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Required:
Calculate the number of shares which would be used in the basic EPS
calculation.
Proforma solution
Number
1 January 28 February
1 March 31 March
1 April 31 July
1 August 30 September
1 October 31 December
________
________
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2909
3.4 Issuable shares
3.4.1 Mandatorily convertible instrument
Shares that will be issued on the conversion of mandatorily issuable
instruments will be included in the weighted average number of shares from
the date that the contract is entered into.
Commentary
This is consistent with IAS 39. These are items that will be classified as equity
instruments and therefore it is appropriate to include in the EPS calculation.
3.4.2 Contingently issuable shares
Contingently issuable shares will be included in the weighted average number
of ordinary shares from the date all necessary conditions and events have
occurred to allow the issue of the shares.
Commentary
This is again consistent with IAS 39 as they will be included in liabilities
unless the likelihood of settlement in cash is remote. On conversion they will
be included in equity and also in the EPS calculation.
3.4.3 Contingently refundable shares
Contingently refundable shares will be included in the weighted average
number of ordinary shares only from the time they are no longer subject to
recall.
4 Diluted earnings per share
4.1 Purpose
Potential ordinary shares may exist whose owners may become shareholders
in the future.
If these parties become ordinary shareholders the earnings will be spread over
a larger number of shares i.e. they will become diluted.
Commentary
Diluted EPS is calculated as a warning to existing shareholders that this may
happen.
Potential ordinary shares should be treated as dilutive only if their conversion
to ordinary shares would decrease earnings per share from continuing
operations.
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2910
4.2 Method
The net profit attributable to ordinary shareholders and the weighted average
number of shares outstanding should be adjusted for the affects of all dilutive
potential ordinary shares, i.e:
A new EPS is calculated using:
a new number of shares;
a new earnings figure.
4.2.1 New number of ordinary shares
This should be the weighted average number of ordinary shares used in the
basic EPS calculation plus the weighted average number of ordinary shares
which would be issued on the conversion of all the dilutive potential ordinary
shares into ordinary shares.
Dilutive potential ordinary shares should be deemed to have been converted
into ordinary shares at the beginning of the period or, if later, the date of the
issue of the potential ordinary shares.
New number of shares:
Basic number X
No of shares which could exist in the future:
from the later of
first day of accounting period
date of issue X
__
X
__
4.2.2 New earnings figure
The amount of net profit or loss for the period attributable to ordinary shareholder,
used in the basic EPS calculation, should be adjusted by the after-tax effect of the
potential ordinary shares becoming ordinary shares, i.e. add back:
Any dividends on dilutive potential ordinary shares, which have
been deducted in arriving at the net profit or loss for the period,
attributed to ordinary shareholders.
Interest recognised in the period for the dilutive potential ordinary
shares.
Any other changes in income or expense that would result from the
conversion of the dilutive potential ordinary shares.
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2911
Worked example 3 Diluted EPS
Convertible bonds
1 January Shares in issue 1,000,000
Profit for the year ended 31 December $200,000
31 March Co issues $200,000 6% convertible bonds
Terms of conversion:
100 shares/$100 if within five years
110 shares/$100 if after five years
Tax rate 33%
Basic EPS
200 000
1 000 000
,
, ,
= 20c
Required:
Calculate diluted EPS.
Worked solution 3
Number of
shares Profit
$
Basic 1,000,000 200,000
Dilution
Shares:
100
200,000
110
9
12
165,000
Interest: $200,000 6%
9
12
0.67 6,030
________
______
1,165,000 206,030
EPS 17.68 cents
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2912
When there has been an actual conversion of the dilutive potential ordinary
shares into ordinary shares in the period, a further adjustment has to be made.
The new shares will have been included in the basic EPS from the date of
conversion. These shares must then be included in the diluted EPS
calculation up to the date of conversion.
Worked example 4 Diluted EPS Actual conversion during the year
1 January Shares in issue 1,000,000
5% Convertible bonds $100,000
(terms of conversion 120 ordinary shares for $100)
Profit for the year ended 31 December $200,000
31 March Holders of $25,000 debentures converted to ordinary shares.
Tax rate 30%
Number of
shares
Profit
$
Basic 1,000,000 200,000
New shares on conversion
9
/
12
100
000 , 25 $
120
22,500
Figures for the basic EPS 1,022,500 200,000
Basic EPS is
500 , 022 , 1
000 , 200 $
= 19.6c
Dilution adjustments
Unconverted shares:
100
000 , 75 $
120
90,000
Interest: $75,000 5% 0.7 2,625
Converted shares pre conversion adjustment
3
/
12
100
000 , 25 $
120
7,500
Interest
3
/
12
$25,000 5% 0.7 219
1,120,000
202,844
Diluted EPS is
000 , 120 , 1
844 , 202 $
= 18.1c
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2913
4.3 Options
An entity should assume the exercise of dilutive options and other dilutive
potential ordinary shares of the entity.
The assumed proceeds from these issues should be considered to be
received from the issue of shares at fair value.
The difference between the number of shares issued and the number
of shares that would have been issued at fair value should be treated
as an issue of ordinary shares for no consideration.
Options will be dilutive only when they result in the entity issuing shares at
below fair value.
Each issue of shares under an option is deemed to consist of two elements.
A contract to issue a number of shares at a fair value. (This is taken
to be the average fair value during the period.)
Commentary
These are non dilutive.
A contract to issue the remaining ordinary shares granted under the
option for no consideration.(a bonus issue).
Commentary
These are dilutive.
Worked example 5 Options
1 January Shares in issue 1,000,000
Profit for the year ended 31 December $100,000
Average fair value $8
The company has in issue options to purchase 200,000 ordinary shares
Exercise price $6
Required:
Calculate the diluted EPS for the period.
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2914
Worked solution 5
Diluted EPS
Number of
shares Profit EPS
$
Basic 1,000,000 100,000 10c
Dilution (W) 50,000
1,050,000 100,000 9.5c
WORKING
Proceeds of issue 200,000 $6 1,200,000
Number that would have been issued at FV $8 = 150,000
Number actually issued 200,000
Number for free 50,000
4.4 Contingently issuable shares
Contingently issuable ordinary shares are included in the calculation of
diluted earnings per share if all the conditions have been satisfied or all the
events have occurred. They would be included from the start of the period
(or from the date the contract was entered into - if later).
If the conditions have not been met, the amount of contingently issuable shares
included in the diluted EPS calculation will be the number of shares that would
be issuable if the end of the period was the end of the contingency period.
5 Significance of EPS
5.1 EPS vs earnings
Prior to 1960, the decision to report EPS, the manner in which it was
calculated, and where it was reported was left solely to the discretion of
company management.
As expected, management chose to report performance in whole dollar
earnings only, which tended to favour large corporations over small
companies. EPS became a reporting necessity to create a level playing
field in performance measurement comparability.
EPS allows comparison between different-sized companies whereas, if only
actual earnings were being compared, the relative size of the company could
not be taken into account.
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2915
5.2 Performance measure
The EPS figure is used by market analysts in the calculation of a companies
Price/Earnings (P/E) ratio. Great emphasis is placed on this measure which
can have a significant effect on the way a companys share price moves.
The P/E ratio is also used by investors in assisting in their decisions to
buy/hold or sell shares in a company.
5.3 Problems with EPS
EPS is affected by a companys choice of accounting policy, so can be
manipulated. It also means that comparisons with other companies is not
possible if different policies are being used.
EPS is a historic figure and should not be used as a prediction of future
earnings. A high EPS figure could be achieved through a lack of investment
in new assets, but this will have a detrimental effect on future profits as lack
of investment will lead to companies falling behind their competitors.
EPS is a measure of profitability, but profitability is only one measure of
performance. Many companies now place much higher significance on other
performance measures such as:
customer satisfaction;
cash flow;
manufacturing effectiveness, and
innovation.
6 Presentation and disclosure
6.1 Presentation
Basic and diluted earnings per share (or loss per share if negative) should be
presented in the statement of comprehensive income for:
the profit or loss from continuing operations attributable to ordinary
equity holders of the parent; and
the profit or loss for each class of ordinary shares that has a
different right to share in the net profit for the period.
Basic and diluted earnings per share should be presented with equal
prominence for all periods presented.
If an entity presents the components of profit or loss in a separate income
statement (per IAS 1), that statement should present:
basic and diluted earnings per share; and
basic and diluted earnings per share for discontinued operations.
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2916
Illustration 3
Consolidated income statement for year ended 31 December 2006 (extract)
(in CHF)
Earnings per share from continuing operations
Basic earnings per share 7 23.71 20.82
Fully diluted earnings per share 7 23.56 20.63
Nestl Consolidated accounts 2006
6.2 Disclosure
6.2.1 General
The amounts used as the numerators in calculating basic and diluted earnings
per share, and a reconciliation of those amounts to the net profit or loss for
the period.
The weighted average number of ordinary shares used as the denominator in
calculating basic and diluted earnings per share, and a reconciliation of these
denominators to each other.
Instruments that could potentially dilute basic EPS in the future but they were not
included in the diluted EPS because they are anti-dilutive for the period
A description of ordinary or potential share transactions that occurred after
the reporting period that would have significantly changed the number of
ordinary shares or potential ordinary shares had the transactions occurred
before the end of the period.
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2917
Illustration 4
7. Earnings per share from continuing operations
2006 2005
(a)
Basic earnings per share (in CHF)
(b)
23.71 20.82
Net profit from continuing operations (in millions of CHF) 9 123 8 095
Weighted average number of shares outstanding 384 801 089 388 812 584
Fully diluted earnings per share (in CHF) 23.56 20.63
Theoretical net profit from continuing operations
(b)
assuming the exercise of all outstanding options
and sale of all treasury shares (in millions of CHF) 9 262
8 248
Number of shares
(c)
393 072 500 399 860 700
(a) 2005 comparatives have been restated following the first application of the option of IAS 19 Employee B
Determining whether an Arrangement contains a Lease, as well as the decision to transfer the fresh che
Nutrition (refer to Note 29).
(b) Profit for the period attributable to the shareholders of the parent adjusted for the net profit/(loss) on disc
(c) Net of the Nestl S.A. shares held in connection with the Share Buy-Back Programme (refer to Note 25)
Nestl Consolidated accounts 2006
6.2.2 Additional EPS
If an additional EPS figure using a reported component of net profit other
than net profit or loss for the period attributable to ordinary shareholders, is
disclosed, such amounts should be calculated using the weighted average
number of ordinary shares determined in accordance with IAS 33.
Commentary
A non-standard profit figure can be used to calculate an EPS in addition to
that required by IAS 33 but the standard number of shares must be used in the
calculation.
If a profit figure is used which is not a reported as a line item in the statement
of comprehensive income, a reconciliation should be provided between the
figure and a line item, which is reported in the statement of comprehensive
income.
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2918
6.2.3 Retrospective adjustments
If an EPS figure includes the effects of:
a capitalisation or bonus issue; or
share split; or
decreases as a result of a reverse share split.
The calculation of basic and diluted earnings per share for all periods
presented should be adjusted retrospectively.
For changes after the reporting period but before issue of the financial
statements, the per share calculations for those and any prior period financial
statements presented should be based on the new number of shares.
Commentary
When per share calculations reflect such changes in the number of shares,
that fact should be disclosed.
Basic and diluted EPS of all periods presented should be adjusted for the
effects of errors, and adjustments resulting from changes in accounting
policies.
Focus
You should now be able to:
recognise the importance of comparability in relation to the calculation of
earnings per share (EPS) and its importance as a stock market indicator;
explain why the trend of EPS may be a more accurate indicator of
performance than a companys profit trend;
define earnings;
calculate the EPS in accordance with IAS 33:
basic EPS;
where there has been a bonus issue of shares/stock split during the year; and
where there has been a rights issues of shares during the year;
explain the relevance to existing shareholders of the diluted EPS, and
describe the circumstances that will give rise to a future dilution of the EPS;
compute the diluted EPS where:
convertible debt or preference shares are in issue; and
share options and warrants exist;
identify anti-dilutive circumstances.
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2919
Activity solution
Solution 1 Multiple capital change
1 January 28 February
1,000,000
2
12
3
2
22
21
= 261,905
1 March 31 March
1,400,000
1
12
3
2
22
21
= 183,333
1 April 31 July
2,100,000
4
12
22
21
= 733,333
1 August 30 September
3,000,000
2
12
22
21
= 523,810
1 January 31 December
4,000,000
3
12
=1,000,000
________
2,702,381
________
SESSION 29 IAS 33 EARNINGS PER SHARE
Accountancy Tuition Centre (International Holdings) Ltd 2008 2920