Treatment of Extra-ordinary items in case of EPS- By CA. Brijesh Thakar

Many times a question has been asked by students that when there is an extraordinary item in the statement of profit and loss account, whether Earning Per Share should be disclosed including extra ordinary item or excluding extra ordinary item?

This question is of significant importance because profit or loss arising from extra ordinary items may affect investors decision making. Let me explain the significance of this question with the help of an example

Profit/loss attributable to equity share holders 1,000,000 ( 2005-06) 1,500,000(2006-07) 1,575,000 (2007-08)
(before extraordinary item)

Loss due to fire (Extra-ordinary item) - - 1,000,000 (2007-08)

Profit/loss attributable to equity share holders
(after extraordinary item) 1,000,000 ( 2005-06) 1,500,000 (2006-07) 575,000 (2007-08)

Weighted Average No of Shares Outstanding 100,000( 2005-06) 100,000 (2006-07) 100,000 (2007-08)

EPS 10( 2005-06) 15(2006-07) 5.75(2007-08)

In the above mentioned example, EPS in 2007-08 is significantly lower in comparison to previous years. This has happened because of loss due to fire which is an extra ordinary item, which is not expected to recur again. Hence Showing EPS including extra-ordinary item may show a misleading picture.

Here, I wish to mention two para of AS- 20. First is Para 12 which says that All items of income and expense which are recognised in a period, including tax expense and extraordinary items, are included in the determination of the net profit or loss for the period. Hence EPS should be shown including Extra- ordinary item. Second is para 48 which says that “In addition to disclosures as required by paragraphs 8, 9 and 44 of this Statement, an enterprise should disclose the following:
(i) where the statement of profit and loss includes extraordinary items (within the meaning of AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies), the enterprise should disclose basic and diluted earnings per share computed on the basis of earnings excluding extraordinary items (net of tax expense);

Hence whenever there is an extra ordinary item, EPS should be disclosed including extra ordinary item and excluding extra-ordinary item also.
In the above mentioned example, during the year 2007-08, EPS of Rs. 5.75 (including Extra-ordinary item) as well as EPS of Rs. 15.75 (Exluding Extra-ordinary item) both will be disclosed.

Note: In case of IFRS, this question will not arise because under IFRS concept of Extra-ordinary item is not there.