Earnings per share Flashcards
Objective and scope of IAS 33
Earnings per Share 1.1 Objective
Earnings per share (EPS) is one of the most commonly used performance measures
worldwide. IAS 33 Earnings per Share seeks to provide guidance to ensure a
consistent basis is followed so that a meaningful comparison can be made over time.
Objective and scope of IAS 33
Earnings per Share 1.2 Scope
IAS 33 Earnings per Share applies to separate entities whose ordinary shares are
traded publicly or are in the process of being issued in public markets.
It also applies to consolidated financial statements where the parent company meets
the above definition.
If it is not mandatory for an entity to present the EPS figure but if the entity volunteers
to do so, compliance with IAS 33 Earnings per Share is still required.
Basic earnings per share (BEPS) 2.1 Profit attributable to ordinary equity holders
The profit attributable to equity holders is based on the profit after tax for the period
less NCI less any irredeemable preference dividends paid (if those dividends had been recognised directly against retained earnings).
Redeemable preference dividends are charged as a finance cost to the statement of
profit or loss, and therefore have already been deducted in arriving at the profit for
the period. The same applies to irredeemable preference shares if they have mandatory cumulative dividends.
The weighted average number of shares takes into account when shares were issued during the year.
For cumulative preference shares, if a dividend is not paid in the current year, then it will be rolled over and paid in future years when distributable profits are available, but only the current year dividend is deducted within the earnings figure.
Basic earnings per share (BEPS)
The calculation of the basic EPS figure is as follows:
Profit/(loss) attributable to ordinary equity holders of parent company
/
Weighted average number of ordinary shares during the period
Basic earnings per share (BEPS) 2.2 Weighted average number of shares
The weighted average number of shares needs to be adjusted for share movements
in the year. Share movements can arise from:
Issuing shares at fair value
Partly paid shares
Bonus issues
Rights issues.
Basic earnings per share (BEPS) 2.6 Rights issues
With a rights issue the entity issues shares to existing shareholders, in proportion to
their current holding, at a discount on the current market price.
A rights issue is treated as a combination of an issue at full price and a bonus issue.
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
X
Theoretical ex rights price (TERP)
= Weighted average share price after the rights issue
Basic earnings per share (BEPS) 2.3 Issuing shares at fair value
time apportion
To calculate the weighted average number of shares for a period during which there
was an issue of shares at fair value:
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.
Basic earnings per share (BEPS) 2.4 Partly paid shares
If ordinary shares are issued but not fully paid, they are known as ‘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.
Basic earnings per share (BEPS) 2.5 Bonus issues
Treat as if bonus shares ALWAYS THERE including COMPARITVES
With a bonus issue the entity issues shares to existing shareholders, in proportion to
their existing holding, for no additional consideration.
The number of shares will therefore change, but there will be no impact on earnings.
In order for the EPS figure not to be distorted, the bonus issue 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 the bonus issue/Number of shares before the bonus issue
Restate the comparatives, by multiplying the prior year EPS figure by the
inverse bonus fraction.
Diluted earnings per share (DEPS)
Entities also 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. In determining whether potential ordinary shares are dilutive or antidilutive, each series of potential ordinary shares is considered separately rather than in aggregate.
Instruments that may give rise to potential ordinary shares are:
Convertible debt
Options and warrants
Contingently issuable shares.
Diluted earnings per share (DEPS) 3.1 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 the debt into shares:
Earnings – will increase as the entity will no longer be paying any
interest on the debt (this is calculated net of tax)
Shares – will increase on conversion (this is calculated as the
maximum number of shares that could be issued).
Diluted earnings per share (DEPS) 3.2 Convertible preference shares
Convertible preference shares are considered in exactly the same way as convertible
debt with the following exception:
The effect of tax is ignored as the preference shares are unlikely to attract tax
relief.
Diluted earnings per share (DEPS) 3.3 Options and warrants
If there are any options or warrants to acquire shares for less than the average
market price, these shares will be dilutive.
The potential ordinary shares are treated as consisting of two elements:
‘a contract to issue a certain number of shares at their average market price’, (IAS 33, para 46a)
and
‘a contract to issue the remaining ordinary shares for no cnsideration’ (IAS 33, para 46b), so called ‘free shares’.
Only the ‘free shares’ are considered in calculating the diluted EPS.
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.
Diluted earnings per share (DEPS) 3.4 Employee share options
Employee share options give employees the option to acquire shares at a fixed price.
There are two types to consider:
Vested options – there are no further conditions, the options can be exercised now:
– Treat exactly the same as a normal option.
Unvested options – the conditions have not yet been met, so the options cannot be exercised until the end of the vesting period:
– The amount that is still to be taken to the statement of profit or loss before the vesting date is divided by the number of shares under option.
– This value is then added onto the exercise price of the option.
– Then treat as a normal option.
Diluted earnings per share (DEPS) 3.5 Contingently issuable shares
Contingently issuable shares usually arise with the acquisition of a subsidiary, where
shares will be issued at some point in the future provided certain conditions are met.
In terms of EPS:
Do not include in basic EPS
Do include in diluted EPS if the conditions have been satisfied at
the period end date
Earnings will not be affected
Number of shares will be affected.
