Earnings per Share: IAS 33
IAS 33 – Overview
 Objective
and scope
 Measurement
 Presentation
 Disclosure
2
IAS 33 – Objective and Scope

Amount of earnings that is attributable to each common or ordinary
shareholder is represented by the earnings per share (EPS)
numbers

Standard seeks to provide guidance on
• How earnings per share should be accounted for
• When diluted EPS should be presented
• What information should be disclosed

Fairly complex calculations
 IASB
has provided numerous illustrative examples that
accompany but are not part of the standard
3
IAS 33 – Objective and Scope


Ordinary shares

Equity instruments that are subordinate to all other classes of equity
instruments

Also referred to as common shares
The EPS calculations focus on these shares as they are residual in nature


Ordinary or common shareholders share in the residual earnings after
operating expenses and dividends on preferred shares
IAS 33 covers financial statements of
• Entities that have ordinary shares or potential ordinary shares traded in a
public
market
• Entities that are in the process of filing their statements with4 a securities
commission for the purpose of going public
IAS 33 – Objective and Scope

EPS is calculated and presented
 If
there are numerous public shareholders
 If
the entity files financial statements with a securities
regulator
 Only
in the consolidated statements when nonconsolidated statements are prepared as well
5
Why Is it Important?

Shares are valued at a multiple of profit, P/E ratio.
This reflects expectations of future earnings

Companies will seek to maximise E to maximise
share price
IAS 33 – Measurement


Two types of EPS

Basic (BEPS)

Diluted (DEPS)
BEPS


Based on existing earnings and outstanding common/ordinary shares
DEPS

“What-if” calculation

Illustrates what EPS would be if all the potential ordinary shares were
actually ordinary shares
 E.g.,
the instruments were actually converted into shares or
options were exercised, resulting in additional shares being
issued
7
IAS 33 – Measurement
Basic earnings per share (BEPS)

BEPS is calculated as follows:


The profit or loss attributable to ordinary equity holders is divided by the
weighted average number of ordinary shares outstanding
The calculation should also be done for income from continuing operations as well
(if presented in the profit and loss statement)
Earnings

Profit or loss attributable to ordinary shareholders (the numerator) begins with:
• Profit or loss from continuing operations (if separately presented)
• Profit or loss
8
IAS 33 – Measurement
Earnings (continued)

Two separate calculations are done where profit or loss from continuing operations is
presented separately on the profit and loss statement

Adjustments to earnings
• Dividends on preferred shares
 Only
declared dividends relating to non-cumulative preferred shares are deducted
 Because
 Dividends
they are not owed unless they are declared
(declared or not) relating to cumulative preferred shares are deducted
 Because
they are owed whether declared or not
•Gains/losses on settlement/repurchase/early conversion of preferred shares
 Any
9
related gains/losses are added to/deducted from earnings
in calculating EPS
IAS 33 – Measurement
Shares

The denominator uses the weighted average number of ordinary shares
outstanding during the period

Gives the best indicator of the earnings based on the average outstanding
equity

The calculation looks at the number of shares outstanding each day although a
“reasonable approximation of the weighted average” may be used

The shares are assumed to be issued on the date that the consideration is
receivable

Although there are several situations that may need clarifying (see next
slide)
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IAS 33 – Measurement
Shares (continued)
• When shares are issued on conversion of debt

The shares are assumed to be issued on the date that interest ceases to
accrue
• When shares are issued upon rendering of services

The shares are assumed to be issued as the services are rendered
• When shares are issued in a business combination

The shares are assumed to be issued on the acquisition date
11
Examples 1

Co X has a year end of 31/12

Share capital for 2015 & 2016 = 10m $1 equity
shares

Profit for the years 2015 & 2016 were $800k & $1m
respectively

Therefore EPS = 8c & 10c
Examples 2 Share Issue at Full Price

Co X in y/e 31/12/17 had a profit of $1.4m

On 30/6/17 there was a 1:10 issue at $4 per share
(when market price was $4)

Profit = 1.4m

No of shares = (10m x6/12) + (11m x 6/12)= 10.5m

EPS= 13.3c
Examples 3

Co A has a year end of 31/12

Share capital = $10m denominated in 25c equity
shares

Profit for the years 2015 & 2016 were $800k & $1m
respectively

Therefore EPS = 2c & 2.5c
Examples 4 Bonus Issue

Co A in y/e 31/12/17 had a profit of $1.4m

On 30/6/17 there was a 1:10 bonus issue (when market
price was $4)

Profit = 1.4m

No of shares = 44m

EPS= 3.2c

Take number of shares at year end! Assume in issue all year

But adjust comparative

2016 becomes 2.5c x 40/44= 2.27c
Examples 5 Rights Issue

Co B in y/e 31/12/17 had a profit of $1.4m

Co B has a capital structure on 1/1/17 with capital
of $10m ordinary shares denominated at 25c each

On 30/6/17 there was a 1:5 rights issue at $3.00
(when market price was $4)

Step 1 calculate new value of shares

[(40m x $4) + ($3.00 x 8m)]= 184m

Per share 184m/48m= $3.83
Example 5 Continued

Step 2 Calculate bonus shares

We raised $24m. At $3.83 per share that requires we issue
6266319 shares if the price per share is $3.83 (24m/3.83=
6266319)

But we issued 8m, therefore 8m – 6266319= 1733681
‘bonus shares’

Step 3 the number of shares

First six months 40m + 1733681 = 41733681

Second six months 40m + 8m= 48m

Therefore (41733681 x 6/12) + (48m x 6/12)= 44866841

2017 EPS (𝜋 = 1.4𝑚)= 3.1c

2016 2.5c x (40m/41733681)= 2.4c
IAS 33 – Measurement
Diluted earnings per share

Shows earnings available to
 Ordinary
shareholders (assuming all potential common
shares are now issued)
 Outstanding

ordinary shares
Both the numerator (earnings) and the denominator
(number of shares) are adjusted for the “what if”
assumption
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IAS 33 – Measurement
Earnings

Adjustments to the profit or loss attributable to ordinary
shareholders

After-tax interest/dividends
 Would
be avoided if the convertible instruments had
been converted at the beginning of the period

Any other changes in profit or loss that would result
from the conversion of the convertible instruments
 Discount/premium
 Changes
amortization
in bonuses that are based on profit or loss
IAS 33 – Measurement
Earnings (continued)

No adjustment is made to the numerator for options
and warrants

In doing the DEPS calculation, it is assumed that
either
• funds received are used to buy back shares (rather
than investing them), or
• shares are issued to generate sufficient cash to buy
back the shares under option
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IAS 33 – Measurement
Shares

The weighted average number of ordinary shares as calculated for BEPS

Would be adjusted for additional ordinary shares that will be issued
on conversion or exercise of potential ordinary shares

The potential ordinary shares are assumed to be issued at the beginning
of the year or the date of issue of the potential ordinary shares if later

If conversion/exercise options lapse during the period, the number of
shares would be pro-rated for the part of the year that the potential
common shares were outstanding

The dilutive weighted average common shares are calculated
independently for each period presented (interim versus annual)
IAS 33 – Measurement
Convertible instruments

Convertible instruments are included in the DEPS calculation when
dilutive

Convertible preferred shares


Assumed to be anti-dilutive if the related dividend per ordinary
share is greater than BEPS
Convertible debt

Anti-dilutive whenever the after-tax interest per ordinary share is
greater than BEPS
22
Example 6

Company C has during 2017 in issue ordinary shares totalling
$10m, each share denominated at 10c. Share price at 31/12/17
was $3

The company’s profit after tax of 30% was $17m

The company has in issue $20m of 5% convertible debentures,
terms of conversion are $100 for 60 ordinary shares

The directors have granted themselves the right to buy 4m
shares for 50c each

Basic EPS = 17m/100m= 17c
Example 6 contd

Fully diluted EPS

Share option

Share price if options exercised

{(100m x 3) + (4m x 0.50)}= 302m

302m/104m= $2.90

Therefore if we raised 2m @ $2.90 we would issue
689655 shares

We actually issue 2m, therefore 1310345 are bonus
issues
Exercise 6 Fully Diluted EPS

Assume convertible bonds and options are all
exercised and in issue all year

Profit = 17m + (20m x 5% x 70%)= 17.7m

No of shares = 100m + 12m + 1310345= 15.6c
IAS 33 – Presentation

The entity must disclose the EPS numbers (with
comparatives) in the statement of comprehensive income

If a separate profit and loss statement is presented, the EPS
numbers are presented there

If discontinued operations are reported, the BEPS and DEPS
for discontinued operations may be presented on the
statement of comprehensive income or in the notes
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IAS 33 – Disclosure

Required additional disclosures
• Numerators in the calculations, including a reconciliation to reported profit or
loss
• Weighted average number of ordinary shares
• Any potentially dilutive instruments that were not included in the calculation
• Description of any transactions occurring after the reporting period that could
affect the calculations
 Such
as the issue or redemption of shares
27
ACCA Dec 09 Barstead a)

Measured as a %. Increase from $1 to $2 is 100%,
increase from $10 to $11 is 10%

Timing can affect earnings year on year

Profits have increased but EPS is more modest, so
profits have increased but capital has increased as
well- issue of shares

Diluted EPS indicates that some convertible bonds
have been issued as well
Dec 2009 Barstead b)

Profit = $15m

9/2009 Number of shares

1/10/08 36m

1/1/09

New value of shares= [(36m x 3.80)+(9m x 2.80]/45m= $3.60

We raised 9m x 2.80= $25.2m

Therefore 25.2m/3.60 = 7m

Treat as 7m issued at full price and bonus issue of 2m shares
Barstead b)

Treat as 7m issued at full price and bonus issue of 2m
shares

Profit = $15m

9/2009 Number of shares

1/10/08 36m + 2m bonus

1/1/09 45m

Number of shares (38m x 3/12) + (45m x 9/12)= 43.25m

[15m /43.25m]= 34.7c

PY 35 x 36/38= 33.2c
Barstead b)

Profit = 15m

Number of shares = 43.25m

If bonds are converted, additional profit will be

10m x 8% x 75%= 600k

Additional shares will be


25 x 10m/100= 2.5m
(15m + 600k)/ (43.25m + 2.5m)= 34.1c
Dec 2009 Barstead c)

Rules based accounting systems set out rules which
must be followed. In principle there should be no
variation from the rules

The rules therefore should cover all situations

Audits are based around compliance with rules

Principles based systems set out core principles and
these are then applied allowing judgement by
preparers of accounts. This allows accounting
systems to be more flexible

IFRS is principle based, these principles are in the
Conceptual Framework.