ACCOUNTING STANDARD - 20 EARNINGS PER SHARE J.P., KAPUR & UBERAI

EARNINGS PER SHARE – A PERFORMANCE INDICATOR A Measurement Standard Numerator : ‘Earnings’ Denominator : ‘Shares’ Predominantly Denominator Focused J.P., KAPUR & UBERAI

WHAT IS TO BE MEASURED ? Diluted EPS Concept of Dilution Basic EPS. Diluted EPS Concept of Dilution Anti-dilutive potential shares J.P., KAPUR & UBERAI

OBJECTIVE OF STANDARD Comparability enhancement Different enterprises, same period Different periods, same enterprise J.P., KAPUR & UBERAI

SCOPE AND APPLICATION Enterprises with Equity Shares / Potential Equity Shares, listed Other enterprises which disclose EPS Financial Periods Commencing on/after 01.04.2001 In CFS, EPS on the basis of consolidation information J.P., KAPUR & UBERAI

PRESENTATION Basic and Diluted EPS to be shown on P/L with equal prominence for all periods presented Basic and Diluted EPS to be shown even for negative amounts. J.P., KAPUR & UBERAI

MEASUREMENT Matters Basic - Per Share How Addressed Determine weighted average of equity shares o/s Adjust for buy-backs/issues Multiply by time weighting factor (No. of days outstanding as a proportion of total days) Basic - Per Share Equity Shares o/s during the period vary J.P., KAPUR & UBERAI

MEASUREMENT Matters How Addressed J.P., KAPUR & UBERAI Shares generally included when considerations receivable. For equity issued for Cash… When cash is receivable On conversion of debt…On date of Conversion In settlement of liability…Effective date of settlement For acquisition of assets…When acquisition is recognised For rendering Services… When services are rendered For interest/principal on Financial Instruments… When interest ceases to accrue When to include in weighted average J.P., KAPUR & UBERAI

ILLUSTRATION OF COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES (Accounting year 01-01-20XI to 31-12-20XI) Computation of weighted average: (1800 X 5/12) + ( 2400 X 5/12) + (2100 X 2/12) = 2100 shares J.P., KAPUR & UBERAI

MEASUREMENT How Addressed Matters Shares issued in Amalgamation In the nature of purchase Iin the nature of a merger Partly paid Equity Share Included in weighted average: As on date of acquisition From the beginning of the reported period Treated as a fraction of the Equity Share J.P., KAPUR & UBERAI

MEASUREMENT Matters How Addressed J.P., KAPUR & UBERAI Equity Shares - Different nominal value - Same dividend rights Contingently issuable shares Bonus issues etc. (where resources are not changed) Bonus element in right issue Conversion of equivalent number of shares of same nominal value Included in Basic EPS when all contractual conditions fulfilled Adjust weighted average to earliest period reported, as if the event had occurred at the beginning of the earliest reported period. Illustration J.P., KAPUR & UBERAI

RIGHTS ISSUE (Accounting year 01-01-20X1 to 31-12-20X1) Net profit Year 20 x 0 : Rs. 11,00,000 Year 20 x 1 : Rs. 15,00,000 No. of shares outstanding prior to rights issue: 5,00,000 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 20 X 1 Fair value of one equity share immediately prior to exercise of rights on 1st March 20 X 1 : 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 J.P., KAPUR & UBERAI

RIGHTS ISSUE (CONTD.) J.P., KAPUR & UBERAI 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 20 X 0 Year 20 x 1 EPS for the year 20 x 0 as originally reported : Rs. 2.20 [Rs. 11,00,000 / 5,00,000 shares] EPS for the year 20 x 0 restated for rights Rs. 2.10 [Issue : Rs. 11,00,000 / (5,00,000 shares x 1.05)] EPS for the year 20 x 1 including effects of rights issue Rs. 2.55 Rs. 15,00,000 (5,00,000 x 1.05 x 2/12) + (6,00,000 x 10/12) J.P., KAPUR & UBERAI

MEASUREMENT Matters How Addressed J.P., KAPUR & UBERAI Deduct from earnings (Add to loss) Non cumulative P. Shares dividend provided Cumulative P. Shares … full dividend for the current period Adjusted Earnings Earnings – Basic Preference Dividends Earnings – Diluted Effect of dilution J.P., KAPUR & UBERAI

COMPUTATION OF DILUTED EARNINGS (Accounting year 01-01-20XX to 31-12-20XX) 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 1,00,000 Each debenture is convertible into 10 equity shares 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 10,00,000 of debentures No. of equity shares used to compute 50,00,000 + 10,00,000 = 60,00,000 diluted earnings per share Diluted earnings per share 1,08,40,000 / 60,00,000 = Re. 1.81 J.P., KAPUR & UBERAI

MEASUREMENT Matters How Addressed J.P., KAPUR & UBERAI Diluted – Per Share What shares to be included? Convert at what rate? What about contingently issued potential shares? Wt. Average Equity Shares as per basic, plus Conversion of all dilutive potential equity shares most advantageous rate/exercise price to the holder if contract fulfilled, already under basic if contract not fulfilled then dilutive. J.P., KAPUR & UBERAI

MEASUREMENT How Addressed Matters Fair value vs Option Value Determination of Fair Value Shares issued for no consideration Simple average, last 6 months weekly closing prices, generally J.P., KAPUR & UBERAI

MEASUREMENT Matters How Addressed Potential Equity Shares Anti- Dilutive When? Process of Determination of Dilutive / Anti-Dilutive If conversion increases earnings / decreases loss Consider each series separately Sequence such consideration in descending order of dilution J.P., KAPUR & UBERAI

DISCLOSURE Numerator reconciliation to P/L Basic – diluted – Wt. Average Denominator reconciliation Nominal Value of Shares along with EPS figures For any other component of net profit reporting Denominator must be the same Numerator must be / reconciled to line item (P/L) Basic and Diluted EPS must be disclosed with equal prominence J.P., KAPUR & UBERAI