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CA Intermediate · Advanced Accounting

AS 20 Earnings Per Share: Basic and Diluted EPS Explained

AS 20 tells you how to compute and present earnings per share. Basic EPS = net profit attributable to equity shareholders ÷ weighted average number of equity shares. Diluted EPS also counts potential equity shares that would reduce EPS. Adjust share counts for bonus issues, splits and rights issues, then disclose both figures.

What this chapter covers

AS 20 Earnings Per Share sets out one standard way to measure how much profit each equity share earns. It applies to enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in India, and to any other enterprise that discloses EPS (which must then follow AS 20). The chapter has two core numbers: basic EPS and diluted EPS.

The chapter is mostly computation. You find the earnings figure (profit after tax and preference dividend), find the weighted average number of shares, and divide. The tricky part is the share count. Bonus issues, share splits and rights issues change it, and each needs its own treatment. Diluted EPS adds convertible instruments, options and warrants.

It connects to the rest of the paper through company financial statements and Schedule III, where EPS is shown on the face of the Statement of Profit and Loss. Practise the computations for both MCQs and descriptive answers.

AS 20 is compact, rule-based and heavily numerical, so the marks are predictable if you practise. The same few patterns repeat: weighted average shares, bonus and rights adjustments, and diluted EPS with convertibles. A student who has practised these can set out a question cleanly and earn full step marks, which frees time for harder chapters. It also tests exact conditions, such as when a potential equity share is dilutive, so it rewards careful reading.

AS 20 Earnings Per Share: topics in the order to study them

  1. 1AS 20 Objective, Scope and DefinitionsLearn the terms first: equity share, potential equity share, dilution, and who must disclose EPS, since every later computation uses them.
  2. 2Basic Earnings Per Share ComputationThis is the core formula and weighted average method, and every adjustment later builds on it.
  3. 3Bonus Issue, Rights Issue and Share Split AdjustmentsThese change the share count in basic EPS, so study them once the simple weighted average is comfortable.
  4. 4Diluted Earnings Per Share and Potential Equity SharesIt extends basic EPS with convertibles, options and warrants, so you need the basic method and adjustments firm first.
  5. 5Presentation and Disclosure of EPSA short, theory-based topic best done last, once you know what figures you are presenting.

How to prepare AS 20 Earnings Per Share

This chapter is won by practice, not reading. Learn the logic once, then drill question types until the steps are automatic.

  1. Read the definitions and scope and write a one-page list of key terms. Be clear on what counts as an equity share and a potential equity share.
  2. Learn basic EPS: earnings = net profit after tax minus preference dividend (and tax on it where relevant). Divide by the weighted average shares, weighting each issue by the months or days outstanding.
  3. Practise a timeline table for every question: date, event, shares, time fraction, weighted shares. This layout earns step marks and avoids slips.
  4. Do bonus, split and rights problems. Bonus and split shares are treated as if issued from the start of the earliest period shown, so restate the comparative EPS too. For rights issues, when the rights price is below fair value, first find the adjustment factor = fair value per share immediately before exercise of rights ÷ theoretical ex-rights fair value per share. Multiply the shares outstanding before the rights issue by this factor and weight them for the period before the rights issue. Weight the shares outstanding after the issue for the period from the date of the rights issue. Restate the comparative EPS by dividing the previously reported EPS by the same factor.
  5. Do diluted EPS problems. Add the potential shares and add back the related post-tax interest or dividend to earnings. Test each instrument and include only those that are dilutive, meaning they reduce (or increase the loss per share of) net profit per share from continuing ordinary activities.
  6. Finish with the disclosure points, including the reconciliation of earnings used to net profit or loss, and a few MCQs. Then time yourself on mixed questions and set your own per-question time target as a practice goal.

Common mistakes in AS 20 Earnings Per Share

  • Using the closing number of shares instead of the weighted average

    Fix: Always build a timeline table and weight each change in shares by the fraction of the year it was outstanding.

  • Forgetting to deduct preference dividend from earnings

    Fix: Write the earnings line first: profit after tax, less preference dividend, equals earnings for equity shareholders.

  • Weighting bonus shares from the date of allotment

    Fix: Remember that a bonus issue brings in no money, so treat the shares as outstanding for the whole period and restate the earlier periods.

  • Skipping the bonus element in a rights issue

    Fix: Compute the theoretical ex-rights fair value and the adjustment factor. Multiply the shares before the rights issue by the factor and weight them for the pre-issue period. Weight the post-issue shares from the date of the rights issue, and divide comparative EPS by the same factor.

  • Including anti-dilutive instruments in diluted EPS

    Fix: Calculate the effect per incremental share of each instrument and include only those that lower net profit per share from continuing ordinary activities.

  • Forgetting to add back post-tax interest on convertible debentures

    Fix: Adjust the numerator for interest saved, net of tax, whenever you add the shares from conversion.

Last-day revision: AS 20 Earnings Per Share

  • Basic EPS = (net profit after tax − preference dividend) ÷ weighted average number of equity shares.
  • Earnings for basic EPS belong to equity shareholders only, so deduct preference dividend for the period.
  • Weight shares by the period they were outstanding, from the date consideration is receivable, except bonus issues and splits, which are treated as outstanding from the start.
  • Bonus issue and share split: restate shares as if issued at the start of the earliest period, with no change in resources.
  • Rights issue at a price below fair value: multiply the shares outstanding before the rights issue by the adjustment factor and weight them for the period before the issue. Weight the shares after the issue from the date of the rights issue. Restate comparative EPS by dividing it by the same factor.
  • Adjustment factor = fair value per share immediately before exercise of rights ÷ theoretical ex-rights fair value per share.
  • Diluted EPS counts potential equity shares such as convertible debentures, convertible preference shares, options and warrants.
  • For convertibles, add back post-tax interest or dividend saved to earnings and add the converted shares.
  • Treat potential equity shares as dilutive only when they reduce (or increase the loss per share of) net profit per share from continuing ordinary activities. Include only dilutive ones in diluted EPS.
  • Disclose basic and diluted EPS on the face of the Statement of Profit and Loss, even if negative.
  • Disclose the earnings used, the weighted average shares, and the nominal value per share. Also give a reconciliation of the earnings used in basic and diluted EPS to the net profit or loss for the period.
  • Restate EPS of earlier periods for bonus, split and similar events.

AS 20 Earnings Per Share practice questions

AS 20 Earnings Per Share in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 20 Earnings Per Share: frequently asked questions

Is AS 20 applicable to all companies?

AS 20 applies to enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in India, and to any other enterprise that discloses EPS. An enterprise not required to disclose EPS may still do so voluntarily, and if it does, it must follow AS 20.

What is the difference between basic and diluted EPS?

Basic EPS uses only equity shares actually outstanding. Diluted EPS also includes potential equity shares, such as convertibles and options, but only those that are dilutive. Dilution is tested on net profit per share from continuing ordinary activities: a potential equity share is dilutive only when it reduces that figure (or increases the loss per share from continuing ordinary activities). Only dilutive potential equity shares are included in diluted EPS.

How do I handle a bonus issue in EPS questions?

Treat bonus shares as outstanding for the whole period, since no money is received. Restate the share count and the EPS of earlier periods shown for comparison.

How should I answer AS 20 numericals to get step marks?

Show earnings first, then a timeline table of weighted shares, then the division. Add a short note for any adjustment, such as the rights bonus element and its factor. Clear steps earn marks even if the final figure is off.