SAINT PAUL SCHOOL OF BUSINESS AND LAW

ACCTG. 17NB

BOOK VALUE & EARNINGS PER SHARE

BOOK VALUE PER SHARE

Book value per share is the amount that would be paid on each share assuming the entity is
liquidated and the amount available to shareholders is exactly the amount reported as shareholders’
equity.

The formula for the computation of book value per share is:
Total Shareholders’ Equity
Book value per share =
Number of shares outstanding

Where there are two classes of share capital, it is necessary to apportion the shareholders’ equity
between the preference share and ordinary share. The book value per share should be computed as
follows:

Preference Shareholders’ Equity

Book value per preference share =
Preference Shares Outstanding

Ordinary Shareholders’ Equity

Book value per ordinary share =
Ordinary Shares Outstanding

For purposes of apportionment between the preference share and ordinary share, the following
procedures should be observed:

1. An amount equal to the par or stated value is allocated to the preference share and ordinary
share.
2. Any balance of the shareholders’ equity in excess of the par or stated value is then apportioned
taking into account the liquidation value and dividend rights of the preference shareholders.

Computation of amount and shares outstanding:

Shares Amount
Share capital issued xx xx
Add: Share capital subscribed xx xx
Total xx xx
Less: treasury shares at par (xx) (xx)
Amount and shares outstanding xx xx

Liquidation value of preference share

The liquidation value is the amount which the preference shareholders normally receive upon the
liquidation of the corporation. The liquidation value may be more than the par value.

Preference as to assets
The preference shareholders are entitled to payment not only for liquidation value but also for
dividend in arrears

Preference as to dividends
The preference means that if dividends are declared the preference shareholders have the right to
receive dividends first before ordinary shareholders are paid a dividend.
When preference share has preference as to dividends, the dividend right may be:

1. Noncumulative
- The preference share is entitled only to current year dividends.

2. Cumulative
- The preference share is entitled to all dividends in arrears.

3. Nonparticipating
- The preference share is entitled to receive only the dividends equal to the fixed rate.

4. Participating
- The preference share is entitled to receive dividends in excess of the basic or fixed rate.
- Participating preference share may be fully participating with ordinary share on a pro data basis or
participating only to a certain amount or percentage.

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- However, before the preference share can participate, the ordinary share should receive first an
amount equal to the basic preference rate, meaning preference rate times the par value of the
ordinary share outstanding.

Special notes:
1. In the absence of specific designation, preference share is assumed to be noncumulative and
nonparticipating.
2. Dividends in arrears usually include current dividends. Dividends in arrears in prior years shall be
specifically disclosed, otherwise, there are no arrearages.
3. In case there are two classes of preference share with different dividend rates and both are
participating, the lower rate shall be the basis for allocation to the ordinary share.

EARNINGS PER SHARE

The earnings per share figure is the amount attributable to every ordinary share outstanding during
the period. Thus, the earnings per share information pertains only to ordinary share. It is not
necessary for preference share because there is a definite rate of return for such share.

A. Basic earnings per share

- computed as follows:
Net income – PS dividends
Basic EPS =
WACSO

If the preference share is cumulative, the preference dividend for the current year only is
deducted from the net income, whether, such dividend is declared or not.

If the preference share is noncumulative, the preference dividend for the current year is deducted
from net income only if there is declaration.

B. Basic loss per share

If he preference share is cumulative, the preference dividend is added to the net loss to get total
loss to the ordinary shareholders.

If the preference share is noncumulative, the preference dividend is ignored because presumably
there is no declaration since there is net loss.

C. Diluted earnings per share

The computation for DEPS is similar with basic earnings per share only that there is the presence of
“dilutors”.

Dilutors refer to potential ordinary shares which has the effect of decreasing the Basic earnings per
share or increasing the basic loss per share.

The three major types of potential ordinary shares are:

1. Convertible bonds payable
2. Convertible preference share
3. Share option and warrant

The computation of diluted earnings per share is based on the “as if” scenario:
a. “As if” the convertible bond payable is converted into ordinary share.
b. “As if” the convertible preference share is converted into ordinary share.
c. “As if” the share options and warrant are exercised.

In short, the computation of diluted earnings per share will be as follows:

Net Income
Diluted earnings per share = + “As if” effect
WACSO

Presentation
An entity shall present on the face of the income statement basic and diluted earnings per share for
income or loss.

Note: Public entities are required to present earnings per share.