Earnings Per Share calculation involving Bonus Shares Issue



Bonus Shares Adjustment - Rationale

Bonus shares, also known as scrip dividends, involve the issue of shares without any consideration. Since bonus shares do not change the resources available to the entity to earn a return for the shareholders (as in the case of shares issued for cash) the effect of change in number of shares in the EPS calculation must be cancelled for the year in which bonus issue takes place and as well as in the prior periods presented. If no adjustment is made in EPS calculation in respect of bonus shares, EPS would appear to have drastically decreased in the year of bonus issue in comparison with prior periods suggesting that the performance of entity has declined even though the bonus issue did not result in any inflow of resources to earn a return for the shareholders. In order to facilitate a valid comparison of EPS, the weighted average shares of the year in which bonus shares are issued, as well as of any comparative prior periods presented must be increased by the amount of bonus shares as though the shares had been issued from the beginning of the prior period comparative presented.

Formulae

Following formulae illustrate how bonus shares adjustment is incorporated in the Basic EPS calculation:


EPS for the year (X)

=Earnings attributable to ordinary share holders for the year
[Weighted Average Shares (excluding bonus) + Bonus Shares]

EPS for the year (X-1)

=Earnings attributable to ordinary share holders for the year
[Weighted Average Shares (excluding bonus) + Bonus Shares]

EPS for the year (X+1)

=Earnings attributable to ordinary share holders for the year
[Weighted Average Shares (excluding bonus) + Bonus Shares]

Where:

Year (X)=Year in which bonus shares are issued (current period)
Year (X-1)=Year preceding the period in which bonus shares are issued (prior period comparative)
Year (X+1)=Year subsequent to the period in which bonus shares are issued (subsequent period)
Weighted Average Shares=Number of shares at the start of the year
PLUS    Shares issued for consideration     x   (time apportionment)
MINUS   Shares redeemed during the year   x   (time apportionment)


Example

ABC PLC, which has a year end of 31st December 2012, issued 1 for 4 bonus shares on 30th June 2012.

Following information relates to ABC PLC:

Ordinary Shares as on 1st January 20114,000,000

Earnings attributable to ordinary shareholders:

2011   $5,000,000

2012   $5,000,000

Calculation of Earning Per Share for 2011 and 2012 for presentation in financial statements for the year ended 31st December 2012 would be as follows:

Step 1:Calculate the number of bonus shares
Number of shares eligible for bonus shares4,000,000
Number of bonus shares (4,000,000 x 1/ 4)1,000,000
Step 2:Calculate Weighted Average Shares
2011   Shares at the start of the year4,000,000
Add: Bonus shares (Step 1)1,000,000
Weighted Average Shares5,000,000
2012   Shares at the start of the year4,000,000
Add: Bonus shares (Step 1)1,000,000
Weighted Average Shares5,000,000

Note that even though bonus shares were issued half way through 2012, they are included in the calculation of weighted average shares without time apportionment for both 2012 and 2011 (i.e. as if the bonus shares had been issued before the year 2011).

Step 3:Calculate Earnings Per Share
2011 Earnings attributable to ordinary share holders$5,000,000
Weighted Average Shares (Step 2)5,000,000
Earnings Per Share ($ 5,000,000 / 5,000,000)$1
2012 Earnings attributable to ordinary share holders$5,000,000
Weighted Average Shares (Step 2)5,000,000
Earnings Per Share ($ 5,000,000 / 5,000,000)$1

Note that despite the bonus issue, there is no change in the earnings per share for the two years as there is no change in earnings. The effect of bonus issue is eliminated by incorporating the bonus shares adjustment in the calculation of weighted average shares for both years.

The EPS calculated as above illustrates the fact that the performance of ABC PLC has remained stable over the past two years. If no adjustment for bonus shares had been made, EPS for 2012 would be lower than 2011 despite the fact that there is no change in the earnings and nor the resources to earn a return to shareholders. This would have presented an unfair comparison of the performance of ABC PLC.

Calculation of weighted average shares for subsequent periods will also incorporate bonus shares in similar manner (i.e. added in full without time apportionment).