Pooj@ *$#& (CA Final Student) (108 Points)
09 December 2010
1. whether income from discontinued operations is to be included in calculating EPS?
2.Whether contingently issuable shares are included while calculating BEPS or DEPS?
3. If there is loss, then also is it necessary to deduct dividend on cumulative preference shares while calculating (EPS)?
Jithin
(Learner)
(1057 Points)
Replied 10 December 2010
Hi Pooja..Here are my answers to Q. 2 & 3.
2) BEPS
On fulfilment of conditions subject to which the contingent shares are issuable –recognised from the date of satisfaction of such conditions.
When conditions are not fulfilled - shares are not recognised.
DEPS
Where the contractual agreement under which shares are issuable contingently, is entered before the start of the year- shares recognised from the beginning of the year.
Where the above agreement is entered during the year- shares recognised from the date of the agreement.
Note:In calculating DEPS, whether or not the conditions for issue of the contingent shares are satisfied- shares will be recognised from the beginning of the period or the date of the agreement whichever is later.
For further clarity, let me give an example. A loan is taken by the company under an agreement which provides that on default of principal/interest, equity shares of equivalent amount will be issued. Now lets examine the impact on BEPS & DEPS under different situations given below.
a)BEPS
i)Principal & interest are paid in time-the contingently issuable shares should not be recognised.
ii)Default is made in payment of principal/interest-recognition from the date of default.
b)DEPS
i)If the loan agreement is entered prior to the beginning of the year-recognised from the start of the year.
ii)If the loan agreement is made during the year-recognised from the date of such agreement.
Whether default is made or not in the payment of principal/interest, the conditions mentioned above shall apply in the calculation of DEPS.
3)Dividend on cumulative preference shares have to be deducted in the calculation of EPS irrespective of the fact that the company is under loss. However the preference dividend arrears of earlier years should not be deducted.
Jithin
(Learner)
(1057 Points)
Replied 13 December 2010
Hi..I am attaching answer to Q 1. I tried to post here itself, but it didnt appear properly.
Jithin
(Learner)
(1057 Points)
Replied 13 December 2010
Please dont download the file..there is some problem..I couldnt attach the word file so I tried to compress it into rar file..But it isnt opening
Jithin
(Learner)
(1057 Points)
Replied 13 December 2010
Here is my answer to Q.1(now I could post it)
EPS includes any income which is available for distibution to equity shareholders..In my opinion, income from discontinued operations is distributable as dividends(not aware of any restriction in this regard). So by that logic we should include income from discontinued operations in the calculation of EPS. However for the purpose of determining whether the potential equity shares are dilutive/anti-dilutive,income from discontinued operations is not included.
Lets take an example to make it clearer. A company has earned an income of Rs.5 lacs from continuing operations. It has also incurred a loss of Rs.20 lacs from discontinued operations. The company has 50,000 equity shares & 50,000 potential equity shares. Also assume that there will be no change in profits on conversion of potential equity shares into equity shares.
BEPS in this case=(15 lacs)/0.50 lacs=Rs.(30)
Now for calculating DEPS, we have to ascertain whether the potential equity shares are dilutive.
Income from No.of shares EPS-from
continuing operations continuing operations
a.Equity 5,00,000 50,000 10
shares
b.Potential equity Nil 50,000 Nil
shares converted
c.Total 5,00,000 1,00,000 5(Dilutive)
Since the potential equity shares are dilutive, they are included in the calculation of DEPS .
So DEPS=(15) lacs/1 lac=Rs(15)
Note:If the income from discontinued operations was included above for determining the dilutive factor, the potential equity shares would have been anti-dilutive & DEPS would have been Rs(30). So be careful to not include income from discontinued operations for determining the dilutive factor. But for the calculation of BEPS & DEPS, include such income.
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