrease in earnings per
converted to any form of share capital.
instrument is
Decrease in share capital.
Decrease in
earnings per share when convertible
converted to ordinary shares.
instruments are
d. Decrease in earnings per share when share capital is

debt capital.
converted to
March 31
3. If a share option is converted on

The potential ordinary shares are included in diluted

31, and in basic EPS from the date
EPS up to March
converted to the year-end, both weighted accordingly.
in diluted EPS.
b. The ordinary shares are not included
are not included in basic EPS.
The ordinary shares
C. are included only in
d. The effects of the share option
previous year's EPS calculation.
4. In calculating whether potential ordinary shares are
used as the "control number"
19
dilutive, the profit figure
discontinued operations
Net profit after tax including
Net profit from continuing operations
Net profit before tax including discontinued operations
C.
d. Retained profit for the year after dividends

ANSWER 60-15

1. a 3. a

2. c 4. b

790
QUESTION 60-16 Multiple choice (AICPA Adapted)
the
1. How will annual interest or preference dividend affect
annual net earnings available to ordinary shareholders?
8. Annual net earnings available to ordinary shareholders
are reduced by annual interest but not by preference
dividends.
b. Annual net carnings available to ordinary shareholders
are reduced by preference dividends but not by annual
interest.

Annual net earnings available to ordinary shareholders

reduced by
are
both annual interest and preference
dividends.
d. Annual net earnings available to ordinary shareholders are
not reduced by annual interest or preference dividends.

2. The "if converted" method of computing earnings per share

assumes
conversion of convertible bonds payable at
Beginning of the earliest period reported or at time of
issuance, if later.
b. Beginning of the earliest period reported regardless of
time of issuance.
Middle of the earliest
C.
period reported regardless of the
time issuance
d. Ending of the earliest period reported regardless of the
time of issuance

3. The nature of diluted earnings per share involving

adjustment for share options can be described as
a. Historical because earnings are historical
b. Historical because it indicates an entity's valuation
© Proforma because it indicates potential changes in
number of shares
d. Proforma because it indicates potential changes in
earnings

4. What is the justification underlying the concept of potential

ordinary shares in an EPS computation?
Form over substance

RAg
Substance over form
Form and substance considered equally
Accounting practice
ANSWER 60-16
1.
2. 3, c 4. b

791
QUESTION 60-17 Multiple choice (IAA)

1. Antidilutive securities

a. Should be included in the computation of diluted

not basic earnings per share.
earnings per share but
b. Are those whose inclusion in earnings per share
computation would cause basic earnings per share to
exceed diluted earnings per share.
C. Include share options and warrants whose option
price is less than the average market price.
® Should be disregarded in all EPS computations.
2. When there are multiple dilutive convertible securities.
the one that should be used first to calculate dilutive
earnings per share is the security with the

a. Largest earnings adjustment

b. Largest earnings per share adjustment
Smallest earnings adjustment
SEd Smallest earnings per share adjustment

3. For an entity having several different issues of convertible

securities, share options and warrants, the standard
requires selection of the combination of securities producing

(B The lowest possible earnings per share.

b. The highest possible earnings per share.
C. The earnings per share figure midway between the
lowest possible and the highest possible earnings per
share.
d. Any earnings per share figure between the lowest
possible and the highest possible earnings per share.

4. The purpose of diluted earnings per share is to

a. a comparison figure for debt holders.

Provide
b. Indicate earnings shareholders shall receive in future
periods.
C. Distinguish between entities with a complex capital
structure and entities with a simple capital structure.
Show the maximum possible dilution of earnings.

792
 5. In calculating diluted earnings per share, which of the
following should not be considered?
a: The weighted average number
of ordinary shares
outstanding
b. The amount of dividends declared on cumulative
preference shares
The amount of cash
shares
dividends declared on ordinary
d. The number of ordinary shares resulting from the
assumed conversion of
bonds payable outstanding
6. Which statement is correct in relation to EPS?
a.
If preference
the
share is outstanding, dividend declared
on preference share is always deducted from net
income in calculating EPS.
EPS can never be negative.
OF If income from continuing operations is less than zero,
potentially dilutive securities are antidilutive.
d. All issues convertible to ordinary shares must be
included in the calculation of diluted
EPS.
7. An entity already has calculated the basic earnings per
share. In determining diluted earnings per share. the annual
dividend on convertible
cumulative preference sharé
which is dilutive should be

Added back to the numerator

of basic EPS whether
declared or not.
b. Deducted from the numerator of basic EPS only if
declared.
Added back to the numerator of basic EPS only if
declared.
d. Deducted from the numerator of basic EPS whether
declared or not.

8. In determining diluted earnings per share, dividends on

nonconvertible cumulative preference shares should be
a. Disregarded
b. Added back to net income whether declared or not
Deducted from net income only if declared
© Deducted from net income whether declared or not

ANSWER 60-17
1. d 3. a 7. a
2. d 4. d 6. c 8. d

793