by Ind AS 33, “Earnings per Share (EPS),” prescribes the calculation and presentation of earnings per share to improve comparability of performance among different entities and over different periods. EPS is a key indicator used by investors to assess the profitability of an entity on a per-share basis, making it crucial for entities to calculate and present this metric consistently.
The standard requires entities to present both basic and diluted EPS on the face of the statement of profit and loss. Basic EPS is calculated by dividing the net profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. This provides a straightforward measure of performance that all entities can calculate.
Diluted EPS takes into account the potential dilution that could occur if convertible instruments or contracts to issue shares were converted into ordinary shares. It reflects the potential decrease in earnings per share that could result if options, warrants, or convertible securities were exercised or converted into shares. The calculation of diluted EPS involves adjusting both the numerator (earnings) and the denominator (number of shares) to reflect the potential dilution.
Ind AS 33 ensures that users of financial statements have a consistent basis for comparing the performance of entities, taking into account both the actual and potential impacts on shareholders’ equity.
Key Scope Inclusions
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Publicly Listed Companies:
Ind AS 33 applies to entities with shares listed on a stock exchange or that are in the process of listing.
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Entities with Ordinary Shares:
The standard covers entities that have issued ordinary shares to the public or have the potential to issue such shares.
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Diluted and Basic EPS:
Requires the presentation of both basic EPS and diluted EPS for entities that have potential ordinary shares, ensuring a comprehensive view of earnings per share.
Scope Exclusions
While Ind AS 33 has a broad application, there are specific exclusions:
- It does not apply to interim financial reports, unless such reports are presented alongside or included within annual reports.
- The calculation and disclosure requirements are not mandatory for entities that do not have equity shares or potential equity shares listed or in the process of listing in a public market.
Earnings per Share (Ind AS 33) Measurement:
The measurement of Earnings per Share (EPS) as prescribed by Ind AS 33 involves specific methodologies for calculating both basic and diluted EPS. These calculations allow users of financial statements to gauge the performance of an entity on a per-share basis, providing critical insights into its profitability.
Basic EPS
- Formula:
Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the parent entity by the weighted average number of ordinary shares outstanding during the period.
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Profit or Loss:
This refers to the net profit or loss for the period attributable to ordinary shareholders, after deducting any dividends on preferred shares or other amounts that are not available to ordinary shareholders.
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Weighted Average Number of Shares:
The denominator is the weighted average number of ordinary shares outstanding during the period, adjusted for changes in the share capital (such as bonus issues, share splits, or share consolidations) without an equivalent change in resources.
Diluted EPS
- Objective:
Diluted EPS shows the potential impact on EPS if all dilutive potential ordinary shares were converted into ordinary shares. It provides a worst-case scenario for EPS under the assumption of full conversion or exercise of all dilutive instruments.
- Formula:
Diluted EPS is calculated by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of shares for the effects of all dilutive potential ordinary shares.
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Adjustments to Profit or Loss:
Adjustments include interest on dilutive potential ordinary shares (e.g., convertible debt) and the effect of other changes in income or expense that would result from the conversion of the potential ordinary shares.
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Adjustments to Shares:
The weighted average number of shares is adjusted to include the additional ordinary shares that would have been outstanding if the dilutive potential ordinary shares had been converted into ordinary shares.
Considerations for Measurement
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Anti-dilutive Potential Shares:
Not all potential ordinary shares are included in the diluted EPS calculation. If their conversion to ordinary shares would increase EPS or decrease loss per share, they are considered anti-dilutive and are excluded from the diluted EPS calculation.
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Complex Financial Instruments:
For instruments that could be converted into shares, such as convertible bonds or options, entities must calculate their dilutive potential. This involves determining the number of shares that could be obtained at no additional cost and adjusting both earnings and the number of shares accordingly.
Presentation
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Separate Presentation:
Basic and diluted EPS must be presented for each class of ordinary shares that has a different right to share in the entity’s net profit for the period. These figures are presented on the face of the statement of profit and loss.
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Continuing and Discontinued Operations:
If an entity presents a separate income statement, it must present basic and diluted EPS for both continuing and discontinued operations either in that statement or in the notes.
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Negative EPS:
Entities should present EPS data even if the amounts are negative, indicating a loss per share.
Disclosures
The disclosures required under Ind AS 33 ensure that users of financial statements have sufficient information to understand the basis of the EPS figures presented and to evaluate the entity’s future earning potential. Key disclosures include:
- Reconciliation:
A reconciliation between the numerator used in calculating both basic and diluted EPS to the net profit or loss attributable to ordinary shareholders. This includes detailing the adjustments made for the calculation of diluted EPS.
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Weighted Average Number of Shares:
Details of the weighted average number of ordinary shares used as the denominator in calculating basic and diluted EPS, and an explanation of changes in these numbers.
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Effect of Dilutive Potential Ordinary Shares:
Information on potential ordinary shares that were not included in the calculation of diluted EPS because they were anti-dilutive for the periods presented, but could potentially dilute basic EPS in the future.
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Descriptions of Instruments:
Descriptions of the nature and terms of share-based payment arrangements that could potentially dilute basic EPS in the future or that have changed during the period.
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Adjustments for Changes in Capital Structure:
If there have been changes in the entity’s capital structure that would affect the comparability of EPS, the entity should describe the nature of the change and consider adjusting the EPS of prior periods presented.
Interim Periods
While Ind AS 33 does not mandate interim period EPS disclosures, entities that choose to disclose EPS in interim financial reports should apply the same principles and methods for calculating basic and diluted EPS as they do for annual periods.
