Ch 6 - EPS and Distributable Profits Flashcards
Why is EPS regarded one of the most important indicators of the company’s performance?
It is important that users of the FS
Are able to compare the EPS of different entities
Are able to compare the EPS of the same entity, in diff acc periods
What is EPS used to do?
- Assess the ongoing fin perf of the company year to year
- Compute the major stock market indicator of perf - Price Earnings ratio (PE ratio)
PE ratio = Market value of the share / EPS
As the PE ratio is an important stock market ratio, it is important that EPS is calculated in a standard way
Who must apply IAS 33 EPS
FRS 102 Section 1.4 requires an entity whose shares are publicly traded to apply IAS 33 Earnings Per Share
How does IAS 33 EPS achieve comparability?
Defining earnings
Prescribing methods for determining the number of shares to be included in the calc of EPS
Requiring standard presentation and disclosures
The basic EPS is required to be shown on the face of the P&L
How do you calc basic EPS?
Earnings/shares where
Earnings - net prof/loss for the period attributable to ordinary equity holders of the parent entity (para 9)
Shares are the weighted average number of ordinary shares outstanding.. during a period (para10)
Define earnings for calculating EPS
Earnings - net prof/loss for the period attributable to ordinary equity holders of the parent entity (para 9)
Define shares for calculating EPS
Shares are the weighted average number of ordinary shares outstanding.. during a period (para10)
What must you be aware of when calculating shares for EPS?
Beware of the type of preference shares you are dealing with
- Redeemable preference shares are treated as debt in FS and the fin cost will already be included in P&L
- Irredeemable pref shares (without cumulative/mandatory dividends) are treated as equity, so the dividend must be deducted from net profit in P&L to arrive at earnings
- For cumulative preference shares, always pretend dividends have been paid in the correct period
How are redeemable shares used for calculating EPS?
Redeemable preference shares are treated as debt in FS and the fin cost will already be included in P&L
How are irredeemable pref shares without cum/mandatory dividends treated for calculating EPS?
are treated as equity, so the dividend must be deducted from net profit in P&L to arrive at earnings
How are cumulative preference shares treated when calculating EPS?
always pretend dividends have been paid in the correct period
If a company has a net prof of £400k at y/e, and £1m of £1 ordinary shares and £1m of 5% irredeemable preference shares in equity. Calc the basic EPS
Total net profit/ shares = £400,000 - dividend from irredeemable preference shares
EPS = £400,000 - £1,000,000*5% / 100,000 shares
EPS = 35.0p
What impact does the issue of new share capital at full market price have on the FS?
When a company issues new share capital at full market value, it will increase earnings and share capital, although not necessarily proportionally
How do you correctly calc EPS when there has been an issue of shares in the year
To calc the correct EPS figure, earnings should be apportioned over the weighted average number of equity shares
i.e. taking into account when shares are issued in the year
What is a bonus issue of shares?
where shares are offered to existing SH for free and therefore doesn’t provide additional resources to the issuer
Means that the shareholder owns the same proportion of the business before and after the issue
