IAS 33 - Earnings Per Share

Question 1

What is considered a healthy EPS (2):

Answer 1

• when the EPS grows over time.
• when the EPS is higher than at other companies in the same sector.

Question 2

Two types of EPS:

Answer 2

• Basic
• Diluted

Question 3

What does IAS 33 require entities to present on the statement of profit and loss and Other Comprehensive Income:

Answer 3

• The 2 different figures for Basic and Diluted EPS

Question 4

What is the EPS useful for:

Answer 4

• It’s a profitability measure that facilitates comparisons between different entities in the same reporting period.
• And between reporting periods for the same entity.

Question 5

What is included in the number of Ordinary Shares:

Answer 5

• Ordinary shares
• Convertibles
• Options
• Warrants

Question 6

Who does IAS33 apply to:

Answer 6

To entities whose ordinary shares are publicly traded.

Question 7

How to calculate EPS:

Answer 7

Profit After Tax / number of ordinary shares in issue during the year.

If there are irredeemable preference shares, the numerator (Profit after tax) is first reduced by the dividends payable to irredeemable preference shareholders.

Question 8

What is an irredeemable preference share:

Answer 8

One that the company won’t buy back.

Question 9

How to calculate the weighted average of the number of ordinary shares during the year:

Answer 9

25% of the year X amount of shares
Plus
75% of the year Y amount of shares

Calculate weighted total.

Question 10

Two types of share issue covered in this section relating to IAS33:

Answer 10

• Full market price issue
• Bonus issue

Question 11

How to include the issuance of bonus shares into the number of ordinary to calculate the EPS:

Answer 11

They are considered to have been present since before the period that is being presented.

This includes updating the EPS for the previous year. Because there is no cash coming into the business when there is a bonus issuance.

To compare EPS over several periods, we need to adjust the EPS and include the bonus issue for each of the previous periods that we are comparing with.

So there is no weighted average to calculate.

Question 12

What is basic EPS versus diluted EPS:

Answer 12

Basic EPS is calculated based on the current year’s information.

Diluted EPS (DEPS) takes into consideration how financial instruments (convertibles, options) can potentially influence the EPS in future periods.

It is required for entities to show EPS and DEPS in equal prominence.

Question 13

How to calculate the DEPS:

Answer 13

Basic earning + notional extra earnings /
Basic ordinary shares + notional extra shares

Question 14

What is notional extra earnings in calculating the DEPS:

Answer 14

The after-tax impact on profit for the year that would result from the conversion of the dilutive potential ordinary shares.

For example, interest on convertible loan notes would no longer be paid.

Question 15

What are convertible instruments?

Answer 15

Instruments that can be converted into ordinary shares.

Question 16

To calculate the DEPS when it regards options:

Answer 16

Calculate the bonus element, the free shares.

If the option is to buy 500k shares @$1.80 and the actual share price is $2.10.

Then the actual number of shares at the market value is: ) 500k x the option price) / $2.10.

The difference between 500k and the actual number of shares is the free number of shares, for which the company doesn’t receive any consideration.

Add these to the number of ordinary shares.
Then profit after tax / new total of ordinary shares

Question 17

How is the denominator (number under the line) determined to calculate the EPS for a group. So number of ordinary shares.

Answer 17

= only the shares of the parent company are considered.

Question 18

What to include in the nomnator (number above the line) when calculating the EPS for a group:

Answer 18

This is the net profit attributable to the group.it excludes the subsidiary’s net profit NOT attributable to the parent.