Financial Accounting II Lecture 42

Earnings Per Share (EPS) is widely used by investors as a measure of a company’s performance and is of particular importance in a) Comparing the results of a company over a period of time. b) Comparing the performance of one company’s equity against the performance of another company’s equity. IAS 33 Earnings Per Share

The objective of IAS 33 is to improve the comparison of the performance of different entities in the same period and of the same entity in different accounting periods by prescribing methods for determining the number of shares to be included in the calculation of earnings per share and other amounts per share and by specifying their presentation. Objectives IAS 33

Ordinary Share: An equity instrument that is subordinate to all other classes of equity instruments. Potential Ordinary Shares: A financial instrument or other contract that may entitle its holder to ordinary shares. Warrants or Options: Financial Instruments that give the holder the right to purchase ordinary shares. Definition IAS 33

There may be more than one class of ordinary shares, but ordinary shares of the same class will have the same rights to receive dividends. Ordinary shares participate in the net profit for the period only after other types of shares, e.g. preference shares. Ordinary share

Debt or equity instruments, including preference shares, that are convertible in to ordinary shares. Potential Ordinary Shares

IAS 33 has the following scope restrictions: a) Only companies with (potential) ordinary shares which are publicly traded need to present EPS (Including companies in the process of being listed) b) Where companies choose to present EPS, even when they have no (potential) ordinary shares which are traded, they must do so according to IAS 33. Scope IAS 33

Basic EPS should be calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. The formulae is shown as Basic EPS

Net profit / (loss) attributable to ordinary shareholders Basic EPS Weighted Average number of ordinary shares outstanding during the period OR Earnings – Profit attributable to Preference Shareholders Weighted Average number of ordinary shares outstanding during the period

Earnings includes all items of income and expenses (including tax, extraordinary items) less net profit attributable to preference shareholders, including preference dividend. Earnings

The number of ordinary shares used should be the weighted average number of ordinary shares during the period. This figure should be adjusted for events, other than the conversion of potential ordinary shares (Discussed later), that have changed the number of shares outstanding without a corresponding changes in resources. Per Share

The time-weighting factor is the number of days the shares were outstanding compared with the total number of days in the period; a reasonable approximation is usually adequate. Per Share

Weighted Average Number of Shares

Shares are usually included in the weighted average number of shares from the date consideration is receivable which is usually the date of issue. In other cases consider the substance of any transaction.

Calculating EPS