ACYFARP: Earnings per Share

Basic Earnings per Share

It is the amount attributable to each ordinary share outstanding during the period.

True

(True or False) Earnings per share information only applies to ordinary shares. It is not required for preference shares because such shares have a definite rate of return.

Basic Earnings per Share and Diluted Earnings per Share

The two types of EPS that need to be presented.

Entities Required to Present Earnings per Share

The following situations necessitate the presentation of earnings per share:

a. Entities with public traded ordinary shares.

b. Entities in the public securities market that are in the process of issuing ordinary shares or potential ordinary shares.

True

(True or False) Public companies shall report earnings per share. Nonpublic entities are not mandated to publish earnings per share, but they are encouraged to do so.

True

(True or False) For income or loss from continuing operations, an entity must present basic and diluted earnings per share on the face of the income statement. On the face of the income statement or notes to financial statements, a company reporting a discontinued operation must disclose the basic and diluted amounts per share for the discontinued operation.

True

(True or False) Even if the amounts are negative, such as basic loss per share, an entity must disclose basic and diluted loss per share.

True

(True or False) When an entity presents both consolidated and separate financial statements, the standard only requires that the disclosure required by the standard be presented on the basis of consolidated financial statements.

Basic Earnings per Share

Net Income / Weighted Average Number of Ordinary Shares Outstanding

Net Income

Net Income - Dividends on Preference Shares

Cumulative Preference Shares - Only the current year's preference dividend is deducted from net income, regardless of whether the dividend is declared or not.

Noncumulative Preference Shares - The current year preference dividend is deducted from net income only if it is declared.

True

(True or False) Preference share dividends are only deducted from income from continuing operations. In computing for Basic EPS of discontinued operations, there is not need to deduct preference share dividends anymore.

Weighted Average Number of Shares

Is normally calculated from the date the consideration is due, which is usually the date of issuance:

a. Ordinary shares in exchange for cash - included when cash is receivable.

b. Ordinary shares issued because of a conversion of debt instrument to ordinary shares - included from the date of its conversion.

c. Ordinary shares issued lieu of interest or principal on other financial instruments - included from the day interest stops accruing on those securities.

d. Ordinary shares issued in exchange for the payment of an entity's liability - included from the date of settlement.

e. Ordinary shares issued in exchange for performing services to the entity - included in the calculation when the services are rendered.

f. Ordinary shares issued as part of the purchase consideration of a business combination that is an acquisition - include from the date of acquisition.

g. Subscription ordinary shares or partially paid shares - included in EPS under IFRS to the extent that they are entitled to dividends (Subscription shares are entitled to a full share of dividends under Philippine jurisdiction).

Share Dividend - Bonus Issue

Ordinary shares are issued to existing shareholders for no change. As a result, the number of ordinary shares is increased without increasing the resources.

Share Dividend - Bonus Issue

The number of ordinary shares outstanding is adjusted to account for the proportionate change in the number of ordinary shares outstanding as if the bonus issue occurred at the start of the earliest period presented.

Rights Issue

Shareholders given such rights have the privilege of purchasing a stock at exercise price, which is frequently less than the fair market value of the shares. As a result, a bonus element is included in such a rights issue, meaning shares are issued for no consideration.

True

(True or False) The number of ordinary shares to be utilized in calculating basic earnings per share for all periods prior to the rights issue is the number of ordinary shares outstanding prior to the rights issue multiplied by an adjustment factor.

Adjustment Factor

Is the ratio of the right-on market value to the ex-right market value of the share.

Market Value of the Share Right-On

Is the market value of the share immediately prior to the exercise of rights.

Market Value of the Share Ex-Right

Is the market value of the share right-on munis the theoretical value of right.

Value of One Right

Market Value of Share Right-On - Subscription Price / Number of Rights to Purchase One Share Plus 1

True

(True or False) If the preference dividend is noncumulative, it shall be ignored in computing for ordinary basic loss per share because there is presumably no declaration if there is a net loss.

Potential Ordinary Shares

Is a financial instrument or other contract in which the holder may be entitled to ordinary shares. It is a financial instrument that represents the future issuance of ordinary shares. It includes the following:

a. Convertible bond payable

b. Convertible preference share

c. Share option and warrant

Dilution

Occurs when the inclusion of potential ordinary shares decreases the basic earnings per share or raises the basic loss per share.

Antidilution

Occurs when the inclusion of potential ordinary shares increases basic earnings per share or decreases basic loss per share. It is not taken into account when calculating diluted earnings per share.

As If Approach - Diluted Earnings per Share

The computation of diluted earnings follows as if:

a. Convertible bond payable is converted into ordinary share or common stock.

b. Convertible preference share or preferred stock is converted into ordinary share or common stock.

c. Share options and warrants are exercised.

As If Convertible Bond Payable is Converted into Ordinary Share Approach

The diluted earnings per share calculation is based on the assumption that the bond payable is converted into ordinary shares. As a result, adjustments to net income and the number of ordinary shares outstanding will be made. The interest expenses on the bond payable, net of tax, is added back to net income. The number of outstanding ordinary shares is increased by the number of ordinary shares that would have been issued if the bond payable had been converted.

As If the Convertible Preference Share or Preferred Stock is Converted into Ordinary Share Approach

Assumes that the preference share is converted into an ordinary share. As a result, the amount of preference dividend is no longer deducted from net income. The number of outstanding ordinary shares is increased by the number of ordinary shares that would have been issued if the preference share had been converted.

Share Options

Are given to employees which allow them to purchase ordinary shares of the company at a set price for a set period of time.

Share Warrants

Are issued to shareholders to allow them to purchase ordinary shares of the company for a set price over a set period of time.

True

(True or False) Options and warrants have no cash yield definition, but their value is derived from the right to purchase ordinary shares at a specified price, which is usually lower than the current market price.

Exercise Price or Option Price > Average Market Price of the Ordinary Share

The option or warrant is dilutive.

True

(True or False) The exercise price or option price for employee share options, on the other hand, must include the fair value of any future services to be provided to be provided to the entity under the option plan.

Actual Exercise of Options and Warrants

The following are the computation procedures for option shares or shares covered by warrants:

a. The actual number of option shares or covered shares issued is averaged from the date of exercise to the end of the current fiscal year.

b. The incremental ordinary shares are averaged from the start of the current year to the date of option and warrant exercise.

Treasury Share Method

Is used to include options and warrants in the EPS calculation. This, however, does not imply that the entity has completed a treasury share purchase transaction. This method is used to calculate incremental ordinary shares that are assumed to be issued for no consideration due to options and warrants.

Incremental Ordinary Shares Resulting from Issuance of Options and Warrants

Include the following procedures:

a. The options and warrants are assumed to be exercised at the beginning of the current year or at the date issued during the current year.

b. The proceeds from the exercise of the options and warrants are assumed to be used to acquire treasury shares at average market price.

c. The number of incremental ordinary shares is equal to the options share minus the assumed treasury shares acquired.

Incremental Ordinary Shares

Are ordinary shares issued for no consideration. As a result, these are the potential ordinary shares that are factored into the diluted earnings per share calculation. The proceeds from the assumed options and warrants will be treated as if they were received from the issuance of shares at fair value or average market price.

True

(True or False) Whether preference dividends are paid or not before the actual conversion, diluted earnings per share would be the same.

Treasury Share Method

Is used to simplify the computation of incremental ordinary shares that are assumed to be issued for no consideration as a result of options and warrants.

Number of Incremental Ordinary Shares

Option Shares - Assumed Treasury Shares Acquired

Incremental Ordinary Shares

Are the potential ordinary shares that are included in the computation of diluted earnings per share. The assumed proceeds from the options and warrants shall be considered to have been received from issue of shares at fair value or average market price.

Incremental Ordinary Shares

Represent the issue of ordinary shares for no consideration.

True

(True or False) If preference dividend payable (preference share capital x dividend rate) is different from dividend paid, the preference dividend payable shall still be used as basis in computing for the numerator of EPS.

True

(True or False) The preference dividend is ignored when it comes to redeemable preference shares and considered as a financial liability. The preference dividend of a redeemable preference share is already deducted from net income as a finance cost. In the absence of any contrary statement, the preference shares are nonredeemable.

True

(True or False) A share split should be retroactively applied to the earliest period presented. If a share split occurred prior to the issuance of the financial statements, the effect of share dividends shall be accounted for in basic EPS. Otherwise, if the share split occurred after the issuance of the financial statements, the share split is ignored.

True

(True or False) If a preference share is nonconvertible, it does not have a potential ordinary share. Thus, dividend paid is deducted from net income in solving for diluted earnings per share.

True

(True or False) If the effect of convertible preference share increases EPS or decreases Loss per Share, antidilution occurs. As such, the diluted EPS should be the same as basic EPS.

True

(True or False) In computing for diluted EPS, the interest expense to be accrued shall only be up to the date of conversion. As such, it is essential to measure the expense proportional from the date of issuance of such convertible financial liability, up to the date of the conversion of the same.

True

(True or False) To be dilutive, the option price must be lower than the average market price.

True

(True or False) Non-convertible securities never become potential ordinary shares.