Query No. 19

Subject:

Computation of weighted average number of shares where bonus shares

have been given on shares issued during the year.¹

A. Facts of the Case

1. The movement of the share capital account of a company from April 1, 2000 to March 31, 2005 is as follows:

** Bonus shares issued on September 10, 2004 in the ratio of 2 bonus shares for each share held.

2. The querist has reproduced paragraph 22 of Accounting Standard (AS) 20, ‘Earnings Per Share’, issued by the Institute of Chartered Accountants of India, which states as follows:

“22. The weighted average number of equity shares outstanding during the period and for all periods presented should be adjusted for events, other than the conversion of potential equity shares, that have changed the number of equity shares outstanding, without a corresponding change in resources.” (Emphasis supplied by the querist.)

According to the querist, since, in case of a bonus issue during the year, there is no change in the resources during the year, a question arises as to whether the weighted average number of shares should be adjusted for the bonus issue during the year ended March 31, 2005 and all the five years presented.

3. The querist has further reproduced paragraph 24 of AS 20, which states as follows:

“24. In case of a bonus issue or a share split, equity shares are issued to existing shareholders for no additional consideration. Therefore, the number of equity shares outstanding is increased without an increase in resources. The number of equity shares outstanding before the event is adjusted for the proportionate change in the number of equity shares outstanding as if the event had occurred at the beginning of the earliest period reported. For example, upon a two-for-one bonus issue, the number of shares outstanding prior to the issue is multiplied by a factor of three to obtain the new total number of shares, or by a factor of two to obtain the number of additional shares.” (Emphasis supplied by the querist.)

As per the querist, based on the provisions of paragraphs 22 and 24 of AS 20, another question arises as to whether the weighted average number of bonus shares should be considered as outstanding from the first day of the year. And, whether the bonus shares on the portion of shares issued during the year, should be considered as outstanding from the first day of the year.

4. The querist has supplied Annexure 1 giving computation of weighted average number of shares considering two approaches as given below:

Approach 1: This deals with a situation where the bonus shares of 40,000 are considered outstanding from April 1, 2004.

Approach 2: This deals with a situation where the bonus shares of 40,000 are considered outstanding from August 10, 2004, being the date of issue of shares for cash.

5. According to the querist, the two approaches can be justified on the following grounds:

Possible justification for Approach 1

Weights are given when computing the weighted average number of shares, to reflect the availability of resources for the part period of the year since the date they became available. Hence, if the resources were made available in December 2004 during the year 2004-05, the weight would be considered for three months because the funds were available for three months. In case of bonus shares, since there is no change in the resources, there should be no weight assigned to them and hence they are considered outstanding from the beginning of the year.

Possible justification for Approach 2

Paragraph 24 of AS 20, inter alia, provides that: “the number of equity shares outstanding before the event is adjusted for the proportionate change in the number of equity shares outstanding” i.e., before the event for which the shares outstanding is calculated, the shares outstanding is recalculated so as to proportionately change the number of shares previously calculated (emphasis supplied by the querist).

6. The querist has further mentioned that paragraph 22 of AS 20, reproduced above requires the current period and all periods presented to be adjusted for the bonus shares. Hence, according to the querist, a question arises as to whether in a situation where weighted average computation is done for a period of five years, the weighted average computation for all the past five years should be adjusted for the bonus shares issued in the current year. The querist has supplied Annexure 2 for such computation explaining two approaches as below:

Approach 1: In this case, the same number of bonus shares issued in year 5 are added to the weighted average number of shares computed for each of the past five years.

Approach 2: In this case, the bonus shares issued in year 5 are added to the weighted average number of shares computed for each of the past five years, but in the ratio of bonus shares to shares outstanding for each year.

B. Query

7. On the basis of the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

(i) How to compute the weighted average number of shares in the year 2004-05, when bonus shares have been given on shares issued during the year?

(ii) If the bonus shares have been issued during the year, how to compute the effect of the bonus shares in the previous years, if the company is required to disclose financial information for the past five years?

C. Points considered by the Committee

8. The Committee notes paragraphs 22, 23 and 24 of AS 20, which provide, inter alia, as below:

“22. The weighted average number of equity shares outstanding during the period and for all periods presented should be adjusted for events, other than the conversion of potential equity shares, that have changed the number of equity shares outstanding, without a corresponding change in resources.

23. Equity shares may be issued, or the number of shares outstanding may be reduced, without a corresponding change in resources. Examples include:

(a) a bonus issue;

...

24. In case of a bonus issue or a share split, equity shares are issued to existing shareholders for no additional consideration. Therefore, the number of equity shares outstanding is increased without an increase in resources. The number of equity shares outstanding before the event is adjusted for the proportionate change in the number of equity shares outstanding as if the event had occurred at the beginning of the earliest period reported. For example, upon a two-for-one bonus issue, the number of shares outstanding prior to the issue is multiplied by a factor of three to obtain the number of additional shares.”

9. From the above, the Committee is of the view that a bonus issue has the effect of increasing the number of shares by virtue of the issue without any inflow of resources, as further equity shares are issued to existing shareholders for no consideration. Consequently, no additional earnings are expected to accrue as a result of the issue. The additional shares should be treated as having been issued for the whole period and also included in the EPS calculation of all earlier periods presented so as to give a comparable result. The Committee is of the view that the aforesaid position holds good even in a situation where bonus issue is made in respect of the fresh issue of equity shares during the period.

Accordingly, in the view of the Committee, the computation made by the querist under Approach 1 in Annexures 1 and 2 are correct.

D. Opinion

10. On the basis of the above, the opinion of the Committee on the issues raised by the querist in paragraph 7 above is as below:

(i) For the year 2004-05, weighted average number of shares should include 40,000 bonus shares issued on September 1, 2004, i.e., bonus shares given on the shares issued during the year, as if the shares were issued for the whole period.

(ii) If the company is required to disclose financial information for the past five years, 240,000 bonus shares issued during the year should be included in the calculation of EPS for all the five years.

ANNEXURE 1

 

Calculation of denominator for Basic EPS

 

March 31, 2001

March 31, 2002

March 31, 2003

March 31, 2004

March 31, 2005

For the year ended March 31, 2001
 

For the year ended March 31, 2002

For the year ended March 31, 2003

For the year ended March 31, 2004

For the year ended March 31, 2005 (Approach 1)

For the year ended March 31, 2005 (Approach 2)

Note:

In the year ended March 31, 2005, bonus shares have been issued. The issue is to determine whether the weight of the bonus shares in respect of the shares issued during the year (i.e. 40000 bonus shares on 20,000 shares issued during the year) should be from April 1, 2004 or from August 10, 2004.

Approach 1 deals with a situation where the bonus shares of 40,000 are considered outstanding from April 1, 2004.

Approach 2 deals with a situation where the bonus shares of 40,000 are considered outstanding from August 10, 2004.

ANNEXURE 2

Computation of weighted average — Issue relating to restatement of prior year numbers for bonus shares issued during the year

Approach 1: Same number of bonus shares issued in year 5 are added to the weighted average number of shares computed for each of the past five years

Approach 2: Same number of bonus shares issued in year 5 are added to the weighted average number of shares computed for each of the past five years, but in the ratio of bonus shares issued to shares outstanding for each year.

 

$ In respect of bonus shares on ‘shares issued during the year’, we have assumed that the Approach 1 is followed i.e. the bonus shares on shares issued during the year is considered as outstanding from the first day of the year.

ANNEXURE 2a

¹ Opinion finalised by the Committee on 27.6.2005