Before going with the Main Topic let’s First Understand ‘WHAT IS EARNING PER SHARE‘. EARNING PER SHARE concept is explained by Indian Accounting Standard (Ind AS) 33 Earnings per Share which sets out how to calculate both basic earnings per share (EPS) and diluted EPS.
Before understanding Computation of Basic Earning Per Share as PER Ind AS 33 we need to know answer of following Three questions-
1. What is Earning Per Share ?
Earning Per Share is an important toll to measure the performance of the company. This depicts earnings per Ordinary Share (Equity Shares) of the company. It is calculated by dividing Net Profits by the number of Ordinary Shares (Equity Shares) outstanding.
2. Why Earning Per Share is computed ?
The Ordinary Shareholders (Equity Shareholders) invest their money in an entity as owners of the company. They undertake Business Risks and Financial Risks along with other Systematic and Unsystematic risks with a hope or expectation that “ they will get Higher than Normal return on their investments”.
EPS is a ratio used to measure an entity’s profitability and to value its shares.
The Purpose is to analyze how effectively an entity has used the resources provided by the Ordinary Shareholders (Equity Shareholders).
3. Where it is shown ?
The disclosure of EPS is given both in Consolidated Financial Statements (if any) and Separate Financial Statement.
COMPUTATION OF BASIC EARNING PER SHARE
1. Basic Earning per share is measured using Profit or Loss attributable to ordinary equity holders.
Ordinary Share is an Equity instrument that is subordinate to all other classes of equity instruments.
Ordinary Shares participate in profit/loss for the period ONLY after all other types of shares such as preference shares have participated,
The holders of Ordinary Shares are called Ordinary Equity holders.
2. Formula for calculating Basic Earning Per Share :
PROFIT/LOSS ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS
WEIGHTED AVERAGE NUMBER OF EQUITY SHARES OUTSTANDING DURING THE PERIOD
3. Computation of Profit/Loss attributable to Ordinary Equity holders:
Note: Only Preference Shares which are classified as Equity will be considered for this purpose.
An Entity is required to classify Preference Shares either as Equity or Financial Liability. In case of former the preference dividend will be adjusted from equity whereas latter will be treated as a Finance Cost in arriving at Profit/Loss after tax.
1. Preference Shares classified as equity: Profit/Loss After Tax – Dividend on Preference Shares
2. Preference Shares classified as Financial Liability: Treated similar to other Interest Expense like Interest on Bank Loan or Interest on Debentures etc.
4. Computation of weighted average number of equity shares outstanding during the period
|Ordinary Shares outstanding at the Beginning||xxxx|
|Less: Ordinary Shares bought back * Time weighting Factor||(xxxx)|
|Add : Ordinary Shares issued * Time weighting Factor||xxxx|
|Ordinary Shares outstanding during the period||xxxx|
Note: Time weighting Factor: Number of Days shares are outstanding/Total number of days in the period.