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Published on 10 April 2025
Understanding Ind AS 33: Options in Earnings Per Share Calculations
Understanding Ind AS 33: Treatment of Options in Basic and Diluted Earnings Per Share (EPS)
This article discusses the treatment of options when calculating Basic and Diluted Earnings Per Share (EPS) under Ind AS 33.
Definition of Options and Potential Ordinary Shares
- Options and Warrants: Financial instruments granting the holder the right to purchase ordinary shares.
- Potential Ordinary Shares: Financial instruments or contracts that can entitle their holder to ordinary shares.
Key Provisions of Ind AS 33
Para 45: Assumption of Exercise for Diluted EPS
To calculate diluted earnings per share, an entity must assume the exercise of dilutive options and warrants. The assumed proceeds from these instruments should be considered as received from issuing ordinary shares, using the average market price of ordinary shares during the reporting period. The difference between the issued ordinary shares and the shares that would have been issued at the average market price is treated as an issue of ordinary shares at no consideration.
Para 46: Criteria for Dilution
Options and warrants are deemed dilutive if their exercise would lead to issuing ordinary shares at a price lower than the average market price during the period. The dilution amount is calculated by subtracting the exercise price from the average market price. Previously reported EPS figures are not adjusted retroactively for share price changes.
Para 48: Employee Share Options
Employee share options with fixed or determinable terms and non-vested ordinary shares are treated as options in diluted EPS calculations, regardless of any vesting conditions. They are considered outstanding from the grant date.
Calculating the Average Market Price of Ordinary Shares
For diluted EPS, the average market price of ordinary shares is calculated based on the average market price during the reporting period. Although theoretically every transaction could contribute to this average, a simple average of weekly or monthly prices is often sufficient. Closing prices are generally adequate, but in cases of wide fluctuations, averaging the high and low prices may yield a more representative figure. The method chosen to calculate the average market price should be consistently applied or adjusted if it ceases to be representative due to changing conditions.
Illustration: Company A
Employee Share Options Data:
- Green: 15,000 options at an exercise price of Rs. 85 with a vesting date of 1 December 20X7.
- Blue: 15,000 options at an exercise price of Rs. 89 with a vesting date of 1 December 20X7.
- White: 15,000 options at an exercise price of Rs. 93 with a vesting date of 1 December 20X7.
Financial Data:
- Profit attributable to equity holders as of 31 March 20X8: Rs. 3,500,000.
- Number of ordinary equity shares outstanding as of 1 April 20X7 and 31 March 20X8: 500,000.
- No options were exercised by employees by 31 March 20X8.
- Average closing market price from 1 April 20X7 to 31 March 20X8: Rs. 91.
Calculation of Basic EPS as of 31 March 20X8
| Particulars | Unit |
|---|---|
| Profit attributable to equity holders | Rs. 3,500,000 |
| Weighted average number of shares | 500,000 |
| Basic Earnings Per Share | Rs. 7.00 |
Calculation of Diluted EPS as of 31 March 20X8
| Particulars | Unit |
|---|---|
| Profit attributable to equity holders | Rs. 3,500,000 |
| Weighted average number of shares | 501,319 |
| Diluted Earnings Per Share | Rs. 6.98 |
Table A: Weighted Average Number of Shares for Diluted EPS
| Date | Particulars | Option Exercise Price (Rs.) | Market Price (Rs.) | No. of Options Granted | Shares Issued for NIL Consideration (Para 45) | Potential Dilutive Shares |
|---|---|---|---|---|---|---|
| 1 December 20X7 | Green | 85 | 91 | 15,000 | 989** | 989 |
| 1 December 20X7 | Blue | 89 | 91 | 15,000 | 330** | 330 |
| 1 December 20X7 | White | 93 | 91 | 15,000 | (330)*** | — |
Notes:
- (d) = [ (c) – (c*a/b)]
- (330)* indicates that shares were not included in the diluted EPS calculation due to their anti-dilutive effect.
Disclosure in Financial Statements of Company A
| Particulars | Basic EPS | Diluted EPS |
|---|---|---|
| Profit / (loss) attributable to equity holders | 3,500,000 | 3,500,000 |
| Weighted average number of shares | 500,000 | 501,319 |
| Earnings per share | 7.00 | 6.98 |
| Anti-dilutive shares for the period | — | 330 |
Conclusion
Understanding the treatment of options under Ind AS 33 is crucial for accurate EPS calculations. Following the outlined provisions ensures compliance and clarity in financial reporting.