EPS Flashcards
Why do we care about EPS?
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
What are the limitations of EPS?
When comparing performance of different entities, the entities may:
1) have different reporting periods
2) use different accounting policies
What is the minimum number of EPS figures that South African listed companies should disclose?
South African listed companies disclose at least 3 EPS figures
List the 3 EPS figures that South African listed companies should disclose?
1) Basic EPS
2) Fully Diluted EPS
3) Headline EPS
What is Basic EPS?
Basic EPS refers to actual earnings per share achieved
in the current year
How many basic EPS figures should be disclosed if there are discontinued operations?
There should be 2 BEPS if there are discontinued operations)
What is fully diluted EPS?
Fully diluted EPS shows how EPS will change because of future changes in capital structure
What is Headline EPS?
It is based on earnings adjusted by ‘separately identifiable re-measurements’ (non trading/non-operating items)
How is BEPS calculated?
BEPS is = Profit/loss attributable to Ordinary Equity holders/Weighted average no of shares in issue during period
i.e Attributable earnings / WANOS
What are Attributable ordinary earnings?
This refers to the profit/loss attributable to ordinary shares
What do Attributable ordinary earnings include?
They include:
1) Dividends on preference shares classified as liabilities (net of tax)
2) exceptional items
What do Attributable ordinary earnings exclude?
They exclude:
1) other comprehensive income
2) Dividends on preference shares classified as equity
What is WANOS?
Weighted-average number of ordinary shares in issue during the reporting period
What does WANOS reflect and how does it reflect this?
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’)
In what instances can the number of shares be changed without a corresponding adjustment to resources?
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
Is WANOS adjusted retrospectively or prospectively?
Retrospectively
what are dilutive potential ordinary shares?
These are financial instruments which will reduce EPS when issued as ordinary shares
Why do we care about DILUTED EPS?
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)
What are potential ordinary shares?
These are Financial instruments that entitle the holder to ordinary shares in future.
List 4 examples of potential ordinary shares
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).
Are potential ordinary shares always dilutive?
Potential ordinary shares MAY be dilutive (reduce EPS) or
anti-dilutive
When Calculating Diluted EPS how do you test if potential ordinary shares are dilutive or
anti-dilutive?
Use “control number” (current P/L) to test if dilutive or anti-dilutive
In the the calculation of diluted EPS, what we do to Anti-dilutive potential ordinary shares?
Anti-dilutive potential ordinary shares are excluded from the calculation of diluted EPS
What is included in Headline Earnings ?
earnings items that relate to the
operating/trading of an entity
What is excluded in Headline Earnings?
items that relate to the capital platform of the entity
What is excluded from the Calculation of HEPS?
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
What is included from the Calculation of HEPS?
INCLUDED in HEPS are:
Re-measurements relating to working capital items (as they are of an operating/trading nature)
What is an example of Re-measurements relating to working capital items?
impairment of inventory/debtors
and gains/losses on financial assets
Why Headline Earnings and HEPS?
Headline earnings is a better predictor of future earnings than basic earnings
Are Headline earnings the same as maintainable earnings or profits (often used in company valuations)?
No because Certain exceptional items are not excluded (From headline earnings?)
List the exceptional items that are not excluded (From headline earnings?)
1) abnormal inventory loss
2) bad debt written off
What items of EPS does IAS 33 requires the disclosure of?
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
How is the numerator of the earnings per share equation calculated?
It is calculated as Profit /(loss) attributable to equity holders of the entity or parent entity, adjusted for preference
share dividends (classified as equity).
What does the denominator of the earnings per share equation represent?
The weighted average number of shares in issue during the period for that class of ordinary share.
When is an earnings per share calculation required?
It is required for all classes of ordinary shares for all companies that are listed or in the process of listing.
Is an earnings per share calculation required for preference shares and, if so, when?
No, as any type of preference share will rank above ordinary shares.
What disclosure is required if the company has debentures which are convertible into ordinary shares?
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).
When will a prior year’s earnings per share figure be restated?
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).
Under what circumstances will the issue of ordinary shares during the year not be weighted from the date of issue?
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)
When calculating earnings from a subsidiary (for the attributable earnings in the EPS calculation) what 2 things do you have to apportion for ?
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
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)?
The months the shares were in issue for
