This article specifically covers the details / point in time when the contingently returnable ordinary shares shall be included in calculation of Basic and Diluted Earnings Per Share (EPS) :
Definition :
1. Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement.
2. A contingent share agreement is an agreement to issue shares that is dependent on the satisfaction of specified conditions.
Para 24 – Outstanding ordinary shares that are contingently returnable (i.e. subject to recall) are not treated as outstanding and are excluded from the calculation of basic earnings per share until the date the shares are no longer subject to recall.
Illustration 1 :
Company grants 100,000 shares to its employees as at 1 October 20X6 with immediate vesting and nil exercise price. The shares are subject to condition of continuous employment till 25 March 20X8, failing which all shares shall be forfeited. The employee has exercised the option and shares have been issued to the employee on or before 31 March 20X7. The shares are entitled to non-forfeitable dividends and undistributed earnings while they are subject to recall.
Profit attributable to ordinary equity holders as at 31 March 20X7 – Rs. 3,000,000
Profit attributable to ordinary equity holders as at 31 March 20X8 – Rs. 5,000,000
No of outstanding ordinary shares as at the beginning & end of the year 31 March 20X7 – 450,000
The employee continues to be in employment with the Company till 31 March 20X8.
Calculation of Basic Earnings Per Share :
| Particulars | 31 March 20X7 | 31 March 20X8 |
| Profit attributable to equity holders (Rs.) – Refer table below* | 2,454,545 | 5,000,000 |
| Weighted average no of shares(a) & (b) | 450,000 | 550,000 |
| Basic Earnings Per Share (Rs.) | 5.45 | 9.09 |
(a)Since, shares have vested but conditions attached being the employment lock-in has not been fulfilled, the option so granted are contingently returnable despite being issued. Hence, the same has not included in calculation of Basic Earnings Per Shares as at 31 March 20X7.
(b)Conditions specified / attached being the employment lock-in has been fulfilled as at 31 March 20X8 and thus, the option so granted are no longer contingently returnable i.e. not subject to recall. Hence, the same has been included in calculation of Basic Earnings Per Share as at 31 March 20X8 from the beginning of the financial year (since no retrospective adjustment are permitted under the standard – hence, cannot include from the date of vesting).
*Calculation of Profit for Basic Earnings Per Share :
| Profit attributable to all equity holders | 3,000,000 |
| Less: profit attributable to shares subject to recall
[ 3,000,000*450,000 / 550,000 ] |
2,454,545 |
Calculation of Diluted Earnings Per Share :
| Particulars | 31 March 20X7 | 31 March 20X8 |
| Profit attributable to equity holders (Rs.) | 3,000,000 | 5,000,000 |
| Weighted average no of shares | 550,000 | 550,000 |
| Diluted Earnings Per Share (Rs.) | 5.45 | 9.09 |
Table A – Calculation of weighted average number of shares as at 31 March 20X7 :
| Date | No of shares | No of days | Weighted Avg no of shares |
| Opening shares | 450,000 | 365 | 450,000 |
| Potential dilutive shares** | 100,000 | 365 | 100,000 |
| Total | 550,000 | ||
**Since, shares have been issued for Nil consideration, they shall always be in the money (average market price will always be higher than Nil exercise price) i.e. potentially dilutive and hence, will be included in the calculation of Diluted Earnings Per Share from the beginning of the year.
Table B – Calculation of weighted average number of shares as at 31 March 20X8 :
| Date | No of shares | No of days | Weighted Avg no of shares |
| Opening shares | 450,000 | 365 | 450,000 |
| Potential dilutive shares (Same as included in computation of Basic Earnings Per Share) | 100,000 | 365 | 100,000 |
| Total | 550,000 | ||
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