MIDTERM: EPS

EPS Ordinary share - Defined

- Is an equity instrument that is subordinate to all other classes of equity instruments - Participate in profit for the period after all other (preference) - May have more than one type of shares (Class A, Class B, Class c, etc.)

Restatement of EPS

- When ordinary shares are issued without a corresponding change in resources (assets), the EPS and the weighted average number of ordinary shares outstanding during the period and for all periods presented should be adjusted retrospectively. - Examples of issuance of ordinary shares väthout a corresponding change in resources include: A capitalization or bonus issue (e.g., share dividend); a. A capitalization or bonus issue (e.g., share dividend); b. A bonus element in any other issue, for example a bonus element in a rights issue to existing shareholders (also referred to as preemptive stock rights); c. A share split (increase in number of shares with corresponding decrease in par value); and d. A reverse share split (consolidation of shares or decrease in number of shares with corresponding increase in par value).

Diluted EPS

-Diluted earnings per share is the amount of profit for the period per share, reflecting the maximum dilutions that would have resulted from conversions, exercises, and other contingent issuances that individually would have decreased earnings per share and in the aggregate would have had a dilutive effect. - Only basic earnings per share is presented if an entity has no dilutive potential ordinary shares (i.e., simple capital structure). The computation of diluted earnings per share is based on the assumption that the dilutive potential ordinary shares were converted or exercised. It is: 1. "As if' the convertible preference shares or convertible bonds have been converted; or 2. "As if' the options or warrants have been exercised. The conversion or exercise is assumed to have taken place on the date the potential ordinary shares became outstanding, regardless of the date of actual conversion or exercise.

Uses of EPS

1. May be used to assess the value of entity's shares. It shows how much profit one share of the entity is producing. The higher the ratio, the better because the value of the share will increase. 2. Promotes comparability when measuring performance of difference entities with different resource bases, different capital structures and different nature of operations. 3. Provides a basis for dividend policy. The higher profit a share is producing, the more likely that higher dividends will be declared on the share.

Types of Earnings per share

1.Basic earnings per share 2.Diluted earnings per share

Loss Per Share

Only the basic loss per share is presented when an entity reports loss for the year. The diluted loss per share is not presented because potential ordinary shares generally decrease the loss per share and, therefore, are antidilutive.

Weighted average number of outstanding ordinary shares

Shares are usually included in the weighted average number of shares from the date consideration is receivable (which is generally the date of their issue), for example : 1. Ordinary shares issued in exchange for cash are included when cash is receivable. 2. Ordinary shares issued in exchange for non-cash assets are included as of the date on which the acquisition is recognized. 3. Ordinary shares issued in exchange of services received are included as the services are rendered. 4. Ordinary shares issued to settle a liability are included from the settlement date. 5. Ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are included from the date that interest ceases to accrue. 6. Treasury shares acquired are excluded when the acquisition is recognized. Treasury shares reissued are included when the reissuance is recognized. 7. Subscribed ordinary shares or partly paid shares are included to the extent of their participation in dividends. 8. Ordinary shares issued as share dividends or share splits are included from the time the original shares, on which the share dividends or share splits are based, were originally issued. 9. Ordinary shares issued as part of the consideration transferred in a business combination are included from the acquisition date. 10. Ordinary shares that will be issued upon the conversion of a mandatorily convertible instrument are included from the date the contract is entered into. 11. Contingently issuable shares are treated as outstanding and are included in the calculation of basic earnings per share only from the date when all necessary conditions are satisfied (i.e., the events have occurred). Shares that are issuable solely after the passage of time are not contingently issuable shares, because the passage of time is a certainty. 12. Outstanding ordinary shares that are contingently returnable (i.e., subject to recall) are not treated as outstanding and are excluded from the calculation of basic earnings per share until the date the shares are no longer subject to recall. 13. Ordinary shares issued in place of interest or principal on other financial instruments are included from the date that interest ceases to accrue 14. Ordinary shares issued on the voluntary reinvestment of dividends on ordinary or preference shares are included when dividends are reinvested Note: The dividend on the redeemable preference shares is ignored because dividends on redeemable preference shares are treated as interest expense and, would have already been deducted from the reported profit.

Options, warrants and their equivalents

When computing for diluted earnings per share, the "treasury share method" shall be used in computing for the incremental shares. This method assumes that: 1. The options or warrants are exercised and 2. The proceeds received from the exercise are used to purchase treasury shares at the average market price. 3. The difference between the treasury shares assumed to have been purchased and the option shares represents the incremental shares.

Rights Issue

When stock rights are issued to shareholders in conformance with their preemptive right, the exercise price is normally less than the fair value of the shares. This type of rights issue includes a bonus element. Thus, for basic and diluted EPS computation, the number of shares outstanding for all periods before the rights issue is multiplied by the following factor:

Adjustments for preference dividends

a. If the preference shares are cumulative, one-year dividend is deducted from profit or loss whether declared or not. b. lf the preference shares are non-cumulative, only the dividend declared is deducted from profit or loss.

Considerations in computing "Profit or loss"

a. Profit or loss should be net of income tax expense b. Profit or loss should be adjusted for the after-tax amounts of preference dividends, differences arising on the settlement of preference shares, and other similar effects of preference shares classified as equity.

Financial Statement Presentation

• Basic and Diluted earnings per share are computed on the following: 1. Profit or loss from continuing operations 2. Profit or loss from discontinued operations, if the entity reports a discontinued operation. 3. Profit or loss for the year EPS is not computed on other comprehensive income and total comprehensive income. • EPS computed on profit or loss from continuing operations and profit or loss for the year are presented on the face of the statement of profit or loss and other comprehensive income. If the entity uses a two-statement presentation, EPS is presented only on the separate income statement.

Preference share - Defined EPS

• One that has preference over other classes of shares, such as preference over dividends or preference over net assets in cases of liquidation, but typically does not have voting rights.