Issue relating to Basic E.P.S

This query is : Resolved

Snehal Parikh (Querist)
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08 August 2010 One of Company has issued cumulative participative preference shares.The Company has not declared or provided preference share dividend on shares during the financial year 2009-10. As per
Companies Act, 1956 dividend accrue,even though not declared or porvided in books of account for F.Y 09-10. As per para 13 of As-20 the current year's dividend on shares should be reduced from PAT for calcualatine basic E.P.S eventhough not declaed or provided in books. This affects indian corporate world substantially. Please explain.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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08 August 2010 Compliance of 211 (3C) of the Companies Act,1956 is mandatory for corporates. As a part of it , they have to follow AS-20 for calculating EPS. The EPS so calculated, will be displayed in the face of the profit and loss account as well as the workings will be included in the notes forming part of the accounts. Thus the requirement becomes transparent as far as all the users of the financial statements are concerned. If the issue is viewed as above, I don't think that the method as well as the disclosure will substantially affect the corporates in general.

Snehal Parikh

Snehal Parikh (Querist)
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14 August 2010 Mr B chckrapani, The Company has right to not declare or provide preference share dividend on cumulative participating preference shares.In such situation,as per para 13 of As-20, the Company must reduce the same from PAT only for the purpose of compliace of As -20.In such situtation, the decision will affect indian corporate world to the extent of great way. I expect your urgent reply

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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02 August 2024 The issue you're describing revolves around the treatment of cumulative participating preference shares in relation to the calculation of Basic Earnings Per Share (EPS) under AS-20 (Accounting Standard 20) as per the Companies Act, 1956.

### Key Points on the Issue

1. **Cumulative Participating Preference Shares:**
- **Cumulative Preference Shares:** These shares accumulate dividends if they are not paid in a particular year, meaning the unpaid dividends are carried forward and must be paid before any dividends on equity shares can be declared.
- **Participating Preference Shares:** These shares not only receive fixed dividends but also participate in the remaining profits of the company after paying the dividend on equity shares.

2. **Accounting for Dividends:**
- **Dividend Accrual:** As per the Companies Act, 1956, the dividend on cumulative preference shares accrues and must be accounted for, even if not declared or provided in the books. This means that the company has an obligation to recognize the dividend liability, whether or not it has been declared.
- **AS-20 Requirements:** AS-20 requires that the current year's dividend on preference shares should be deducted from the Profit After Tax (PAT) to calculate Basic EPS. This treatment ensures that the EPS reflects the portion of profit that is attributable to equity shareholders after satisfying the preference shareholders' claims.

3. **Impact on Basic EPS Calculation:**
- **Reduction from PAT:** According to AS-20, even if the preference share dividend is not declared or provided for in the books, it should be deducted from PAT for EPS calculation. This is to ensure that the EPS calculation accurately reflects the profit available to equity shareholders after meeting the preference share dividend obligations.
- **Implications:** This requirement can significantly affect the EPS reported by companies, especially those with substantial cumulative preference share dividends. It could lead to a lower EPS figure compared to a situation where dividends were declared and provided.

4. **Practical Impact on Companies:**
- **Financial Statements:** Companies need to account for the accrued dividend on cumulative preference shares when calculating EPS, which can lead to substantial changes in reported figures.
- **Investor Perception:** Lower EPS figures due to the deduction of accumulated dividends might impact investor perception and stock valuation.

5. **Compliance with AS-20:**
- **Standard Compliance:** The requirement is in place to provide a more accurate picture of profit attributable to equity shareholders. Companies need to ensure compliance with AS-20, even though it might have significant effects on financial reporting.

### Practical Steps for Companies

1. **Accurate Reporting:** Ensure that the dividend on cumulative preference shares is accurately reflected in the financial statements, even if it has not been declared or provided.
2. **Adjust EPS Calculation:** Deduct the accrued dividend from PAT when calculating Basic EPS to comply with AS-20.
3. **Disclosure:** Clearly disclose the impact of cumulative preference share dividends on EPS in the financial statements to provide transparency to stakeholders.

### Conclusion

The requirement to deduct the dividend on cumulative participating preference shares from PAT for EPS calculation under AS-20 ensures that the EPS reflects the actual profit available to equity shareholders after meeting preference share dividend obligations. This approach, while potentially affecting reported EPS, provides a more accurate representation of shareholder earnings and aligns with accounting standards.