X Ltd. purchased a patent right on 1 st April, 20X1, for 3,00,000, which has a legal life of 15 years. However, due to the competitive nature of the…

Value as on 31 st March, 20X2 Original cost - 3,00,000 Less: Amortisation (3,00,000 x 1/5) (60, 000) Net Value - 2,40,000 Value as on 31 st March, 20X3 On 1 st April, 20X2, the impairment is recorded by writing down the asset to the estimated value of 1,50,000, which necessitates a - 90,000 charge to profit & loss (carrying value,2,40,000 less fair value - 1,50,000). Amortisation provided for the financial year 20X2-20X3 is 75,000 (₹ 1,50,000/2) Net value is = 1,50,000 - 75,000 = 75,000. Value as on 31 st March, 20X4 As of 1 st April, 20X3, the carrying value of the patent is 75,000. Revalued amount of patent is 3,00,000. Out of total revaluation gain of 2,25,000,90,000 will be charged to profit & loss and balance amount of 1,35,000 (₹ 2,25,000 - 90,000) will be credited to revaluation reserve. Amortisation provided for the financial year 20X3-20X4 is 75,000 (₹ 3,00,000 /4) Net value is = 3,00,000 - 75,000 = 2,25,000. Similarly, Value as on March 31, 20X5 = 2,25,000 - 75,000 = 1,50,000 Value as on March 31, 20X6 = 1,50,000 - 75,000 = 75,000 Value as on March 31, 20X7 = 75,000 - 75,000 = Nil Statement of Profit and Loss (extracts) for the year ended 31 st March, 20X2 and 31 st March, 20X3 20 X3 20 X2 Trading results ₹ ₹ A. Profit before interest, fair value movements and tax 895,000 825,000 B. Interest on 8% convertible loan stock (20X2: 9/12 × ₹ 100,000) (100,000) (75,000) C. Change in fair value of embedded option (2,650) (2,500) Profit before tax 792,350 747,500 Taxation @ 33% on (A-B) (262,350) (247,500) Profit after tax 5,30,000 5,00,000 Calculation of basic EPS Number of equity shares outstanding 1,500,000 1,500,000 Earnings 530,000 500,000 Basic EPS 35 paise 33 paise Calculation of diluted EPS Test whether convertibles are dilutive: The saving in after-tax earnings, resulting from the conversion of 100nominal of loan stock, amounts to 100 × 8% × 67% +2,650/12,500 = 5.36 +0.21 = 5.57. There will then be 135 extra shares in issue. Therefore, the incremental EPS is 4 paise (ie.5.57/135). As this incremental EPS is less than the basic EPS at the continuing level, it will have the effect of reducing the basic EPS of 35 paise. Hence the convertibles are dilutive. 20 X3 20 X2 Adjusted earnings ₹ ₹ Profit for basic EPS 530,000 500,000 Add: Interest and other charges on earnings saved as a result of the conversion 102,650 (100,000 + 2,650) 77,500 (75000+2500) Less: Tax relief thereon (33,000) (24,750) Adjusted earnings for equity 599,650 552,750 Adjusted number of shares From the conversion terms, it is clear that the maximum number of shares issuable on conversion of 1,250,000 loan stock after the end of the financial year would be at the rate of 135 shares per 100nominal (that is, 1,687,500 shares). 20 X3 20 X2 Number of equity shares for basic EPS 1,500,000 1,500,000 Maximum conversion at date of issue 1,687,500 × 9/12 1,265,625 Maximum conversion after balance sheet date 1,687,500 — Adjusted shares 3,187,500 2,765,625 Adjusted earnings for equity 599,650 552,750 Diluted EPS (approx.) 19 paise 20 paise Note: Since Effective Interest Rate is not given, splitting of the convertible loan into liability and equity components as envisaged under Ind AS 109 cannot be done. However, since fair values of derivatives are given, the same is considered for accounting at FVTPL.