ACCOUNTING STANDARDS INTERPRETATION (ASI) 12

Applicability of AS 20, Earning per share

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Issue

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1. Whether companies, which are required to give information under Part IV of Schedule VI to the Companies Act, 1956, should calculate and disclose earnings per share in accordance with AS 20.

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Consensus

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2. Every company, which is required to give information under Part IV of Schedule VI to the Companies Act, 1956, should calculate and disclose earnings per share in accordance with AS 20, whether or not its equity shares or potential equity shares are listed on a recognised stock exchange in India.

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Basis for conclusions

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3. AS 20, �Earnings Per Share�, has come into effect in respect of accounting periods commencing on or after 1-4-2001 and is mandatory in nature, from that date, in respect of enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in India.

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AS 20 does not mandate an enterprise, which has neither equity shares nor potential equity shares which are so listed, to calculate and disclose earnings per share, but, if that enterprise discloses earnings per share for complying with the requirements of any statute or otherwise, it should calculate and disclose earnings per share in accordance with AS 20.

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4. Part IV of Schedule VI to the Companies Act, 1956, requires, among other things, disclosure of earnings per share. Accordingly, every company, which is required to give information under Part IV of Schedule VI to the Companies Act, 1956, should calculate and disclose earnings per share in accordance with AS 20, whether or not its equity shares or potential equity shares are listed on a recognised stock exchange in India.

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��� ACCOUNTING STANDARD (AS) 20

Earnings per share

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AS 20, �Earnings per share�, issued by the Council of the ICAI, comes into effect in respect of accounting periods commencing on or after 1-4-2001 and is mandatory in nature from that date, in respect of enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in India.

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An enterprise, which has neither equity shares nor potential equity shares which are so listed but which discloses earnings per share, should calculate and disclose earnings per share in accordance with this Standard from the aforesaid date.

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However, in respect of accounting periods commencing on or after 1-4-2004, if any such enterprise does not fall in any of the following categories, it need not disclose diluted earnings per share (both including and excluding extraordinary items) and information required by paragraph 48 (ii) of this Standard:

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i)������� Enterprises whose equity securities or potential equity securities are listed outside India and enterprises whose debt securities (other than potential equity securities) are listed whether in India or outside India.

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ii)������ Enterprises, which are in the process of listing their equity or debt securities as evidenced by the board of directors� resolution in this regard.

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iii)���� Banks including co-operative banks.

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iv)���� Financial institutions.

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v)����� Enterprises carrying on insurance business.

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vi)���� All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore, Turnover does not include �other income�.

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vii)�� All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crore at any time during the accounting period.

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viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

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Where an enterprise (which has neither equity shares nor potential equity shares which are listed on a recognised stock exchange in India but which discloses earnings per share) has been covered in any one or more of the above categories and subsequently, ceases to be so covered, the enterprise will not qualify for exemption from the disclosure of diluted earnings per share (both including and excluding extraordinary items) and paragraph 48 (ii) of this Standard, until the enterprise ceases to be covered in any of the above categories for two consecutive years.

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Where an enterprise (which has neither equity shares nor potential equity shares which are listed on a recognised stock exchange in India but which discloses earnings per share) has previously qualified for exemption from the disclosure of diluted earnings per share (both including and excluding extraordinary items) and paragraph 48(ii) of this Standard (being not covered by any of the above categories) but no longer qualifies for exemption in the current accounting period, this Standard becomes applicable, in its entirety, from the current period. However, the relevant corresponding previous period figures need not be disclosed.

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If an enterprise (which has neither equity shares nor potential equity shares, which are listed on a recognised stock exchange in India but which discloses earnings per share), pursuant to the above provisions, does not disclose the diluted earnings per share (both including and excluding extraordinary items) and information required by paragraph 48 (ii), it should disclose the fact.

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The following is the text of the Accounting Standard.

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Objective

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The objective of this Statement is to prescribe principles for the determination and presentation of earnings per share, which will improve comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise.

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The focus of this Statement is on the denominator of the earnings per share calculation.

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Even though earnings per share data has limitations because of different accounting policies used for determining �earnings�, a consistently determined denominator enhances the quality of financial reporting.

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Scope

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1. This Statement should be applied by enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in India. An enterprise, which has neither equity shares nor potential equity shares which are so listed but which discloses earnings per share should calculate and disclose earnings per share in accordance with this Statement.

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2. In consolidated financial statements, the information required by this Statement should be presented on the basis of consolidated information.

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3. In the case of a parent (holding enterprise), users of financial statements are usually concerned with, and need to be informed about, the results of operations of both the enterprise itself as well as of the group as a whole. Accordingly, in the case of such enterprises, this Statement requires the presentation of earnings per share information on the basis of consolidated financial statements as well as individual financial statements of the parent. In consolidated financial statements, such information is presented on the basis of consolidated information.

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Definitions

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4. For the purpose of this Statement, the following terms are used with the meanings specified:

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An equity share is a share other than a preference share.

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A preference share is a share carrying preferential rights to dividends and repayment of capital.

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5. Equity shares participate in the net profit for the period only after preference shares. An enterprise may have more than one class of equity shares. Equity shares of the same class have the same rights to receive dividends.

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Definitions

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A financial instrument is any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity shares of another enterprise.

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6. for this purpose:

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�A financial asset is any asset that is:

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�������� Cash;

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�������� A contractual right to receive cash or another financial asset from another enterprise;

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�������� A contractual right to exchange financial instruments with another enterprise under conditions that are potentially favourable; or

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�������� An equity share of another enterprise.

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A financial liability is any liability that is:

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�������� A contractual obligation to deliver cash or another financial asset to another enterprise or

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�������� A contractual obligation to exchange financial instruments with another enterprise under conditions those are potentially unfavourable.

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Definitions

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A potential equity share is a financial instrument or other contract that entitles, or may entitle, its holder to equity shares.

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Share warrants or options are financial instruments that give the holder the right to acquire equity shares.

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7. Examples of potential equity shares are:

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(a) Debt instruments or preference shares, those are convertible into equity shares;

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(b) Share warrants;

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(c) Options including employee stock option plans under which employees of an enterprise are entitled to receive equity shares as part of their remuneration and other similar plans; and

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(d) Shares, which would be issued upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares), such as the acquisition of a business or other assets, or shares issuable under a loan contract upon default of payment of principal or interest, if the contract so provides.

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Definitions

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Presentation

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8. An enterprise should present basic and diluted earnings per share on the face of the statement of profit and loss for each class of equity shares that has a different right to share in the net profit for the period. An enterprise should present basic and diluted earnings per share with equal prominence for all periods presented.

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9. This Statement requires an enterprise to present basic and diluted earnings per share, even if the amounts disclosed are negatives (a loss per share).

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Measurement

Basic Earnings per share

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10. Basic earnings per share should be calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

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Earnings per share =��������� Net profit or loss for the period attributable to equity shareholders

Weighted average number of equity shares outstanding during the period

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Earnings - Basic

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11. For the purpose of calculating basic earnings per share, the net profit or loss for the period attributable to equity shareholders should be the net profit or loss for the period after deducting preference dividends and any attributable tax thereto for the period.

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The net profit or loss for the period attributable to equity shareholders

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= Net profit or loss�less�preference dividends and any attributable tax thereto for the period

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12. All items of income and expense, which are recognised in a period, including tax expense and extraordinary items, are included in the determination of the net profit or loss for the period unless an Accounting Standard requires or permits otherwise (see Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). The amount of preference dividends and any attributable tax thereto for the period is deducted from the net profit for the period (or added to the net loss for the period) in order to calculate the net profit or loss for the period attributable to equity shareholders.

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Net profit or loss

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=All items of income and expense, which are recognised in a period, including tax expense and extraordinary items are included in the determination of the net profit or loss for the period unless an Accounting Standard requires or permits otherwise

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13. The amount of preference dividends for the period that is deducted from the net profit for the period is: (a) the amount of any preference dividends on non-cumulative preference shares provided for in respect of the period; and

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(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.

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14. If an enterprise has more than one class of equity shares, net profit or loss for the period is apportioned over the different classes of shares in accordance with their dividend rights.

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Per Share - Basic

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

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The weighted average number of equity shares outstanding during the period

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= The number of equity shares outstanding at the beginning of the period, adjusted by the number of equity shares bought back or issued during the period multiplied by the time-weighting factor

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16. The weighted average number of equity shares outstanding during the period reflects the fact that the amount of shareholders� capital may have varied during the period as a result of a larger or lesser number of shares outstanding at any time. It is the number of equity shares outstanding at the beginning of the period, adjusted by the number of equity shares bought back or issued during the period multiplied by the time-weighting factor. The time-weighting factor is the number of days for which the specific shares are outstanding as a proportion of the total number of days in the period; a reasonable approximation of the weighted average is adequate in many circumstances.

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Example -Weighted Average Number of Shares

(Accounting year 01-01-20X1 to 31-12-20X1)

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17. In most cases, shares are included in the weighted average number of shares from the date the consideration is receivable, for example:

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(a)��� Equity shares issued in exchange for cash are included when cash is receivable;

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Number of days: From the date when cash is receivable

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(b)�� Equity shares issued as a result of the conversion of a debt instrument to equity shares are included as of the date of conversion;

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Number of days: From the date of conversion

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(c)��� Equity shares issued in lieu of interest or principal on other financial instruments are included as of the date interest ceases to accrue;

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Number of days: From the date interest ceases to accrue

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(d)�� Equity shares issued in exchange for the settlement of a liability of the enterprise are included as of the date the settlement becomes effective;

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Number of days: From the date the settlement becomes effective

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(e)��� Equity shares issued as consideration for the acquisition of an asset other than cash are included as of the date on which the acquisition is recognised; and

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Number of days: From the date on which the acquisition is recognised

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(f)���� Equity shares issued for the rendering of services to the enterprise are included as the services are rendered.

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Number of days: From the date as the services are rendered

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In these and other cases, the timing of the inclusion of equity shares is determined by the specific terms and conditions attaching to their issue. Due consideration should be given to the substance of any contract associated with the issue.

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18. Equity shares issued as part of the consideration in an amalgamation in the nature of purchase are included in the weighted average number of shares as of the date of the acquisition because the transferee incorporates the results of the operations of the transferor into its statement of profit and loss as from the date of acquisition.

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Amalgamation in the nature of purchase

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Number of days: From the date of the acquisition���

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Equity shares issued during the reporting period as part of the consideration in an amalgamation in the nature of merger are included in the calculation of the weighted average number of shares from the beginning of the reporting period because the financial statements of the combined enterprise for the reporting period are prepared as if the combined entity had existed from the beginning of the reporting period. Therefore, the number of equity shares used for the calculation of basic earnings per share in an amalgamation in the nature of merger is the aggregate of the weighted average number of shares of the combined enterprises, adjusted to equivalent shares of the enterprise whose shares are outstanding after the amalgamation.

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Amalgamation in the nature of merger

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Number of days: From the beginning of the reporting period���

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19. Partly paid equity shares are treated as a fraction of an equity share to the extent that they were entitled to participate in dividends relative to a fully paid equity share during the reporting period.

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Example � Partly paid shares: Computation of weighted average

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(Accounting year 01-01-20X1 to 31-12-20X1)

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20. Where an enterprise has equity shares of different nominal values but with the same dividend rights, the number of equity shares is calculated by converting all such equity shares into equivalent number of shares of the same nominal value.

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Shares of different nominal values: Computation of weighted average

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The number of equity shares is calculated by converting all such equity shares into equivalent number of shares of the same nominal value

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21. Equity shares which are issuable upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares) are considered outstanding, and included in the computation of basic earnings per share from the date when all necessary conditions under the contract have been satisfied.

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Contingently issuable shares

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22. The weighted average number of equity shares outstanding during the period and for all periods presented should be adjusted for events, other than the conversion of potential equity shares, that have changed the number of equity shares outstanding, without a corresponding change in resources.

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23. Equity shares may be issued, or the number of shares outstanding may be reduced, without a corresponding change in resources. Examples include:

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(a)��� A bonus issue;

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(b)�� A bonus element in any other issue, for example a bonus element in a rights issue to existing shareholders;

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(c)��� A share split; and

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(d)�� A reverse share split (consolidation of shares).

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24. In case of a bonus issue or a share split, equity shares are issued to existing shareholders for no additional consideration. Therefore, the number of equity shares outstanding is increased without an increase in resources.

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The number of equity shares outstanding before the event is adjusted for the proportionate change in the number of equity shares outstanding as if the event had occurred at the beginning of the earliest period reported.

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For example, upon a two-for-one bonus issue, the number of shares outstanding prior to the issue is multiplied by a factor of three to obtain the new total number of shares, or by a factor of two to obtain the number of additional shares.

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Example - Bonus Issue

Computation of weighted average number of equity shares

(Accounting year 01-01-20XX to 31-12-20XX)

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25. The issue of equity shares at the time of exercise or conversion of potential equity shares will not usually give rise to a bonus element, since the potential equity shares will usually have been issued for full value, resulting in a proportionate change in the resources available to the enterprise.

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In a rights issue, on the other hand, the exercise price is often less than the fair value of the shares. Therefore, a rights issue usually includes a bonus element. The number of equity shares to be used in calculating basic earnings per share for all periods prior to the rights issue is the number of equity shares outstanding prior to the issue, multiplied by the following factor:

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Fair value per share immediately prior to the exercise of rights

Theoretical ex-rights fair value per share

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The theoretical ex-rights fair value per share is calculated: By adding the aggregate fair value of the shares immediately prior to the exercise of the rights to the proceeds from the exercise of the rights, and dividing by the number of shares outstanding after the exercise of the rights. Where the rights themselves are to be publicly traded separately from the shares prior to the exercise date, fair value for the purposes of this calculation is established at the close of the last day on which the shares are traded together with the rights.

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Example - Rights Issue

Computation of weighted average number of equity shares

(Accounting year 01-01-20XX to 31-12-20XX)

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Measurement

Diluted Earnings per share

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26. For the purpose of 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.

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Potential equity shares: A potential equity share is a financial instrument or other contract that entitles, or may entitle, its holder to equity shares. Examples of potential equity shares are:

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(a) Debt instruments or preference shares, those are convertible into equity shares;

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(b) Share warrants;

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(c) Options including employee stock option plans under which employees of an enterprise are entitled to receive equity shares as part of their remuneration and other similar plans; and

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(d) Shares, which would be issued upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares), such as the acquisition of a business or other assets, or shares issuable under a loan contract upon default of payment of principal or interest, if the contract so provides

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27. In calculating diluted earnings per share, effect is given to all dilutive potential equity shares that were outstanding during the period, that is:

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(a) The net profit for the period attributable to equity shares is:

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(i) Increased by the amount of dividends recognised in the period in respect of the dilutive potential equity shares as adjusted for any attributable change in tax expense for the period;

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(ii) Increased by the amount of interest recognised in the period in respect of the dilutive potential equity shares as adjusted for any attributable change in tax expense for the period; and

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(iii) Adjusted for the after-tax amount of any other changes in expenses or income that would result from the conversion of the dilutive potential equity shares.

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�(b) The weighted average number of equity shares outstanding during the period is increased by the weighted average number of additional equity shares which would have been outstanding assuming the conversion of all dilutive potential equity shares.

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28. For the purpose of this Statement, share application money pending allotment or any advance share application money as at the balance sheet date, which is not statutorily required to be kept separately and is being utilised in the business of the enterprise, is treated in the same manner as dilutive potential equity shares for the purpose of calculation of diluted earnings per share.

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Earnings � Diluted

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29. For the purpose of calculating diluted earnings per share, the amount of net profit or loss for the period attributable to equity shareholders, as calculated in accordance with paragraph 11, should be adjusted by the following, after taking into account any attributable change in tax expense for the period:

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(a) Any dividends on dilutive potential equity shares, which have been deducted in arriving at the net profit attributable to equity shareholders as calculated in accordance with paragraph 11;

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(b) Interest recognised in the period for the dilutive potential equity shares; and

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

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30. After the potential equity shares are converted into equity shares, the dividends, interest and other expenses or income associated with those potential equity shares will no longer be incurred (or earned). Instead, the new equity shares will be entitled to participate in the net profit attributable to equity shareholders.

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Therefore, the net profit for the period attributable to equity shareholders calculated in accordance with paragraph 11 is increased by the amount of dividends, interest and other expenses that will be saved, and reduced by the amount of income that will cease to accrue, on the conversion of the dilutive potential equity shares into equity shares. The amounts of dividends, interest and other expenses or income are adjusted for any attributable taxes.

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Example - Convertible Debentures

Computation of diluted earnings in case of convertible debentures

(Accounting year 01-01-20XX to 31-12-20XX)

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31. The conversion of some potential equity shares may lead to consequential changes in other items of income or expense. For example, the reduction of interest expense related to potential equity shares and the resulting increase in net profit for the period may lead to an increase in the expense relating to a non-discretionary employee profit sharing plan. For the purpose of calculating diluted earnings per share, the net profit or loss for the period is adjusted for any such consequential changes in income or expenses.

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Per Share � Diluted

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32. For the purpose of calculating diluted earnings per share, the number of equity shares should be the aggregate of the weighted average number of equity shares calculated in accordance with paragraphs 15 and 22, and the weighted average number of equity shares which would be issued on the conversion of all the dilutive potential equity shares into equity shares. Dilutive potential equity shares should be deemed to have been converted into equity shares at the beginning of the period or, if issued later, the date of the issue of the potential equity shares.

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33. The number of equity shares, which would be issued on the conversion of dilutive potential equity shares, is determined from the terms of the potential equity shares. The computation assumes the most advantageous conversion rate or exercise price from the standpoint of the holder of the potential equity shares.

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34. Equity shares which are issuable upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares) are considered outstanding and included in the computation of both the basic earnings per share and diluted earnings per share from the date when the conditions under a contract are met.

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If the conditions have not been met, for computing the diluted earnings per share, contingently issuable shares are included as of the beginning of the period (or as of the date of the contingent share agreement, if later). The number of contingently issuable shares included in this case in computing the diluted earnings per share is based on the number of shares that would be issuable if the end of the reporting period was the end of the contingency period. Restatement is not permitted if the conditions are not met when the contingency period actually expires subsequent to the end of the reporting period. The provisions of this paragraph apply equally to potential equity shares that are issuable up on the satisfaction of certain conditions (contingently issuable potential equity shares).

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35. For the purpose of calculating diluted earnings per share, an enterprise should assume the exercise of dilutive options and other dilutive potential equity shares of the enterprise. The assumed proceeds from these issues should be considered to have been received from the issue of shares at fair value. The difference between the number of shares issuable and the number of shares that would have been issued at fair value should be treated as an issue of equity shares for no consideration.

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36. Fair value for this purpose is the average price of the equity shares during the period. Theoretically, every market transaction for an enterprise�s equity shares could be included in determining the average price. As a practical matter, however, a simple average of last six months weekly closing prices are usually adequate for use in computing the average price.

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37. Options and other share purchase arrangements are dilutive when they would result in the issue of equity shares for less than fair value. The amount of the dilution is fair value less the issue price. Therefore, in order to calculate diluted earnings per share, each such arrangement is treated as consisting of:

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(a) A contract to issue a certain number of equity shares at their average fair value during the period. The shares to be so issued are fairly priced and are assumed to be neither dilutive nor anti-dilutive. They are ignored in the computation of diluted earnings per share; and

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(b) A contract to issue the remaining equity shares for no consideration. Such equity shares generate no proceeds and have no effect on the net profit attributable to equity shares outstanding. Therefore, such shares are dilutive and are added to the number of equity shares outstanding in the computation of diluted earnings per share.

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Example - Effects of Share Options on Diluted Earnings per share

(Accounting year 01-01-20XX to 31-12-20XX)

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Computation of earnings per share

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38. To the extent that partly paid shares are not entitled to participate in dividends during the reporting period they are considered the equivalent of warrants or options.

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Dilutive Potential Equity Shares

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39. Potential equity shares should be treated as dilutive when, and only when, their conversion to equity shares would decrease net profit per share from continuing ordinary operations.

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40. An enterprise uses net profit from continuing ordinary activities as �the control figure� that is used to establish whether potential equity shares are dilutive or anti-dilutive. The net profit from continuing ordinary activities is the net profit from ordinary activities (as defined in AS 5) after deducting preference dividends and any attributable tax thereto and after excluding items relating to discontinued operations.

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41. Potential equity shares are anti-dilutive when their conversion to equity shares would increase earnings per share from continuing ordinary activities or decrease loss per share from continuing ordinary activities. The effects of anti-dilutive potential equity shares are ignored in calculating diluted earnings per share.

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42. In considering whether potential equity shares are dilutive or anti-dilutive, each issue or series of potential equity shares is considered separately rather than in aggregate.

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The sequence in which potential equity shares are considered may affect whether or not they are dilutive. Therefore, in order to maximise the dilution of basic earnings per share, each issue or series of potential equity shares is considered in sequence from the most dilutive to the least dilutive. For the purpose of determining the sequence from most dilutive to least dilutive potential equity shares, the earnings per incremental potential equity share is calculated. Where the earnings per incremental share is the least, the potential equity share is considered most dilutive and vice-versa.

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43. Potential equity shares are weighted for the period they were outstanding. Potential equity shares that were cancelled or allowed to lapse during the reporting period are included in the computation of diluted earnings per share only for the portion of the period during which they were outstanding. Potential equity shares that have been converted into equity shares during the reporting period are included in the calculation of diluted earnings per share from the beginning of the period to the date of conversion; from the date of conversion, the resulting equity shares are included in computing both basic and diluted earnings per share.

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Restatement

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44. If the number of equity or potential equity shares outstanding increases as a result of a bonus issue or share split or decreases as a result of a reverse share split (consolidation of shares), the calculation of basic and diluted earnings per share should be adjusted for all the periods presented. If these changes occur after the balance sheet date but before the date on which the financial statements are approved by the board of directors, the per share calculations for those financial statements and any prior period financial statements presented should be based on the new number of shares. When per share calculations reflect such changes in the number of shares, that fact should be disclosed.

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45. An enterprise does not restate diluted earnings per share of any prior period presented for changes in the assumptions used or for the conversion of potential equity shares into equity shares outstanding.

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46. An enterprise is encouraged to provide a description of equity share transactions or potential equity share transactions, other than bonus issues, share splits and reverse share splits (consolidation of shares) which occur after the balance sheet date when they are of such importance that non-disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions. Examples of such transactions include:

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(a)��� The issue of shares for cash;

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(b)�� The issue of shares when the proceeds are used to repay debt or preference shares outstanding at the balance sheet date;

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(c)��� The cancellation of equity shares outstanding at the balance sheet date;

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(d)�� The conversion or exercise of potential equity shares, outstanding at the balance sheet date, into equity shares;

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(e)��� The issue of warrants, options or convertible securities; and

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(f)���� The satisfaction of conditions that would result in the issue of contingently issuable shares.

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47. Earnings per share amounts are not adjusted for such transactions occurring after the balance sheet date because such transactions do not affect the amount of capital used to produce the net profit or loss for the period.

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Disclosure

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48. In addition to disclosures as required by paragraphs 8, 9 and 44 of this Statement, an enterprise should disclose the following:

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�(i) Where the statement of profit and loss includes extraordinary items (within the meaning of AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies), the enterprise should disclose basic and diluted earnings per share computed on the basis of earnings excluding extraordinary items (net of tax expense); and

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(ii) (a) The amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to the net profit or loss for the period;

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(b) The weighted average number of equity shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other; and

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(c) The nominal value of shares along with the earnings per share figures.

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49. Contracts generating potential equity shares may incorporate terms and conditions, which affect the measurement of basic and diluted earnings per share. These terms and conditions may determine whether or not any potential equity shares is dilutive and, if so, the effect on the weighted average number of shares outstanding and any consequent adjustments to the net profit attributable to equity shareholders. This Statement encourages disclosure of the terms and conditions of such contracts.

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50. If an enterprise discloses, in addition to basic and diluted earnings per share, per share amounts using a reported component of net profit other than net profit or loss for the period attributable to equity shareholders, such amounts should be calculated using the weighted average number of equity shares determined in accordance with this Statement. If a component of net profit is used which is not reported as a line item in the statement of profit and loss, reconciliation should be provided between the component used and a line item, which is reported in the statement of profit and loss. Basic and diluted per share amounts should be disclosed with equal prominence.

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51. An enterprise may wish to disclose more information than this Statement require. Such information may help the users to evaluate the performance of the enterprise and may take the form of per share amounts for various components of net profit. Such disclosures are encouraged. However, when such amounts are disclosed, the denominators need to be calculated in accordance with this Statement in order to ensure the comparability of the per share amounts disclosed.

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Illustration 1

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From the books of Bharti Ltd. Following informations are available as on 1.4.2005 and 1.4.2006:

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Calculate

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Solution

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Earnings per share = � � Net profit or loss for the period attributable to equity shareholders

Weighted average number of equity shares outstanding during the period

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The net profit or loss for the period attributable to equity shareholders

= Net profit or loss�less�preference dividends and any attributable tax thereto for the period

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Net profit attributable to the equity shareholders for the years ending 31.3.2007 and 31.3.2006 were Rs 10, 00,000.

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The weighted average number of equity shares outstanding during the period

= The number of equity shares outstanding at the beginning of the period, adjusted by the number of equity shares bought back or issued during the period multiplied by the time-weighting factor

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Example � Partly paid shares: Computation of weighted average

(Accounting year 01-04-20005 to 31-03-2006)

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Example � Partly paid shares: Computation of weighted average

Accounting year 01-04-20006 to 31-03-2007)

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Example - Bonus Issue

Computation of weighted average number of equity shares

(Accounting year 01-04-20005 to 31-03-2006)

(Accounting year 01-04-20006 to 31-03-2007)

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Computation of weighted average number of equity shares

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Computation of weighted average number of equity shares

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Net profit or loss for the period attributable to equity shareholders

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Diluted EPS

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Illustration 2

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X Co Ltd supplied the following information. You are required to compute the basic EPS.

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Accounting Year 1.1.2005 � 31.12.2005

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Solution

Example - Rights Issue

Computation of weighted average number of equity shares

(Accounting year 01-01-2005 to 31-12-2005)

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FAQ

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1. Define the following items in the context of AS 20.

(a)��� Preference share

(b)�� Potential equity share

(c)��� Share warrant

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2. Explain the procedure for calculation of basic and diluted earning per share in brief.

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3. How will you determine the weighted average number of equity shares?

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4. Should appropriation to mandatory reserves be excluded from the net profit attributable to equity shareholders?

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5. X Ltd. is engaged in manufacturing industrial packaging equipment. As per the terms of an agreement entered into with its debentureholders, the company is required to appropriate adequate portion of its profits to a specific reserve over the period of maturity of the debenture such that, at the redemption date, the Reserve constitutes at least half the value of such debentures. As such, appropriations are not available for distribution to the equity shareholders. X Ltd. has excluded this from the numerator in the computation of basic EPS. Is this treatment correct?

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6. Would completely vested options to purchase shares of a company be included in the computation of basic EPS?

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7. Explain the calculation of weighted average number of equity shares in case of a bonus issue or share split.

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8. X Ltd. provides the following information. Compute basic EPS as per AS20.

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9. In April 2004 a Ltd. Company issued 1,20,000 equity shares of Rs 100 each. Rs. 50 per share was called up on that date which was paid by all shareholders. The remaining Rs 50 was called up on 1.9.2004. All shareholders paid the sum in September 2004, except one shareholder having 24,000 shares. The net profit for the year-ended 31.03.2005 is Rs 2,64,000 after dividend on preference shares and dividend distribution tax of Rs 64,000. Compute basic EPS for the year-ended 31.3.2005 as per Accounting Standard 20.

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IFRS

Earnings per share

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Contents

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What is EPS?

Measurement � Basic EPS

Measurement � diluted EPS

Restatement

Presentation and disclosure

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What is Earnings per share?

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EPS is an entity's net profit for a particular period divided by the number of ordinary shares . EPS is a standard measure often used to assess an entity's profitability.

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IFRS set out requirements for the measurement and disclosure of basic and diluted EPS. These requirements apply to all entities whose ordinary shares, or potential ordinary shares are publicly traded, or that are in the process of issuing shares in the public markets [IAS33R.2]. The requirements also apply to those entities that voluntarily choose to disclose EPS information. When both parent and consolidated information are presented together, only consolidated EPS information is required [IAS33R.4].

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Measurement - Basic EPS

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Basic EPS is computed by dividing net profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period [IAS33R.10].

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Earnings � basic

Basic earnings are calculated as the net profit or loss attributable to ordinary shareholders less preference dividends [IAS33R.12]. Preference dividends include any non-cumulative preference share dividends declared during the period, and any cumulative preference share dividends, whether or not declared [IAS33R.14].

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Per share � basic

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Ordinary shares are usually straightforward to identify. Ordinary shares are equity instruments that are subordinate to all other classes of equity instruments and have rights to the residual net assets when the entity is dissolved [IAS33R.5].

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The weighted average number of ordinary shares outstanding is the opening balance of ordinary shares issued less treasury shares, adjusted for the time-weighted effect of increases and decreases in ordinary and treasury shares issued and bought back throughout the period [IAS33R.20]. Shares are usually classified as issued on the date the consideration for such shares is recognised [IAS33R.21].

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Ordinary shares issued in a business combination, accounted for using the purchase method, are considered outstanding from the acquisition date [IAS33R.22].

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The EPS calculation will be affected for all periods presented if the business combination is a uniting of interests. The weighted average number of shares for each period is the total of the weighted average number of shares of the combined entity for that period, adjusted into the equivalent shares of the newly combined entity [IAS33R.22].

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Part-paid shares are included in the weighted average number of ordinary shares as fractional shares to the extent that they are entitled to participate in dividends relative to fully paid shares. Fractional shares are calculated as entitlement to dividend divided by the dividend entitlement of fully paid shares [IAS33R.A15].

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Ordinary shares may be issued on the satisfaction of some event or condition (contingently issuable shares). These shares are part of the weighted average number of ordinary shares from the date when conditions for their issue have been satisfied. Contingently returnable shares are not treated as outstanding. They are excluded from the calculation of basic EPS until no longer subject to recall [IAS33R.24-25].

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The weighted average number of ordinary shares should be adjusted for events that change the number of shares outstanding without a corresponding change in the entity's resources [IAS33R.26]. Examples of these types of events include bonus issues, share splits, and share rights issuances. The number of shares outstanding is adjusted as if the event had occurred at the beginning of the earliest period presented [IAS33R.27-28] .

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The computation of the weighted average number of ordinary shares is more complex when the entity issues shares at less than fair value, such as in a rights issue. The number of shares at the beginning of the earliest period presented is restated to take account of additional shares issued, adjusted for the effect of the share's ex rights value [IAS33R.A2].

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Measurement - diluted EPS

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The calculation of diluted EPS is consistent with the calculation of basic EPS. However, management adjusts earnings and the weighted average numbers of ordinary shares to give effect to all dilutive potential ordinary shares that were outstanding during the period [IAS33R.32].

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Earnings � diluted

A diluted earnings is the net profit or loss attributable to ordinary shareholders, adjusted for the after-tax effect of changes in income and expenses as if the conversion of potential ordinary shares had occurred [IAS33R.32]. For example, expenses are reduced by: dividends saved on convertible preference shares, interest saved on convertible debt and fees, discounts or premiums that are accreted as yield adjustments. Consequential changes in items of income and expense must also be considered. For example, the reduction in interest expense related to potential ordinary shares and the resulting increase in net profit might increase the entity's contribution to its non-discretionary employee profit-sharing plan [IAS33R.33-34].

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Dilutive potential ordinary shares

A potential ordinary share is defined as a financial instrument or other contract that may entitle its holder to ordinary shares [IAS33R.5]. Conversion may be in the power of either the issuer or the holder. Warrants and options are common examples of potential ordinary shares [IAS33R.7] [IAS33R.46].

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Potential ordinary shares are treated as dilutive, and included in the calculation of diluted EPS, when their deemed conversion to ordinary shares would decrease net profit per share from continuing ordinary operations, also known as the 'control number' (Disposal groups and discontinued operations) [IAS33R.41-42]. In contrast, potential ordinary shares are anti-dilutive when their conversion would increase EPS or decrease the loss from ordinary operations. The effects of anti-dilutive shares are ignored in calculating diluted EPS [IAS33R.43].

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Each issue or series of issues of potential ordinary shares should be considered individually to determine its potential for dilution. The sequence may affect whether or not potential ordinary shares are dilutive or anti-dilutive. To maximize the dilution of basic EPS, each series is considered from the most dilutive to the least dilutive [IAS33R.44].

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Potential ordinary shares should be included in the calculation of diluted EPS for the period that they were actually outstanding. Potential ordinary shares that are converted to ordinary shares during the period should be included in diluted EPS from the beginning of the period to the date of conversion; and in both basic and diluted EPS thereafter [IAS33R.38].

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Any potential ordinary shares that expired or were cancelled during the period are included in the diluted EPS calculation for the portion of the period for which they were outstanding [IAS33R.38].

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Per share � diluted

The weighted average number of shares for diluted EPS is the weighted average number of shares as for basic EPS; plus the weighted average dilutive potential ordinary shares [IAS33R.36].

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The number of ordinary shares that would be issued in the conversion of dilutive potential ordinary shares is determined from the terms of conversion, for example an option's exercise price. The computation should assume the most advantageous conversion rate from the holder's perspective [IAS33R.39].

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Where options and other share purchase arrangements entitle the holder to an ordinary share at less than fair value, then the dilutive effect should be calculated in two steps: a contract to issue a certain number of shares at fair value (these shares are neither dilutive nor anti-dilutive); and a contract to issue a certain number of shares for no consideration. The latter shares are dilutive and included in the computation of diluted EPS [IAS33R.45].

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Written put options indexed to and potentially settled in an entity's own shares that are in the money during the reporting period should be included in the weighted average calculation, as of the beginning of the period, if dilutive. The entity should assume that the proceeds used to buy back ordinary shares will be raised from issuing shares at the average market price during the period. Any difference between the issue price of the new shares and the repurchase price should be treated as an issue of ordinary shares for no consideration and included in the weighted average of dilutive shares [IAS33R.63].

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The inclusion of potential ordinary shares in the denominator of a diluted EPS computation will generally result in an anti-dilutive per share amount when an entity has a loss from continuing ordinary operations. Potential ordinary shares are excluded from the computation of diluted EPS when this is the case, even if the enterprise reports net income [IAS33R.41].

Treasury shares held to satisfy share options should be considered as potential ordinary shares. Options that can only be satisfied by the entity's future purchase of shares in the market should not be treated as potential ordinary shares and should not be included in the calculation of diluted EPS. An example would be an entity that is unable to issue additional ordinary shares. Management's intention with respect to the issue of new shares or the purchase of existing shares in the market should be disregarded. Share options should be treated as potential ordinary shares if management has the ability to issue new shares [IAS33R.58-61].

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Share-based awards should be considered outstanding at grant date for computing diluted EPS even though exercise may be contingent on vesting. The number of contingently issuable shares included in the diluted EPS calculation is based on the number of shares that would be issuable if the end of the reporting period was the end of the contingency period [IAS33R.52]. The assumed exercise price, for the purposes of determining the incremental shares issued for no consideration, comprises the sum of (a) the amount the employee must pay on exercise, (b) the amount of compensation cost attributable to future services but not yet recognised, and (c) the amount of excess tax benefits, if any, that would be credited to additional paid-in capital, assuming the options were exercised. Excess tax benefits can arise in certain tax jurisdictions when the fair value of the share-based awards is greater at exercise date than the amount used for purposes of determining compensation expense.

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Group reporting

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Any potential ordinary shares issued by a subsidiary, joint venture or associate, that are potentially convertible into ordinary shares of the subsidiary, joint venture, associate or parent, should be included in the consolidated diluted earnings per share calculation of the parent to the extent that the potential ordinary shares are dilutive [IAS33R.40]. For example, options, warrants and convertible securities issued by a subsidiary have an effect on consolidated EPS. The effect is clear when the instruments are convertible into ordinary shares of the parent company. A similar effect can arise if the instruments result in potentially issued shares of the subsidiary and there is a significant minority interest in the subsidiary.

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Restatement

Where the number of shares outstanding increases because of bonus issues, share splits and other similar events, basic and diluted EPS for all periods presented should be restated. The EPS calculations should give effect to these changes if these events occur after the balance sheet date, but before the financial statements are issued [IAS33R.64].

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EPS calculations should also be adjusted for the effects of errors and changes in accounting policies accounted for retrospectively, and the effects of a business combination accounted for as a uniting of interests [IAS33R.64].

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Restatement of prior-period diluted EPS amounts is not allowed for a change in the previous assumptions used, for example assumed conversion of contingently issuable shares, or for the conversion of potential ordinary shares into ordinary shares outstanding [IAS33R.65]. However, disclosure of such events is encouraged where non-disclosure would affect the ability of the financial statement users to make decisions [IAS33R.70 (d), 71].

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Presentation and disclosure

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An entity is encouraged to disclose share transactions, which occur after the balance sheet date. Separate EPS presentation on the face of the income statement is required for each class of ordinary shares, even where the amounts are negative. Basic and diluted EPS should be presented with equal prominence [IAS33R.66].

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When basic and diluted EPS are the same � presentation can be accomplished in one line on the income statement.

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If an entity chooses to present per share amounts for a reported component of income in addition to those required by IFRS (for example, restructuring provisions or results of discontinued operations), such per share amounts are computed using the weighted average number of ordinary shares determined in accordance with IFRS. If the per share amount is for a component of net profit which is not reported as a line item on the face of the income statement, a reconciliation between the amount used and a reported amount should also be provided [IAS33R.73].

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An entity should disclose [IAS33R.70 (a), (b)]:

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(a)��� The amounts used as the numerator in calculating basic and diluted EPS, and a reconciliation of the amounts to the net profit or loss for the period; and

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(b)�� The weighted average number of shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other.