Indian Accounting Standard 33 – Earnings per Share

Earnings per share is a method used to review the performance of an entity. As the term itself denotes it simply means determining the profit attributable to each share. Such information is required to understand the return on investment for the shareholders and prospective investors.  

What is the objective of the standard?

The objective of the standard is to provide a common parameter for reviewing the performance of the entities and compare the same. Also, the computation can be used for reviewing the performance of the entity between different periods.

What is the scope of the standard?

This standard requires that if an entity computes earnings per share then it must calculate and disclose the same as per this standard. Further, this standard requires that if an entity presents both Consolidated financial statements and Separate financial statements as per the standards then it must present the earnings per share in both the statements separately The standard prescribes two methods for measurement of earnings per share:

• Basic earnings per share 
• Diluted earnings per share

Basic earnings per share will be calculated by dividing the profit or loss attributable to ordinary equity holders of the parent entity by the weighted average number of ordinary shares outstanding for the period.  This computation enables in understanding the earnings attributable to each ordinary share.  

Computing earning per share

Detailed formula: Profit or loss attributable to ordinary equity holders of parent entity – After-tax preference dividend. A weighted average of ordinary shares.

Example: Apple Ltd has a profit of Rs. 5 crores  The number of ordinary shares outstanding is 10 lakhs.  So the EPS will be Rs. 50.  The numerator that is the profit or loss will be profit or loss from continuing operations attributable to the parent entity and profit or loss attributable to the parent entity adjusted for after-tax amounts of preference dividends,  differences arising on the settlement of preference shares, any other effects on preference share classified as equity.

If any item that is to be recognised in profit or loss as per the standards is adjusted in the securities premium account or other reserves, the amount will be deducted from profit or loss from continuing operations for the purpose of computing basic earnings per share. The denominator is the weighted average number of ordinary shares outstanding during the period.

The weighted average number of ordinary shares is the number of ordinary shares at the beginning of the period,  adjusted by the number of shares bought back or issued during the period multiplied by a time weighing factor. Shares are included in the above computation from the date on which the consideration is receivables. 

The weighted average number of ordinary shares outstanding during the period and for all periods presented shall be adjusted for events, other than the conversion of potential ordinary shares, that have changed the number of ordinary shares outstanding without a corresponding change in resources.

Diluted earnings per share: The diluted earnings per share are computed by adjusting the profit or loss and ordinary shares for the effects of all dilutive potential ordinary share. The numerator will be the profit or loss as computed for basic earnings per share adjusted by the after-tax effect of the

• dividends or any other items that are related to dilutive potential ordinary shares that are deducted in computing basic earnings per share.
• interest in the period related to dilutive potential ordinary shares that are recognized
• changes in income or expense that would be due to the conversion of the dilutive potential ordinary share.  

The denominator is the weighted average number of ordinary shares as per the computation of basic earnings per share plus the weighted average number of shares that would be issued on conversion of all dilutive potential ordinary shares into ordinary shares.  

Potential ordinary shares will be dilutive only when their conversion to ordinary shares reduces the earnings per share or increase the loss per share from continuing operations.

What are the retrospective adjustments permitted?

Due to capitalisation, bonus issue or share split if the number of ordinary or potential ordinary shares outstanding increases, or decreases as a result of a reverse share split, calculation of basic and diluted earnings per share for all periods presented shall be adjusted retrospectively. If these changes occur post the reporting period but before the financial statements are approved for the issue, the per-share calculations for those and any prior period financial statements presented shall be based on the new number of shares.

The fact that per share calculations reflect such changes in the number of shares shall be disclosed. In addition, basic and diluted earnings per share of all periods presented shall be adjusted for the effects of errors and adjustments resulting from changes in accounting policies accounted for retrospectively.

How are earnings per share to be presented?

• An entity shall present basic and diluted earnings per share with equal prominence for all periods. 
• An entity shall present basic and diluted earnings share even if it is negative. 

What are the disclosure requirements?

An entity shall disclose the following:

• The amounts used as the numerators in calculating basic and diluted earnings per share and a reconciliation to the profit or loss.
• the weighted average number of ordinary shares used as the denominator in calculating basic and diluted earnings per share and a reconciliation of the denominators to each other. 
• instruments (including contingently issuable shares) that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they are anti-dilutive for the period(s) presented.
• description of ordinary share transaction or potential ordinary share transactions

Definitions

The following terms are used in the standard with the meanings specified Anti Dilution is the increase in the earnings per share or reduction in the loss per share that results from the assumption that convertible instruments are converted,  options or warrants exercised or that ordinary share are issued upon the satisfaction of specified conditions.  

A contingent share agreement is an agreement that is dependent on the satisfaction of conditions for the issue of shares.  Contingently issuable ordinary shares are issued on the satisfaction of specified conditions in a contingent share agreement for consideration or otherwise. Dilution is the reduction in the earnings per share or increase in the loss per share that results from the assumption that convertible instruments are converted,  options or warrants exercised or that ordinary share are issued upon the satisfaction of specified conditions.  

Options,  warrants and their equivalent give the holder the right to purchase an ordinary share. An ordinary share is an equity instrument that is subordinate to all equity instruments. A potential ordinary share is an instrument that may entitle its holder to ordinary shares.  Put options on ordinary shares are contracts that give the holder the right to sell ordinary shares at a specified price for a given period.