Earnings per Share: IAS 33

Wiecek and Young

IFRS PrimerChapter 27

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Earnings per Share

Related standards IAS 33 Current GAAP comparisons IFRS financial statement disclosures Looking ahead End-of-chapter practice

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Related Standards

FAS 128 Earnings per Share

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IAS 33 – Overview

Objective and scope Measurement Presentation Disclosure

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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 standard

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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 Potential ordinary shares

– Financial instruments (or other contracts) that may entitle the holder to ordinary shares

– Convertible debt, convertible preferred shares, options, warrants, and contingently issuable shares

Contingently issuable shares – Issuable under the terms of a contingent share agreement – Shares that will be issued for little or no cash when certain conditions in the

agreement are met

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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IAS 33 – Objective and Scope

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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

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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

• Contingently issuable shares are included from the date that all conditions are met

• Stock Split, Reverse Split or Stock Dividend – Number of shares issued and outstanding has changed without a corresponding change

in resources – Number of shares is adjusted for all periods presented

• Where the financial instrument is mandatorily convertible– Treated as ordinary shares from the date that the contract is entered into

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IAS 33 – Measurement

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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

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

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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

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)

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IAS 33 – Measurement Dilutive potential ordinary shares

The entity must therefore determine whether potential common shares are dilutive or anti-dilutive

Potential common shares that result in lower DEPS – Referred to as dilutive – Included in the calculations of DEPS

Potential common shares that would result in a DEPS higher than the BEPS – Referred to as anti-dilutive– Not included in the calculations or final reported DEPS

Process– Entity considers the incremental impact of each potential common share individually,

then each potentially dilutive security in sequence From the most dilutive to the least dilutive

Options and warrants are always considered to be the most dilutive since the incremental impact to the numerator is assumed to be zero

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IAS 33 – Measurement

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IAS 33 – Measurement Written call options/warrants When the entity writes a call option or issues a warrant

– Gives the holder the right to buy/obtain shares for a predetermined price (exercise price)

When that price is lower than market price– Option is said to be “in the money” – Incentive for the holder to exercise the option and it would be dilutive to the company

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IAS 33 – Measurement Written put options and forward purchase contracts When the entity writes a put option or enters into a forward contract to sell shares

– Gives the holder the right to sell the shares to the entity for a predetermined price (exercise price)

When the price is higher than the market price– Option is “in the money” – Incentive to exercise the option and sell the share to the entity at the higher price

Dilutive

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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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IAS 33 – Measurement Contingently issuable shares Included from the beginning of the period if the conditions are satisfied by year end

The conditions often relate to – Earnings levels– Share prices – Other factors such as store openings

If the conditions are not satisfied by year end – Calculation is based on the number of shares that would be issued if the end of the

current period were the end of the evaluation period

Contracts that may be settled in ordinary shares or cash Where the entity has an option to settle a contract in ordinary shares or cash, it is

assumed that shares will be used – If dilutive, it would be included in the DEPS calculations

If the holder has the option, then the entity would consider the more dilutive of the two and use that in the calculations

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IAS 33 – Measurement Purchased options Purchased call and put options are not included in the DEPS calculations

– Anti-dilutive

If the options are call options– “In the money” when the exercise price is less than the market price

Entity would exercise the option and be better off

If the options are put options– “In the money” when the exercise price exceeds the market price

Entity would be able to sell its shares for higher than market

Retrospective adjustments When the number of shares increases (with no corresponding change in resources)

during or after the reporting period but before the statements are authorized for issue, all EPS numbers are adjusted

All EPS numbers are adjusted for any effects or errors or changes in accounting policies accounted for retrospectively

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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

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 calculations Such as the issue or redemption of shares

An entity may decide to include additional per share amounts using other reported components from the statement of comprehensive income

– Additional disclosures are required in this case

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Current GAAP Comparisons

Page 134 of 164 ofhttp://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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IFRS Financial Statement DisclosuresHeinekenhttp://www.annualreport.heineken.com/downloads/Heineken_AnnualReport_EN_07.pdf

EPS on the Financial Statements page 67 of 160

Earnings per share note page 109 of 160

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Looking Ahead

Joint convergence project– IASB and FASB are currently studying EPS as part of this project – Objective of the work is to converge and simplify the accounting

Proposals– Use of end of period market prices in calculating DEPS

As well as the carrying amount of any liabilities not remeasured at fair value

– In calculating DEPS and regarding instruments accounted for at FVTPL

Profit or loss from changes in fair value remain in the numerator Denominator not include the incremental impact of additional shares

An exposure draft is expected to be issued in late 2008

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End-of-Chapter Practice

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End-of-Chapter Practice

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End-of-Chapter Practice

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