IAS 33 - Earnings per share

Earnings per share is one of the most quoted statistics in the analysis industry. It is also very
important due to being part of the P/E (Price Earnings) ratio, another key financial statistic.
IAS 33 ensures that standard EPS is always calculated the same way to ensure comparability
between companies. Companies are permitted to disclose EPS measures based on other
earnings figures, but only with a reconciliation and they cannot appear on the face of the income
statement to avoid potential confusion with the 'official' figure.

Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary
equity holders of the parent entity by the weighted average number of ordinary shares
outstanding during the period.

Basic earnings per share

Calculation EPS = Earnings
No. of shares

(a) Earnings = Profit or loss for the period attributable to ordinary equity holders of the parent:
i.e. consolidated profit after
– income taxes
– NCI
– preference dividends
(b) No of shares = Weighted average number of equity shares outstanding during the period.

Changes in equity share capital

1 Issued at full market price
use weighted average number of shares.
2 Issued as bonus shares
apply effect retrospectively ie change comparative figures of last year.
3 Issued as right shares
treat as issue at full market rate followed by bonus issue.

Issued at full market price

Where an issue of shares is made at full market price, the company ought to generate
additional profits, as it has extra funds to generate profits from. However, if the issue was
not at the beginning of the year, then this will need to be time apportioned to reflect the fact
that the company will have only been able to generate extra profits from the extra funds for
part of the year.

Ex 1 A company has earnings of Rs1,000,000 and a year end of 31 December. On 1-10-18 the
company issued 300,000 shares at full market price. The share capital before the share
issue was 600,000 shares.
Weighted number of shares
No. of Time Weighted
Date Narrative shares period average
1-1-18 b/f 600,000 x 9/12 450,000
10-1-18 issued at 300,000
full MP 900,000 x 3/12 225,000
675,000
EPS = 1,000,000
675,000 1.48 per share

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Bonus issue
Bonus shares are issued at no consideration and so the company cannot be expected to
generate the same return (EPS) per share after a bonus issue.
Ex 2 A company has a 1:2 bonus issue on 31-12-18. The bonus fraction is therefore 3/2
2018 2017
Assets (e.g. cash) Rs100 Rs100
Earnings Rs20 Rs20
Shares 60 40
EPS 0.33 0.50
To make EPS comparable, we need to restate the 2017 figure as if it had the same share
capital as 2018 i.e. 20/(40 x 3/2)

This is algebraically the same as restating the previous EPS by the reciprocal of the bonus
fraction, i.e. 0.5 x 2/3

Rights issue
A rights issue (at below current market price) includes both an issue of shares and a
bonus issue which must be accounted for.
The bonus fraction is measured as:
Fair value per share immediately before exercise of rights
Theoretical ex rights price (TERP)
It is applied to all periods (e.g. months) prior to the issue.

Ex 3 Calculation of TERP
Assume rights issue on a 1 for 4 basis
Share price immediately before exercise of rights Rs 10
Rights price Rs 6.50
Rs
4 @ 10 = 40.00
1 @ 6.50 6.50
5 46.50
∴ TERP = 46.50 / 5 = 9.30
Bonus fraction = 10 / 9.3
To restate comparatives use reciprocal 9.30 / 10

Ex 4 On 1 January 2018 Saunders Co had 200,000 ordinary shares in issue.

On 30 April 2018 the company issued at full market price, 27,000 ordinary shares.
On 31 July 2018 the company made a rights issue of 1 for 10 @ Rs 2.00. The fair value of the
shares on the last day before the issue of shares from the rights issue was Rs 3.10.
Finally, on 30 September 2018 the company made a 1 for 20 bonus issue.
Profit for the period was Rs 400,000.
The reported EPS for year ended 31 December 2017 was Rs 1.86
Required
Calculate the EPS for year ended 31 December 2018 and the restated EPS for year ended 31
December 2017.

Solution Bonus fraction 30-9-2018 21/20

TERP 31-7-2018 10 @ 3.1 = 31.00
1 @ 2.00 2.00
11 33.00
∴ TERP = 33 / 11 = 3.00 Bonus factor 3.1/3

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 Weighted average number of shares
No. of Time Bonus Weighted
Date Narrative shares period Factor average
1-1-18 b/f 200,000 4 months 3.1/3 21/20 72,333
30-4-18 Full MP 27,000
227,000 3 months 3.1/3 21/20 61,574
31-7-18 Right Issue 22,700
249,700 2 months 21/20 43,698
30-9-18 Bonus 12,485
262,185 3 months 65,546
243,151
EPS for 2018 = 400,000 / 243,151 1.65
Restated EPS for year ended 31-12-2017
1.86 x 3 / 3.1 x 20 / 21 1.71

Contingently issuable shares are treated as outstanding and are included in the calculation of
basic earnings per share only from the date when all necessary conditions are satisfied

Diluted earnings per share

Dilution is a reduction in earnings per share or an increase in loss per share resulting from
the assumption that convertible instruments are converted, that options or warrants are
exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

Diluted EPS shows how Basic EPS would change if 'potential' ordinary shares (such as
convertible debt) become ordinary shares. It is therefore a 'warning' measure of what may
happen in the future for current ordinary shareholders.

Basic EPS is calculated by comparing earnings with the number of shares currently in issue.
If an entity has a commitment to issue shares in the future, for example on the exercise of
options or the conversion of loan stock, this may result in a change to basic EPS. IAS 33
refers to such commitments as potential ordinary shares.

When the potential shares are actually issued, the impact on basic EPS will be two-fold:
(a) The number of shares will increase;
(b) There may be a change in earnings e.g. lower interest charges.
This potential change in EPS is reflected in the calculation of diluted EPS.

Ex 5 Convertible debt
Acorn Co had the same 1 million ordinary shares in issue on both 1 April 2018 and 31 March
2019. On 1 April 2018 the company issued 120,000 Rs 1 units of 5% convertible bond. Each
unit of bond is convertible into 4 ordinary shares on 1 April 20X9 at the option of the holder. The
following is an extract from Acorn Co's income statement for the year ended 31 March 2019:
Rs '000
Profit before interest and tax 980
Interest on 5% convertible bond (60)
Profit before tax 920 920
Income tax at 30% (276)
Profit for the period 644
Required
Calculate the basic and diluted earnings per share for the year ended 31 March 2019.
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Solution
Basic EPS 644/1000 = 0.64

Profit for the period 644 Number of shares

Saving in interest after tax Basic 1,000,000
60 x (1-0.3) 42 On conversion 480,000
Profit if bonds converted 686 120,000 x 4 1,480,000

Diluted EPS = 686 / 1,480 0.46

Share options or warrants

Potential shares on the exercise of options or warrants are split as follows:
(a) Shares that would have been issued if the cash received had been used to buy
shares at average market price for the period;
(b) The remaining shares are treated as having been issued for no consideration.
It is only the shares deemed to have been issued for no consideration which are
added to the number of shares in issue when calculating diluted EPS (shares issued
at full market price have no dilutive effect).

Ex 6 Galaxy Co has a profit for the period of Rs 30m for the year. 1.4m ordinary shares were
in issue during the year. Galaxy Co also had outstanding 250,000 options for the whole
year with an exercise price of Rs 15.
The average market price of one ordinary share during the period was Rs 20.
Required
Calculate the basic and diluted EPS.
Solution
Basic EPS 30/1.4 = 21.43

Diluted EPS
Consideration on exercise 250,000 × 15 = 3,750,000
Shares acquired at average market price 3,750,000 / 20 = 187,500
∴ shares issued for no consideration (250,000 – 187,500) = 62,500
Diluted EPS = 30 / (1.4+.0625) 20.51

Basic and diluted EPS are shown on the face of the income statement with equal
prominence whether the result is positive or negative for each class of ordinary shares and
period presented.

Dilutive and anit dilutive potential ordinary shares

Potential ordinary shares shall be treated as dilutive when, their conversion to ordinary shares
would decrease earnings per share or increase loss per share .

Potential ordinary shares are antidilutive when their conversion to ordinary shares would
increase earnings per share or decrease loss per share. The calculation of diluted earnings
per share does not assume conversion, exercise, or other issue of potential ordinary shares
that would have an antidilutive effect on earnings per share.

In determining whether potential ordinary shares are dilutive or antidilutive, each issue or series
of potential ordinary shares is considered separately rather than in aggregate.

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EPS as a performance indicator
Importance of the EPS measure:
• EPS may be a better indication than profit of the financial performance of an entity
as it considers changes in capital during the period, i.e. new capital can only generate
a return from that date it is paid into the company.
• Earnings per share is considered a key stock market indicator and is quoted in the
financial press.
• EPS is important because of its role in the P/E (Price/Earnings) ratio. This is
probably the most important ratio for analysis work due to the ability to compare
different companies and its use as a 'value for money' measure.
Limitations of earnings per share
• EPS is based on historical not prospective data, and so is an indication of past
rather than future performance.
• The diluted EPS figure is a theoretical calculation. Markets do not necessarily react
in the same way.
• The official EPS definition includes one-off income/ expense which distort the EPS
figure. Additional EPS measures are permitted, but must be disclosed in the notes to
the financial statements not on the face of the income statement.

Q1 Company K had total earnings during Year 5 of Rs. 30,000,000.

It has 6,000,000 ordinary shares in issue.
There are unvested employee share options on 500,000 shares, which can be
exercised at a future date, at an exercise price of Rs. 210 per share.
The future expense that the company expects to recognise in respect of these
options up to the vesting date is Rs. 15,000,000.
The average market price of shares in Company J during Year 5 was Rs. 300.
Calculate diluted EPS (Ans 4.91)

Q2 A statement showing the retained profit of Pilum Co for the year ended 31 December
2018 is set out below: Rs
Profit before tax 2,530,000
Less: income tax expense 1,127,000
1,403,000
Transfer to reserves (230,000)
Dividends: Paid preference dividend (276,000)
Paid ordinary divided (414,000)
Retained 483,000

On 1 January 2018 the issued share capital of Pilum Co was 4,600,000 6% preference
shares of Rs 1 each and 412,000 ordinary shares of Rs 10 each.

Required
Calculate the earnings per share (on basic and diluted basis) in respect of the year
ended 31 December 2018 for each of the following circumstances. (Each of the three
circumstances (a) to (e) is to be dealt with separately):
(a) On the basis that there was no change in the issued share capital of the company
during the year ended 31 December 2018. (Ans 2.74)
(b) The company made a bonus issue on 1 October of one ordinary share for
every four shares in issue at 30 September

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 (c) On the basis that the company made a rights issue of Rs 1 ordinary shares on
1 October 2018 in the proportion of 1 for every 5 shares held, at a price of Rs 12.00
The market price for the shares at close of trade on the last day of quotation cum
rights was Rs 17.8 per share. (Ans 2.50)
(d) On the basis that the company made no new issue of shares during the year
ended 31 December 2018 but on that date it had in issue Rs 1,500,000 10%
convertible loan stock 2022 – 2025. This loan stock will be convertible into ordinary
Rs 1 shares as follows:
2022 9.0 Rs 10 shares for Rs 100 nominal value loan stock
2023 8.5 Rs 10 shares for Rs 100 nominal value loan stock
2024 8.0 Rs 10 shares for Rs 100 nominal value loan stock
2025 7.5 Rs 10 shares for Rs 100 nominal value loan stock
(e) There were outstanding options to purchase 74,000 ordinary shares at $9.00
per share. Share price during the year was Rs 15.
Assume where appropriate that the income tax rate is 30%. (10 marks) (Ans 2.25)

Q3 The profit after tax for Darrington Limited for the year ended December 31, 2017 was
May 18 Rs. 240 million. At January 01, 2017, the company had in issue 40 million equity shares
and Rs. 100 million 6% convertible loan note. The loan note will mature in 2018 and will
be redeemed at par or converted to equity shares on the basis of 25 shares for each
Rs. 1,000 of loan note at the loan note holders' option.
On April 01, 2017, Darrington Limited made a fully subscribed rights issue of 1 new share
for every 4 shares held at a price of Rs. 32 each. The market price of the equity shares of
Darrington Limited, just before the issue, was Rs. 42. The earnings per share (EPS)
reported, for the year ended December 31, 2016, was Rs. 4.
Applicable income tax rate is 30%.

Required:
Calculate the basic EPS for Darrington Limited (including comparatives) and the
diluted EPS that would be disclosed for the year ended December 31, 2017.
(Ans Basic 5.00 diluted 4.81 2016 basic 3.81)

Q4 Silk Company had 8,500,000 ordinary shares on January 01, 2011 and during 2011 it did
Aug 12 not issue any ordinary shares. In addition to these shares, Silk Company also had the
following convertible loans in issue in 2011:
Rs.
(i) 12% loan which is convertible in 4 years’ time at the
rate of one (1) share per Rs.10 of the loan 2,500,000
(ii) 15% loan which is convertible in 2 years’ time at the
rate of one (1) share per Rs.16 of the loan 3,000,000
Following is also relevant:
Total earnings in 2011 Rs.10,200,000
Income tax rate applicable 35%
Required:
(i) Compute Basic Earnings per Share (EPS). 01
(ii) Determine whether both loans or one of them is dilutive. 06
(iii) Compute diluted EPS. 02

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Q5 Saaim Limited's statement of financial position as of June 30, 2012 is showing its paid
Aug 14 up ordinary share capital of Rs. 75 million (Rs. 10 per share).
During the year ended June 30, 2013, the company has issued options of 1.5 million
shares. The company has reported the net profit of Rs. 1,350,000 for the year.
The exercise price for the shares under option is Rs. 12 per share and the average
market value of one ordinary share is Rs. 16 per share.
Required:
Calculate Basic EPS and Diluted EPS for the year ended June 30, 2013. 07

Q6 Following data pertains to Mega Limited:

Aug 15 Net profit before tax for the year ended December 31, 2014 (Rs.) 1,172,500
Taxable profit for the year ended December 31, 2014 (Rs.) 850,000
Income tax rate 35%
Weighted-average number of outstanding shares on January 1, 2014 1,000,000
Bonus shares issued on May 1, 2014 100,000
Repurchase of its own shares by the company on July 1, 2014 50,000
In 2013, the company had issued 10,000 convertible bonds of Rs. 100 each. These bonds
carry 8% interest rate and could be converted into 100,000 ordinary shares of Rs. 10 each.
On August 1, 2014, the company issued another 12,000 convertible bonds having face
value of Rs. 100 each and having interest rate of 10%. These bonds are convertible into
ordinary shares @ 10 ordinary shares of Rs. 10 for each bond.
Required:
(i) Compute basic earnings per share (EPS) 4
(ii) Which of the above bond(s) is(are) dilutive? 6
(iii) Calculate diluted EPS 2

Q7 The Chief Financial Officer of Central Textile Mills Limited is preparing a presentation on Basic
Aug 16 and Diluted Earnings Per Share (EPS) for the upcoming annual Board meeting of the company.
Following information is available for the period ended June 30, 2015:
• The statement of financial position of the company as on June 30, 2015 is showing its
paid up ordinary share capital of Rs. 18,200,000 of Rs. 10 per share.
• The company has reported net profit attributable to ordinary shares of Rs. 9,000,000
for the year.
• Average market value of one ordinary share is Rs. 90 per share during the year.
• Following options were issued by the company during the year:

Option-1 [Potential Ordinary Shares]:

➢ 115 shares of potential ordinary share options are issued by the company
during the year.
➢ The exercise price for the option share is Rs. 67 per share.
Option-2 [Convertible Preference Shares]:
➢ 1.50 million convertible preference shares entitled to cumulative dividend of
Rs. 18 per share.
➢ Each preference share is convertible into 3 ordinary shares.
Option-3 [5% Convertible Bonds of Rs. 1,000 each]:
➢ Nominal total value of convertible bond is Rs. 3 million.
➢ Each bond is convertible into 30 ordinary shares.
• Assume tax rate is 33%.
Required:
Calculate Basic and Diluted Earnings Per Share (EPS) 10

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Q8 A. R. Brothers has paid up capital of Rs.60 million comprising 6,000,000 shares of
Feb 14 Rs. 10 each. The company has financed its operation by issuing following financial
instruments on July 1, 2012:
(i) Rs. 2,000,000 of 12% convertible bonds with par value of Rs.10 each, convertible
in 2 years time at the rate of 3 shares for each bond.
(ii) Rs. 4,000,000 of 10% convertible bonds with par value of Rs.10 each, convertible
in 3 years time at the rate of 4 shares for each bond.
A. R. Brothers' profit before tax for the year ended June 30, 2013, was Rs.2,150,000.
The rate of income tax is 30%.
Required:
(i) Calculate the Basic Earnings per Share. 02
(ii) Which of the above loan is dilutive? 05
(iii) Calculate Diluted Earnings per Share. 02

Q9 Following data related to AC Company and its subsidiary DC Company for the year
Feb 13 ended June 30, 2012:
AC Company: (in ‘000’ )
Profit attributable to ordinary share holders of AC Company Rs. 25,000
Ordinary shares outstanding 10,000
Instruments of DC Company owned by AC Company:
Ordinary shares outstanding 900
Warrants exercisable to purchase ordinary share of DC Company 300
Convertible preference shares 375
DC Company:
Profit for the year (after tax) Rs. 8,000
Ordinary shares outstanding 1,200
Warrants exercisable to purchase ordinary shares of DC Company 600
Convertible preference shares (convertible into 1 equity share) 500
Exercise price is Rs.10
Average market price is Rs. 20
Dividend on preference shares is Re.1 per share
Required:
Calculate basic earnings per share and diluted earnings per share for the subsidiary and
group. Ignore income tax and assume that no inter-company elimination or adjustment is
necessary except for dividends. 12

Q 10 On 1 January 2018, Mary had 5 million ordinary shares in issue. The following
transactions in shares took place during the next year.
1-Feb-18 A 1 for 5 bonus issue
1-Apr-18 A 1 for 2 rights issue at Rs. 1 per share. The market price of the shares
prior to the rights issue was Rs. 4.
1-Jun-18 An issue at full market price of 800,000 shares.
In 2018 Mary made a profit before tax of Rs. 3,362,000. It paid ordinary dividends of
Rs. 1,200,000 and preference dividends of Rs. 800,000. Tax was Rs. 600,500.
The reported EPS for 2017 was Rs.0.32.

Required
Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative purposes.
(Ans 2018 - 0.21 2017 - 0.20)

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Q 11 The profit after tax earned by AAZ Limited during the year ended December 31, 2016
amounted to Rs. 127.83 million. The weighted average number of shares outstanding
during the year were 85.22 million.
Details of potential ordinary shares as at December 31, 2016 are as follows:
- The company had issued debentures which are convertible into 3 million
ordinary shares. The debenture holders can exercise the option on 31-12-2018.
If the debentures are not converted into ordinary shares they shall be redeemed on
31-12-18. The interest on debentures for the year 2016 amounted to Rs. 7.5 million.
- Preference shares issued in 2013 are convertible into 4 million ordinary shares
at the option of the preference shareholders. The conversion option is exercisable on
December 31, 2020. The dividend paid on preference shares during the year 2016
amounted to Rs. 2.45 million.
- The company has issued options carrying the right to acquire 1.5 million ordinary
shares of the company on or after December 31, 2016 at a strike price of Rs. 9.90 per
share. During the year 2016, the average market price of the shares was Rs. 11 .
The company is subject to income tax at the rate of 30%.

Required
Compute basic and diluted earnings per share.
(Ans Basic 1.471 diluted 1.43 )

Q 12 following information pertains to ABC Limited, in respect of year ended March 31, 2016.
Rs. in ‘000
Consolidated profit for the year (including non-controlling interest) 15,000
Profit attributable to non-controlling interest 2,000
Dividend paid during the year to ordinary shareholders 4,000
Dividend paid on 10% Cumulative preference shares for the year 2015 2,000
Dividend paid on 10% Cumulative preference shares for the year 2016 2,000
Dividend declared on 12% Non-cumulative pref. shares for the year 2016 2,400

(i) The company had 10 million ordinary shares at March 31, 2015.
(ii) The cumulative preference shares were issued at the time of inception of the company.
(iii) The 12% non-cumulative preference shares are convertible into ordinary shares, on
or before December 31, 2017 at a premium of Rs. 2 per share. The conversion rights
are not adjusted for subsequent bonus issues.
(iv) 0.50 million non-cumulative pref. shares were converted into ordinary shares on 1-7-15.
(v) The dividend declared on the non-cumulative preference shares, as referred above,
was paid in April 2016.
(vi) 1.20 million right shares of Rs. 10 each were issued at a premium of Rs. 1.50 per
share on 1-10-2015. The market price on the date of issue was Rs. 12.50 per share.
(vii) 20% bonus shares were issued on January 1, 2016.
(viii) Due to insufficient profit no dividend was declared during the year ended 31-3-2015.
(ix) The average market price for the year ended March 31, 2016 was Rs. 15 per share.

Required
Compute the basic and diluted earnings per share
(Ans Basic 0.65 diluted 0.74 hence invalid )