Question

You have been asked by your boss to determine whether it is necessary to show earnings per share (EPS) on the financial statements when the company is not public and not governed by the Securities & Exchange Commission (SEC). What will you tell your boss? (US GAAP ISSUE) AN ASC NUMBER MUST BE USED AS A CITATION REFERENCE EACH GAAP ASSIGNMENT WILL HAVE THE FOLLOWING FORMAT: PROBLEM TO BE RESEARCHED: What is the question being asked? SOURCES FOR RESEARCH: (EX. FASB TEXT PAGE, GAAP GUIDE, ETC.) A CITATION MUST BE IDENTIFIED (i.e. U.S. GAAP (ASC) ACCOUNTING STANDARDS CODIFICATION TOPIC 111-11 FOR EXAMPLE) Where did you get you answer? III. CONCLUSION – What is your answer?

Answer 1

As per ASC 260 -

ASC 260 provides guidance on the “computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock.” This Topic also contains guidance for master limited partnerships and notes the following:

Publicly traded master limited partnerships often issue multiple classes of securities that may participate in partnership distributions according to a formula specified in the partnership agreement. A typical master limited partnership consists of publicly traded common units held by limited partners, a general partner interest, and incentive distribution rights. Depending on the structure of the master limited partnership, the incentive distribution rights may be a separate class of nonvoting limited partner interest that the general partner initially holds but generally may transfer or sell apart from its overall interest. Alternatively, the incentive distribution rights may be embedded in the general partner interest such that they cannot be detached and transferred apart from the general partner's overall interest.

Generally, the partnership agreement obligates the general partner to distribute 100 percent of the partnership's available cash (as defined in the partnership agreement) at the end of each reporting period to the general partner and limited partners via a distribution waterfall (that is, a schedule that prescribes distributions to the general partner and limited partners at each threshold) within a contractually determined period of time following the end of a reporting period. When certain thresholds are met, the distribution waterfall further allocates available cash to the holder of the separate class of nonvoting limited partner interest (the incentive distribution right holder) or, when the incentive distribution right is embedded in the general partner interest, to the general partner. The net income (or loss) of the partnership is allocated to the capital accounts of the general partner and limited partners based on their respective sharing of income or losses specified in the partnership agreement, but only after taking into account any priority income allocations resulting from incentive distributions.

As per Accounting Standard 20 -

Earnings per share (EPS) is a financial ratio that provides information regarding earnings available on each equity share held in a company.

This ratio acts as an important financial tool to improve the comparability between two or more companies, as well as between two or more accounting periods.

AS 20 entails the process of calculation of Earnings per share.

There are two types of EPS which are to be reported by enterprises on the face of the statement of profit & loss account even if the amounts disclosed are negative (a loss per share).

1. Basic EPS

2. Diluted EPS

Basic EPS

Basic EPS = Net profit or loss attributable to equity shareholders / Weighted average number of outstanding equity shares

Earnings – Basic (Numerator)

Net profit or loss for the period as defined under AS 5 which is shown here:

Particulars	Amount
Earnings before tax	XXX
(+) extraordinary items (income)	XXX
(-) extraordinary items (expenses)	(XXX)
(-) tax attributable to the period	(XXX)
(-) preference dividend *	(XXX)
Profit for the purpose of calculating EPS	XXX

*the preference dividend deducted for the period is:

(a) the amount of any preference dividends on non-cumulative preference shares provided for the period; and

(b) the full amount of the required preference dividends for cumulative preference shares for the period, whether or not the dividends have been provided for. The amount of preference dividends for the period does not include the amount of any preference dividends for cumulative preference shares paid or declared during the current period in respect of previous periods.

Per share – Basic (Denominator)

For calculating basic earnings per share, the number of equity shares should be the weighted average number of equity shares outstanding during the period.

The time-weighting factor = Number of days for which the specified share is outstanding / Total number of days in the period

Example 1: Number of shares outstanding as on 01-01-2010 are 2000. Fresh issue of 600 shares for cash on 31-05-2010. Buy back of 300 shares on 01-11-2010.

Solution: The weighted average outstanding number of shares = (2000 x 12/12) + (600 x 7/12) – (300 x 2/12) = 2300 shares

Example 2: Opening balance of shares as on 01-01-2010 is 2000 shares. On 31-10-2010, issue of 600 shares of Rs. 10 each, Rs. 5 paid up.

Solution: As per AS 20, partly paid up equity shares should be calculated in the ratio of amount paid up to face value (amount paid / face value).

The weighted average outstanding number of shares = (2000 x 12/12) + (600 x 5/10 x 2/12) = 2050 shares

Example 3: On 01-01-2010, 2 Lac equity shares of Rs. 10 each fully paid up. On 30-06-2010, fresh issue of 2 lac equity shares of Rs. 5 each fully paid up.

Solution: The weighted average outstanding number of shares = (2,00,000 x 12/12) + (2,00,000 x 5/10 x 6/12) = 2,50,000 shares

Example 4: Net profit for the year 2010 is Rs. 18 lacs. Net profit for the year 2011 is Rs. 60 lacs. Number of equity shares outstanding till 30-09-2010 is 20 lacs. Bonus issue on 01-10-2011 = 2 (new): 1(old). Calculate EPS for the year 2011 and adjusted EPS for the year 2010.

Solution: As per AS 20, when bonus shares are issued during the year, it should be calculated in the weighted average from the beginning of reporting period irrespective of issue date. Therefore, the bonus issue is treated as if it had occurred prior to the beginning of the year 2010, the earliest period reported.

Particulars	Amount (in Rs.)
Net profit for the year 2010	18,00,000
Net profit for the year 2011	60,00,000
Number of equity shares outstanding till 30-09-2011	20,00,000
Bonus issue on 01-10-2011	20,00,000 x 2 = 40,00,000
Earnings per share for the year 2011	60,00,000 /(20,00,000 + 40,00,000) = Re. 1
Adjusted Earnings per share for the year 2010	18,00,000 / (20,00,000 + 40,00,000) = Re. 0.30

Diluted EPS

For calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares.

Earnings – Diluted (Numerator)

For calculating Diluted EPS, the numerator used for basic EPS should be adjusted by the following, after considering any attributable change in tax expense for the period:

a) any dividends on dilutive potential equity shares which have been deducted in arriving numerator of basic EPS;

b) interest recognized in the period for the dilutive potential equity shares; and

c) any other changes in expenses or income that would result from the conversion of the dilutive potential equity shares.

Per share – Diluted (Denominator)

For calculating diluted earnings per share, the number of equity shares should be the aggregate of the weighted average number of equity shares which would be issued on the conversion of all the dilutive potential equity shares into equity shares.

Diluted earning per share is calculated in the case of potential equity share like convertible debentures, convertible preference shares, options etc. Potential equity shares are diluted if their conversion into equity shares reduces the earning per share and if it increases, then they are considered as anti-dilutive.

Example:

Particulars	Amount
Net profit for the current year	Rs. 1,00,00,000
Number of equity shares outstanding	50,00,000
Basic EPS	1,00,00,000/50,00,000 = 2
Number of 12% convertible debentures of Rs. 100 each Each debenture is convertible into 10 equity shares	1,00,000
Interest expense for the current year	Rs. 12,00,000
Tax relating to interest expense (30%)	Rs. 3,60,000

Particulars	Amount
Adjusted Net profit for the current year	Rs. (1,00,00,000 + 12,00,000 – 3,60,000) = Rs. 1,08,40,000
Number of equity shares resulting from conversion of debentures	10,00,000
Number of equity shares used to calculate diluted earnings per share	50,00,000 + 10,00,000 = 60,00,000
Diluted earnings per share	1,08,40,000/60,00,000 = Rs. 1.81

Comparison between Ind AS33 and AS 20

Basis	IND AS 33	AS 20
Extraordinary items	EPS is required to be disclosed without extraordinary items.	EPS is required to be disclosed with and without extraordinary items.
Disclosure	Requires the disclosure of basic and diluted EPS from continuing and discontinued operations separately.	Does not require disclosure of basic and diluted EPS from continuing and discontinued operations separately.
Put options	Provides additional clarity and guidance on aspects like options held by entity on its own shares like: written put options, purchased options, etc.	Does not deal with these aspects