Earnings Per Share

Dr. Derek K. Chan

HKU

Earnings Per Share 1

Outline
1. Introduction
2. Basic Earnings Per Share
2.1 Earnings Calculation
2.2 Number of Shares Calculation
2.2.1 Shares Issued or Redeemed during the Year
2.2.2 Adjustment for a Bonus Issue or a Stock Split

Earnings Per Share 2

Outline
3. Diluted Earnings Per Share
3.1 Diluted EPS Calculation
3.2 Dilutive Future Shares
3.3 Dilution Test
3.4 Steps in Diluted EPS Calculation when there are
Multiple Potentially Dilutive Securities
4. Disclosure Rules

Earnings Per Share 3

1. Introduction
Earnings per share (EPS)
shows the profit attributable to each ordinary share and
is considered by many investors to be an important
measure of profitability.
forms a basis for calculating the Price/Earnings Ratio
(P/E ratio), which is market price of ordinary share per
share divided by EPS and provides a basis for
comparative purposes with the performance of other
companies.
It is important for the accountancy profession to identify a
uniform method of computing and disclosing the EPS figure.
Earnings Per Share 4
1. Introduction
HKAS 33 "Earnings Per Share" (Previously known as
HKSSAP 5; issued March 1984; revised March 1995,
May 1998, March 2004 and March 2010) states that
listed companies must disclose basic and diluted EPS in
their financial statements and this disclosure is made on
a consistent basis between companies.
Compliance with this statement ensures compliance with
International Accounting Standard IAS 33 "Earnings Per
Share".

Earnings Per Share 5

1. Introduction
The basic EPS computation uses the results of actual
transactions to determine the numerator and the
denominator in the EPS calculation.
Diluted EPS is computed by making assumptions
regarding equity transactions that have not occurred, but
will likely to occur in the future given the current
information.
Given the importance of EPS to investors and other
users of financial statements, it is desirable that the
effect of dilution on EPS should also be properly
reported if a company has a significant number of
dilutive securities in its capital structure.
Earnings Per Share 6
1. Introduction
Differentiate between simple and complex capital structures
Simple Capital Structure
No potentially dilutive securities
Disclose basic EPS only
Complex Capital Structure
Potentially dilutive securities such as options, warrants,
or convertible securities
Stock options: granted to employees as incentive payments
Warrants: sold by companies for cash, generally in conjunction
with the issuance of another security

Disclose both basic and diluted EPS

Earnings Per Share 7
1. Introduction
Dilutive securities are securities that would lead to a
reduction (increase) in earnings (loss) per share as a
result of the conversion of the securities or the exercise of
the options to acquire ordinary shares.
Diluted EPS measures the maximum potential dilution
that could occur if all dilutive securities were turned into
equity shares and ranked for dividend. In other words,
diluted EPS is computed by assuming that all equity
transactions that will likely to occur in the future have
already happened in the current period.
The computation of both basic and diluted EPS provides
financial statement users with endpoints as to earnings
per share. Earnings Per Share 8
2. Basic Earnings Per Share
Basic EPS is calculated by dividing the earnings (or, more
specifically, profits for the year attributable to ordinary shares)
of the company for the financial period by the weighted
average number of ordinary shares in issue during that
financial period:

EPS = Earnings / Weighted average number of ordinary

shares

Earnings Per Share 9

2.1 Earnings Calculation
The guidelines in HKAS 33 outline earnings as:
consolidated profit or loss for the year after tax;
less minority (non-controlling) interests (if the reporting
entity is the holding company of a group);
less preference dividends declared (you must include
dividends to cumulative preference shareholders even if
they have not been declared).

Earnings Per Share 10

2.1 Earnings Calculation
REMARKS:
In this course, we will not deal with group accounting to make our
life easier. Group Accounting will be discussed in
ACCT4104/BUSI0003 Advanced Financial Accounting.
Basic EPS reflects only income available to ordinary shareholders
and does not include preference shares. (Recall that ordinary shares
participate in the net profit for the period only after other types of
shares such as preference shares.)

Earnings Per Share 11

2.2 Number of Shares Calculation
The number of shares to include when calculating the
basic EPS is the weighted average number of ordinary
shares (WANOS) in issue during the period.

Earnings Per Share 12

2.2.1 Shares Issued or Redeemed during the Year
As well as the shares in issue at the beginning of the year, shares
may have been issued or redeemed during the year.
In this case, you need to include the shares issued or redeemed,
weighted for the time they are in issue.
HKAS 33 recommends that the shares should be weighted in
accordance with the number of days that they are in issue, but that
it is also acceptable to use the number of months.
REMARK:
In this course, we assume that the shares are weighted in
accordance with the number of months that they are in issue. If
share transactions occurred during a month, the weighted average
computation is assumed to be made to the nearest month.
Earnings Per Share 13
Example 1: Basic EPS Calculation
Compute the EPS for 2014 with the following information:

Number of ordinary shares outstanding as of January 1 2,000

Number of non-cumulative $0.1 preference shares as of
January 1 1,000
Sale of ordinary shares for cash on October 1 1,600
Redemption of ordinary shares on November 1 600

Net income in 2014 is $2,000 and a $100 dividend is declared and paid
to preference shareholders.

Earnings Per Share 14

Example 1: Contd
Denominator (weighted average number of ordinary shares only):
Jan 1 to Sept 30 2,000 9/12 = 1,500
Oct 1 to Oct 31 (2,000 + 1,600) 3,600 1/12 = 300
Nov 1 to Dec 31 (2,000 + 1,600 600) 3,000 2/12 = 500
WANOS = 2,300

Numerator:
Net income available to ordinary shareholders in 2014 = $2,000
$100 = $1,900.

EPS = $1,900 / 2,300 = $0.826.

If no dividend were declared in 2014, then EPS = $2,000 / 2,300 =

$0.8696.
Earnings Per Share 15
2.2.2 Adjustment for a Bonus Issue or a Stock Split
Bonus issue:
A bonus issue (stock dividend) is a distribution of additional
shares of a corporations own capital share on a pro-rata basis to
its shareholders at no cost (i.e., each shareholder receives
additional shares equal to the percentage of shares already held).
A bonus issue could be regarded as a capitalization of profits
because it could be used to transfer retained income to permanent
capital and thus remove such earnings from cash dividend
availability.
Retained profits XXX
Share Capital - Ordinary shares XXX

Earnings Per Share 16

2.2.2 Adjustment for a Bonus Issue or a Stock Split
Stock Splits:
Stock splits are usually larger than stock dividends, but theoretically the
same, i.e., both of them are distribution of a proportional amount of
shares to shareholders.
In a stock split, the total number of shares is increased by a specified
amount, such as a two-for-one split.
In contrast to a stock dividend, a stock split does not result in a transfer
of retained profits to share capital. Thus, there is no change in the share
capital or the retained profits balance. No accounting entry is needed.

Earnings Per Share 17

2.2.2 Adjustment for a Bonus Issue or a Stock Split
Earnings effect of a bonus issue or a stock split:

Since ordinary shares are issued to existing shareholders

for no additional consideration in a bonus issue or stock
split, no additional earnings will accrue as a result of the
issue.

Earnings Per Share 18

2.2.2 Adjustment for a Bonus Issue or a Stock Split
Effect on EPS of a bonus issue or a stock split:

However, since the additional shares rank for dividend, they should be
treated as being in issue for the whole period and the earnings should
be apportioned over the number of shares ranking for dividend after
the bonus issue or stock split.
Therefore, you need to include this issue in your calculation by
adjusting the number of ordinary shares outstanding before the bonus
issue or stock split by the proportionate change in the number of
ordinary shares outstanding as if the bonus issue or the stock split had
occurred at the beginning of the period (or the date of issue of the
ordinary shares if later).
Amounts disclosed for prior periods are also adjusted. Only when the
retroactive recognition of changes in the number of shares can EPS
presentations for prior periods be stated on a basis comparable with the
EPS presentation for the current period.
Earnings Per Share 19
Example 2:
Following Example 1 with the following changes:
1. No preference share dividends are declared to the
shareholders. However, the preference share dividends are
cumulative.
2. A 10% bonus issue is made on April 1.
3. A 2-for-1 stock split is made on December 1.

Earnings Per Share 20

Example 2: Contd
Dates Shares Bonus Stock Portion Weighted
outstanding issue split of year average
Jan 1 to Mar 31 2,000 1.1 2.0 3/12 1,100
Apr 1 to Sept 30 2,200 2.0 6/12 2,200
Oct 1 to Oct 31 3,800 2.0 1/12 633
Nov 1 to Nov 30 3,200 2.0 1/12 533
Dec 1 to Dec 31 6,400 1/12 533
WANOS 5,000*
* rounding
EPS = $1,900 / 5,000 = $0.38.
NOTE: Preference share dividends of $100 are deducted because
the preference shares are cumulative.
Earnings Per Share 21
3. Diluted Earnings Per Share
Where a listed company has potential ordinary shares
outstanding, you need to address whether the potential
ordinary shares are dilutive.

Definition: A potential ordinary share is a financial

instrument or other contract that may entitle its holder to
ordinary shares. Common examples are:
convertible preference share
convertible bonds
share options or warrants
Earnings Per Share 22
3. Diluted Earnings Per Share
Why report diluted EPS?
Investors are concerned not only with the past performance but
the forecasting future EPS, it is important to disclose the effect
of any future dilution.
Therefore, you should calculate the diluted earnings per share
figure, taking into account potential ordinary shares that are
dilutive.
HKAS 33 and IAS 33 state that dilution occurs if inclusion of a
potentially dilutive security reduces the basic EPS or increases
the basic loss per share. If the opposite results, the security is
classified as an antidilutive security.
Antidilutive securities are not included in computing diluted
EPS. Earnings Per Share 23
3.1 Diluted EPS Calculation

The diluted EPS should be calculated on the assumption that

the maximum number of new shares had been issued under the
terms of the contract, and that these had been exercised on the
first day of the period (or the date of issue of the contract if
later).

Earnings Per Share 24

3.1 Diluted EPS Calculation
The denominator in the diluted EPS calculation is the total of:
the weighted average number of ordinary shares of
the company during the financial year (as per basic
EPS);
the weighted average number of potential ordinary
shares that are dilutive.
The numerator must be similarly adjusted.
NOTE:
If potential ordinary shares were issued or converted to ordinary
shares part way through the accounting period, be careful to only
adjust for the part of the period they were in issue.
Earnings Per Share 25
3.2 Dilutive Future Shares
A listed company may have a number of potential ordinary
shares in issue during a financial year. If so, the diluted
earnings per share should take into account only those
potential ordinary shares which have a diluting effect, i.e.,
those that reduce net profit per share (or increase the loss per
share).

Earnings Per Share 26

3.2.1 Stock Options and Warrants
Companies may grant options to directors and senior executives
or issue warrants which give holders the right to subscribe for
shares at fixed prices on specified future dates.
If the options or warrants are assumed to be exercised, then we
need to make an assumption on how the cash proceeds from the
exercise of the stock options or warrants be used. The generally
accepted assumption is that earnings will not be affected but the
number of ordinary shares will increase.
Under this assumption (this is often referred to as the treasury
stock method), the shares ranking for dividend will be
increased by the number of shares under options or warrants,
net of the number of shares that would have been redeemed
from the market at fair value by using the assumed cash
proceeds from the exercise of options or warrants.

Earnings Per Share 27

3.2.1 Stock Options and Warrants
Fair value for this purpose is calculated on the basis of
the average price of the ordinary shares during the period
when the options or warrants were in issue.
The diluted EPS should be calculated on the assumption
that the maximum number of new shares had been issued
under the terms of the options or warrants and that these
had been exercised on the first day of the period (or the
date of issue of the options or warrants if later).

Earnings Per Share 28

Example 3: Diluted EPS with Stock Options
Compute the basic and diluted EPS with the following information for 2014:
Net income of the year $500
Ordinary shares outstanding (no change in 2014) 1,000
Options outstanding at the beginning of the year
to purchase equivalent shares (no change in 2014) 400
Exercise price per share on options $4
Average market price during the period of ordinary share $10

Basic EPS = $500 / 1,000 = $0.50.

Earnings Per Share 29

Example 3: Contd
Diluted EPS Calculation: (Treasury Stock Approach)
Proceeds from exercise of options (400 $4) $1,600
Number of shares assumed to be purchased ($1,600/$10) 160
Number of new shares to be issued (400 160) 240

Diluted EPS = $500 / (1,000 + 240) = $0.40.

Now, suppose that the options were issued on April 1, 2014, and
the average market price of ordinary share from April 1 to
December 31, 2014, was $10, then diluted EPS = $500 / (1,000
3/12 + 1,240 9/12) = $0.4237.

Earnings Per Share 30

3.2.2 Convertible Securities
In order to secure a lower rate of interest or dividend, companies
sometimes attach benefits to bonds and preference shares in the
form of conversion rights. These permit the owner of such
convertible securities to convert his/her holdings in whole or part
into ordinary share capital. The right is normally exercisable
between specified dates. The ultimate conversion of these securities
will have the following effects:
There will be an increase in earnings by the amount of interest
expenses on bonds or preference dividends no longer accrued.
Moreover, if the convertible securities are bonds, the effect on
earnings will be net of tax because interests on bonds are
allowable for profit tax purposes.
The number of shares ranking for ordinary dividend will
increase.
Earnings Per Share 31
3.2.2 Convertible Securities
Therefore, where a company has convertible securities at
any time during the period, the diluted EPS should be
calculated on the assumption that the maximum number of
new ordinary shares had been issued on conversion and
that this conversion had taken place on the first day of the
period (or on the date of issue of the convertible securities
if later).
The earnings for the period should be adjusted by adding
back the assumed saving of dividend on convertible
preference shares or the assumed saving of interest on the
convertible bonds, net of tax.

Earnings Per Share 32

Example 4: Diluted EPS with Convertible Securities
Compute the basic and diluted EPS with the following information for
2014:
Net income of the year $500
Ordinary shares outstanding (no change in 2014) 1,000
Convertible bonds (stated interest at 10%) outstanding at the
beginning of the year $500
Conversion terms of convertible bonds: 0.8 shares for each $1
bond 20%
Tax rate

Basic EPS = $500 / 1,000 = $0.50.

Earnings Per Share 33

Example 4: Contd
Diluted EPS:
[$500 + $500 10% (1 0.2)] / (1,000 + 400) = $0.386.

Now, suppose interest dates are Jan. 1 and July 1, and the convertible
bonds were issued on Oct. 1, then

Diluted EPS = [$500 + $500 10% (1 0.2) 3/12] / (1,000 9/12

+ 1,400 3/12) = $0.464.

Earnings Per Share 34

 Effect of Actual Conversion
Recall that if additional shares are issued as a result of securities
being converted, those newly issued shares would be included in
the computation of the weighted average number of shares
outstanding for the period (for both the basic and the diluted
EPS).
In addition, however, an adjustment must be made to reflect what
earnings per share would have been if conversion had taken place
at the beginning of the period or issuance date, whichever comes
later.

STOP AND THINK:

Why must we assume conversion occurred at the beginning of
the period when we know it did not?

Earnings Per Share 35

Example 5: Diluted EPS with Actual Conversion
Continued with basic information in Example 4 but it is now assumed that
$300 of the bonds are actually converted on October 1, 2014 and the
interest savings are already included in the net income of $500. Compute
the basic and diluted EPS.

Jan 1 to Sept 30 (9 months) Oct 1 to Dec 31 (3 months)

-------------------------------------- ----------------------
$300 not actually converted $300 actually converted
to 240 shares to 240 shares

-------------------------------------------------------------------
$200 not converted to 160 shares

Earnings Per Share 36

Example 5: Contd
Basic EPS = $500 / (1,000 9/12 + 1,240 3/12) = $0.47.

Diluted EPS:
($500 + $300 10% 0.8 9/12 + $200 10% 0.8) / (1,000 +
500 0.8) = $0.381,

where

$300 10% 0.8 9/12 = $18 is the net of tax interest

savings for the first 9 months if the $300 bonds were
converted at the beginning of the year, and
$200 10% 0.8 = $16 is the net of tax interest savings for
the whole year if the $200 bonds were also converted at the
beginning of the year.
Earnings Per Share 37
3.3 Dilution Test
It is possible to determine if a potential ordinary share is dilutive
or antidilutive without actually computing the diluted EPS
assuming conversion.

The test for dilution of stock options and warrants is simply to

compare the average market price during the financial period
with the exercise price.
If the market price exceeds the exercise price, the options
are dilutive and would be included as if exercised in
computing diluted EPS.
In Example 3 above, since the exercise price is $4 while the
average market price during the period of ordinary shares is
$10, the stock options are dilutive.
Earnings Per Share 38
3.3 Dilution Test
The test for dilution of each convertible security is performed by
computing what the conversion contributes to per share
earnings.
If the conversion of the convertible security contributes less
per share than preconversion basic EPS, the convertible
security is dilutive.
In Example 4 above, net income to the ordinary shareholders
increases by $40 (500 10% .8), and the number of
ordinary shares outstanding increases by 400 shares. The
contribution of this conversion to earnings is $0.10 per share
($40/400). Since this amount is less than preconversion
basic EPS of $0.50 per share, the convertible bonds are
dilutive.
Earnings Per Share 39
Example 6: Dilutive Securities
Lai Fung Corporation has basic earnings per ordinary share of
$2.09 for the period ended December 31, 2014. For each of the
following examples, decide whether the convertible security
would be dilutive or antidilutive in computing the diluted
earnings per share. Consider each example individually. The
tax rate is 30%.

Earnings Per Share 40

Example 6: Contd
a) 8 1/2% debentures, $1,000,000 face value, are convertible
into ordinary shares at the rate of 40 shares for each $1,000
bond.
After-tax interest:
$1,000,000 8.5% 70%* = $59,500.
*The after-tax rate: 100% 30% tax rate = 70%
Contribution per share:
$59,500 40,000 shares (1,000 bonds 40 shares per bond) =
$1.49.
The contribution is less than $2.09 basic earnings per share;
therefore, the bond conversion would be dilutive.
Earnings Per Share 41
 Example 6 Contd
b) $5 cumulative preference shares are convertible into ordinary
shares at the rate of 2 ordinary shares for 1 preference share. There
are 50,000 preference shares outstanding.
Contribution per share:
50,000 shares $5 per share = $250,000; $250,000 100,000
shares (50,000 preference shares 2 shares of ordinary share for
each preference share) = $2.50.
The contribution is greater than the $2.09 basic earnings per
share; the security is antidilutive.
c) Options to purchase 200,000 ordinary shares are outstanding. The
exercise price is $25 per share. Average market price is $20 per
share.
The exercise price exceeds the average market price;
assumed conversion would be antidilutive.
Earnings Per Share 42
Example 6 (Contd)
d) $400,000 of 10% debentures are convertible at the rate of 25
ordinary shares for each $1,000 bond.
After-tax interest:
$400,000 10% 70% = $28,000.
Contribution per share:
$28,000 10,000 shares (400 bonds 25 shares per bond) =
$2.80.

The contribution is greater than the $2.09 basic earnings per

share; the convertible bonds are antidilutive.
Earnings Per Share 43
Example 6: Contd
e) Preference $6 cumulative, 5,000 shares outstanding, convertible
into 3 ordinary shares for each preference share.
Contribution per share:
$6 5,000 = $30,000; $30,000 15,000 shares (5,000 3) =
$2.00.

The contribution is less than the $2.09 basic earnings per

share; the security is dilutive.

Earnings Per Share 44

3.4 Steps in Diluted EPS Calculation when there are
Multiple Potentially Dilutive Securities
When a company has several different potential ordinary shares,
each issue of potential ordinary shares is considered in sequence
from the most dilutive to the least dilutive such that the lowest
possible EPS figure is obtained. The steps in computing basic and
diluted EPS are summarized as follows.

Step 1: Calculate basic EPS using a weighted average number of

shares for ordinary shares outstanding during the year.

Earnings Per Share 45

3.4 Steps in Diluted EPS Calculation when there are
Multiple Potentially Dilutive Securities
Step 2: Determine whether stock options, warrants, and convertible
securities are dilutive.

Stock options and warrants are dilutive if the exercise price is

less than the average market price of the ordinary shares.
For convertible securities, compute incremental earnings per
share for each security individually. Those with an incremental
value greater than the basic EPS are antidilutive and are
excluded.

Earnings Per Share 46

3.4 Steps in Diluted EPS Calculation when there are
Multiple Potentially Dilutive Securities
Step 3: Calculate diluted EPS:
Include all dilutive stock options and warrants first. Apply the
assumed cash proceeds at the average market price to compute
incremental shares (i.e., treasury stock approach). Compute a new
EPS figure.
Include dilutive convertible securities one at a time, beginning with
the security that has the smallest incremental EPS (contribution per
share). Compute a new EPS figure. Continue selecting and applying
convertible securities until the next security in the list has an
incremental EPS value greater than the last computed EPS.
Discontinue the process at that point. All other securities in the list
are antidilutive for purposes of computing the lowest possible diluted
EPS figure and therefore are excluded.
Step 4: Report basic and diluted EPS on the face of the income
statement. Earnings Per Share 47
Example 7: Diluted EPS with Multiple Potentially
Dilutive Securities
For the year ended 31 December 2014 Rome Company had:
Net income for the year of $20,000,000.
30,000,000 ordinary shares outstanding at the beginning of
2014.
1,200,000 outstanding cumulative and convertible preference
shares which pay a preference dividend of $0.80 per share and
convert at a rate of 5 ordinary shares for each 4 preference
shares outstanding.
$21,000,000 7.5% convertible bonds which convert at a rate of
1 ordinary share for each $7 of debt outstanding.
During the year, the following stock options are outstanding:
Earnings Per Share 48
Example 7: Contd
Outstanding Exercise Number of
Period Price Options
----------------------------------- ---------- -------------
Series A: 1 Jan to 30 June 2014 $5.2 2,000,000
Series B: 1 Jan to 31 Dec 2014 5.7 1,200,000
On 1 July, 2014, 2,000,000 ordinary shares are issued from exercise of
Series A stock options.
On 1 July 2014, 1,800,000 warrants to subscribe 1 ordinary share of $1
each with an exercise price of $5.2 per share are issued. No warrants
are exercised up to year-end date.
Ordinary share market prices for 2014 were as follows:
Average for first 1/2 of year $5.5
Average for second 1/2 of year 6.5
Average for year 6.0
Tax rate of 16%. Earnings Per Share 49
Example 7: Contd
The steps for computing earnings per share will be applied to the
data for Rome Company to compute the various earnings per share
figures.
Step 1: Compute basic earnings per share

Net income $20,000,000

Less preference dividends: (1,200,000 $0.80) 960,000
Net income available to ordinary shareholders $19,040,000

Basic EPS [$19,040,000 /(30,000,000 6/12

+ 32,000,000 6/12)] $0.614

Earnings Per Share 50

Example 7: Contd
Step 2: Determine whether options, warrants and convertible bonds
are dilutive for computing diluted earnings per share

a) Stock options: Both stock options are dilutive, since the

exercise prices ($5.2 and $5.7) are less than the applicable
market prices ($5.5 and $6 average market prices for the first
half of the year and the whole year, respectively, for the
unexercised options).
b) Warrants are dilutive since the exercise price ($5.2) is less than
the applicable market price ($6.5 average market prices for the
second half of the year for the unexercised warrants).

Earnings Per Share 51

Example 7: Contd
c) Convertible securities:
Net Profit Number of Incremental
Impact Shares EPS
-------------- ------------- --------------
$0.8 preference shares $960,000 1,500,000 $0.64 antidilutive
7.5% bonds 1,323,000* 3,000,000 0.441 dilutive

*$21,000,000 7.5% (1 0.16)

Only the convertible bond is dilutive, since its impact on EPS is less than the
$0.614 basic EPS.

Earnings Per Share 52

Example 7: Contd
Step 3: Compute diluted earnings per share Weighted
Net Number of Part of Average
Description Profit Shares Year Shares EPS
-------------- -------- ------------- -------- ----------- -------
Basic earnings per share $19,040,000 31,000,000 $0.614
1 Jan - 30 June, 2014 options:
Number of shares
assumed issued 2,000,000
Number of shares
assumed repurchased
by using the proceeds
[(2,000,000 $5.2) / $5.5] (1,890,909)
Incremental shares 109,091 1/2 54,545
1 Jan - 31 Dec, 2014 options:
Number of shares
assumed issued 1,200,000
Number of shares
assumed repurchased
by using the proceeds
[(1,200,000 $5.7) / $6] (1,140,000)
Incremental shares 60,000 1 60,000
Earnings Per Share 53
Example 7: Contd
Step 3: Contd

Weighted
Net Number of Part of Average
Description Profit Shares Year Shares EPS
-------------- -------- ------------- -------- ----------- -------
1 July, 2014 warrants:
Number of shares
assumed issued 1,800,000
Number of shares
assumed repurchased
by using the proceeds
[(1,800,000 $5.2) / $6.5] (1,440,000)
Incremental shares 360,000 1/2 180,000
$19,040,000 31,294,545 $0.608
7.5% bonds 1,323,000 3,000,000 1 3,000,000
Diluted earnings per share $20,363,000 34,294,545 $0.594

Earnings Per Share 54

Example 7 (Contd)
Step 4: Report basic and diluted EPS on the face of the income
statement

Rome Company would report basic EPS of $0.614 and diluted EPS
of $0.594. In addition, Rome Company would provide note
information similar to that developed in Step 3.

Earnings Per Share 55

4. Disclosure Rules
HKAS 33 recommends the following be disclosed in the financial
statements:

On the face of the Income Statement/Profit and Loss Account:

basic and diluted EPS.

These amounts should be shown for both the current and the
previous accounting periods appeared in the Income Statement.

In the footnotes:
the amounts used as the numerators in calculating basic and
diluted EPS, and a reconciliation of those amounts to the net
profit or loss for the period;
the WANOS used as the denominator in calculating basic and
diluted EPS, and a reconciliation of these denominators to
each other. Earnings Per Share 56