INTERNATIONAL ACCOUNTING STANDARD 33- EARNINGS PER SHARE
1
INTRODUCTION
Earnings per Share (IAS 33)
Earnings Per Share (issued in 1997), and should be applied for annual periods beginning on or after 1
January 2005. The Standard replaces SIC-24 Earnings Per Share—Financial Instruments and Other
Contracts that May Be Settled in Shares.
2
OBJECTIVE
The objective of this Standard is to prescribe principles for the determination and presentation of
earnings per share, so as to improve performance comparisons
Between
o
o
different entities in the same reporting period and
different reporting periods for the same entity.
Even though earnings per share data have limitations because of the different accounting policies that
may be used for determining ‘earnings’, a consistently determined denominator enhances financial
reporting. The focus of this Standard is on the denominator of the earnings per share calculation.
3
SCOPE
1. This Standard shall apply to:
(a) the separate or individual financial statements of an entity AND
(b) the consolidated financial statements of a group with a parent
(i) whose ordinary shares or potential ordinary shares are traded in a public market (a domestic
or foreign stock exchange or an over-the-counter market, including local and regional
markets) or
(ii) that files, or is in the process of filing, its financial statements with a securities commission or
other regulatory organisation for the purpose of issuing ordinary shares in a public
market;
2.
When an entity presents both consolidated financial statements and separate financial statements
prepared in accordance with IAS 27 Consolidated and Separate Financial Statements, the
disclosures required by this Standard need be presented only on the basis of the consolidated
information.
3. An entity that chooses to disclose earnings per share based on its separate financial statements
shall present such earnings per share information only in its statement of comprehensive income.
An entity shall not present such earnings per share information in the consolidated financial
statements. (Para4)
4. If an entity presents the components of profit or loss in a separate income statement as described
in paragraph 81 of IAS 1 Presentation of Financial Statements (as revised in 2007), it presents
earnings per share only in that separate statement. (Para 4A)
4
DEFINITIONS
The following terms are used in this Standard with the meanings specified:
a)
Antidilution is an increase in earnings per share or a reduction in loss per share resulting 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.
b)
A contingent share agreement is an agreement to issue shares that is dependent on the
satisfaction of specified conditions.
c)
Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other
consideration upon the satisfaction of specified conditions in a contingent share agreement.
d)
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.
e)
Warrants and their equivalents are financial instruments that give the holder the right to
purchase ordinary shares.
f)
An ordinary share is an equity instrument that is subordinate to all other classes of equity
instruments.
g)
A potential ordinary share is a financial instrument or other contract that may entitle its holder to
ordinary shares.
h) Put options on ordinary shares are contracts that give the holder the right to sell ordinary shares
at a specified price for a given period.
5 EARNINGS PER SHARE (EPS)
5.1
Basic earnings per share shall be calculated by
Profit or loss attributable to ordinary equity holders of the parent entity (the numerator)
DIVIDED by
The weighted average number of ordinary shares outstanding (the denominator) during the period
5.2
WHAT IS PROFIT/LOSS
The profit or loss attributable to ordinary shareholders and
The profit or loss relating to continuing operations attributable to the ordinary shareholders
ADJUSTED BY
o
o
Post-tax effect of preference dividends (and other items relating to preference shares); and
Non-controlling interests,
5.3
What are preference dividends?
There are two types of preference shares
o Cumulative Preference Shares :-If no dividend is declared in respect of a period, the
holders accumulate their rights
The profit or loss should be adjusted for the post-tax effect of the preference dividends in
relation to that period, whether or not the dividends are paid or not.
o
Non-Cumulative Preference Shares:-If no dividend is declared in respect of a period, the
holders losses the right to the dividend for that period.
The profit or loss should be adjusted for preference dividends declared in relation to the period.
6.
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES.
6.1 The weighted average number of ordinary shares outstanding during the period is
the number of ordinary shares outstanding at the beginning of the period,
Adjusted by
the number of ordinary shares bought back or issued during the period
Multiplied by
a time-weighting factor.
The time-weighting factor is the number of days that the shares are outstanding as a proportion
of the total number of days in the period; a reasonable approximation of the weighted average is
adequate in many circumstances.
6.2
Types of Issue of Ordinary Shares in a number of ways:
6.2.1
For Consideration
o
o
o
Issued for cash
Issued to acquire a controlling interest in another entity
Issued to redeem the debt of the entity
In each case the earnings will be boosted from the date of issue. In order to ensure consistency
between the top and bottom of the basic EPS calculation the shares are also included from the date of
issue.
Without Consideration
o
o
o
o
6.2.2
Issued as Bonus Shares
Bonus elements in another issue (Right Issues)
Share Splits
Reverse Share splits
Bonus Issue
o
Treat as if the new shares have been in issue for the whole of the period.
o
Multiply the number of shares in issue by the bonus fraction.
o
The EPS will fall (all other things being equal) because the earnings are being spread over a larger
number of shares. This would mislead users when they compare this year’s figure to those from
previous periods.
o
The comparative figure and any other figures from earlier periods that are being used in an
analysis must be adjusted. This is done by multiplying the comparative by the inverse of the
bonus fraction.
6.2.3
Rights Issue
A right issue has features in common with a bonus issue and with an issue at full market price. A
rights issue gives a shareholder the right to buy shares from the company at a price set below the
market price. Thus:
o
The company will receive a consideration which is available to boost earnings (like an issue at full
price); and
o
The shareholder receives part of the share for no consideration (like a bonus issue)
The method of calculating the number of shares in periods when there has been a rights issue reflects
the above.
A bonus fraction is applied to the number of shares in issue before the date of the rights issue and the
new shares issued are pro-rated as for issues for consideration.
The bonus fraction is the cum-rights price per share (CRP) divided by the theoretical ex-rights price
per share.
For presentational purposes, in order to ensure consistency, the comparative figure for EPS must be
restated for the bonus element of the issue. This is achieved by multiplying last year’s EPS by the
inverse of the bonus fraction.
6.2.4
Multiple Capital changes
o
Write down the number of shares at start of the year
o
Look forward through the year and write down the total number of shares after each capital
change
o
Multiply each number by the fraction of the year that it was in existence
o
If the capital change has bonus elements multiply all preceeding slices by the bonus fraction.
6.2.5
ISSUABLE SHARES
6.2.5.1 Mandatorily convertible Instrument
Shares that will be issued on the conversion of mandatorily issuable instruments will be included in
the weighted average number of shares from the date that the contract is entered into. This is
consistent with IAS 39. There are items that will be classified as equity instruments and therefore it is
appropriate to include in the EPS Calculation.
6.2.5.2 Contingently issuable shares
Contingently issuable shares will be included in the weighted average number of ordinary shares
from the date all necessary conditions and events have occurred to allow the issue of the shares.
6.2.5.3 Contingently refundable shares
Contingently refundable shares will be included in the weighted average number of ordinary shares
only from the time they are no longer subject to recall.
7
Diluted Earnings Per Share
An entity shall calculate diluted earnings per share amounts for profit or loss attributable to ordinary
equity holders of the parent entity and, if presented, profit or loss from continuing operations
attributable to those equity holders.
The objective of diluted earnings per share is consistent with that of basic earnings per share
—
to provide a measure of the interest of each ordinary share in the performance of an
entity
—
While giving effect to all dilutive potential ordinary shares outstanding during the
period.
For calculating diluted earnings per share, the profit or loss attributable to ordinary equity holders of
the parent entity, as calculated in accordance with paragraph 12 for Basic EPS would be adjusted, by
the after-tax effect of:
(a)
any dividends or other items related to dilutive potential ordinary shares deducted in
arriving at profit or loss attributable to ordinary equity holders of the parent entity as
calculated in accordance with paragraph 12;
(b)
any interest recognised in the period related to dilutive potential ordinary shares; and
(c)
any other changes in income or expense that would result from the conversion of the dilutive
potential ordinary shares.
For calculating the new number of Ordinary Shares
This should be the weighted average number of ordinary shares used in the basic EPS calculation
plus the weighted average number of ordinary shares which would be issued on the conversion of all
the dilutive potential ordinary shares into ordinary shares.
Dilutive potential ordinary shares should be deemed to have been converted into ordinary shares at
the beginning of the period or, if later, the date of the issue of the potential ordinary shares.
New Number of shares:
Basic Number of Shares
No. of shares which could exist in the future:
From the later of
First day of accounting period
Date of issue
XXX
XXX
-----XXX
------
Options, warrants and their equivalents
An entity should assume the exercise of dilutive options and other dilutive potential ordinary shares
of the entity.
The assumed proceeds from this issue should be considered to be received from the issues of
shares at fair value. The difference between the number of shares issued and the number of
shares that would have been issued at fair value should be treated as an issue of ordinary
shares for no consideration.
Options will be dilutive only when they result in the entity issuing shares at below fair value.
Share options and other share purchase arrangements are dilutive to the extent that they result in the
issue of ordinary shares for less than fair value. IAS 33 wants to reflect this fact by requiring this
treatment:
a)
The options/share purchase arrangements are deemed to have been exercised at the
exercise price.
b)
The “deemed” proceeds are then converted into a number of shares at fair value.
c)
The difference between the shares deemed to have been issued and the shares that
would have been issued at full market price is the dilution and are shares issued for
“no consideration.”
This method is often called the treasury stock method.
Any potential ordinary shares that expired or were canceled are included in the diluted earnings per
share calculation for the period in which they were outstanding. Thus share options that lapsed
during the period would be included in the calculation and weighted for the period they were
outstanding.
Potential ordinary shares are dilutive if their deemed conversion to ordinary shares would decrease
net profit per share from continuing ordinary operations. Thus the “control number” is the net profit
from continuing operations. It is the effect of potential ordinary shares on this “number” that
determines whether the issue of potential ordinary shares is dilutive or anti-dilutive.
The effects of all anti-dilutive potential ordinary shares are ignored in the calculation of diluted
earnings per share. Each issue of potential ordinary shares is considered individually in the order
most dilutive to least dilutive.
Net profit from continuing operations is the net profit from ordinary activities after deducting
preference dividends and after excluding items relating to discontinued operations.
Presentation
o
Basic and diluted earnings per share (or loss per share if negative) should be presented in the
statement of comprehensive income for:
o
An entity shall present in the statement of comprehensive income basic and diluted earnings per
share
•
for profit or loss from continuing operations attributable to the ordinary equity holders of the
parent entity and
•
for profit or loss attributable to the ordinary equity holders of the parent entity for the period
for each class of ordinary shares that has a different right to share in profit for the period.
o
An entity shall present Basic and Diluted Earnings Per Share with equal prominence for all
periods presented.
o
If an entity presents the components of profit and loss in a separate income statement (per IAS 1),
that statement should present:
•
•
Basic and diluted earnings per share and
Basic and diluted earnings per share for discontinued operations.
DISCLOSURE
An entity shall disclose the following:
o
the amounts used as the numerators in calculating basic and diluted earnings per share, and a
reconciliation of those amounts to profit or loss attributable to the parent entity for the period.
o
the weighted average number of ordinary shares used as the denominator in calculating basic
and diluted earnings per share, and a reconciliation of these denominators to each other.
o
Instruments (including contingently issuable shares) that could potentially dilute basic earnings
per share in the future, but were not included in the calculation of diluted earnings per share
because they are ant dilutive for the period(s) presented.
o
a description of ordinary share transactions or potential ordinary share transactions, that occur
after the reporting period and that would have changed significantly the number of ordinary
shares or potential ordinary shares outstanding at the end of the period if those transactions had
occurred before the end of the reporting period.