Book Value Per Share, Basic Earnings Per

Book Value per Share,
Basic Earnings per

Share and Diluted
Earnings per Share
17 September 2016
Book value per share

Definition and formula
Accounting procedures
Preference as to assets
Preference as to dividends
UNOR - College of Business and Accountancy
17 September 2016
Slide 2
Definition and importance
The amount that would be paid on each share assuming

the entity is liquidated and the amount available to
the shareholders is exactly the amount reported in the
shareholders equity (Valix et al., 2015).
Measure used by owners of shares in a firm to determine

the level of safety associated with each individual share
after all debts are paid accordingly.
Should the company decide to dissolve, the book value

per common indicates the peso value remaining for
common shareholders after all assets are liquidated, all
debtors are paid and preferred shareholders rights are
considered.
Calculated using historical costs.
17 September 2016
Slide 3
Definition - preference
shares
Liquidation value - normally received upon

liquidation; may be more than the par value
Preference shareholders may be:

1. Preferred as to assets
2. Preferred as to dividends
Noncumulative preference share entitled to current year dividends only
Cumulative preference share - all
dividends in arrears
Nonparticipating preference share
dividends equal to the fixed rate
Participating preference share - entitled
17 September
to dividends
aside from the fixed rate
(fully,2016
UNOR - College of Business
and Accountancy
Slide 4
Formula
One
class of share capital:
17 September 2016
Slide 5
Illustration No. 1
The shareholders equity in the statement of financial
position on December 31, 2015 showed the following:
Share capital, P100 par, 50,000 shares
P5,000,000
Share premium
1,000,000
Retained earnings
2,000,000
Revaluation surplus
1,500,000
Total shareholders equity
P9,500,000
17 September 2016
Slide 6
Illustration No. 1
(Contd)
17 September 2016
Slide 7
Formula
(Contd.)
Two
classes of share capital
17 September 2016
Slide 8
1. The amount equal to the par value is allocated to the
preference share and ordinary share.
2. Any balance of the shareholders equity in excess of the par
or stated value is then apportioned taking into account
the liquidation value and dividend rights of the preference
shareholders.
For book value purposes, the following are assumed to be
available for dividends:
a. Retained earnings (R/E)
b. Share premium (SP)
c. Revaluation surplus
3. Treasury share are treated as retired [gain (SP), loss (SP,
R/E)]
17 September 2016
Slide 9
(Contd)
SPECIAL NOTES ON PREFERENCE SHARE AS TO
DIVIDENDS
1. No specific designation - assume noncumulative,
nonparticipating
2. Dividends in arrears - include current dividends,
must be specifically disclosed
3. Two classes of preference shares with different rates
both participating - lower rate will be the basis for
allocation of ordinary shares
If one preference share is participating, rate of the
participating preference share will be used as basis
17 September 2016
Slide 10
Preference as to assets
The preference shareholders are
entitled to payments not only for
liquidation value but also for dividends
in arrears.
17 September 2016
Slide 11
Preference as to
dividends
If dividends are declared, the
preference shareholders have the right
to receive dividends first before the
ordinary shareholders are paid
dividends
17 September 2016
Slide 12
Illustration 2
Preference share capital, 12% P100 par,
25,000 shares
P2,500,00
0
Ordinary share capital, P100 par, 50,000

shares
5,000,000
Share premium
Retained earnings
600,000
3,000,000
P11,100,
000
Dividends have been paid on the preference share up
to
December 31, 2013.

17 September 2016
Slide 13
Illustration 2
(Contd)
CASE 1 - PREFERENCE SHARE IS NONCUMULATIVE

AND NONPARTICIPATING
Excess Preferenc
over par
e
Balances
P3,600,00
0
P2,500,00
0
Preference dividend
(300,000)
300,000
Balance to common
3,300,000

Divided by shares
outstanding
UNOR
- College
of Business
and Accountancy
Book
value
per share
Ordinary
5,000,000
3,300,000
2,800,000
8,300,000
25,000
50,000
P112
17 September 2016
P166
Slide 14
Illustration 2
(Contd)
CASE 2 - PREFERENCE SHARE IS CUMULATIVE AND

NONPARTICIPATING
Excess Preferenc
over par
e
Balances
P3,600,00
0
P2,500,00
0
Preference dividend
(600,000)
600,000
Balance to common
3,000,000

Divided by shares
outstanding
UNOR
- College
of Business
and Accountancy
Book
value
per share
Ordinary
5,000,000
3,000,000
3,100,000
8,000,000
25,000
50,000
P124
17 September 2016
P160
Slide 15
Illustration 2
(Contd)

PARTICIPATING
Excess Preferenc
over par
Ordinary
Balances
P3,600,00
0
P2,500,00
0
5,000,000
Preference dividend
(600,000)
600,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Preference (1/3 x
2,400,000)
Ordinary (2/3 x
2,400,000)
600,000
800,000
1,600,00
3,900,000 17 September
7,200,000
2016
Slide 16
Illustration 2
(Contd)

PARTICIPATING UP TO 16%
Excess
over par
Preferenc
e
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(600,000)
600,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Balances
Preference (4% x 2,500,000)
600,000
100,000
Ordinary (balance to
common)
Divided by shares outstanding
2,300,00
3,200,000
7,900,000
25,00017 September
50,000
2016
Slide 17
Illustration 2
(Contd)
CASE 5 - PREFERENCE SHARE IS CUMULATIVE,

NONPARTICIPATING AND WITH LIQUIDATION VALUE
Excess
Prefere Ordinar
OF P106 PER SHARE
over par
nce
Balances
P3,600,0
00
P2,500,0
00
5,000,00
0
Liquidation premium (25,000sh

x P6)
(150,000
)
150,000
Preference dividends
(600,000
)
600,000
Balance to common
2,850,00
0

UNOR
Divided
- College
by
of shares
Business and
outstanding
Accountancy
2,850,00
0
3,250,00
0
7,850,00
0
17 September 2016
25,000
50,000
Slide 18
Exercise 1
Preference share capital, 12% P100 par
P1,000,00
0
Ordinary share capital, P100 par
4,000,000
Share premium
2,000,000
Retained earnings
1,000,000
P8,000,0
00
Dividends have been paid on the preference share up to

December 31, 2013.
17 September 2016
Slide 19
Exercise 1
(Contd)
REQUIRED:
Compute the book value per ordinary share and per
preference share under each of the following conditions
with respect to preference share:
1. Cumulative and fully participating
2. Cumulative and fully participating after ordinary
share receives 15%
3. Cumulative and participating up to 16%
4. Cumulative and nonparticipating
5. Noncumulative and nonparticipating.
17 September 2016
Slide 20
Illustration 3
Preference share capital, 12% P100 par,
25,000 shares cumulative
P2,500,00
0

shares
5,000,000
Deficit
(900,000)
P6,600,0
00
No dividends have been paid on preference share since

2012.
17 September 2016
Slide 21
Illustration 3
(Contd)
CASE 1 PREFERENCE SHARE HAS PREFERENCE AS

TO ASSETS (DIVIDENDS IN ARREARS ARE FULLY
Excess
Prefere Ordinar
PAYABLE)
over par
nce
(P900,00
)
P2,500,0
00
P5,000,0
00
Preference dividend
(1,200,00
0)
1,200,00
0
Balance to common
(2,100,00
0)
Balances

Book value per share
(2,100,00
0)
3,700,00
0
2,900,00
0
25,000
50,000
P148
P58
17 September 2016
Slide 22
Illustration 3
(Contd)
CASE 2 PREFERENCE SHARE HAS PREFERENCE AS

TO DIVIDENDS
Excess
Prefere Ordinar
over par
nce
(P900,00
)
P2,500,0
00
P5,000,0
00
Preference - 1/3
300,000
(300,000
)
Ordinary - 2/3
600,000
Balances
Share in deficit:
Total
Divide by shares outstanding
UNOR
Book
- College
value
of Business
per
andshare
Accountancy
(600,000
)
2,200,00
0
4,400,00
0
25,000
50,000
17 September 2016
88
88
Slide 23
Illustration 4
Preference share capital, 12% cumulative,
participating, P100 par, 50,000 shares authorized,
25,000 shares issued, of which 5,000 shares are in
treasury
Treasury preference shares, at cost
Subscribed preference share capital, 10,000 shares
Subscription receivables - preference
Ordinary share capital, P50 par, 200,000 shares
authorized, 90,000 shares issued, of which 10,000
shares are in treasury
Treasury ordinary shares, at cost
Subscribed ordinary share capital, 20,000 shares
Subscription receivables - ordinary
P2,500,000
400,000
1,000,000
300,000
4,500,000
550,000
1,000,000
200,000
17 September
2016
Slide 24
Illustration 4
Share premium
(Contd)
P1,250,000
Retained earnings unappropriated
1,000,000
Retained earnings appropriated
2,500,000
Last dividend payments
December 31,
2010
17 September 2016
Slide 25
Illustration 4
(Contd)
Computation of share capital outstanding:

PREFERENCE
Amount
Shares
ORDINARY
Amount
Shares
Issued
P2,500,0
00
25,000
P4,500,0
00
90,000
Subscribed
1,000,00
0
10,000
1,000,00
0
20,000
Total
3,500,00
0
500,000
Less: treasury at
par
Outstanding
P3,000,0
00
35,000
5,500,00
0
110,000
5,000
500,000
10,000
30,000 P5,000,0
00
100,000
17 September 2016
Slide 26
Illustration 4
(Contd)
Adjustment to retire ordinary treasury shares and

preference treasury shares.
Preference share capital (5,000sh
x 100)
500,000
Treasury preference shares
400,000
Share premium
100,000
Ordinary share capital (10,000sh

x 50)
Share premium
Treasury ordinary shares
500,000
50,000
550,000
17 September 2016
Slide 27
Illustration 4
(Contd)
Excess
over par
Preference
Ordinary
Balances
P4,800,000
P3,000,000
5,000,000
Preference dividend
(1,800,000)
1,800,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Preference (3/8 x 2,400,000)
600,000
900,000
Ordinary (5/8 x 2,400,000)

1,500,00
5,700,000
7,100,000
30,000
100,000
Annualvalue
dividend
preference (12% x P3,000,000 x 5) P128 P1,800,000
Book
perfor
share
P71
Ordinary dividend (P5,000,000 x 12%)
600,000
17 September 2016
Slide 28
Illustration 5
An entity showed the following shareholders equity on
December 31, 2015:
Preference share capital, P100 par, 50,000

shares
P5,000,00
0

shares
7,500,000
The
preference
dividend rate is 12% and the preference
share is
Retained
earnings
4,000,000
cumulative and fully participating.
Dividends on the preference share are in arrears for 2014 and
2015.
On December 31, 2015, the board of directors of the entity would
like to pay the ordinary shareholders a dividend of P10 per share.
17 September 2016
Slide 29
Illustration 5
(Contd)
Question:
To attain the dividend objective of the entity,
how much maximum dividend would be
declared on the preference and ordinary
shares?
17 September 2016
Slide 30
Illustration 5
(Contd)
Ordinary dividend for 2015 (150,000 shares

x P10)
% of ordinary dividend (1,500,000
7,500,000)
P1,500,00
0
20%
Computation of maximum dividends

Ordinary dividend
P1,500,00
0
Preference dividend:
2014 (12% x P5,000,000)
600,000
2015 (20% x P5,000,000)
1,000,000
Maximum dividend
P3,100,0
00
17 September 2016
Slide 31
Illustration 5
(Contd)
Proof:
Dividend
Maximum dividend
Preferenc
e
Ordinary
P3,100,000
Preference dividends:
2014
(600,000)
P600,000
2015
(600,000)
600,000
Ordinary dividend for 2015

using the preference rate
(12% x 7,500,000)
(900,000)
Balance for participation
1,000,000
Preference (50/125 x
P1,000,000)
Ordinary (75/125 x
P900,000
400,000
17 September 2016
Slide 32
600,000
Basic earnings per share

Definition and formula
Uses of earnings per share
Determination of weighted average
Bonus issue and rights issue
Presentation
17 September 2016
Slide 33
Definition
The amount attributable to every ordinary share

outstanding during the period
Pertains to ordinary shares
Not necessary for preference; definite rate of return
Two presentation under PAS 33:

1. Basic earnings per share
2. Diluted earnings per share
Required for publicly-traded entities or in the
process of issuing ordinary shares or potential
ordinary shares in the public securities market; not
required for nonpublic entities but encouraged
17 September 2016
Slide 34
Definition
(Contd)
Equity instrument - residual interests in the assets

after deducting liabilities
Potential ordinary share - financial instrument or

other contract that may entitle its holder to ordinary
share
Financial instrument - any contract that gives 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
17 September 2016
Slide 35
Formula
Net income - after deducting dividends on

preference shares
Preference share is cumulative - current year only

is deducted, whether dividends are declared or not
Preference share is noncumulative - current year

only is deducted if there is only dividend
declaration
If there is significant change during the year weighted average number of ordinary share
capital
17 September
2016
Slide 36
is the denominator
Illustration 6
An entity provided the following information for the
current
year:
Preference share capital, P100 par, 10%
P1,000,00
cumulative
shares
Income from continuing operations
Income form discontinued operations
Net income
0
5,000,000
P1,500,00
0
500,000
P2,000,0
0
Required:
Compute for the earnings per share.
17 September 2016
Slide 37
Illustration 6
(Contd)
Computation:
Income from continuing operations
Preference dividend for current year (10% x
P1,000,000)
Net income
P1,500,000
(100,000)
P1,400,00

Income from continuing operations (P1.4mil.
50,000sh)
Income from discontinued operation (P0.5mil.
50,000sh)
Net income
P28
10
P38
17 September 2016
Slide 38
Uses of earnings per

share
Determinant of market price of ordinary shares

(attractiveness of the ordinary share as an
investment)
Measure of performance
Basis of dividend policy
17 September 2016
Slide 39
Illustration 7
An entity had the following capital structure at the end of
the current year:
Preference share capital, P100 par, 40,000
P2,000,00
shares issued and outstanding
0
shares issued and outstanding
8,000,000
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.
Dividends paid to ordinary shareholders is P20 per share.
17 September 2016
Slide 40
Illustration 7
(Contd)
Preference
Ordinary
Basic dividend:
Preference (10% x P2,000,000)
P200,000
Ordinary (80,000 x P20)

Total dividends
Net income
P1,600,000
240,000
960,000
P440,000
P2,560,000
P3,000,000
Basic dividend (P200,000 + P1,600,000)

(1,800,000)
P1,200,000

Preference share (P440,000 40,000 shares)
P11
Ordinary share (P2,560,000 80,000 shares)
32
17 September 2016
Slide 41
Determination of
weighted average
Ordinary shares in exchange for cash are included when

cash is receivables.
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.
Ordinary shares issued in place of interest or principal on

other financial instruments are included form the date that
interest ceases to accrue.
Ordinary shares issued in exchange for the settlement of a

liability of the entity are included from the settlement date.
Ordinary shares issued as a consideration for the

acquisition of an asset other than cash are included as of
the date on which the acquisition is recognized.
17 September 2016
Slide 42
Determination of
weighted average
(Contd)
Ordinary shares issued for the rendering of services to the

entity are included as the services are rendered.
Ordinary shares issued as part of the purchase

consideration of a business combination that is an
acquisition are included in the weighted average number
of shares from the date of acquisition.
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 entered into.
In the case of a stock dividend or a share split, ordinary

shares are issued to existing shareholders for no
additional consideration.
17 September 2016
Slide 43
Determination of
weighted average
(Contd)
The number of ordinary shares outstanding before

the event is adjusted for the proportionate change in
the number of ordinary shares outstanding as if the
event had occurred at the beginning of the earliest
period reported.
Subscribed ordinary shares or partly paid shares are

included in EPS to the extent that they are entitled to
participate in dividends. (Corporation Code of the
Philippines - entitled to participate fully in dividends;
the law prevails)
17 September 2016
Slide 44
Illustration 8
January 1
Beginning
balance
100,000 shares
May 1
Additional
issuance
150,000 shares
September 1
Additional
issuance
150,000 shares
Total shares
outstanding
400,000
shares
17 September 2016
Slide 45
Illustration 8
(Contd)
(a)
(b)
(a x b)
Date
Shares
Months
outstanding
Peso month
Jan. 1
100,000
12
May 1
150,000
1,200,000
Sep. 1
150,000
600,000
P1,200,000
3,000,000
Average share (P3,000,000 12)
250,000
shares
17 September 2016
Slide 46
Illustration 8
(Contd)
ANOTHER APPROACH:
Date
Shares
Fraction
Average
shares
Jan. 1
100,000
12/12
100,000
May 1
150,000
8/12
100,000
Sep. 1
150,000
4/12
50,000
250,000
17 September 2016
Slide 47
Illustration 9
January 1
Beginning balance
March 1
Issued for cash
50,000 shares
July 1
20% stock dividend
30,000 shares
November 1
Treasury shares
Total shares outstanding
100,000 shares
(15,000 shares)
165,000
shares
17 September 2016
Slide 48
Illustration 9
(Contd)
(a)
(b)
(a x b)
Date
Shares
Mos.
outstading
Peso month
Jan. 1
120,000
12
P1,440,000
Mar. 1
60,000
10
600,000
Nov. 1
(15,000)
(30,000)
2,010,000
167,500
shares
17 September 2016
Slide 49
Illustration 9
(Contd)
ANOTHER APPROACH:
Date
Shares
Fraction
Average
shares
Jan. 1
120,000
12/12
120,000
Mar. 1
60,000
10/12
50,000
Nov. 1
(15,000)
2/12
(2,500)
167,500
17 September 2016
Slide 50
Illustration 10
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 dividends
December 31
Share split 5 for 1
17 September 2016
Slide 51
Illustration 10
(Contd)
(a)
(b)
(a x b)
Date
Shares
Mos.
outstading
Peso month
Jan. 1
1,200,000
12
Mar. 1
600,000
5,400,000
Nov. 1
(120,000)
(720,000)
P14,400,000
19,080,000
1,590,000
shares
17 September 2016
Slide 52
Illustration 10
(Contd)
ANOTHER APPROACH:
Date
Shares
Fraction
Average
shares
Jan. 1
1,200,000
12/12
Apr. 1
600,000
9/12
450,000
Jul. 1
(120,000)
6/12
(60,000)
1,200,000
1,590,000
17 September 2016
Slide 53
Bonus issue
Ordinary shares are issued to existing shareholders

for no consideration.
Stock dividend
Adjusted proportionate for the proportionate change

in the number of ordinary shares outstanding as if
occurred at the beginning of the year
17 September 2016
Slide 54
Illustration 11
Net income - 2015
7,200,000
Net income 2016
6,000,000
Ordinary share outstanding on January 1,

2015
200,000
On October 1, 2016, the entity implemented a bonus

issue of ordinary shares in the ratio of two ordinary
shares for each ordinary share.
17 September 2016
Slide 55
Rights issue
Exercise price is less than the fair value of the shares
Include a bonus element - no consideration
Stock right or right of preemption
Adjustment factor is the ratio of the market value of

the right-on to the theoretical market value of the
share ex-right
Market value of the share right-on - market value

of the share immediately prior to the exercise of
rights.
Problem - if ex-right
Market value of the share ex-right total market

value of the shares outstanding plus the proceed
17 September 2016
UNOR from
- College the
of Business
and Accountancy
exercise
of rights divided by the numberSlide
of 56
Diluted earnings per share

Concept of dilution
Potential ordinary shares
Procedures for treasury share method
Multiple potential ordinary share
17 September 2016
Slide 57
Illustration 14
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
P4,000,00
shares
0
10,000,00
shares authorized, 100,000 shares issued
0
Net income
5,000,000
Income tax rate
30%
Assume that the convertible bond payable is issued on
April 1 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.
17 September 2016
Slide 58
Illustration 15
10% convertible bonds payable, each
P1,000 bond convertible into 10 ordinary
P4,000,00
shares
0
10,000,00
0
Net income
5,000,000
Income tax rate
30%
All of the bonds were converted into ordinary shares on
October 1 of the current year.
17 September 2016
Slide 59
Illustration 16
10% convertible cumulative preference
share capital , P100 par, 30,000 shares one preference share is convertible into
P3,000,00
two ordinary shares
0
10,000,00
0
Net income
6,000,000
17 September 2016
Slide 60
Illustration 17
Preference share capital 10%, 50,000
shares, P100 par, cumulative and
P5,000,00
convertible into 100,000 ordinary shares
0
10,000,00
0
Net income
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
17 September 2016
full before the conversion.
Slide 61

Book Value Per Share, Basic Earnings Per

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What is book value per share and what does it measure?

What is book value per share and what does it measure?

What are the accounting procedures used to calculate book value per share?

What are the accounting procedures used to calculate book value per share?

Book Value per Share,

Basic Earnings per

Book value per share

UNOR - College of Business and Accountancy

Definition and importance

The amount that would be paid on each share assuming

Measure used by owners of shares in a firm to determine

Should the company decide to dissolve, the book value

Calculated using historical costs.

UNOR - College of Business and Accountancy

Liquidation value - normally received upon

Preference shareholders may be:

class of share capital:

UNOR - College of Business and Accountancy

Total shareholders equity

UNOR - College of Business and Accountancy

UNOR - College of Business and Accountancy

classes of share capital

UNOR - College of Business and Accountancy

UNOR - College of Business and Accountancy

UNOR - College of Business and Accountancy

Ordinary share capital, P100 par, 50,000

Total shareholders equity

December 31, 2013.

CASE 1 - PREFERENCE SHARE IS NONCUMULATIVE

Total shareholders equity

CASE 2 - PREFERENCE SHARE IS CUMULATIVE AND

Total shareholders equity

CASE 3 - PREFERENCE SHARE IS CUMULATIVE AND

UNOR - College of Business and Accountancy

CASE 4 - PREFERENCE SHARE IS CUMULATIVE AND

Preference (4% x 2,500,000)

UNOR - College of Business and Accountancy

CASE 5 - PREFERENCE SHARE IS CUMULATIVE,

Liquidation premium (25,000sh

Total shareholders equity

Ordinary share capital, P100 par

Total shareholders equity

Dividends have been paid on the preference share up to

UNOR - College of Business and Accountancy

Ordinary share capital, P100 par, 50,000

Total shareholders equity

No dividends have been paid on preference share since

CASE 1 PREFERENCE SHARE HAS PREFERENCE AS

Total shareholders equity

CASE 2 PREFERENCE SHARE HAS PREFERENCE AS

UNOR - College of Business and Accountancy

Retained earnings unappropriated

Retained earnings appropriated

Last dividend payments

UNOR - College of Business and Accountancy

Computation of share capital outstanding:

UNOR - College of Business and Accountancy

Adjustment to retire ordinary treasury shares and

Treasury preference shares

Ordinary share capital (10,000sh