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Chapter 24


Book value per share amount each share would receive assuming the entity is liquidated and
its assets are sold and liabilities are settled exactly at the amounts reported on the statement of
financial position.

Formula (One Class)


Formula (Two Classes)


Residual Equity Theory states that ordinary SHE is the residual amount after deducting
preference SHE from total SHE.
Ordinary SHE = Total SHE Preference SHE

Preference SHE = Liquidation (aggregate par) value + PS Dividends (in arrears only)
Order of priority of Pref. SHE book value allocation
o Liquidation value
o Aggregate par value

Cumulative PS: all dividend in arrears are allocated

Noncumulative PS: current year dividend only, if it is in arrear

No dividend in arrears, no dividends allocated.

Outstanding shares shares entitled to dividends

Outstanding shares = Issued + Subscribed Treasury

Issued shares = Share capital (OS Cap. or PS Cap.) par value

Subscribed shares = Subscribed share capital par value

Treasury shares = Treasury shares (cap.) cost per share (cost method)
Subscription receivable is NOT DEDUCTED from Total SHE in computation of BPS.

Trust Fund Doctrine states that in case of corporate liquidation, any unpaid subscription must
be collected and used to settle the corp. obligations to creditors.

Participating Preference Shares: excess of Total SHE from [(Liquidation or Aggregate par +
Basic dividends (Div. in arrears + OS div.)] is allocated to PS and OS pro-rata.

Basic dividends:
o PS: cumulative, all div. in arrears
: noncumulative, one year dividends, if in arrear
: no div. in arrears, no dividends
o OS: one year dividends, using preference dividend rate
Participating PS with two types of PS: LOWEST preference dividend rate is used.

Chapter 25


PAS 33 Earnings per share

Earnings per share probability ratio representing how much was earned by each ordinary share
during the period


Ordinary share equity instrument subordinate to all other classes of equity instruments

Preference share equity or debt instrument that gives holder some preference over holders of
ordinary shares which preference over dividends and assets in case of liquidation

Uses of EPS
o Assesses the value of entitys shares (the higher ratio, the better)
o Measures comparability when measuring performance of different entities
o Basis for dividend policy (the higher the profit, higher dividends will be declared)

Types of EPS
o Basic EPS
o Dilutive EPS
Two types of EPS must be presented with EQUAL PROMINENCE

Basic EPS =

Profit, loss and preferred dividends should be NET OF INCOME TAX EXPENSE
Preference Dividends

Cumulative, ONE YEAR dividend, WHETHER OR NOT has been declared

Noncumulative, recognized JUST WHEN DECLARED, no declared, no dividends

Ordinary dividends are IGNORED

Unusual and infrequent losses or gains (i.e. expropriation loss) are INCLUDED in profit (loss)
used in computation
Dividends from redeemable preference shares are IGNORED, it was treated as interest expense
and already deducted from the profit given.

If the problem is SILENT, assume that:

o Tax has been deducted
o Noncumulative
o No dividends declared

Participating preference shares are treated as special ordinary shares and HAS EPS.

Profit allocation on participating preference shares (pro-rata basis)

o Allocate basic dividends on OS and PS
o Allocate the EXCESS shares using pro-rata basis (ratio of aggregate par) on OS and PS

Profit allocation on participating PS (per-share basis)

o Allocate basic dividends on OS and PS to get the UNDISTRIBUTED EARNINGS

o Solve algebraically using:
UE = (Y x OS) + (rY x PS)
UE = undistributed earnings
Y = EPS of undistributed earnings
r = Preference rate of participation
o Compute basic EPS of the distributed earnings
o Basic EPS = EPS of distributed earnings + Y
o Multiply basic EPS to outstanding shares

Weighted Average Number of Ordinary Shares (WAOS) number of OS outstanding at the

beginning of the period, adjusted by the number of OS issued or reacquired during the period
multiplied by the number of days the shares are outstanding as a proportion of the total number of
days in the period
Considerations in WAOS computation, OS issued in exchange for:
o Cash date receivable
o Non-cash assets date of acquisition
o Services services rendered
o Settlement of liabilities date of settlement
o Result of debt instrument conversion date interest CEASES to accrue
o Treasury shares acquired EXCLUDED date of acquisition
o Subscribed OS INCLUDED to the extent of participation
o Share splits date from the time of original shares until share splits are issued
o Bonus issue date when shares affected are issued
o Consideration for business combination date of acquisition
o Convertible PS date contract is entered into
o Contingently issuable shares OUTSTANDING on date when conditions are SATISFIED
o Contingently returnable NOT OUTSTANDING, EXCLUDED on BPS calculation on date
shares are no longer subject to recall
o In place of interest or principal date that interest CEASES to accrue
o Voluntary reinvestment of dividends date when dividends are reinvested

RETROSPECTIVE adjustment is used for issuance of shares without a corresponding change in

resources such as: (made a the date of issuance)
o Capitalization or bonus issue (share dividend)
o Bonus element (preemptive stock rights)
o Share split (increase in shares but decreases par value)
o Reverse share split (decreases share but increases par value)

When stock (share) rights are issued to existing shareholders, WAOS BEFORE the issue is
multiplied by the adjustment factor.

WAOS computation on stock rights:

o Value of 1 right =

o FV ex right = Right on Value of 1 right

o Adjustment Factor =
o WAOS = Outstanding shares Adjustment factor

OS after rights = OS before rights + OS issued on rights, to be used after issuance of rights

Adjustment factor is not applied anymore to the OS after exercise date

Increasing rate preference shares provides for a low initial dividend to compensate an entity for
selling the PS at a discount, or an above market dividend to compensate investors for purchasing
PS at a premium; AMORTIZED

FV consideration < CV of PS, gain, added to P/L

FV consideration > CV of PS, loss, deducted to P/L

Imputed dividend = CV x preference dividend rate

Discount liability = CV imputed dividend

CV = CV (prior) + imputed dividend

Amortization of discount liability is by transferring it to retained earnings (Dr. RE; Cr. DL)

Discount liability contra-equity account to the PS capital presented in SFP

Discount liability is DEDUCTED to profit in the computation of EPS

Diluted EPS profit for the period per share, reflecting the maximum dilutions that would have
resulted from conversions, exercises, and other contingent issuances that individually would have
decreased EPS and in the aggregate wouldve had a dilutive effect

Simple capital structure no potential OS are potentially dilutive

Complex capital structure has potential OS that are potentially dilutive

Potential OS financial instrument or contract that may ENTITLE its holder to OS

Examples of OS:
o Convertible PS and convertible bonds
o Options and warrants
o Share to be issued upon satisfaction of conditions

Options, warrants financial instruments that give the holder the right to purchase OS
Put options contracts that give the holder the right to sell OS at a specified price

Dilution reduction in EPS (increase in LPS) from the assumption that convertible instruments
are converted, that options or warrants are exercised, or that OS are issued upon satisfaction of
specified conditions

Antidilution increase in EPS (reduction in LPS) from the assumption that convertible
instruments are converted, that options or warrants are exercised, or that OS are issued upon
satisfaction or specified conditions

Dilutive potential OS
o reduce EPS (kasi dumadami ang WAOS)
o Exercise price < Market value of OS
o Treated as if converted as of the DATE dilutive potential OS BECOME OUTSTANDING

Antidilutive potential OS
o increase EPS (kasi kumukonti ang WAOS)
o Exercise price > Market value of OS

Dilutive EPS =

Convertible PS
o NO ADJUSTMENT to P/L for any dividends
o If Dilutive EPS > Basic EPS, its antidilutive, ONLY BASIC EPS is reported

Convertible bonds
o Interest expense (net of tax) is ADDED BACK to the profit (loss)
o Basic EPS preference dividends IGNORED, this is BONDS, not PS

Convertible bonds (converted during the period)

o Basic EPS WAOS additional shares are included, WEIGHTED from conversion date
o Interest expense matures until conversion date

Convertible bonds (issued during the period)

o Basic WAOS NOT AFFECTED because there was no actual conversion (i.e. addition to
shares outstanding)
o Interest expense only starts to mature from the DATE OF ISSUANCE
o Dilutive EPS WAOS WEIGHTED from the issuance date
Convertible bonds (effective interest method)
o Interest expense = PV (PV of single payment of bonds + PV of ordinary annuity of
interest) x EIR x 70%
Nonconvertible PS
o Basic dividends Pref. div. is DEDUCTED from P/L
o Numerator would be = Profit (loss)+ interest on CONVERTIBLE BONDS x 70% Pref.
div on Nonconvertible PS

Treasury Share Method used for computing the incremental shares for computing diluted EPS
of options, warrants and their equivalents

Assumption: Options or warrants are exercised and the proceeds received are used to purchase
treasury shares at the average market price

Computing incremental shares:

o Total exercise price = Exercise price + FV per option
o Proceeds = Option shares x Total exercise price
o Treasury shares =
o Incremental shares = Option shares Treasury shares

Treasury share method (basic)


Treasury share method (options issued during the year)

o Incremental shares WEIGHTED starting from exercise date

Treasury share method (options actually exercised)

o Average market price used is on the EXERCISE DATE
o Dilutive EPS WAOS
OS Outstanding
Incremental shares WEIGHTED UNTIL exercise date
Option shares WEIGHTED FROM the exercise date

Contracts that may be settled in OS or cash

o Entitys option
o Holders option

Entitys option
o Presume, OS settlement
o Incremental shares are INCLUDED if the effect is DILUTIVE
o NO NEED to apply treasury share method

Holders option
o Cash or OS, whichever is MORE DILUTIVE

Option right to purchase OS in accordance with an agreement upon payment of specified

o Put options right to SELL OS at a specified price
o Call options right to PURCHASE OS at a specified price
o Purchase options option is purchased from another entity
o Written options written by an entity and sold to a purchaser

Purchase options are NOT INCLUDED in dilutive EPS computation because theyre antidilutive
Put options are EXERCISED ONLY when exercise price > market price, dilutive

Call options are EXERCISED ONLY when exercise price < market price, dilutive
Computing incremental shares:
o Proceeds = Option shares x Exercise (repurchase) price
o Share assumed to be issued =
o Incremental shares = Shares assumed to be issued Option shares

EPS is presented EVERY PERIOD (based on statement of P/L and other comprehensive income)

Diluted EPS is reported even if it EQUALS basic EPS

Diluted EPS > Basic EPS, NOT REPORTED, its antidilutive

More than one potential OS must be ranked based on dilutive effects
o Most dilutive, LEAST incremental EPS first
o Least dilutive, GREATEST incremental EPS last

Test for dilution (Different potential OS):

o Options and warrants (often MOST DILUTIVE among other potential OS)
Exercise price < Market price, dilutive
Exercise price > Market price, antidilutive

o Convertible bonds

Incremental EPS =

o Convertible preference shares

Incremental EPS =

EPS computation for multiple potential OS

o Compute basic EPS for, continuing operations, discontinued operations and total for the
o Rank the potential OS
o Compute diluted EPS by GRADUALLY considering the potential OS starting from rank 1
o Stop when diluted EPS have increased (it should gradually decreased), its antidilutive
o Compute for the E(L)PS on discontinued operations
o Compute for the diluted EPS

Contingently issuable shares OS issuable for little or no cash or other consideration upon
satisfaction of specified conditions in a contingent share agreement
o Basic EPS OS are outstanding from the DATE OF CONDITIONS ARE MET. In case of
the need for maintenance of condition, no shares are included until the end of contingency
o Dilutive EPS OS outstanding from the DATE OF CONTINGENT SHARE AGREEMENT.
In case conditions are not satisfied, restatement is NOT PERMITTED
If shares are only partly entitled to dividends, such are considered PARTLY OUTSTANDING.