In order to review the performance of an entity one of the widely used methods is earnings per share. Earning per share simply means ascertaining the amount of profit attributable to each share. EPS helps understanding the return on investment to the shareholders and giving an opportunity to prospective investors to decide whether they should go for investment in an entity. In essence, Ind AS 33 describes the principles and methods for determining and presenting EPS in the financial statements of an entity.
Objective The Ind AS 33 facilitates providing a universal barometer to review the performance of all the entities and compare them. Further, the computation of EPS can be used to review the performance of the entity between different accounting periods. The standard further states that if an entity ascertains EPS then it shall compute and disclose the same in accordance with this standard. Also, this standard mandates an entity present its earnings per share in both the statements individually if it presents both the separate financial statements and the consolidated financial statements.
Methods There are broadly following two methods as prescribed by Ind AS 33 for computing EPS:
1. Basic EPS This method enables understanding the earning attributable to each ordinary share. In this method, EPS is calculated as bellow-
EPS = [Profit/ (loss) attributable to ordinary equity holders of the parent entity less post-tax pref. dividend] ÷ Weighted average number of outstanding ordinary shares
However, following adjustments need to be done to the earnings before computing EPS:
Any item of income or expense, which is required to be recognized in profit or loss, is transferred to any reserve, the amount of such income/expense shall be adjusted to profit or loss accruing to continuing operations.
Post-tax amount of dividend on cumulative preference shares should be deducted irrespective of actual declaration of dividend on such shares.
Any discount on issue or premium on induced rate of preference shares is amortized to retained earnings using the effective interest method and accounted as a preference dividend for the purposes of calculating earnings per share
The number of ordinary shares shall be the weighted average number of ordinary outstanding shares during the year.
The contingently issuable shares to be issued for are considered only from the date when all required conditions are met.
The weighted average number of ordinary outstanding shares shall be adjusted for events, apart from the conversion of potential ordinary shares, which have changed the number of ordinary outstanding shares without a simultaneous and corresponding change in resources.
In a capitalization, a share-split or a bonus issue, ordinary shares are issued to existing shareholders for no additional consideration. Thus, the number of ordinary shares outstanding is increased considering as if such event had occurred at the beginning of the earliest period presented.
2. Diluted EPS The diluted EPS is calculated by adjusting the profit/ (loss) and ordinary shares for the effects of all dilutive potential ordinary share. For computing diluted EPS, following adjustments need to be done:
Adjustment to profit or loss attributable to ordinary equity holders by the after-tax effect of the:
Dividends or any other items related to dilutive potential ordinary shares which are deducted in calculating the basic EPS.
Interest related to dilutive potential ordinary shares that are recognized.
Changes in income/expense that would be due to the conversion of the dilutive potential ordinary share.
The weighted average number of ordinary outstanding shares is increased by the weighted average number of additional ordinary shares that would have been outstanding presuming the conversion of all dilutive potential ordinary shares.
Potential ordinary shares should be regarded as dilutive only when their conversion to ordinary shares would reduce the EPS or induce the loss per share from continuing operations.
For computing diluted EPS, an entity should assume the exercise of dilutive options and warrants of the entity. The estimated proceeds from such instruments shall be considered as having been received from the issue of ordinary shares at the average market price of ordinary shares during the period.
The dilutive effect of all the convertible instruments shall be accounted in diluted EPS.
As in the computation of basic EPS, contingently issuable shares are treated as outstanding and included while computing diluted EPS if the conditions are met.
If an entity has issued a contract which can be settled in ordinary share or cash at the entity’s option, it shall presume that the contract will be settled in ordinary shares, and the net resulting potential ordinary shares shall be included in diluted EPS if the effect is dilutive.
For contracts that can be settled in ordinary shares or cash at the holder’s option, the more dilutive of cash settlement and share settlement shall be used in calculating diluted EPS.
Derivative contracts such as put options and call options (i.e., options held by the entity on its own ordinary shares) should not be included while computing diluted EPS because the effect of such inclusion would be anti-dilutive.
Contracts in which the entity is entitled to repurchase its own shares, like written put options and forward purchase contracts, are reflected in the computation of diluted EPS if the effect is dilutive.
Retrospective adjustments If the number of ordinary or potential ordinary outstanding shares rises as a result of a capitalization, a share-split or a bonus issue, or falls as a result of a reverse share split, the computation of basic and diluted EPS for all the periods presented shall be adjusted retrospectively. If these changes occur post-reporting period but prior to the approval of financial statements for issue, the per share calculations for those and any prior period financial statements presented shall be based on the new number of shares.
Presentation An entity is required to present below for EPS:
Both basic and diluted EPS for all periods presented.
Both basic and diluted EPS even if the amounts are negative.
Disclosure requirements An entity is required to disclose the following while presenting EPS:
The amounts used for computing basic and diluted EPS and a reconciliation to the profit or loss.
The weighted average number of ordinary shares for computing basic and diluted EPS 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.
Computation of EPS helps entities to present their financial statements with an objective to provide the shareholders know about their investment.
Here at AJSH, we provide our clients in preparation of financial statements ensuring appropriate disclosures are made as per applicable Ind-AS and also assist them in adoption of any newly introduced Ind-AS. If you have any query or wish to know more about it, kindly contact us.
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