Earnings per Share: IAS 33

IAS 33 – Overview

Objective and scopeMeasurementPresentationDisclosure

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IAS 33 – Objective and Scope Amount of earnings that is attributable to each common or

ordinary shareholder is represented by the earnings per share (EPS) numbers

Standard seeks to provide guidance on

• How earnings per share should be accounted for

• When diluted EPS should be presented

• What information should be disclosed

Fairly complex calculations IASB has provided numerous illustrative examples that

accompany but are not part of the standard3

IAS 33 – Objective and Scope

Ordinary shares

Equity instruments that are subordinate to all other classes of equity instruments

Also referred to as common shares

The EPS calculations focus on these shares as they are residual in nature

Ordinary or common shareholders share in the residual earnings after operating expenses and dividends on preferred shares

IAS 33 covers financial statements of

• Entities that have ordinary shares or potential ordinary shares traded in a public

market

• Entities that are in the process of filing their statements with a securities

commission for the purpose of going public

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IAS 33 – Objective and Scope

EPS is calculated and presented If there are numerous public shareholders If the entity files financial statements with a securities

regulator Only in the consolidated statements when non-

consolidated statements are prepared as well

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Why Is it Important?

Shares are valued at a multiple of profit, P/E ratio. This reflects expectations of future earnings

Companies will seek to maximise E to maximise share price

IAS 33 – Measurement Two types of EPS

Basic (BEPS)

Diluted (DEPS)

BEPS

Based on existing earnings and outstanding common/ordinary shares

DEPS

“What-if” calculation

Illustrates what EPS would be if all the potential ordinary shares were actually ordinary shares

E.g., the instruments were actually converted into shares or options were exercised, resulting in additional shares being issued

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IAS 33 – Measurement Basic earnings per share (BEPS)

BEPS is calculated as follows:

The profit or loss attributable to ordinary equity holders is divided by the weighted average number of ordinary shares outstanding

The calculation should also be done for income from continuing operations as well (if presented in the profit and loss statement)

Earnings

Profit or loss attributable to ordinary shareholders (the numerator) begins with:

• Profit or loss from continuing operations (if separately presented)

• Profit or loss 8

IAS 33 – Measurement Earnings (continued)

Two separate calculations are done where profit or loss from continuing operations is presented separately on the profit and loss statement

Adjustments to earnings

• Dividends on preferred shares

Only declared dividends relating to non-cumulative preferred shares are deducted

Because they are not owed unless they are declared

Dividends (declared or not) relating to cumulative preferred shares are deducted

Because they are owed whether declared or not

•Gains/losses on settlement/repurchase/early conversion of preferred shares

Any related gains/losses are added to/deducted from earnings in calculating EPS

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IAS 33 – Measurement Shares

The denominator uses the weighted average number of ordinary shares outstanding during the period

Gives the best indicator of the earnings based on the average outstanding equity

The calculation looks at the number of shares outstanding each day although a “reasonable approximation of the weighted average” may be used

The shares are assumed to be issued on the date that the consideration is receivable

Although there are several situations that may need clarifying (see next slide)

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IAS 33 – Measurement

Shares (continued)• When shares are issued on conversion of debt

The shares are assumed to be issued on the date that interest ceases to accrue

• When shares are issued upon rendering of services

The shares are assumed to be issued as the services are rendered

• When shares are issued in a business combination

The shares are assumed to be issued on the acquisition date

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Examples 1

Co X has a year end of 31/12 Share capital for 2015 & 2016 = 10m $1 equity

shares Profit for the years 2015 & 2016 were $800k & $1m

respectively Therefore EPS = 8c & 10c

Examples 2 Share Issue at Full Price

Co X in y/e 31/12/17 had a profit of $1.4m On 30/6/17 there was a 1:10 issue at $4 per share

(when market price was $4) Profit = 1.4m No of shares = (10m x6/12) + (11m x 6/12)= 10.5m EPS= 13.3c

Examples 3

Co A has a year end of 31/12 Share capital = $10m denominated in 25c equity

shares Profit for the years 2015 & 2016 were $800k & $1m

respectively Therefore EPS = 2c & 2.5c

Examples 4 Bonus Issue

Co A in y/e 31/12/17 had a profit of $1.4m On 30/6/17 there was a 1:10 bonus issue (when market

price was $4) Profit = 1.4m No of shares = 44m EPS= 3.2c Take number of shares at year end! Assume in issue all

year But adjust comparative 2016 becomes 2.5c x 40/44= 2.27c

Examples 5 Rights Issue

Co B in y/e 31/12/17 had a profit of $1.4m Co B has a capital structure on 1/1/17 with capital of

$10m ordinary shares denominated at 25c each On 30/6/17 there was a 1:5 rights issue at $3.00

(when market price was $4) Step 1 calculate new value of shares [(40m x $4) + ($3.00 x 8m)]= 184m Per share 184m/48m= $3.83

Example 5 Continued Step 2 Calculate bonus shares We raised $24m. At $3.83 per share that requires we

issue 6266319 shares if the price per share is $3.83 (24m/3.83= 6266319)

But we issued 8m, therefore 8m – 6266319= 1733681 ‘bonus shares’

Step 3 the number of shares First six months 40m + 1733681 = 41733681 Second six months 40m + 8m= 48m Therefore (41733681 x 6/12) + (48m x 6/12)= 44866841 2017 EPS (= 3.1c 2016 2.5c x (40m/41733681)= 2.4c

IAS 33 – Measurement

Diluted earnings per share Shows earnings available to

Ordinary shareholders (assuming all potential common shares are now issued)

Outstanding ordinary shares

Both the numerator (earnings) and the denominator (number of shares) are adjusted for the “what if” assumption

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IAS 33 – Measurement

Earnings Adjustments to the profit or loss attributable to ordinary

shareholders After-tax interest/dividends

Would be avoided if the convertible instruments had been converted at the beginning of the period

Any other changes in profit or loss that would result from the conversion of the convertible instruments

Discount/premium amortization Changes in bonuses that are based on profit or

loss

IAS 33 – Measurement

Earnings (continued) No adjustment is made to the numerator for options

and warrants In doing the DEPS calculation, it is assumed that

either

• funds received are used to buy back shares (rather than investing them), or

• shares are issued to generate sufficient cash to buy back the shares under option

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IAS 33 – Measurement Shares

The weighted average number of ordinary shares as calculated for BEPS

Would be adjusted for additional ordinary shares that will be issued on conversion or exercise of potential ordinary shares

The potential ordinary shares are assumed to be issued at the beginning of the year or the date of issue of the potential ordinary shares if later

If conversion/exercise options lapse during the period, the number of shares would be pro-rated for the part of the year that the potential common shares were outstanding

The dilutive weighted average common shares are calculated independently for each period presented (interim versus annual)

IAS 33 – Measurement

Convertible instruments

Convertible instruments are included in the DEPS calculation when dilutive

Convertible preferred shares

Assumed to be anti-dilutive if the related dividend per ordinary share is greater than BEPS

Convertible debt

Anti-dilutive whenever the after-tax interest per ordinary share is greater than BEPS

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Example 6

Company C has during 2017 in issue ordinary shares totalling $10m, each share denominated at 10c. Share price at 31/12/17 was $3

The company’s profit after tax of 30% was $17m

The company has in issue $20m of 5% convertible debentures, terms of conversion are $100 for 60 ordinary shares

The directors have granted themselves the right to buy 4m shares for 50c each

Basic EPS = 17m/100m= 17c

Example 6 contd

Fully diluted EPS Share option Share price if options exercised {(100m x 3) + (4m x 0.50)}= 302m 302m/104m= $2.90 Therefore if we raised 2m @ $2.90 we would issue

689655 shares We actually issue 2m, therefore 1310345 are bonus

issues

Exercise 6 Fully Diluted EPS

Assume convertible bonds and options are all exercised and in issue all year

Profit = 17m + (20m x 5% x 70%)= 17.7m No of shares = 100m + 12m + 1310345= 15.6c

IAS 33 – Presentation

The entity must disclose the EPS numbers (with comparatives) in the statement of comprehensive income

If a separate profit and loss statement is presented, the EPS numbers are presented there

If discontinued operations are reported, the BEPS and DEPS for discontinued operations may be presented on the statement of comprehensive income or in the notes

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IAS 33 – Disclosure

Required additional disclosures

• Numerators in the calculations, including a reconciliation to reported profit or loss

• Weighted average number of ordinary shares

• Any potentially dilutive instruments that were not included in the calculation

• Description of any transactions occurring after the reporting period that could

affect the calculationsSuch as the issue or redemption of shares 27

ACCA Dec 09 Barstead a)

Measured as a %. Increase from $1 to $2 is 100%, increase from $10 to $11 is 10%

Timing can affect earnings year on year Profits have increased but EPS is more modest, so

profits have increased but capital has increased as well- issue of shares

Diluted EPS indicates that some convertible bonds have been issued as well

Dec 2009 Barstead b)

Profit = $15m

9/2009 Number of shares

1/10/08 36m

1/1/09

New value of shares= [(36m x 3.80)+(9m x 2.80]/45m= $3.60

We raised 9m x 2.80= $25.2m

Therefore 25.2m/3.60 = 7m

Treat as 7m issued at full price and bonus issue of 2m shares

Barstead b)

Treat as 7m issued at full price and bonus issue of 2m shares

Profit = $15m 9/2009 Number of shares 1/10/08 36m + 2m bonus 1/1/09 45m Number of shares (38m x 3/12) + (45m x 9/12)=

43.25m [15m /43.25m]= 34.7c PY 35 x 36/38= 33.2c

Barstead b)

Profit = 15m Number of shares = 43.25m If bonds are converted, additional profit will be 10m x 8% x 75%= 600k Additional shares will be 25 x 10m/100= 2.5m (15m + 600k)/ (43.25m + 2.5m)= 34.1c

Dec 2009 Barstead c)

Rules based accounting systems set out rules which must be followed. In principle there should be no variation from the rules

The rules therefore should cover all situations Audits are based around compliance with rules Principles based systems set out core principles and

these are then applied allowing judgement by preparers of accounts. This allows accounting systems to be more flexible

IFRS is principle based, these principles are in the Conceptual Framework.