18 EPS Flashcards
Define Ordinary shares; Potential ordinary share, Options, warrants and their equivalents, Financial instrument, Equity instrument
Ordinary shares. An equity instrument that is subordinate to all other classes of equity instruments. Potential ordinary share. A financial instrument or other contract that may entitle its holder to ordinary shares. Options, warrants and their equivalents. Financial instruments that give the holder the right to purchase ordinary shares. (IAS 33) Financial instrument. Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Equity instrument. Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
IAS 33 identifies the following examples of financial instruments and other contracts generating potential ordinary shares:
(a) Debt or equity instruments, including preference shares, that are convertible into ordinary shares (b) Share warrants and options (c) Employee plans that allow employees to receive ordinary shares as part of their remuneration and other share purchase plans (d) Shares that would be issued upon the satisfaction of certain conditions resulting from contractual arrangements, such as the purchase of a business or other assets
Scope:
IAS 33 has the following scope restrictions.
(a) Only companies with (potential) ordinary shares which are publicly traded need to present EPS (including companies in the process of being listed). (b) EPS need only be presented on the basis of consolidated results where the parent’s results are shown as well. (c) Where companies choose to present EPS, even when they have no (potential) ordinary shares which are traded, they must do so in accordance with IAS 33
What is basic EPS
Basic EPS should be calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Earnings includes all items of income and expense (including tax and non-controlling interests) less the results of discontinued operations where these are presented, less net profit attributable to preference shareholders, including preference dividends. Preference dividends deducted from net profit consist of:
(a) Preference dividends on non-cumulative preference shares declared in respect of the period (b) The full amount of the required preference dividends for cumulative preference shares for the period, whether or not they have been declared (excluding those paid/declared during the period in respect of previous periods)
What is time weighting factor?
The time-weighting factor is the number of days the shares were outstanding compared with the total number of days in the period; a reasonable approximation is usually adequate
Shares are usually included in the weighted average number of shares from the ________ which is usually the date of issue. The treatment for the issue of ordinary shares in different circumstances is as follows. Ordinary shares issued as ______ in an acquisition should be included as of the date of acquisition because the acquired entity’s results will also be included from that date. If ordinary shares are _____, they are treated as a fraction of an ordinary share to the extent they are entitled to dividends relative to fully paid ordinary shares. C______ (including those subject to recall) are included in the computation when all necessary conditions for issue have been satisfied
Shares are usually included in the weighted average number of shares from the date consideration is receivable which is usually the date of issue. The treatment for the issue of ordinary shares in different circumstances is as follows. Ordinary shares issued as purchase consideration in an acquisition should be included as of the date of acquisition because the acquired entity’s results will also be included from that date. If ordinary shares are partly paid, they are treated as a fraction of an ordinary share to the extent they are entitled to dividends relative to fully paid ordinary shares. Contingently issuable shares (including those subject to recall) are included in the computation when all necessary conditions for issue have been satisfied
There are other events, however, which change the number of shares outstanding, without a corresponding change in resources. In these circumstances it is necessary to make adjustments so that the current and prior period EPS figures are comparable. Four such events are considered by IAS 33.
a) Capitalisation or bonus issue (sometimes called a stock dividend) (b) Bonus element in any other issue, eg a rights issue to existing shareholders (c) Share split (d) Reverse share split (consolidation of shares)
These two types of event can be considered together as they have a similar effect. In both cases, ordinary shares are issued to existing shareholders for no additional consideration. The number of ordinary shares has increased without an increase in resources. This problem is solved by adjusting the number of ordinary shares outstanding before the event for the proportionate change in the number of shares outstanding as if the event had occurred at the beginning of the earliest period reported. T/F
These two types of event can be considered together as they have a similar effect. In both cases, ordinary shares are issued to existing shareholders for no additional consideration. The number of ordinary shares has increased without an increase in resources. This problem is solved by adjusting the number of ordinary shares outstanding before the event for the proportionate change in the number of shares outstanding as if the event had occurred at the beginning of the earliest period reported.
Rights issue A rights issue of shares is an issue of new shares to existing shareholders at a price below the current market value. The offer of new shares is made on the basis of x new shares for every y shares currently held; eg a 1 for 3 rights issue is an offer of one new share at the offer price for every three shares currently held. This means that there is a bonus element included. T/F
Rights issue A rights issue of shares is an issue of new shares to existing shareholders at a price below the current market value. The offer of new shares is made on the basis of x new shares for every y shares currently held; eg a 1 for 3 rights issue is an offer of one new share at the offer price for every three shares currently held. This means that there is a bonus element included
Procedures The procedures for calculating the EPS for the current year and a corresponding figure for the previous year are:
(a) The EPS for the corresponding previous period should be multiplied by the following fraction. (Note. The market price on the last day of quotation is taken as the fair value immediately prior to exercise of the rights, as required by the standard.)
(b) To obtain the EPS for the current year you should: (i) Multiply the number of shares before the rights issue by the fraction of the year before the date of issue and by the following fraction
(ii) Multiply the number of shares after the rights issue by the fraction of the year after the date of issue and add to the figure arrived at in (i) The total earnings should then be divided by the total number of shares so calculated
Define diluted EPS
Diluted EPS is calculated by adjusting the net profit due to continuing operations attributable to ordinary shareholders and the weighted average number of shares outstanding for the effects of all dilutive potential ordinary shares
At the end of an accounting period, a company may have in issue some securities which do not (at present) have any ‘claim’ to a share of equity earnings, but may give rise to such a claim in the future. These securities include:
(a) A separate class of equity shares which at present is not entitled to any dividend, but will be entitled after some future date (b) Convertible loan stock or convertible preferred shares which give their holders the right at some future date to exchange their securities for ordinary shares of the company, at a pre-determined conversion rate (c) Options or warrants
Earnings The earnings calculated for basic EPS should be based on continuing operations and adjusted by the post-tax (including deferred tax) effect of:
(a) Any dividends on dilutive potential ordinary shares that were deducted to arrive at earnings for basic EPS (b) Interest recognised in the period for the dilutive potential ordinary shares (convertible debt)
(c) Any other changes in income or expenses (fees or discount) that would result from the conversion of the dilutive potential ordinary shares
The number of ordinary shares is the weighted average number of ordinary shares calculated for basic EPS plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. It should be assumed that dilutive ordinary shares were converted into ordinary shares at the beginning of the period or, if later, at the actual date of issue. There are two other points:
(a) The computation assumes the most advantageous conversion rate or exercise rate from the standpoint of the holder of the potential ordinary shares. (b) Contingently issuable (potential) ordinary shares are treated as for basic EPS; if the conditions have not been met, the number of contingently issuable shares included in the computation is based on the number of shares that would be issuable if the end of the reporting period was the end of the contingency period. Restatement is not allowed if the conditions are not met when the contingency period expires.
