This briefing document reviews the main themes and important ideas related to Earnings Per Share (EPS) as outlined in the provided sources, primarily focusing on IAS 33.
1. Introduction and Scope of IAS 33
IAS 33 provides guidance on the calculation and presentation of earnings per share, aiming to improve comparability of performance among different entities in the same reporting period and among different reporting periods for the same entity. The standard covers both basic EPS and diluted EPS.
2. Basic Earnings Per Share (BEPS)
Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Key Ideas:
- Profit attributable to ordinary shareholders: This is generally profit after tax, adjusted for preference dividends. As one source notes, “Further, earnings attributable to equity shareholders is profit after tax reduced by preference dividend.”
- Weighted average number of ordinary shares outstanding: This reflects the shares that were in issue for different periods during the reporting period, weighted by the portion of the year they were outstanding.
- Shares issued during the period are weighted for the time they were outstanding. For example, “Note Therefore time apportion the issue but do not adjust prior year figures.”
- Treasury shares (an entity’s own shares reacquired and held) are not considered outstanding and are excluded from the weighted average number of shares. “Treasury shares are not regarded as outstanding and are excluded from the denominator for the period during which they are held by the entity…”
3. Diluted Earnings Per Share (DEPS)
Diluted EPS takes into account the potential dilution that could occur if potential ordinary shares were exercised or converted. Potential ordinary shares (POSs) are financial instruments that may entitle their holders to ordinary shares in the future.
Key Ideas:
- Potential Ordinary Shares (POSs): These include convertible bonds, convertible preference shares, share options, warrants, and contingently issuable shares.
- Dilutive vs. Anti-dilutive POSs: POSs are considered dilutive only when their conversion would decrease EPS or increase loss per share from continuing operations. “Dilutive Potential Ordinary Shares Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease EPS or increase loss per share from continuing operations.” Anti-dilutive POSs are ignored in the calculation of diluted EPS.
- Independent Determination: Dilutive POSs are determined independently for each period presented. “Dilutive potential ordinary shares shall be determined independently for each period presented.”
- Step-by-Step Approach: Calculating diluted EPS often involves a step-by-step process:
- Identify all POSs.
- For each class of POSs, determine their earnings per incremental share (EPIS).
- Rank POSs based on their dilutive effect (most dilutive to least dilutive).
- Calculate diluted EPS by sequentially including dilutive POSs until further inclusion would be anti-dilutive.
- Treasury Share Method: For share options and warrants, the treasury share method is used. This method assumes that the proceeds from the exercise of options/warrants are used to repurchase ordinary shares at the average market price during the period. The dilutive effect is the “bonus element” – the difference between the number of shares issued upon exercise and the number of shares that would have been repurchased. “The treasury share method assumes that the proceeds (exercise price) from exercising the option are used to repurchase shares at the average market price of a share during the period. The bonus element is the difference between the number of ordinary shares that would be issued at the exercise price and the number of ordinary shares that would have been repurchased at the average market price. Only the bonus element of the options… is reflected in diluted EPS.”
- Convertible Instruments: For convertible preference shares, if they are assumed to be converted, the earnings would increase by the amount of the preference dividend. For convertible debt, earnings would increase by the amount of interest (net of tax).
- Contracts Settled in Shares or Cash: If an entity has a contract that can be settled in either cash or shares at its option, it is presumed that the contract will be settled in ordinary shares when calculating diluted EPS. If the holder has the option, the more dilutive outcome (cash or share settlement) is considered. “If a contract may be settled in either cash or shares at the entity’s option, then the presumption is that it will be settled in ordinary shares and the resulting POSs are used to calculate diluted EPS. If a contract may be settled in either cash or shares at the holder’s option, then the more dilutive of cash-settlement and share-settlement is used to calculate diluted EPS.”
4. Specific Instruments and their Impact on EPS
The sources detail the EPS implications of various specific instruments:
- Bonus Issues (Capitalisation Issues) and Share Splits: These increase the number of shares outstanding without a change in resources. They are applied retrospectively to all periods presented for both basic and diluted EPS. “The bonus shares are deemed to have been issued at the start of the comparative period because there is no change in resources before and after the issue.” “In Share Spilt or Reverse Split there is a change in the number of shares, but no simultaneous change in resources. Treatment is same as in case of bonus shares for current as well as previous periods” .
- Rights Issues: These involve issuing new shares to existing shareholders at a price below the current market value. A “bonus fraction” is calculated to account for the bonus element in the rights issue and is applied retrospectively. “A bonus fraction is calculated and applied to shares in issue before the rights issue as share issue below market price gives the company additional resources while at the same it includes a bonus element. The bonus fraction = Actual cum right price / Theoretical ex-right price”. The calculation of the theoretical ex-rights price is also explained in one source.
- Treasury Shares: These are deducted from the number of outstanding shares in the denominator for basic EPS.
- Options and Warrants: Dilutive options and warrants are included in diluted EPS using the treasury share method.
- Convertible Preference Shares: The numerator for diluted EPS is adjusted for dividends that would have been avoided if the preference shares were converted. The denominator is adjusted for the number of ordinary shares that would be issued upon conversion.
- Convertible Bonds: The numerator for diluted EPS is adjusted for the interest expense (net of tax) that would have been avoided if the bonds were converted. The denominator is adjusted for the number of ordinary shares that would be issued upon conversion.
- Contingently Issuable Ordinary Shares: These are included in basic EPS when all necessary conditions are satisfied. For diluted EPS, they are included based on the number of shares that would be issuable if the reporting date were the end of the contingency period, if dilutive.
- Ordinary Shares Issued for Non-Cash Consideration (e.g., Assets, Liabilities): Generally impact the denominator of basic EPS from the date of issuance.
5. Retrospective Adjustments
Certain events require retrospective adjustments to the EPS figures of prior periods presented to maintain comparability:
- Bonus Issues (Capitalisation Issues), Share Splits, and Reverse Share Splits: These require restatement of EPS for all prior periods presented. “Capitalisation or bonus issue, share split and reverse share split (share consolidation)” are listed as items requiring retrospective adjustment.
- Rights Issues: The bonus element of a rights issue also requires retrospective adjustment.
6. Presentation and Disclosure
IAS 33 requires specific presentation and disclosure of EPS information in the financial statements. While the sources don’t heavily detail these requirements, it’s understood that both basic and diluted EPS for profit or loss from continuing operations and for net profit or loss should be presented prominently on the face of the income statement.
7. Important Considerations and Caveats
- Accuracy of Information: As stated in one of the initial disclaimers, “Although every effort is made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular facts and circumstances of the situation.”
- Complexity: The calculation of diluted EPS can be complex, especially with various types of potential ordinary shares.
- Judgment: Determining whether potential ordinary shares are dilutive and applying the specific methods often requires professional judgment.
- Interim Periods: Diluted POSs are determined independently for each period presented in interim financial statements, and the year-to-date diluted EPS is not a weighted average of the interim computations. “The number of dilutive potential ordinary shares included in the year-to-date period is not a weighted average of the dilutive potential ordinary shares included in each interim computation.”
This briefing document provides a summary of the key concepts and requirements related to Earnings Per Share under IAS 33 as outlined in the provided sources. For detailed application and specific scenarios, refer to the full text of IAS 33 and relevant implementation guidance.