AS-20 – Earnings Per Share :
Earning per share (EPS) is a financial ratio that gives the information regarding earnings available to each equity share. This accounting standard gives computational methodology for determination and presentation of earnings per share. An enterprise should present basic and diluted earning per share on the face of the statement of profit and loss account for each class of equity shares that has a different right to share in the net profit for the period. An enterprise should present basic and diluted earning per share with equal prominence for all periods presented. The standard also requires that an enterprise to present basic and diluted earnings per share even if the amount disclosed are negative i.e. a loss per share.
Basic earning per share should be calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. For the purpose of calculating basic earnings per share, the net profit or loss for the period attributable to equity shareholders should be the net profit or loss for the period after deducting preference dividends and any attributable tax thereto. For the purpose of calculating basic earnings per share, the number of equity shares should be the weighted average number of equity shares outstanding during the period. The weighted average number of
equity shares outstanding during the period reflects the fact that the amount of shareholders’ capital may have varied during the period as a result of a larger or lesser number of shares outstanding at any time. It is the number of equity shares outstanding at the beginning of the period, adjusted by the number of equity shares bought back or issued during the period multiplied by the time weighin factor.
Diluted earnings per share is calculated when there are potential equity shares in the capital structure of the enterprise. Potential equity share are those financial instruments which entitle the holder to the right of equity shares like convertible debentures, convertible preference shares, options warrants etc. For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares.
The weighted average number of equity shares outstanding during the period is increased by the weighted average number of additional equity shares which would have been outstanding assuming the conversion of all dilutive potential equity shares.
Potential equity shares should be treated as dilutive when, and only when, their conversion to equity shares would decrease net profit per share from continuing ordinary operations. Potential equity shares are anti-dilutive when their conversion to equity shares would increase earnings per share from continuing ordinary activities or decrease loss per share from continuing ordinary activities. The effects of anti-dilutive potential equity shares are ignored in calculating diluted earnings per share.
An enterprise should also disclose the following:
(i) The amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to the net profit or loss for the period;
(ii) The weighted average number of equity shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of these denominators to each other; and
(iii) The nominal value of shares along with the earnings per share figures.