EPS

Question 1

Why do we care about EPS?

Answer 1

1) Earnings from P/L shows absolute earnings whereas EPS can be meaningful to someone
valuing one share in the company
2) It can be used for performance comparisons between different entities
3) For listed companies it is more useful to know what the earnings for each share are AND EPS links easily (via the price-earnings ratio) to the price per share

Question 2

What are the limitations of EPS?

Answer 2

When comparing performance of different entities, the entities may:
1) have different reporting periods
2) use different accounting policies

Question 3

What is the minimum number of EPS figures that South African listed companies should disclose?

Answer 3

South African listed companies disclose at least 3 EPS figures

Question 4

List the 3 EPS figures that South African listed companies should disclose?

Answer 4

1) Basic EPS
2) Fully Diluted EPS
3) Headline EPS

Question 5

What is Basic EPS?

Answer 5

Basic EPS refers to actual earnings per share achieved
in the current year

Question 6

How many basic EPS figures should be disclosed if there are discontinued operations?

Answer 6

There should be 2 BEPS if there are discontinued operations)

Question 7

What is fully diluted EPS?

Answer 7

Fully diluted EPS shows how EPS will change because of future changes in capital structure

Question 8

What is Headline EPS?

Answer 8

It is based on earnings adjusted by ‘separately identifiable re-measurements’ (non trading/non-operating items)

Question 9

How is BEPS calculated?

Answer 9

BEPS is = Profit/loss attributable to Ordinary Equity holders/Weighted average no of shares in issue during period

i.e Attributable earnings / WANOS

Question 10

What are Attributable ordinary earnings?

Answer 10

This refers to the profit/loss attributable to ordinary shares

Question 11

What do Attributable ordinary earnings include?

Answer 11

They include:
1) Dividends on preference shares classified as liabilities (net of tax)
2) exceptional items

Question 12

What do Attributable ordinary earnings exclude?

Answer 12

They exclude:
1) other comprehensive income
2) Dividends on preference shares classified as equity

Question 13

What is WANOS?

Answer 13

Weighted-average number of ordinary shares in issue during the reporting period

Question 14

What does WANOS reflect and how does it reflect this?

Answer 14

WANOS reflects the fact that ordinary share capital has varied during period

It does this by accounting for:

1) The number of ordinary shares outstanding at beginning of period
2) Adjustments for any shares repurchased or issued during the period (for portion of period outstanding: ‘time-weighted’)
3) number of shares that changed without
corresponding change in resources (capitalisation issue, share split: ‘retrospective
adjustment’)

Question 15

In what instances can the number of shares be changed without a corresponding adjustment to resources?

Answer 15

Number of shares can be changed without a corresponding adjustment to resources when there is:
1) a Share split/Reverse share split?
2) Capitalisation/a Bonus issue–
3) Rights issue

Question 16

Is WANOS adjusted retrospectively or prospectively?

Answer 16

Retrospectively

Question 17

what are dilutive potential ordinary shares?

Answer 17

These are financial instruments which will reduce EPS when issued as ordinary shares

Question 18

Why do we care about DILUTED EPS?

Answer 18

Diluted EPS assists users to evaluate the sensitivity of EPS to
future changes in the capital structure of the company (where potential dilutive ordinary shares exist)

Question 19

What are potential ordinary shares?

Answer 19

These are Financial instruments that entitle the holder to ordinary shares in future.

Question 20

List 4 examples of potential ordinary shares

Answer 20

1) Convertible debentures or convertible preference shares.
2) Options and warrants (issuable at below market price).
3) Shares that may be issued to employees as part of
remuneration (e.g., share incentive schemes).
4) Shares that will be issued if certain future events happen
or do not happen (contingent shares).

Question 21

Are potential ordinary shares always dilutive?

Answer 21

Potential ordinary shares MAY be dilutive (reduce EPS) or
anti-dilutive

Question 22

When Calculating Diluted EPS how do you test if potential ordinary shares are dilutive or
anti-dilutive?

Answer 22

Use “control number” (current P/L) to test if dilutive or anti-dilutive

Question 23

In the the calculation of diluted EPS, what we do to Anti-dilutive potential ordinary shares?

Answer 23

Anti-dilutive potential ordinary shares are excluded from the calculation of diluted EPS

Question 24

What is included in Headline Earnings ?

Answer 24

earnings items that relate to the
operating/trading of an entity

Question 25

What is excluded in Headline Earnings?

Answer 25

items that relate to the capital platform of the entity

Question 26

What is excluded from the Calculation of HEPS?

Answer 26

EXCLUDED from HEPS are : 1) Re-measurements recognized in the P/L (realized or not) relating to changes in the CA of assets & liabilities (capital platform) after initial recognition 2) list of excluded items in extract from Circular 01/2018 Excluded items are adjusted for tax (current & deferred) and for NCI

Question 27

What is included from the Calculation of HEPS?

Answer 27

INCLUDED in HEPS are: Re-measurements relating to working capital items (as they are of an operating/trading nature)

Question 28

What is an example of Re-measurements relating to working capital items?

Answer 28

impairment of inventory/debtors and gains/losses on financial assets

Question 29

Why Headline Earnings and HEPS?

Answer 29

Headline earnings is a better predictor of future earnings than basic earnings

Question 30

Are Headline earnings the same as maintainable earnings or profits (often used in company valuations)?

Answer 30

No because Certain exceptional items are not excluded (From headline earnings?)

Question 31

List the exceptional items that are not excluded (From headline earnings?)

Answer 31

1) abnormal inventory loss 2) bad debt written off

Question 32

What items of EPS does IAS 33 requires the disclosure of?

Answer 32

1) Basic and diluted EPS\ 2) The earnings and WANOS used to calculate BEPS and DEPS, together with related reconciliations 3) Anti-dilutive potential o/shares excluded from DEPS calculation 4) Post B/Sheet o/share or potential o/share transactions

Question 33

How is the numerator of the earnings per share equation calculated?

Answer 33

It is calculated as Profit /(loss) attributable to equity holders of the entity or parent entity, adjusted for preference share dividends (classified as equity).

Question 34

What does the denominator of the earnings per share equation represent?

Answer 34

The weighted average number of shares in issue during the period for that class of ordinary share.

Question 35

When is an earnings per share calculation required?

Answer 35

It is required for all classes of ordinary shares for all companies that are listed or in the process of listing.

Question 36

Is an earnings per share calculation required for preference shares and, if so, when?

Answer 36

No, as any type of preference share will rank above ordinary shares.

Question 37

What disclosure is required if the company has debentures which are convertible into ordinary shares?

Answer 37

Diluted earnings per share (Or a note disclosure of the potential ordinary share not included in the calculation of diluted EPS because it is anti-dilutive for the period).

Question 38

When will a prior year's earnings per share figure be restated?

Answer 38

When: (a) the comparative figures have been restated in terms of IAS 8 (i.e. for the correction of a prior period error, or as a result of a change in policy); (b) the number of equity shares has increased or decreased without a corresponding adjustment to equity (e.g. bonus/ share capitalization issue, share split, or reverse share split); and (c) a rights issue has occurred (i.e., the bonus element therein).

Question 39

Under what circumstances will the issue of ordinary shares during the year not be weighted from the date of issue?

Answer 39

When the number of shares has changed without a corresponding adjustment to equity (in which case the number of shares after the bonus issue or share split should be used for the entire year); or Where the consideration from the issue of shares was not received on the date of issue; or When shares have been issued in exchange for an interest in a subsidiary (in which case they should be weighted from the date on which the earnings of the new subsidiary are included in the group net income, that is, acquisition date)

Question 40

When calculating earnings from a subsidiary (for the attributable earnings in the EPS calculation) what 2 things do you have to apportion for ?

Answer 40

When calculating earnings from a subsidiary you have to apportion for 2 things 1) The months the shares were invested in for (since the deal was finalized) 2) The percentage holding the company has in that subsidiary

Question 41

When calculating earnings from a subsidiary (for the attributable earnings in the EPS calculation) what do you have to apportion for when calculating preference share dividends (classified as a liability)?

Answer 41

The months the shares were in issue for