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Hong Kong Accounting Standard 33

Earnings per Share

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Objective

• The objective of HKAS 33 Earnings per Share (EPS) is to prescribe principles for the determination and presentation of EPS, so as to improve performance comparisons between different entities in the same reporting period and between different reporting periods for the same entity.

• Even though EPS data have limitations because of the different accounting policies that may be used for determining ‘earnings’, a consistently determined denominator enhances financial reporting.

• The focus of HKAS 33 is on the denominator of the EPS calculation.

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Scope

• HKAS 33 shall be applied by entities- whose ordinary shares or potential ordinary shares are publicly traded and- that are in the process of issuing ordinary shares or potential ordinary shares in public markets.

• An entity that discloses EPS shall calculate and disclose EPS in accordance with HKAS 33.

• The disclosures required by HKAS 33 need be presented only on the basis of the consolidated information.

• An entity that chooses to disclose EPS based on its separate financial statements shall present such EPS information only on the face of its separate income statement.

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Measurement

• Basic Earnings per Share

• Diluted Earnings per Share

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Basic Earnings per Share

• Earnings- profit or loss attributable to ordinary equity holders of the parent entity- profit or loss from continuing operations attributable to those equity holders

• adjusted for- the after-tax amounts of preference dividends,- other similar effects of preference shares classified as equity.

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Basic Earnings per Share

• Shares

- the weighted average no. of ordinary

shares outstanding during the period.

- the no. of ordinary shares outstanding

at the beginning of the period,

- adjusted by the no. of ordinary shares

bought back or issued during the period

- multiplied by a time-weighted factor.

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Basic EPS – Example 1

• Issue of shares at full market price

On 1-5-08, 2,000 shares were issued at full market price.

31-12-08 31-12-07

Earnings $3,000 $2,000

Ordinary shares at 1-1

6,000 4,000

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Basic EPS – Answer 1

• Issue of shares at full market price

On 1-5-08, 2,000 shares were issued at full market price.

Answer:

Weighted average no. of shares in issue for 2008

= 4,000 x 4/12 + 6,000 x 8/12

= 5,333 shares

31-12-08 31-12-07

Earnings $3,000 $2,000

Ordinary shares at 31-12

6,000 4,000

Weighted average no of shares

5,333 4,000

Basic EPS

$0.56 $0.50

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Basic EPS• No. of ordinary shares outstanding changed with no resources changed

- That is the no. of ordinary shares outstanding is increased without an increase in resources.- The no. of ordinary shares outstanding before the event is adjusted for the proportionate change in the no. of ordinary shares outstanding as if the event had occurred at the beginning of the earliest period presented. (all comparative EPS amounts are also restated)

Examples:i. A capitalization or bonus issueii. A bonus element in any other issue, for example a bonus element in a right

issue to existing shareholdersiii. A share split andiv. A reverse share split

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Basic EPS – Example 2

• Bonus issue of shares

There was a 1 for 4 bonus issue on 1-5-08

31-12-08 31-12-07

Earnings $2,000 $1,000

Ordinary shares in issue at 31-12

5,000 4,000

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Basic EPS – Answer 2

• Bonus issue of shares

There was a 1 for 4 bonus issue on 1-5-08

31-12-08 31-12-07

Earnings $2,000 $1,000

Ordinary shares in issue at 31-12

5,000 4,000

Weighted average no of shares

5,000 5,000

Basic EPS $0.40 $0.20

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Basic EPS – Rights issue 1

• The exercise price of a rights issue is often less than the fair value of the shares.

• A right issue includes a bonus element.• If a rights issue is offered to all existing shareholders, the

no. of ordinary shares to be used in calculating basic and diluted EPS for all periods before the rights issue is:the no. of ordinary shares outstanding before the issue, multiple by the following factor:

Fair value per share immediately before the exercise of rightsTheoretical ex-rights fair value per share

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Basic EPS – Rights issue 2

• Theoretical ex-rights fair value per share is calculated by:

- Adding the aggregate market value of the shares immediately before the exercise of the rights to the proceeds from the exercise of the rights,

- Divided by the no. of shares outstanding after the exercise of the rights.

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Basic EPS – Example 3

• Rights issue of shares

• There was a 1 for 4 rights issue for $2 per share on 1-5-08. Market price is $2.5 per share

31-12-08 31-12-07

Earnings $2,000 $1,000

Ordinary shares in issue at 31-12

5,000 4,000

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Basic EPS – Answer 3

Theoretical ex-rights price

1 share @$2.00 $2.0

4 shares@$2.50 $10.0

5 shares@$2.40 $12.0

Weighted average no of shares

07: 4,000 x 2.5/2.4 = 4,167

08: 4,167 x 4/12 + 5,000 x 8/12

= 4,722

31-12-08 31-12-07

Earnings 2,000 1,000

Weighted average no of shares

4,722 4,167

Basic EPS $0.42 $0.24

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Diluted EPS• An entity shall calculate diluted EPS amounts for:

- Profit or loss attributable to ordinary equity holders of the parent entity and,- Profit or loss from continuing operations attributable to those equity holders.

• For the purpose of calculating diluted EPS, an entity shall adjust- Profit or loss attributable to ordinary equity holders of the parent entity and,- The weighted average no. of shares outstanding

for the effect of all dilutive potential ordinary shares

A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares.

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Diluted EPS - earnings

• For the purpose of calculating diluted EPS, an entity shall adjust profit or loss attributable to ordinary equity holders of the parent entity, as calculated in accordance with basic EPS, by the after-tax effect of:

i) Any dividends related to dilutive potential ordinary shares deducted in arriving at profit or loss attributable to ordinary equity holders of the parent entity as calculated in accordance with basic EPS

ii) Any interest recognized in the period related to dilutive potential ordinary shares

iii) Any other changes in income or expense that would result from the conversion of the dilutive potential ordinary share.

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Diluted EPS - Shares

• For the purpose of calculating diluted EPS, the no. of ordinary shares shall be

- The weighed average no. of ordinary shares calculated in accordance with basic EPS

- Plus the weighted average no of ordinary share that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

• Dilutive potential ordinary shares shall 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.

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Diluted EPS

Diluted EPS =

Earnings ± Adjustments to earnings

Shares + Potential ordinary shares

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Antidilutive

• Potential ordinary shares shall be treated as dilutive when, and only when their conversion to ordinary shares would decrease EPS or increase loss per share from continuing operations.

• Potential ordinary shares are antidilutive when their conversion to ordinary shares would increase EPS or decrease loss per share from continuing operations.

• The calculation of diluted EPS does not assume conversion, exercise, or other issue of potential ordinary shares that would have an antidilutive effect of EPS.

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Antidilutive

• Determine dilutive or antidilutive- In determining whether potential ordinary shares are

dilutive or antidilutive, each issue or series of potential ordinary share is considered separately rather than in aggregate.

- The sequence in which potential ordinary shares are considered may affect whether they are dilutive.

- Therefore, to maximize the dilution of basic EPS, each issue or series of potential ordinary shares is considered in sequence from the most dilutive to the least dilutive

- Options and warrants are generally included first because they do not affect the numerator of the calculation.

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Diluted EPS – Example 1

• Diluted EPSNet profit for the year $180,000

No. of ordinary share in issue 600,000

Average fair value of one share $2.0

Shares under the option 100,000

Exercise price of share under option $1.50

Calculate the basic EPS and diluted EPS

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Diluted EPS – Answer 1

Basic EPS = 180,000 / 600,000

= $0.30

Additional shares: 100,000 – (100,000 x 1.5/2) = 25,000

Diluted EPS = 180,000 / (600,000+25,000)

= $0.288

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Diluted EPS – Example 2

Issued share capital as at 31-12-07: 3,500,000 ordinary shares of $1 each.

1. The average market price of the shares during the year was $0.75

2. Options have been granted to the staffs giving them the right to subscribe for 100,000 ordinary shares in 2009 at $0.50 per share

3. $1,000,000 of 6% convertible bonds. Each $1 bond is convertible into 2 ordinary shares.

4. 900,000 10% convertible cumulative preference shares of $1 each

Each preference share is convertible into 2 ordinary shares

5. Net profit attributable to ordinary shareholders for the year ended 31-12-07 is $200,000, all of which relates to continuing operations.

6. Tax rate at 17.5%

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Diluted EPS – Answer 2Adjustments to earningsOptions No adjustment to earningsConvertible bond interest 6% x 1,000,000 x (1-17.5%)

49,500Preference dividends 10% x 900,000 90,000

Potential ordinary sharesOptions – additional shares 100,000 – (100,000 x 0.5/0.75) 33,333Convertible bonds 1,000,000 x 2 2,000,000Convertible preference shares 900,000 x 2 1,800,000

Rank Earnings Shares EPSRank

Options – additional shares - 33,333 - 1Convertible bonds 49,500 2,000,000 0.0248 2Convertible preference shares 90,000 1,800,000 0.0500 3

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Diluted EPS – Answer 2

Earnings Shares EPS

Basic 200,000 3,500,000 0.0571

Options – additional shares

- 33,333

200,000 3,533,333 0.0566

Convertible bonds 49,500 2,000,000

249,500 5,533,333 0.0451

Convertible preference shares

90,000 1,800,000

339,500 7,333,333 0.0463 Antidilution

Diluted EPS = 0.0451

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Retrospective adjustments• If the number of ordinary or potential ordinary shares outstanding increases

as a result of a capitalization, bonus issue or share split, or decreases as a result of a reverse share split, the calculation of basic and diluted EPS for all periods presented shall be adjusted retrospectively.

• If these changes occur after the balance sheet date but before the financial statements are authorized for issue, the per share calculations for those and any prior period financial statements presented shall be based on the new no. of shares

Basic and diluted EPS of all periods presented shall be adjusted for the effects of errors and adjustments resulting from changes in accounting policies accounted for retrospectively.

An entity does not restate diluted EPS of any prior period presented for changes in the assumptions used in EPS calculations or for the conversion of potential ordinary shares into ordinary shares

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Presentation• An entity shall present on the face of the income statement basic

and diluted EPS - for profit or loss from continuing operations attributable to the

ordinary equity holders of the parent entity and - for profit or loss attributable to the ordinary equity holders of the

parent entity for the period for each class of ordinary shares that has a different right to share in profit for the period.

• An entity shall present basic and diluted EPS with equal prominence for all periods presented.

• An entity that reports a discontinuing operation shall disclose the basic and diluted amounts per share for the discontinuing operation either on the face of the income statement or in the notes.

• An entity shall present basic and diluted EPS, even if the amounts are negative (ie a Loss per share)

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DisclosuresAn entity shall disclose:- The amounts used as the numerators in calculating basic and diluted EPS,

and a reconciliation of those amounts to profit or loss attributable to the parent entity for the period. The reconciliation shall include the individual effect of each class of instruments that affects EPS.

- The weighted average number of ordinary shares used as the denominator in calculating basic and diluted EPS, and a reconciliation of these denominators to each other. The reconciliation shall include the individual effect of each class of instruments that affects EPS.

- Instruments (including contingently issuable shares) that could potentially dilute basic EPS in the future, but were not included in the calculation of diluted EPS because they are antidilutive for the period(s) presented.

- A description of ordinary share transactions or potential ordinary share transactions, other than those accounted for in accordance with paragraph 64 (retrospective adjustments), that occur after the balance sheet and that would have changed significantly the number of ordinary shares or potential ordinary shares outstanding at the end of the period if those transactions had occurred before the end of the reporting period.