1. Earnings per Share: IAS 33

2. IAS 33 – Overview Objective and scope Measurement Presentation
Disclosure

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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)

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Example 5 Continued Step 2 Calculate bonus shares
We raised $24m. At $3.83 per share that requires we issue shares if the price per share is $3.83 (24m/3.83= )
But we issued 8m, therefore 8m – = ‘bonus shares’
Step 3 the number of shares
First six months 40m =
Second six months 40m + 8m= 48m
Therefore ( x 6/12) + (48m x 6/12)=
2017 EPS (𝜋=1.4𝑚)= 3.1c
c x (40m/ )= 2.4c

18. 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

19. 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

20. 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

21. 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)

22. 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

23. 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

24. 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 $2.90 we would issue shares
We actually issue 2m, therefore are bonus issues

25. 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 = 15.6c

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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.