# ### Author Topic: Accounting Standard 20 - Earning Per Shares  (Read 1796 times)

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#### TechShristi ##### Accounting Standard 20 - Earning Per Shares
« on: December 21, 2013, 08:27:31 AM »
EPS (Earning Per Share) :

Earning Per Share means Earning available per share to the share holder that is Total earning divided by Number of Shares.

How to calculate the Number of Shares?

Suppose, Mr. A hold 10000 shares on 1st January 2013 then it purchase 2000 shares on 31st August and Sales 1000 shares on 1st December 2013.Cacluate the total number of Shares hold by MR.A during the year?

>> 10000 * 8/12 + 12000* 3/12 + 11000 * 1/12 =    666.67+3000+916.67 = 4583 sahres

Note: 10000 Shares are held from Jan. to August
12000 Shares are held from September to December
11000 Sahres are held from December to December end.

How to calculate the Normal EPS?

EPS is calculated by dividing Total earning with No. of shares.Suppost the earning available to the share holder is 1000000. then EPS would be

1000000/4583 Shares
= 218.19 EPS

What is Diluted Earning Per Share?

Before moving to Diluted Earning Per Share, let us understand the word Diluted.'Diluted' means mixing of something to the original solution.So, in Earning per share diluted means how the Earning per share is affected by the various options of shares issused, that is if new shares are issused then what will be the diluted version of EPS.

>> To Calculate the Diluted EPS, One must take care of following points:

• Convertible Debenture:

• In convertible debenture, interest would be deducted and tax saving would be added.This is because, once the debenture would get converted in to shares, the interest which was initially deducted to arrive the profit figure will no more required.So in future there will be no interest and no such deduction.
• So add the interest to the profit with a assumption that it will not accrue in the future.Similarly, now there will not be any Tax saving because of interest, so tax saving would be added to the profit.
• By adding Tax saving and deducting interest it is assumed that it will not arise in the future.
• Please note that this will affect the conversion part only.Non conversion debenture will still get interest and tax saving.So, it will not apply to Non-Conversion of Debentures.
• Now divide the total earning including incremental earning with total Number of shares after conversion
• Convertible Preference Shares:

• The Calculation of Convertible Preference Shares would be same as Convertible Debenture.The only difference would be in case of Preference Shares, the interest would be deducted and tax would be added.
• Now divide the total earning including incremental earning with total Number of shares after conversion
• Right Issues:
• In case of Right issues, First of all we calculate the theoretical Ex right Price with the help of following formula:
Fair Value of Right Shares before issues of right shares + Total amount received from right issues / No. of Shares out Standing + No. of shares issued.
• Second step include calculation of adjustment factor with the help of following factor:
Fair Value per share before right issues/Theoretical Ex right Price
• Now calculate the Diluted EPS.
• Remember while calculating the diluted EPS, the old (before right issues) outstanding shares will be multiplied with adjustment factor.
• Options:

• In there will no incremental in earning but of course number of shares would increase.So we will calculate the number of Incremental shares using the following formula given below:
Outstanding No. of Shares * (Fair value before right issues-Right issues amount )/Fair value before right issues
• Now divide the total earning including incremental earning (Which will be zero in options)with total Number of shares after conversion of options.
ILLUSTRATIONS:

Weighted Number of Shares:
 [i]No. of Shares[/i] [i]I[/i][i]ssued[/i] [i]No. of Shares[/i] [i]Bought Back[/i] [i]No[/i][i]. of Shares Outstanding[/i] 1st January, 20X1 Balance at beginning of year 1,800 - 1,800 31st May, 20X1 Issue of shares for cash 600 - 2,400 1st Nov., 20X1 Buy Back of shares - 300 2,100 31st Dec., 20X1 Balance at end of year 2,400 300 2,100 Computation of Weighted Average: (1,800 x 5/12) + (2,400 x 5/12) + (2,100 x 2/12) = 2,100 shares.   The weighted average number of shares can alternatively be computed as follows: (1,800 x12/12) + (600 x 7/12) - (300 x 2/12) = 2,100 shares

Right Issues:

 Net profit Year      20X0 :         Rs. 11,00,000   Year      20X1 :         Rs. 15,00,000 No. of shares outstanding prior to rights issue 5,00,000 shares Rights issue One new share for each five outstanding (i.e. 1,00,000 new shares)   Rights issue price : Rs. 15.00   Last date to exercise rights: 1st  March 20X1 Fair value of one equity share immediately prior to exercise of rights on 1st  March 20X1 Rs. 21.00 Computation of theoretical ex-rights fair value per share   Fair value of all outstanding shares immediately prior to exercise of rights+total amount received from exercise   Number of shares outstanding prior to exercise + number of shares issued in the exercise   (Rs. 21.00 x 5,00,000 shares) + (Rs. 15.00 x 1,00,000 shares)   5,00,000 shares + 1,00,000 shares   Theoretical ex-rights fair value per share = Rs. 20.00 Computation of adjustment factor   Fair value per share prior to exercise of rights  Rs. (21.00) = 1.05 Theoretical ex-rights value per share             Rs. (20.00) Computation of earnings per share Year 20X0 Year 20X1 EPS for the year 20X0 as originally reported: Rs.11,00,000/5,00,000 shares Rs. 2.20
 EPS for the year 20X0 restated for rights issue: Rs.11,00,000/ (5,00,000 shares x 1.05) Rs. 2.10 EPS for the year 20X1 including effects of rights issue                  Rs. 15,00,000                        _ (5,00,000 x 1.05 x 2/12)+ (6,00,000 x 10/12) Rs. 2.55

Convertible Debenture:

 Net profit for the current year Rs. 1,00,00,000 No. of equity shares outstanding 50,00,000 Basic earnings per share Rs. 2.00 No. of 12% convertible debentures of Rs. 100 each   Each debenture is convertible into 10 equity shares 1,00,000 Interest expense for the current year Rs. 12,00,000 Tax relating to interest expense (30%) Rs. 3,60,000 Adjusted net profit for the current year Rs. (1,00,00,000 + 12,00,000 - 3,60,000) = Rs. 1,08,40,000 No. of equity shares resulting from conversion of debentures 10,00,000 No. of equity shares used to compute diluted earnings per share 50,00,000 + 10,00,000 = 60,00,000 Diluted earnings per share 1,08,40,000/60,00,000 = Re. 1.81

Convertible Preference:

 Convertible Preference Shares       Attributable tax, e.g., corporate dividend tax 8,00,000 shares entitled to a cumulative dividend of Rs. 8 per share. Each preference share is convertible into 2 equity shares.Further suppose Net profit is 1,00,00,000 and No. of shares outstanding is 20,00,000 Shares   10%

 Increase in net profit attributable to equity shareholders as adjusted by attributable tax [(Rs.8 x 8,00,000)+ 10%(8 x 8,00,000)] Rs. 70,40,000 No. of incremental shares {2 x 8,00,000} 16,00,000

Finally:
Total Profit: 10000000+7040000
= 17040000
Total Number of Shares: 2000000+1600000
= 3600000

EPS after conversion = 17040000/3600000
= 4.4

How to Calculate the Diluted EPS?

To calculate the Diluted EPS, follow the following steps:

• First calculate the Incremental EPS
• The least EPS would be the most diluted EPS
• Consider the least EPS first and then move in ascending order.
• Consider the Incremental profit and Number of shares of most diluted options and add to the original profit and number of shares
• Then, calculate the Diluted EPS.
• Then move toward second diluted options and add incremental shares and profit to the above figure.
• Then calculate the Diluted EPS of second options
Similarly calculate the diluted EPS of all options available and finally at last you will get the Diluted EPS.  Download the file for Whole AS 20 on Earning per share along with above example in pdf file
« Last Edit: December 21, 2013, 09:51:23 AM by TechShristi »

#### Techshristi's Forum ##### Accounting Standard 20 - Earning Per Shares
« on: December 21, 2013, 08:27:31 AM »