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EARNINGS PER SHARE (IAS – 33)

Earning per share is an accounting ratio that improves comparison of the performance of different entities in the same period and of the same entity in different accounting periods. International Accounting Standard (IAS) 33 provides complete guidelines regarding calculation and presentation of EPS. Only listed companies need to present EPS. Where a non listed company chooses to present EPS in its financial statements, it must do so in accordance with IAS 33.

Basic Earnings per Share (EPS)

Apparently EPS is the outcome of current year’s earnings divided by the number of ordinary shares. IAS 33 guides to use following formula for calculation of basic EPS:

Profitsavailablefor distributionstoordinaryshareholders

=EPS

Weighted averagenumberof ordinarysharesoutstandingduringthe year

Profits available for distribution to ordinary shareholders:

This is the current year’s profit figure which is obtained after subtracting all types of expenses (cost of goods sold, administrative, selling, financial and income tax expenses) out of all the incomes (revenues and gains) recognized during the year. This is also known as the profit after tax.

Weighted average number of ordinary shares outstanding during the year:

This is the figure that needs calculation; these are the weighted average of ordinary shares that remained outstanding during the year. This figure is obtained after making certain adjustments concerning increase or decrease in the number of ordinary shares in accordance with the time period due. The time-weighting factor is the number of days the shares were outstanding compared with the total number of days in the period.

A very simple example to understand the concept of weighted average is as under:

FS Company Limited

Number of Ordinary Shares

January 1, 2007 Opening Balance b/f 200,000 September 30, 2007 Issue of ordinary share capital 200,000 December 31, 2007 Closing Balance c/f 400,000

Weighted Average number of ordinary share capital outstanding during the year:

200,000 (outstanding for full year) 200,000 200,000 x 3/12 (outstanding for Oct. Nov. & Dec.) 50,000 Weighted average number of ordinary share capital outstanding250,000

Another example to understand weighted average calculations:

Jubilation Co., a listed company, has the following share transactions during the year ending on December 31, 2007.

Date Details Shares Treasury Shares Issued shares* Outstanding

Jan 1, 2007 Balance b/f 200,000 30,000 170,000 May 31, 2007 Fresh Issue 80,000 -250,000 Dec 1, 2007 Treasury shares 25,000 225,000 Dec 31, 2007 Balance c/f 280,000 55,000 225,000

*Treasury shares are the company’s own shares held by the company itself

Weighted average number of shares

Shares weight weighted Outstanding in months average

170,000 5/12 70,833 250,000 6/12 125,000 225,000 1/12 18,750

214,583

Alternative calculation:

Number of weight weighted shares in months average

170,000 12/12 170,000 80,000 7/12 46,666 (25,000) 1/12 (2,083)

214,583

Shares are usually included in the weighted average number of shares from the date on which the consideration is receivable which is usually the date of issue. Ordinary shares issued as purchase consideration in an acquisition should be included as of the date of acquisition because the acquired entity’s results will also be included from that date.

Solved problem # 1:

Famous Co. is a company with an issued and paid up capital of 100,000 ordinary shares of Re. 1 each and 20,000 10% debentures of Re. 1 each. The company manufactures electrical appliances. During its accounting year ending on December 31, 2007 the company had operating expenses of Rs. 50,000 the gross profit was Rs. 200,000. The company paid the 10% interest on debentures and declared an ordinary dividend of 40 paisa per share. Assuming an income tax rate of 30% on the given figures show the trading results and EPS of the company.

Solution:

Famous Co Income Statement For the year ended December 31, 2007

In addition to the information given in the above problem assume the Famous Co also issued further 40,000 ordinary shares on July 1, 2007.

Solution:

Weighted average number of ordinary shares

On September 30, 2008, Blue-moon Co made an issue at full market price of 1,000,000 ordinary shares. The company’s accounting year runs from January 1 to December 31. Relevant information for the year 2007 and 2008 is as follows:

2008 2007 Shares in issue as on December 31 9,000,000 8,000,000 Profits after tax (in Rupees) 3,300,000 3,280,000

Required:

Calculate EPS for the year 2008 and corresponding figure for 2007

Solution:

Weighted average number of shares

2008 2007 Shares in issue on opening date 8,000,000 8,000,000 Fresh issue 1,000,000 x 3/12 250,000 Weighted average 8,250,000 8,000,000 Earnings 3,300,000 3,280,000

Earnings per share Rs. 3,300,000 Rs. 3,280,000 8,250,000 8,000,000

40 paisa 41 paisa

Despite an increase in total earnings by Rs. 20,000 in the year 2008, the EPS is not as good as in the year 2007, because there was extra capital employed for the last 3 months of the year 2008.