Definition
Net basis refers to the methodology used when calculating the Earnings Per Share (EPS) of a company, taking into account all financial aspects that influence a company’s tax charge, which can be both constant and variable. It aligns with International Accounting Standard (IAS) 33, wherein listed companies are required to present their EPS on the net basis in their profit and loss statements.
Examples
Example 1: Calculating Net Basis EPS
Situation: A publicly listed company reports a net income of $500,000 after taxes for the fiscal year. It has 1,000,000 outstanding shares.
Calculation:
1Net Basis EPS = Net Income / Outstanding Shares
2Net Basis EPS = $500,000 / 1,000,000 = $0.50
The EPS on a net basis would be $0.50.
Example 2: Comparing Net Basis and Gross Basis
Situation: Another company with a net income of $600,000 after accounting for taxes (net basis EPS calculation) but earned a gross income of $800,000 before taxes (gross basis calculation). The company also has 1,500,000 shares outstanding.
Net Basis EPS Calculation:
1Net Basis EPS = $600,000 / 1,500,000 = $0.40
Gross Basis EPS Calculation: (including a tax effect of $200,000)
1Gross Basis EPS = $800,000 / 1,500,000 = $0.53
The differences highlight the importance of presenting EPS on a net basis as required by IAS 33.
Frequently Asked Questions (FAQs)
What is the purpose of calculating EPS on a net basis?
Calculating EPS on a net basis provides a more accurate reflection of the company’s profitability by considering all relevant tax effects.
How does IAS 33 affect EPS calculations?
IAS 33 requires companies to present their EPS figures on the net basis in profit and loss statements, ensuring standardized financial reporting across listed entities.
Can net basis EPS differ from diluted EPS?
Yes, net basis EPS can differ from diluted EPS as diluted EPS includes potential shares from convertible securities, whereas net basis EPS strictly considers current marketplace shares.
What’s the difference between net basis and nil basis?
Net basis includes tax charges affecting EPS calculations, whereas nil basis does not involve tax adjustments.
Does all EPS calculation need to conform to net basis reporting?
Yes, listed companies must conform to net basis reporting for consistency with IAS 33 standards.
Related Terms
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Earnings Per Share (EPS): A company’s profit divided by the number of outstanding shares.
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International Accounting Standard (IAS) 33: A standard governing the presentation of EPS in financial statements.
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Gross Basis EPS: EPS calculation before deducting taxes or other expenses.
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Nil Basis: An uncommon EPS calculation method not incorporating tax charges.
Online Resources
- International Financial Reporting Standards (IFRS) Foundation
- Investopedia: Earnings Per Share (EPS)
- Ernst & Young: Financial Reporting Developments
Suggested Books for Further Studies
- International Financial Reporting Standards (IFRS) 2019 by IFRS Foundation.
- Financial Reporting and Analysis by Charles H. Gibson.
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield.
Accounting Basics: “Net Basis” Fundamentals Quiz
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