Solution

When presenting financial statements, it is important to consider the impact of any changes in share capital or other transactions that occurred during the relevant period. In this case, since the bonus shares were issued on 1st January 2018, the impact on Basic EPS would be considered for the financial year ended 31st March 2018 (i.e. the F.Y. 2017-18).

However, when calculating the weighted average number of shares outstanding, we would need to consider the number of shares outstanding for the entire period for which the EPS is being calculated, which would include the prior year as well.

Bonus shares do not affect the earnings of the company. Instead, they are distributed to shareholders free of cost, in proportion to their existing shareholdings. Therefore, the impact of bonus shares on Basic EPS will depend on the change in the number of shares outstanding.

The Basic EPS formula is as follows:

Basic EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding

Assuming that the company did not have any preferred dividends, the impact of bonus shares on Basic EPS can be calculated as follows:

Step 1: Determine the number of shares outstanding before the bonus issue

Assume that the company had 1,000,000 shares outstanding before the bonus issue.

Step 2: Determine the bonus issue ratio

Assume that the company issued a bonus of 1 share for every 5 shares held by the shareholders. Therefore, the bonus issue ratio is 1:5.

Step 3: Calculate the number of bonus shares issued

The number of bonus shares issued would be (1,000,000 / 5) = 200,000 shares.

Step 4: Determine the new number of shares outstanding after the bonus issue

The new number of shares outstanding would be (1,000,000 + 200,000) = 1,200,000 shares.

Step 5: Calculate the impact on Basic EPS

Since the net income and the number of preferred dividends are assumed to be constant, the impact on Basic EPS would be solely due to the increase in the number of shares outstanding.

To calculate the weighted average number of shares outstanding, we need to take into account the number of shares outstanding during the entire period for which the EPS is being calculated. Assuming that the bonus issue was made on 1st January 2018, and the EPS is being calculated for the year ended 31st December 2018, the weighted average number of shares outstanding can be calculated as follows:

Number of shares outstanding before bonus issue = 1,000,000 (for the entire year)

Number of shares outstanding after bonus issue = 1,200,000 (for the remaining 364 days of the year)

Therefore, the weighted average number of shares outstanding would be:

Weighted Average Number of Shares Outstanding = (1,000,000 x 365 + 1,200,000 x 364) / 729 = 1,100,000 shares (rounded to the nearest thousand)

Now we can calculate the impact on Basic EPS:

Basic EPS before bonus issue = (Net Income / 1,000,000) = X

Basic EPS after bonus issue = (Net Income / 1,100,000) = Y

Impact on Basic EPS = ((Y - X) / X) x 100

The impact on Basic EPS would depend on the net income of the company. If the net income remains constant, the impact would be negative as the number of shares outstanding has increased. If the net income increases proportionately with the increase in the number of shares outstanding, then the impact on Basic EPS would be neutral. If the net income increases by a larger percentage than the increase in the number of shares outstanding, then the impact on Basic EPS would be positive.

For example, if the net income before the bonus issue was $1,000,000, and it remains constant after the bonus issue, then:

Basic EPS before bonus issue = ($1,000,000 / 1,000,000) = $1 per share

Basic EPS after bonus issue = ($1,000,000 / 1,100,000) = $0.91 per share

Impact on Basic EPS = ((0.91 - 1) / 1) x 100 = -9%