Module 2 2 EPS BVPS - dvdvdv PDF

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MODULE 2-2

EPS & BVPS

LEARNING OBJECTIVES: 1. Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. Explain the accounting for convertible preferred stock. 3. Contrast the accounting for share warrants and for share warrants issued with other securities. 4. Describe the accounting for share compensation plans. 5. Discuss the controversy involving share compensation plans. 6. Compute earnings per share in a simple capital structure. 7. Compute earnings per share in a complex capital structure. 8. Define book value per share. 9. Compute for the book value per share. OVERVIEW PAS 33 Earnings Per Share sets out how to calculate both basic earnings per share (EPS) and diluted EPS. The calculation of Basic EPS is based on the weighted average number of ordinary shares outstanding during the period, whereas diluted EPS also includes dilutive potential ordinary shares (such as options and convertible instruments) if they meet certain criteria. The book value per share (BVPS) is a ratio that weighs stockholders' total equity against the number of shares outstanding. In other words, this measures a company's total assets, minus its total liabilities, on a per-share basis.

Acquiring new knowledge Asynchronous - links to more information: www.farhatlectures.com; http://www.ifrsbox.com Earnings per share indicates the income earned by each ordinary share.  Companies report earnings per share only for ordinary shares.  When the income statement contains discontinued operations, companies are required to report earnings per share from continuing operations and net income on the face of the income statement. Simple Structure--Only ordinary shares; no potentially dilutive securities. Complex Structure--Potentially dilutive securities are present. “Dilutive” means the ability to influence the EPS in a downward direction.

Preferred Share – non-cumulative Subtracts the current-year preference share dividend from net income to arrive at income available to ordinary shareholders, only when declared. Preference Share - Cumulative Preference dividends are subtracted on cumulative preference shares, whether declared or not.

Weighted-Average Number of Shares Companies must weight the shares by the fraction of the period they are outstanding. When share dividends or share splits occur, companies need to restate the shares outstanding before the share dividend or split. Diluted EPS – Convertible Securities Measure the dilutive effects of potential conversion on EPS using the if-converted method. This method for a convertible bond assumes: (1) the conversion at the beginning of the period (or at the time of issuance of the security, if issued during the period), and (2) the elimination of related interest, net of tax. Potential diluters: Convertible Bonds Per Share Effect of 8% Bonds (If-Converted Method), Diluted Earnings per Share Incremental EPS on bonds = Interest exp. on bonds (net) # of OS If bonds were converted Note : If incremental EPS on bonds is lower than BEPS it will give dilutive effect on EPS. Options and Warrants Diluted EPS – Options and Warrants Measure the dilutive effects of potential conversion using the treasury-share method. This method assumes: (1) company exercises the options or warrants at the beginning of the year (or date of issue if later), and (2) that it uses those proceeds to purchase ordinary shares for the treasury. Per Share Effect of Options (Treasury-Share Method), Diluted Earnings per Share Incremental shares = Option shares – Assumed Treasury Assumed TS = Option shares x (option price +FV of option) Ave. M.V. of shares Note: to determine whether option is dilutive, the option price must be lower than the average market value of shares. Convertible Preference Share Per Share Effect of 10% Convertible Preference Shares (If-Converted Method), Diluted Earnings per Share Incremental EPS on PS = PS dividends_________ # of OS if PS is converted Note: when incremental EPS is lower than BEPS, it will give dilutive effect on EPS. Steps for computing diluted earnings per share: 1. Determine, for each dilutive security, the per share effect assuming exercise/conversion. 2. Rank the results from step 1 from smallest to largest earnings effect per share. 3. Beginning with the earnings per share based upon the weighted-average of ordinary shares outstanding, recalculate earnings per share by adding the smallest per share effects from step 2. Continue this process so long as each recalculated earnings per share is smaller than the previous amount.

EPS Presentation and Disclosure A company should show per share amounts for:  Income from continuing operations,  Discontinued operations, and  Net income. Per share amounts for a discontinued operation should be presented on the face of the income statement or in the notes.

Book value per share Book value per share – measures the amount each share would received in the event of liquidation. Formula for the computation of book value per share is: Simple capital structure (one class of shares) Book value per share = Total shareholders’ equity Number of shares outstanding Complex structure (two or more classes of shares) Book value per share = Preference shareholders’ equity on preference Number of Preference shares outstanding Book value per share = Ordinary shareholders’ equity on ordinary stock Number of ordinary share outstanding Preference shareholders’ equity The preference shareholders’ equity includes the following: a. Liquidation value (Par value + Liquidation Premium) b. Equity on dividends  Preference shares are cumulative – allocate all dividends in arrears  Preference shares are non-cumulative – allocate the current year dividend only. Ordinary shareholders’ equity Is the residual amount after deducting preference shareholders’ equity from the total shareholders’ equity. The ordinary shareholders’ equity is computed as follows: Total shareholders’ equity xx Less: Preference shareholders’ equity (xx) Ordinary shareholders’ equity xx Subscription receivable For purposes of book value per share computation, subscription receivable is not deducted from total shareholders’ equity. This is because in case of corporate liquidation, any unpaid subscription must be collected and used to settle the corporation obligation to outside creditors. Illustration: One class of shares

ABC Co.’s shareholders’ equity consist of the following Share capital, P10 par, 100,000 shares issued Subscribed share capital Share premium Subscription receivable Retained Earnings Revaluation Surplus Cumulative Translation losses on foreign operation Treasury shares, at cost, 10,000 shares Total Shareholder’s equity

1,000,000 500,000 370,000 (200,000) 660,000 140,000 (100,000) (70,000) 2,300,000

Requirements: Compute for the book value per share. Solution: The number of shares outstanding is computed as follows Number of shares issued 100,000 Number of shares subscribed (500,000/10 par) 50,000 Total 150,000 Number of treasury shares (10,000) Number of shares outstanding 140,000 Book value per

=

Total shareholder’s equity Number of shares outstanding

Book value per share = 2,500,000 140,000 Book Value per share = 17.86 Subscription receivable is not deducted from the total shareholder’s equity used as numerator from the book value per share computation. The subscription receivable is simply added back, (I,e., 2,300,000 + 200,000 = 2,500,000) or simply ignored in computing for the total shareholder’s equity.

Illustration 2: Two classes of shares – Cumulative preference share ABS Co.’s year-end shareholder’s equity consists of the following: Preference share, 10% cumulative, P100 par, 20,000 shares 2,000,000 Ordinary share, 10 par, 100,000 shares issued 1,000,000 Retained Earnings 820,000 Total shareholder’s equity 3,820,000 Dividends are in arrears for three years Requirements: Compute for the book value per share for each class of shares.

Solutions: Total shareholder’s equity

3,820,000

Preference shareholder’s equity: Aggregate par value 2,000,000 Dividends in arrears (2Mx10%x3 years) 600,000 Ordinary shareholder’s equity Divide by: Number of ordinary shares outstanding Book value per share (outstanding shares)

(2,600,000) 1,220,000 / 100,000 12.20

Book value per share = Preference shareholder’s equity (Preference shares) Number of Preference share outstanding Book value per share = 2,600,000 (Preference shares) 20,000 Book value per share (Preference shares) = 130

Participating preference When preference shares are participating, the excess of the total shareholders’ equity over allocated amount to preference shares and ordinary shares is allocated to both participating shares and ordinary shares pro rate base on aggregate par values. The following are guidelines when preference shares are participating: 1. Allocate to preference share their liquidation value or aggregate par value. If preference shares are non-cumulative, allocate current years dividend only. 2. The ordinary shares are allocated one year dividends by multiplying the aggregate par par value with the preference dividend rate. If there is more than one type of preference share, the lowest rate will be used. 3. The excess of total shareholders’ equity over 1& 2 above is allocated on a pro rata base on aggregate par values. Summary:  Book value per share = Equity / number of shares outstanding  Subscription receivable is not deducted from total shareholders’ equity for purposes of book value per share computation.  Where there are two or more classes of shares capital, the total shareholders’ equity is allocated to various classes of shares using the residual equity theory.  Preference shareholders’ equity is equal to the sum of the following: a. Liquidation value or aggregate par value b. All dividends in arrears for cumulative preference; 1 year dividend for noncumulative preference share. c. Amount of participation, if preferred is participating.  If preference shares are participating, ordinary share are allocated 1-year dividends using the lowest preference dividends rate.  The balance for participation is allocated to the various classes of shares pro rata base on aggregate par value.

MODULE#2 2 Po s t t e s t

PRACT I CALACCOUNT I NG1–REVI EW EPS/ BVPS PROF . U. C. VAL LADOL I D Multiple Choice Identify the choice that best completes the statement or answers the question. 1 . OnDe c e mb e r3 1 , 2 0 2 0 , Wi n t e r t o n , I n c . h a d6 0 0 , 0 0 0s h a r e so f o r d i n a r ys t o c ki s s u e da n do u t s t a n d i n g . Wi n t e r t o ni s s u e da 1 0p e r c e n t s t o c kd i v i d e n do nJ u l y1 , 2 0 2 1 . OnOc t o b e r 1 , 2 0 2 1 , Wi n t e r t o nr e a c q u i r e d4 8 , 0 0 0s h a r e so f i t so r d i n a r y s t o c ka n dr e c o r d e dt h ep u r c h a s eu s i n gt h ec o s t me t h o do f a c c o u n t i n gf o rt r e a s u r ys t o c k . Wh a t n u mb e ro f s h a r e s s h o u l db eu s e di nc o mp u t i n gb a s i ce a r n i n g sp e rs h a r ef o rt h ey e a re n d e dDe c e mb e r3 1 , 2 0 2 1 ? a .6 1 2 , 0 0 0 b .6 1 8 , 0 0 0 c .6 4 8 , 0 0 0 d .6 6 0 , 0 0 0

2 .At De c e mb e r3 1 , 2 0 2 0 , Ma v i sCo mp a n yh a d1 5 0 , 0 0 0s h a r e so f o r d i n a r ys t o c ki s s u e da n do u t s t a n d i n g . OnAp r i l 1 , 2 0 2 1 , a na d d i t i o n a l 3 0 , 0 0 0s h a r e so f o r d i n a r ys t o c kwe r ei s s u e d . Ma v i s ' sn e t i n c o mef o r t h ey e a re n d e dDe c e mb e r 3 1 , 2 0 2 1 , wa s5 1 7 , 5 0 0 . Du r i n g2 0 2 1 , Ma v i sd e c l a r e da n dp a i d3 0 0 , 0 0 0i nc a s hd i v i d e n d so ni t sn o n c o n v e r t i b l e p r e f e r r e ds t o c k . Th eb a s i ce a r n i n g sp e ro r d i n a r ys h a r e , r o u n d e dt ot h en e a r e s t p e n n y , f o r t h ey e a re n d e dDe c e mb e r 3 1 , 2 0 2 1 , s h o u l db e a .3 . 0 0 b .2 . 0 0 c .1 . 4 5 d .1 . 2 6

3 .Th eEg l i n t o nCo mp a n y ' sn e t i n c o mef o r t h ey e a re n d e dDe c e mb e r3 1wa s3 0 , 0 0 0 . Du r i n gt h ey e a r , Eg l i n t o nd e c l a r e d a n dp a i d3 , 0 0 0i nc a s hd i v i d e n d so np r e f e r r e ds t o c ka n d5 , 2 5 0i nc a s hd i v i d e n d so no r d i n a r ys t o c k . At De c e mb e r3 1 , 3 6 , 0 0 0s h a r e so f o r d i n a r ys t o c kwe r eo u t s t a n d i n g , 3 0 , 0 0 0o f wh i c hh a db e e ni s s u e da n do u t s t a n d i n gt h r o u g h o u t t h e y e a r a n d6 , 0 0 0o f wh i c hwe r ei s s u e do nJ u l y1 . Th e r ewe r en oo t h e ro r d i n a r ys t o c kt r a n s a c t i o n sd u r i n gt h ey e a r , a n d t h e r ei sn op o t e n t i a l d i l u t i o no f e a r n i n g sp e rs h a r e . Wh a t s h o u l db et h ey e a r ' sb a s i ce a r n i n g sp e ro r d i n a r ys h a r eo f Eg l i n t o n , r o u n d e dt ot h en e a r e s t p e n n y ? a .0 . 6 6 b .0 . 7 5 c .0 . 8 2 d .0 . 9 1

4 .Du n d a s , I n c . h a d1 5 0 , 0 0 0s h a r e so f o r d i n a r ys t o c ki s s u e da n do u t s t a n d i n ga t De c e mb e r3 1 , 2 0 2 0 . OnJ u l y1 , 2 0 2 1 , a na d d i t i o n a l 2 5 , 0 0 0s h a r e so f o r d i n a r ys t o c kwe r ei s s u e df o r c a s h . Du n d a sa l s oh a du n e x e r c i s e ds t o c ko p t i o n st o p u r c h a s e2 0 , 0 0 0s h a r e so f o r d i n a r ys t o c ka t 1 5p e r s h a r eo u t s t a n d i n ga t t h eb e g i n n i n ga n de n do f 2 0 2 1 . Th ema r k e t p r i c eo f Du n d a so r d i n a r ys t o c kwa s2 0t h r o u g h o u t 2 0 2 1 . Wh a t n u mb e r o f s h a r e ss h o u l db eu s e di nc o mp u t i n gd i l u t e d e a r n i n g sp e rs h a r ef o rt h ey e a r e n d e dDe c e mb e r 3 1 , 2 0 2 1 ? a .1 8 2 , 5 0 0 b .1 8 0 , 0 0 0 c .1 7 7 , 5 0 0 d .1 6 7 , 5 0 0

5 .Hu r o n t a r i oEn t e r p r i s e sh a d2 0 0 , 0 0 0s h a r e so f o r d i n a r ys t o c ki s s u e da n do u t s t a n d i n ga t De c e mb e r 3 1 , 2 0 2 0 . OnJ u l y 1 , 2 0 2 1 , Hu r o n t a r i oi s s u e da1 0p e r c e n t s t o c kd i v i d e n d . Un e x e r c i s e ds t o c ko p t i o n st op u r c h a s e4 0 , 0 0 0s h a r e so f o r d i n a r ys t o c k( a d j u s t e df o rt h e2 0 2 1s t o c kd i v i d e n d )a t 2 0p e r s h a r ewe r eo u t s t a n d i n ga t t h eb e g i n n i n ga n de n do f 2 0 2 1 . Th ema r k e t p r i c eo f Hu r o n t a r i o ' so r d i n a r ys t o c k( wh i c hwa sn o t a ff e c t e db yt h es t o c kd i v i d e n d )wa s2 5p e r s h a r ed u r i n g2 0 2 1 . Ne t i n c o mef o r t h ey e a re n d e dDe c e mb e r3 1 , 2 0 2 1 , wa s1 , 1 0 0 , 0 0 0 . Wh a t s h o u l db eHu r o n t a r i o ' s 2 0 2 1d i l u t e de a r n i n g sp e r o r d i n a r ys h a r e , r o u n d e dt ot h en e a r e s t p e n n y ? a .4 . 2 3 b .4 . 8 2 c .5 . 0 0 d .5 . 0 5

6 .OnJ a n u a r y2 , 2 0 2 0 , L a k e s h o r eCo . i s s u e da t p a r5 0 , 0 0 0o f 4p e r c e n t b o n d sc o n v e r t i b l e , i nt o t a l , i n t o5 , 0 0 0s h a r e so f L a k e s h o r e ' so r d i n a r ys t o c k . Nob o n d swe r ec o n v e r t e dd u r i n g2 0 2 0 . Th r o u g h o u t 2 0 2 0L a k e s h o r eh a d5 , 0 0 0s h a r e so f o r d i n a r ys t o c ko u t s t a n d i n g . L a k e s h o r e ' s2 0 2 0n e t i n c o mewa s5 , 0 0 0 . L a k e s h o r e ' si n c o met a xr a t ei s4 0p e r c e n t . No p o t e n t i a l l yd i l u t i v es e c u r i t i e so t h e rt h a nt h ec o n v e r t i b l eb o n d swe r eo u t s t a n d i n gd u r i n g2 0 2 0 . L a k e s h o r e ' sd i l u t e d e a r n i n g sp e rs h a r ef o r2 0 2 0wo u l db e a .0 . 5 8 . b .0 . 6 2 . c .0 . 7 0 . d .1 . 1 6 .

7 .At De c e mb e r3 1 , 2 0 2 0 , t h eQu e e nCo mp a n yh a d7 0 0 , 0 0 0s h a r e so f o r d i n a r ys t o c ko u t s t a n d i n g . OnSe p t e mb e r 1 , 2 0 2 1 , a na d d i t i o n a l 3 0 0 , 0 0 0s h a r e so f o r d i n a r ys t o c kwe r ei s s u e d . I na d d i t i o n , Qu e e nh a d2 0 , 0 0 0 , 0 0 0o f 8p e r c e n t c o n v e r t i b l eb o n d so u t s t a n d i n ga t De c e mb e r3 1 , 2 0 2 0 , wh i c ha r ec o n v e r t i b l ei n t o4 0 0 , 0 0 0s h a r e so f o r d i n a r ys t o c k . No b o n d swe r ec o n v e r t e di n t oo r d i n a r ys t o c ki n2 0 2 1 . T h en e t i n c o mef o rt h ey e a re n d e dDe c e mb e r3 1 , 2 0 2 1 , wa s 6 , 0 0 0 , 0 0 0 . As s u mi n gt h ei n c o met a xr a t ewa s4 0p e r c e n t , wh a t s h o u l db et h ed i l u t e de a r n i n g sp e rs h a r ef o r t h ey e a r e n d e dDe c e mb e r3 1 , 2 0 2 1 ? a .5 . 0 0 b .5 . 5 3 c .5 . 8 0 d .8 . 3 0

8 .Th e2 0 2 1n e t i n c o meo f At wa t e r I n c . wa s2 0 0 , 0 0 0a n d1 0 0 , 0 0 0s h a r e so f i t so r d i n a r ys t o c kwe r eo u t s t a n d i n gd u r i n g t h ee n t i r ey e a r . I na d d i t i o n , t h e r ewe r eo u t s t a n d i n go p t i o n st op u r c h a s e1 0 , 0 0 0s h a r e so f o r d i n a r ys t o c ka t 1 0p e r s h a r e . T h e s eo p t i o n swe r eg r a n t e di n2 0 2 0a n dn o n eh a db e e ne x e r c i s e db yDe c e mb e r 3 1 , 2 0 2 1 . Ma r k e t p r i c e so f At wa t e r ' so r d i n a r ys t o c kd u r i n g2 0 2 1we r e J a n u a r y1 De c e mb e r 3 1 Av e r a g ePr i c e

2 0p e rs h a r e 4 0p e rs h a r e 2 5p e rs h a r e

T h ea mo u n t t h a t s h o u l db es h o wna sAt wa t e r ' sd i l u t e de a r n i n g sp e rs h a r ef o r 2 0 2 1( r o u n d e dt ot h en e a r e s t c e n t )i s a .2 . 0 0 . b .1 . 9 5 .

c .1 . 8 9 . d .1 . 8 6 .

9 .Al b e r t aI n c o r p o r a t e dh a s2 , 5 0 0 , 0 0 0s h a r e so f o r d i n a r ys t o c ko u t s t a n d i n go nDe c e mb e r 3 1 , 2 0 2 0 . Ana d d i t i o n a l 5 0 0 , 0 0 0s h a r e so f o r d i n a r ys t o c kwe r ei s s u e dAp r i l 1 , 2 0 2 1 , a n d2 5 0 , 0 0 0mo r eo nJ u l y1 , 2 0 2 1 . OnOc t o b e r1 , 2 0 2 1 , Al b e r t ai s s u e d5 , 0 0 0 , 1 , 0 0 0f a c ev a l u e , 7p e r c e n t c o n v e r t i b l eb o n d s . Ea c hb o n di sc o n v e r t i b l ei n t o4 0s h a r e so f o r d i n a r ys t o c k . Nob o n d swe r ec o n v e r t e di n t oo r d i n a r ys t o c ki n2 0 2 1 . Wh a t i st h en u mb e ro f s h a r e st ob eu s e di n c o mp u t i n gb a s i ce a r n i n g sp e rs h a r ea n dd i l u t e de a r n i n g sp e r s h a r e , r e s p e c t i v e l y ? a .2 , 8 7 5 , 0 0 0a n d2 , 9 2 5 , 0 0 0 b .2 , 8 7 5 , 0 0 0a n d3 , 0 7 5 , 0 0 0 c .3 , 0 0 0 , 0 0 0a n d3 , 0 5 0 , 0 0 0 d .3 , 0 0 0 , 0 0 0a n d3 , 2 0 0 , 0 0 0

1 0 .Th ef o l l o wi n gs h a r ec a p i t a l t r a n s a c t i o n sp e r t a i n st oNe wt o nf o rt h ey e a r 2 0 2 1 : J a n u a r y1 Sh a r e so u t s t a n d i n g 4 4 , 0 0 0 F e b r u a r y1 Sh a r e si s s u e df o r c a s h 5 6 , 0 0 0 Ma y1 s h a r e sr e a c q u i r e d 2 5 , 0 0 0 Au g u s t 1Re c e i p t o f 2 5 %s t o c kd i v i d e n d s Se p t e mb e r 1 Re s o l dp a r t o f t r e a s u r ys h a r e 1 0 , 0 0 0 No v e mb e r 1 I s s u e d2 f o r 1s t o c ks p l i t Wh a t i st h ewe i g h t e da v e r a g eo r d i n a r ys h a r eo u t s t a n d i n g ? a . 1 8 7 , 5 0 0 b . 2 0 3 , 3 3 3 c . 2 0 7 , 5 0 0 d . 2 5 0 , 0 0 0

1 1 .MI SSI SSAUGA Co r p o r a t i o n ' ss t a t e me n to ffi n a n c i a lp o s i t i o na tDe c e mb e r3 1 ,2 0 1 9r e p o r t st h ef o l l o wi n g s h a r e h o l d e r ' se q u i t yb a l a n c e s : 8 %Pr e f e r e n c eSh a r eCa p i t a l , P3 0p a r , 5 0 , 0 0 0s h a r e si s s u e da n do u t s t a n d i n g–1 , 5 0 0 , 0 0 0 Or d i n a r ySh a r eCa p i t a l , P1 0p a rv a l u e , 9 0 , 0 0 0s h a r e si s s u e da n do u t s t a n d i n g -9 0 0 , 0 0 0 Ad d i t i o n a l Pa i di nCa p i t a l –4 5 0 , 0 0 0a n dRe t a i n e dEa r n i n g s–3 5 0 , 0 0 0 Di v i d e n do np r e f e r r e ds t o c kh a v eb e e np a i dt h r o u g h2 0 1 6b u t h a v en o t b e e nd e c l a r e df o r 2 0 1 7a n d2 0 1 8 If the preference share is cumulative and has a liquidation value of P 45, what is the book value per ordinary share? a. P 6.56 b. P 10.56 c. P 52.20 d. P 49.80

1 2 .L OEBCo mp a n y ' ss t o c k h o l d e r s ' e q u i t ya t De c e mb...