EARNINGS PER SHARE

Comprehensive Board Exam Reviewer

PAS 33 · Philippine CPA Licensure Examination

1. OVERVIEW OF EARNINGS PER SHARE

What is EPS?
Earnings Per Share (EPS) is the portion of a company's profit allocated to each outstanding ordinary share. It is
one of the most widely used indicators of a company's profitability and is required to be disclosed under PAS 33
(IAS 33 — Earnings Per Share).

Who Must Report EPS?

PAS 33 applies to entities whose ordinary shares or potential ordinary shares are publicly traded, or that
are in the process of issuing such shares.

Two Types of EPS

Type Definition

Profit attributable to ordinary shareholders ÷ Weighted average ordinary shares

Basic EPS outstanding

Adjusted profit ÷ Adjusted weighted average shares (including dilutive potential ordinary
Diluted EPS shares)

2. BASIC EARNINGS PER SHARE

Formula

Basic EPS = (Net Profit – Preference Dividends) ÷ Weighted Average Ordinary Shares

A. The Numerator — Profit Attributable to Ordinary Shareholders

Start with net profit (or loss) for the period, then deduct preference dividends:

Preference Share Type Treatment of Dividend in Numerator

Cumulative preference shares Deduct annual dividend WHETHER OR NOT declared

Non-cumulative preference shares Deduct ONLY if declared during the period

Preference shares redeemable at
premium Include premium on redemption as preference dividend

Preference shares issued at

discount Accrete discount — add to preference dividend

✔ KEY POINT: If there is a NET LOSS, it is still adjusted for preference dividends. A loss becomes larger (more negative)
after deducting preference dividends.

B. The Denominator — Weighted Average Ordinary Shares (WAOS)

Shares are weighted by the fraction of the period they were outstanding. The formula is:

WAOS = Σ (Shares Outstanding × Months/12)

Events Affecting the Denominator:

Event Weighting Rule Adjustment

New share issuance for

cash Weight from date of issuance Prospective

Treasury stock purchase Deduct from date of purchase Prospective

Treasury stock reissuance Add back from date of reissuance Prospective

Share dividend / share split Apply retroactively to ALL periods Retroactive

Reverse share split Apply retroactively to ALL periods Retroactive

Bonus issue (rights issue at

below mkt) Bonus element applied retroactively Retroactive

Shares issued in business

combination Weight from acquisition date Prospective

✔ KEY POINT: Share dividends and splits are treated as if they occurred at the BEGINNING of the earliest period
presented — even if they happen after year-end but before the financial statements are authorized for issue.

Worked Example 1 — Weighted Average Ordinary Shares

Date Transaction Shares Issued Treasury Outstanding Weight Weighted

Jan. 1 Beginning balance 100,000 — 100,000 3/12 25,000

Apr. 1 Issued for cash +20,000 — 120,000 4/12 40,000

Aug. 1 Treasury stock bought — 5,000 115,000 2/12 19,167

Oct. 1 Treasury stock reissued — (2,000) 117,000 3/12 29,250

Dec. 31 End of year

WAOS 113,417

Net profit = P2,500,000 | Preference dividends = P200,000

Basic EPS = (P2,500,000 – P200,000) ÷ 113,417 = P20.28

 3. RETROACTIVE ADJUSTMENTS — SHARE DIVIDEND & SPLIT

When a share dividend or split occurs, the WAOS for ALL prior periods presented must be restated using the
adjustment factor:

Adjustment Factor = Shares After ÷ Shares Before

Worked Example 2 — Share Dividend Retroactive Restatement

A company had 80,000 shares on Jan. 1. On July 1, issued 20,000 new shares for cash. On Nov. 1, declared a
25% share dividend. Net profit = P1,200,000.

Solution

• Adjustment factor = (80,000+20,000) × 125% ÷ (80,000+20,000) = 1.25

• Jan. 1 – Jun. 30: 80,000 × 1.25 × 6/12 = 50,000

• Jul. 1 – Dec. 31: (80,000+20,000) × 1.25 × 6/12 = 62,500

• WAOS = 50,000 + 62,500 = 112,500 shares

• Basic EPS = P1,200,000 ÷ 112,500 = P10.67

Answer: Basic EPS = P10.67

Worked Example 3 — 2-for-1 Share Split

Beginning shares: 60,000. On May 1, issued 15,000 for cash. On Sep. 1, declared 2-for-1 split. Net profit =
P900,000.

Solution

• Adjustment factor = 2 (2-for-1 split)

• Jan. 1 – Apr. 30: 60,000 × 2 × 4/12 = 40,000

• May 1 – Dec. 31: 75,000 × 2 × 8/12 = 100,000

• WAOS = 40,000 + 100,000 = 140,000 shares

• Basic EPS = P900,000 ÷ 140,000 = P6.43

Answer: Basic EPS = P6.43

 4. DILUTED EARNINGS PER SHARE

Diluted EPS shows EPS as if all dilutive potential ordinary shares were converted at the beginning of the
period (or date of issuance if later).

Diluted EPS = (Adjusted Profit) ÷ (WAOS + Dilutive Potential Ordinary Shares)

Sources of Potential Ordinary Shares:

Instrument Description

Convertible Bonds / Notes Bonds convertible into ordinary shares

Convertible Preference Shares Preference shares convertible into ordinary shares

Share Options / Warrants Rights to purchase ordinary shares at fixed price

Contingently Issuable Shares Shares issuable upon satisfaction of conditions

A. Convertible Bonds (If-Converted Method)

Assume conversion at the beginning of the period (or date of issuance):

Adjustment Amount

Numerator ADD BACK: After-tax interest expense

adjustment on convertible bonds Interest × (1 – tax rate)

Denominator ADD: Shares that would be issued Bonds ÷ Conversion price (or ×
adjustment upon conversion Conversion ratio)

Worked Example 4 — Convertible Bonds

Net profit = P5,000,000. WAOS = 500,000 shares. P2,000,000 of 10% convertible bonds outstanding all year,
convertible at 50 shares per P1,000 bond. Tax rate = 30%.

Solution

• Interest expense = P2,000,000 × 10% = P200,000

• After-tax interest = P200,000 × (1 – 0.30) = P140,000

• Additional shares = (P2,000,000 ÷ P1,000) × 50 = 100,000 shares

• Diluted numerator = P5,000,000 + P140,000 = P5,140,000

• Diluted denominator = 500,000 + 100,000 = 600,000 shares

• Diluted EPS = P5,140,000 ÷ 600,000 = P8.57

• Basic EPS = P5,000,000 ÷ 500,000 = P10.00 (for comparison)

Answer: Diluted EPS = P8.57

B. Convertible Preference Shares (If-Converted Method)

 Adjustment

Numerator
adjustment ADD BACK: Preference dividends previously deducted

Denominator
adjustment ADD: Ordinary shares that would be issued on conversion

Worked Example 5 — Convertible Preference Shares

Net profit = P3,600,000. WAOS = 300,000 shares. 10,000 convertible 8% preference shares, P100 par, each
convertible into 5 ordinary shares. Preference dividends = P80,000.

Solution

• Basic EPS = (P3,600,000 – P80,000) ÷ 300,000 = P11.73

• Diluted numerator = P3,600,000 – P80,000 + P80,000 = P3,600,000

• Additional shares = 10,000 × 5 = 50,000 shares

• Diluted denominator = 300,000 + 50,000 = 350,000 shares

• Diluted EPS = P3,600,000 ÷ 350,000 = P10.29

Answer: Diluted EPS = P10.29

C. Share Options and Warrants (Treasury Stock Method)

Options/warrants are dilutive only when the exercise price is BELOW the average market price (in-the-money).
Use the Treasury Stock Method:

Incremental Shares = Shares Issuable on Exercise – Shares Repurchased with Proceeds

Step Action How

Compute proceeds from

Step 1 exercise Shares under option × Exercise price

Step 2 Compute shares repurchased Proceeds ÷ Average market price

Step 3 Compute incremental shares Shares issuable – Shares repurchased

Step 4 Add to denominator WAOS + Incremental shares

Step 5 No numerator adjustment Profit is NOT adjusted for options

Worked Example 6 — Share Options

Net profit = P2,000,000. WAOS = 200,000 shares. Options outstanding: 30,000 shares at exercise price of P25.
Average market price during the year = P40.

Solution

• Proceeds from exercise = 30,000 × P25 = P750,000

• Shares repurchased = P750,000 ÷ P40 = 18,750 shares

 • Incremental shares = 30,000 – 18,750 = 11,250 shares

• Diluted denominator = 200,000 + 11,250 = 211,250 shares

• Diluted EPS = P2,000,000 ÷ 211,250 = P9.47

• Basic EPS = P2,000,000 ÷ 200,000 = P10.00 (for comparison)

Answer: Diluted EPS = P9.47

■ NOTE: Options are ANTI-DILUTIVE (excluded from diluted EPS) when the exercise price EXCEEDS the average market
price — i.e., out-of-the-money options.

5. DILUTIVE vs. ANTI-DILUTIVE TEST

A potential ordinary share is dilutive if its inclusion DECREASES EPS (or increases loss per share). It is
anti-dilutive if inclusion would INCREASE EPS and must be EXCLUDED from diluted EPS.

Instrument Incremental EPS Test Dilutive If...

Convertible bonds After-tax interest ÷ Additional shares < Basic EPS → Dilutive

Preference dividends ÷ Additional

Convertible preference shares < Basic EPS → Dilutive

Exercise price vs. Average market

Options/Warrants price Exercise price < Mkt → Dilutive

Order of Inclusion — Multiple Dilutive Instruments

When there are multiple dilutive instruments, include them in order from MOST dilutive to LEAST dilutive (i.e.,
lowest incremental EPS first). Stop including once adding an instrument becomes anti-dilutive.

Worked Example 7 — Multiple Dilutive Instruments

Basic EPS = P12.00. Three instruments: (A) Convertible bonds — incremental EPS P8.00; (B) Convertible
preference — incremental EPS P14.00; (C) Options — incremental EPS P5.00.

Solution — Ranking & Inclusion

• Rank by incremental EPS: C (P5.00) → A (P8.00) → B (P14.00)

• Include C first: new diluted EPS < P12.00 → dilutive, include

• Include A next: new diluted EPS still decreases → dilutive, include

• Include B: incremental EPS P14.00 > current diluted EPS → ANTI-DILUTIVE, EXCLUDE

• Final diluted EPS uses only C and A

Answer: Diluted EPS uses instruments C and A only

 6. RIGHTS ISSUE (BONUS ELEMENT)

A rights issue at a price below fair value contains a bonus element. The bonus element is treated like a share
dividend and applied retroactively.

Theoretical Ex-Rights Price (TERP) = (Pre-rights shares × Last cum-rights price + Rights shares ×
Exercise price) ÷ Total shares after rights

Adjustment Factor = Last Cum-Rights Price ÷ TERP

Worked Example 8 — Rights Issue

Shares outstanding Jan. 1 = 100,000. Rights issue on Jul. 1: 1 new share for every 4 held at P30 per share. Last
cum-rights price = P50. Net profit = P1,800,000.

Solution

• New shares = 100,000 ÷ 4 = 25,000 shares. Total after = 125,000

• TERP = (100,000 × P50 + 25,000 × P30) ÷ 125,000 = (5,000,000 + 750,000) ÷ 125,000 = P46

• Adjustment factor = P50 ÷ P46 = 1.0870

• Jan. 1 – Jun. 30: 100,000 × 1.0870 × 6/12 = 54,348

• Jul. 1 – Dec. 31: 125,000 × 6/12 = 62,500

• WAOS = 54,348 + 62,500 = 116,848 shares

• Basic EPS = P1,800,000 ÷ 116,848 = P15.41

Answer: Basic EPS = P15.41

7. COMPREHENSIVE PROBLEM

Problem Data:
Item Details

Net profit for 2019 P6,500,000

Tax rate 30%

Shares, Jan. 1 400,000 ordinary shares outstanding

Mar. 1 Issued 60,000 new shares for cash

Jun. 1 Purchased 20,000 treasury shares

Sep. 1 Declared 10% share dividend

Preference shares P200,000; 8% cumulative; P100 par — NOT convertible

Convertible bonds P3,000,000; 12% bonds; convertible into 5 shares per P1,000 bond; issued Jan. 1
Options outstanding 50,000 shares at exercise price P80; avg. market price P100

Step 1 — Preference Dividends

Cumulative preference dividends = P200,000 × 8% = P16,000
Basic numerator = P6,500,000 – P16,000 = P6,484,000

Step 2 — Weighted Average Ordinary Shares

Period Shares (before split adj.) Adj. Factor Weight Weighted

Jan. 1 – Feb. 28 400,000 ×1.10 2/12 73,333

Mar. 1 – May 31 460,000 ×1.10 3/12 126,500

Jun. 1 – Aug. 31 440,000 ×1.10 3/12 121,000

Sep. 1 – Dec. 31 484,000* ×1.00 4/12 161,333

WAOS 482,167
*Sep. 1 shares = 440,000 × 110% = 484,000 (share dividend applied, no further adj. needed for post-dividend period)

Step 3 — Basic EPS

Basic EPS = P6,484,000 ÷ 482,167 = P13.45

Step 4 — Diluted EPS Adjustments

Convertible Bonds:
• After-tax interest = P3,000,000 × 12% × (1–0.30) = P252,000
• Additional shares = (P3,000,000 ÷ P1,000) × 5 = 15,000 shares
• Incremental EPS = P252,000 ÷ 15,000 = P16.80 > Basic EPS P13.45 → ANTI-DILUTIVE
Options (Treasury Stock Method):
• Proceeds = 50,000 × P80 = P4,000,000
• Shares repurchased = P4,000,000 ÷ P100 = 40,000 shares
• Incremental shares = 50,000 – 40,000 = 10,000 shares
• Incremental EPS = P0 ÷ 10,000 = P0.00 → DILUTIVE

Step 5 — Diluted EPS

Diluted EPS = P6,484,000 ÷ (482,167 + 10,000) = P6,484,000 ÷ 492,167 = P13.18

8. QUICK REFERENCE — BOARD EXAM CHEAT SHEET

Topic Rule / Key Point

Basic EPS numerator Net profit – Cumulative pref. div. (whether or not declared)

Basic EPS denominator WAOS = shares × months/12 (weight each change)

Share dividend/split Retroactive adjustment — multiply ALL prior periods by factor

Convertible bonds If-converted: add back after-tax interest; add conversion shares
Convertible preference If-converted: add back pref. dividends; add conversion shares

Options/Warrants Treasury stock method: add only incremental shares; no numerator change

Dilutive test Instrument is dilutive if incremental EPS < current diluted EPS

Anti-dilutive EXCLUDE — always results in higher EPS than basic

Order of inclusion Most dilutive first (lowest incremental EPS first)

Rights issue Compute TERP; adjustment factor = cum-rights price ÷ TERP; retroactive

Preference: non-cumulative Deduct ONLY if declared

Preference: cumulative ALWAYS deduct annual dividend regardless of declaration

Loss year Deduct preference dividends → loss increases; options excluded (anti-dilutive)

Contingent shares Include if conditions are currently met at end of period

■ NOTE: Diluted EPS can NEVER be greater than Basic EPS. If your computed diluted EPS is higher, check for anti-dilutive
instruments that should be excluded.

END OF REVIEWER · Earnings Per Share · PAS 33