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Ind AS 33, “Earnings per Share,” is an important accounting standard that provides guidance on the calculation, presentation, and disclosure of earnings per share (EPS) for entities preparing financial statements in accordance with the Indian Accounting Standards (Ind AS). In this comprehensive guide, we will delve into the key aspects of Ind AS 33, its objectives, calculation methodologies, and the significance of EPS in assessing an entity’s financial performance.
Scope and Objective:-
Ind AS 33 aims to enhance the transparency and comparability of financial reporting by requiring entities to disclose earnings per share information. EPS is a key performance measure that provides insights into an entity’s profitability and helps investors and analysts assess the financial performance and potential returns of an investment. Ind AS 33 applies to entities whose equity instruments are publicly traded or have the potential to be publicly traded.
Types of Earnings per Share:-
Ind AS 33 provides guidance on the calculation of basic earnings per share (BEPS) and diluted earnings per share (DEPS).
Basic Earnings per Share (BEPS):-
BEPS 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. It represents the earnings available to each ordinary share without considering potential dilution.
Diluted Earnings per Share (DEPS):-
DEPS takes into account the potential dilution of ordinary shares from instruments such as stock options, convertible securities, or other contingently issuable shares. DEPS reflects the impact of all potential dilutive instruments on the earnings per share calculation.
How to calculate EPS:-
Calculating earnings per share (EPS) involves a few key steps to determine the profitability of a company on a per-share basis. Let’s break down the process:
Step 1: Gather the Financial Statements:-
Start by collecting the necessary financial statements, typically the income statement and the weighted average number of shares outstanding.
Step 2: Determine the Net Profit or Loss:-
Identify the net profit or loss figure attributable to ordinary shareholders from the income statement. This represents the company’s earnings available to distribute among its shareholders.
Step 3: Adjust for Special Items:-
Make any necessary adjustments to the net profit or loss figure to exclude any extraordinary or non-recurring items. These items could include gains or losses from the sale of assets, restructuring costs, or one-time expenses.
Step 4: Weighted Average Number of Shares:-
When calculating EPS under Ind AS 33, one of the key components is the determination of the weighted average number of shares outstanding during the reporting period. This figure is crucial as it reflects the number of shares that were actually available for trading and held by investors during the period. We need to consider factors like rights issues, sweat equity shares, bonus shares, and other potential share issuances or conversions.
Rights Issues:-
In the case of rights issues, where existing shareholders are given the opportunity to purchase additional shares, the weighted average number of shares is adjusted to reflect the impact of these new shares. The adjustment is made from the date the rights become exercisable until the end of the reporting period.
Sweat Equity Shares:-
Sweat equity shares are issued to employees or directors as part of their compensation. When calculating the weighted average number of shares, the period over which the sweat equity shares vest is taken into account. Only the vested portion of the shares is included in the calculation.
Bonus Shares:-
Bonus shares are issued to existing shareholders without any additional cost. When calculating the weighted average number of shares, the bonus shares are considered as if they were outstanding for the entire reporting period. The number of bonus shares is added to the total shares outstanding in the calculation.
Convertible Instruments:-
If the company has convertible instruments, such as convertible bonds or preference shares, the potential impact on the weighted average number of shares is evaluated. The potential dilution effect of these instruments is factored into the calculation based on their conversion terms and the probability of conversion.
Step 5: EPS:-
After computing the adjusted net profit attributable to equity shareholders (step:3) and the Weighted average no of shares (step:4), we divide profit by no of shares and get the EPS.
Disclosure Requirements:-
Ind AS 33 mandates certain disclosures to provide additional information related to earnings per share. These disclosures include:
Reconciliation:-
Entities are required to provide a reconciliation of the numerator and denominator used in the earnings per share calculation, showing the adjustments made for extraordinary items, discontinued operations, or other significant events.
EPS of Discontinued Operations:-
When an entity has discontinued operations during the reporting period, it must disclose the EPS from continuing operations separately from the EPS from discontinued operations.
Weighted Average Number of Shares:-
Entities must disclose the weighted average number of ordinary shares used in the EPS calculation, considering any changes in the number of shares outstanding during the reporting period.
Importance of EPS:-
EPS is a critical financial metric that helps investors and stakeholders assess an entity’s profitability, track its performance over time, and make informed investment decisions. It provides valuable insights into the earnings available to shareholders and the potential returns on their investments.
In conclusion, Ind AS 33, plays a crucial role in promoting transparency and comparability in financial reporting. By providing clear guidelines for the calculation and disclosure of EPS, this standard enables stakeholders to assess an entity’s financial performance and make informed investment decisions.