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IAS-33 Earnings per Share & Financial Statements
Diluted EPS
• At the end of an accounting period, a company may have in issue some securities which do not (at present) have any claim to a share of equity earnings, but may give rise to such a claim in the future.

These securities include.
a) A separate class of equity shares which at present is not entitled to any dividend, but will be entitled after some future date.
b) Convertible loan stock or convertible preferred shares which give their holders the right at some future date to exchange their securities for ordinary shares of the company, at a pre-determined conversion rate.
c) Options or Warrants.

• In such circumstances, the future number of shares ranking for dividend might increase, which in turn results in a fall in the EPS. In other words, a future increase in the number of equity shares will cause a dilution or “watering down” of equity and it is possible to calculate diluted earnings per share (i.e. the EPS that would have been obtained during the financial period if the dilution had already taken place). This will indicate to investors the possible effects of a future dilution.

Example 03
ABC Company has a paid up capital of Rs. 50,000,000 consisting of 5,000,000 ordinary shares of Rs.10/- each on June 30, 20X5. There was no movement during the year 20X4-X5. The company has two outstanding loans that are convertible into ordinary shares:
a) Rs. 1,000,000 of 14 % convertible loan, convertible in three years time at the rate of 3 shares per Rs. 10/- of loan amount;
b) Rs. 2,000,000 of 10 % convertible loan, convertible in one years time at the rate of 4 shares per Rs. 5/- of loan amount.
The Total Earnings in 20X5 were Rs. 6,500,000/-
The rate of Income Tax is 35%
Required:
Calculate the EPS and diluted EPS.

Effects on EPS of Changes in Capital Structure

• We looked at the effect of issues of new shares or buy-backs of shares on basic EPS above. In these situations, the corresponding figures for EPS for the previous year will be comparable with the current year because, as the weighted average of shares has risen or fallen, there has been a corresponding increase or decrease in resources. Money has been received when shares were issued, and money has been paid out to repurchase shares. It is assumed that the sales or purchases have been made at full market price.
• But there are other events, however, which change the number of shares outstanding, without a corresponding change in resources. In these circumstances it is necessary to make adjustments so that the current and prior period EPS figures are comparable.
• Four such events are considered by IAS 33 these are

a) Capitalization or bonus issue.
b) Bonus element in any other issue. e.g. a right issue to existing shareholders.
c) Share split
d) Reverse share split (Consolidation of shares)

Presentation of EPS
• Basic and diluted EPS should be presented by an enterprise on the face of the income statement for each class of ordinary share that has a different right to share in the net profit for the period.
• The basic and diluted EPS should be presented with equal prominence for all periods presented.
Disclosure of EPS
• Disclosure must still be made where the EPS figures (basic and/or diluted) are negative (i.e. a loss per share)
• The amounts used as the numerators in calculating basic and diluted EPS, and a reconciliation of those amounts to the net profit or loss for the period.
• The weighted average number of ordinary shares used as the denominator in calculating basic and diluted EPS,  and a reconciliation of these denominators to each other.
Significance of Earnings per Share
• EPS has served as a means of assessing the stewardship and management role performed by company directors  and managers. Remuneration packages might be linked to EPS growth, thereby increasing the pressure on management to improve EPS. The danger of this, however, is that management effort may go into distorting
results to produce a favorable EPS.