Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Advanced Financial Accounting > 15.2 IAS 33 Earnings Per Share > Flashcards

15.2 IAS 33 Earnings Per Share Flashcards

1
Q

What is the scope of IAS 33

A
  • Only applied to public companies
  • Doesn’t stop LTDs from doing it
  • If the company is a group then only need to show on the consolidated financial statements
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is Basic Earnings per Share and what does it show

A

Basic EPS = Earnings / Number of shares
* EPS should be one decimal place
* Finds how much profit is available to each shareholder
o Maximum amount of dividend possible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What earnings are to be used

A
  • Group profit after tax
  • Less non-controlling interests and irredeemable preference dividends
    o Irredeemable preference dividends removed as only considers ordinary shareholders
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the number of shares to be used

A

Weighted average number of ordinary shares outstanding during the period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the three ways of issuing new shares

A
  • Issued at full market price
  • Bonus issue (given for free)
  • Rights issue (sell to existing for a discount)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is an issue at full market price

A
  • Earnings should be apportioned over the weighted average equity share capital
  • Need to take into account the dates the new shares were issued
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a bonus issue

A
  • The existing shareholders are provided with extra free shares in proportion to their shareholdings at the time
    o Will hold same proportion of the company after the issue as before
  • Companies does not get extra share capital or resources as a result of the bonus issue
    o EPS is reduced and in theory will cause the share price to fall
  • Do not do a weighted average and just treat as if it was issued on the first of the year
    o As no new money was brought in
  • Comparative figures are restated to look as if the bonus issue had always been in place
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What would you do if there is both a bonus issue and market issue

A

Companies might issued shares via a bonus issue and a market issue during the year. You need to:
* Apply the bonus fraction
* Time apportion the number of shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a bonus fraction

A
  • Shares after divided by shares before
  • From the start of the year up until the date of the bonus issue
  • Use this to restate the prior shareholdings as if the bonus issue had always taken place
    o When it then takes place don’t need it as no need to restate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How do you time apportion the number of shares

A
  • Time apportion the number of share to reflect the cash being received from the market issue
  • Do a weighted average on the number of months that number of shares was held by the company
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is a rights issue

A
  • Rights issues do result in the contribution of extra resources to the company
  • Normally priced bellow market price
    o Shareholders are a captive audience but need to be incentivised
  • Therefore, rights issue combine characteristics of both full market price and bonus issue
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the 4 steps for calculating the EPS on a rights issue

A
  1. Calculate the theoretical ex-rights price (TERP)
  2. Apply bonus fraction
  3. Weighted average number of shares (WANS)
  4. Earnings per share (EPS)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What happens in step 1 of calculating a rights issue

A
  • Start with the number of shares previously held by an individual at their market price
  • Add the number of new shares purchased at the rights price.
  • Find the TERP by dividing the total value of the shares by the number held.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What happens in step 2 of calculating a rights issue

A

Bonus fraction = Market price before issue / Theoretical ex rights price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What happens in step 3 of calculating a rights issue

A
  • Draw up a table to calculate the average number of shares (WANS)
  • Apply the bonus fraction from the start of the year up to the date of the rights issue but not afterwards.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What happens in step 4 of calculating a rights issue

A
  • Calculate earnings per share: PAT/WANS.
  • To restate the prior year’s EPS:
    o Multiple the prior year’s EPS by the inverse of the bonus fraction
17
Q

What is diluted earnings per share

A
  • Looking into the future, what will happen to my EPS if I issue more shares
    o Likely go down as if earnings stay the same as more shares to split them between
  • Equity share capital may change in the future owing to circumstances which exist now – known as dilution, as a increase in shares will reduce (dilute) earnings
  • The provision of diluted EPS figure attempts to alert shareholders to potent impact on EPS
18
Q

What are examples of diluting factors

A
  • The conversion of bond/loans into shares
    o Convertible loan notes gives lender to have shares in the company instead of the debt
  • The exercise price of options (shares brought bellow MV) and the subscription price for warrants
19
Q

What is the formula and basic principle for DEPS

A

DEPS=(Earnings + Notional extra earnings) / (Number of shares + Notional extra shares)
For ordinary shares, adjust basic earnings and the number of shares assuming convertibles, options, etc. had converted to equity shares on the first day of the accounting period, or on the date issued, if later

20
Q

What are notional extra earnings

A
  • If debt is converted to shares, will not be paying interest
  • So saving in costs or extra earnings for the shareholders
21
Q

What are notional extra shares

A

Number of additional shares issued if all conversions are made and options realised

22
Q

What are convertible bonds

A

If convertible bonds are converted into shares
* The interest charge would be saved
o Therefore earnings Would increase
o But loss of tax relief on interest saved
* The number of shares would increase
* This can potentially dilute EPS

23
Q

What are options and warrants to subscribe to shares

A
  • An option or warrant gives the holder the right to buy shares at some time in the future at a predetermined price
  • The holder buys the shares and the company does receive some cash so the calculation of DEPS needs to allow for this
  • Often below market value or no one would take it up
    o As could buy them from the market for less
24
Q

What are the two components that must be considered when find EPS with options

A

The shares issued upon exercise of the option or warrant have to be considered as two separate components.
a. The number of shares that would have been issued if the cash that the company received from the option or warrant holder had been used to buy shares at fair value. Note - the fair value is taken to be the average price of shares during the period.
b. The shares that have effectively been issued for free, which are treated like a bonus issue.

25
Q

How are BEPS and DEPS presented

A
  • BEPS and DEPS must both be given on Statement of Profit or Loss and detailed in notes
  • Must be presented even when negative
  • Only need to present group view
    o Unless there is a discontinued operation
26
Q

What disclosure is needed for BEPS and DEPS

A
  • In the notes must reconcile the earnings figure used in EPS to figure in SPL
  • Give the WANS used in BEPS and DEPS with a reconciliation
  • Financial instruments which could potentially dilute EPS but have not been included in the DEPS as they are currently antidilutive
    o These don’t need to be declared
27
Q

What is the importance of BEPS (P/E ratio)

A

EPS is a key component within the Price Earnings (P/E) ratio

P/E ratio = Market value of share / EPS

Shows the markets view of the future prospects of a share

28
Q

What is the importance of BEPS for investors

A

EPS measures performance from an investors viewpoint
* It shows the earnings available to shareholders (per share)
* It indicates the potential return on investment
* Can give a better picture than profit alone, particularly when there has been a share issue

29
Q

What are the limitations of BEPS

A
  • Does not overtly take account of inflation
  • Does not consider the impact of any time lag between the issue of new shares and investment of resulting funds by the company
  • Earnings can be manipulated or of low quality
  • Relatively simplistic and not suitable for use in isolation
  • Based on historic accounts
  • Unlike DEPS, BEPS does not account for potential future dilution of earnings due to the existence of convertible loan stock, convertible preference shares and share options
30
Q

What is the importance of DEPS

A
  • Does take into account for potential future dilution of earnings due to existence of convertible loan stock, convertible preference shares and share options
    o Acts as an early warning to investors
  • Shows what current EPS would be if all dilutive factors had been converted
  • Useful for trend analysis
31
Q

What are the limitations of DEPS

A

Many similar to limitations of EPS
* Fails to consider inflation
* Based on historical information
* May not be compatible between companies
o Finding BEPS and DEPS are the same process
o But earnings can be manipulated
o Also companies do legitimately use different policies for earnings

Advanced Financial Accounting (25 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions