Ind AS – 33 – Treatment of Options in calculation of Basic and Diluted Earnings Per Share (EPS)

Ind AS 33 Earnings Per Share –Options :

This article specifically covers the treatment of Options in calculation of Basic and Diluted Earnings Per Shareunder Ind AS – 33

Extract of Ind AS – 33

Definition :

  1. Options, warrants and their equivalents are financial instruments that give the holder the right to purchase ordinary shares.
  1. A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares.

Para 45 – For the purpose of calculating diluted earnings per share, an entity shall assume the exercise of dilutive options and warrants of the entity. The assumed proceeds from these instruments shall be regarded as having been received from the issue of ordinary shares at the average market price of ordinary shares during the period. The difference between the number of ordinary shares issued and the number of ordinary shares that would have been issued at the average market price of ordinary shares during the period shall be treated as an issue of ordinary shares for no consideration.

Para 46 –Options and warrants are dilutive when they would result in the issue of ordinary shares for less than the average market price of ordinary shares during the period. The amount of the dilution is the average market price of ordinary shares during the period minus the issue price. Previously reported earnings per share are not retroactively adjusted to reflect changes in prices of ordinary shares.

Para 48 – Employee share options with fixed or determinable terms and non-vested ordinary shares are treated as options in the calculation of diluted earnings per share, even though they may be contingent on vesting. They are treated as outstanding on the grant date.

Average market price of ordinary shares :

For the purpose of calculating diluted earnings per share, the average market price of ordinary shares assumed to be issued is calculated on the basis of the average market price of the ordinary shares during the period. Theoretically, every market transaction for an entity’s ordinary shares could be included in the determination of the average market price. As a practical matter, however, a simple average of weekly or monthly prices is usually adequate. Generally, closing market prices are adequate for calculating the average market price. When prices fluctuate widely, however, an average of the high and low prices usually produces a more representative price. The method used to calculate the average market price is used consistently unless it is no longer representative because of changed conditions. For example, an entity that uses closing market prices to calculate the average market price for several years of relatively stable prices might change to an average of high and low prices if prices start fluctuating greatly and the closing market prices no longer produce a representative average price.

Illustration :

Company A has granted shares to various employees, as detailed below :

Employee name Vesting date Option exercise price No of options granted
Green 1 December 20X7 85 15,000
Blue 1 December 20X7 89 15,000
White 1 December 20X7 93 15,000

Profit attributable to equity holders as at 31 March 20X8 – Rs. 3,500,000. No of ordinary equity shares outstanding as at 1 April 2017 & 31 March 20X8 is 500,000.No options have been exercised by the employee till 31 March 20X8.The average of closing market price of the shares from 1 April 20X7 to 31 March 20X8is Rs. 91.

Calculation of Basic Earnings Per Shareas at 31 March 20X8:

Particulars Unit
Profit attributable to equity holders (Rs.) 3,500,000
Weighted average no of shares* 500,000
Basic Earnings Per Share (Rs.) 7.00

*Since no options have been exercised and issued to any of the employees

Calculation of Diluted Earnings Per Share as at 31 March 20X8:

Particulars Unit
Profit attributable to equity holders (Rs.) 3,500,000
Weighted average no of shares(refer table A below)# 501,319
Diluted Earnings Per Share (Rs.) 6.98

#This includes outstanding shares included in computation of basic earnings per share and potential dilutive shares calculated below

Table A –Weighted Average no of Shares for Diluted Earnings Per Share:

Date Particulars Option exercise price

(a)

Market price

(b)

No of Options granted

(c)

Shares issued for NIL Consideration – Para 45

(d)

Potential Dilutive shares
1 December 20X7 Green 85 91 15,000 989** 989
1 December 20X7 Blue 89 91 15,000 330** 330
1 December 20X7 White 93 91 15,000 (330)***

**(d) = [ (c) – (c*a/b)]

***Since, shares have anti-dilutive effect, they have not been considered for computing Diluted Earnings Per Share.

Disclosure in financial statement of Company A:

Particulars Basic EPS Diluted EPS
Profit / (loss) attributable to equity holders 3,500,000 3,500,000
Weighted average no of shares 500,000 501,319
Earnings per share 7.00 6.98
Anti-dilutive shares for the period 330

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