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Basic Earnings Per Share

Basic earnings per share (EPS) is calculated by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. To calculate basic EPS for this document: net income is reduced by the noncumulative annual preference share dividend and divided by the total ordinary shares outstanding which includes shares issued as a 10% share dividend. The basic EPS is P7.82.

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Natalie Irish Villanueva
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94 views18 pages

Basic Earnings Per Share

Basic earnings per share (EPS) is calculated by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. To calculate basic EPS for this document: net income is reduced by the noncumulative annual preference share dividend and divided by the total ordinary shares outstanding which includes shares issued as a 10% share dividend. The basic EPS is P7.82.

Uploaded by

Natalie Irish Villanueva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BASIC EARNINGS PER SHARE

Basic EPS= Profit (Loss) less Preferred dividends


Weighted average number of outstanding ordinary shares

Earnings:
 Profit (loss) is net of income tax expense. It includes any exceptional,
unusual or infrequent gains or losses.

 Preferred dividend 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 deductive.

The numerator ( or the difference between 1 and 2 ) represents the profit or loss
attributable to ordinary shareholders.

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 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 reacquisition during the period.

The time-weighting factor is the number of days that the shares are outstanding over
the total number of days in the period. However, a reasonable approximation of the
weighted average (e.g months outstanding) is allowed.

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


Outstanding shares are:
1. Issued shares plus
2. 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.

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.
- Contingently issuable ordinary shares are “ordinary shares issuable for little or no
cash or other consideration upon the satisfaction of specified conditions in a
contingent share agreement.

Partly paid shares are treated as fractional shares to the extend of their participation
in dividends. Partly shares that are not entitled to dividends are treated as
equivalent of warrants or options in the calculation of diluted earnings per share.

Under the Philippine Corporation Code, subscribed shares are entitled to participate
in dividends in full. Accordingly, subscribed shares are treated as fully outstanding in
EPS computation.

In some countries where partly paid shares are entitled to partial dividends only, the
subscribed shares are treated as partly outstanding. For example a 50% paid
subscribed shares that are entitled to only 50% dividend are treated as 50%
outstanding.

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 stock

rights)

c. Share split or stock split-up (i.e., increase in number of shares 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).

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 stocks immediately before the


exercise of rights. Asddddddddddddddddddddd\\

Theoretical ex-rights fair value per share


Theoretical ex-rights fair value per share is "calculated by 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 price

No. of rights needed to purchase one share +1


On October 1, 2019,
the entity issued a
10% share dividends
on ordinary
shares and declared
the annual cash
dividend of P200,000
on preference
shares. The
preference shares are
noncumulative,
nonparticipating and
nonconvertible.
Net income for the
year ended
December 31, 2019
was P1,920,000.
What amount should
be reported as basic
earnings per share?
A. 8.20
B. 8.72
C. 9.36
D. 7.82
Answer: D. 7.82
Ordinary shares -
January 1, 2019
200,000
Share dividends on
October 1, 2019(10% x
200,000) 20,000
Total ordinary share
outstanding 220,000
Net income
1,920,000
Preference dividend
(200,000)
Net income to
ordinary shares
1,720,000
BASIC EARNINGS
PER SHARE
(1,720,000 /
220,000) P7.82
On October 1, 2019,
the entity issued a
10% share dividends
on ordinary
shares and declared
the annual cash
dividend of P200,000
on preference
shares. The
preference shares are
noncumulative,
nonparticipating and
nonconvertible.
Net income for the
year ended
December 31, 2019
was P1,920,000.
What amount should
be reported as basic
earnings per share?
A. 8.20
B. 8.72
C. 9.36
D. 7.82
Answer: D. 7.82
Ordinary shares -
January 1, 2019
200,000
Share dividends on
October 1, 2019(10% x
200,000) 20,000
Total ordinary share
outstanding 220,000
Net income
1,920,000
Preference dividend
(200,000)
Net income to
ordinary shares
1,720,000
BASIC EARNINGS
PER SHARE
(1,720,000 /
220,000) P7.82
On October 1, 2019,
the entity issued a
10% share dividends
on ordinary
shares and declared
the annual cash
dividend of P200,000
on preference
shares. The
preference shares are
noncumulative,
nonparticipating and
nonconvertible.
Net income for the
year ended
December 31, 2019
was P1,920,000.
What amount should
be reported as basic
earnings per share?
A. 8.20
B. 8.72
C. 9.36
D. 7.82
Answer: D. 7.82
Ordinary shares -
January 1, 2019
200,000
Share dividends on
October 1, 2019(10% x
200,000) 20,000
Total ordinary share
outstanding 220,000
Net income
1,920,000
Preference dividend
(200,000)
Net income to
ordinary shares
1,720,000
BASIC EARNINGS
PER SHARE
(1,720,000 /
220,000) P7.82

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