AS 20 – Earnings Per Share tells you how much profit a company earns per equity share. Why does it matter? Because investors use EPS to compare companies — a company earning ₹10 per share looks very different from one earning ₹1. As a CA, you'll compute it, audit it, and disclose it. For the exam, expect a 5–8 mark problem almost every attempt.
Basic EPS is the simpler of the two types. The formula is: Basic EPS = (Net Profit after Tax – Preference Dividend) / Weighted Average Number of Equity Shares. The numerator is profit available to equity holders — so preference dividend (whether declared or not, if cumulative) is always deducted. The denominator is not simply the shares outstanding at year-end. You weight each lot of shares by the fraction of the year they were outstanding. Shares issued on 1 July in a March year-end company are weighted at 9/12. Bonus shares are the big exception — they are treated as if they always existed (retrospective effect), so no time-weighting needed; also restate prior-year EPS.
Diluted EPS goes a step further — it shows what EPS would be if all potential equity shares (convertible debentures, ESOPs, warrants) were converted today. The trick: add back the after-tax interest saved on convertible debentures to the numerator, and add the potential shares to the denominator. Only include a potential share if it is dilutive (i.e., it reduces EPS). Anti-dilutive instruments — those that would increase EPS — are ignored. Both Basic and Diluted EPS must be presented on the face of the Statement of Profit & Loss, even if they are equal. This is a common disclosure point examiners test.
One more rule: if the company reports a loss, diluted EPS = basic EPS (you cannot dilute a loss further for the denominator — that would make the loss look smaller, which is anti-dilutive logic).