CFAS

PAS 33 - EARNINGS PER SHARE

BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
Example: If Company A and Company B both have
1,000 shares but calculate them differently (e.g.,
counting extra shares for employee bonuses), the
LEARNING OBJECTIVES:
comparison would be unfair. PAS 33 ensures both
1. Explain how basic EPS is computed.
companies calculate shares in the same way.
2. Explain how diluted EPS is computed.

PAS 33 requires publicly listed entities, including those

in the process of enlisting, to present EPS information.
INTRODUCTION A publicly listed entity is one whose ordinary shares or
potential ordinary shares are traded in a public market
PAS 33 prescribes the principles in computing and (e.g., Philippine Stock Exchange 'PSE').
presenting eamings per share (EPS) to promote inter-
and intra-comparability of performance of entities. - Publicly listed companies must present EPS.

- PAS 33 promotes comparability of performance ● Simplified explanation: Companies whose

through EPS. shares are traded in the stock market (e.g.,
the Philippine Stock Exchange) must show
● Simplified explanation: PAS 33 ensures EPS in their financial reports. This also applies
companies calculate and report Earnings Per to companies planning to list on the stock
Share (EPS) in a standard way. This helps market.
people compare:
● Between companies (e.g., Company A vs. Example: A company like Jollibee, listed on the stock
Company B) exchange, must include EPS when reporting its
● Within the same company over time (e.g., financial results.
Company A’s performance in 2022 vs. 2023).
Non-publicly listed entities are not required to present
Example: If two companies report EPS differently, EPS information. However, if they choose to do so, they
investors might struggle to see which one is truly will need to apply PAS 33.
better. PAS 33 solves this by setting common rules.
- Non-listed companies are not required to present EPS
Because of differing accounting policies, PAS 33 but must follow PAS 33 if they do.
recognizes that EPS data may have limitations -
particularly on "earnings" which is the numerator in the ● Simplified explanation: Private companies
EPS calculation. don’t have to report EPS. However, if they
decide to, they must follow the same rules as
- EPS data may have limitations due to differing listed companies under PAS 33.
accounting policies.
Example: A private company like a local coffee shop
● Simplified explanation: The way companies doesn’t need to show EPS. But if they want to attract
calculate their profits (earnings) can differ investors by showing EPS, they need to follow PAS 33.
due to unique accounting policies. This can
make EPS less reliable or harder to compare. If both consolidated and separate tinancial statements
are prepared, EPS is required only for the consolidated
Example: If Company A records profits differently from financial statements.
Company B (e.g., handling revenue or expenses
differently), their EPS might not reflect a fair - EPS is required only for consolidated financial
comparison. statements.

Therefore, the focus of PAS 33 is on the consistent ● Simplified explanation: If a company

determination of the denominator of the EPS prepares two sets of financial statements:
calculation. ● Consolidated (combining the parent company
and its subsidiaries)
- PAS 33 focuses on consistent calculation of shares ● Separate (for just the parent company),
(denominator).
EPS is needed only in the consolidated statements.
● Simplified explanation: Since the “earnings”
part (profits) might vary due to accounting Example: If a holding company owns multiple
policies, PAS 33 emphasizes calculating the businesses (e.g., malls, hotels, and supermarkets), it
number of shares (denominator) consistently.
This reduces errors in comparisons.

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
calculates 1st SEMESTER │A.Y. 2024 - 2025
and shows Example: If a company earns ₱1,000 and has both
EPS for the combined group, not just one of its preference and ordinary shares:
businesses. ● Preference shareholders get their fixed
dividends first (e.g., ₱500).
● The remaining ₱500 is split among ordinary
Earnings Per Share shareholders.

Earnings per share (EPS) is a computation made for Ordinary shares participate in profit for the period
ordinary shares. It is a form of profitability ratio which after all other classes of shares (e.g, preference shares)
provides a measure of how much profit (loss) each have participated.
ordinary share has earned (incurred) during the period.
4. Ordinary shares can have different types (alphabet
1. EPS measures profitability per ordinary share. shares).
● Simplified explanation: Earnings Per Share ● Simplified explanation: A company might
(EPS) shows how much profit (or loss) each issue different types of ordinary shares, like
ordinary share earned during a specific time “Class A” and “Class B.” These can have
period. It helps investors see how profitable a different rights, such as voting power. Some
company is on a per-share basis. shares (e.g., super voting shares) give
founders or key insiders more control over
Example: If a company makes ₱100,000 profit and has decisions.
10,000 ordinary shares, EPS = ₱10 per share. This Example:
means each share earned ₱10 in profit. ● Class A shares: 1 vote per share.
● Class B shares (super voting shares): 10 votes
per share.
● This setup allows founders to keep control
Normally, no EPS is computed for preference shares even if other investors own most of the
because they have a fixed return, as represented by company.
their dividend rates. In some cases, however, EPS may
be computed for preference shares when they are also
entitled to a variable return in addition to their fixed Preference share - is one that has preference over
return (e.g. participating preference shares). Such other classes of shares, such as preference over
preference shares are considered special ordinary dividends or preference over net assets in cases of
shares for purposes of EPS computation. liquidation, but typically does not have voting rights.

2. EPS is not usually computed for preference shares. 5. What are preference shares?
● Simplified explanation: Preference shares
usually earn a fixed amount, like a set ● Simplified explanation: Preference shares
dividend, so EPS isn’t calculated for them. give certain advantages over ordinary
However, if preference shares can earn extra shares, like priority in receiving dividends or
(beyond the fixed return), they are treated money during liquidation. However, they
like ordinary shares for EPS calculation. usually don’t let holders vote on company
Example: decisions.
● Regular preference shares: Earn a fixed 5% Example:
dividend, so no EPS is needed. ● If a company liquidates and has ₱10,000 left:
● Participating preference shares: Earn a 5% ● Preference shareholders might receive
fixed dividend plus extra if the company does ₱8,000.
well. For these, EPS might be calculated. ● Ordinary shareholders split the remaining
₱2,000.
● Preference shareholders have the
Ordinary share - is an equity instrument that is “preference” to get paid first.
subordinate to all other classes of equity instruments."
(PAS 33.5) Types of Earnings per share
PAS 33 requires the following two presentations of
3. What are ordinary shares? EPS:

● Simplified explanation: Ordinary shares are 1. Basic earnings per share

the most basic type of shares. They are the 2. Diluted earnings per share
last to get paid if the company distributes
profits or liquidates (closes and sells off its If the entity does not have dilutive potential ordinary
assets). shares, it presents basic earnings per share only.

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
Basic Earnings per share
1. Basic Earnings Per Share (EPS)
● Simplified explanation: Basic EPS shows how
much profit each ordinary share earned,
without considering any other factors. It’s the
straightforward calculation:

Earnings

Example: 1. Profit (loss) is net of income tax expense. It

includes any exceptional, unusual or
infrequent gains or losses.
● A company has ₱500,000 profit and 100,000 ● Simplified explanation: The starting point for
ordinary shares. EPS is the company’s profit or loss after
● Basic EPS = ₱500,000 ÷ 100,000 = ₱5 per taxes. This includes any unusual or rare
share. events, like a big one-time gain or loss.

This means each share earned ₱5 during the period. Example:

2. Diluted Earnings Per Share (EPS) ● A company makes a profit of ₱1,000,000

● Simplified explanation: Diluted EPS adjusts after paying taxes.
basic EPS by including “potential” shares that ● It also sold an old factory for a one-time gain
could exist in the future. These might come of ₱200,000.
from things like stock options, convertible ● Total earnings used for EPS = ₱1,200,000.
bonds, or warrants. Diluted EPS shows how
much profit each share would earn if all these
potential shares were issued.

2. Preferred dividends are deducted as

Example:
follows:
● Preference shareholders get priority for
● Same company as above, but it also has dividends, so their share is deducted before
stock options allowing employees to convert calculating EPS for ordinary shareholders. The
their options into 10,000 new shares. deduction depends on the type of preference
● Total shares now = 100,000 + 10,000 = 110,000 shares:
shares.
● Diluted EPS = ₱500,000 ÷ 110,000 = ₱4.55 per
 . If the preference shares are cumulative,
a
share.
one-year dividend is deducted, whether
declared or not.
This lower EPS reflects the effect of potential shares.
● Simplified explanation: These shares
3. When only Basic EPS is required: guarantee a fixed dividend every year,
● Simplified explanation: If a company doesn’t whether or not it is paid. For EPS, the
have any “potential” shares, it only needs to dividend amount for the year must be
present Basic EPS. deducted, even if the company didn’t declare
or pay it yet.
Example: A small company with 50,000 shares and no
stock options or convertible bonds would only report Example:
Basic EPS, as there’s no possibility of additional shares
affecting the calculation.
● Cumulative preference dividend = ₱50,000
per year.
● Even if the company doesn’t pay it this year,
₱50,000 is still deducted from profits for EPS.

b. If the preference shares are

non-cumulative, only the dividend declared
during the period is deducted.

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● Simplified explanation: These shares do not ● Discount amortization (cost): Deducted from
guarantee unpaid dividends from previous profit.
years. Only the dividend actually declared ● Premium amortization (benefit): Added to
during the year is deducted. profit.

Example: Example:

● Non-cumulative preference dividend = ● If the company amortized a discount of

₱50,000. ₱10,000 this year, reduce profit by ₱10,000.
● If the company declares only ₱30,000 this ● If there was a premium of ₱5,000 amortized,
year, only ₱30,000 is deducted from profits add ₱5,000 to profit.
for EPS.

Overall EPS Calculation Example:

b. Any gain or loss (that is recognized directly in
● Profit after tax (including one-time gains): retained earnings) arising from settling or
₱1,000,000 repurchasing preference shares. Loss is deducted
● Cumulative preference dividend: ₱50,000 from, while gain is added to, profit or loss.
● Earnings available to ordinary shareholders:
₱1,000,000 - ₱50,000 = ₱950,000 ● Simplified explanation: When a company
buys back or settles preference shares, the
This ₱950,000 is then divided by the number of gain or loss directly affects profit:
ordinary shares to calculate EPS. ● Loss: Deducted from profit.
● Gain: Added to profit.

Example:
Dividends in arrears (i.e., those pertaining to prior
periods) are ignored in the computation of EPS. ● The company buys back preference shares at
a loss of ₱20,000. This loss is subtracted from
Simplified explanation: If a company didn’t pay profit.
dividends to cumulative preference shareholders in ● If it instead makes a ₱15,000 gain on the
previous years, these unpaid amounts (arrears) are not transaction, add ₱15,000 to profit.
deducted when calculating the current period’s EPS.
Only the current year’s dividend matters. c. In an induced or early conversion of convertible
preference shares, the excess of fair value of
Example: ordinary shares or other additional consideration
paid over the fair value of the ordinary shares
issuable under the original conversion terms (loss)
● A company owes ₱50,000 in unpaid dividends is deducted from profit or loss. Conversely, a 'gain'
from last year and ₱50,000 for this year. is added to profit or loss.
● For EPS, only this year’s ₱50,000 is deducted,
and last year’s ₱50,000 is ignored.
● Simplified explanation: If preference shares
are converted to ordinary shares earlier than
The numerator (or the difference between 1 and 2) planned, and the company pays more than
represents the profit or loss attributable to ordinary originally agreed to induce the conversion,
shareholders. This amount is also adjusted for the this “extra cost” (loss) is deducted. If there’s a
following, which are treated like preferred “gain,” it’s added.
dividends:
Example:
a. Amortization of discount or premium on
increasing rate preference shares. Discount
amortization is deducted from, while premium ● Original terms allow conversion of preference
amortization is added to, profit or loss. shares to ordinary shares at 1:1 (1 preference
share = 1 ordinary share).
Simplified explanation: If a company issues preference ● The company offers 1.2 ordinary shares for
shares with rates that increase over time, the discount each preference share instead to induce early
or premium related to these shares affects the profit or conversion.
loss: ● The “extra” value given (e.g., ₱30,000) is
treated as a loss and deducted from profit.
● Conversely, if the company gains ₱10,000 in
the transaction, it’s added to profit.

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● Simplified explanation: The number of shares
Shares is adjusted based on how long they were
available during the year:
The denominator is the weighted average number
of shares outstanding. This is computed by applying a
 . Shares issued outright are averaged from the
a time-weighting factor to the number of ordinary issuance date.
shares at the beginning of the period and to all
issuances and reacquisitions during the period.
- Count from the day they are issued.

● Simplified explanation: The denominator for

b. Subscribed shares are averaged from the
EPS is the average number of ordinary shares
subscription date.
that were available during the year. The
average is calculated by considering how
long shares were available (outstanding) - Count from the subscription date.
during the year, with adjustments for new
issuances, reacquisitions, and other changes. c. Treasury shares are averaged

Example: i. as reduction to the number of outstanding shares

from the reacquisition date; or
● A company starts the year with 100,000
shares. - Subtract shares from the total on the day
● On July 1, it issues 50,000 more shares. they are reacquired.
● The time-weighted average:
○ (100,000 x 6/12) + (150,000 x 6/12) =
125,000 shares ii. as addition to the number of outstanding shares
from the reissuance date
The time-weighting factor is the number of days that
the shares are outstanding over the total number of - Add shares back to the total on the day they
days in the period. However, a reasonable are reissued.
approximation of the weighted average (e.g., months
outstanding) is allowed. Examples:

Outstanding shares are those that are entitled to ● Shares issued outright: 10,000 shares issued
participate in dividends. Outstanding shares are (1) on April 1 (for 9 months):
issued shares plus (2) subscribed shares minus (3) ○ 10,000 x 9/12 = 7,500 shares
treasury shares.
● Treasury shares reacquired: 5,000 shares
bought back on July 1 (for 6 months):
Simplified explanation: These are shares eligible for ○ -5,000 x 6/12 = -2,500 shares
dividends. They are:
Other events:
● Issued shares (shares sold to investors).
● Subscribed shares (shares that investors
• Shares issued in a business combination are
committed to buy). averaged from the acquisition date.
● Minus treasury shares (shares the company
has repurchased).
- Count from the acquisition date.

Example:
• Shares issuable upon the conversion of a
mandatorily convertible instrument are averaged
● Issued shares = 200,000 from the date the contract is entered into.
● Subscribed shares = 20,000
● Treasury shares = 50,000
- Count from the contract date.
● Outstanding shares = 200,000 + 20,000 -
50,000 = 170,000.
• Contingently issuable shares are averaged when
the conditions have been satisfied,
Shares are usually time-weighted from the date
consideration is receivable (which is generally the - Count when the conditions are satisfied.
date of their issue). Thus:
Examples:

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● Business combination: 50,000 shares issued ● If they don’t qualify for dividends, they aren’t
on June 30 for acquiring another company: counted in Basic EPS but are included in
○ 50,000 x 6/12 = 25,000 shares Diluted EPS calculations.
● Convertible bonds: If a contract to issue
20,000 shares is signed on March 1: Under the Philippine Corporation Code, subscribed
○ 20,000 x 10/12 = 16,667 sharws shares are entitled to participate in dividends in
● Contingently issuable shares: If 10,000 shares full. Accordingly, subscribed shares are treated as
are issued on December 1 because a target fully outstanding in EPS computation.
was met:
○ 10,000 x 1/12 = 833 shares ● Simplified explanation: In the Philippines,
subscribed shares (shares that investors have
Contingently issuable ordinary shares are "ordinary committed to buy) are treated as fully
shares issuable for little or no cash or other outstanding in EPS calculations, even if the
consideration upon the satisfaction of specified investor hasn’t fully paid for them. These
conditions in a contingent share agreement." (PAS shares can participate in dividends in full.
335)
Example:
● Simplified explanation: These are shares that
will only be issued if certain conditions are
● A shareholder subscribes to 5,000 shares but
met, like achieving a profit target or
has only paid 20%.
completing a project. They are considered for
● In the Philippines, all 5,000 shares are treated
EPS only when the conditions are satisfied.
as fully outstanding for EPS because they are
entitled to full dividends.
Example:
In some countries where partly paid shares are
● A company agrees to issue 10,000 shares to a entitled to partial dividends only, the subscribed
CEO if the company’s profit reaches ₱5 shares are treated as partly outstanding. For
million. example, a 50% paid subscribed shares that are
● If the company achieves the target, the entitled to only 50% dividends are treated as 50%
10,000 shares are included in the EPS outstanding.
calculation from the date the condition is met.
● If the target isn’t achieved, the shares are not ● Simplified explanation: In some countries,
included. subscribed shares only receive dividends
proportional to the amount paid. For EPS,
Partly paid shares are treated as fractional shares these shares are treated as partially
to the extent of their participation in dividends. outstanding based on their payment
Partly paid shares that are not entitled to dividends percentage.
are treated as equivalent of warrants or options in
the calculation of diluted earnings per share. Example:

● Simplified explanation: Shares that are only ● A shareholder subscribes to 4,000 shares but
partially paid for by the shareholder are
pays only 50%.
treated differently based on their dividend ● The shares are entitled to only 50% of
rights: dividends. For EPS, these are treated as:
● If they are entitled to partial dividends, they
○ 4,000 x 50% = 2,000 shares counted
are counted as fractional shares for EPS. for EPS
● If they don’t qualify for dividends, they are
treated like warrants or options in diluted EPS
calculations.

Example

● A shareholder owns 1,000 shares, but only

paid 50% of the price.
● If these shares are entitled to 50% of
dividends:
○ 1,000 x 50% = 500 shares counted
for EPS

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
Retrospective Adjustments

When ordinary shares are issued without a

SUMMARY TABLE corresponding change in resources (assets), the
basic and diluted EPS and the weighted average
number of ordinary shares outstanding during the
period and for all periods presented are adjusted
retrospectively.

● Simplified explanation: When a company

issues ordinary shares but doesn’t receive any
new cash or assets in return (i.e., shares are
issued for free or with no effect on company
resources), the EPS needs to be recalculated.
This is done retrospectively, meaning it’s
adjusted as if the new shares were there from
the start of the period.
ILLUSTRATION ● This is because issuing more shares reduces
the earnings per share, so the number of
shares needs to be adjusted to accurately
reflect the impact of the issuance.

Examples of issuance of ordinary shares without a

corresponding change in resources include:

a. Share or stock dividend (capitalization or bonus

issue)

● Simplified explanation: A company gives free

extra shares to its existing shareholders. This
increases the total number of shares, but no
money or other resources are received in
exchange.
● The company’s total value (assets) remains
unchanged, but each shareholder gets more
shares, so the company adjusts EPS to reflect
this.

Example:

● If you own 100 shares and the company

declares a 10% stock dividend, you will
receive 10 additional shares (100 × 10%).
● If the company had 1,000,000 shares before,
it now has 1,100,000 shares. EPS is
recalculated as if the company had 1,100,000
shares all year.

b. A bonus element in any other issue (e.g.

preemptive stock rights)

● Simplified explanation: This happens when

existing shareholders can buy additional
shares at a price lower than the market value.
The difference between the price paid and
the market value is the “bonus” element, and
the issuance of shares doesn’t add new
resources to the company.

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● The number of shares is adjusted for EPS as if ● If you had 200 shares before the split, you
the bonus shares were issued from the would now have 100 shares, but the price per
beginning. share doubles.
● The total number of shares in the company is
Example: halved, and EPS is adjusted to reflect that
there are fewer shares. If the company had
● A company offers shareholders the option to 2,000,000 shares before, it now has 1,000,000.
buy 1 new share for every 5 shares owned at
a price of ₱50 per share when the market
price is ₱100. The aforementioned do not affect the entity's assets
● The “bonus” is the difference between the because they are issued for free.
discounted price and the market value. EPS is
adjusted to reflect the extra shares issued, as
if they were issued at the beginning of the Summary
period.
● Whenever a company issues shares without
receiving any money or assets in return (like
c. Share split or stock split-up (i.e., increase in stock dividends, stock splits, etc.), the number
number of shares with corresponding decrease in of shares is adjusted in the calculation of EPS,
par value); and to reflect as if the shares were issued at the
beginning of the period. This ensures the EPS
● Simplified explanation: In a stock split, the figure is comparable and accurate, taking
company increases the number of shares into account the increase or decrease in
while reducing the value of each share. This shares.
doesn’t change the total value of the
company but makes each share cheaper and
more accessible. ILLUSTRATION
● The number of shares increases, and EPS is
adjusted to reflect the higher number of
shares as though they were outstanding all
year.

Example:

● A company does a 2-for-1 stock split.

● If you owned 100 shares, you now own 200
shares, but the price per share is halved.
● The total number of shares in the company
doubles, and EPS is adjusted to reflect that
there are now more shares. If the company
originally had 1,000,000 shares, it now has
2,000,000.

d. Reverse share split or stock split-down

(consolidation of shares or decrease in number of
shares with corresponding increase in par value).

● Simplified explanation: In a reverse stock

split, the company reduces the number of
shares but increases the value of each share.
Again, this doesn’t change the total value of
the company but reduces the number of
shares available.
● EPS is adjusted to reflect the lower number of
shares as if they were outstanding all year.

Example:

● A company does a 1-for-2 reverse stock split.

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025

Notice that the share dividends and share split in

20x2 resulted to a restatement of the 20x1 EPS from
$72 (see given in the problem) to ₽32.73.

Rights Issue

When a company gives shareholders the right to buy

additional shares at a price lower than the market
price (fair value), it’s called a rights issue. This creates
a bonus element because the new shares are being
sold at a discount.

In terms of Earnings Per Share (EPS) calculation, this

rights issue changes the number of shares outstanding.
To ensure that EPS is calculated fairly before and after
the rights issue, the number of shares before the issue
is adjusted by a specific factor. This factor helps
account for the fact that the rights were issued at a
discount.

When stock rights are issued to shareholders in

conformance with their preemptive right, the exercise
price is normally less than the fair value of the shares.
This type of rights issue includes a bonus element.
Thus, for basic and diluted EPS computation, the
number of shares outstanding for all periods before
the rights issue is multiplied by the following factor:

Theoretical ex-rights fair value per share is "calculated

by adding the aggregate market value of the shares
immediately before the exercise of the rights to the
proceeds from the exercise of the rights, and dividing
by the number of shares outstanding after the exercise
of the rights." (PAS 33 AG.A2)

Alternatively, the theoretical ex-rights fair value per

share may also be computed as follows:

ILLUSTRATION

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
- These are financial instruments that give the
Diluted Earnings per share holder the right to purchase ordinary shares
at a specific price (often below market value).
An entity with dilutive potential ordinary shares When the holder exercises these options, they
(i.e., complex capital structure) presents diluted EPS buy shares, again increasing the total number
in addition to basic EPS. An entity with no dilutive of shares.
potential ordinary shares (i.e., simple capital
structure) presents basic EPS only. Example:

● Diluted Earnings per Share (EPS) is a way to ● A company has 1,000,000 shares outstanding,
calculate the earnings per share of a and it has 100,000 convertible bonds. If these
company that considers all potential shares bonds are converted into shares, the number
that could be added if financial instruments of shares will increase to 1,100,000. This
like convertible bonds, preference shares, or means the company’s profit is now divided by
stock options were exercised or converted more shares, which could decrease the EPS.
into ordinary shares. This helps to show a
“worst-case” scenario where all the potential
Potential ordinary shares are considered when
shares have been issued, making the total
computing for diluted EPS only when they are
number of shares increase.
dilutive. Potential ordinary shares are dilutive if,
● Basic EPS is calculated based only on the when exercised, they decrease basic earnings per
current number of shares outstanding. share or increase basic loss per share.
Diluted EPS is presented only if the company
has any dilutive potential shares (i.e.,
Antidilutive potential ordinary shares are ignored.
financial instruments that could turn into
Potential ordinary shares are antidilutive if, when
ordinary shares), which can affect the EPS.
exercised, they increase basic earnings per share or
decrease basic loss per share.
A potential ordinary share is "a financial instrument
or other contract that may entitle its holder to
● Dilutive Potential Shares: These are the
ordinary shares." (PAS 33.5)
shares that, if converted or exercised, would
decrease the EPS (because more shares are
● These are financial instruments that may issued, but the profit doesn’t increase).
convert into regular shares, potentially ● Antidilutive Potential Shares: These are
increasing the number of shares outstanding. potential shares that, if converted or
When these shares are exercised or exercised, would actually increase the EPS
converted, they can lower the EPS because (because more shares would increase the
they increase the total number of shares earnings). These are ignored in the diluted
without increasing the company’s profit (or EPS calculation.
potentially reducing the profit).
Example:
Examples of potential ordinary share:
● A company has 1,000,000 shares with a basic
a. Convertible preference shares - are preference EPS of ₱2 per share. It has 100,000
shares that are convertible into the issuer's ordinary convertible bonds that, if converted, would
shares. add 100,000 shares. But, if the conversion
increases the EPS from ₱2 to ₱2.50 per share,
- These are preference shares that can be those bonds are considered antidilutive and
converted into regular ordinary shares. If would not be included in the diluted EPS
converted, they increase the total number of calculation.
shares outstanding.
• Convertible bonds and convertible preference
b. Convertible bonds shares are dilutive if their conversion decreases
basic EPS or increases in basic loss per share.
- These are bonds that can be converted into
ordinary shares. When the bonds are > Options, warrants and their equivalents are dilutive if
converted, they also increase the number of their exercise price is less than the market value of the
shares. ordinary shares, making the exercise favorable on the
part of the holder.
c. Options, warrants and their equivalents - are
"financial instruments that give the holder the right to
purchase ordinary shares." (PAS 33.5)

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
assumes these 100,000 options were
The computation of diluted earnings per share is based exercised even if they weren’t.
on the assumption that the dilutive potential ordinary
shares were converted or exercised. It is:

1. "As if" the convertible preference shares or Key Assumptions in Diluted EPS:
convertible bonds have been converted; or
● The conversion or exercise is assumed to
2. "As if' the options or warrants have been exercised. have happened on the date the potential
ordinary shares were first issued, even if they
The conversion or exercise is assumed to have taken are not actually exercised yet.
place on the date the potential ordinary shares first
became outstanding, regardless of the date of actual
Example 1:
conversion or exercise.

● If convertible bonds were issued on January

For example, convertible bonds outstanding as of
January 1 are assumed to have been converted on 1, the calculation assumes they were
January 1. Options issued on April 1 are assumed to converted into ordinary shares on January 1,
have been exercised on April 1. even if the actual conversion happens later in
the year.
How to Calculate Diluted EPS:
Example 2:
The diluted EPS calculation assumes that all dilutive
potential ordinary shares were already converted or ● If stock options were issued on April 1, the
exercised, even if it hasn’t happened yet. It’s as if diluted EPS assumes the options were
those potential shares existed throughout the entire exercised on April 1 (the date of issuance),
period being measured. even if they are actually exercised months
later.
Steps for Diluted EPS:
Summary:
1. For Convertible Preference Shares or
Convertible Bonds: ● Basic EPS = Profit ÷ Shares Outstanding
● Assume these have already been converted (calculated only for existing shares).
into ordinary shares. ● Diluted EPS = Profit ÷ (Shares Outstanding +
All Potential Shares, assuming their
conversion or exercise).
Example:
● Diluted EPS shows what the EPS would look
like if all potential shares were converted,
● A company has 1,000,000 shares and 100,000 which can decrease the EPS if it increases the
convertible bonds. If all bonds are converted total number of shares without a proportional
into shares, the total number of shares increase in profit.
becomes 1,100,000. The company’s profit is ● Only dilutive potential shares (those that
now divided by 1,100,000 shares instead of reduce EPS) are included in the diluted EPS
1,000,000. calculation. Antidilutive potential shares
(those that increase EPS) are excluded.

2. For Options and Warrants:

● Assume these have been exercised.

Example:

● A company has 1,000,000 shares and 100,000

stock options at ₱10 per share. If the market
price is ₱20, holders of these options will
exercise them to buy shares at ₱10. The
number of shares increases because more
people buy shares, but the company’s
earnings stay the same. The diluted EPS

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
Convertible Preference Share

When computing for diluted EPS, convertible

preference shares are assumed to have already
been converted into additional ordinary shares.
Thus, there is no adjustment to profit or loss for any
dividends on the convertible preference shares.

The incremental shares arising from the assumed

conversion of the convertible preference shares are
added in the denominator of the diluted EPS
formula.

When calculating diluted earnings per share (EPS), it’s

assumed that convertible preference shares have
already been converted into ordinary shares. This
means:

● The denominator (the total number of shares)

is increased by the number of additional
ordinary shares the preference shares would
become once converted.
● However, there is no change to the profit
because we assume the preference shares
are already ordinary shares, so there’s no
need to subtract any dividends paid on those
preference shares.

Example:

● A company has 1,000,000 ordinary shares

and a profit of ₱1,000,000 (so the basic EPS
is ₱1 per share).
● The company has 100,000 convertible
preference shares that could be converted NOTES
into ordinary shares. ● Profit is not reduced by the preferred
dividends because the convertible
preference shares are assumed to have
For diluted EPS:
been converted into ordinary shares.
○ When calculating diluted EPS, if the
1. Assume the 100,000 preference shares are company has convertible preference
already converted into ordinary shares. shares (shares that can be
2. So, the total number of shares in the converted into ordinary shares), we
denominator becomes 1,100,000 (1,000,000 assume those shares have already
ordinary + 100,000 converted preference been converted into ordinary shares.
shares). ○ Why? Because once converted, the
3. The profit remains the same (₱1,000,000), preference shares no longer exist,
and there is no adjustment for dividends on and the dividends that would have
the preference shares because they’re now been paid to preference
assumed to be ordinary shares. shareholders don’t need to be
considered. They are now treated
Now, the diluted EPS will be: like regular shares (ordinary shares),
which don’t have special dividends
₱1,000,000 ÷ 1,100,000 = ₱0.91 per share. attached to them.

This diluted EPS is lower than the basic EPS of ₱1, Example: If the company would have paid dividends
because the total number of shares has increased by to preference shareholders, we don’t subtract that
100,000 shares after assuming the preference shares from the profit in the diluted EPS calculation because
were converted. we assume those preference shares are now ordinary
shares and are part of the total share count.
ILLUSTRATION

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● No after tax interest expense is added ● The 50,000 preference shares are assumed to
because the potential ordinary shares are be converted into 100,000 additional ordinary
convertible preference shares and not shares (because each preference share
convertible bonds. converts to 2 ordinary shares).
○ If the company has convertible ● No adjustment is made to the profit because
bonds (loans that can be converted the preference shares are assumed to be
into shares), there is a tax converted into ordinary shares, and therefore,
adjustment to account for the no dividends are subtracted from the profit.
interest that would have been paid ● No interest expense is added back because
on the bond, which is no longer we are dealing with preference shares, not
needed once converted into shares. convertible bonds.
But, this note clarifies that
convertible preference shares don’t Now, the total shares for diluted EPS will be:
have interest expenses, they just
have dividends. Therefore, no ● 1,000,000 ordinary shares (original) + 100,000
adjustment is needed for taxes on incremental shares (from the conversion of
interest expenses, because we’re
preference shares) = 1,100,000 total shares.
dealing with dividends on
preference shares, not interest on
bonds. The diluted EPS will be:

● ₱1,000,000 ÷ 1,100,000 = ₱0.91 per share.

Example: If the company had convertible bonds, we
would add back the interest expense (after tax) into
the profit when calculating diluted EPS because the This diluted EPS is lower than the basic EPS because
bondholder would not receive interest once converted the total number of shares has increased by 100,000
to shares. However, with preference shares, we don’t due to the assumed conversion of the preference
need to worry about this since they only pay dividends. shares into ordinary shares.

Convertible Bonds
● The incremental shares are computed as
(50,000 x 2) because each of the 50,000 When computing for diluted EPS, convertible bonds
outstanding preference shares is convertible are assumed to have been converted into additional
into two ordinary shares. ordinary shares. Thus, the after tax interest expense
○ To calculate the incremental shares incurred on the bonds is added back to profit or
(additional shares), we need to loss. It is net of tax because interest expense has a
figure out how many ordinary tax consequence.
shares will be created if all
preference shares are converted. The incremental shares arising from the assumed
○ In this case, each preference share conversion of the convertible bonds are added in
is convertible into 2 ordinary shares. the denominator of the diluted EPS formula.
So, if there are 50,000 preference
shares, the total number of When calculating diluted Earnings Per Share (EPS)
additional shares (incremental for a company with convertible bonds (bonds that
shares) after conversion will be: can be turned into ordinary shares), there are a few
○ 50,000 preference shares x 2 = steps to follow:
100,000 additional ordinary shares.
○ These 100,000 shares are added to 1. “Convertible bonds are assumed to have
the total number of shares in the been converted into additional ordinary
denominator when calculating shares.”
diluted EPS. ● What this means: We treat the convertible
bonds as though they have already been
Example: converted into ordinary shares for the
purpose of calculating diluted EPS. This
Let’s say a company has: means we assume that the bondholders have
decided to exchange their bonds for regular
shares of the company.
● 1,000,000 ordinary shares.
● 50,000 convertible preference shares.
● Profit of ₱1,000,000.

When calculating diluted EPS:

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025

Example: Suppose the company has 100,000

convertible bonds. For the EPS calculation, we assume
that those bonds have already turned into ordinary
shares, which will increase the number of shares.

2. “The after-tax interest expense incurred on

the bonds is added back to profit or loss.”
● What this means: When the company has
convertible bonds, it pays interest to the
bondholders. However, if the bonds are
converted into shares, the company will stop
paying this interest.
● Why add it back? Since we’re assuming the
bonds have been converted, the interest
expense would no longer be needed.
Therefore, we add back the interest expense
to the profit for the EPS calculation.
● Net of tax means that we account for the tax
impact of the interest. Companies can deduct
interest payments from their income taxes, so
we only add back the after-tax interest
(because that’s the actual cost to the
company after taxes).

Example: If the company pays ₱20,000 in interest on

its convertible bonds, and its tax rate is 20%, the
after-tax interest expense would be ₱20,000 × (1 - 0.20)
= ₱16,000. This ₱16,000 is added back to the profit for
the EPS calculation.

3. “The incremental shares arising from the

assumed conversion of the convertible bonds
are added in the denominator of the diluted
EPS formula.”
● What this means: When the bonds are
assumed to have been converted into
ordinary shares, we increase the number of
shares in the denominator of the diluted EPS
formula. This is because the conversion of the
bonds would add more shares in circulation,
which reduces the EPS.

Example: If each of the 100,000 convertible bonds can

be converted into 2 ordinary shares, we would add
200,000 shares (100,000 bonds × 2) to the total number Options, Warrants and their Equivalents
of shares when calculating diluted EPS.
Options, warrants and their equivalents are
considered in computing for diluted EPS only when
they are dilutive, such as When their exercise price
is less than the average market price of the
ordinary shares (i.e., in the money).

If the exercise price is less than the average market

price of the ordinary shares, the holder would
probably exercise the option or warrant because the
exercise is favorable on his part.

This would result to a dilution in the number of

outstanding shares.

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
● When calculating diluted EPS, options, issued (from the options or warrants) and the treasury
warrants, and similar financial instruments shares that were bought back.
are only included if they dilute the earnings.
These are considered dilutive when their Example:
exercise price (the price at which the holder
can buy shares) is lower than the average ● Suppose there are 1,000 options, and the
market price of the company’s shares during exercise price is ₱8 per share, but the
the period.
average market price is ₱10 per share.
● Why it’s dilutive: If the exercise price is lower ● If all 1,000 options are exercised, the
than the market price, the holder will likely company receives ₱8,000 (₱8 x 1,000).
exercise the option or warrant to buy shares
● The company then buys back shares using
at a cheaper price, which increases the total that money. At the market price of ₱10, they
number of shares in circulation. This is called can buy back 800 shares (₱8,000 ÷ ₱10).
dilution and lowers the EPS.
● The incremental shares (new shares issued
minus shares bought back) would be 200
Example: If the market price of the company’s shares shares (1,000 options exercised - 800 shares
is ₱10, and the exercise price of an option is ₱8, the bought back).
option holder would likely buy the shares at ₱8 each, ● These 200 shares would be added to the
resulting in more shares and a lower diluted EPS. denominator to calculate diluted EPS.

On the other hand, if the exercise price is more than

the average market price of the ordinary shares, the
holder would probably not exercise the option or
warrant because the exercise is unfavorable on his
part. Therefore, there would be no dilution.

If the exercise price (the price at which an option or

warrant holder can buy shares) is higher than the
average market price of the shares, the holder is
unlikely to exercise the option or warrant. This is
because they would be paying more than the shares
are worth, making the exercise unfavorable. As a
result, there is no dilution (no increase in the number of
shares) and no effect on the EPS.

When computing for diluted EPS, the "treasury

share method" is used in computing for the
incremental shares, This method assumes that:

1. The options or warrants are exercised; and

Assume the options or warrants are exercised: It’s

assumed the holder buys the shares at the exercise
price.

2. The proceeds received from the exercise are used

to purchase treasury shares at the average market
price.

Assume the proceeds are used to buy back shares: The

company would use the money from the exercise to
buy back shares at the average market price.

3. The difference between the treasury shares

assumed to have been purchased and the option
shares represents the incremental shares. Notes:
● The total exercise includes the fair value of
Calculate the incremental shares: The incremental the share option.
shares are the difference between the new shares (PAS 3347A) This is computed as follows: (140 exercise
price + 10

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
biggest decrease in EPS) is ranked first, while the one
fair value of each share option) = 150 total exercise causing the least dilution is ranked last.
price).
● The average market price is used in the To figure out which share is the most dilutive, we look
computation while the ending market price is at how much each share lowers the EPS. The share that
ignored. leads to the smallest increase in EPS (or biggest
decrease) is considered the most dilutive.

Steps for testing dilution:

1. Control number: When checking for dilution,

the profit used is profit from continuing
operations (meaning ongoing, regular
business, excluding one-off gains or losses).
2. Step-by-step ranking: The potential ordinary
shares are tested one by one, starting with
the most dilutive (the one with the smallest
EPS).
3. Stopping point: If at any point, adding
another potential ordinary share increases
the diluted EPS above the basic EPS, then the
company stops considering additional shares
for dilution. The lowest EPS (whether basic or
diluted) is what gets presented as the final
diluted EPS.

Example:

Multiple potential ordinary shares ● Company A has three potential ordinary

shares:
When there are two or more potential ordinary 1. Convertible bonds that would add 10,000
shares, they need to be "ranked" according to their shares.
dilutive effect on basic EPS. The most dilutive 2. Stock options that would add 5,000 shares.
potential ordinary share is ranked first; the least 3. Convertible preference shares that would add
dilutive is ranked last. The most dilutive potential 3,000 shares.
ordinary share is the one with the least incremental
EPS. Step 1: The company ranks these shares from most to
least dilutive. Let’s assume:
When testing potential ordinary shares for dilution,
the profit figure used as the "control number" (i.e.,
● The convertible bonds are the most dilutive
the numerator in the EPS formula) is profit from
because they result in the biggest reduction
continuing operations.
in EPS.
● The stock options are the second most
When computing for the diluted EPS, the potential dilutive.
ordinary shares are considered step-by-step
● The convertible preference shares are the
according to their "rankings." If any time the
least dilutive.
diluted EPS exceeds the basic EPS, the entity
discontinues considering further any potential
ordinary share and the lowest amount computed is Step 2: The company tests the dilutive effect of each
the amount presented as diluted EPS. share, starting with the convertible bonds. If adding
the convertible bonds results in diluted EPS still being
lower than basic EPS, they keep adding more shares.

In simple terms: Step 3: If at any step, the diluted EPS exceeds basic
EPS, the process stops. The final diluted EPS will be
based on the lowest EPS.
When a company has multiple potential ordinary
shares (like options, convertible bonds, or warrants),
they need to be ranked in order of how much they In a nutshell, the company tests each potential share
would dilute the basic EPS (Earnings Per Share). The one at a time, ranking them by how much they would
share that would cause the most dilution (i.e., the reduce EPS, and stops testing once adding a share

16
 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025
The company does not need to show EPS for other
increases the EPS. The final diluted EPS figure will be comprehensive income (OCI) or total comprehensive
the lowest one. income. These are other sections of financial
statements that include gains or losses not yet realized
Presentation (like unrealized gains or losses from investments).

The two EPS (basic and diluted) are presented with Example:
equal prominence on the face of the statement of
profit or loss and other comprehensive income. If Let’s assume a company XYZ Inc.:
the entity uses a 'two-statement' presentation as
described in PAS 1, it presents the EPS only in the ● XYZ Inc. makes $100,000 in profit from its
separate statement of profit or loss. ongoing operations but has a loss from selling
one part of the business, so it reports a
Both basic EPS and diluted EPS must be shown clearly $20,000 loss from discontinued operations.
and in equal prominence in the statement of profit or
loss (income statement) and other comprehensive
income. If the company uses a two-statement
presentation, which separates the profit and loss from
● The basic EPS and diluted EPS will be shown
other comprehensive income (as per PAS 1), then the
for:
EPS is only shown in the profit or loss statement.
1. Profit from continuing operations:
($100,000 ÷ 50,000 shares = $2 per
EPS is presented every time a statement of profit or share).
loss and other comprehensive income is presented,
2. Loss from discontinued operations:
including comparatives. If diluted EPS is presented
(-$20,000 ÷ 50,000 shares = -$0.40
for at least one period, it will be presented for all
per share).
periods, even if it equals basic EPS.
3. Total profit for the year: ($80,000 ÷
50,000 shares = $1.60 per share).
Every time a company shows its profit or loss
(including for previous periods), EPS must be shown.
Even if XYZ Inc. has a loss from the discontinued
This includes showing EPS for the previous year if
operations, both basic and diluted EPS will still be
you’re showing current year results, allowing for
shown.
comparisons. If diluted EPS is shown for at least one
period (even if it is the same as basic EPS), then it must
be shown for all periods presented.

Basic and diluted EPS are presented even if the

amounts are negative (i.e., loss per share).

Loss per share: If the company is making a loss

(negative earnings), basic EPS and diluted EPS will still
be shown, but they will be negative.

If an entity reports discontinued operations, it

presents basic and diluted EPS for each of the
following:

If the company has parts of its business that have

been sold off or stopped (called discontinued
operations), the company must show EPS for:

a. profit or loss from continuing operations,

● ongoing parts of the business
b. results of discontinued operations, and
● sold or stopped parts of the business).
c. profit or loss for the year.
● combined total

An entity is not required to present EPS on other

comprehensive income and total comprehensive
income.

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 CFAS
PAS 33 - EARNINGS PER SHARE
BANGCORO, SHERIE ANNE – BACHELOR OF SCIENCE IN ACCOUNTANCY
1st SEMESTER │A.Y. 2024 - 2025

Summary

18