[Type text]
2011 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 33 Earnings per Share
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Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 2

1. Earnings per Share - Introduction ............................ 3
2. Definitions
3. Measurement
5
7
4. Diluted Earnings per Share .................................... 18
5. Convertible instruments 29
6. Contingently-issuable shares................................. 29
7. Contracts that may be settled in ordinary shares
(or cash) ...................... 32
8. Annex - Earnings per Share - Treasury Stock
Method ......................... 41
9. Multiple choice questions 41
10. Answers to multiple choice questions ................ 45
Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook:
-Applying IFRS
-IFRS News
-Accounting Solutions http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
OVERVIEW
Aim
The aim of this workbook is to assist the individual in understanding Earnings per Share according to IFRS.
Objective
The objective of IAS 33 is to prescribe principles for the calculation and presentation of earnings per share. This is to improve comparisons between different undertakings in the same reporting period, and between different reporting periods for the same undertaking.
Even though earnings per share data have limitations, due to the different accounting policies that may be used for determining
‘earnings’, a standard denominator (the number of shares) enhances financial reporting. The focus of IAS 33 is on the denominator of the earnings per share calculation.
Scope
IAS 33 shall be applied by undertakings whose shares, and potential shares, are publicly traded, and by undertakings that are in the process of issuing shares, or potential shares in public markets. Others may provide such information if it is produced according to IAS 33.
When an undertaking presents both consolidated and separate financial statements, the disclosures required by IAS 33 need be presented only for the consolidated information.
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EXAMPLE- consolidated and separate financial statements
You produce both consolidated and separate financial statements. You calculate earnings per share for the consolidated accounts, but do not need to do so for the parent company accounts.
IAS 33 shall apply to: a. the separate or individual financial statements of an undertaking: 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; 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. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
An undertaking that discloses earnings per share, based on its separate financial statements, shall present such information only on the face of its separate income statement.
EXAMPLE- consolidated and separate financial statementsparent company accounts
You produce both consolidated and separate financial statements. You calculate earnings per share for both. The parent company accounts’ figure should only appear on the balance sheet (SFP) of those accounts.
IAS 33 for Banks
For banks with simple capital structures, IAS 33 does not entail much work. The complications come when more shares are issued, especially new classes of shares (such as preference shares) and share option schemes are introduced.
The use of convertible debt leads to further complexity.
In analysing financial statements of clients, low earnings per share will indicate a poor return on capital. This may result in the company having problems raising additional capital when needed, possibly leaving the bank’s loans at risk.
A diluted earnings per share figure may indicate that there is likely to be additional capital in the client’s balance sheet from share options or convertible debt.
However, there is no guarantee that either will create additional capital if the client’s share price does not reach a level profitable for the holders of the options, or convertible debt, to take up the shares.
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2. Definitions
Antidilution is an increase in earnings per share when convertible instruments are converted to ordinary shares.
EXAMPLE-antidilution
You convert some high-interest debt to ordinary shares. The interest saved (earnings) increases the earnings per share, even allowing for the additional shares in issue.
A contingent share agreement is an agreement to issue shares, which is dependent on the satisfaction of specified conditions.
EXAMPLE-contingent share agreement
You have provided staff with share options. If they work for you for 3 years, they will be able to buy shares at a discount. This is a contingent share agreement.
Contingently-issuable ordinary shares are shares issuable for little, or no, cash upon the satisfaction of specified conditions, in a contingent share agreement.
EXAMPLE-contingently-issuable ordinary shares
You buy a business in exchange for your shares. If the share price falls by more than 25% in the first 6 months, you will issue more shares (free) to the vendors, as compensation.
Dilution is a reduction in earnings per share resulting from the assumption that convertible instruments are converted, that options (or warrants) are exercised, or that shares are issued upon the satisfaction of specified conditions. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
EXAMPLE-dilution
You convert some low-interest debt to ordinary shares. The interest saved (earnings) decreases the earnings per share, as the additional shares in issue increase substantially.
Options, warrants and their equivalents are financial instruments that give the holder the right to purchase shares.
EXAMPLE-warrant
To reduce the interest rate of your bonds, you offer a warrant with each bond. Each warrant allows the holder to buy a share at $55 in 3 years’ time.
If the market price is above $55 at that time, the holder will exercise the warrant to buy a share at a discount. If not, the warrant will not be exercised, as the holder can buy a share cheaper in the market.
An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments.
Ordinary shares participate in profit only after other types of shares (such as preference shares) have participated. An undertaking may have more than one class of ordinary shares.
Ordinary shares of the same class have the same rights to receive dividends.
EXAMPLE- ordinary shares with a fixed dividend
Issue
Ordinary shares are defined as equity instruments that are subordinate to all other classes of equity instruments.
How should management treat a class of ordinary shares for EPS
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purposes if that class of ordinary shares has priority over another class of ordinary shares to a fixed dividend but ranks equally to the other class in all other respects?
Background
An undertaking has two classes of ordinary shares, Class A and
Class B. The Class A shares have a fixed dividend entitlement of
5.00 per share.
They also participate equally with the Class B shares in any additional dividends declared. The two classes of ordinary shares participate equally on a liquidation of the undertaking.
Solution
The Class A shares and the Class B shares are ordinary shares.
Both participate equally in any future dividends and participate equally on a liquidation, even though Class A shares have an additional fixed dividend entitlement.
Both classes of share should be included for the purposes of
EPS calculations.
A potential ordinary share is a financial instrument (or other contract) that may entitle its holder to ordinary shares.
Examples of potential ordinary shares are:
(i) financial liabilities (or equity instruments), including preference shares, that are convertible into ordinary shares;
(ii) options and warrants;
(iii) shares that would be issued upon the satisfaction of conditions resulting from contractual arrangements, such as the purchase of a business, or other assets.
EXAMPLE- potential ordinary share http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
Your preferred shares can be converted into an equal number of ordinary shares in 2 years’ time.
They represent potential ordinary shares, even though you do not know whether the holders will convert them. (It will depend on the prices of each class of share at the time.)
If the price of the ordinary share is higher than that of the preferred share, the holders will convert, and will make a profit. If the price is lower, they will not).
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.
EXAMPLE- put options on ordinary shares
You issue a new class of shares at $10 per share. A put option allows the holder to sell back the share to the company in 4 years’ time for $16. If the price in the market is lower than $16, the holder will sell you the share. If the price is higher, the holder will make more profit selling in the market.
EXAMPLES-preference shares
You have reserves of $100m. Your preference dividend will cost
$75m. This will be paid in full before the ordinary shareholders receive any dividend. Their dividend will be a maximum of $25m.
You have reserves of $75m. Your preference dividend will cost
$75m. This will be paid in full before the ordinary shareholders receive any dividend. The ordinary shareholders will receive nothing.
If you have no reserves, no preference dividend can be paid.
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IAS 32 defines financial instrument, financial asset, financial liability, equity instrument and fair value , and provides guidance on applying those definitions.
3. Measurement
Basic Earnings per Share
An undertaking shall calculate basic earnings per share amounts for profit attributable to ordinary equity holders of the parent undertaking and, if presented, profit from continuing operations, attributable to those equity holders.
EXAMPLE- profit from continuing operations
Your retail business is being sold, and has been classified as held-for sale (see IFRS 5).
Your remaining business is a wholesale operation. This is the continuing operation. You will show the earnings per share for the whole business, and a separate calculation for the earnings per share, based on the continuing operation alone.
Basic earnings per share shall be calculated by dividing profit attributable to ordinary shareholders of the parent undertaking
(the numerator) by the weighted-average number of ordinary shares outstanding (the denominator) during the period.
EXAMPLE-basic earnings per share
Your net profit after tax, preference dividends and minority interests is $500m. You have 25m shares. The earnings per share = 500/25 = $20 per share.
The objective of basic earnings per share information is to provide a measure of the interests of each ordinary share of a parent undertaking, in the performance over the reporting period. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
Earnings
For the purpose of calculating basic earnings per share, the amounts attributable to ordinary equity holders of the parent undertaking, in respect of:
(i) profit from continuing operations, attributable to the parent undertaking; and
(ii) profit attributable to the parent undertaking shall be adjusted for the after-tax amounts of preference dividends, differences arising on the settlement of preference shares, and other similar effects of preference shares classified as equity.
Include all items of income and expense, attributable to ordinary equity holders of the parent undertaking, that are recorded in a period, (including tax expense and dividends on preference shares).
The after-tax amount of preference dividends that is deducted from profit (or loss) is:
(i) the after-tax amount of any dividends on non-cumulative preference shares, declared in respect of the period; and
EXAMPLE-non-cumulative preference shares
In period 1, you do not pay the dividend on the non-cumulative preference shares of $140m.
In period 2, you pay $140m preference dividend relating to the period.
For period 1, no preference dividend expense has been incurred.
For period 2, you include $140m as the expense of the preference dividend.
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Contrast this with cumulative preference shares (see below).
(ii) the after-tax amount of the dividends for cumulative preference shares required for the period, whether or not the dividends have been declared.
Exclude the amount of any dividends for cumulative preference shares paid (or declared) during the current period, in respect of previous periods.
EXAMPLE-cumulative preference shares
In period 1, you do not pay the dividend on the cumulative preference shares of $80m.
In period 2, you pay $80m preference dividend relating to period
1, and another $80m for period 2.
In both periods, you include $80m as the expense of the preference dividend.
Preference shares, that provide for a low initial dividend to compensate an undertaking for selling the preference shares at a discount, or an above-market dividend in later periods to compensate investors for purchasing preference shares at a premium, are sometimes referred to as ‘increasing rate’ preference shares.
Any original issue discount (or premium) on ‘increasing rate’ preference shares is amortised to retained earnings, using the effective interest method, and treated as a preference dividend for the purposes of calculating earnings per share.
EXAMPLE-original issue discount
You have sold $100 preference shares at $96. (However, you will repay the owner of the share $100 at the end of the life of the preference share.)The $4 is amortised to retained earnings over the life of the preference share. No amount is recorded in the http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share income statement for this amortisation. For earnings per share purposes, the amortised amount is added to the preference dividend in each period.
Preference shares may be repurchased under a tender offer to the holders.
The excess of the fair value of the consideration (paid to the preference shareholders) over the carrying amount of the preference shares, represents a return to the holders of the preference shares, and a charge to retained earnings for the undertaking.
This amount is deducted in calculating profit (or loss) attributable to ordinary equity holders of the parent undertaking.
EXAMPLE-repurchase of preference shares
You had issued preference shares at $100 each 10 years ago.
You now have some spare cash, and buy back the shares for
$114 each. The $14 premium for each share is charged to retained earnings. No amount is recorded in the income statement for this transaction. However, for earnings per share purposes, the $14 for each share is charged in the period of the transaction.
Early conversion of convertible preference shares may be encouraged by favourable changes to the original conversion terms, or the payment of additional consideration.
The excess of the fair value of the ordinary shares (or other consideration paid over the fair value of the ordinary shares issuable under the original conversion terms) is a return to the preference shareholders, and is deducted in calculating profit attributable to ordinary shareholders.
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EXAMPLE-conversion of preference shares 1
You had issued preference shares at $50 each 6 years ago. The holders now convert each share into an ordinary share. The current market price of an ordinary share is $62 each. For earnings per share purposes, the $12 premium for each share is charged in the period of the transaction.
If the company can force the holders to convert when the price is below $50, the discount will be credited to the calculation of earnings for earnings per share.
Any excess of the carrying amount of preference shares (over the fair value of the consideration paid to settle them) is added in calculating profit attributable to ordinary shareholders.
EXAMPLE-conversion of preference shares 2
You had issued preference shares at $10 each 5 years ago. The holders now must convert each share into an ordinary share. The current market price of an ordinary share is $8 each. For earnings per share purposes, the $2 discount for each share is credited in the period of the transaction.
Shares
For the purpose of calculating basic earnings per share, the number of ordinary shares shall be the weighted-average number of shares, outstanding during the period.
The weighted-average number of shares outstanding during the period is the number of shares outstanding at the start of the period, adjusted by the number of shares bought back (or issued) during the period multiplied by a time-weighting factor. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
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 often adequate.
EXAMPLES-weighted-average shares
Your period is a calendar year.
On January 1 st , there were 100 shares. This rose to 150 on July
1 st . The weighted average for the period (ending 31 st December) was 125.
On January 1 st , there were 400 shares. This rose to 600 on April
1 st . The weighted average for the period (ending 31 st December) was 550.
(For 1 quarter, there were 400 shares; for 3 quarters, there were
600.)
Shares are usually included in the weighted-average number of shares from the date consideration is receivable (which is generally the date of their issue), for example:
(i) shares, issued in exchange for cash, are included when cash is receivable;
(ii) shares, issued on the voluntary reinvestment of dividends, are included when dividends are reinvested;
EXAMPLE- when should shares be recognised as issued?
Issue
Shares are included in the weighted average number from the date that consideration is receivable.
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When should an undertaking include new shares in the calculation of the weighted average number of shares outstanding?
Background
Undertaking A owes 100,000 to undertaking B. Undertaking A has suffered cash flow problems, so A’s management entered into negotiation with B’s management concerning the payment of the debt.
An agreement was reached in which A would pay 50,000 in cash now (30 June 20X2) followed by the issue of 10,000 new shares in A on 31 December 20X2.
Management is preparing the financial statements for the year ended 31 December 20X2 and have questioned how the shares issued on 31 December 20X2 should be treated for EPS purposes.
Solution
The new shares issued should be treated as outstanding for EPS purposes from the date that the agreement was reached that they would be accepted in settlement of the liability.
Management of undertaking A should therefore treat the new shares as having been issued on 30 June 20X2 for EPS calculations.
EXAMPLEdividends are reinvested
The board declares a dividend on June 15 th . It will be paid on
June 30 th . You decide to receive extra shares for your dividend, rather than cash. These shares will be included in the weightedaverage calculation from June 30 th . http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
(iii) shares issued, as a result of the conversion of a debt instrument to shares, are included from the date that interest ceases to accrue;
EXAMPLE-date that interest ceases to accrue 1
You hold a bond. You will receive interest until August 31 st , after which it will be converted into a share. The share will be included in the weighted-average calculation from September 1st.
(iv) shares issued, in place of interest (or principal on other financial instruments) are included from the date that interest ceases to accrue;
EXAMPLE-date that interest ceases to accrue 2
You hold a bond. The company is having cash flow problems.
Instead of receiving interest for the period March 1 st —August 1 st , you will receive a share.
You will receive the share on August 20 th .
The share will be included in the weighted-average calculation from March 1st., when interest ceased to accrue.
(v) shares, issued in exchange for the settlement of a liability, are included from the settlement date;
EXAMPLE- shares issued in exchange for the settlement of a liability
In payment for fees, your professional advisors agree to receive shares. Your shares are issued on May 4 th , and this is considered to be the settlement date.
These shares will be included in the weighted-average calculation from May 4 th .
(vi) shares, issued as consideration for the acquisition of an asset other than cash, are included as of the date on which the acquisition is recorded; and
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EXAMPLE- shares issued as consideration for the acquisition of an asset
Rather than pay cash, you issue shares to buy a building. The acquisition of the building is recorded in your books on February
21 st . The shares will be included in the weighted-average calculation from February 21 st .
(vii) shares, issued for the rendering of services, are included as the services are rendered.
.
EXAMPLE- shares issued for the rendering of services
In payment for fees for achieving a stock-exchange listing, your professional advisors agree to receive shares. Your shares are issued on May 14 th , but you do not give your advisors their shares until July 31st.
These shares will be included in the weighted-average calculation from May 14 th , as this was when the services were rendered.
Shares issued, as part of the purchase consideration of an acquisition, are included in the weighted-average number of shares from the date of the acquisition. The acquirer incorporates the results of the acquiree from that date.
EXAMPLE- shares issued as consideration for the acquisition of a company
Rather than pay cash, you issue shares to buy a company. The acquisition of the company is recorded in your books on
November 1 st . The shares will be included in the weightedaverage calculation from November 1 st .
EXAMPLE- calculation of EPS following merger when there are preference shares. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
Issue
Ordinary shares that are issued in a business combination should be included in the weighted average number of shares from the acquisition date. The reason behind this treatment is that the acquirer incorporates into its income statement the profits and losses of the acquirer from that date.
How should preference shares be treated when calculating EPS following a merger if the terms of the preference shares have changed?
Background
Undertaking A merges with undertaking B. Prior to the merger, A has 50,000 8% preference shares in issue and B has 80,000 4% preference shares in issue.
Each preference share (A and B) has a 1.00 nominal value.
The terms of the merger provide for the holders of B’s preference shares to exchange 10 of B’s preference shares for 6 of A’s preference shares.
Solution
Management should deduct the dividend cost of the preference shares in determining the earnings amount for use in the EPS calculation. The dividend cost should be determined for each year presented as if the undertakings had always been merged.
The preference dividend cost to be deducted would therefore be:
50,000 x 8% = 4,000
80,000 x 6/10 x 8% =
7,840
3,840
EXAMPLE- calculation of the weighted averaged number of
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shares
Issue
The weighted average number of outstanding ordinary shares in the period should be considered when calculating basic EPS.
How should an undertaking calculate the weighted average number of outstanding ordinary shares during the year?
Background
Consider the following information:
Date Description
Number of shares
3,000
01/01/20X2 Balance at beginning of the year - ordinary shares
300
01/01/20X2 Balance at beginning of the year - treasury shares
1/06/20X2 Issue of new shares for cash
500
1/12/20X2 Purchase of treasury shares for cash
44
Solution
Ordinary shares
Shares outstanding/ issued
Fraction of period
(months)
Weightedaverage shares
3,000
Treasury shares (300) http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
At 1/1/20X2
Issue of new shares for cash
At 1/06/20X2
2,700
500
5/12
6/12
1,125
1,600
3,200
Purchase of treasury shares for cash
At 1/12/20X2
(44)
1/12 263
3,156
Weighted average number of shares outstanding
2,988
EXAMPLE- impact of treasury shares on EPS calculation
Issue
The number of ordinary shares for the purpose of calculating basic earnings per share should be the weighted average number of ordinary shares outstanding during the period.
How should management treat treasury shares in the calculation
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of basic EPS?
Background
An undertaking acquired 60 of its own ordinary shares at 31
March 20X2 out of a total of 1,000 shares in issue. The undertaking’s year-end is 31 December. The shares will be held in treasury until the next shareholders’ meeting, when they will decide to either cancel them or sell them.
Solution
The weighted average number of own shares held as treasury shares during the period should be deducted from the number of ordinary shares outstanding.
The number of ordinary shares to be used in the EPS calculation at 31 December 20X2 is:
Number of ordinary shares
Treasury shares (60 x 9/12)
1,000
(45)
Weighted average number of ordinary shares outstanding
(denominator) 955
EXAMPLE- calculation of EPS for a merged group
Issue
Ordinary shares that are issued in a business combination should be included in the weighted average number of shares from the acquisition date. The reason behind this treatment is that the acquirer incorporates into its income statement the profits and losses of the acquirer from that date. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
How does management calculate the weighted average number of share of the merged undertaking?
Background
Undertaking A merged with Undertaking B on 30 June 20X3.
The terms of the merger were that undertaking A issued 4 shares for every 3 B shares held.
Solution
The shares in issue of the two undertakings are as follows:
20X2 20X3 20X3
Undertaking
A
1,200
Pre merger
1,200
Post merger
2,400
Undertaking
B
600 900
-
Weighted average number of shares for the merged undertaking.
1,200
+(600 x
4/3)
=2,000
1,200 +(900 x 4/3)
=2,400
2,400
=2,400
Weighting 12/12 6/12
6/12
2,000
2,400
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Shares, that will be issued upon the conversion of a mandatorily convertible instrument, are included in the calculation of basic earnings per share from the date the contract is entered into.
EXAMPLEconversion of a mandatorily convertible instrument
You issue preference shares in 2XX8. In 2X14, each will exchanged for an ordinary share. They will be included in the calculation of basic earnings per share from 2XX8. Any preference dividend will be excluded from the calculation.
Contingently-issuable shares are treated as outstanding, and are included in the calculation of basic earnings per share, only from the date when all necessary conditions are satisfied (i.e. the events have occurred).
EXAMPLEcontingently-issuable shares
You buy a company for shares in 2XX7. If the profits for calendar years 2XX7 and 2XX8 meet budget, you will issue more shares to the vendor in February 2XX9. These additional shares will be included in the weighted-average calculation from January 1st
2XX9, if the targets are met.
EXAMPLE- contingently issuable shares
Issue
Undertakings should consider contingently issuable shares as outstanding, and should include them in the calculation of the basic earnings per share from the date when all necessary conditions are satisfied.
Such concepts should be applied equally to contingently issuable http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share potential ordinary shares when calculating the diluted EPS, with the difference that the contingently issuable potential ordinary shares should be included as of the beginning of the period.
How should an undertaking calculate basic and diluted EPS when there are contingently issuable shares?
Background
Undertaking A operates a chain of coffee shops. The board of directors has ambitious expansion plans and decides to incentivise senior management through the issue of shares contingent on certain performance criteria being met.
The terms of the issue of shares are as follows: a) 1,000 shares will be issued for each new coffee shop opened during the year after a minimum of five shops have been opened
(for example 2,000 shares will be issued if seven shops are opened). b) 10 share s will be issued for every 1% above the group’s profit target that is achieved (for example, 30 shares will be issued if the profit target is exceeded by 3%). The profit target for the year was 1,500,000.
The actual issue of shares will be made on 31 March 20X3.
During 20X2, 12 new coffee shops were opened as follows:
1 January 20X2 3 shops
31 March 2 shops
30 April 2 shops
1 July 2 shops
30 September 2 shops
1 December 1 shops
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The profit after tax for the year, by quarter, was as follows:
Result for period
Cumulative results year-to-date
Quarter 1
Quarter 2
700,000
900,000
700,000
1,600,000
Quarter 3 (150,000)*
1,450,000
Quarter 4 450,000
1,900,000
*Significant cost overruns on shop openings plus an unexpected surge in the price of coffee beans caused a loss to be incurred in the third quarter.
Undertaking A had 7,000,000 in issue at 1 January 20X2.
Solution
Basic earnings per share
Earnings
Q/E
31/03/X2
700,000
Q/E
30/06/X2
900,000
Q/E
30/9/X2
Q/E
Y/E
31/12/X2
31/12/X2
(150,000) 450,000
1,900,000
Weighted average number of shares: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
Shares in issue at
1/1/X2
700,000 700,000 700,000 700,000
700,000
Shares to be issued for coffee shop openings
_(a)
1,333 (b) 4,000 (c) 6,333 (d)
2,916(e)
Shares to be issued for exceeding profit target
_(f) _(f) _(f) _(f)
_(f)
Total shares
700,000 701,333 704,000 706,000
702,917
Basic EPS 1.00 1.28 (0.21) 0.64
2.70
(a) No shares issuable because threshold of five shops has not been exceeded.
(b) 2,000 shares for the two new shops in excess of the threshold of five. The shares are in issue for two months during the quarter
(2000 x 2/3=1,333).
(c) During the third quarter, four new shops in excess of the threshold of five have been open for the entire quarter.
(d) During the fourth quarter, six new shops in excess of the threshold of five have been open for the entire quarter and one new shop in excess of the threshold of five has been open for one month (6,000+1,000x1/3=6,333)
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(e) On a twelve months basis, two new shops in excess of the threshold of five have been open for eight months, two for six months, two for three months and one for one month (2,000 x
8/12 + 2,000 x 6/12 + 2,000 x 3/12 + 1,000 x 1/12 = 2,916)
(f) The exceeding of the profit target cannot be known for certain until the end of the financial year. The issue of these shares therefore remains contingent until the financial year is complete.
The basic EPS calculation should therefore not be adjusted for these contingent shares.
Diluted earnings per share
Q/E
31/3/X2
Q/E
30/6/X2
Q/E
30/9/X2
Q/E
31/12/X2
Y/E
31/12/X2
Earnings 700,000 900,000 (150,000) 450,000
1,900,000
700,000 700,000
700,000
Weighted average number of shares:
700,000 700,000 Shares in issue at
1/1/X2
- Shares to be issued for coffee shop openings
2,000 6,000 7,000
7,000(g)
Shares to be issued for exceeding the profit target
_(h)
60(i)
_(j)
260(k)
260(l) http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
Total shares
700,000 702,060 706,000 707,260
707,260
Diluted
EPS
1.00 1.28 (0.21) 0.64
2.69
(g) On a year-to-date basis, contingently issuable shares should be included as of the beginning of the year.
(h) The profit target of 1.5m is not met; a projection of twelve months earnings based on the quarterly result is not appropriate.
(i) The profit target is exceeded by 6.7% ((1.6m - 1.5m) / 1.5m x
100% = 6.7%), so that 60 shares to be issued (6% x10 shares =
60 shares)
(j) Cumulative result for the year-to-date is less than the target of
1.5m.
(k) The profit target is exceeded by 26.7% ((1.9m - 1.5m) / 1.5m x
100% = 26.7%), so that 260 shares to be issued (26% x10 shares = 260 shares)
(i) On a year-to-date basis, contingently issuable shares should be included as of the beginning of the year.
Shares that are issuable solely after the passage of time are not contingently-issuable shares, because the passage of time is a certainty.
Outstanding shares that are contingently-returnable (subject to recall) are not treated as outstanding, and are excluded from the calculation of basic earnings per share, until the date the shares are no longer subject to recall.
EXAMPLEcontingentlyreturnable shares
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You issue 100m shares in 2XX5 at $10 each. These are a new class of ordinary shares that can be cancelled by the company in
2X10, if the holders are paid $16 each. They will be excluded from the calculation of basic earnings per share, until 2X11. In
2X11, the shares will no longer subject to recall.
Shares may be issued, or reduced, without a corresponding change in resources.
EXAMPLES-no change in resources
(i) a capitalisation or bonus issue (sometimes referred to as a stock dividend);
Rather than pay a cash dividend, you give shareholders additional shares.
(ii) a bonus element in any other issue , for example a bonus element in a rights issue to existing shareholders;
If shareholders hold their shares for 3 years, they will receive 1 bonus share for each 10 shares they own.
(iii) a share split ; and
You have 2m shares. The market price is $1.000 each. You change the shares to 200m of $10 each, to make each share less expensive.
(iv) a reverse share split ( consolidation of shares ).
You have 100m shares in issue.
Your shares have a market value of $0.50 each, following losses.
You decide to consolidate the shares into 2m shares of $25 each.
EXAMPLE- Effect of bonus issue on EPS calculation
Issue
The weighted average number of ordinary shares, for all periods presented, should be adjusted for events that have changed the number of ordinary shares outstanding, without a corresponding change in resources. Those events should be other than the http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share conversion of potential shares.
How should management calculate the basic EPS when a bonus issue is made during the period?
Background
Undertaking A had 400,000 ordinary shares outstanding for many years until 31 July 20X3. On 1 August 20X3, the undertaking made a bonus issue of 1 ordinary share for every 4 shares held.
Undertaking A’s results after tax were as follows:
20X2 20X3
Net profit after tax 1,040,000 3,200,000
Solution
Management should treat the bonus issue as if it had occurred prior to 1 January 20X2, the earliest period presented. The calculation is as follows:
Number of shares after bonus issue 400,000 x 5/4 = 500,000
Earnings per share 20X3 3,200,000 / 500,000 = 6.40
Adjusted earnings per share 20X2
1,040,000 / 500,000 = 2.08
A consolidation of shares generally reduces the number of shares outstanding, without a corresponding reduction in resources.
In a capitalisation issue (or bonus issue or a share split), shares are issued to existing shareholders, for no additional consideration. The number of shares outstanding is increased without an increase in resources.
The number of shares, outstanding before the event, is adjusted for the proportionate change in the number of shares
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outstanding, as if the event had occurred at the start of the earliest period presented.
EXAMPLE-adjustment to the earliest period presented
You have consolidated your shares in 2XX9, from $2 to $30. You present years 2XX5-2XX9 in your accounts. All weighted-average share figures from 2XX5-2XX8 should be divided by 15 ($30/$2) to be comparable with 2XX9.
In a two-for-one bonus issue, the number of shares, outstanding before the issue, is multiplied by three, to obtain the new total number of shares.
When the overall effect is a share repurchase at fair value, the reduction in the number of shares outstanding is the result of a corresponding reduction in resources.
An example is a share consolidation combined with a special dividend. The weighted-average number of shares outstanding for the period in which the combined transaction takes place, is adjusted for the reduction in the number of shares, from the date the special dividend is recognised.
EXAMPLE-share consolidation combined with a special dividend
You decide to consolidate your shares from 15 th September.
20*$1 shares will be replaced by 1*$20 share. On September
30 th, each $20 shareholder will receive a special dividend of $1 per share. The revised number of shares will be included in the weighted-average calculation from September 30 th .
4. Diluted Earnings per Share
If there are no potential shares outstanding, there will be no diluted earnings per share. If there are, diluted earnings per http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share share will be required, wherever basic earnings per share are presented.
For the purpose of calculating diluted earnings per share, an undertaking shall adjust profit, and the weighted-average number of shares outstanding, for the effects of all dilutive potential shares.
EXAMPLEdiluted earnings per share
– convertible bonds
You have 100m* $10 shares in issue. You also have 2m*$100 convertible bonds. The bonds have an interest rate of 8%. The tax rate =25%. Each bond will be convertible into 10 shares.
Earnings for the period were $740m.
The basic earnings per share calculation =$740m/100m = $7,40 per share.
To calculate the diluted earnings per share:
1. Add back the cost of interest that was payable on the bonds.
The amount is to be calculated after tax:
2m* $100*8%*(1-25%)=$12m
The profit excluding the interest payment = $740m + $12m =
$752m.
2. Add the number of new shares that would be issued, if all bonds were converted, to the current number of shares:
2m*10shares= 20m + 100m =120m shares and potential shares.
3. Divide the revised profit by the revised number of shares:
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$752m / 120m shares and potential shares = $6,27 per share.
Analysis.
The bonds may be converted in the future. If they were converted today, earnings per share would fall from $7,40 per share to
$6,27 per share. Whilst earnings would rise, due to interest not needing to be paid, the number of shares would rise steeply to achieve this, leaving existing shareholders with less value than they currently enjoy.
EXAMPLE- adjustment of earnings for the effects of convertible debentures
Issue
For the purpose of calculating diluted EPS, the amount of net profit or loss for the period attributable to ordinary shareholders should be adjusted by the after-tax effect of any changes in income or expense that would result from conversion of the dilutive potential shares.
How should management adjust earnings for use in the calculation of diluted EPS where an undertaking has convertible debentures in issue and a profit-related bonus scheme?
Background
Undertaking A has in issue 25,000 4% debentures with a nominal value of 1.00. The debentures are convertible to ordinary shares at a rate of 1:1 at any time until 20X9. The undertaking’s management receives a bonus based on 1% profit before tax.
Undertaking A’s results for 20X2 showed a profit before tax of
80,000 and a profit after tax of 64,000 (tax rate is 20%).
Solution
Management should adjust earnings for use in the calculation of http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share diluted EPS for the reduction in the interest charge that would occur if the debentures were converted, plus the increase in the bonus payment that would arise from the increased profit.
This is illustrated below:
Profit after tax = 64,000
Add: Reduction in interest cost
25,000 x 4% = 1,000
Less tax expense 20% x 1,000= (200)
Less: Increase in management bonus 1,000 x 1% = (10)
Add tax benefit 20% x 10 = 2
Earnings for the purposes of dilutive EPS = 64,792
Profit after tax 64,000
Add: Reduction in interest cost
25,000 x 4% 1,000
Less tax expense 20% x 1,000
Less: Increase in management bonus
1,000 x 1%
Add tax benefit 20% x 10
Earnings for the purposes of dilutive EPS
(200)
(10)
2
64,792
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The objective of diluted earnings per share is to give effect to all dilutive potential ordinary shares outstanding during the period.
As a result:
(i) profit is increased by the:
after-tax amount of dividends and
interest recorded in the period
EXAMPLEdiluted earnings per share
– convertible shares
You have 100m*$10 shares in issue. You also have 3m*$400 convertible preference shares. The shares have a dividend rate of 11%. The dividends have been paid after tax. Each convertible preference share will be convertible into 40 ordinary shares.
Earnings for the period were $740m.
The basic earnings per share calculation =$740m/100m = $7,40 per share.
To calculate the diluted earnings per share:
1. Add back the cost of dividends that was payable on the shares:
3m* $400*11%=$132m
The profit excluding the preference dividend = $740m + $132m =
$872m.
2. Add the number of new shares that would be issued, if all preferred shares were converted, to the current number of shares:
3m*40shares= 120m + 100m =220m shares and potential shares.
3. Divide the revised profit by the revised number of shares: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
$872m / 220m shares and potential shares = $3,96 per share.
Analysis.
The preference shares may be converted in the future. If they were converted today, earnings per share would fall from $7,40 per share to $3,96 per share. Whilst earnings would rise, due to preference dividends not needing to be paid, the number of shares would rise steeply to achieve this, leaving existing shareholders with less value than they currently enjoy. in respect of the dilutive potential shares, and is adjusted for any other changes in income (or expense) that would result from the conversion of the dilutive potential shares; and
EXAMPLE- Effect of potential ordinary shares on consolidated EPS
Issue
A subsidiary may issue potentially ordinary shares which are convertible into either ordinary shares of the subsidiary or ordinary shares of the reporting undertaking.
If these potential ordinary shares of the subsidiary have a dilutive effect on the consolidated basic EPS of the reporting undertaking, then they are included in the calculation of consolidated diluted EPS.
How should potential ordinary shares issued by a subsidiary be included in the consolidated EPS calculation?
Background
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A parent has a subsidiary that has issued securities entitling holders to obtain ordinary shares of the subsidiary. The following information is relevant:
Parent a) net profit was 22,000 (excluding the earnings of, or dividends paid by, the subsidiary); b) 20,000 ordinary shares were outstanding throughout the period; the parent undertaking had not issued any other securities; c) the parent undertaking owns a 70% interest in the subsidiary
(1,400 ordinary shares of the subsidiary); and d) the parent undertaking owns 50 warrants issued by the subsidiary.
Subsidiary a) net profit was 4,000; b) 2,000 ordinary shares were outstanding throughout the period; and c) warrants exercisable to purchase 500 ordinary shares of the subsidiary at 5 per share were outstanding throughout the period.
The average market price for ordinary shares of the subsidiary for the period was 10.
There were no inter-company transactions or eliminations, other than dividends. Taxes are not to be considered for simplification purposes.
Solution http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
The dilutive impact of the warrant issued by the subsidiary on the consolidated EPS should be considered by taking the parent’s profits before dividends from the subsidiary as the numerator adjusted for the parent’s interest in subsidiary’s earnings derived from the subsidiary’s diluted EPS. The subsidiary’s diluted EPS must therefore be calculated as a first step.
Subsidiary’s EPS calculation
Basic EPS = Net profit/shares outstanding = 4,000 / 2,000 = 2.00
The diluted EPS is calculated by dividing the net profit by the number of outstanding shares plus the number of potential ordinary shares, which will have a dilutive impact. The latter are calculated by the treasury stock method.
The treasury stock method assumes that the payment received on the exercise of the warrant is used to purchase treasury stocks at current market price. This difference has a dilutive impact (dilutive shares), if the number of treasury stocks is less the number of stocks issued under the warrant,
Diluted EPS = (Net profit) / (shares outstanding + dilutive shares)
Dilutive shares = ((10-5) / 10) x 500 shares) = 250
Subsidiary’s diluted EPS = 4,000 / (2,000 + 250) = 1.78
Consolidated basic EPS calculation
Parent’s interest in the subsidiary’s earnings derived from the subsidiary’s basic EPS:
= Subsidiary’s basic EPS x Subsidiary’s shares outstanding x
Parent’s interest
= (2.00 x 2,000 x 70%) = 2,800
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Consolidated basic EPS:
= (Parent’s net profit + parent’s interest in the subsidiary's earnings derived from the basic EPS) / Number of parent’s shares outstanding
= (22,000 + 2,800) / 20,000 = 1.24
Consolidated diluted EPS calculation
Parent’s interest in the subsidiary’s earnings derived from the subsidiary’s diluted EPS:
= Subsidiary’s diluted EPS x Subsidiary’s shares outstanding x
Parent’s interest
= 1.78 x 2,000 x 70% = 2,492
Parent’s interest in the subsidiary’s earnings attributable to warrants:
= Subsidiary’s diluted EPS x Subsidiary’s dilutive shares x
Parent’s interest in warrants
= 1.78 x 250 x (50 / 500) = 45
Consolidated diluted EPS:
= (Parent’s net profit + parent’s interest in the subsidiary's earnings derived from the diluted EPS + Parent’s interest in the subsidiary’s earnings attributable to warrants) / Number of parent’s shares outstanding
= (22,000 + 2,492 + 45) / 20,000 = 1.23
(ii) the weighted-average number of shares outstanding is increased by the weighted-average number of additional shares that would have been outstanding, assuming the conversion of all dilutive potential shares.
EXAMPLEdiluted earnings per share
– convertible bonds and shares http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
(this combines the previous two examples)
You have 100m*$10 shares in issue. You have 2m*$100 convertible bonds. The bonds have an interest rate of 8%. The tax rate =25%. Each bond will be convertible into 10 shares.
Earnings for the period were $740m.
You also have 3m*$400 convertible preference shares. The shares have a dividend rate of 11%. The dividends have been paid after tax. Each convertible preference share will be convertible into 40 ordinary shares. Earnings for the period were
$740m.
The basic earnings per share calculation =$740m/100m = $7,40 per share.
To calculate the diluted earnings per share:
1. Add back the cost of interest that was payable on the bonds.
The amount is to be calculated after tax:
2m* $100*8%*(1-25%)=$12m
2. Add back the cost of dividends that was payable on the convertible preference shares:
3m* $400*11%=$132m
The profit excluding the preference dividend and interest payments
= $740m +$12m+ $132m = $884m.
3. Add the number of new shares that would be issued, if all bonds and preferred shares were converted, to the current number of shares:
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(2m*10shares)+ (3m*40shares)= 20m+120m + 100m =240m shares and potential shares.
4. Divide the revised profit by the revised number of shares:
$884m / 240m shares and potential shares = $4,02 per share.
Analysis.
The bonds and preference shares may be converted in the future. If they were converted today, earnings per share would fall from $7,40 per share to $4,02 per share.
Earnings
For the purpose of calculating diluted earnings per share, an undertaking shall adjust profit by the after-tax effect of:
(i) any dividends (or other items) related to dilutive potential shares, deducted in arriving at profit;
(ii) any interest recognised in the period, related to dilutive potential shares; and
(iii) any other changes in income (or expense), that would result from the conversion of the dilutive potential shares.
After the potential shares are converted into shares, the above 3 issues ((i)-(iii)) disappear. Instead, the new shares are entitled to participate in profit.
Therefore, profit is adjusted for the items identified in (i)-(iii) and any related taxes. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
The expenses associated with potential shares include transaction costs and discounts.
EXAMPLE-expenses
You have 100m*$10 shares in issue. You also have 3m*$400 convertible preference shares. The shares have a dividend rate of 11%. The dividends have been paid after tax. Each convertible preference share will be convertible into 40 ordinary shares.
Earnings for the period were $740m.
For conversion, the professional expenses for registration and tax are 1% of the total value of the new shares to be issued.
The basic earnings per share calculation =$740m/100m = $7,40 per share.
To calculate the diluted earnings per share:
1. Add back the cost of dividends that was payable on the shares:
1. 3m* $400*11%=$132m
2. Calculate the cost of conversion:
3m* $400*1%=$12m
The profit excluding the preference dividend, but adding the cost of conversion = $740m + $132m -$12m= $860m.
3. Add the number of new shares that would be issued, if all preferred shares were converted, to the current number of shares:
3m*40shares= 120m + 100m =220m shares and potential shares.
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4. Divide the revised profit by the revised number of shares:
$860m / 220m shares and potential shares = $3,91 per share.
Analysis.
The preference shares may be converted in the future. If they were converted today, earnings per share would fall from $7,40 per share to $3,91 per share. The costs of conversion =$0,05 per share ($3,96-$3,91).
EXAMPLE- Tax rate used in diluted EPS calculation
Issue
The expenses associated with potential ordinary shares include fees and discount or premium that are accounted for as yield adjustments.
The amounts of dividends, interest and other income or expense are adjusted for any taxes, borne by the enterprise, that are attributable to them.
Should management use an undertaking’s effective tax rate when calculating diluted EPS?
Solution
No. Management should use the standard tax rate because the tax benefit the undertaking enjoys is based on the standard rate of tax.
The effective tax rate may be influenced by factors affecting the undertaking’s results other than the expenses associated with the potential ordinary shares. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
The conversion of potential shares may lead to consequential changes in income, or expenses. The reduction of interest expense related to potential shares, and the resulting increase in profit may lead to an increase in the expense related to an employee profit-sharing plan.
For the purpose of calculating diluted earnings per share, profit is adjusted for any such changes in income, or expense.
EXAMPLE-employee profit-sharing plan
Your employees benefit from an employee profit-sharing plan, which provides 5% of net profit after tax, as calculated for basic earnings per share or diluted earnings per share, whichever is the lower.
Using the previous example, diluted earnings per share are lower, so the calculation will be:
5% of $860m = $43m.
The revised diluted earnings per share would be =
$860m-$43m = $817m / 220m shares and potential shares =
$3,71
Basic earnings are $740m. 5% would yield $37m.
The revised basic earnings per share would be:
($740m-$43m)/100m shares = $6,97 per share.
Shares
For the purpose of calculating diluted earnings per share, the number of shares shall be the weighted-average number of shares, plus the weighted-average number of shares that would
24

be issued on the conversion of all the dilutive potential shares into shares.
Dilutive potential shares shall be deemed to have been converted into shares at the start of the period or, if later, the date of the issue of the potential shares.
Dilutive potential shares shall be determined independently for each period presented. The number of dilutive potential shares, included in the year-to-date period, is not a weighted-average of the dilutive potential shares, included in each interim computation.
Potential shares are weighted for the period they are outstanding.
Potential shares, that are cancelled (or allowed to lapse) during the period, are included in the calculation of diluted earnings per share only for the portion of the period during which they are outstanding.
EXAMPLE-lapsed shares
You are producing the accounts for 2XX8. On January 1 st , there were
5m potential shares. Most of these related to directors’ share option schemes.
On June 30 th , a director left, and his 1m share options were cancelled.
This reduced the potential shares to 4m. This figure remained unchanged until December 31 st . The potential shares would be
5m for the first half-year, and 4m for the second half-year.
Potential shares, that are converted into shares during the period, are included in the calculation of diluted earnings per share from the start of the period to the date of conversion; from the date of conversion, the resulting shares are included in both basic (and diluted) earnings per share. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
The number of shares that would be issued on conversion of dilutive potential shares is determined from the terms of the potential shares. When more than one basis of conversion exists, the calculation assumes the most advantageous conversion rate (or exercise price) for the holder of the potential shares.
EXAMPLE-most advantageous conversion rate
You issued some preference shares for $100 each, five years ago. The holders have the option next year to convert their shares into cash, for $125 per share, or alternatively for one ordinary share.
Your ordinary shares were trading at $143 per share at the balance sheet date. For the calculation, it should be assumed that holders will choose to convert to ordinary shares, rather than receive cash.
A subsidiary, joint venture or associate may issue to parties other than the parent, venturer or investor potential ordinary shares that are convertible into either ordinary shares of the subsidiary, joint venture or associate, or ordinary shares of the parent, venturer or investor (the reporting undertaking).
If these potential ordinary shares of the subsidiary, joint venture or associate have a dilutive effect on the basic earnings per share of the reporting undertaking, they are included in the calculation of diluted earnings per share.
Dilutive Potential Shares
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Potential shares shall be treated as dilutive only when their conversion to shares would reduce earnings per share from continuing operations.
EXAMPLE-dilutive potential shares
The basic earnings per share calculation = $7,40.
The diluted earnings per share will be $3,71. (see EXAMPLEemployee profit-sharing plan above )
The conversion would be dilutive, as the ordinary shareholders would see their earnings per share fall.
An undertaking uses profit from continuing operations as the control number, to establish whether potential shares are dilutive, or antidilutive. Profit is adjusted, and excludes items relating to discontinuing operations.
Potential shares are antidilutive when their conversion to shares would increase earnings per share from continuing operations.
The calculation of diluted earnings per share does not assume conversion, exercise, or other issue of potential shares that would have an antidilutive effect on earnings per share.
EXAMPLE-antidilutive potential shares
The basic earnings per share calculation = $7,40.
The diluted earnings per share will be $3,71. (see EXAMPLEemployee profit-sharing plan)
The conversion would be dilutive, as the ordinary shareholders would see their earnings per share fall. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
You also have some high-interest bonds, which would be antidilutive (increase the earnings per share) if converted. These will not be included in the diluted earnings per share calculation.
In determining whether potential shares are dilutive or antidilutive, each issue of potential shares is considered separately. The sequence in which potential shares are considered may affect whether they are dilutive.
To maximise the dilution of basic earnings per share, each issue of potential shares is considered in sequence, from the most dilutive to the least dilutive: dilutive potential shares with the lowest ‘earnings per incremental share’ are included in the diluted earnings per share calculation, before those with a higher earnings per incremental share.
Options and warrants are generally included first because they do not affect the numerator of the calculation.
Options, warrants and their equivalents
For the purpose of calculating diluted earnings per share, an undertaking shall assume the exercise of dilutive options and warrants of the undertaking.
The assumed proceeds from these instruments shall be regarded as having been received, from the issue of shares, at the average market price of shares during the period.
EXAMPLE-warrants-average market price
You have 200m shares in issue.
You have issued warrants for 10m shares to be exercised the following year.
The issue price will be $37.
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The average market price of your shares during the current period was $37.
Such shares are assumed to be fairly priced, and to be neither dilutive, nor antidilutive. They are ignored in the calculation of diluted earnings per share.
The difference between the number of shares issued, and the number of shares that would have been issued at the average market price of shares during the period, shall be treated as an issue of shares for no consideration.
EXAMPLE- Out-of-the-money share options
Issue
For the purpose of calculating diluted earnings per share, an undertaking should assume the exercise of dilutive options and other dilutive potential ordinary shares of the undertaking.
The assumed proceeds from these issues should be considered to have been received from the issue 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 and other share purchase arrangements are dilutive when they would result in the issue of ordinary shares for less than fair value. The amount of dilution is fair value less the issue price.
Fair value for the purpose of calculating diluted EPS is calculated on the basis of the average price of the shares in the period. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
Should management include out-of-the-money share options in the diluted EPS calculation?
Background
An undertaking issued share options to its employees on 1
January 20X3. The share options are exercisable upon issue.
The exercise price of the share options is 20. The average share price during the year was as follows:
Average share price 1 January 20X3 to 30 June 20X3 8
Average share price 1 July 20X3 to 31 December 20X3 22
Average share price for the year to 31 December 20X3 15
Management is preparing the financial statements for the year ended 31 December 20X3 and is considering the effect on diluted
EPS of the following two scenarios for year-end share prices: a) the share price is 18 at 31 December 20X3; or b) the share price is 23 at 31 December 20X3.
Solution a) The year-end share price is less than the exercise price:
The share options should not be included in the diluted EPS calculation as they are out-of-the-money, that is, exercise price is higher than average price of the ordinary shares.
Out-of-the-money share options are anti-dilutive because the undertaking would issue fewer ordinary shares if the share options were exercised than if the same amount of cash was received by issuing shares at fair value. b) The year-end share price is more than the exercise price
There is no change in the answer from that given in a) above
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because the extent of dilution is calculated by reference to the average share price during the period.
The fair value of the shares is 15 and therefore the options are still out of the money.
The answer would change, however, if the options had been issued at 1 July 20X3.
The average price of the shares during the second half of the year was above the exercise price options, so that the share options would be included in the diluted EPS calculation.
EXAMPLE- Treatment of share option schemes where shares will be purchased from market
Issue
For the purpose of calculating diluted earnings per share, an undertaking should assume the exercise of dilutive options and other dilutive potential ordinary shares of the undertaking.
The assumed proceeds from these issues should be considered to have been received from the issue 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.
How should management account for the impact on EPS of share option schemes where the undertaking will purchase the shares from the market to satisfy the obligations under the option scheme?
Background http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
A listed undertaking issues share options to its employees as a form of employee compensation. The options are exercisable immediately at grant date.
Management does not have the authority to issue new shares, having already issued the maximum number of shares authorised by the undertaking’s articles of association. Shares will therefore be bought in the market at market price to satisfy the options.
Solution
The share options are not potential ordinary shares because there are no changes in the number of shares before and after the share options are exercised. These share options should not be included in the diluted EPS calculation.
The treatment would change, however, if either of the following conditions applied: a) Shares purchased by management in advance of exercise of the options would be treated as treasury shares. The treasury shares would be excluded from the calculation of basic EPS but included as a dilutive element in the calculation of diluted EPS. b) Management’s ability to issue new shares, that is, if the maximum number of authorised shares had not already been reached, would enable management to meet the undertaking’s obligations through the issue of new shares.
The options should then be treated as dilutive in accordance with the requirements of IAS 33.
Options and warrants are dilutive, when they would result in the issue of shares for less than the average market price of shares during the period. The amount of the dilution is the average market price of shares during the period, minus the issue price.
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EXAMPLE-warrants- below average market price
You have issued warrants for 10m shares to be exercised the following year.
The issue price will be $33.
The average market price of your shares during the current period was $37.
The $4 ($37-$33) is the dilution per share of the warrants.
Such shares generate no proceeds, and have no effect on profit attributable to ordinary shares outstanding. They are dilutive, and are added to the number of shares outstanding in the calculation of diluted earnings per share.
Options and warrants have a dilutive effect, only when the average market price of shares during the period, exceeds the exercise price of the options, or warrants (i.e. they are ‘in the money’). Previously reported earnings per share are not retroactively adjusted, to reflect changes in prices of shares.
Staff share options with fixed terms are treated as options in the calculation of diluted earnings per share. They are treated as outstanding on the grant date.
EXAMPLE-staff share options
In 2XX5, you issued some staff share options that can be exercised after 3 years’ service. They are treated as outstanding on the grant date in 2XX5, for diluted earnings per share purposes.
Performance-based staff share options are treated as contingently-issuable shares, because their issue is contingent upon satisfying specified conditions, in addition to the passage of time.
EXAMPLE-performance-based staff share options 1 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
In 2XX8, you issued some staff share options that can be exe rcised if profits for the next 3 years’ service grow by more than 10% each year. They are treated as contingently-issuable shares, for diluted earnings per share purposes. (See below)
5. Convertible instruments
The dilutive effect of convertible instruments shall be reflected in diluted earnings per share.
Convertible preference shares are antidilutive, whenever the amount of the dividend on such shares for the current period, exceeds basic earnings per share.
EXAMPLE-convertible preference shares – antidilutive
The dividend on your convertible preference shares is 15%. The earnings per share was 12% of the average market price of the share. As each preference share earned more, it is antidilutive.
Similarly, convertible debt is antidilutive when its interest (net of tax and other changes in income, or expense) per ordinary share obtainable on conversion, exceeds basic earnings per share.
EXAMPLE-convertible debt – antidilutive
The interest cost of your convertible bonds is 11% after tax. The earnings per share was 8% of the average market price of the share. As each bond earned more, it is antidilutive.
6. Contingently-issuable shares
As in the calculation of basic earnings per share, contingentlyissuable ordinary shares are treated as outstanding, and included
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in the calculation of diluted earnings per share, if the conditions are satisfied (ie the events have occurred).
Contingently-issuable shares are included from the start of the period (or from the date of the contingent share agreement, if later).
If the conditions are not satisfied, the number of contingentlyissuable shares included in the diluted earnings per share calculation is based on the number of shares that would be issuable, if the end of the period were the end of the contingency period.
EXAMPLE-performance-based staff share options 2
In 2XX8, you issued staff share options for 40m shares, that can be exercised if profits for the next 3 years grow by more than
10% each year. They are treated as contingently-issuable shares, for diluted earnings per share purposes.
At the end of 2XX8, you add the 40m shares to the weighted – average figure, as if they had been issued on December 31 st
2XX8.
At the end of 2XX9, the profit target has not been met, so the shares are cancelled as of December 31 st 2XX9. The figures for
2XX8 are not restated.
Restatement is not permitted, if the conditions are not met when the contingency period expires.
If attainment of a specified amount of earnings is the condition for contingent issue, and if that amount has been attained at the end of the reporting period, but must be maintained beyond the end of the reporting period for an additional period, then the additional http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share ordinary shares are treated as outstanding, if the effect is dilutive, when calculating diluted earnings per share.
EXAMPLE-performance-based staff share options 3
In 2XX8, you issued staff share options for 40m shares, that can be exercised if profits for the next 3 years’ service grow by more than 10% each year.
They are treated as contingently-issuable shares, for diluted earnings per share purposes. At the end of 2XX8, you add the
40m shares to the weighted –average figure, as if they had been issued on December 31 st 2XX8.
At the end of 2XX9, the first profit target has been met, so the shares continue to be counted as of December 31 st 2XX9, even though further targets must be met.
The calculation of basic earnings per share does not include contingently-issuable shares, until the end of the contingency period.
The number of shares contingently-issuable may depend on the future market price of the ordinary shares. In that case, if the effect is dilutive, the calculation of diluted earnings per share is based on the number of shares that would be issued, if the market price at the end of the reporting period were the market price at the end of the contingency period.
EXAMPLE- shares contingently-issuable
In 2XX4, you purchase a company with your shares. If your share price is below $200 at the end of 2XX6, you will issue 10m shares for each $5 below that price.
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The market price at the end of 2XX4 is $185. The calculation uses 30m shares ((200-185)*10m) for these shares.
If the condition is based on an average of market prices over a period of time, which extends beyond the end of the reporting period, the average for the period of time that has lapsed is used.
The number of shares contingently-issuable may depend on future earnings, and prices of the shares.
EXAMPLE- Share option subject to performance criteria
Issue
Ordinary shares whose issue is contingent on the occurrence of certain events shall be considered outstanding and included in the computation of diluted earnings per share if the conditions have been met (the events occurred).
Contingently issuable shares should be included as of the beginning of the period (or as of the date of the contingent share agreement, if later).
If the conditions have not been met, the number of contingently issuable shares included in the diluted earnings per share computation is based on the number of shares that would be issuable if the end of the reporting period was the end of the contingency period.
How should management treat the following share options granted when calculating diluted EPS?
Background
Management grants share options to employees on 1 January
20X2 with the following terms: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share a) The undertaking meets its profit targets for 20X2 and 20X3.
The profit targets are 1,000 and 2,000 respectively for 20X2 and
20X3; b) The employee must stay with the undertaking for an additional year if condition (i) is met, that is, until 31 December 20X4.
Management is considering the calculation of diluted EPS under the following conditions: a) As at 31 December 20X3, the undertaking has met its profit target for the last two years; however, the option is still not exercisable because the employee needs to stay for another year. b) As at 31 December 20X2, the undertaking’s profit is 1,500. c) As at 31 December 20X2, the undertaking’s profit is 4,500. d) as for (a) except that the undertaking has to meet revenue growth target based on a market index for 20X2 and 20X3. The revenue growth must be at least 5% above the industry average revenue growth for both years. As at 31 December 20X2, the undertaking’s revenue growth has exceed industry average by
11%.
Solution
Management should treat the share options in the calculation of diluted EPS as follows: a) The shares issued under the share options should be included in diluted EPS calculation.
The number of contingently issuable shares included in diluted
EPS computation is based on the number of shares that would
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be issuable if the end of the reporting period was the end of the contingency period.
All of the option performance measures have been met except that the employee must stay until 31 December 20X4. According to paragraph 31 of IAS 33, 31 December 20X3 is taken to be the end of the contingency period, and accordingly all conditions have been met at 31 December 20X3. b) The shares issued under the share options should not be included in diluted EPS calculation.
The undertaking has must recognise a cumulative profit of 3,000 for the two years in order to meet the conditions. The undertaking has only recognised a cumulative profit of 1,500, and accordingly not all conditions are met. c) The shares issued under the share options should be included in diluted EPS calculation.
The undertaking must recognise a cumulative profit of 3,000 for the two years in order to meet the conditions. The undertaking has made a cumulative profit of 4,500, and accordingly all conditions are met. d) The shares issued under the share options should not be included in diluted EPS calculation.
One of the conditions for the share options to be exercisable is for the undertaking to achieve revenue growth of at least 5% higher than the industry average for both years.
As at 31 December 20X2, the undertaking has exceeded the revenue growth of the industry by 11%; however, the average industry revenue growth for 20X3 is not yet known as at 31 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
December 20X2. The condition is therefore not met at 31
December 20X2. Forecast industry revenue growth should not be used.
In such cases, the number of shares included in the diluted earnings per share calculation is based on both conditions
(earnings to date and the current market price at the end of the reporting period). Contingently-issuable shares are not included in the diluted earnings per share calculation unless both conditions are met.
EXAMPLE- shares contingently-issuable-conditions not met
In 2XX8, 100m share options were provided to staff. The shares will be issued in 2X11, if earnings exceed $1.450m, and the share price exceeds $775.
At the end of 2XX8, earnings were $1.265, but the share price had exceeded $775. As only one of the conditions had been met, these potential shares were not included in the diluted earnings per share calculation.
In other cases, the number of shares contingently-issuable depends on a condition, other than earnings or market price (for example, the opening of a specific number of retail stores).
These contingently-issuable shares are included in the calculation of diluted earnings per share.
7. Contracts that may be settled in ordinary shares (or cash)
When an undertaking has issued a contract that may be settled in shares, or cash at the undertaking’s option , the undertaking shall presume that the contract will be settled in shares, and the
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resulting potential shares shall be included in diluted earnings per share, if the effect is dilutive.
EXAMPLE-cash or shares 1
You are buying a building. The vendor gives you the option to pay the $10m in cash, or by issuing shares to the same value.
For the purpose of diluted earnings per share calculations, you assume that payment will be made in shares. If the shares are issued at below market price, you include them in the calculation.
For contracts that may be settled in shares, or cash at the holder's option , the more dilutive of cash settlement and share settlement, shall be used in calculating diluted earnings per share.
EXAMPLE-cash or shares 2
An example of a contract that may be settled in shares, or cash, is a debt instrument that, on maturity, gives the undertaking the unrestricted right to settle the principal amount in cash, or in its own shares.
Another example is a written put option, that gives the holder a choice of settling in shares, or cash.
Purchased options
Contracts, such as purchased put options and purchased call options (i.e. options held by the undertaking on its own shares) are not included in the calculation of diluted earnings per share, as including them would be antidilutive. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
The put option gives the company the right to sell shares, if it wishes.
It would be exercised only if the exercise price were higher than the market price.
A call option allows the company to buy shares at a fixed price.
This would reduce the capital of the company. A call option would be exercised only if the exercise price were lower than the market price.
Written put options
Contracts that require the undertaking to repurchase its own shares, such as written put options and forward purchase contracts, are reflected in the calculation of diluted earnings per share, if the effect is dilutive.
EXAMPLE-put option
You have bought the right to sell a share at $150. The right lasts for a 3-month period. If the market price is $130, you can buy a share at $130 and sell it for $150, making a profit of $20.
If the period has not expired, you may wish to wait, hoping that the market price will fall further. If the market price falls to less than $130, your profit will increase.
Any price below $150 is called ‘in the money’, as a profit can be made.
Any price above $150 is ‘out of the money’, as no profit can be made at that price.
If these contracts are ‘in the money’ during the period (ie the exercise ‘settlement’ price is above the average market price for
33

that period), the potential dilutive effect on earnings per share is calculated.
Application Guidance
Profit Attributable to the Parent Undertaking
For the purpose of calculating earnings per share, profit refers to profit of the consolidated undertaking, after adjusting for minority interests.
Rights Issues
The issue of shares, at the time of exercise (or conversion) of potential shares does not usually give rise to a bonus element.
This is because the potential shares are usually issued for full value, resulting in a proportionate change in the resources available to the undertaking.
Where the rights are to be publicly traded separately from the shares before the exercise date, fair value for the purposes of this calculation is established, at the close of the last day on which the shares are traded together with the rights.
EXAMPLE- Rights issue
Issue
The issue of ordinary shares could have a bonus element, for example in a rights issue, where the exercise price is often less than the fair value of the shares.
The calculation of EPS should consider the bonus element when calculating the number of ordinary shares outstanding prior to the issue. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
How should an undertaking calculate basic EPS when a rights issue with a bonus element is issued during the period?
Background
Undertaking A makes a rights issue. The terms of the issue are one new share for each five shares held at an exercise price of
100.00. The last date that a shareholder can take up the rights offer is 31 March 20X3.
The number of shares outstanding prior to the rights issue was
625,000, and fair value of the shares on 31 March 20X3 was
172.00.
The rights issue was fully taken up and 125,000 shares (625,000
÷ 5) were issued.
The profit after tax for undertaking A was as follows:
20X2 20X3
Net profit after tax 10,000,000 12,000,000
Solution
Management should perform the calculation of EPS in four steps: a) calculate the theoretical ex-rights value per share; b) calculate the adjustment factor to reflect the bonus element of the rights issue; c) use the adjustment factor to determine the number of shares to be used in the calculation of EPS for the periods prior to 31
March 20X3; and d) calculate EPS.
This is illustrated below:
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Calculation of theoretical ex-rights value per share
Fair value of all outstanding shares + total amount received from exercise of rights
Number of shares outstanding prior to exercise + number of shares issued in the exercise
(172.00 x 625,000 shares) + (100.00 x 125,000 shares)
= 160.00
625,000 shares + 125,000 shares
Calculation of adjustment factor:
Fair value per share prior to exercise of rights = 172.00 =
1.075
Theoretical ex-rights value per share 160.00
Calculation of earnings per share:
Description Calculation EPS
10,000,000/625,000 shares 20X2 EPS as originally presented
20X2 EPS restated for rights issue
20X3 EPS including effects of rights issue
10,000,000/(625,000 shares x
1.075)
12,000,000/ [(625,000 x 1.075 x
3/12) + (750,000 x 9/12)]
16.00
14.88
16.43
Average Market Price of Ordinary Shares http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
To calculate diluted earnings per share, the average market price of shares is calculated on the basis of the average market price of the shares during the period.
A simple average of weekly (or monthly) prices is usually adequate.
Generally, closing market prices are adequate for calculating the average market price. When prices fluctuate widely, an average of the high and low prices produces a more representative price.
The method used to calculate the average market price is used consistently, unless it is no longer representative.
An undertaking that uses closing market prices to calculate the average market price for several years of relatively stable prices, might change to an average of high and low prices, if prices start fluctuating, and the closing market prices no longer produce a representative average price.
Options, Warrants and Their Equivalents
Options (or warrants) to purchase convertible instruments are assumed to be exercised to purchase the convertible instrument, whenever it is profitable to do so.
In the calculation of diluted earnings per share, those options (or warrants) have a dilutive effect if the holder buys or sells at a better price than would be achieved in the market.
If tendering cash is more advantageous to the option (or warrant) holder and the contract permits tendering cash, tendering of cash is assumed
Similar treatment is given to preference shares that have similar provisions (or to other instruments) that have conversion options,
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that permit the investor to pay cash for a more favourable conversion rate.
The underlying terms of certain options (or warrants) may require the proceeds received from the exercise of those instruments to be applied to redeem debt, or other instruments, of the undertaking (or its parent or a subsidiary).
In the calculation of diluted earnings per share, those options (or warrants) are assumed to be exercised, and the proceeds applied to purchase the debt, at its average market price, rather than to purchase ordinary shares.
However, the excess proceeds received from the assumed exercise, over the amount used for the assumed purchase of debt, are considered (assumed to be used to buy back ordinary shares) in the diluted earnings per share calculation. Interest
(net of tax) on any debt assumed to be purchased, is added back as an adjustment to the profit.
Written put options
EXAMPLE-written put options http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
An undertaking has outstanding 120 written put options on its shares with an exercise price of $35 (=$4,200). The average market price of its shares for the period is $28.
In calculating diluted earnings per share, the undertaking assumes that it issued 150 shares at $28 per share at the start of the period to satisfy its put obligation of $4,200.
The difference between the 150 shares issued and the 120 shares received from satisfying the put option (30 incremental shares) is added to the denominator in calculating diluted earnings per share.
Instruments of Subsidiaries, Joint Ventures or Associates
Instruments issued by a subsidiary, joint venture or associate that enable their holders to obtain shares in those organisations are included in calculating the diluted earnings per share data of those organisations.
Those earnings per share are then included in the reporting undertaking’s earnings per share calculations, based on the reporting undertaking’s holding of those organisations.
Instruments of a subsidiary, joint venture or associate that are convertible into the reporting undertaking’s shares are included among the potential shares of the reporting undertaking, for the purpose of calculating diluted earnings per share.
Likewise, options or warrants issued by such organisations to purchase shares of the reporting undertaking are considered among the potential shares of the reporting undertaking, in the calculation of consolidated diluted earnings per share.
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For the purpose of determining the earnings per share impact of instruments issued by a reporting undertaking that are convertible into shares of a subsidiary, joint venture or associate, the instruments are assumed to be converted, and the numerator
(profit) adjusted.
In addition to those adjustments, the numerator is adjusted for any change in the profit (such as dividend income, or equity method income) that is attributable to the increase in the number of shares of the subsidiary, joint venture or associate outstanding, as a result of the assumed conversion.
The denominator of the diluted earnings per share calculation is not affected, as the number of shares of the reporting undertaking would not change upon assumed conversion.
Participating Equity Instruments and Two-Class Ordinary
Shares
The equity of some undertakings includes:
(i) instruments that participate in dividends with shares, according to a predetermined formula (for example, two for one) with, at times, an upper limit on the extent of participation (for example, up to, but not beyond, a specified amount per share).
(ii) a class of ordinary shares, with a different dividend rate from that of another class of ordinary shares, but without prior or senior rights.
For the purpose of calculating diluted earnings per share, conversion is assumed for those instruments that are convertible into shares, if the impact is dilutive.
To calculate basic and diluted earnings per share: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
(i) profit is adjusted by the amount of dividends declared in the period for each class of shares, and by the contractual amount of dividends (or interest on participating bonds) that must be paid for the period (for example, unpaid cumulative dividends).
(ii) the remaining profit is allocated to shares and participating equity instruments, to the extent that each instrument shares in earnings, as if all of the profit (or loss) for the period had been distributed. The total profit (or loss) allocated to each class of equity instrument is determined by adding together the amount allocated for dividends, and the amount allocated for a participation feature.
(iii) the total amount of profit, allocated to each class of share, is divided by the number of outstanding shares to which the earnings are allocated, to determine the earnings per share for the instrument.
For the calculation of diluted earnings per share, all potential shares, assumed to have been issued, are included in outstanding shares.
Partly-Paid Shares
Where shares are issued but not fully paid, they are treated in the calculation of basic earnings per share as a fraction of a share, to the extent that they were entitled to participate in dividends, during the period relative to a fully-paid share.
To the extent that partly-paid shares are not entitled to participate in dividends during the period, they are treated as the equivalent of warrants (or options) in the calculation of diluted earnings per share. The unpaid balance is assumed to represent proceeds used to purchase ordinary shares.
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The number of shares included in diluted earnings per share is the difference between the number of shares subscribed, and the number of shares assumed to be purchased.
EXAMPLE- Impact of partly-paid shares on calculation of
EPS
Issue
Part-paid shares are included in the weighted average calculation as fractional shares to the extent that they are entitled to participate in dividends relative to a fully-paid ordinary share during the period.
How should management calculate the weighted average number of shares when there are part-paid shares?
Background
At 1 January 20X2 an undertaking has 1,000 ordinary shares outstanding. It issued 400 new ordinary shares at 1 October
20X2. The subscription price is 2.00 per share. At the date of issue each shareholder paid 0.50. The balance of 1.50 per share will be paid during 20X3.
Each part-paid share will be entitled to dividends in proportion to the percentage of the issue price paid up on the share.
Solution
The new shares issued should be included in the calculation of the weighted average number of shares in proportion to the percentage of the issue price received from the shareholder during the period.
Calculation of the weighted average: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
Date/description
At 1 January 20X2
Shares Fraction of period
Weighted- average shares
1,000
100
9/12 750
Issue of new shares for cash*, part paid
At 1 October 20X2
1100
3/12 275
1,025 Weighted average number of shares
* 0.50 / 2.00 x 400 shares = 100 shares
Uniting of Interests
(IFRS 3 Business Combinations no longer allows the uniting of interests, or ‘merger accounting’ as a method. This method will only appear in comparative figures for combinations that were accounted for as uniting of interests in the past. See also IFRS 1
First-time IFRS adopters.)
Shares, issued as part of a business combination that is a uniting of interests, are included in the calculation of the weightedaverage number of shares for all periods presented.
This is because the financial statements of the combined undertaking are prepared as if the combined undertaking had always existed.
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Therefore, the number of shares used for the calculation of basic earnings per share in a uniting of interests is the aggregate of the weighted-average number of shares of the combined undertakings, adjusted to equivalent shares of the undertaking whose shares are outstanding after the combination.
EXAMPLEuniting of interests
You merged Tamara company with Natasha company. Natasha company was liquidated, and the combination was accounted for as a uniting of interests. At the merger, the issued shares were:
Tamara: 5m shares of $10 = $50m
Natasha: 100m shares of $1 = $100m
Tamara’s shares are outstanding after the combination.
Natasha’s shares need to be adjusted to the equivalent value of
Tamara’s: the $1 shares need to be adjusted to $10, for the purposes of earnings per share.
Total shares= 5m+ (100m/10)= 15m
EXAMPLE- Additional EPS disclosure
Issue
An undertaking may disclose, in addition to basic and diluted earnings per share, per share amounts using a reported component of net profit other than net profit or loss for the period attributable to ordinary shareholders.
These amounts should be calculated using the weighted average number of ordinary shares determined in accordance with IAS
33. If a component of net profit is used which is not reported as a line item in the income statement, reconciliation should be provided between the component used and a line item which is reported in the income statement. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Earnings per Share
Basic and diluted per share amounts should be disclosed with equal prominence.
Where and how should management present additional EPS calculations?
Background
Undertaking A recognised a profit during 20X2 of 23,580 (20X1:
20,690) after allowing for exceptional reorganisation costs of
1,500 (20X1: nil) and a loss on discontinued operations of 2,300
(20X1: profit of 1,200).
Management would like to present additional EPS figures excluding the effects of these items.
The undertaking had 20,000 shares outstanding throughout 20X1 and 20X2 and 4,000 options. For every four options, the holder is entitled to purchase one share.
No options were exercised in 20X1 and 20X2. The weighted average number of shares for the calculation of basic EPS and diluted EPS were 20,000 and 21,000 respectively.
Solution
The additional EPS disclosure should be presented in the notes to the financial statement, giving equal prominence to the basic and diluted amounts per share.
Suggested disclosure is as follows:
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Basic earnings per share
Adjustments for reorganisation:
Exceptional reorganisation costs
Loss /(profit) on discontinued operations
Adjusted basic earnings per share
Basic earnings per share
Adjustment for share options
Diluted EPS
Diluted adjusted EPS
Profit for the year
20X2
23,580
20X1
20,690
Weighted average number of ordinary shares
20X2
20,000
20X1
20,000
1,500
2,300
27,380
23,580
-
23,580
27,380
-
(1,200)
19,490
20,690
-
20,690
19,490
-
-
20,000
21,000
20,000
1,000
21,000
-
-
20,000
20,000
1,000
21,000
21,000
Earnings per Share
Earnings per share
20X2
20X1
1.18 1.03
- -
- -
1.37 0.97
1.18 1.03
- -
1.12 0.99
1.30 0.93 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 40

[Type text]
8. Annex - Earnings per Share - Treasury Stock Method
Amendments to IAS 33 have been considered by the International
Accounting Standards Board as a result of its efforts to maintain convergence with the Financial Accounting Standards Board
(FASB).
IAS 33 and the US equivalent, FASB Statement No. 128 Earnings per Share are substantially converged. IAS 33 and FASB
Statement No. 128 currently use a method known as the treasury stock method for calculating the effects of dilutive options and warrants in the diluted earnings per share calculation.
In September 2005, the FASB published an Exposure Draft to amend the calculation of Earnings per Share under the treasury stock method in SFAS 128.
The proposal would amend the treasury stock method to include as assumed proceeds the end-of-period carrying value of a liability that is assumed to be settled in shares and use the end-of-period market price in the computation of incremental shares.
The FASB and the IASB decided subsequently to make the following changes to the proposal:
 a new method, known as the fair value method, be used for all instruments subject to the treasury stock method that can be settled in cash or shares, are classified as a liability and are measured at fair value with changes in fair value in profit or loss; and
 the fair value method be used for all instruments subject to the if-converted method that can be settled in cash or shares, http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng are classified as a liability and are measured at fair value with changes in fair value recognised in profit or loss.
The IASB also decided to amend IAS 33:
 to require the two-class method for computing basic earnings per share for mandatorily convertible instruments with a stated participation right. Mandatorily convertible instruments without a stated participation right would be excluded from the calculation of basic earnings per share; and
 to include options and warrants with a nominal exercise price in the computation of basic earnings per share if (a) the instruments are currently exercisable or convertible into ordinary shares for little or no cost to the holder or (b) the option or warrant currently participates in earnings with ordinary shareholders.
9. Multiple choice questions
1. IAS 33 is required to be used by:
1. All companies.
2. Private companies.
3. Companies whose shares and potential shares are publicly traded.
2. When an undertaking presents both consolidated and separate financial statements, the disclosures required by IAS
33 need be presented:
1. For both sets of statements.
2. Only for the consolidated information.
3. Only for the separate financial statements.
3. Antidilution is:

1. An increase in earnings per share when convertible instruments are converted to ordinary shares.
2. A decrease in earnings per share when convertible instruments are converted to ordinary shares.
3. An increase in earnings per share when ordinary shares are converted to convertible instruments.
4. Dilution is:
1. An increase in earnings per share when convertible instruments are converted to ordinary shares.
2. A decrease in earnings per share when convertible instruments are converted to ordinary shares.
3. An increase in earnings per share when ordinary shares are converted to convertible instruments.
5. Put options on ordinary shares are contracts that give the holder the right to:
1. Buy ordinary shares.
2. Sell ordinary shares.
3. Buy or sell ordinary shares.
6. Your preference dividend of $200m. is due. You have reserves of only $40m. You can pay a preference dividend of:
1. 0.
2. $40m.
3. $200m.
7. Examples of potential ordinary shares are:
(i) financial liabilities (or equity instruments), including preference shares, that are convertible into ordinary shares;
(ii) options and warrants;
(iii) shares that would be issued upon the satisfaction of conditions resulting from contractual arrangements, such as the purchase of a business, or other assets. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
IAS 33 Earnings per Share
(iv) treasury shares that have been cancelled
1. None of the above.
2. (i)
3. (i)-(ii)
4. (i)-(iii)
5. (i)- (iv)
8. Basic earnings per share amounts uses the profit attributable to:
1. Ordinary equity holders of the parent undertaking.
2. Ordinary equity holders and preferred shareholders of the parent undertaking.
3. Ordinary equity holders, preferred shareholders and minority interests of the group.
9. Basic earnings per share shall be calculated by dividing the numerator by the number of ordinary shares outstanding (the denominator):
1. At the start of the period.
2. The weighted-average during the period.
3. At the end of the period.
10. The after-tax amount of dividends that is deducted from profit (or loss) is:
(i) the after-tax amount of any dividends on non-cumulative preference shares, declared in respect of the period.
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(ii) the after-tax amount of the dividends for cumulative preference shares required for the period, whether or not the dividends have been declared.
(iii) any original issue discount (or premium) on ‘increasing rate’ preference shares amortised to retained earnings.
(iv) the amount of any dividends for cumulative preference shares paid (or declared) during the current period, in respect of previous periods.
(v) the amount of any dividends for ordinary shares paid (or declared) during the current period
1. None of the above.
2. (i)
3. (i)-(ii)
4. (i)-(iii)
5. (i)-(iv)
6. (i)-(v)
11. The timeweighting factor is the number of ……….. that the shares are outstanding:
1. days.
2. weeks.
3. months.
12. Shares, issued in exchange for the settlement of a liability, are included in the EPS calculation from:
1. The date the services were contracted.
2. The completion of the services.
3. The settlement date.
13. Shares, that will be issued upon the conversion of a mandatorily convertible instrument, are included in the calculation of basic earnings per share from: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
IAS 33 Earnings per Share
1. The date the contract is entered into.
2. The date of conversion.
3. The date that the new shares are registered.
14. Contingently-issuable shares are treated as outstanding, and are included in the calculation of basic earnings per share:
1. The date the contract is entered into.
2. From the date when all necessary conditions are satisfied.
3. The date that the new shares are registered.
15. In a capitalisation issue, the number of shares, outstanding before the event, is adjusted for the proportionate change in the number of shares outstanding:
1. As if the event had occurred at the start of the earliest period presented.
2. At the start of the current period.
3. At the date of the capitalisation issue.
4. At the end of the current period.
16. A share consolidation is combined with a special dividend.
The weighted-average number of shares outstanding for the period in which the combined transaction takes place, is adjusted for the reduction in the number of shares:
1. As if the event had occurred at the start of the earliest period presented.
2. At the start of the current period.
3. At the date the special dividend is recognised.
4. At the end of the current period.
17. Diluted earnings per share is required when:
1. Losses have been made.
2. There are potential shares outstanding.
3. An acquisition has been made.
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18. For the purpose of calculating diluted earnings per share, an undertaking shall adjust profit by the after-tax effect of:
(i) any dividends (or other items) related to dilutive potential shares, deducted in arriving at profit.
(ii) any interest recognised in the period, related to dilutive potential shares.
(iii) any other changes in income (or expense), that would result from the conversion of the dilutive potential shares.
1. None of the above.
2. (i)
3. (i)-(ii)
4. (i)-(iii)
19. Dilutive potential shares shall be deemed to have been converted into shares:
1. At the start of the period.
2. The date of the issue of the potential shares.
3. At the start of the period or, if later, the date of the issue of the potential shares.
4. At the end of the period.
20. An undertaking uses …………. as the control number, to establish whether potential shares are dilutive, or antidilutive:
1. Profit from continuing operations.
2. Profit from discontinuing operations.
3. Profit from continuing operations + profit from discontinuing operations.
21. You have some high-interest bonds, which would be antidilutive if converted. These will be included in:
1. Basic earnings per share calculation.
2. Diluted earnings per share calculation.
3. Neither. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
IAS 33 Earnings per Share
22. Options and warrants are dilutive, when they would result in the issue of shares for:
1. More than the average market price of shares during the period.
2. Less than the average market price of shares during the period.
3. The average market price of shares during the period.
23. Staff share options with fixed terms are treated as options in the calculation of diluted earnings per share. They are treated as outstanding:
1. On the grant date.
2. On the exercise date.
3. At the start of the earliest period presented.
24. Contingently-issuable shares: If the conditions are not met when the contingency period expires, restatement of previous periods:
1. Is required.
2. Is optional.
3. Is not permitted,
25. When an undertaking has issued a contract that may be settled in shares, or cash at the undertaking’s option, the undertaking shall presume that the contract will be settled in:
1. Cash.
2. Shares.
3. The more dilutive of the two.
26. When an undertaking has issued a contract that may be settled in shares, or cash at the holder’s option, the undertaking shall presume that the contract will be settled in:
1. Cash.
2. Shares.
3. The more dilutive of the two.
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27. Contracts, such as purchased put options and purchased call options (i.e. options held by the undertaking on its own shares) are included:
1. Basic earnings per share calculation.
2. Diluted earnings per share calculation.
3. Neither.
28. If the effect is dilutive, contracts that require the undertaking to repurchase its own shares, such as written put options and forward purchase contracts, are reflected in:
1. Basic earnings per share calculation.
2. Diluted earnings per share calculation.
3. Neither.
29. Instruments issued by a subsidiary, joint venture or associate that enable their holders to obtain shares in those organisations are included in:
1. Basic earnings per share calculation.
2. Diluted earnings per share calculation.
3. Neither.
IAS 33 Earnings per Share
10. Answers to multiple choice questions
Question Answer
1. 3
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
1
3
1
2
4
1
2
4
1
3
2
2
1
2
2
2
3
2
3
3
4
3
1
3
2
1
2
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