Question

Situation: In 2019, its first year of operations, Kanbec Corporation appropriately reported basic earnings per share of $1.05 on its income statement. During 2020, the company instituted a share option plan and is required to report both basic and diluted earnings per share of $1.12 and $0.98, respectively, on its 2020 income statement. In its 2020 annual report, Kanbec presents comparative income statements for 2019 and 2020.

Directions: Research the related generally accepted accounting principles and prepare a short memo to Kanbec's president that explains how to report the 2019 and 2020 comparative earnings per share in its 2020 annual report. Cite reference and applicable paragraph numbers.

Answer 1

Earnings per Share (EPS) represents the Company's Profit per share basis. The formula for EPS is as below.

EPS = (Profit after Tax - Dividend for Preference Shareholders)/Total Outstanding Shares

Diluted Earnings Per Share represents the earnings per share after condering all the convertible securities into shares in the next financial year. The formula for the Diluted earnings per share is as follows.

Diluted EPS = (Profit after Tax + Savings for dilution - Dividend for Preference Shareholders)/(Total Outstanding Shares+Convertible Securities)

** Savings for dilution means, in case of Debentures converted into shares then the interest paid on such debentures and the tax thereon is a saving to the company. Therefore that should also be considered as a gain as a result of such dilution.

IAS 33 (Earnings per Share) is mandatory for all companies. However, disclosure of diluted earnings per share (both including and excluding extraordinary items) is not mandatory for Small and Medium Sized Companies, as defined in the Notification. Such companies are however encouraged to make these disclosures.

In the Present case Share Options and othershare purchase arrangements are dilutive when they would result in the issue of equity shares for less than fair value. The amount of the dilution is fair value less the issue price. The calculation of Weighted average number of Shares should also be disclosed as per IAS 33-Disclosure Requirements at paragragh 73.

Potential equity shares should be treated as dilutive when, and only when, their conversion to equity shares would decrease net profit per share from continuing ordinary operations.

Disclosures required for the Year 2020.

1. Profit After Tax.

2. Weighted Average Number of Shares Claculation.

3. Earnings Per Share.

4. Profit After Tax after Dilution .

5. Weighted Average number of Shares after share Options.

6. Diluted Earnings Per Share.

Disclosures required for the Year 2019.

1. Profit After Tax (EPS X No.of Shares Outstanding as on the Closing Date of the Year)

2. Profit After Tax after considering Dilution (Equal to the EPS in the present case)

3. Weighted Average number of Shares after share Options.

4. Diluted Earnings per Share Claculation.