Chapter 10 - Earnings per share and distributable profits Flashcards
What international accounting standards are we concerned with in this chapter?
- IAS33 – Earnings Per Share (EPS)
Briefly outline what IAS33 establishes
IAS 33 – Earnings Per Share (EPS) establishes the principles and guidelines for calculating and presenting earnings per share (EPS) to improve comparability between companies. EPS is a key performance measure, especially for companies with publicly traded shares, and IAS 33 ensures consistency in how it is calculated and disclosed.
According to IAS33, what is the definition of earnings per share (EPS)?
Earnings Per Share (EPS) is a measure of the amount of a company’s profit attributable to each ordinary share (common share) outstanding during a financial reporting period. It indicates how much profit (or loss) a company has earned for each share
What are the two types of EPS?
- Basic earnings per share
- Diluted earnings per share (not examinable)
Outline the equation for basic EPS and define each term
- Earnings - Profit or loss for the period attributable to ordinary equity holders of the parent” i.e. consolidated profit after tax, non-controlling interests and irredeemable preference share dividends.
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Weighted average number of shares - This is the weighted average number of equity shares in issue during the year. The calculation depends on the type of share issues that may have taken place during the period:
- Issue at full market price
- Bonus issue
- Rights issue
What is the formatting for EPS that you must remember?
EPS is always written in pence to 1 decimal place
Outline how to calculate the EPS where an issue at full market price has taken place
Where an issue of shares is made at FMP, the number of shares for the year will need to be time apportioned
1) Set up the table as pictured
2) For each period during the year where the total number of shares in issue remains the same, group the months together. This will likely change when new shares are issued, so split the periods accordingly. Fill out the relevant periods in the “months” column.
3) For each period, multiply the total number of shares in issue by the number of months the shares were in issue, then divide by 12 (since there are 12 months in a year). This gives you the weighted average number of shares for each period.
4) Add together the weighted averages for each period to get the total weighted average number of shares for the year.
5) Finally, use the calculated weighted average number of shares in the basic EPS formula:
Outline how to calculate the EPS where a bonus issue has taken place
Bonus shares are issued for no consideration. Therefore, the same level of profits will now be applied to a higher number of shares. From a comparative perspective this can lead to a distortion. For a bonus issue the treatment for the weighted average number of shares is to assume that the bonus shares had been always been in issue. To do this, we apply a “bonus fraction” to all shareholdings prior to the bonus issue. The prior year comparative is also adjusted to reflect the assumption that the bonus shares have always been in issue
1) Calculate the EPS for the current year and comparative year ignoring the bonus issue for now
2) Calculate the BI Bonus fraction using the equation
3) Multiply the EPS for the current year and comparative year by 1 over the BI Bonus fraction to give the EPS taking into account the bonus issue
Outline how to calculate the EPS where a rights issue has taken place
Rights issue shares are issued for less than current market value. This is in effect a combination of an issue a full market price and a bonus issue. From a comparative perspective this can lead to a distortion. To avoid this, we apply a bonus fraction to all shareholdings prior to the rights issue. The prior year comparative is also adjusted.
1) Set up the first table as pictured
2) Fill in the No. column with the number of shares present before the rights issue and the number of new shares issued
3) Fill the price column with the marketpricepersharebeforetheissue and then price at which the new shares were issued
4) Multiply the number and price for the pre-rights issue holding and new rights issue share and put this in the total column
5) Sum up the No. column and the total column and use both values in the equation for TERP.
6) Use the calcualted TERP value in the equation for the RI Bonus fraction.
7) Set up the second table as pictured
8) Group the the months together before and after the rights issue and fill out the relevant periods in the “months” column.
9) For the period prior to the rights issue, multiply the total number of shares in issue by the number of months the shares were in issue, then divide by 12 (since there are 12 months in a year). Multiply this by the RI Bonus fraction to give the weighted average number of shares for this period.
10) For the period after the rights issue, multiply the total number of shares in issue by the number of months the shares were in issue, then divide by 12 (since there are 12 months in a year) to give the weighted average number of shares for this period.
11) Add together the weighted averages for each period to get the total weighted average number of shares for the year.
12) Use the calculated weighted average number of shares in the basic EPS formula to get the EPS for the current year
13) Finally, multiply the comparative year EPS by 1 over the RI Bonus fraction to get the prior year adjusted EPS
Outline how to calculate the EPS where a combination of share issues have taken place
ANSWER
DISTRIBUTABLE PROFITS
Outline the key differences between UK GAAP and IFRS for the reporting of earnings per share
