Basic earnings per share

1. Meaning of earnings per share

The term “earnings per share” means the amount expected to be received by a shareholder
each year as a return on investment.
The EPS is the amount of income attributable to each ordinary share. Thus, the EPS information
pertains only to ordinary share.
It is not necessary for preference share because there is a definite rate of return for such share.
2. What entities are required to disclose earnings per share?
The presentation of earnings per share is required for entities whose ordinary share or potential
ordinary shares are publicly traded and by entities that are in the process of issuing ordinary
shares or potential ordinary shares in the public securities market.
In other words, public entities are required to present earnings per share.
Nonpublic entities are not required to present earnings per share. However, such entities are
encouraged to present earnings per share to achieve comparability in financial reporting.
3. Explain the presentation of earnings per share.
An entity shall present on the face of the income statement basic and diluted earnings per share
for income or loss from continuing operations.
An entity that reports a discontinued operation shall disclose the basic and diluted amounts per
share for the discontinued operation either on the face of the income statement or in the notes
to the statements.
An entity shall present basic and diluted earnings per share even if the amounts are negative, for
example, basic loss per share.
When an entity presents both consolidated financial statements and separate financial
statements, the disclosures need be presented only on the basis of the consolidated
information.
An entity presents both consolidated financial statements shall present such earnings per share
information only on the face of its separate income statement.
An entity shall not present such earnings per share information on the consolidated financial
statements.
4. Formula for computing Basic Earnings per Share.
The basic earnings per share is computed by dividing the net income by the ordinary shares
outstanding.
The earnings should be the net income after deducting the annual preference dividend.
The annual cumulative preference dividend is deducted from net income, whether such dividend
is declared or not.
The annual noncumulative preference dividend is deducted from net income only when
declared.
The ordinary shares outstanding should be the weighted average ordinary shares outstanding.
5. Explain the treatment of stock dividend or share split in computing earnings per share.
In the case of a stock dividend or a share split, ordinary shares are issued to existing
shareholders for no additional consideration.
The number of ordinary shares outstanding before the event is adjusted for the proportionate
change in the number of ordinary shares outstanding as if the event had occurred at the
beginning of the earliest period reported.
6. Explain the treatment of “rights issue” or stock rights in computing earnings per share.
When rights are issued to shareholders most often the exercise price is less than the fair value of
the shares.
Accordingly, such rights issue includes a bonus element, meaning shares issued for no
consideration.
The Philippine term for a rights issue is “stock right” and the legal term is “right of preemption”.
In this case, Application Guidance 2 of PAS 33 provides that “the number of ordinary shares to
be used in calculating basic earnings per share for all periods to the rights issue is the number of
ordinary share outstanding prior to the rights issue multiplied by a adjustment factor”.
The adjustment factor is the ratio of the market value of the share right-on to the market value
of the share ex-right.
7. Explain the treatment of “subscribed ordinary shares” in computing earnings per share.
Under Application Guidance 15 of PAS 33, subscribed ordinary shares or partly paid ordinary
shares are included in EPS to the extent that they are entitled to participate in dividends.
Under the Philippine Corporation Code, subscribed shares are entitled to participate fully in
dividends. Thus, the full subscribed shares are included in EPS computation under Philippine
jurisdiction.