17 EARNINGS PER SHARE (IAS 33) OBJECTIVE

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1 Chapter 17 EARNINGS PER SHARE (IAS 33) OBJECTIVE The objective of this IAS is to prescribe principles for the determination and presentation of earning per share. SCOPE This IAS shall apply to the entities (Individual or Group), already listed on the stock exchanges or in the process of listing. DEFINITIONS Anti-dilution is an increase in earnings per share or a reduction in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary are issued upon the satisfaction of specified conditions. A contingent share agreement is an agreement to issue that is dependent on the satisfaction of specified conditions. Contingently issue-able ordinary are ordinary issue-able for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement. Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary are issued upon the satisfaction of specified conditions. Options, warrants and their equivalents are financial instruments that give the holder the right to purchase ordinary. An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments. A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary. Common Examples of Potential Ordinary Shares convertible debt; convertible preferred ; share warrants; share options; share rights; employee stock purchase plans; contractual rights to purchase ; and contingent issuance contracts or agreements (such as those arising in business combination). Put option on ordinary are contracts that give the holder the right to sell ordinary at a specified price for a given period. REQUIREMENTS TO PRESENT EPS An entity whose securities are publicly traded (or that is in process of public issuance) must present, on the face of the income statement, basic and diluted earnings per share for: profit or loss from continuing operations attributable to the ordinary equity holders of the parent entity; and profit or loss attributable to the ordinary equity holders of the parent entity for the period for each class of ordinary that has a different right to share in profit for the period. Basic and diluted earnings per share must be presented with equal prominence for all periods presented. Page 1 of 32

2 Basic and diluted EPS must be presented even if the amounts are negative (that is, a loss per share). If an entity reports a discontinued operation, basic and diluted amounts per share must be disclosed for the discontinued operation either on the face of the income statement or in the notes to the financial statements. MEASUREMENT BASIC EPS Basic EPS should be calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary outstanding during the period. Earnings Earnings include all items of income and expense (including tax, extraordinary items and minority interests) less net profit attributable to preference shareholders, including preference dividends. Preference dividends, which shall be deducted from net profit consist of: (a) preference dividends on non-cumulative preference declared in respect of the period; and (b) the full amount of the required preference dividends for cumulative preference for the period, whether or not they have been declared (excluding those paid/declared during the period in respect of previous periods). Per share o o o The number of ordinary used should be the weighted average number of ordinary outstanding during the period. This figure for all periods presented should be adjusted for events, other than the conversion of potential ordinary that have changed the number of outstanding without a corresponding change in resources. Examples include a bonus issue, bonus element in a rights issue, a share split and a consolidation of. The time-weighting factor is the number of days the were outstanding compared with the total number of days in the period; a reasonable approximation is usually adequate. Shares are usually included in the weighted average number of from the date their proceeds is receivable which is usually the date of issue. In certain other cases consideration should be given to the specific terms and conditions attached to the issue i.e. the substance of a contract associated in the issue. The treatment for the issue of ordinary in different circumstances is as follows. In exchange for cash On the voluntary reinvestment of dividends on ordinary or preferred As a result of the conversion of a debt instrument to ordinary In place of interest or principal on other financial instruments In exchange for the settlement of a liability of the enterprise As consideration for the acquisition of an asset other than cash For the rendering of services to the enterprise When cash is receivable The dividend payment date Date interest ceases accruing Date interest ceases accruing The settlement date The date on which the acquisition is recognized As services are rendered Page 2 of 32

3 o o o Page 3 of 32 Ordinary issued as purchase consideration in an acquisition should be included as of the date of acquisition because the acquired entity's results will also be included from that date onward. If ordinary are partly paid, they are treated as a fraction of an ordinary share to the extent they are entitled to dividends during the financial period relative to fully paid ordinary. Contingently issue able including those subject to recall are included in the computation from the date when all necessary conditions for issue have been satisfied. Effect on basic EPS of changes in capital structure New issues/buy backs When there has been an issue of new or a buy-back of, the corresponding figures for EPS for the previous year will be comparable with the current year because, as the weighted average of has risen or fallen, there has also been a corresponding increase or decrease in resources. Money has been received when were issued, and money has been paid out on the repurchased. It is assumed that the sale or purchase has been made at full market price. However, there are other events, which change the number of outstanding, without a corresponding change in resources. In these circumstances it is necessary to make adjustments to EPS reported in prior years so that the current and prior period s EPS figures become comparable. Bonus issue/share split/consolidation These three types of event can be considered together as they have a similar effect. In all cases, new ordinary are issued to existing shareholders for no additional consideration and as such the number of ordinary has changed without an increase or decrease in resources. The problem is solved by adjusting the number of ordinary outstanding before the event for the proportionate change in the number of outstanding as if the event had occurred at the beginning of the earliest period reported. Rights issue A rights issue of is an issue of new to existing shareholders at a price below the current market value. The offer of new is made on the basis of x new for every y currently held; e.g. a 1 for 3 rights issue is an offer of 1 new share at the offered price for every 3 currently held. The offer of new share at a price below the current market value means that there is a bonus element included. To arrive at figures for EPS when a rights issue is made, one should first calculate the theoretical ex-rights price. This is a weighted average value per share. The procedures for calculating the EPS for the current year and a corresponding figure for the previous year are as follows. (a) (b) The EPS for the corresponding previous period should be multiplied by the following fraction. (Note. The market price on the last day of quotation is taken as the fair value immediately prior to exercise of the rights, as required by the standard.) Theoretical ex - rights price Market price on last day of quotation (with rights) To obtain the EPS for the current year one should: (i) Multiply the number of before the rights issue by the fraction of the year before the date of issue and by the following fraction. Market price on last day of quotation with rights Theoretical ex - rights price

4 (ii) Multiply the number of after the rights issue by the fraction of the year after the date of issue and add to the figure arrived at in (i). The total earnings should then be divided by the total number of so calculated. DILUTED EPS At the end of an accounting period, a company may have in issue some securities, which do not at present have any 'claim' to share equity earnings, but may give rise to such a claim in the future. These securities include: a) A separate class of equity which at present is not entitled to any dividend, but will be entitled after some future date; b) Convertible loan stock or convertible preferred which give their holders the right at some future date to exchange their securities for ordinary of the company, at a pre-determined conversion rate; and c) Options or warrants. In such circumstances, the future number of ' ranking for dividend might increase, which in turn results in a fall in the EPS. In other words, a future increase in the number of equity will cause a dilution or 'watering down' of equity earning, and it is therefore, appropriate to calculate a diluted earnings per share i.e. the EPS that would have been obtained during the financial period if the dilution had already taken place. This will indicate to investors the possible effects of a future dilution. Earnings The earnings calculated for basic EPS should be adjusted by the post-tax including deferred tax effect of: a) any dividends on dilutive potential ordinary that were deducted to arrive at earnings for basic EPS; b) interest recognized in the period for the dilutive potential ordinary ; and c) any other changes in income or expenses, fees and discount, premium accounted for as yield adjustments that would result from the conversion of the dilutive potential ordinary. The conversion of some potential ordinary may lead to changes in other income or expenses. For example, the reduction of interest expense related to potential ordinary and the resulting increase in net profit for the period may lead to an increase in the expense relating to a non-discretionary employee profitsharing plan. When calculating diluted EPS, the net profit or loss for the period is also adjusted for any such consequential changes in income or expense. Per share The number of ordinary is the weighted average number of ordinary calculated for basic EPS plus the weighted average number of ordinary that would be issued on the conversion of all the dilutive potential ordinary into ordinary. It should be assumed that dilutive ordinary were converted into ordinary at the beginning of the period or, if later, at the actual date of their issue. There are following other points, which also need to be considered in connection with diluted EPS. a) The computation assumes the most advantageous conversion rate or exercise rate from the standpoint of the holder of the potential ordinary. b) Contingently issue able (potential) ordinary are treated as for basic EPS; if the conditions have not been met, the number of contingently issue able included in the computation is based on the number of Page 4 of 32

5 that would be issue able if the end of the reporting period was the end of the contingency period. However, restatement is not allowed if the conditions are not met when the contingency period expires. c) A subsidiary, joint venture or associate may issue potential ordinary. that are convertible into either ordinary of the subsidiary, joint venture or associate, or ordinary of the reporting entity. If these potential ordinary have a dilutive effect on the consolidated basic EPS of the reporting entity, they are included in the calculation of diluted EPS. Treatment of options It should be assumed that options are exercised and that the assumed proceeds would have been received from the issue of at fair value. Fair value for this purpose is calculated on the basis of the average price of the ordinary during the period. Options and other share purchase arrangements are dilutive when they would result in the issue of ordinary for less than fair value. The amount of the dilution is fair value less the issue price. In order to calculate diluted EPS, each transaction of this type is treated as consisting of two parts. a) A contract to issue a certain number of ordinary at their average fair value during the period. These are fairly priced and are assumed to be neither dilutive nor anti-dilutive. They are, as such, ignored in the computation of diluted earnings per share. b) A contract to issue the remaining ordinary for no consideration. Such ordinary generate no proceeds and have no effect on the net profit attributable to ordinary outstanding. Therefore such are dilutive and they are added to the number of ordinary outstanding in the computation of diluted EPS. To the extent that partly paid are not entitled to participate in dividends during the period, they are considered the equivalent of warrants or options. Dilutive potential ordinary According to IAS 33, potential ordinary should be treated as dilutive when, and only when, their conversion to ordinary would decrease net profit per share from continuing ordinary operations. How is this determined? The net profit from continuing ordinary activities is 'the control number', used to establish whether potential ordinary are dilutive or anti-dilutive. The net profit from continuing ordinary activities is the net profit from ordinary activities after deducting preference dividends and after excluding items relating to discontinued operations; it also excludes extraordinary items and the effects of changes in accounting policies and of corrections of fundamental errors. Potential ordinary are anti-dilutive when their conversion to ordinary would increase earnings per share from continuing ordinary operations or decrease loss per share from continuing ordinary operations. The effects of anti-dilutive potential ordinary are ignored in calculating diluted EPS. In considering whether potential ordinary are dilutive or anti-dilutive, each issue or series of potential ordinary is considered separately, not in aggregate. The sequence in which potential ordinary are considered may affect whether or not they are dilutive. Therefore, in order to maximize the dilution of basic EPS, each issue or series of potential ordinary is considered in sequence from the most dilutive to the least dilutive. This may sound very confusing, but the following example may help. Potential ordinary are weighted for the period they were outstanding. If any that were cancelled or allowed to lapse during the reporting period are included in Page 5 of 32

6 the computation of diluted EPS only for the portion of the period during which they were outstanding. Potential ordinary that have been converted into ordinary during the reporting period are included in the calculation of diluted EPS from the beginning of the period to the date of conversion; from the date of conversion, the resulting ordinary are included in both basic and diluted EPS. Restatement If the number of ordinary or potential ordinary outstanding increases as a result of a capitalization, bonus issue or share split, or decreases as a result of a reverse share split i.e. consolidation of, the calculation of basic and diluted EPS for all periods presented should be adjusted retrospectively. If these changes occur after the balance sheet date but before issue of the financial statements, the calculations per share for the financial statements and those of any prior period should be based on the new number of and this should be disclosed. In addition, basic and diluted EPS of all periods presented should be adjusted for a) the effects of fundamental errors, and adjustments resulting from changes in accounting policies, dealt with in accordance with IAS 8; and b) the effects of a business combination that is a uniting of interests An enterprise does not restate diluted EPS of any prior period for changes in the assumptions used or for the conversion of potential ordinary into ordinary outstanding. PRESENTATION Basic and diluted EPS should be presented by an enterprise on the face of the income statement for each class of ordinary share that has a different right to share in the net profit for the period. The basic and diluted EPS should be presented with equal prominence for all periods presented. Disclosure must be made even where the EPS figures (basic and/or diluted) are negative ie a loss per share. DISCLOSURE An enterprise should disclose the following. (a) The amounts used as the numerators in calculating basic and diluted EPS, and a (b) Page 6 of 32 reconciliation of those amounts to the reported net profit or loss for the period The weighted average number of ordinary used as the denominator in calculating basic and diluted EPS, and a reconciliation of these denominators to each other. Example # 1-Bonus Issue Net Profit 20X0 Net Profit 20X1 Ordinary outstanding until 30 September 20X 1 Bonus issue 1 October 20X ordinary for each ordinary share Outstanding at 30 September 20X1 200 X 2 = 400 Example #2-Right issue M Ltd. has produced the following net profit figures. Rs.m 19X X X8 2.8

7 On 1 January 19X7 the number of outstanding was 1,000,000. During 19X7 the company announced a rights issue with the following details. Rights: 1 new share for each 5 outstanding Exercise price: Rs.5.00 Last date to exercise rights: 1 March 19X7 The market (fair) value of one share in M Ltd. immediately prior to exercise on 1 March 19X7 = Rs Required Calculate the EPS for 19X6, 19X7 and 19X8. Example # 3-Dilutive EPS In 19X7 Faraz Ltd. had a basic EPS of 1.05 based on earnings of Rs.105,000 and 100,000 ordinary Rs.1. It also had in issue Rs.40,000 15% Convertible Loan Stock which is convertible in two years' time at the rate of 4 ordinary for every Rs. 5 of loan stock. The rate of tax is 30%. Required Calculate the diluted EPS. Example# 4- Options Beta Ltd has the following results for the year ended 31 December 19X7. Rs.2,200,000 Net profit for year Weighted average number of ordinary outstanding during 500,000 year Average fair value of one ordinary share during year Rs Weighted average number of under option during year 100,000 Exercise price for under option during year Rs Required Calculate both basic and diluted earnings per share. Example# 5-Dilutive potential ordinary Imran Ltd. has the following results for the year ended 31 December 19X7. Earnings: net profit attributable to ordinary Rs. 10,000,000 shareholders Ordinary outstanding 2,000,000 Average fair value of one ordinary share during the Rs year Tax rate 40% Potential ordinary are as follows. (a) The profit for the year is net off 20% profit attributable to employees s profit sharing schemes. (b) Options: 100,000 with exercise price of Rs.60 (c) Convertible preference : 800,000 entitled to a cumulative dividend of Rs.8 per share; each preference share is convertible to two ordinary (d) 5% Convertible bond: nominal amount Rs.100,000,000; each 1,000 bond is convertible to 20 ordinary ; there is no amortization of premium or discount affecting the determination of interest expense. Required: - Calculate both basic and dilutive EPS for all the years? Example # 6 Numerator information $ Denominator information Income from ordinary activities 100,000 Common outstanding 100,000 before extraordinary loss at 1/1/05 Shares issued for cash 1/4/05 20,000 Page 7 of 32

8 Net income 100,000 Shares issued in 10% stock dividend declared on July % cumulative preference 100,000 Shares of treasury stocks purchased 1/10/05 Shares issued and bought back are at market value. Required: - Calculate both basic and dilutive EPS? 12,000 10,000 Page 8 of 32

9 PRACTICE QUESTIONS IAS 33 Q.1 The profit after tax earned by AAZ Limited during the year ended December 31, 2007 amounted to Rs million. The weighted average number of outstanding during the year was million. Details of potential ordinary as at December 31, 2007 are as follows: The company had issued debentures which are convertible into 3 million ordinary. The debenture holders can exercise the option on December 31, If the debentures are not converted into ordinary they shall be redeemed on December 31, The interest on debentures for the year 2007 amounted to Rs. 7.5 million. Preference issued in 2004 are convertible into 4 million ordinary at the option of the preference shareholders. The conversion option is exercisable on December 31, The dividend paid on preference during the year 2007 amounted to Rs million. The company has issued options carrying the right to acquire 1.5 million ordinary of the company on or after December 31, 2007 at a strike price of Rs per share. During the year 2007, the average market price of the was Rs. 11 per share. The company is subject to income tax at the rate of 30%. Required: (a) Compute basic and diluted earnings per share. (b) Prepare a note for inclusion in the company s financial statements for the year ended December 31, 2007 in accordance with the requirements of International Accounting Standards. Q.2 The following information relates to Afridi Industries Limited (AIL) for the year ended December 31, 2008: (i) The share capital of the company as on January 1, 2008 was Rs. 400 million of Rs. 10 each. (ii) On March 1, 2008, AIL entered into a financing arrangement with a local bank. Under the arrangement, all the current and long-term debts of AIL, other than trade payables, were paid by the bank. In lieu thereof, AIL issued 4 million Convertible Term Finance Certificates (TFCs) having a face value of Rs. 100, to the bank. These TFCs are redeemable in five years and carry mark up at the rate of 8% per annum. The bank has been allowed the option to convert these TFCs on the date of redemption, in the ratio of 10 TFCs to 35 ordinary. (iii) On April 1, 2008, AIL issued 30% right to its existing shareholders at a price which did not contain any bonus element. (iv) During the year, AIL earned profit before tax amounting to Rs. 120 million. This profit includes a loss before tax from a discontinued operation, amounting to Rs. 20 million. (v) The applicable tax rate is 35%. Required: Prepare extracts from the financial statements of Afridi Industries Limited for the year ended December 31, 2008 showing all necessary disclosures related to earnings per share and diluted earnings per share. (Ignore corresponding figures) Q.3 The following information pertains to ABC Limited, in respect of year ended March 31, Rs. (000) Consolidated profit for the year (including minority interest) 15,000 Profit attributable to minority interest 2,000 Page 9 of 32

10 Dividend paid during the year to ordinary shareholders 4,000 Dividend paid on 10% Cumulative Preference for the year ,000 Dividend paid on 10% Cumulative Preference for the year ,000 Dividend declared on 12% Non Cumulative Preference for the year 2, (i) The dividend declared on the non-cumulative preference, as referred above, was paid in April (ii) The cumulative preference were issued at the time of inception of the company. (iii) The company had 10 million ordinary at March 31, (iv) The 12% non-cumulative preference are convertible into ordinary, on or before December 31, 2011 at a premium of Rs. 2 per share million non cumulative preference were converted into ordinary on July 1, (v) 1.20 million right of Rs. 10 each were issued at a premium of Rs per share on October 1, The market price on the date of issue was Rs per share. (vi) 20% bonus were issued on January 1, (vii) Due to insufficient profit no dividend was declared during the year ended March 31, (viii) The average market price for the year ended March 31, 2010 was Rs. 15 per share. Required: Compute basic and diluted earnings per share and prepare a note for inclusion in the consolidated financial statements for the year ended March 31, Q.4 Extracts from statement of comprehensive income of Rahat Limited (RL) for the year ended March 31, 2011 are as under: Rs. (000) Profit after taxation 150, ,000 Exchange gain on foreign operations, net of tax 10,000 8,000 Total comprehensive income 160, ,000 Following further information is available: (i) As of April 1, 2010 share capital of the company consisted of: 5 million ordinary of Rs. 10 each 0.2 million convertible 15% cumulative preference of Rs. 100 each (ii) Each preference share is convertible into 7 ordinary at the option of the shareholders. 10,000 preference were converted into ordinary on July 1, (iii) On September 10, 2010 a right issue of one million ordinary had been announced at an exercise price of Rs. 12 per share. By October 1, 2010 which was the last date to exercise the right, all the had been subscribed and paid. The market price of an ordinary share on September 10 and October 1, 2010 was Rs and Rs. 15 respectively. (iv) On April 30, 2011 the Board of Directors had declared a final cash dividend of 20% (2010:18%) for the year ended March 31, (v) There was no movement in share capital during the previous year. Required: Prepare a note related to earnings per share, for inclusion in the company s financial statements for the year ended March 31, 2011 in accordance with International Financial Reporting Standards. Show comparative figures. Page 10 of 32

11 Q.5 One of your clients has contacted you to calculate earnings per share in accordance with the requirements of International Accounting Standards and has provided you the following information: (i) At the beginning of the year 2006 the company s share capital was Rs 50 million consisting of 5,000,000 ordinary of Rs 10 each. Ten percent bonus were issued on April 1, Market price of ordinary at the beginning of the year was Rs 33 per share. On June 30, 2006 the price was Rs 38 per share and at the end of the year, the price was Rs 36 per share. (ii) Profit attributable to ordinary shareholders of the company for the year 2006 is (iii) Page 11 of 32 Rs 20 million. The company had issued convertible Term Finance Certificates (TFCs) of Rs 120 million carrying markup at the rate of 13 percent per annum. The certificate holders have the option to convert TFCs into ordinary in the ratio of 25 ordinary for each TFC of Rs 1,000. (iv) The company is subject to income tax at the rate of 35%. Required: Calculate the basic and diluted earnings per share for the year 2006 in each of the following situations: (a) (b) if none of the TFC holders opt to convert TFCs into ordinary ; if a TFC holders who owns 40% of the total TFCs exercises his right of conversion on the first day of July 1, Q.6 Market Searchers Limited (MS) had 5.0 million ordinary at the beginning of the year In the month of February 2003, it announced a right issue of one new share for each five issued at the exercise price of Rs.5.00 per share with the last date of exercise of right being March 1, Fair value of one ordinary share prior to exercise on March 1, 2003 was Rs.11. Moreover, it issued 500,000 convertible bonds on January 1, Each block of 10 bonds is convertible into 3 ordinary. Interest expense for the year 2004 relating to the liability component of the convertible bond is Rs.10.0 million. Current and deferred tax relating to that interest expense is Rs.4.0 million. Interest expense includes Rs.1.0 million being the amortization of discount arising on initial recognition of the liability component as per IAS 32. Net profits for the year ended on December 31 of each year are as follows: Rs.1,100 million Rs.1,500 million Rs.1,800 million Required: (a) Compute earnings per share for the years 2002, 2003 and 2004 as per IAS 33. (b) Discuss whether or not the financial instruments or other contracts that may be settled by payment of financial assets or issuance of ordinary of the reporting enterprise, at the option of the issuer or the holder are deemed to be potential ordinary under IAS 33. Q.7 Durable Electronics Limited is a manufacturing concern specializing in the manufacturing and marketing of home appliances. The trading results for the year ended December 31, 2005 are as follows: Rupees in million Profit before taxation 60 Income Tax 12 Profit after taxation 48 The details of movement in the share capital of the company during the year are as follows:

12 - As on January 1, 2005, 10 million ordinary of Rs. 10 each were outstanding having a market value of Rs. 350 million. - The board of directors of the company announced an issue of right share in the proportion of 1 for 5 at Rs. 40 per share. The entitlement date of right was April 30, The market price of the immediately before the entitlement date was Rs. 40 per share. - The company announced 20% bonus for its shareholders on June 1, The shareholders were informed that the share transfer books of the company would remain closed from July 1 to July 10, both days inclusive. Transfers received up to June 30, 2005 will be considered in time for entitlement of bonus. However, right issued in the month of April 2005 will not be entitled for the bonus. The ex-bonus market value per share was Rs A further right issue was made in the proportion of 1 for 4 on October 31, 2005 at a premium of Rs. 15 per share. The market value of the before the right entitlement was Rs. 33 per share. Required: Calculate the basic and diluted earnings per share for the year ended December 31, 2005 in accordance with IAS 33 (Earnings per share). Q.8 The following financial statement extracts for the year ending 31 May 1999 relate to Mayes, a public limited company. Rs.000 Rs.000 Operating profit Continuing operations 26,700 Discontinued operations (1,120) 25,580 Continuing operations Profit on disposal of tangible non- current assets 2,500 Discontinued operations (Loss) on sale of operations (5,080) 23,000 Interest payable (2,100) Profit before tax 20,900 Income tax expense (7,500) Profit after tax 13,400 Minority interest (540) Profit attributable to members of parent company 12,860 Dividends: Preference dividend on non-equity 210 Ordinary dividend on equity 300 (510) Other appropriations - non equity (note iii) (80) Net profit for the period 12,270 Capital as at 31 May Issued and fully paid ordinary of Re.1 each 12,500 7% convertible cumulative redeemable preference 3,000 of Re.1 15,500 Additional Information Page 12 of 32

13 (i) (ii) (iii) On 1 January 1999, 3.6 million ordinary were issued at Rs.2.50 in consideration of the acquisition of Junes for Rs.9 million. These do not rank for dividend in the current period. Additionally the company purchased and cancelled Rs.2.4 million of its own Rs.1 ordinary on 1 April On 1 July 1999, the company made a bonus issue of 1 for 5 ordinary before the financial statements were issued for the year ended 31 May The company has a share option scheme whereby certain directors can subscribe for company. The following details relate to the scheme. Options outstanding 31 May 1998: (i) 1 2 million ordinary at Rs.2 each (ii) 2 million ordinary at Rs.3 each Both sets of options are exercisable before 31 May Options granted during year 31 May 1999 (i) One million ordinary at Rs.4 each exercisable before 31 May 2002 granted 1 June (ii) During the year to 31 May 1999, the options relating to the 1 2 million ordinary at Rs.2 were exercised on 1 March (iii) The average fair value of one ordinary share during the year was Rs.5. The 7% convertible cumulative redeemable preference are convertible at the option of the shareholder or the company on 1 July 2000, 2001, 2002 on the basis of two ordinary for every three-preference share. The preference share dividends are not in arrears. The are redeemable at the option of the shareholder on 1 July 2000, 2001, 2002 at Rs.1.50 per share. The other appropriations - non equity item charged against the profits relates to the amortization of the redemption premium and issue costs on the preference. (iv) Mayes issued Rs.6 million of 6% convertible bonds on 1 June 1998 to finance the acquisition of Space, an unlisted company. Each bond is convertible into 2 ordinary of Rs.1. Assume an income tax rate of 35% and that interest on the bonds receives tax relief at this rate of tax. (v) Page 13 of 32 The interest payable relates entirely to continuing operations and the taxation charge relating to discontinued operations is assessed at Rs.100,000 despite the accounting losses. The loss on discontinued operations relating to the minority interest is Rs.600,000. Required: Calculate the basic and diluted earnings per share for the year ended 31 May 1999 for Mayes utilizing IAS33 Earnings per share. Q.9 The issued share capital of Classic Limited at December 31, 2007 and 2008 comprises 2,000,000 ordinary of Rs. 10 each. The company granted potions over 100,000 ordinary in The options can be exercised between 2009 and 2011 at Rs. 60 per share. The average market price of Classic Limited during the year was Rs. 75. In addition Classic Limited has 800,000 Rs. 10 convertible cumulative preference (treated as an equity instrument under IAS-32) and Rs. 1,000,000, 5% convertible bonds in issue throughout Each convertible bond and preference share is convertible into two ordinary. The company s results for the year ended December 31, 2008 comprised operating profit from continuing operations of Rs. 300,000 and operating profit from discontinued operations of Rs. 100,000. Interest and tax at 30% amounted to Rs. 100,000 and Rs. 90,000 respectively. The profit for the year was Rs. 210,000. Required: - Calculate Basic and Diluted Earnings Per Share for Classic Limited?

14 Q. 10 The following information relates to Que Limited (QL) for the year ended 31 December 2011: (i) Issued share capital on 1 January 2011 consisted of 80 million ordinary of Rs. 10 each. (ii) Profit after tax amounted to Rs. 130 million. It includes a loss after tax from a discontinued operation, amounting to Rs. 40 million. (iii) On 30 September 2011, QL issued 20% right at a price of Rs. 11 per share. The market value of the immediately before the right issue was Rs per share. (iv) There are 25,000 share options in existence. Each option allows the holder to acquire 120 at a strike price of Rs. 10 per share. The options have already vested and will expire on 30 June The average market price of ordinary in 2011 was Rs. 12 per share. (v) QL had issued debentures in 2008 which are convertible into 6 million ordinary. The debentures shall be redeemed on 31 December The conversion option is exercisable during the last six months prior to redemption. The interest on debentures for the year 2011 amounted to Rs. 11 million. (vi) Preference issued in 2009 are convertible (at the option of the preference shareholders) into 4 million ordinary on 31 December The dividend paid on preference during 2011 amounted to Rs million. (vii) The company is subject to income tax at the rate of 35%. Required: Prepare extracts from the financial statements of Que Limited for the year ended 31 December 2011 showing all necessary disclosures related to earnings per share. (Ignore comparative figures) (17 marks) Q-11 The following information pertaining to Krishna Limited (KL) has been extracted from its financial statements for the year ended 31 December (i) Total comprehensive income for the year: Rs. In 000 Profit from continuing operations - net of tax 200,000 Profit from discontinued operations - net of tax 10,000 Fair value gain on investments available for sale - net of tax 16,000 Total comprehensive income 226,000 (ii) Share capital as on 1 January 2012: 8,000,000 Ordinary of Rs. 10 each. 500,000 Convertible preference of Rs. 100 each entitled to a cumulative dividend at 12%. Each share is convertible into two ordinary and the dividend is paid on 28 February, every year. (iii) 20% bonus being the final dividend for the year ended 31 December 2011 were issued on 31 March (iv) On 30 April 2012, holders of 80% convertible preference converted their into ordinary. (v) On 1 July 2012, KL issued 20% right to its ordinary shareholders at Rs. 70 per share. The market price prevailing on the exercise date was Rs. 80 per share. (vi) On 1 August 2011, KL granted 2,500 share options to each of its twenty technical managers. The managers would become eligible to exercise these options on completion of further five years of service with KL. By 31 December 2012, two managers had already left and it is expected that a further six managers would leave KL before five years. As of 31 December 2012 estimated fair value of each share option was Rs. 40. Required: Page 14 of 32

15 Prepare a note relating to basic and diluted earnings per share for inclusion in KL s financial statements for the year ended 31 December 2012, in accordance with International Financial Reporting Standards. Q-12 Alpha Limited (AL) a listed company acquired following 80% equity in Zee Limited on 01 July The following information has been extracted from their draft financial statements. AL ZL Rs. (000) Rs. (000) Balance as at 01 January 2013: - Share capital (Rs. 100 each) 80,000 35,000 12% Convertible bonds (Rs. 100 each) 30, Profit for the year ended 31 December 2013 (after tax) 60,000 25,000 Following information is also available: - (i) The bonds were issued at par on 01 January 2011 and are convertible at any time before redemption date of December 31, 2015, at the rate of five ordinary for every four bonds. (ii) Cost and fair value information of ZPL s investment property is as under: - 31 Dec Dec 2012 Rs (000) Cost 65,000 60,000 67,000 59,000 (iii) ZL uses cost model while the group policy is to use the fair value model to account for investment property. AL operates a defined benefit gratuity scheme for its employees. The actuary s report has been received after the preparation of draft financial statements and provides the following information pertaining to the year ended 31 December 2013: - Rs. (000) Actuarial losses 150 Current service costs 8,000 Net interest income 3,000 (iv) On August 2013, under employees share option scheme, 60,000 were issued by AL to its employees at Rs. 150 per share against the average market price of Rs. 250 per share. (v) Dividend details are as under: - AL ZL 2013 (interim) 2012 (final) 2013 (interim) 2012 (final) Cash 18% 10% 12% 15% -- 20% -- 16% At the time of payment of dividend, income 10% was deducted by AL and ZL. (vi) Applicable tax rate for business income is 35%. Required: - Extracts from the consolidated profit and loss account of Alpha Limited including earnings per share for the year ended December 31, 2013 in accordance with the IFRS? Page 15 of 32

16 (Note: comparative figures and information for notes to the financial statements are not required) (15) Q 13 The following information has been extracted from draft statement of financial position of Ittehad Industries Limited (IIL), as on December 31, 2014: Rs. in millions Share capital (Rs. 10 each) 1,800 1,200 Share premium Accumulated profit 3,756 3, % Term Finance Certificates The following information is also available: - i) The profit after tax earned by IIL during the year ended December 31, 2014 amounted to Rs. 225 million. ii) On April 01, 2014, IIL issued 25% right to its existing shareholders at Rs. 15 per share. Market value of the prior to issue of right was Rs. 25 per share. iii) 20% bonus for the year ended December 31, 2013 were issued on May 01, iv) The right issued on April 01, 2014 were also entitled for the bonus. On December 31, 2014, 5 million were not yet vested under the employee share option scheme. The exercise price of the option was Rs. 12 per share and average market price per share during 2014 was Rs. 15 per share. The amount to be recognized in relation to employee share option in profit or loss account over future accounting periods up to vesting date is Rs. 10 million. v) On July 01, 2014, IIL issued TFCs which are convertible into 20 million ordinary on December 31, vi) IIL is subject to income tax at the rate of 35%. Required: - Prepare relevant extract to be reflected in the financial statements of IIL for the year ended December 31, 2014 showing all necessary disclosures relating to earnings per share. (Comparative figures not required) Page 16 of 32

17 A-1 Step # 1: Ranking in order of dilution Convertible Debentures Increase in earnings (Rs. 7.5m x 70%) Increase in Increase in earnings Rs. 5,250,000 Increase in no. of ordinary Earnings per incremental Rs. Rank 3,000, Convertible Preference Shares Increase in earnings Increase in 2,450,000 4,000, Options Increase in earnings Increase in (1.5m x 1.1 / 11) - 150,000-1 Step # 2: Testing for dilutive effect Profit from operations attributable to ordinary shareholders Rs. Ordinary Shares EPS Rs. Effect Basic Earnings per share *125,380,000 85,220, Options (Rank 1) - 150,000 Page 17 of ,380,000 85,370, Dilutive Convertible preference (Rank 2) 2,450,000 4,000, ,830,000 89,370, Dilutive Convertible debentures (Rank 3) 5,250,000 3,000, ,080,000 92,370, Anti- Dilutive *Rs. 127,830,000 Rs. 2,450,000 = Rs. 125,380,000 (b) AAZ Limited

18 Notes to the financial statements For the year ended December 31, 2007 EARNINGS PER SHARE 2007 Basic alternative to ordinary share holders Profit (Rupees) 125,380,000 Weighted average number of ordinary outstanding during the year 85,220,000 Earnings per share - basic (Rupees) 1.47 Diluted Profit after taxation (Rupees) 127,830,000 Weighted average number of ordinary, options and convertible preference outstanding during the year 89,370,000 Earnings per share - diluted (Rupees) Because diluted earnings per share is increased when taking the convertible preference into account (from Rs to Rs. 1.44), the convertible debentures are anti-dilutive and are ignored in the calculation of diluted earnings per share. A-2 Afridi Industries Limited Extracts from the Statement of Comprehensive Income For the year ended December 31, 2008 Rupees in million Profit before tax % 42.0 Other comprehensive income - Total comprehensive income Earnings per share Basic Continued operations (91 [W-1] - 49 [W-2]) 1.86 Discontinued operations ((133) W-1-49 W-2 ) (0.27) 1.59 Diluted Continued operations ( [W-1] [W-2]) 1.78 Discontinued operations ((13) [W-1] [W-2]) (0.21) 1.57 Afridi Industries Limited Extracts from the Notes to the Financial Statements For the year ended December 31, 2009 Basic earnings per share Page 18 of 32

19 Profit attributable to ordinary shareholders (Rs. in millions) Weighted average number of ordinary (numbers in millions) (W-2) (W-1) Diluted earnings per share Rs. in million Profit attributable to ordinary shareholders After tax effect of finance cost on convertible TFCs (4x100x8 / 65%)x10/ Profit after tax attributable to ordinary shareholders (diluted) Numbers in million Weighted average number of ordinary (W-2) Effect of convertible TFCs on number of (W-2) Weighted average number of ordinary (diluted) WORKINGS W-1: Basic and diluted earnings Rs. in million Profit before tax (20.00) 120 Tax (49.00) 7.00 (42) Profit attributable to ordinary shareholders - basic earnings (13.00) 78 Finance cost on convertible TFCs (4 x 100 x 8% x 65%) x 10/ Profit attributable to ordinary shareholders - diluted earnings (13.00) W-2: No of ordinary outstanding for basic and diluted EPS computation Numbers in million Ordinary outstanding as of Jan 1, Right issued during the year (40 x 30% x 9/12) 9.00 No of ordinary outstanding for Basic Earnings per Share TFCs convertible into 35 ordinary (4,000,000 x 35/10) x 10/ No of ordinary outstanding for Diluted Earnings per Share A-3 ABC Limited Notes to Consolidated Financial Statements For the year ended March 31, Rs. in '000 Earnings per share basic Profit after tax and minority interest (15,000-2,000) 13,000 Dividend paid during the year to ordinary shareholders (Rs. 4,000) - Page 19 of 32

20 10% Cumulative preference dividend for 2009 (Rs. 2,000) - 10% Cumulative preference dividend for 2010 (2,000) Dividend declared on 12% non cumulative preference for 2010 (2,400) Profit available for distribution to ordinary share holders 8,600 No. in '000 Weighted average number of ordinary W1 13,146 Earnings per share - Basic and diluted Rs Diluted earnings per share Profit available for distribution to ordinary share holders 8,600 Effect of dividend declared on 12% non cumulative preference convertible into 2,400 ordinary on or before December 31, ,000 Weighted average number of ordinary W1 13,146 12% Non cumulative preference convertible to ordinary on or before December 31, 2011 W2 1,771 14,917 Antidiluted earning per share 0.74 W1: Weighted average ordinary outstanding for "Basic EPS" Time lines Actual Bonus Adjustment factor (W3) Period Adjustment 2010 (Weighted ) to Outstanding on April 1, 10, X1.2 3/12 3, to Outstanding on July 1, 2009 Opening Conversion of 500,000 12% Cumulative preference into ordinary at a premium of Rs. 2 per share (500/12*10) 10, to Outstanding on Oct.1, 2009 Opening 1,200,000 of Rs. 10 each were issued at Rs per share against the market price of , X1.2 3/12 3,151 10,417 1,200 11, /12 6,970 Weighted average ordinary resulting from conversion for "Diluted EPS" 13,146 Page 20 of 32

21 Time lines Actual Period Adjustment 2010 (Weighted ) to Outstanding on April 01, 3,025 Share converted on July 1, 2009 Shares to be converted 417 1,667 2,084 3/ to Outstanding on July 1, ,667 9/12 1,250 1,771 W3: Calculation of bonus adjustment factor No. Rs. Rs. in '000 Bonus element with right issue Outstanding before the exercise of rights at fair value 10, ,213 Rights issued at a premium of Rs , ,800 11, ,013 Theoretical ex-right value per share (144,013/11,617) Rs Adjusting factor (Fair value 12.5 / Theoretical ex-right value ) Bonus issued on January 01, 2010 (20%) Adjusting factor 1.2 A-4 Rahat Limited Notes to and forming part of the financial statements For the year ended March 31, Rs./share in Earnings per share: 1.1 Basic earnings per share Profit after taxation 150, ,000 Dividend on 15% convertible preference (19,000*15%) (2,850) (3,000) / (20,000*15%) Profit attributable to ordinary shareholders 147, ,000 Restated Weighted average number of ordinary in issue W1 5, , Basic earnings per share Rs Diluted earnings per share Profit after taxation 150, ,000 Weighted average number of in issue W1 5, , Conversion of 10,000 cumulative preference on July 1, 2010 (10*7)/12* Page 21 of 32

22 Adjustment for potential ordinary on conversion of 1, , % cumulative preference (190*7)/(200*7) Restated Weighted average number of for diluted earnings 6, , Diluted earnings per share During the year the company has issued 1 million right ordinary at Rs. 12 per share against the prevailing market price of Rs. 15 per share. This has resulted in restatement of basic and diluted earnings per share for the year ended March 31, W-1 Weighted average ordinary outstanding for 'Basic EPS' Description Date of issue Actual No. of (Restated) Time Bonus Weighted Actual No. Bonus factor Weighted factor average of (W-1) average (W :2) Balance ,000 3/ , , , Conversion of 10,000 cumulative preference ,070 3/ , Right issue ,000 6,070 6/12-3, Weighted average 5, , W-2 Calculation of theoretical ex-right value per share and bonus adjustment factor Outstanding before the exercise of rights at fair value 5, ,050 Exercise of rights issued at Rs. 12 per share 1, ,000 6,070 88,050 Theoretical ex-right value per share 88,050/6, Bonus adjustment factor 15/ A-5 No TFC s Converted to ordinary Basic Earnings per share (B.EPS) Profit attributable to ordinary shareholders Rs. 20,000,000 No. of 5,000,000x3/12x11/10+5,500,000x9/12 1,375,000+4,125,000 5,500,000 (20,000,000/5,375,000) 3.63 Rs. /share Dilutive Earnings per share (D.EPS) Earnings used for basic EPS 20,000,000 Net of tax interest saved on conversion of TFC s [120,000,000x13%(1-0.35)] 10,140,000 30,140,000 No. of Used for basic EPS 5,500,000 Page 22 of 32

23 Assumed to be issued on conversion of TFC s [120,000,000x25/1000] 3,000,000 8,500,000 (30,140,000/8,500,000) 3.54 Rs. / Share 40% TFC s converted into ordinary Basic Earnings per share (B.EPS) Profit attributable to ordinary shareholders Rs. 20,000,000 Interest saved on conversion of TFC s (120,000,000x.40x13%(1-.35)) 4,056,000 24,056,000 No. of 5,000,000x3/12x11/10+5,500,000x3/12+ 6,100,000 6,700,000x6/12 (24,056,000/6,100,000) 3.94 Rs. /share Dilutive Earnings per share (D.EPS) Earnings used for basic EPS 24,056,000 Net of tax interest saved on conversion of TFC s [72,000,000x13%(1-0.35)] 6,084,000 30,140,000 No. of Used for basic EPS 6,100,000 Assumed to be issued on conversion of TFC s [72,000,000x25/1000] 1,800,000 7,900, Rs. /share A Basic Earnings per share (B.EPS) Millions Profit attributable to ordinary shareholders Rs. 1,100 No. of 5 Rs. 220 /share Dilutive Earnings per share (D.EPS) Rs. 220 /share Basic Earnings per share (B.EPS) Millions Millions Profit attributable to ordinary shareholders Rs. 1,500 Rs. 1,100 No. of 5x11/10 [5x2/12x11/10+6x10/12] Rs./Share 200 Rs. /Share TERP (60/6) 10 5 market value =5x share exercise price =1x 5 5 Page 23 of 32