IAS 33 Earnings per Share
A practical guide
Contents
Introduction
2
Presentation of EPS measures
3
Calculation of basic EPS
4
Calculation of diluted EPS
6
Worked example 1 – convertible bond
9
Worked example 2 – employee share options
10
IAS 33 Earnings per Share A practical guide 1
Introduction
Although IAS 33 Earnings per Share has not changed for several years, it is still a standard that causes
headaches for preparers of financial statements and contains more than a few traps for the unwary.
The practical difficulties experienced in calculating earnings per share often stem from the fact that
IAS 33 is very rules-based. This lack of an underlying principle means that the calculations required can
sometimes give counter-intuitive results, which in turn causes uncertainty for preparers as to whether
they have applied the requirements correctly.
This practical guide has been put together to help you navigate the complexities, avoid the common
pitfalls and ease the process when it comes to calculating earnings per share, or EPS as it is commonly
known. It includes a detailed step-by-step guide to calculating both basic and diluted EPS, as well as
two worked examples dealing with scenarios that often catch people out.
IAS 33 Earnings per Share A practical guide 2
Presentation of EPS measures
As well as setting out how EPS should be calculated, IAS 33 also sets out which entities are required to
present EPS information and what information they should present.
Which companies need to present earnings per share?
• Any company that wishes to do so may voluntarily present EPS. However, if it does so, both basic and
diluted EPS must be calculated and presented in accordance with IAS 33 (or, for those companies
using old UK GAAP, FRS 22).
• All companies with ordinary shares or potential ordinary shares (such as options or convertible debt)
which are publicly traded must disclose EPS. In addition, any company applying for a listing must also
disclose EPS in its prospectus.
• A parent company which prepares combined consolidated and separate financial statements may
present EPS on a consolidated basis only.
• IAS 34 Interim Financial Reporting requires that interim reports for companies wihin the scope of
IAS 33 contain EPS disclosures in the same form as required by IAS 33 for full financial statements,
presented for the current and all comparative periods.
What needs to be presented?
IAS 33 sets out two measures of EPS which must be disclosed on the face of the Income Statement
– basic and diluted EPS. In addition, if an entity has any discontinued operations as defined by
IFRS 5 Non‑current Assets Held for Sale and Discontinued Operations, basic and diluted EPS should
be presented separately for both continuing and discontinued operations, as well as for the entity as
a whole.
Companies may disclose other adjusted EPS measures, but these should not be given more prominence
than the required measures. Entities wishing to disclose an adjusted EPS figure may choose any number
as the numerator, provided they disclose a reconciliation from it to a number in the income statement.
However, adjusted EPS must be presented on both a basic and diluted basis, with the denominator in
each calculation determined in accordance with IAS 33.
Disclosures about how all EPS measures presented have been calculated are also required in the notes to
the financial statements.
IAS 33 Earnings per Share A practical guide 3
Calculation of basic EPS
Basic EPS is calculated as follows:
Profit/(loss) attributable to ordinary equity holders
Weighted average number of ordinary shares outstanding
Key definitions
Profit/(loss) attributable to
ordinary equity holders
Profit after tax, excluding amounts attributable to non-controlling interests, less any amounts accruing to
holders of preference shares which are accounted for as equity.
Ordinary shares
Equity instruments which have the lowest priority of participation in profit for the period. If an entity has
multiple classes of share, it needs to determine which of these has the lowest priority – this will be the
'ordinary share' class for EPS purposes. If two or more classes of shares rank equally at the bottom of the
priority list, EPS will need to be calculated for each of these, taking into account the relative rights.
Weighted average number of
ordinary shares outstanding
The number of shares outstanding at the beginning of the period, adjusted by the number of shares
bought back or issued during the period on a time‑weighted basis.
Potential complexities
Preference shares accounted for as equity
Any amounts charged or credited directly to equity in relation to preference shares accounted for as
equity, whether these are dividends, coupon payments, payments on redemptions made during the
period or other accounting adjustments relating to such shares, are likely to impact the numerator in the
basic EPS calculation.
Shares held by the entity
These are not treated as shares in issue, and are therefore deducted from the denominator in the basic
EPS calculation. The same applies to shares held by an employee benefit/ESOP trust sponsored by
the entity.
Partly paid shares
These are treated as a fraction of a share reflecting the extent to which they give entitlement to
participate in dividends during the period. (N.B – the extent to which they carry voting rights is
irrelevant for this test)
Contingently issuable shares
These are not included in the denominator when calculating basic EPS.
The exception to this is that shares which are issuable dependent only on the passage of time, with
all other conditions having been satisfied, are included in the calculation of basic EPS. An example of
this would be mandatorily convertible preference shares, whether classified as partly debt and partly
equity or wholly equity. For such an instrument, the weighted average number of shares is adjusted as
if conversion occurred immediately on the initial date of issue of the convertible instrument. However,
no adjustment should be made to reverse any interest expense or preference dividend payable included
in the profit or loss attributable to ordinary equity holders – for this figure, conversion is only factored in
when it actually occurs.
IAS 33 Earnings per Share A practical guide 4
Bonus issues, share splits, share consolidations and any other transactions which change the number
of shares in issue without changing the entity’s resources
When a bonus issue or similar transaction takes place, the number of ordinary shares outstanding
is adjusted as if the transaction had taken place at the start of the earliest period for which EPS is
presented, to maintain comparability. This will result in a restatement of prior year EPS figures. Note that
if a bonus issue takes place after the end of the period but before the financial statements are issued,
EPS should be disclosed on a post-bonus issue basis.
Rights issues
A rights issue, where typically shares are issued to existing shareholders for less than the current market
price, is accounted for by adjusting from the start of the earliest period for the ‘bonus element’ of the
rights issue. The ‘bonus element’ arises because the transaction could be viewed as issuing some shares
for market value and some for nothing. The bonus element is calculated using a ‘theoretical ex-rights
price’ and comparing this to the market price prior to the rights issue.
IAS 33 Earnings per Share A practical guide 5
Calculation of diluted EPS
The steps for calculating diluted EPS are as follows:
1. Identify all potential ordinary shares that the company has in issue.
2.For each category of potential ordinary share, calculate the earnings (or loss) per incremental share
from continuing operations (see overleaf for how to do this).
3.Rank the potential ordinary shares, with the most dilutive (those with the lowest earnings per
incremental share or biggest loss per incremental share) at the top of the list.
4.Basic EPS is adjusted by each in order until the earnings per incremental share of subsequent classes
is greater than the current adjusted figure. So compare the top figure on the list with your basic EPS
from continuing operations. If it is bigger than the basic EPS figure, all of your potential ordinary
shares are anti‑dilutive and your diluted EPS figure is the same as your basic EPS figure. (Note that if you
have a basic loss per share, only potential ordinary shares with a bigger loss per incremental share could
be dilutive). If not, adjust the numerator and denominator in the basic EPS calculation as follows:
Earnings figure per basic EPS calculation for continuing operations
+ earnings impact of the first category of potential ordinary shares
No. of shares per basic EPS calculation for continuing operations
+ No. of shares impact of the first category of potential ordinary shares
5.Compare this adjusted figure with the earnings per incremental share of the next category of
potential ordinary shares on your list from step 3. If the earnings per incremental share is bigger,
you have finished calculating dilutive EPS – all of your other categories of potential ordinary shares
are anti-dilutive. If not, adjust again by factoring in the impact of the next category of potential
ordinary shares on the numerator and denominator.
6.Repeat step 5 until you reach a point where all remaining categories of potential ordinary shares are
anti-dilutive or you reach the end of your list of categories of potential ordinary shares. You have now
calculated your diluted EPS figure from continuing operations.
7.Calculate diluted earnings per share from discontinued operations and for the business as a whole,
by adjusting the basic EPS calculation to factor in those potential ordinary shares that were
included in the calculation of diluted EPS from continuing operations. This means that in rare
circumstances it is possible for diluted EPS for the business as a whole to be greater than basic
EPS, where there are potential ordinary shares that have a dilutive effect on EPS from continuing
operations but an anti-dilutive effect on overall EPS.
Key definitions
Potential ordinary shares
Options, warrants, convertible debt, convertible preference shares – anything that could be turned into
ordinary shares. Includes obligations under share-based payments, such as employee share schemes or
contingent consideration arrangements for business acquisitions, even though these may still be partly
contingent on future events.
Earnings per incremental share
The effect on earnings per share that conversion of a category of potential ordinary shares into ordinary
shares would have. IAS 33 contains detailed rules on how to calculate this for various types of potential
ordinary share – see below.
If-converted method
Method for calculating earnings per incremental share for convertible instruments (debt or equity).
Treasury stock method
Method for calculating earnings per incremental share for options, warrants and similar items (including
share option schemes).
Dilutive potential ordinary
shares
Potential ordinary shares for which the earnings per incremental share is lower than the following figure:
basic EPS from continuing operations, adjusted for any other categories of potential ordinary share with
a lower earnings per incremental share than this category.
Anti-dilutive potential
ordinary shares
Potential ordinary shares that are not dilutive.
IAS 33 Earnings per Share A practical guide 6
Calculating earnings per incremental share
Earnings effect
The effect on earnings is generally the actual charge to P&L that would be avoided by conversion:
• For a convertible instrument, this will be interest costs less any associated tax deductions for liabilities
held at amortised cost, or fair value movements taken to the P&L for liabilities held at fair value
through the profit and loss.
• For an option or warrant, this will be nil if it is classified as equity (as it will have no earnings impact)
or the post-tax amount of the fair value movement during the period if it is accounted for at fair value
through profit or loss.
• For a share-based payment scheme, there will generally be no adjustment to earnings for the charge
incurred as a result of applying the requirements of IFRS 2 Share-based Payment, unless the scheme
offers a choice of settlement in cash or shares but is accounted for as cash-settled.
Number of shares effect
When calculating the number of incremental shares in relation to a category of potential ordinary
shares, the approach used to determine the numerical effect depends on the type of instrument:
• For convertible debt, convertible preference shares or other similar convertible instruments,
the denominator is increased by the number of shares that would be issued if the instrument were
converted – this is referred to as the ‘if-converted’ method. This can give slightly counter-intuitive
answers, as conversion is assumed even if the conversion option is ‘out of the money’.
• Options (and warrants) can only ever be dilutive if the exercise price is less than the average share
price for the period. To calculate the number of incremental shares:
a) Calculate the total proceeds that will be received if all of the options or warrants are exercised.
b)Calculate the number of shares that this would buy based on market prices by dividing the total
proceeds of the exercise of the options by the company’s average share price for the period.
c)Calculate the difference between the answer to (b) and the total number of shares that will be
issued when the options or warrants are exercised. IAS 33 uses the resulting number of ‘free’ shares
as the ‘number of shares’ effect of the options or warrants.
This is referred to as the ‘treasury stock’ method and, unlike the if-converted method, does take into
account if the option is ‘in the money’ or not.
For both categories of instrument, any potential ordinary shares that are dilutive are deemed to be
converted into shares at the beginning of the reporting period, or the date of issue if this is later.
Potential complexities
Contingently issuable shares
Contingently issuable shares are shares which may be issued in the future, depending on performance
criteria. IAS 33 specifies that these should be included in the calculation of diluted EPS based on
the number of shares which would be issued if the end of the reporting period were the end of the
contingency period. Contingently issuable shares never have an earnings impact, so they will always
be dilutive.
IAS 33 Earnings per Share A practical guide 7
If the contingency is in the form of total earnings during a period (e.g. total PBT of £3m over the next
three years), this assessment is straightforward e.g. if the £3m has been met at the end of the first year
then the additional ordinary shares are taken into account in the calculation of diluted EPS. However, if
it is expressed as average earnings (PBT of £1 m per year for each of the next three years) this should be
converted to the equivalent total earnings position (total PBT of £3m over the next three years) in order
to make the assessment. So if the profits are £1.5m at the end of the first year, no additional shares
are brought into the calculation. However, if profits are £5m at the end of the first year, the additional
shares are included in the calculation of diluted EPS because, if the end of the first period were the end
of the contingency period, the condition would have been achieved.
Contingently issuable potential ordinary shares
A further level of complexity is introduced where potential ordinary shares may be issuable dependent
on a contingency, for example remuneration schemes where share options may be issued to employees
dependent on the future performance of the company. The general rule is:
1.Apply the requirements for contingently issuable shares to work out whether the potential ordinary
share will be issued.
2.If the contingency is not met for the purposes of IAS 33, ignore the instrument. If it is met, apply the
if-converted or treasury stock method to the instrument as normal.
Employee share options
Employee share option schemes are a particularly common type of contingently issuable potential
ordinary share – hence they may have a dilutive effect on EPS even prior to vesting. For unvested
options which are contingent on performance measures, the entity will need to determine whether or
not they are expected to vest, as described above for contingently issuable shares and options. If vesting
depends purely on completion of a period of service, the calculation is done on the basis that all
employees in employment at the end of the reporting period complete the period of service.
An earnings adjustment is generally not necessary for share option schemes. The exception to this is for
schemes which can be settled either in cash or in shares at the discretion of the employee. For this type
of award, IFRS 2 requires that cash settlement is assumed but IAS 33 requires that equity settlement
is assumed. Therefore, the charge to the income statement for the cash settled scheme should be
reversed and the charge that would be recognised for an equity-settled scheme included instead.
When applying the treasury stock method to calculate the number of incremental shares for a share
option scheme, for IAS 33 purposes the exercise price of the option is deemed to be the cash exercise
price plus the remaining IFRS 2 charge per share which has not yet been recognised in the income
statement.
ESOP trusts
Where shares are held in an ESOP trust or similar vehicle for the purposes of settling share schemes in
the future, the amount of shares held does not impact the calculation of incremental shares set out
above. The only impact that the number of shares held by an ESOP trust or similar vehicle will have on
the calculation of EPS is that they reduce the number of shares treated as being in issue for the purposes
of calculating the denominator in the basic EPS calculation, as set out above.
IAS 33 Earnings per Share A practical guide 8
Worked example 1 – convertible bond
Scenario
ABC Plc has 1,000,000 £1 ordinary shares and 1,000 £100 10% convertible bonds (for simplicity
assumed to be issued at par), each convertible into 20 ordinary shares on demand, all of which
have been in issue for the whole of the reporting period. ABC Plc’s share price is £4.50 per share
and earnings for the period are £500,000. The tax rate applicable to the entity is 21%.
EPS calculations
Basic EPS is 50p per share (500,000/1,000,000).
The earnings per incremental share for the convertible bonds is calculated as follows:
Earnings effect =
No. of bonds x nominal value x interest cost, less tax deduction at 21%
= 1,000 x 100 x 10% x (1-21%) = £7,900
Incremental shares calculation
Assume all bonds are converted to shares, even though this converts £100 worth of bonds into 20
shares worth only £90 and is therefore not economically rational. This gives 1000 x 20 = 20,000
additional shares.
Earnings per incremental share =
£7,900
= 39.5p
20,000
Therefore the bonds are dilutive.
Diluted EPS =
£500,000 + £7,900
= 49.8p per share
1,000,000 + 20,000
IAS 33 Earnings per Share A practical guide 9
Worked example 2 – employee share options
Scenario
ABC Plc has 50 employees, each of whom has 1,000 unvested share options in a share option
scheme. The exercise price of the options is £5 and the fair value of services still to be rendered
by each employee, calculated in accordance with IFRS 2, is £1,200. ABC Plc has 1,000,000
ordinary shares in issue and the average share price for the period was £10. Earnings for the
period are £500,000.
EPS calculations
Basic EPS is 50p per share (500,000/1,000,000).
The earnings per incremental share for the employee share options is calculated using the treasury
stock method as follows:
Earnings effect = nil
Incremental shares calculation
Total exercise price of share options = nominal exercise price + remaining IFRS 2 charge per option
=5+
Number of ‘full price’ shares =
=
1,200
= £6.20
1,000
Number of options x exercise price
Average price for the period
50 x 1,000 x 6.2
= 31,000
10
Number of ‘free’ shares = number of options – number of ‘full price’ shares
= 50,000 – 31,000 = 19,000
Diluted EPS =
£500,000 + £0
= 49.1p per share
1,000,000 + 19,000
IAS 33 Earnings per Share A practical guide 10
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