Chapter 11 Earnings per share Flashcards
1.1 Objective and scope of IAS 33 Earnings per Share
IAS 33 applies to separate entities whose ordinary shares are traded publicly or are in the process of being issued in public markets. It also applies the consolidated accounts where the parent company meets the above definition.
2.1 Basic earnings per share
Calculation is: profit attributable to ordinary share holders of parent company / weighted average number of ordinary shares during the period.
Profit to Ord share holders: based on profit after tax less NCI less irredeemable preference dividends paid. Redeemable preference dividends are charged as finance cost to SPL and already included. The weighted average shares takes into account when shares are issued. For cumulative preference shares, if a dividend is not paid in the year, it is rolled over, but only the current year dividend is deducted within the earnings figure.
Weighted average number of shares: needs to be adjusted for share movements arising from issuing shares at FV, partly paid shares, bonus issues and rights issues.
2.2 Issuing shares at FV
To calculate the weighted average number of shares for a period during which there was an issue of shares at FV:
- Take the number of shares at the start of the year and time apportion up to the date of the new issue
- Calculate the total number of shares after the issue and time apportion for the period after the issue
- Add both numbers together to get the weighted average
2.3 Partly paid shares
In the weighted average number of shares, include partly paid shares as a fraction of an ordinary share, to the extent that the shareholders are entitled to participation in a dividend.
2.4 Bonus issues
When entity issues shares to existing shareholders in proportion to their existing holding. In order for the EPS figure not to be distorted, the bonus issues is treated as if the shares have been there from the earliest presented period. In the calculation:
- Multiply the number of shares before the issue by the bonus fraction
- Bonus fraction = number of shares after bonus issue / number of shares before bonus issue
- Restate the comparatives, by multiplying the prior year EPS figures by the inverse bonus fraction
2.5 Rights issues
The entity issues shares to existing shareholders, in proportion to their current holding, at a discount on the current market price. To calculate the weighted average number of shares:
- Multiply the number of shares prior to the issue by the rights issue bonus fraction:
- Pre-rights issue market price per share / theoretical ex rights price
- The TERP is the weighted average share price after the rights issue
3.1 Diluted earnings per share
Entities need to report the diluted EPS figure, which provides a measure of the interest of each ordinary share in the performance of an entity, taking into account any commitments the entity has to issue more shares.
If there are any financial instruments in issue that entitle their holders to ordinary shares, then these must be taken into account if they are dilutive:
- Shares are dilutive if, on conversion the % increase in earnings is less than the % increase in the number of shares
- Shares are antidilutive if, on conversion the % increase in earnings is more than the % increase in the number of shares
Antidilutive shares are ignored in EPS calculations. Instruments that may give rise to potential ordinary shares are convertible debt, options and warrants and contingently issuable shares.
3.2 Convertible debt
Convertible debt can be redeemed for cash or converted into ordinary shares. For dilutive EPS, it is necessary to consider the impact of converting debt into shares:
- Earnings: will increase as the entity will no longer be paying any interest on the debt
- Shares: will increase on conversion
3.3 Convertible preference shares
Convertible shares are considered in exactly the same way as convertible debt with the exception that the effect of tax is ignored as the preference shares are unlikely to attract tax relief.
3.4 Options and warrants
If there are any options or warrants to acquire shares for less than market price, the shares are dilutive. The ordinary shares are treated as two elements, a contract to issue a certain number of shares at their average market price and a contract to issue the remaining ordinary shares for no consideration (free-shares).
The free shares are calculated as the difference between the number of shares issued and the number of shares that could have been issued at the average market price.
3.5 Employee share options
They give employees the option to acquire shares at a fixed price. There are two types:
- Vested options: no further conditions, options can be vested now. Treat the same as an option
- Unvested options: conditions not been met, so cannot be exercised until end of vesting period. The amount that is still to be taken to the SPL before the vesting date is divided by the number of shares under the option. This value is added to the exercise price of the option. Then treat as a normal option.
3.6 Contingently issuable shares
These usually arise with the acquisition of a subsidiary, where shares will be issued at some point in the future provided conditions are met. In terms of EPS: do not include in basic EPS, do not include in diluted EPS if conditions are met at the period end date, earnings will not be affected and the number of shares will be affected.
3.7 Dealing with a number of convertibles/options
If an entity has a number of convertible instruments or options, then:
- Consider each instrument separately
- Calculate the potential EPS for each instrument
- Identify which is the most dilutive down to which is the least. Options/warrants are the most dilutive as they increase the number of shares with no impact on earnings
- Calculate the maximum diluted EPS by working order, considering most dilutive first
4.1 Presentation and disclosure
The following disclosures should be made for IAS 33 Earnings per share:
- Amount used for earnings in the based and diluted EPS calculation
- Weighted average number of ordinary shares in the basic and diluted EPS calculation
- Instruments which are diluted and may affect future DEPS
- Post year end share transactions which have significant impact on reported figures
- BEPS and DEPS based on alternative measures of earnings
