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IAS 33 EARNING PER SHARE
IAS 33 applies to:
- Entries whose ordinary shares or potential ordinary shares are publicly traded or that are in
the process of issuing shares in the public.
- Entries that voluntarily chose to disclose.
When both parent and group information are presented together, only the earnings per share for the
group are required to be disclosed.
Definitions of key terms (IAS 33)


Ordinary share; An equity instrument that is subordinate to all other classes of equity
instrument.
Potential Ordinary share
Basic earning per share:
1. BASIC EPS
Basic EPS is:
profit/(loss) attributable to ordinary equity holders
Weighted average no. of ordinary shares outstanding during the period.
Shares
If there have been no changes in the share capital of the company during the period then the
weighted average is just the number of shares in issue throughout the period. IAS 33 is
primarily concerned with how to deal with changes in share capital during a period. The
principal objective is to keep consistency between the numerator and denominator.
Dilution
The reduction in earnings per share or increase in the loss per share resulting from the
assumption that potential ordinary shares will materialize.
Anti dilution
An increase in earning per share or a reduction loss per share resulting the assumption that
potential ordinary shares will materialize.
Ordinary shares
 An “ordinary share” participates in profit for the period only after other types of
shares, such as preferred shares, have participated.
Presentation of earnings per share
An entity should present on the face of the income statement both basic and diluted earnings per
share for profit or loss from continuing operations attributable relative to the ordinary equity holders
of the parent and for profit or loss attributable to the ordinary equity holders of the parent by each
class of ordinary shares with different rights.
Basic earning per share:
2. BASIC EPS
Basic EPS is:
profit/(loss) attributable to ordinary equity holders
Weighted average number of ordinary shares outstanding during the period
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-
 Earning are calculated as
Amounts attributable to the ordinary shareholder in respect of profit or loss from continuing
operations and net profit or loss.
After all expenses including taxes and minority interest.
After cumulative preference divided for period whether declared or not
After non-cumulative preference share dividend declared for period.
After other adjustments relating to preference shares.
Number of ordinary shares
- Number of ordinary shares at the beginning of the period are added to the number of shares
issued during the period less the numbers it shares bright back in the period.
- Shares issued and bought basic are multiplied by a time weighting factors dependent on
when the event took place.
- Shares are included from the date the consideration is receivable.
- Partly paid shares are included as fraction shares to the extent that they are entitled to
participate in dividends during the period relative to a fully paid ordinary share.
New Issues of ordinary share
Types
(1) Full paid issued at market price
(2) Partly paid issued at market price
(3) Bonus issue/capitalization issue/scrip issue share freely for executives shareholders free of
charge.
They are of consideration received Number any adjustment regarding to time is done.
But also number of share prior year should be added back.
(4) Right Issue
Capitalization or Bonus issue and share split/reverse share split.
- These two types of event can be considered together as they have a similar effect.
In both cases, ordinary shares are issued to existing shareholders for no additional consideration.
The number of ordinary shares has increased without an increase in resources.

This problem is solved by adjusting the number of ordinary shares outstanding
before the event for the proportionate change in the number of shares outstanding as
if the event had occurred at the beginning of the earliest period reported.
Right Issues
Rights issues are normally made at less than the fall market price. A rights issue combine the
characteristics of an issue at full market price with a borrow issue.
The knighted average included the bonus element for the full year plus the fall price element on a
time apportioned basis.
There are five stages to the processes:
1st calculate theoretical ex-rights price.
2nd calculate bonus element of the issue
3rd calculate the full price element this will be a balancing figure.
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4th calculate the weighted average number of shares in issue for this year.
5th calculate especially for the current year.
6th Re-calculate (or restate) the ESP for the prior year.
DILUTED EPS;
Many companies issue convertible instruments, options and warrants that entitle their holders to
purchase shares in the future at a below market price. When there shares are eventually issued, the
interests of the original shareholders will be diluted, the dilution will not always occur because there
are more shares in issue, but also because these share will have been issued at below market price.
- This may affect investors buy or sell decisions, and so IAS 33 requires entities to disclose a
diluted EPS and as well as basic EPS.
The diluted EPS is calculated EPS is calculated using current earnings but assuming that the
worst possible future dilution has already happen.
Example of dilutive factors
(a) Convertible bonds and convertible preference shares.
(b) Option and warrant
(c) Party paid share
(d) Contingently issuable shares i.e. Shares issuable if certain conditions are met.
Convertible bonds and convertible
Preferences shares
The EPS will be affected in two ways
 Earnings will be increased, because the finance costs will cease on conversion.
 Earnings will be divided amongst more equity shares.
Generally, conversion will decrease the EPS.
Options and warrants to subscribe for shares.
- Options and warrants normally give their holders the right to purchase shares in the future at
below market price.
IAS 33 Breaks down the future issue in to two components.
 An issue of shares at full markets price. This will not dilute will dilute the interests of the
other shareholders interests.
 A free issue to the warrant/option holders for no consideration. This will dilute the interest
of the other shareholder.
Partly paid shares.
Some times partly paid shares are only entitled to a proportion of their dividend. These partly paid
shares will be treated as a fraction of an ordinary share when calculating basic EPS.
Future payments will increase proportion of shares entitled to a divided. If the share price has risen
since the date of issue then the cash received will be less than the market rate at the time. This will
dilute the interests of the existing fully paid shareholder.
Contingently issuable shares.
- Some times shares are issued as reward if specific performance criteria are yet.
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Example, the CEO nights receive one millions shares if profits exceed a certain amount.
These shares will diluted the interest of other shareholder, but they are only included In the
calculation of diluted EPS if.
- The performance criteria have been yet and.
- The shares have not yet been issued.
(a) The order in which dilutive factors should be allowed for.
Any entity were have several dilutive instruments.
When combined as a group.
Some of these instruments may become out dilutive.
The diluted EPS should take into account those instruments which dilute the EPS.
These instruments can be identified by:
(b) Ranking the instruments in order of extra earnings from each new shares.
(c) Calculating the diluted EPS starting with the lowest increments EPS.
Disclosure
An entity should disclose the following:
(a) The earning used for basic and diluted EPS. These earning should be reconciled to the net
profit or loss for the period.
(b) The weighed average number of order shares used for basic and diluted EPS.
The two average should be reconciled to each other.
Criticism of EPS as a performance measure Performance measure
EPS is used by investors and it does affect the market price of shares. However has several
important limitations as a performance measures.
(a) It ignores inflation apparent growth in earnings may not be real growth.
(b) Past performance may not be good indication for future performance.
(c) Earning may be affects by entities choice of accounting policies. This makes inter-company
campus.
a) Contingently issuable shares i.e. shares issuable of certain conditions are yet.
Companies difficult
Dilution
Some commendations think that the TAS 33 requirements for calculating diluting EPS are too
complicated.
Question 1
Goodwill Company Limited is a listed company which prepares the Financial statements of 31st
December.
Goodwill Income Statement for the year ended 31st December 2011.
Tshs.
Sales
Cost of Sales
Gross profit
Other incomes
From continuing operations
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Tshs.
9,000,000
(5,400,000)
3,600,000
2,200,000
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From discontinuing operations
1,200,000
7,000,000
Operating Expenses
Salaries & Wages
Profit before interest & Tax
Interest on long-term loans:
Profit before tax
Income tax
Net profit for the year
2,400,000
1,200,000
The capital structure at 1st January 2011 were as follows:
8% cumulative preference shares:
30,000 ordinary shares @ Tshs. 2,000
Fully paid up
Share premium
Reserves
(3,600,000)
3,400,000
(360,000)
3,040,000
(360,000)
2,680,000
7,250,000
60,000,000
1,250,000
1,300,000
70,300,000
Required:
Calculate the basic EPS
(i) Assuming no new issue of ordinary share for the year ended 31st December 2011.
(ii) Assuming that 12,000 ordinary shares issued at the market price and full paid up on 1 st July, 2011.
(iii) Assuming that after new issue of shares as (ii) above and on 12 th August, made the bonus issue of
9,000 ordinary shares.
(iv) Assuming the company made the issues of ordinary shares as (ii) and (iii) above.
And on 1st October 2011 made the right issue of 1 new ordinary shares for every 3 held at Tshs.
1,200/= each while the market price of share on 31st September 2011 was Tshs. 2,400.
(v) Assuming in additions to above, on 31st October, 2011 made a new issue of 6,000 ordinary shares at
market price of Tshs. 2,500 and paid Tshs. 2,000.
Question 2 (NBAA MAY 2012)
A statement showing the retained profit of Pyuza Ltd for the year ended 31 st December, 2004 is set out
below:
Tshs.
Profit before tax
Tshs.
2,530,000,000
Less: Income tax expenses
(1,127,000,000)
1,403,000,000
Transfer to reserve
(230,000,000)
1,173,000,000
Dividends:
Paid preference interim dividend
138,000,000
Paid ordinary interim dividend
184,000,000
Declared preference final dividend
138,000,000
Declared ordinary final dividend
230,000,000
690,000,000
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Retained profit
483,000,000
On 1st January, 2004 the issued share capital of Pyuza Ltd was 4,600,000; 6% preference shares of Tshs.
1,000 each and 4,120,000 ordinary shares of Tshs. 1,000 each.
Required:
Compute the Earnings Per Share (on basic and diluted basis) in respect of the year ended 31 st December,
2004 for each of the following situations. Each of the three situations in (a) - (c) below is to be dealt with
separately: Assume where appropriate that the income tax rate is 30%:
(a)
On the basis that there was no change in issued share capital of the company during the year ended
31st December, 2004'.
(4.5 marks)
(b)
On the basis that the company made a rights issue of Tshs. 1,000 ordinary shares on 1st October,
2004 in the proportion of 1 for every 5 shares held, at a price of Tshs. 1,200. The market price for
the shares at close of trade on the last day of quotation cum rights was Tshs. 1,780 per share.
(10 marks)
(c)
On the basis that the company made no new issue of shares during the year ended 31 st December,
2004 but on that date it had in issue Tshs. 1,500,000; 10% convertible loan stock 2008 – 2011. This
loan stock will be convertible into ordinary Tshs. 1,000 shares as follows:
2008: 90 Tshs. 1,000 shares for Tshs. 100,000 nominal value loan stock
2009: 85 Tshs. 1,000 shares for the Tshs. 100,000 nominal value loan stock
2010: 80 Tshs. 1,000 shares for Tshs. 100,000 nominal value loan stock
2011: 75 Tshs. 1,000 shares for Tshs. 100,000 nominal value loan stock.
(5.5 marks)
(Total = 20 marks)
Question 3
ABC Company Limited during the year ended 31st December, 2010 made a profit before tax and
interest of Tshs. 48,400,000. At 1st January, 2010, the company had



Ordinary share capital 104,000 ord. Share @ Tshs.
1000
10% Debenture
12% 10,000 cumulative prefers shares @ Tshs.
1000
Tshs. 104,000,000
Tshs. 24,000,000
Tshs. 10,000,000
On 1st July 2010 made the right issue for 2 new ordinary shares for every 3 ordinary shares held at
Tshs. 800. The market price on 30th June 2010 was Tshs. 1,200.
On 1st October, 2010 made new issue of 48,000 ordinary issue at the market price of Tshs. 1300 and
until 31st December 2010 on Tshs. 975 were paid up.
On 31stDecember, 2010. The company had the share options for 24,000 ordinary shares at Tshs.
1200.
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And 12% cumulative preference share convertible as Tshs. 1000 into 1 ordinary shares.
Given the average price per share for the year was Tshs. 1500.
Corporate tax rate assuming at 25%
Required:
Calculate, Basic EPS and diluted EPS.
Question 4
During the year of income ended 31st December 2010 the company made profit after interest and
tax of Tshs. 18,600,000 but before.



Payments of Pref. Share dividend
Payment of ordinary share dividend
General Reserves appropriation
Tshs. 2,400,000
Tshs. 1,200,000
Tshs. 1,500,000
On 1st January, 2010 had 24,000 ordinary shares of which new issue of 10,000 ordinary shares
were made on 1st April, 2010 at the market price and full paid up.
Followed by bonus issue on 10th July, 2010 for 4500 ordinary shares:
On 31st December 2010
The company had 8% convertible bond = Tshs. 25,000,000 and Tshs. 10,000 nominal value
convertible into 1 ordinary shares. Share option for 12,000 shares at Tshs. 600/- while the average
market price during the year was Tshs. 1,000.
Assuming Tax Rate = 30%
Required:
Calculate Basic EPS and diluted EPS.
Question 5
Extracts of Niagara’s consolidated income statement for the year to 31 March, 20x3 are:
Sales
Cost of sales
Gross profit
Other operating expenses
Finance costs
Impairment of non-current assets
Income from associates
Profit before tax
Taxation
Profit for the period
Shs. 000
36,000
(21,000)
15,000
(6,200)
(800)
(4,000)
1,500
5,500
(2,800)
2,700
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Attributable to:
Shareholders of the parent
Minority interests
2,585
115
2,700
The impairment of non-current assets attracted tax relief of shs. 1 million which has been included
in the tax charge.
Niagara paid an interim ordinary dividend of 3c per share in June 20x2 and declared a final
dividend on 25 March, 20x3 of 6c per share.
The issued share capital of Niagara on 1 April, 20x2 was:
Ordinary shares of 25c each shs. 3 million
8% Preference shares
shs. 1 million
The preference shares are non-redeemable.
The company also had in issue shs. 2 million 7% convertible loan stock dated 20x5. The loan stock
will be redeemed at par in 20x5 or converted to ordinary shares on the basis of 40 new shares for
each shs. 100 of loan stock at the option of the stockholders Niagara’s income tax rate is 30%.
There are also in existence directors’ share warrants (issued in 20x1 which entitles the directors to
receive 750,000 new shares in total in 20x5 at no cost of the directors.
The following share issues took place during the year to 31 March, 20x3.
1 July 20x2; a rights issue of 1 new share at shs. 1.50 for every 5 shares held. The market
price of Niagara’s shares the day before the rights was shs. 2.40.
1 October 20x2; an issue of shs. 1 million 6% non-redeemable preference shares at par.
Both issues were fully subscribed.
Niagara’s basic earnings per share in the year to 31 March, 20x2 was correctly disclosed as 24c.
Required:
Calculate for Niagara for the year to 31 March, 20x3:
(i) The dividend cover and explain its significance
(ii) The basic earnings per share including the comparative
(iii)The fully diluted earnings per share (ignore comparative); and advise a prospective investor
of the significance of the diluted earnings per share figure.
Question 6 (NBAA)
(a) An Earnings per share are one of the most quoted statistics in financial analysis, coming into
prominence because of the widespread use of the price earnings ratio as an investment
decision-making yardsticks.
Required:
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Apart from other disclosures, explain why there is a need to disclose diluted earnings per
share in financial statements.
(5
marks)
(a)
Wazalendo Limited is a listed company. On 1 st November 2003 its issued share capital
was 10,000,000 ordinary shares of Tshs. 600 each and 4,000,000 4%preference shares of
Tshs 1,000 each. During the year ended 31 October 2004, the company made a rights
offer to its shareholders of three new ordinary shares of Tshs 600 each for every 10
existing ordinary shares held. The offer was fully taken up by shareholders who
purchased the new shares for Tshs 3,000 each on 1st May 2004. The fair value of each
ordinary share on 30th April 2004 was Tshs 4, 150.
At 31 October 2004, the ordinary shareholders of Wazalendo also held options, exercisable
between 1 November 2007 and 1st May 2008 to purchase 1, 200,000 ordinary shares at Tshs
2,800 per share. No options were issued during the year ended 31 st October 2004. the average
fair value of the ordinary shares during the year was Tshs. 4,200 each.
The company paid an ordinary dividend of Tshs 1,040,000,000 and a preference dividend of
Tshs 160,000,000 during the year to 31st October 2004.
Wazalendo’s draft profit and loss account for the year ended 31 st October 2004 shows the
following:
(Tshs. 000,000)
Operating profit
4,525
Interest payable
(329)
Profit on ordinary activities before taxation
4,196
Taxation
(1,279)
Profit on ordinary activities after taxation
2,917
Minority interests
(132)
Profit for the financial year
2,785
Required:
(i)
Calculate the basic earnings per share for Wazalendo for the year ended 31 st October
2004.
(5 marks)
(ii)
Calculate the diluted earnings per share for the year ended 31 st October 2004 (5
marks)
(iii) Prepare the earnings per share disclosure note for the year ended 31 st October 2004. (5
marks)
(Total
=
20marks)
Note: comparative figured are not required
Question 7
XYZ Company during the year ended 31st December 2012. Made profit before interest and tax of
Tshs 66,500,000. Provisions for tax is made at Tshs.. 16,000,000.
Capital structure of the company of at 1st January, 2012 made of the following:10% Debentures
Tshs. 45,000,000
8% Cum Pref. shares @ shs. 100
Tshs.
125,500,000
Ordinary shares @ Tshs. 250
Tshs.
300,000,000
Profit and Loss
Tshs.
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3,500,000
Tshs.
474,000,000
Required:
Calculate basic EPS
a) Assuming that there was no change in issued share capital made during the year ended 31 st
December, 2012
b) On the basis that the company made a new issue of 400,000 ordinary shares at the market
price and full paid on 31st March, 2012. And followed by new issue of 200,000 ordinary
shares at the market price but 50% paid up on 30th June, 2012 and the balance remained
unpaid to 31st Dec 2012, while bonus issue of 1 for every 5 held were issued on 15 th
February, 2012.
c) On the basis that the company made only right issue of 2 new ordinary share for every 5
shares held at Tshs. 200/= at 30th June, 2012, and the market price on 20th June, 2012 was
Tshs. 270/=.
Question 8 NBAA May 2016
Daima Plc has 1,500,000 ordinary shares in issue and profits after tax of TZS.1,250,000,000 (all
from continuing operations) for the year ended 30th September 2015.
The company also has the following convertible stock:
 TZS.400,000,000 of 10% loan stock, each TZS.1,000,000 of stock having the right to convert
into 2,000 ordinary shares.

TZS. 100,000,000 of 12% loan stock, each TZS.2,500,000 of stock having the right to convert
into 200 ordinary shares.
In additional, it has 500,000 TZS.1,000 10% convertible cumulative preference shares. Each
convertible to 1.5 ordinary shares. The tax rate is 30%.
Required:
Calculate the basic and diluted Earnings per Share for the year ended 30th September 2015.
(15 marks) (Total: 20 marks)
Conveniently
Diluted EPS
Dilution is a reduction in Earnings per share or an increase in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or
that ordinary shares are issued upon the satisfaction of specified conditions.
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Diluted Earnings per share means an EPs that is reduced due to increase in the number of shares
(the denominator) without a proportionated increase in the earnings. (The numerated)
A potential ordinary shares, is a financial instrument or other contracts that may entitle it’s holder
to ordinary shares.
 These are ordinary shares likely to come into existence as the results of financial instrument
or contracts
Why diluted EPS calculated?
Diluted EPS provides additional information which is relevant for the existing as well as the
potential investors.
 Existing shareholders will know what the EPS could be in future, on the shares held by
them. Accordingly they can decide whether to hold the shares or to sell them.
 Potential shareholders can decide whether to buy or not using diluted EPS.
 In general diluted EPS provides the warning signal for both existing shareholders and
potential ordinary shareholder
Dilutive factors
(1) Convertible bonds
(2) Convertible preference shares
(3) Share options & warrants
(4) Partly paid –up shares.
Question 9
XYZ Co. has 120,000 Tshs 100 ordinary shares in issue and profits after tax of Tshs 9,600,000/= for
the year ended. 31st Dec 2015. Assume corporate tax to be 30%
Calculate diluted EPS in the following each situations separately.
(a) Assume the company has 10% convertible debenture of Tshs 25,000,000/= and every Tshs
1250 Convertible into 2, Tshs 100 ordinary shares.
(b) Assume that the company has 12% convertible preference shares of Tshs 20,000,000 and
every Tshs 625 shall be convertible into one ordinary shares.
(c) Assume that the company has 40,000 Tshs 100 shares options exercisable at Tshs 125 while
average market price per share during the year ended 31 Dec 2015 was Tshs 200.
(d) Assume all the conditions above exist at 31st Dec 2015 calculate diluted EPS
Question 10
(a) Given the capital structure of the company XYZ Co on 1st Oct 2010 made up of the
following
8% debentures
150,000,000
10% Cum. Pref. shares @ Tsh 100 200,000,000
Ordinary share capital @ Tsh 200 500,000,000
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During the year ended 31st Sept 2011. The company made profit before interest & tax of
Tshs 122,000,000
Assume tax rate = 20%
Required
Calculate basic EPS
(b) If on 31st Dec 2010 the company issue share ordinary shares; 500,000 shares at market price
and was full paid on the allotment stage.
But on 31st March 2011, the company made another issue of 500,000 shares at market price
of Tshs 300/= only Tshs 150 was paid until on reporting date 31st Sep 2011.
Also the company made bonus issue on 30th June 2011 for one Tshs 200 ordinary share for
every five Tshs 100 ordinary share held on 1st Oct 2010, utilizing general reserves
Required
Calculate basis EPS
(c) Assume XYS Co made only eight issue on 31st March 2011 for Tshs 100 ordinary share for
every seven Tshs 200 ordinary shares held at Tshs 200. If market price before right issue
was Tshs 300
Calculate basis EPS
(d) Consider part (c) above.
- On 31st Sep 2011, the company held the share options of 400,000 shares of exercise price of
Tshs 240 given average market price was Tshs 300
- And the company held, the convertible
 8% debenture Tshs 150,000,000 convertible Tshs 1000 nominal value for six Tshs 200
ordinary shares.
 12% Cum pre shares convertibles as Tshs 1000 nominal value for eight, Tshs 200
ordinary shares.
Assume corporate tax rate 20%
Calculate
Dilute EPS
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QUESTION 11
IAS 33: Earning per share sets out the requirements for calculating and disclosing the basic
earnings per share figure for quoted entities.
The following figures appeared in the Consolidated Statement of Profit or Loss and Other
Comprehensive Income of Precious Plc for the year ended 31 st July 2016, together with
comparative for 2015:
Profit before taxation
Taxation on profit
Profit for the year
Other comprehensive income-revaluation gain on land
Total comprehensive income for the period
Profit for the year attributable to:
Owners of the parent
On-controlling interest
Profit for the year
Total comprehensive income for the year attributable to:
Owner of the parents
Non- controlling interests
Total comprehensive income for the year
2016
400
(75)
325
30
355
2015
300
(60)
240
10
250
280
45
325
210
30
240
310
45
355
220
30
250
The following figures are taken from Precious’s Statement of Financial Position as at 31 st
July 2016, together with comparative for 2015:
2016
2015
Equity share capital of TZS 0.50 each
460
200
4% Preference shares-non-redeemable, non-cumulative
100
100
Share premium
215
60
Retained earnings
688
570
Other equity reserves
90
60
Non-controlling interests
85
40
Total equity
1,638
1,030
During the year ended 31st July 2016, the following changes took place to the issued share
capital of Precious Plc:
i. 100 million equity shares were issued in conjunction with the acquisition of another
business. These issued at full market price at date of issue, 1 st November 2015
ii. 150 million ordinary shares were issued for cash to existing shareholders on 1 st
February 2016. The issue price was TZS 1.50 per share, which represented a discount
of 25% on the traded price immediately before the issue (TZS 2).
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iii.
On 31st July 2016, a bonus issue of 270 million shares was completed, capitalizing
TZS 135 million of retained earnings. Also on this date, the preference dividend due
for the year, and an equity dividend of TZS 23 million were paid.
Required:
(a) Discuss the significance of the Earning Per Share (EPS) figure to the analysis of
company performance. Why is it important to have an accounting standard in this area?
(b) Applying the requirements of IAS 33: Earning Per Share to the information above,
calculate the EPS for the year 31 st July 2016 and the comparative figures for 2015 to be
reported in the 2016 financial statements. The EPS figures originally reported in 2015 was
TZS 0.525. (20 marks)
SUGGESTED ANSWER
(a)
Significance of the earnings per share figure.
Earnings per share (EPS) is one of the most widely watched measures of company
performance. As such it is the measure that is subject to most intense efforts to
maximize its level and its growth. It is superior to other measures on many levels, but
has some limitations also.
EPS gives a way to measure a company’s profits relative to the number of shares in
issue. It is argued that as owners hold equity shares, it is more relevant to them to know
how much profit each share has earned than to know the overall profit figure.
EPS feed into the price/earnings ratio, one of the most important stock market measures
of value. This gives an estimate of the number of years it would take for an investment
in an equity share to return itself in earnings terms, assuming current performance
continues into the future.
It is essential that such an important measure of performance have clear guidelines
regarding its calculation. IAS 33 Earnings per Share gives us a standardized method of
calculating both earnings, and the number of shares.
Many investors feel that other measures are more appropriate, and that the IAS 33
published, as the IAS 33 figure gets equal or greater prominence.
There is a danger in relying on a single measure of performance, as no single measure
can encapsulate all aspects of an entity’s performance.
Also, there is a danger that EPS, may be seen by unsophisticated investors as a definite
exact number, when in reality it is subject to all the accounting estimates and judgment
that are necessary in preparing a set of financial statements.
Despite these fears, it is generally agreed that IAS 33 gives a very fair method of
calculating EPS, and that the consistency it offers is of value to the investor and analyst.
(b)
Earning relevant to 2016 EPS calculation
In class
Profit for the year (attributable to owners of the
parent)
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TSHS (Million)
280
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Less preference dividends (100*4%)
IAS 33 earnings
(4)
276
Number of equity share in issue (weighed average) for year ended 31 July 2016.
Date
1 Aug 2015
1 Nov 2015
1 Feb 2016
31 July 2016
31 July 2016
No. of
Share
(m)
400
+100 =
500
+150 =
650
+270 =
920
Total
Time
TERP
Weight Weighting
3/12
2/1.885
3/12
2/1.885
6/12
Bonus Issue
W. Av. No.
Weighting
920/650
920/650
Of share
150.17
187.72
920/650
460.00
N/A
797.89
1 Feb 2016: rights issue at discount – calculation of Theoretical Ex – Rights Price
(TERP)
No. of share in issue prior to rights issue
500
Tsh.2.00
Tsh.1,000
(m)
No. of share issued during right issue
150
Tsh.1.50
Tsh.225
Total no. of shares after rights issue
650
Tsh.1.885
Tsh.1,225
All shares in issue prior to the rights issue are weighted by a bonus fraction equal
to the ex-rights price (prior to the rights issue) divided by the TERP (2.00/1.885)
31 July 2016: bonus issue – calculation of bonus fraction
No. of share in issue prior to bonus issue
650
No. of shares in issue after bonus issue
920
Bonus fraction =
920/650
Weighted average number of shares in issue for year ended 31 July 2016 = 797.89
Million
Basic EPS
276/797.89
Tshs.0.3459
Previous year’s EPS figures need to be restated to reflect the distorting effect of
issues of shares below market value. This is achieved by multiplying the
previously calculated EPY by the inverse of the bonus fraction.
2015 EPS restated Tshs0.525*1.885/2*650/920 = Tshs 0.3496
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QUESTION 12
On I st June 2016, the chief executive of Marhaba Company (Marhaba), Mr. Mandaro,
retired from the company. The ordinary share capital at the time of his retirement was 6
million shares of TZS. 1,000 each. Mr. Mandaro owns 52% of the ordinary shares of
Marhaba and the remainder is owned by employees. As an incentive to the new
management, Mr. Mandaro agreed to a new executive compensation plan which
commenced after his retirement. The plan provides cash bonuses to the board of directors
when the company's earnings per share exceeds the normal earnings per share which has
been agreed at TZS.500 per share.
The cash bonuses are 20% of the profit generated in excess of that required to give an
earnings per share figure of TZS.500. The new board of directors has reported that the
compensation to be paid is TZS.360 million based on earnings per share of TZS.800 for
the year ended 31 st May 2017. However, Mm Mandaro is surprised at the size of the
compensation as other companies in the same industry were eithér breaking even or
making losses in the period. He was anticipating that no bonus would be paid during the
year as he felt that the company would not be able to earn more than normal earnings per
share of TZS.500
Mr. Mandaro, who had taken no active part in management decisions, decided to take
advantage of his role as non-executive director and demanded an explanation of how the
earnings per share of TZS.80() had been reached. His investigation revealed the following
information:
i. The company received a grant from the government of TZS.5 billion towards the cost of
purchasing a non-current asset of TZS.15 billion. The grant had been credited to profit or
loss in a total and the non-current asset had been recognized at TZS. 15 billion in the
Statement of Financial Position and depreciated at a rate of 10% per annum on the straight
line basis. The directors explained that current thinking by the International Accounting
Standards Board (IASB) was that the accounting standard on government grants was
conceptually wrong because it misstates the assets and liabilities of the company and
hence, they were following approach which has recently been advocated in a recent
discussion paper.
ii. Shortly after Mr. Mandaro had retired from the company, Marhaba made an initial
public offering of its shares. The sponsor of the issue charged a fee of TZS.300 million.
The fee was paid by issuing 100,000 TZS. 1,000 ordinary shares at a market value of TZS.
120 million and by cash of TZS.180 million. The directors had charged the cash paid as an
expense in the Statement of Profit or Loss. Further, they had credited the value of the
shares issued to the sponsor in the Statement of Profit or Loss for the year as they felt that
the shares were issued for no consideration and that, therefore, they should offset the
cash paid by the company. The public offering was made on I st August 2016 and involved
vesting four million ordinary shares of TZS. 1,000 at a market price of TZs.l,200 per share
(exclusive of the sponsor's shares). Mr. Mandaro and other current shareholders decided to
sell three million of their shares as part of the offer, leaving one million new shares to be
issued. The cost of issuing shares are to be regarded as an element of the net
consideration.
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iii. Marhaba had made a 1 to 4 right issue on 30 th June 2017. The cost of the share was
TZS. 1,600 per share and the market price was TZS.2,000 per share before the right issue.
The directors had ignored this transaction because it occurred after the year end but they
intend to capitalize retained earnings to reflect the bonus element of the rights issue in the
financial statements for the year ending 3 1 st May 2018. The financial statements for the
previous year have not yet being approved.
The directors had calculated earnings per share for the year ended 3 1 st May 2017 as
follows:
Profit after tax
TZS.4.8 billion
Ordinary shares of TZS. 1 ,000
6,000,000
Earnings per share
TZS.800
Mr. Mandaro was concerned over the way that earnings per share had been calculated by
the directors ånd also he felt that some of the above accounting practices were at best
unethical and at worst fraudulent. He therefore, asked your technical and ethical advice
on the practices of the directors.
Required:
a) Draft a report summarizing the correct treatment of the matters above and advise Mr.
Mandaro as to whether earnings per share has been accurately calculated by the directors.
Include in your report a revised calculation when this differs from the directors'
calculations.
b) Briefly discuss whether or not the directors may have acted unethically in the way they
have calculated earnings per share.
SUGGESTED ANSWER
Advice to Mr. Mandaro on the calculation of Earnings per share
From: Consultant
Introduction: Basis of calculating EPS
Earnings per share (EPS), is a widely used measure of financial performance. Detailed guidance on its
calculation and on presentation and disclosure issues is given in IAS 33 Earnings per share. Basic EPS
calculation is obtained by diving profit attributable to ordinary shareholders (numerator) to weighted
average number of ordinary shares outstanding during the period (denominator). While the
denominator is relatively difficult to manipulate, the selection of accounting policies designed generally
to boost the earnings figure, may be possible and hence earnings per share may be manipulated. The
analysis of the observations noted is as follows:
(i)
Government grant
IAS 20 Accounting for government grants and disclosure of government assistance allows two methods
of accounting for government grants.
 Net the grant off against the cost of the asset and depreciate the net figure
 Carry the grant as a deferred credit and release it to income over the life of the asset.
The grant should therefore be removed from the statement of profit or loss and other comprehensive
income. Only TZS 500 million (TZS 5 billion ÷ 10 year) should be credited to income; the balance of
TZS 4.5 billion should be shown as a deferred credit or deducted from the cost of the asset.
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(ii)
Share Issue
In the calculation of EPS, the directors have used the number of shares in issue when Mr. Mandaro
retired from the company (6 million). They have not taken into account the new issue of shares made at
the initial public offering.
The number of new shares issued is one million plus the sponsor’s shares of 100,000. This needs to be
time apportioned (the shares were in issue for ten months) and added to the denominator of the EPS
calculation.
The treatment of the issue costs is also incorrect. IAS 39 states that transaction costs, defined as
incremental external costs directly attributable to an equity transaction, should be accounted for as a
deduction from equity. It was therefore incorrect to credit the value of the shares to profit or loss and
likewise incorrect to charge the cash paid as an expense in profit or loss.
The accounting entries should have been as follows:
Dr. Retained earnings/share premium TZS 300 million
Cr.
Cash
TZS 180 million√
Share capital
TZS 100 million√
Share premium
TZS 20 million √
(iii) Rights Issue
The right issue took place after the company’s year-end. The proceeds of the rights issue were not
available for use during the accounting period. It would not therefore be appropriate to adjust EPS to
reflect any part of the rights issue.
However, an adjustment needs to be made for the bonus element in the rights issue, since this is deemed
to affect the number of shares, and hence EPS for all accounting periods.
The bonus element is =
The theoretical ex right price (TERP) is:
Initial holding: 4 x 2,00 = 800
Rights issue: 1 x 1,600 = 1,600
5 9,600
TERP =
bonus shares are =
= TZS 1,920
* No. of shares in issue
Revised EPS calculation
i/ Revised earnings
Profit per directors
(1) Government grant taken to deferred
income
Credited to income in year
(2) Cash paid
TZS
million
4,800
(5,000)
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500
180
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Shares issued to sponsor
Revised earnings
Revised number of shares
Per directors
Additional shares issued = 1,100,000* 10/12
Bonus shares (2000/1920-1)*6,916,667
Total Revised number of shares
Revised EPS (360 mill/7,204,861
(b)
(120)
360
6,000,000
916,667
6,916,667
288,194
7,204,861
TZS 49.97
It is not always easy to determine whether creative accounting of this kind is deliberate or
whether it arises from ignorance or oversight. The assessment of whether directors have acted
ethically is often a matter of the exercise of professional judgement.
In factual term when the correct accounting treatment is used, an earnings per share of TZS 800
is converted into a mere TZS 50 per share. Since the directors are entitled to a cash bonus for an
EPS of above TZS 500, there would appear to be a strong incentive for them to select accounting
policies designed to boost it.
The directors’ explanation for their treatment of the government grant, issue of shares and rights
issues may simply reflect lack of knowledge on the part of directors, rather than unethical
accounting. It is more likely, therefore, that the directors were confused about the appropriate
treatment and should be allowed the benefit of any doubt. However the possibility of deliberate
manipulation cannot be completely ignored.
Conclusion
On the facts of the case, accounting standards have not been followed, and generally in a manner
likely to boost EPS. Accusations of fraud should not be made hastily without taking legal
advice. As suggested in (i) above, in practice there should be internal controls to ensure that the
directors should be made aware of their responsibility for the accuracy and fairness of the
financial statements and obligation to apply accounting standards.
CPA(T) Zachayo N Leonard 0657174882, 0717782882
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QUESTION 13
Parapanda is a listed company. On 1st November, 2006 its issued share capital comprised of
10 million ordinary shares of shs. 6 each and 4 million – 4% preference shares of shs. 10
each.
During the year ended 31st October 2007 the Company made a rights offer to its
shareholders of three (3) new ordinary shares of shs. 6 each for every ten (10) existing
ordinary shares held.
The offer was fully taken up by shareholders, who purchased the new shares for shs.30 each
on 1st May, 2007. The fair value of each ordinary share on 30 th April 2007 was shs. 41.50.
On 31st October 2007, the ordinary shares of Parapanda Company also held options
exercisable between 1st November 2009 and 1st May 2010 to purchase 1,200,000 ordinary
shares at shs. 28 per share.
No options were issued during the year ended 31 st October 2007. The average fair value of
the ordinary shares during the year was shs. 42 each.
Parapanda Company limited paid an ordinary dividend of shs. 10,400,000 and a preference
dividend of shs. 1,600,000 during the year to 31 st October 2007.
Parapanda Company Limited
Income Statement for the year ended 31st October 2007.
Operating profits
45,250,000
Interest payable
(3,290,000)
Profits on ordinary activities before tax
41,960,000
Tax
(12,790,000)
Profits on ordinary activities after tax
29,170,000
Minority interest
(1,320,000)
Profit for the year
27,850,000
Required:
(a) Calculate the basic earnings per share for Parapanda Company Limited for the year
ended 31st October 2007. (9 marks)
(b) Calculate the diluted earnings per share for the year ended 31st October 2007. (7
marks)
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QUESTION 14
a) Dabaga Inc was incorporated on January 1, 2012, with an equity of TZS 4.0 million.
The statement of financial positions of the entity at the beginning and end of the first
financial year were as follows:
Beginning
TZS. 000
Assets
Property , plant and equipment
Inventory
receivables
Equity and liabilities
Share capital
Accumulated profit
Borrowings
End
TZS. 000
60,000
30,000
50,000
140,000
50,000
40,000
60,000
150,000
40,000
100.000
140,000
40,000
10,000
100,000
150,000
The statement of comprehensive income for the first year reflected the following
amounts:
TZS. 000
Revenue
800,000
Operating expenses
(750,000)
Depreciation of plant and equipment
(10,000)
Operating profit
40,000
Interest paid
(20,000)
Profit before tax
20,000
Income tax expenses
(10,000)
Profit after tax
10,000
The rate of information was 120% for the year. The inventory represents two months`
purchases, and all statement of comprehensive income items accrued evenly during the year.
Required:
Restate the above financial statements (the statement of comprehensive income and
statement of financial position) using reliable price index in such a hyperinflationary
situation.
(8 marks) (Total 20 marks
SUGGESTED ANSWER
The financial statements can be restated to the measuring unit statements of financial
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position date using reliable price index, as follow:
Statement of Financial Position
Recorded
Tshs. 000
Assets
Property, plant and equipment
Inventory (calculation a)
Receivables
Equity and liabilities
Share capital
Accumulated profit
Borrowings
Restated
Tshs. 000
Calculations
50,000
40,000
60,000
150,000
110,000
41,905
60,000
211,905
2.20/1.00
2.20/2.10
40,000
10,000
100,000
150,000
88,000
23,905
100,000
211,905
2.20/1.00
Balancing
Statement of comprehensive income
Recorded
Recorded
Tshs. 000
Tshs. 000
Revenue (calculation b)
800,000
1,100,000
2.20/1.60
Operating expenses
(750,000) (1,031,250)
2.20/1.60
Depreciation (calculation c)
(10,000)
(22,000)
2.20/1.0
Interest paid
(20,000)
(27,500)
2.20/1.60
Income tax expenses
(10,000)
(`13,750)
2.20/1.60
Net profit before restatement gain
10,000
5,500
Gain arising from inflation adjustment
18,405 Balancing figure
Net profit after restatement gain
23,905
Calculations:
i)
Index for inventory
ii)
Inventory purchased on average at November 30
Index at the date = 1,000 + (1.20 x 11/12) = 2.1
Index for income and expenses
iii)
Average for the year = 1.00 + (1.20/2) = 1.60
Index for depreciation
Linked to the index of property, plant and equipment =
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QUESTION 15
A statement showing the retained profit of UPTAKE Ltd for the year ended 31 st December
2004 is set out below.
Tshs.
Tshs.
Profit before tax
2,530,000,000
Less: Income tax expenses
(1,127,000,000)
1,403,000,000
Transfer to reserve
(230,000,000)
1,173,000,000
Dividends:
Paid preference interim dividend
138,000,000
Paid ordinary interim dividend
184,000,000
Declared preference final dividend
138,000,000
Declared ordinary final dividend
230,000,000
690,000,000
Retained profit
483,000,000
st
On 1 January, 2004 the issued share capital of UPTAKE Ltd was 4,600,000;6% preference
shares of Tshs. 1,000 each and 4,120,000 ordinary shares of Tshs. 1,000 each.
Required:
Compute the earnings per Share (on basic and diluted basis) in respect of the year ended 31 st
December, 2004 for each of the following situations. Each of the three situations in (a) – (c)
below is to be dealt with separately: Assume where appropriate that the income tax rate is
30%
(a) On the basis that there was no change in issued share capital of the company during
the year ended 31st December, 2004. (4.5 marks)
(b) On the basis that the company made a rights issue of Tshs. 1,000 ordinary shares on
1st October, 2004 in the proportion of 1 for every 5 shares held, at a price of Tshs.
1,200. The market price for the shares at close of trade on the last day of quotation
cum rights was Tshs. 1,780 per share. ( 10 marks)
(c) On the basis that the company made no new issue of shares during the year ended
31st December, 2004 but on that date it had in issue Tshs 1,500,000; 10% convertible
loan stock 2008 – 2011. This loan stock will be convertible into ordinary Tshs. 1,000
shares as follows:
2008: 90 Tshs. 1,000 shares for Tshs. 100,000 nominal value loan stock
2009: 85 Tshs. 1,000 shares for Tshs. 100,000 nominal value loan stock
2010: 80 Tshs. 1,000 shares for Tshs. 100,000 nominal value loan stock
2011: 75 Tshs. 1,000 shares for Tshs. 100,000 nominal value loan stock (5.5 marks)
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