325761264 Book Value Per Share Basic Earnings Per
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Book Value per Share, Basic Earnings per Share and Diluted Earnings per Share 17 September 2016
Book value per share Definition and formula Accounting procedures Preference as to assets
Preference as to dividends
UNOR - College of Business and Accountancy
1 17 September 2016 Slide 2
Definition and importance •
•
•
•
The amount that would be paid on each share assuming the entity is liquidated and the amount available to the shareholders is exactly the amount reported in the shareholders’ equity (Valix et al., 2015). Measure used by owners of shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. Should the company decide to dissolve, the book value per common indicates the peso value remaining for common shareholders after all assets are liquidated, all debtors are paid and preferred shareholders’ rights are considered. Calculated using historical costs.
UNOR - College of Business and Accountancy
17 September 2016 Slide 3
Definition - preference shares • •
Liquidation value - normally received upon liquidation; may be more than the par value Preference shareholders may be: 1. Preferred as to assets 2. Preferred as to dividends • Noncumulative preference share - entitled to current year dividends only • Cumulative preference share - all dividends in arrears • Nonparticipating preference share – dividends equal to the fixed rate • Participating preference share - entitled to dividends aside from the fixed rate (fully, participation up to certain extent)
UNOR - College of Business and Accountancy
17 September 2016 Slide 4
Formula One class of share capital:
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
UNOR - College of Business and Accountancy
17 September 2016 Slide 5
Illustration No. 1 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Share capital, P100 par, 50,000 shares
P5,000,000
Share premium
1,000,000
Retained earnings
2,000,000
Revaluation surplus
1,500,000
Total shareholders’ equity
UNOR - College of Business and Accountancy
P9,500,000
17 September 2016 Slide 6
Illustration No. 1 (Cont’d) 𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑃9,500,000 = 50,000 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑃190 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
UNOR - College of Business and Accountancy
17 September 2016 Slide 7
Formula (Cont’d.) Two classes of share capital
𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
UNOR - College of Business and Accountancy
17 September 2016 Slide 8
Accounting procedures 1. The amount equal to the par value is allocated to the preference share and ordinary share. 2. Any balance of the shareholders’ equity in excess of the par or stated value is then apportioned taking into account the liquidation value and dividend rights of the preference shareholders. For book value purposes, the following are assumed to be available for dividends: a. Retained earnings (R/E) b. Share premium (SP) c. Revaluation surplus 3. Treasury share are treated as retired [gain (SP), loss (SP, R/E)] UNOR - College of Business and Accountancy
17 September 2016 Slide 9
Accounting procedures (Cont’d) SPECIAL NOTES ON PREFERENCE SHARE AS TO DIVIDENDS 1. ‘No specific designation - assume noncumulative, nonparticipating 2. Dividends in arrears - include current dividends, must be specifically disclosed 3. Two classes of preference shares with different rates both participating - lower rate will be the basis for allocation of ordinary shares If one preference share is participating, rate of the participating preference share will be used as basis
UNOR - College of Business and Accountancy
17 September 2016 Slide 10
Preference as to assets The preference shareholders are entitled to payments not only for liquidation value but also for dividends in arrears.
UNOR - College of Business and Accountancy
17 September 2016 Slide 11
Preference as to dividends If dividends are declared, the preference shareholders have the right to receive dividends first before the ordinary shareholders are paid dividends
UNOR - College of Business and Accountancy
17 September 2016 Slide 12
Illustration 2 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Preference share capital, 12% P100 par, 25,000 shares
Ordinary share capital, P100 par, 50,000 shares Share premium Retained earnings Total shareholders’ equity
P2,500,000
5,000,000 600,000 3,000,000 P11,100,000
Dividends have been paid on the preference share up to December 31, 2013.
UNOR - College of Business and Accountancy
17 September 2016 Slide 13
Illustration 2 (Cont’d) CASE 1 - PREFERENCE SHARE IS NONCUMULATIVE AND NONPARTICIPATING Excess over par
Preference
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(300,000)
300,000
Balance to common
3,300,000
Balances
Total shareholders’ equity Divided by shares outstanding Book value per share UNOR - College of Business and Accountancy
3,300,000 2,800,000
8,300,000
25,000
50,000
P112
P166 17 September 2016 Slide 14
Illustration 2 (Cont’d) CASE 2 - PREFERENCE SHARE IS CUMULATIVE AND NONPARTICIPATING Excess over par
Preference
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(600,000)
600,000
Balance to common
3,000,000
Balances
Total shareholders’ equity Divided by shares outstanding Book value per share UNOR - College of Business and Accountancy
3,000,000 3,100,000
8,000,000
25,000
50,000
P124
P160 17 September 2016 Slide 15
Illustration 2 (Cont’d) CASE 3 - PREFERENCE SHARE IS CUMULATIVE AND PARTICIPATING Excess over par
Preference
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(600,000)
600,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Balances
Preference (1/3 x 2,400,000)
600,000 800,000
Ordinary (2/3 x 2,400,000) Total shareholders’ equity Divided by shares outstanding Book value per share UNOR - College of Business and Accountancy
1,600,00 3,900,000
7,200,000
25,000
50,000
P156
P144 17 September 2016 Slide 16
Illustration 2 (Cont’d) CASE 4 - PREFERENCE SHARE IS CUMULATIVE AND PARTICIPATING UP TO 16% Excess over par
Preference
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(600,000)
600,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Balances
Preference (4% x 2,500,000)
600,000 100,000
Ordinary (balance to common) Total shareholders’ equity
Divided by shares outstanding Book value per share UNOR - College of Business and Accountancy
2,300,00 3,200,000
7,900,000
25,000
50,000
P128
P158 17 September 2016 Slide 17
Illustration 2 (Cont’d) CASE 5 - PREFERENCE SHARE IS CUMULATIVE, NONPARTICIPATING AND WITH LIQUIDATION VALUE OF P106 PER SHARE
Balances
Excess over par Preference
Ordinary
P3,600,000 P2,500,000
5,000,000
Liquidation premium (25,000sh x P6)
(150,000)
150,000
Preference dividends
(600,000)
600,000
Balance to common
2,850,000
Total shareholders’ equity Divided by shares outstanding Book value per share
UNOR - College of Business and Accountancy
2,850,000 3,250,000
7,850,000
25,000
50,000
P130
P157
17 September 2016 Slide 18
Exercise 1 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Preference share capital, 12% P100 par
P1,000,000
Ordinary share capital, P100 par
4,000,000
Share premium
2,000,000
Retained earnings
1,000,000
Total shareholders’ equity
P8,000,000
Dividends have been paid on the preference share up to December 31, 2013.
UNOR - College of Business and Accountancy
17 September 2016 Slide 19
Exercise 1 (Cont’d) REQUIRED: Compute the book value per ordinary share and per preference share under each of the following conditions with respect to preference share: 1. Cumulative and fully participating 2. Cumulative and fully participating after ordinary share receives 15% 3. Cumulative and participating up to 16% 4. Cumulative and nonparticipating 5. Noncumulative and nonparticipating.
UNOR - College of Business and Accountancy
17 September 2016 Slide 20
Illustration 3 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Preference share capital, 12% P100 par, 25,000 shares cumulative
P2,500,000
Ordinary share capital, P100 par, 50,000 shares
5,000,000
Deficit
(900,000)
Total shareholders’ equity
P6,600,000
No dividends have been paid on preference share since 2012.
UNOR - College of Business and Accountancy
17 September 2016 Slide 21
Illustration 3 (Cont’d) CASE 1 – PREFERENCE SHARE HAS PREFERENCE AS TO ASSETS (DIVIDENDS IN ARREARS ARE FULLY PAYABLE) Excess over par Preference Balances
(P900,00) P2,500,000 P5,000,000
Preference dividend
(1,200,000)
Balance to common
(2,100,000)
Total shareholders’ equity Divided by shares outstanding Book value per share
UNOR - College of Business and Accountancy
Ordinary
1,200,000
(2,100,000) 3,700,000
2,900,000
25,000
50,000
P148
P58
17 September 2016 Slide 22
Illustration 3 (Cont’d) CASE 2 – PREFERENCE SHARE HAS PREFERENCE AS TO DIVIDENDS Excess over par Preference Balances
Ordinary
(P900,00) P2,500,000 P5,000,000
Share in deficit: Preference - 1/3
300,000
Ordinary - 2/3
600,000
Total Divide by shares outstanding
Book value per share
UNOR - College of Business and Accountancy
(300,000) (600,000) 2,200,000
4,400,000
25,000
50,000
88
88
17 September 2016 Slide 23
Illustration 4 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Preference share capital, 12% cumulative, participating, P100 par, 50,000 shares authorized, 25,000 shares issued, of which 5,000 shares are in treasury Treasury preference shares, at cost Subscribed preference share capital, 10,000 shares Subscription receivables - preference Ordinary share capital, P50 par, 200,000 shares authorized, 90,000 shares issued, of which 10,000 shares are in treasury Treasury ordinary shares, at cost Subscribed ordinary share capital, 20,000 shares Subscription receivables - ordinary UNOR - College of Business and Accountancy
P2,500,000 400,000 1,000,000 300,000
4,500,000 550,000 1,000,000 200,000 17 September 2016 Slide 24
Illustration 4 (Cont’d) Share premium
P1,250,000
Retained earnings unappropriated
1,000,000
Retained earnings appropriated
2,500,000
Last dividend payments
UNOR - College of Business and Accountancy
December 31, 2010
17 September 2016 Slide 25
Illustration 4 (Cont’d) Computation of share capital outstanding: PREFERENCE Amount Issued
P2,500,000
ORDINARY
Shares
Amount
Shares
25,000 P4,500,000
90,000
Subscribed
1,000,000
10,000
1,000,000
20,000
Total
3,500,000
35,000
5,500,000
110,000
500,000
5,000
500,000
10,000
P3,000,000
30,000
P5,000,000
100,000
Less: treasury at par Outstanding
UNOR - College of Business and Accountancy
17 September 2016 Slide 26
Illustration 4 (Cont’d) Adjustment to retire ordinary treasury shares and preference treasury shares. Preference share capital (5,000sh x 100)
500,000
Treasury preference shares
400,000
Share premium
100,000
Ordinary share capital (10,000sh x 50)
Share premium Treasury ordinary shares
UNOR - College of Business and Accountancy
500,000
50,000 550,000
17 September 2016 Slide 27
Illustration 4 (Cont’d) Excess over par
Preference
Ordinary
Balances
P4,800,000
P3,000,000
5,000,000
Preference dividend
(1,800,000)
1,800,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Preference (3/8 x 2,400,000)
600,000 900,000
Ordinary (5/8 x 2,400,000) Total shareholders’ equity Divided by shares outstanding Book value per share Annual dividend for preference (12% x P3,000,000 x 5) Ordinary dividend (P5,000,000 x 12%) UNOR - College of Business and Accountancy
1,500,00 5,700,000
7,100,000
30,000
100,000
P128
P71
P1,800,000 600,000 17 September 2016 Slide 28
Illustration 5 An entity showed the following shareholders’ equity on December 31, 2015: Preference share capital, P100 par, 50,000 shares
P5,000,000
Ordinary share capital, P50 par, 150,000 shares
7,500,000
Retained earnings
4,000,000
The preference dividend rate is 12% and the preference share is cumulative and fully participating. Dividends on the preference share are in arrears for 2014 and 2015. On December 31, 2015, the board of directors of the entity would like to pay the ordinary shareholders a dividend of P10 per share. UNOR - College of Business and Accountancy
17 September 2016 Slide 29
Illustration 5 (Cont’d) Question: To attain the dividend objective of the entity, how much maximum dividend would be declared on the preference and ordinary shares?
UNOR - College of Business and Accountancy
17 September 2016 Slide 30
Illustration 5 (Cont’d) Ordinary dividend for 2015 (150,000 shares x P10) % of ordinary dividend (1,500,000 ÷ 7,500,000)
P1,500,000 20%
Computation of maximum dividends Ordinary dividend
P1,500,000
Preference dividend: 2014 (12% x P5,000,000)
600,000
2015 (20% x P5,000,000)
1,000,000
Maximum dividend
UNOR - College of Business and Accountancy
P3,100,000
17 September 2016 Slide 31
Illustration 5 (Cont’d) Proof: Dividend Maximum dividend
Preference
Ordinary
P3,100,000
Preference dividends: 2014
(600,000)
P600,000
2015
(600,000)
600,000
Ordinary dividend for 2015 using the preference rate (12% x 7,500,000)
(900,000)
Balance for participation
1,000,000
Preference (50/125 x P1,000,000)
P900,000 400,000
Ordinary (75/125 x P1,000,000) Maximum dividend UNOR - College of Business and Accountancy
600,000 P1,600,000
P1,500,000 17 September 2016 Slide 32
Basic earnings per share Definition and formula Uses of earnings per share Determination of weighted average
Bonus issue and rights issue Presentation
UNOR - College of Business and Accountancy
2 17 September 2016 Slide 33
Definition
The amount attributable to every ordinary share outstanding during the period Pertains to ordinary shares Not necessary for preference; definite rate of return Two presentation under PAS 33: 1. Basic earnings per share 2. Diluted earnings per share Required for publicly-traded entities or in the process of issuing ordinary shares or potential ordinary shares in the public securities market; not required for nonpublic entities but encouraged
UNOR - College of Business and Accountancy
17 September 2016 Slide 34
Definition (Cont’d)
Equity instrument - residual interests in the assets after deducting liabilities Potential ordinary share - financial instrument or other contract that may entitle its holder to ordinary share Financial instrument - any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity Warrants or options - financial instruments that give the holder the right to purchase ordinary shares
UNOR - College of Business and Accountancy
17 September 2016 Slide 35
Formula 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐵𝑎𝑠𝑖𝑐 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
• • • •
Net income - after deducting dividends on preference shares Preference share is cumulative - current year only is deducted, whether dividends are declared or not Preference share is noncumulative - current year only is deducted if there is only dividend declaration If there is significant change during the year - weighted average number of ordinary share capital is the denominator
UNOR - College of Business and Accountancy
17 September 2016 Slide 36
Illustration 6 An entity provided the following information for the current year: Preference share capital, P100 par, 10% cumulative Ordinary share capital, P100 par, 50,000 shares Income from continuing operations Income form discontinued operations Net income
P1,000,000 5,000,000 P1,500,000 500,000 P2,000,00
Required: Compute for the earnings per share. UNOR - College of Business and Accountancy
17 September 2016 Slide 37
Illustration 6 (Cont’d) Computation: Income from continuing operations
Preference dividend for current year (10% x P1,000,000) Net income
P1,500,000
(100,000) P1,400,00
Basic earnings per share Income from continuing operations (P1.4mil. ÷ 50,000sh) Income from discontinued operation (P0.5mil. ÷ 50,000sh) Net income
UNOR - College of Business and Accountancy
P28 10 P38
17 September 2016 Slide 38
Uses of earnings per share • • •
Determinant of market price of ordinary shares (attractiveness of the ordinary share as an investment) Measure of performance Basis of dividend policy
UNOR - College of Business and Accountancy
17 September 2016 Slide 39
Illustration 7 An entity had the following capital structure at the end of the current year: Preference share capital, P100 par, 40,000 shares issued and outstanding
P2,000,000
Ordinary share capital, P50 par, 80,000 shares issued and outstanding
8,000,000
Net income for the year
3,000,000
The preference dividend rate is 10% and the preference share is nonconvertible but cumulative and fully participating. Dividends paid to ordinary shareholders is P20 per share.
UNOR - College of Business and Accountancy
17 September 2016 Slide 40
Illustration 7 (Cont’d) Preference
Ordinary
Basic dividend: Preference (10% x P2,000,000)
P200,000
Ordinary (80,000 x P20) Balance for participation Total dividends
P1,600,000 240,000
960,000
P440,000
P2,560,000
Net income
P3,000,000
Basic dividend (P200,000 + P1,600,000)
(1,800,000)
Balance for participation
P1,200,000
Basic earnings per share Preference share (P440,000 ÷ 40,000 shares)
P11
Ordinary share (P2,560,000 ÷ 80,000 shares)
32
UNOR - College of Business and Accountancy
17 September 2016 Slide 41
Determination of weighted average • •
•
• •
Ordinary shares in exchange for cash are included when cash is receivables. Ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are included from the date that interest ceases to accrue. Ordinary shares issued in place of interest or principal on other financial instruments are included form the date that interest ceases to accrue. Ordinary shares issued in exchange for the settlement of a liability of the entity are included from the settlement date. Ordinary shares issued as a consideration for the acquisition of an asset other than cash are included as of the date on which the acquisition is recognized.
UNOR - College of Business and Accountancy
17 September 2016 Slide 42
Determination of weighted average (Cont’d) • •
•
•
Ordinary shares issued for the rendering of services to the entity are included as the services are rendered. Ordinary shares issued as part of the purchase consideration of a business combination that is an acquisition are included in the weighted average number of shares from the date of acquisition. Ordinary shares that will be issued upon the conversion of a mandatory convertible instrument are included in the calculation of basic earnings per share from the date the contract entered into. In the case of a stock dividend or a share split, ordinary shares are issued to existing shareholders for no additional consideration.
UNOR - College of Business and Accountancy
17 September 2016 Slide 43
Determination of weighted average (Cont’d)
•
The number of ordinary shares outstanding before the event is adjusted for the proportionate change in the number of ordinary shares outstanding as if the event had occurred at the beginning of the earliest period reported. Subscribed ordinary shares or partly paid shares are included in EPS to the extent that they are entitled to participate in dividends. (Corporation Code of the Philippines - entitled to participate fully in dividends; the law prevails)
UNOR - College of Business and Accountancy
17 September 2016 Slide 44
Illustration 8
January 1
Beginning balance
100,000 shares
May 1
Additional issuance
150,000 shares
September 1
Additional issuance
150,000 shares
Total shares outstanding
400,000 shares
UNOR - College of Business and Accountancy
17 September 2016 Slide 45
Illustration 8 (Cont’d) (a)
(b)
(a x b)
Date
Shares
Months outstanding
Peso month
Jan. 1
100,000
12
P1,200,000
May 1
150,000
8
1,200,000
Sep. 1
150,000
4
600,000 3,000,000
Average share (P3,000,000 ÷ 12)
UNOR - College of Business and Accountancy
250,000 shares
17 September 2016 Slide 46
Illustration 8 (Cont’d) ANOTHER APPROACH: Date
Shares
Fraction
Average shares
Jan. 1
100,000
12/12
100,000
May 1
150,000
8/12
100,000
Sep. 1
150,000
4/12
50,000 250,000
UNOR - College of Business and Accountancy
17 September 2016 Slide 47
Illustration 9
January 1
Beginning balance
March 1
Issued for cash
50,000 shares
July 1
20% stock dividend
30,000 shares
November 1
Treasury shares
(15,000 shares)
Total shares outstanding
165,000 shares
UNOR - College of Business and Accountancy
100,000 shares
17 September 2016 Slide 48
Illustration 9 (Cont’d) (a)
(b)
(a x b)
Date
Shares
Mos. outstading
Peso month
Jan. 1
120,000
12
P1,440,000
Mar. 1
60,000
10
600,000
Nov. 1
(15,000)
2
(30,000) 2,010,000
Average share (P2,010,000 ÷ 12)
UNOR - College of Business and Accountancy
167,500 shares
17 September 2016 Slide 49
Illustration 9 (Cont’d) ANOTHER APPROACH: Date
Shares
Fraction
Average shares
Jan. 1
120,000
12/12
120,000
Mar. 1
60,000
10/12
50,000
Nov. 1
(15,000)
2/12
(2,500) 167,500
UNOR - College of Business and Accountancy
17 September 2016 Slide 50
Illustration 10
January 1
100,000 shares issued and outstanding
April 1
Issued 50,000 new shares
June 1
Share split 2 for 1
July 1
Purchased 20,000 treasury shares
October 1
20% stock dividends
December 31
Share split 5 for 1
UNOR - College of Business and Accountancy
17 September 2016 Slide 51
Illustration 10 (Cont’d) (a)
(b)
(a x b)
Date
Shares
Mos. outstading
Peso month
Jan. 1
1,200,000
12
P14,400,000
Mar. 1
600,000
9
5,400,000
Nov. 1
(120,000)
6
(720,000) 19,080,000
Average share (P19,080,000 ÷ 12)
UNOR - College of Business and Accountancy
1,590,000 shares
17 September 2016 Slide 52
Illustration 10 (Cont’d) ANOTHER APPROACH: Date
Shares
Fraction
Average shares
Jan. 1
1,200,000
12/12
1,200,000
Apr. 1
600,000
9/12
450,000
Jul. 1
(120,000)
6/12
(60,000) 1,590,000
UNOR - College of Business and Accountancy
17 September 2016 Slide 53
Bonus issue • • •
Ordinary shares are issued to existing shareholders for no consideration. Stock dividend Adjusted proportionate for the proportionate change in the number of ordinary shares outstanding as if occurred at the beginning of the year
UNOR - College of Business and Accountancy
17 September 2016 Slide 54
Illustration 11 Net income - 2015
7,200,000
Net income – 2016
6,000,000
Ordinary share outstanding on January 1, 2015
200,000
On October 1, 2016, the entity implemented a bonus issue of ordinary shares in the ratio of two ordinary shares for each ordinary share.
UNOR - College of Business and Accountancy
17 September 2016 Slide 55
Rights issue • • • • • • •
Exercise price is less than the fair value of the shares Include a bonus element - no consideration Stock right or right of preemption Adjustment factor is the ratio of the market value of the right-on to the theoretical market value of the share ex-right Market value of the share right-on - market value of the share immediately prior to the exercise of rights. Problem - if ex-right Market value of the share ex-right – total market value of the shares outstanding plus the proceed from the exercise of rights divided by the number of shares outstanding after the exercise of rights
UNOR - College of Business and Accountancy
17 September 2016 Slide 56
Diluted earnings per share Concept of dilution Potential ordinary shares Procedures for treasury share method
Multiple potential ordinary share
UNOR - College of Business and Accountancy
3 17 September 2016 Slide 57
Illustration 14 An entity had the following securities outstanding at the beginning of the current year: 10% convertible bonds payable, each P1,000 bond convertible into 10 ordinary shares
P4,000,000
Ordinary share capital, P100 par, 250,000 shares authorized, 100,000 shares issued
10,000,000
Net income Income tax rate
5,000,000 30%
Assume that the convertible bond payable is issued on April 1 of the current year. In this case, all conversion computations will be made for nine months only, from April 1 to December 31 of the current year. UNOR - College of Business and Accountancy
17 September 2016 Slide 58
Illustration 15 An entity had the following securities outstanding at the beginning of the current year: 10% convertible bonds payable, each P1,000 bond convertible into 10 ordinary shares
P4,000,000
Ordinary share capital, P100 par, 250,000 shares authorized, 100,000 shares issued
10,000,000
Net income Income tax rate
5,000,000 30%
All of the bonds were converted into ordinary shares on October 1 of the current year.
UNOR - College of Business and Accountancy
17 September 2016 Slide 59
Illustration 16 An entity had the following securities outstanding at the beginning of the current year: 10% convertible cumulative preference share capital , P100 par, 30,000 shares - one preference share is convertible into two ordinary shares
P3,000,000
Ordinary share capital, P100 par, 250,000 shares authorized, 100,000 shares issued
10,000,000
Net income
UNOR - College of Business and Accountancy
6,000,000
17 September 2016 Slide 60
Illustration 17 An entity had the following securities outstanding at the beginning of the current year: Preference share capital – 10%, 50,000 shares, P100 par, cumulative and convertible into 100,000 ordinary shares
P5,000,000
Ordinary share capital, P50 par, 500,000 shares authorized, 200,000 shares issued
10,000,000
Net income
4,000,000
The preference shares were all converted into ordinary shares on October 1 of the current year. The preference dividends for the entire year were paid in full before the conversion. UNOR - College of Business and Accountancy
17 September 2016 Slide 61
Book value per share Definition and formula Accounting procedures Preference as to assets
Preference as to dividends
UNOR - College of Business and Accountancy
1 17 September 2016 Slide 2
Definition and importance •
•
•
•
The amount that would be paid on each share assuming the entity is liquidated and the amount available to the shareholders is exactly the amount reported in the shareholders’ equity (Valix et al., 2015). Measure used by owners of shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. Should the company decide to dissolve, the book value per common indicates the peso value remaining for common shareholders after all assets are liquidated, all debtors are paid and preferred shareholders’ rights are considered. Calculated using historical costs.
UNOR - College of Business and Accountancy
17 September 2016 Slide 3
Definition - preference shares • •
Liquidation value - normally received upon liquidation; may be more than the par value Preference shareholders may be: 1. Preferred as to assets 2. Preferred as to dividends • Noncumulative preference share - entitled to current year dividends only • Cumulative preference share - all dividends in arrears • Nonparticipating preference share – dividends equal to the fixed rate • Participating preference share - entitled to dividends aside from the fixed rate (fully, participation up to certain extent)
UNOR - College of Business and Accountancy
17 September 2016 Slide 4
Formula One class of share capital:
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
UNOR - College of Business and Accountancy
17 September 2016 Slide 5
Illustration No. 1 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Share capital, P100 par, 50,000 shares
P5,000,000
Share premium
1,000,000
Retained earnings
2,000,000
Revaluation surplus
1,500,000
Total shareholders’ equity
UNOR - College of Business and Accountancy
P9,500,000
17 September 2016 Slide 6
Illustration No. 1 (Cont’d) 𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑃9,500,000 = 50,000 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑃190 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
UNOR - College of Business and Accountancy
17 September 2016 Slide 7
Formula (Cont’d.) Two classes of share capital
𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
UNOR - College of Business and Accountancy
17 September 2016 Slide 8
Accounting procedures 1. The amount equal to the par value is allocated to the preference share and ordinary share. 2. Any balance of the shareholders’ equity in excess of the par or stated value is then apportioned taking into account the liquidation value and dividend rights of the preference shareholders. For book value purposes, the following are assumed to be available for dividends: a. Retained earnings (R/E) b. Share premium (SP) c. Revaluation surplus 3. Treasury share are treated as retired [gain (SP), loss (SP, R/E)] UNOR - College of Business and Accountancy
17 September 2016 Slide 9
Accounting procedures (Cont’d) SPECIAL NOTES ON PREFERENCE SHARE AS TO DIVIDENDS 1. ‘No specific designation - assume noncumulative, nonparticipating 2. Dividends in arrears - include current dividends, must be specifically disclosed 3. Two classes of preference shares with different rates both participating - lower rate will be the basis for allocation of ordinary shares If one preference share is participating, rate of the participating preference share will be used as basis
UNOR - College of Business and Accountancy
17 September 2016 Slide 10
Preference as to assets The preference shareholders are entitled to payments not only for liquidation value but also for dividends in arrears.
UNOR - College of Business and Accountancy
17 September 2016 Slide 11
Preference as to dividends If dividends are declared, the preference shareholders have the right to receive dividends first before the ordinary shareholders are paid dividends
UNOR - College of Business and Accountancy
17 September 2016 Slide 12
Illustration 2 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Preference share capital, 12% P100 par, 25,000 shares
Ordinary share capital, P100 par, 50,000 shares Share premium Retained earnings Total shareholders’ equity
P2,500,000
5,000,000 600,000 3,000,000 P11,100,000
Dividends have been paid on the preference share up to December 31, 2013.
UNOR - College of Business and Accountancy
17 September 2016 Slide 13
Illustration 2 (Cont’d) CASE 1 - PREFERENCE SHARE IS NONCUMULATIVE AND NONPARTICIPATING Excess over par
Preference
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(300,000)
300,000
Balance to common
3,300,000
Balances
Total shareholders’ equity Divided by shares outstanding Book value per share UNOR - College of Business and Accountancy
3,300,000 2,800,000
8,300,000
25,000
50,000
P112
P166 17 September 2016 Slide 14
Illustration 2 (Cont’d) CASE 2 - PREFERENCE SHARE IS CUMULATIVE AND NONPARTICIPATING Excess over par
Preference
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(600,000)
600,000
Balance to common
3,000,000
Balances
Total shareholders’ equity Divided by shares outstanding Book value per share UNOR - College of Business and Accountancy
3,000,000 3,100,000
8,000,000
25,000
50,000
P124
P160 17 September 2016 Slide 15
Illustration 2 (Cont’d) CASE 3 - PREFERENCE SHARE IS CUMULATIVE AND PARTICIPATING Excess over par
Preference
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(600,000)
600,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Balances
Preference (1/3 x 2,400,000)
600,000 800,000
Ordinary (2/3 x 2,400,000) Total shareholders’ equity Divided by shares outstanding Book value per share UNOR - College of Business and Accountancy
1,600,00 3,900,000
7,200,000
25,000
50,000
P156
P144 17 September 2016 Slide 16
Illustration 2 (Cont’d) CASE 4 - PREFERENCE SHARE IS CUMULATIVE AND PARTICIPATING UP TO 16% Excess over par
Preference
Ordinary
P3,600,000
P2,500,000
5,000,000
Preference dividend
(600,000)
600,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Balances
Preference (4% x 2,500,000)
600,000 100,000
Ordinary (balance to common) Total shareholders’ equity
Divided by shares outstanding Book value per share UNOR - College of Business and Accountancy
2,300,00 3,200,000
7,900,000
25,000
50,000
P128
P158 17 September 2016 Slide 17
Illustration 2 (Cont’d) CASE 5 - PREFERENCE SHARE IS CUMULATIVE, NONPARTICIPATING AND WITH LIQUIDATION VALUE OF P106 PER SHARE
Balances
Excess over par Preference
Ordinary
P3,600,000 P2,500,000
5,000,000
Liquidation premium (25,000sh x P6)
(150,000)
150,000
Preference dividends
(600,000)
600,000
Balance to common
2,850,000
Total shareholders’ equity Divided by shares outstanding Book value per share
UNOR - College of Business and Accountancy
2,850,000 3,250,000
7,850,000
25,000
50,000
P130
P157
17 September 2016 Slide 18
Exercise 1 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Preference share capital, 12% P100 par
P1,000,000
Ordinary share capital, P100 par
4,000,000
Share premium
2,000,000
Retained earnings
1,000,000
Total shareholders’ equity
P8,000,000
Dividends have been paid on the preference share up to December 31, 2013.
UNOR - College of Business and Accountancy
17 September 2016 Slide 19
Exercise 1 (Cont’d) REQUIRED: Compute the book value per ordinary share and per preference share under each of the following conditions with respect to preference share: 1. Cumulative and fully participating 2. Cumulative and fully participating after ordinary share receives 15% 3. Cumulative and participating up to 16% 4. Cumulative and nonparticipating 5. Noncumulative and nonparticipating.
UNOR - College of Business and Accountancy
17 September 2016 Slide 20
Illustration 3 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Preference share capital, 12% P100 par, 25,000 shares cumulative
P2,500,000
Ordinary share capital, P100 par, 50,000 shares
5,000,000
Deficit
(900,000)
Total shareholders’ equity
P6,600,000
No dividends have been paid on preference share since 2012.
UNOR - College of Business and Accountancy
17 September 2016 Slide 21
Illustration 3 (Cont’d) CASE 1 – PREFERENCE SHARE HAS PREFERENCE AS TO ASSETS (DIVIDENDS IN ARREARS ARE FULLY PAYABLE) Excess over par Preference Balances
(P900,00) P2,500,000 P5,000,000
Preference dividend
(1,200,000)
Balance to common
(2,100,000)
Total shareholders’ equity Divided by shares outstanding Book value per share
UNOR - College of Business and Accountancy
Ordinary
1,200,000
(2,100,000) 3,700,000
2,900,000
25,000
50,000
P148
P58
17 September 2016 Slide 22
Illustration 3 (Cont’d) CASE 2 – PREFERENCE SHARE HAS PREFERENCE AS TO DIVIDENDS Excess over par Preference Balances
Ordinary
(P900,00) P2,500,000 P5,000,000
Share in deficit: Preference - 1/3
300,000
Ordinary - 2/3
600,000
Total Divide by shares outstanding
Book value per share
UNOR - College of Business and Accountancy
(300,000) (600,000) 2,200,000
4,400,000
25,000
50,000
88
88
17 September 2016 Slide 23
Illustration 4 The shareholders’ equity in the statement of financial position on December 31, 2015 showed the following: Preference share capital, 12% cumulative, participating, P100 par, 50,000 shares authorized, 25,000 shares issued, of which 5,000 shares are in treasury Treasury preference shares, at cost Subscribed preference share capital, 10,000 shares Subscription receivables - preference Ordinary share capital, P50 par, 200,000 shares authorized, 90,000 shares issued, of which 10,000 shares are in treasury Treasury ordinary shares, at cost Subscribed ordinary share capital, 20,000 shares Subscription receivables - ordinary UNOR - College of Business and Accountancy
P2,500,000 400,000 1,000,000 300,000
4,500,000 550,000 1,000,000 200,000 17 September 2016 Slide 24
Illustration 4 (Cont’d) Share premium
P1,250,000
Retained earnings unappropriated
1,000,000
Retained earnings appropriated
2,500,000
Last dividend payments
UNOR - College of Business and Accountancy
December 31, 2010
17 September 2016 Slide 25
Illustration 4 (Cont’d) Computation of share capital outstanding: PREFERENCE Amount Issued
P2,500,000
ORDINARY
Shares
Amount
Shares
25,000 P4,500,000
90,000
Subscribed
1,000,000
10,000
1,000,000
20,000
Total
3,500,000
35,000
5,500,000
110,000
500,000
5,000
500,000
10,000
P3,000,000
30,000
P5,000,000
100,000
Less: treasury at par Outstanding
UNOR - College of Business and Accountancy
17 September 2016 Slide 26
Illustration 4 (Cont’d) Adjustment to retire ordinary treasury shares and preference treasury shares. Preference share capital (5,000sh x 100)
500,000
Treasury preference shares
400,000
Share premium
100,000
Ordinary share capital (10,000sh x 50)
Share premium Treasury ordinary shares
UNOR - College of Business and Accountancy
500,000
50,000 550,000
17 September 2016 Slide 27
Illustration 4 (Cont’d) Excess over par
Preference
Ordinary
Balances
P4,800,000
P3,000,000
5,000,000
Preference dividend
(1,800,000)
1,800,000
Ordinary dividends
(600,000)
Balance to common
2,400,000
Preference (3/8 x 2,400,000)
600,000 900,000
Ordinary (5/8 x 2,400,000) Total shareholders’ equity Divided by shares outstanding Book value per share Annual dividend for preference (12% x P3,000,000 x 5) Ordinary dividend (P5,000,000 x 12%) UNOR - College of Business and Accountancy
1,500,00 5,700,000
7,100,000
30,000
100,000
P128
P71
P1,800,000 600,000 17 September 2016 Slide 28
Illustration 5 An entity showed the following shareholders’ equity on December 31, 2015: Preference share capital, P100 par, 50,000 shares
P5,000,000
Ordinary share capital, P50 par, 150,000 shares
7,500,000
Retained earnings
4,000,000
The preference dividend rate is 12% and the preference share is cumulative and fully participating. Dividends on the preference share are in arrears for 2014 and 2015. On December 31, 2015, the board of directors of the entity would like to pay the ordinary shareholders a dividend of P10 per share. UNOR - College of Business and Accountancy
17 September 2016 Slide 29
Illustration 5 (Cont’d) Question: To attain the dividend objective of the entity, how much maximum dividend would be declared on the preference and ordinary shares?
UNOR - College of Business and Accountancy
17 September 2016 Slide 30
Illustration 5 (Cont’d) Ordinary dividend for 2015 (150,000 shares x P10) % of ordinary dividend (1,500,000 ÷ 7,500,000)
P1,500,000 20%
Computation of maximum dividends Ordinary dividend
P1,500,000
Preference dividend: 2014 (12% x P5,000,000)
600,000
2015 (20% x P5,000,000)
1,000,000
Maximum dividend
UNOR - College of Business and Accountancy
P3,100,000
17 September 2016 Slide 31
Illustration 5 (Cont’d) Proof: Dividend Maximum dividend
Preference
Ordinary
P3,100,000
Preference dividends: 2014
(600,000)
P600,000
2015
(600,000)
600,000
Ordinary dividend for 2015 using the preference rate (12% x 7,500,000)
(900,000)
Balance for participation
1,000,000
Preference (50/125 x P1,000,000)
P900,000 400,000
Ordinary (75/125 x P1,000,000) Maximum dividend UNOR - College of Business and Accountancy
600,000 P1,600,000
P1,500,000 17 September 2016 Slide 32
Basic earnings per share Definition and formula Uses of earnings per share Determination of weighted average
Bonus issue and rights issue Presentation
UNOR - College of Business and Accountancy
2 17 September 2016 Slide 33
Definition
The amount attributable to every ordinary share outstanding during the period Pertains to ordinary shares Not necessary for preference; definite rate of return Two presentation under PAS 33: 1. Basic earnings per share 2. Diluted earnings per share Required for publicly-traded entities or in the process of issuing ordinary shares or potential ordinary shares in the public securities market; not required for nonpublic entities but encouraged
UNOR - College of Business and Accountancy
17 September 2016 Slide 34
Definition (Cont’d)
Equity instrument - residual interests in the assets after deducting liabilities Potential ordinary share - financial instrument or other contract that may entitle its holder to ordinary share Financial instrument - any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity Warrants or options - financial instruments that give the holder the right to purchase ordinary shares
UNOR - College of Business and Accountancy
17 September 2016 Slide 35
Formula 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐵𝑎𝑠𝑖𝑐 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
• • • •
Net income - after deducting dividends on preference shares Preference share is cumulative - current year only is deducted, whether dividends are declared or not Preference share is noncumulative - current year only is deducted if there is only dividend declaration If there is significant change during the year - weighted average number of ordinary share capital is the denominator
UNOR - College of Business and Accountancy
17 September 2016 Slide 36
Illustration 6 An entity provided the following information for the current year: Preference share capital, P100 par, 10% cumulative Ordinary share capital, P100 par, 50,000 shares Income from continuing operations Income form discontinued operations Net income
P1,000,000 5,000,000 P1,500,000 500,000 P2,000,00
Required: Compute for the earnings per share. UNOR - College of Business and Accountancy
17 September 2016 Slide 37
Illustration 6 (Cont’d) Computation: Income from continuing operations
Preference dividend for current year (10% x P1,000,000) Net income
P1,500,000
(100,000) P1,400,00
Basic earnings per share Income from continuing operations (P1.4mil. ÷ 50,000sh) Income from discontinued operation (P0.5mil. ÷ 50,000sh) Net income
UNOR - College of Business and Accountancy
P28 10 P38
17 September 2016 Slide 38
Uses of earnings per share • • •
Determinant of market price of ordinary shares (attractiveness of the ordinary share as an investment) Measure of performance Basis of dividend policy
UNOR - College of Business and Accountancy
17 September 2016 Slide 39
Illustration 7 An entity had the following capital structure at the end of the current year: Preference share capital, P100 par, 40,000 shares issued and outstanding
P2,000,000
Ordinary share capital, P50 par, 80,000 shares issued and outstanding
8,000,000
Net income for the year
3,000,000
The preference dividend rate is 10% and the preference share is nonconvertible but cumulative and fully participating. Dividends paid to ordinary shareholders is P20 per share.
UNOR - College of Business and Accountancy
17 September 2016 Slide 40
Illustration 7 (Cont’d) Preference
Ordinary
Basic dividend: Preference (10% x P2,000,000)
P200,000
Ordinary (80,000 x P20) Balance for participation Total dividends
P1,600,000 240,000
960,000
P440,000
P2,560,000
Net income
P3,000,000
Basic dividend (P200,000 + P1,600,000)
(1,800,000)
Balance for participation
P1,200,000
Basic earnings per share Preference share (P440,000 ÷ 40,000 shares)
P11
Ordinary share (P2,560,000 ÷ 80,000 shares)
32
UNOR - College of Business and Accountancy
17 September 2016 Slide 41
Determination of weighted average • •
•
• •
Ordinary shares in exchange for cash are included when cash is receivables. Ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are included from the date that interest ceases to accrue. Ordinary shares issued in place of interest or principal on other financial instruments are included form the date that interest ceases to accrue. Ordinary shares issued in exchange for the settlement of a liability of the entity are included from the settlement date. Ordinary shares issued as a consideration for the acquisition of an asset other than cash are included as of the date on which the acquisition is recognized.
UNOR - College of Business and Accountancy
17 September 2016 Slide 42
Determination of weighted average (Cont’d) • •
•
•
Ordinary shares issued for the rendering of services to the entity are included as the services are rendered. Ordinary shares issued as part of the purchase consideration of a business combination that is an acquisition are included in the weighted average number of shares from the date of acquisition. Ordinary shares that will be issued upon the conversion of a mandatory convertible instrument are included in the calculation of basic earnings per share from the date the contract entered into. In the case of a stock dividend or a share split, ordinary shares are issued to existing shareholders for no additional consideration.
UNOR - College of Business and Accountancy
17 September 2016 Slide 43
Determination of weighted average (Cont’d)
•
The number of ordinary shares outstanding before the event is adjusted for the proportionate change in the number of ordinary shares outstanding as if the event had occurred at the beginning of the earliest period reported. Subscribed ordinary shares or partly paid shares are included in EPS to the extent that they are entitled to participate in dividends. (Corporation Code of the Philippines - entitled to participate fully in dividends; the law prevails)
UNOR - College of Business and Accountancy
17 September 2016 Slide 44
Illustration 8
January 1
Beginning balance
100,000 shares
May 1
Additional issuance
150,000 shares
September 1
Additional issuance
150,000 shares
Total shares outstanding
400,000 shares
UNOR - College of Business and Accountancy
17 September 2016 Slide 45
Illustration 8 (Cont’d) (a)
(b)
(a x b)
Date
Shares
Months outstanding
Peso month
Jan. 1
100,000
12
P1,200,000
May 1
150,000
8
1,200,000
Sep. 1
150,000
4
600,000 3,000,000
Average share (P3,000,000 ÷ 12)
UNOR - College of Business and Accountancy
250,000 shares
17 September 2016 Slide 46
Illustration 8 (Cont’d) ANOTHER APPROACH: Date
Shares
Fraction
Average shares
Jan. 1
100,000
12/12
100,000
May 1
150,000
8/12
100,000
Sep. 1
150,000
4/12
50,000 250,000
UNOR - College of Business and Accountancy
17 September 2016 Slide 47
Illustration 9
January 1
Beginning balance
March 1
Issued for cash
50,000 shares
July 1
20% stock dividend
30,000 shares
November 1
Treasury shares
(15,000 shares)
Total shares outstanding
165,000 shares
UNOR - College of Business and Accountancy
100,000 shares
17 September 2016 Slide 48
Illustration 9 (Cont’d) (a)
(b)
(a x b)
Date
Shares
Mos. outstading
Peso month
Jan. 1
120,000
12
P1,440,000
Mar. 1
60,000
10
600,000
Nov. 1
(15,000)
2
(30,000) 2,010,000
Average share (P2,010,000 ÷ 12)
UNOR - College of Business and Accountancy
167,500 shares
17 September 2016 Slide 49
Illustration 9 (Cont’d) ANOTHER APPROACH: Date
Shares
Fraction
Average shares
Jan. 1
120,000
12/12
120,000
Mar. 1
60,000
10/12
50,000
Nov. 1
(15,000)
2/12
(2,500) 167,500
UNOR - College of Business and Accountancy
17 September 2016 Slide 50
Illustration 10
January 1
100,000 shares issued and outstanding
April 1
Issued 50,000 new shares
June 1
Share split 2 for 1
July 1
Purchased 20,000 treasury shares
October 1
20% stock dividends
December 31
Share split 5 for 1
UNOR - College of Business and Accountancy
17 September 2016 Slide 51
Illustration 10 (Cont’d) (a)
(b)
(a x b)
Date
Shares
Mos. outstading
Peso month
Jan. 1
1,200,000
12
P14,400,000
Mar. 1
600,000
9
5,400,000
Nov. 1
(120,000)
6
(720,000) 19,080,000
Average share (P19,080,000 ÷ 12)
UNOR - College of Business and Accountancy
1,590,000 shares
17 September 2016 Slide 52
Illustration 10 (Cont’d) ANOTHER APPROACH: Date
Shares
Fraction
Average shares
Jan. 1
1,200,000
12/12
1,200,000
Apr. 1
600,000
9/12
450,000
Jul. 1
(120,000)
6/12
(60,000) 1,590,000
UNOR - College of Business and Accountancy
17 September 2016 Slide 53
Bonus issue • • •
Ordinary shares are issued to existing shareholders for no consideration. Stock dividend Adjusted proportionate for the proportionate change in the number of ordinary shares outstanding as if occurred at the beginning of the year
UNOR - College of Business and Accountancy
17 September 2016 Slide 54
Illustration 11 Net income - 2015
7,200,000
Net income – 2016
6,000,000
Ordinary share outstanding on January 1, 2015
200,000
On October 1, 2016, the entity implemented a bonus issue of ordinary shares in the ratio of two ordinary shares for each ordinary share.
UNOR - College of Business and Accountancy
17 September 2016 Slide 55
Rights issue • • • • • • •
Exercise price is less than the fair value of the shares Include a bonus element - no consideration Stock right or right of preemption Adjustment factor is the ratio of the market value of the right-on to the theoretical market value of the share ex-right Market value of the share right-on - market value of the share immediately prior to the exercise of rights. Problem - if ex-right Market value of the share ex-right – total market value of the shares outstanding plus the proceed from the exercise of rights divided by the number of shares outstanding after the exercise of rights
UNOR - College of Business and Accountancy
17 September 2016 Slide 56
Diluted earnings per share Concept of dilution Potential ordinary shares Procedures for treasury share method
Multiple potential ordinary share
UNOR - College of Business and Accountancy
3 17 September 2016 Slide 57
Illustration 14 An entity had the following securities outstanding at the beginning of the current year: 10% convertible bonds payable, each P1,000 bond convertible into 10 ordinary shares
P4,000,000
Ordinary share capital, P100 par, 250,000 shares authorized, 100,000 shares issued
10,000,000
Net income Income tax rate
5,000,000 30%
Assume that the convertible bond payable is issued on April 1 of the current year. In this case, all conversion computations will be made for nine months only, from April 1 to December 31 of the current year. UNOR - College of Business and Accountancy
17 September 2016 Slide 58
Illustration 15 An entity had the following securities outstanding at the beginning of the current year: 10% convertible bonds payable, each P1,000 bond convertible into 10 ordinary shares
P4,000,000
Ordinary share capital, P100 par, 250,000 shares authorized, 100,000 shares issued
10,000,000
Net income Income tax rate
5,000,000 30%
All of the bonds were converted into ordinary shares on October 1 of the current year.
UNOR - College of Business and Accountancy
17 September 2016 Slide 59
Illustration 16 An entity had the following securities outstanding at the beginning of the current year: 10% convertible cumulative preference share capital , P100 par, 30,000 shares - one preference share is convertible into two ordinary shares
P3,000,000
Ordinary share capital, P100 par, 250,000 shares authorized, 100,000 shares issued
10,000,000
Net income
UNOR - College of Business and Accountancy
6,000,000
17 September 2016 Slide 60
Illustration 17 An entity had the following securities outstanding at the beginning of the current year: Preference share capital – 10%, 50,000 shares, P100 par, cumulative and convertible into 100,000 ordinary shares
P5,000,000
Ordinary share capital, P50 par, 500,000 shares authorized, 200,000 shares issued
10,000,000
Net income
4,000,000
The preference shares were all converted into ordinary shares on October 1 of the current year. The preference dividends for the entire year were paid in full before the conversion. UNOR - College of Business and Accountancy
17 September 2016 Slide 61
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