Illustrations – TaxDose.com

Illustrations :

Note: These illustrations do not form part of the Accounting Standard. Their purpose is to illustrate the application of the Accounting Standard.

Illustration I

Example – Weighted Average Number of Shares

(Accounting year 01-01-20X1 to 31-12-20X1)

		No. of Shares. Issued	No. of Shares Bought Back	No. of Shares Outstanding
1st January, 20X1	Balance at beginning of year	1,800	–	1,800
31st May, 20X1	Issue of shares for cash	600	–	2,400
1st Nov 20X	Buy Back of shares	–	300	2,100
31st Dec ., 20X1	Balance at end of year	2,400	300	2,100
Computation of Weighted Average: (1,800 x 5/12) + (2,400 x 5/12) + (2,100 x 2/12) = 2,100 shares. The weighted average number of shares can alternatively be computed as follows: (1,800 x12/12) + (600 x 7/12) – (300 x 2/12) = 2,100 shares

Illustration II

Example – Partly paid shares

(Accounting year 01-01-20X1 to 31-12-20X1)

		No. of Shares. Issued	Nominal value of Shares.	Amount paid
1^stJanuary, 20X1	Balance at beginning of year	1,800	Rs. 10	Rs. 10
31^st october , 20X1	Issue of shares	600	Rs. 10-	Rs. 5
Assuming that partly paid shares are entitled to participate in the dividend to the extent of amount paid, number of partly paid equity shares would be taken as 300 for the purpose of calculation of earnings per share. Computation of weighted average would be as follows: (1,800×12/12) + (300×2/12) = 1,850 shares.

Illustration III

Example – Bonus Issue

(Accounting year 01-01-20XX to 31-12-20XX)

Net profit for the year 20X0	Rs. 18,00,000
Net profit for the year 20X1 Rs. 60,00,000	Rs. 60,00,000
No. of equity shares outstanding until 30th September 20X1	20,00,000
Bonus issue 1st October 20X1	2 equity shares for each equity share outstanding at 30th September, 20X1 20,00,000 x 2 = 40,00,000
Earnings per share for the year 20X1	_____Rs. 60,00,000_______ ( 20,00,000 + 40,00,000 )	= Re. 1.00
Adjusted earnings per share for the year 20X0	____Rs. 18,00,000____ (20,00,000 + 40,00,000)	= Re. 0.30
Since the bonus issue is an issue without consideration, the issue is treated as if it had occurred prior to the beginning of the year 20X0, the earliest period reported.

Example – Rights Issue
(Accounting year 01-01-20XX to 31-12-20XX)

Net profit	Year 20X0 : Rs. 11,00,000 Year 20X1 : Rs. 15,00,000
No. of shares outstanding prior to rights issue	5,00,000 shares
Rights issue	One new share for each five outstanding (i.e. 1,00,000 new shares) Rights issue price : Rs. 15.00 Last date to exercise rights: 1st March 20X1
Fair value of one equity share immediately prior to exercise of rights on 1st March 20X1	Rs. 21.00
Computation of theoretical ex-rights fair value per share Fair value of all outstanding shares immediately prior to exercise of rights+total amount received from exercise ………………………………………………………………………………………………………………….. Number of shares outstanding prior to exercise + number of shares issued in the exercise (Rs. 21.00 x 5,00,000 shares) + (Rs. 15.00 x 1,00,000 shares) 5,00,000 shares + 1,00,000 shares Theoretical ex-rights fair value per share = Rs. 20.00
Computation of adjustment factor Fair value per share prior to exercise of rights Rs. (21.00) = 1.05 Theoretical ex-rights value per share Rs. (20.00)
Computation of earnings per share
		Year 20X0	Year 20X1
EPS for the year 20X0 as originally reported: Rs.11,00,000/5,00,000 shares		Rs. 2.20
EPS for the year 20X0 restated for rights issue: Rs.11,00,000/ (5,00,000 shares x 1.05)		Rs. 2.10
EPS for the year 20X1 including effects of rights issue ___________Rs. 15,00,000___________ (5,00,000 x 1.05 x 2/12)+ (6,00,000 x 10/12)			Rs. 2.55

Illustration V Example –

Convertible Debentures

(Accounting year 01-01-20XX to 31-12-20XX)

Net profit for the current year	Rs. 1,00,00,000
No. of equity shares outstanding	50,00,000
Basic earnings per share	Rs. 2.00
No. of 12% convertible debentures of Rs. 100 each Each debenture is convertible into 10 equity shares	1,00,000
Interest expense for the current year	Rs. 12,00,000
Tax relating to interest expense (30%)	Rs. 3,60,000
Adjusted net profit for the current year	Rs. (1,00,00,000 + 12,00,000 – 3,60,000) = Rs. 1,08,40,000
No. of equity shares resulting from conversion of debentures	10,00,000
No. of equity shares used to compute diluted earnings per share	50,00,000 + 10,00,000 = 60,00,000
Diluted earnings per share	1,08,40,000/60,00,000 = Re. 1.81

Illustration VI

Example – Effects of Share Options on Diluted Earnings Per Share

(Accounting year 01-01-20XX to 31-12-20XX)

Net profit for the year 20X1	Rs. 12,00,000
Weighted average number of equity shares outstanding during the year 20X1	5,00,000 shares
Average fair value of one equity share during the year 20X1	Rs. 20.00
Weighted average number of shares under option during the year 20X1	1,00,000 shares
Exercise price for shares under option during the year 20X1	Rs. 15.00

Computation of earnings per share

	Earnings	Shares	Earnings per shar
Net profit for the year 20X1	Rs. 12,00,000
Weighted average number of shares outstanding during year 20X1		5,00,000
Basic earnings per share			Rs. 2.40
Number of shares under option		1,00,000
Number of shares that would have been issued at fair value: (100,000 x 15.00)/20.00	*	(75,000)
Diluted earnings per share	Rs. 12,00,000	5,25,000	Rs. 2.29
*The earnings have not been increased as the total number of shares has been increased only by the number of shares (25,000) deemed for the purpose of the computation to have been issued for no consideration {see para 37(b)}

Illustration VII

Example – Determining the Order in Which to Include Dilutive Securities

in the Computation of Weighted Average Number of Shares

(Accounting year 01-01-20XX to 31-12-20XX)

Earnings, i.e., Net profit attributable to equity shareholders	Rs. 1,00,00,000
No. of equity shares outstanding	20,00,000
Average fair value of one equity share during the yea	Rs. 75.00
Potential Equity Shares
Options	1,00,000 with exercise price of Rs. 60
Convertible Preference Shares Attributable tax, e.g., corporate dividend tax	8,00,000 shares entitled to a cumulative dividend of Rs. 8 per share. Each preference share is convertible into 2 equity shares. 10%
12% Convertible Debentures of Rs. 100 each	Nominal amount Rs. 10,00,00,000. Each debenture is convertible into 4 equity shares.
Tax rate	30%

Increase in Earnings Attributable to Equity Shareholders on

Conversion of Potential Equity Shares

	Increase in Earnings	Increase in no. of Equity Shares	Incremental Earnings per share
Options
Increase in earnings
No. of incremental shares issued for no consideration {1,00,000 x (75 – 60) / 75}	Nil	20,000	Nil
Convertible Preference Shares
Increase in net profit attributable to equity shareholders as adjusted by attributable tax [(Rs.8 x 8,00,000)+ 10%(8 x 8,00,000)]	Rs. 70,40,000
No. of incremental shares {2 x 8,00,000}		16,00,000	Rs. 4.40
12% Convertible Debentures
Increase in net profit {Rs. 10,00,00,000 x 0.12 x ( 1 – 0.30)}	Rs. 84,00,000
No. of incremental shares {10,00,000 x 4}		40,00,000	Rs. 2.10

It may be noted from the above that options are most dilutive as their earnings per incremental share is nil. Hence, for the purpose of computation of diluted earnings per share, options will be considered first. 12% convertible debentures being second most dilutive will be considered next and thereafter convertible preference shares will be considered (see para 42).

Computation of Diluted Earnings Per Share

	Net Profit Attributable (Rs.)	No. of Equity Shares	Net profit attributable Per Share (Rs.)
As reported	1,00,00,000	20,00,000	5.00
Options		20,000
	1,00,00,000	20,20,000	4.95	Dilutive
12% Convertible Debentures	84,00,000	40,00,000
	1,84,00,000	60,20,000	3.06	Dilutive
Convertible Preference Shares	70,40,000	16,00,000
	2,54,40,000	76,20,000	3.34	AntiDilutive

Since diluted earnings per share is increased when taking the convertible preference shares into account (from Rs. 3.06 to Rs 3.34), the convertible preference shares are anti-dilutive and are ignored in the calculation of diluted earnings per share. Therefore, diluted earnings per share is Rs. 3.06.

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