PAS 33 EARNINGS PER SHARE

- Prescribe the principles in computing and presenting earning per share (EPS) to
promote inter- and intra-comparability
- Requires publicly listed entities, including those in the process of enlisting, to present
EPS information.

A publicly listed entity is one whose ordinary shares or potential ordinary shares are traded in
a public market.

EARNINGS PER SHARE

- A computation made for ordinary shares. It a form of profitability ratio which provides a
measure of how much profit (loss) each ordinary share has earned (incurred) during the
period.

An ordinary share is an equity instrument that is subordinate to all other classes of equity
instruments.

A preference share is one that has preference over other classes of shares, such as preference
over dividends or preference over net assets in cases of liquidation but typically does not having
voting rights. .

Types of EARNINGS PER SHARE

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

BASIC EARNINGS PER SHARE

Basic EPS is computed as follows:

Profit (loss)less Preferred Dividends

Basic EPS=
Weighted Average number of outstanding ordinary shares

EARNINGS
1. Profit (loss) is net of income tax expense. It includes any exceptional, unusual or
infrequent gains or losses.
2. Preferred dividends are deducted as follows:
a. If the preference shares are cumulative, one-year dividend is deducted, whether
declared or not.
b. If the preference shares are non-cumulative, only the dividend declared during
the period is deducted.
Dividends in arrears (i.e., those pertaining to prior periods) are ignored in the computation of
EPS.
The numerator (or the difference between profit (loss) and preferred) and represents the
profit or loss attributable to ordinary shareholders. This amount is also adjusted for the
following, which are treated like preferred dividends:
a. Amortization of discount or premium on increasing rate preference shares. Discount
amortization is deducted from, while premium amortization is added to, profit or
loss.
b. Any gain or loss (that is recognized directly in retained earnings) arising from settling
or repurchasing preference shares. Loss is deducted from, while gain is added to,
profit or loss.
c. In an induced or early conversion of convertible preference shares, the excess of fair
value of ordinary shares or other additional consideration paid over the fair value of
the ordinary shares issuable under the original conversion terms ('loss') is
deducted from profit or loss. Conversely, a gain is Added to profit or loss.

SHARES
The denominator is the weighted average number of shares outstanding. This is computed
by applying a time-weighting factor to the number of ordinary shares at the beginning of the
period and to all issuances and reacquisitions during the period.

● Outstanding shares are those that are entitled to participate in dividends.

Outstanding shares are (1) issued shares plus (7) subscribed shares minus (3)
treasury shares.

Shares are usually time-weighted from the date consideration is receivable

(which is generally the date of their issue). Thus:
A. Shares issued outright are averaged from the issuance date.
B. Subscribed shares are averaged from the subscription date.
C. Treasury shares are averaged
i. as reduction to the number of outstanding shares from the reacquisition date; or
ii. as addition to the number of outstanding shares from the reissuance date.

Other events:
➔ Shares issued in a business combination are averaged from the acquisition date.
➔ Shares issuable upon the conversion of a mandatorily convertible instrument are
averaged from the date the contract is entered into.
➔ Contingently issuable shares are averaged when the conditions have been satisfied.
ILLUSTRATION:
Entity A had 50,000, P10 par; 6% cumulative preference shares outstanding all throughout
20x1. Entity A reported proft after lax of P1,200,000 for the year ended December 31, 20x1.
The movements in the number of ordinary shares are as follows,

1/1/20x1 Ordinary shares outstanding 180,000

4/1/20x1 Shares issued for cash 30,000
6/30/20x1 Subscribed shares 10,000
10/1/20x1 Reacquisition of treasury shares (20,000)
Outstanding shares at the end of period 200,000

> The weighted average number of ordinary shares outstanding is computed as follows:
Date No. of sh. Months outstanding Weighted average
(a) (b) (c) = (a) x (b)
1/1/20x1 180,000 12/12* 180,000
4/1/20x1 30,000 9/12** 22,500
6/30/20x1 10,000 6/12 5,000
10/1/20x1 (20,000) 3/12 (5,000)
202,500

* 12 months from Jan. 1 to Dec. 31 divided by 12 months in a year.

**9 months from April 1 to Dec. 31 divided by 12 months in a year.

➢ The basic earnings per share is computed as follows;

Profit (loss)less Preferred Dividends
Basic EPS=
Weighted Average number of outstanding ordinary shares
1,200,000−(50,000 x P 10 x 6 % )
Basic EPS =
202,500

BASIC EPS = (1,200,000 - 30,000) / 202,500 = P5.78

One-year dividend (whether declared or not) is deducted from profit or loss because the
preference shares are cumulative.

Retrospective adjustments

When ordinary shares are issued without a corresponding change in resources

(assets), the basic and diluted EPS and the weighted average number of ordinary shares
outstanding during the period and for all periods presented are adjusted retrospectively.

Examples of issuance of ordinary shares without a corresponding change in

resources include:
 a. Share or stock dividend (capitalization or bonus issue)
b. A bonus element in any other issue (e.g., preemptive stod
rights)
c. Share split or stock split-up (i.e., increase in number of shat
with corresponding decrease in par value); and
d. Reverse share split or stock split down (consolidation of
Shares or decrease in number of shares with corresponding
increase in par value).

The aforementioned do not affect the entity's asses because they are issued for free.

Illustration:
Entity A had 100, 000 ordinay shares outstanding all throughout 20x1. Entity A
reported profit of P7,200,000 in 20x1 and accordingly, the basic earnings per share was
P72 (7.2M / 100K).
In 20x2, three distributions of additional ordinary shares occurred:
● On April 1, a 10% bonus issue (share dividend) was declared.
● On July 1, 10,000 treasury shares were sold.
● On September 1, a 2-for-1 share split was issued.

Profit in 20x2 was P9,250,000.

➢ The weighted average number of ordinary shares outstanding

are adjusted retrospectively as follows:
20x1 20x2
1/1 (100,000 x 110% × 2) 220,000 (100,000*110%*2*12/12) 220,000
4/1 -
7/1 (10,000*2*6/12) 10,000
9/1 -
Weighted average 220,000 230,000

Bonus issues are retrospectively adjusted as of the earliest date that the related shares are
outstanding. Thus:
● The 10% share dividends are adjusted to all outstanding shares prior to April 1,
20x2. Accordingly, the share dividends do not affect the treasury shares that were
sold on July 1, 20x2.
● The 2-for-1 share split is adjusted to all outstanding shares prior to September 1,
20x2.

➢ The restated basic earnings per share are computed as follows:

 20x2 20x1
Profit after tax 9,250,000 7,200,000
Adjusted weighted ave, no. of outstanding sh. 230,000 220,000
Basic EPS 40.22 32.73

Right 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 stocks immediately before the exercise of rights
Theoretical ex-rights fair value per share

Theoretical ex-rights fair value per share is “calculated by the adding the aggregate market
value of the shares immediately before the exercise of the rights to the proceeds from the
exercise of the rights, and dividing by the number of shares outstanding after the exercise of
the rights." (PAS 33 AG.A2)

Alternatively, the theoretical ex -rights fair value per share may also be computed as
follows:

Fair value of shares selling right-on XX

Less: Value of 1 right (xx)
Theoretical ex-rights fair value per share xx

Where:
Value of 1 right = Fair value of share right-on - Subscription .
No. of rights needed to purchase one share + 1

DILUTED EARNINGS PER SHARE

- Entity with dilutive potential ordinary shares presents diluted EPS
- No dilutive potential ordinary shares presents basic EPS.

A potential ordinary share is a financial instrument or other contract that may entitle its holder
to ordinary shares.

Potential ordinary shares are dilutive if, when exercised, they decrease basic earnings per
share or increase basic loss per share.

Antidilutive potential shares are ignored. Potential ordinary shares are antidilutive if, when
exercised, they increase basic earnings per share or decrease basic loss per share.
EXAMPLE OF POTENTIAL ORDINARY SHARE

1. CONVERTIBLE PREFERENCE SHARES

2. CONVERTIBLE BONDS
3. OPTIONS, WARRANTS AND THEIR EQUIVALENTS

Convertible preference shares and Convertible bonds are dilutive if their conversion
decreases basic eps and increase in basic loss per share.

Options, warrants and their equivalent are dilutive if exercise price is less than the market
value of the ordinary shares making the exercise favorable on the part of the holder.

Dilution and anti dilution

Potential ordinary share is a financial instrument or other contract that may entitle the holder
to ordinary shares.

Dilution arises when the inclusion of the potential ordinary shares decreases the basic
earnings per share or increases the basic loss per share. In this case, the potential ordinary
shares are dilutive securities.

On the other hand, anti dilution arises when the inclusion of the potential ordinary shares
increases basic earnings per share or decreases basic loss per share.

In this case, the potential ordinary shares are considered as antidilutive and therefore
ignored in computing diluted earnings per share.

Diluted earnings per share

An entity with dilutive potential ordinary share presents diluted EPS in addition to basic
EPS. An entity with no dilutive potential ordinary share presents basic EPS only.

Profit (loss) plus after taxinterest expense on convertible bonds

Basic EPS =
Weighted Average number of outstanding ordinary shares plusincremental shares
The computation of the diluted earnings per share is based on the "as if" scenario related to
the following potential ordinary shares:

a. "As if" the convertible bond payable is converted into

ordinary share
b. "As if" the convertible preference share is converted into ordinary share.
c. "As if" the share options and warrants are exercised.
In other words, the computation of the diluted earnings per share is based on the
assumption that additional ordinary shares are issued as a result of conversion of
convertible securities and exercise of share options.

Convertible bond payable

The computation of diluted earnings per share assumes that the bond payable is converted
into ordinary shares.
Accordingly, adjustments shall be made both to net income and to the number of ordinary
shares outstanding.
The net income is adjusted by adding back the interest expense on the bond payable, net of
tax.
The number of ordinary shares outstanding is increased by expense on the bond payable,
net of tax. 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 or
a total of 40,000 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

Divide by ordinary shares actually outstanding 100,000

Basic earnings per share 50

Diluted earnings per share

Net income 5,000,000

Add: Interest expense on bonds payable
(10% x 4,000,000) 400,000
Income tax (30% x 400,000) (120,000) 280,000
Adjusted net income 5,280,000

Ordinary shares actually outstanding 100,000

Assumed issued ordinary shares through
conversion of bonds payable (4,000 x 10) 40,000

Total ordinary shares 140,000

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

Observe that if a convertible bond payable is outstanding during the entire year, it is
assumed that the conversion takes place at the beginning of the year.

Convertible preference share

If there is a convertible preference share, the computation of diluted earnings per share also
assumes that the preference share is converted into ordinary shares.

Accordingly, the net income is not reduced anymore by the amount of preference dividend.
The number of ordinary shares outstanding is increased by the number of ordinary shares
that would have been issued upon conversion of the preference share.

Illustration

At the beginning of current year, an entity provided the following information:

10% convertible cumulative preference share capital,

P100 par, 30,000 shares-one preference share is
convertible into two ordinary shares or a total of 60,000
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.

OPTIONS, WARRANTS AND THEIR EQUIVALENTS-

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.

When computing for diluted eps, the treasury share method is used in computing for the
incremental shares that are assumed to be issued for no consideration as a result of
options and warrants.

a. The options and warrants are assumed to be exercised at the beginning of the current
year or at the date they are 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 place.
c. The number of incremental ordinary shares is equal to the option shares minus the
assumes treasury shares acquired.

MULTIPLE POTENTIAL ORDINARY SHARES

When there are two or more potential ordinary shares, they need to be "ranked" according to
their dilutive effect on basic EPS. The most dilutive potential ordinary share is ranked first; the
least dilutive is ranked last. The most dilutive potential ordinary share is the one with the least
incremental EPS. When testing potential ordinary shares for dilution, the profit figure used as
the "control number" (i.e., the numerator in the EPS formula) is profit from continuing
operations. When computing for the diluted EPS, the potential ordinary shares are considered
step-by-step according to their "rankings." If any time the diluted EPS exceeds the basic EPS,
the entity discontinues considering further any potential ordinaly share and the lowest
amount computed is the amount presented as diluted EPS.

Presentation
The two EPS (basic and diluted) are presented with equal prominence on the face of the
statement of profit or loss and other comprehensive income. If the entity uses a "two-
statement” presentation as described in PAS 1, it presents the EPS only in lie
separate statement of profit or loss.

EPS is presented every time a statement of profit or loss other comprehensive income is
presented, including comparatives. If diluted EPS is presented for at least one period, it will
be presented for all periods, even if it equals basic EPS.

Basic and diluted EPS are presented even if the amounts are negative (i.e., loss per share).
If an entity reports discontinued operations, it presents basic and diluted EPS for each of
the following:
a, profit or loss from continuing operations,
b. results of discontinued operations, and
C. profit or loss for the year.
An entity is not required to present EPS on other comprehensive income and total
comprehensive income.