IAS 33 Summary Notes

IAS 33 Earnings Per Share

INTRODUCTION

EPS is widely accepted as the most important indicator of a company’s

performance. It is important that users of financial statements:
Importance
 Are able to compare the EPS of different entities
 Are able to compare the EPS of the same entity over the years
IAS 33 achieves comparability by:
How IAS 33
 Defining earnings
achieves
 Prescribing methods to determine the number of shares
comparability?
 Requiring standard presentation and disclosure
Scope The entities whose ordinary shares are publicly traded

BASIC EPS

Earnings attributable to ordinary shareholders

BEPS =
Weighted average number of shares

Earnings Profit after tax – NCI share – preference dividend

=
Shares = Weighted average number of ordinary shares outstanding during the year

ISSUE OF SHARES AT FULL MARKET PRICE

Earnings No impact
The weighted average equity shares are to be considered taking into account of the
Shares date any new shares are issued during the year since the shares issued during the
year generate additional resources only for part of year.

EXAMPLE 33A
A company issued 200,000 shares at full market price ($3) on 1 July 2008. Relevant information
is:
2008 2007
Profit attributable to ordinary shareholders for the year $550,000 $460,000
Number of ordinary share in issue at Dec 31 1,000,000 800,000

Required:
Calculate the EPS for each of the years.

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IAS 33 Summary Notes

BONUS ISSUE (OR CAPITALISATION ISSUE OR SCRIP ISSUE)

Earnings No impact
The bonus shares are deemed to have been issued at the start of the comparative
Shares
period because there is no change in resources before and after the issue.

EXAMPLE 33B
A company makes a bonus issue of one new share for every five existing shares held on 1 July
2008. Relevant information is:
2008 2007
Profit attributable to ordinary shareholders for the year $550,000 $460,000
Number of ordinary share in issue at Dec 31 1,200,000 1,000,000

Required:
Calculate the EPS for each of the years.

RIGHT ISSUE BELOW MARKET VALUE

Earnings No impact
A bonus fraction is calculated and applied to shares in issue before the rights issue
as share issue below market price gives the company additional resources while at
Shares
the same it includes a bonus element.
The bonus fraction = Actual cum right price / Theoretical ex-right price

EXAMPLE 33C
A company issued one new share for every two existing shares held by way of rights at $1.5 per
share on 1 July 2008. The market price of share before right issue was $3 per share.
2008 2007
Profit attributable to ordinary shareholders for the year $550,000 $460,000
Number of ordinary share in issue at Dec 31 1,200,000 800,000

Required:
Calculate the EPS for each of the years.

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IAS 33 Summary Notes

DILUTED EPS

Equity share capital may change in future owing to circumstances which exist now due to some
potential ordinary shares which may affect EPS in the future. DEPS attempts to alert
shareholders to the potential adverse effect of potential ordinary shares on EPS. Potential
ordinary shares include:
 Convertible bonds
 Convertible preference shares
 Share options and warrants

Calculate the incremental EPS and if it is dilutive (less than BEPS) then the impact is included in
calculation of DEPS.

Earnings under BEPS + Incremental earnings

DEPS =
Shares under BEPS + Incremental shares

Earnings had the potential ordinary shares were in issue

IEPS =
Maximum possible number of shares convertible or free shares under options

CONVERTIBLES AND OPTIONS

In case of convertible preference shares, if they are assumed to be converted the
company earnings would increase by the amount of preference dividend.

Earnings In case of convertible debt, if they are assumed to be converted the company
earnings would increase by the amount of Interest (net of tax).

In case of options, there is no impact on earnings.

In case of convertibles (pref shares & debt) the maximum possible increase in shares
is taken into account.

In case of options, free shares are taken into account. Free shares are calculated as
follows.
Shares
Shares to be issued under options XXX
Shares to be issued x Exercise price / Average fair value per share (XXX)
Free shares XXX

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IAS 33 Summary Notes

EXAMPLE 33D
On 1 April 2011, a company issued $1,250,000 8% convertible unsecured bonds for cash at par.
Each $100 nominal of loan stock will be convertible in 2016 or 2017 into the number of ordinary
shares set out below:
On 31 December 2016 124 shares
On 31 December 2017 120 shares

Issued share capital:

$500,000 in 10% cumulative irredeemable preference shares of $1
$1,000,000 in ordinary share of 25 cents each = 4,000,000 shares

Income tax rate are 30%

Trading results for the years ended 31 December were as follows:

2012 $ 2011 $
Operating profit 1,100,000 991,818
Interest on 8% bonds (100,000) (75,000)
Profit before tax 1,000,000 916,818
Income tax (300,000) (275,045)
Profit after tax 700,000 641,773
Calculate the basic and diluted EPS.

EXAMPLE 33E
On 1 January 2007, a company has 4 million ordinary shares in issue and issues options over
another million shares. The net profit for the year is $500,000. During the year to 31 December
2007 the average fair value of one ordinary share was $3 and the exercise price for the shares
under option was $2.

Calculate basic and diluted EPS for the year ended 31 December 2007.

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IAS 33 Summary Notes

IMPORTANCE AND LIMITATIONS

The uses of EPS as a financial indicator include:

 The assessment of management performance over time.
Uses of  Trend analysis of EPS to give an indication of earnings performance.
EPS  An indicator of dividend payouts. The higher the EPS the greater the
expectation of an increased dividend compared to previous periods.
 An important component in determining the entity's price/earnings (P/E) ratio.
 it shows what the current year’s EPS would be if all the dilutive potential
ordinary shares in issue had been converted
Uses of
 it can be used to assess trends in past performance
DEPS
 in theory, it serves as a warning to equity shareholders that the return on
their investment may fall in future periods.
Although EPS is believed to have a real influence on the market price of shares, it
has several important limitations as a performance measure:
 It does not take account of inflation. Apparent growth in earnings may not be
real.
 It is based on historic information and therefore it does not necessarily have
Limitations predictive value.
 An entity’s earnings are affected by the choice of its accounting policies.
Therefore it may not always be appropriate to compare the EPS of different
companies.
 DEPS is only an additional measure of past performance despite looking at
future potential shares.

EXAMPLE 33F
Profit attributable to ordinary shareholders $10,000,000
Ordinary shares outstanding 2,000,000
Average market price of one ordinary share during year $ 75

Potential ordinary shares

 Options 100,000 with exercise price of $ 60
 Convertible preference shares 800,000 shares with a par value of $ 100 entitled to a
cumulative dividend of $ 8 per share. Each preference share is convertible to two ordinary
shares.
 5% convertible bonds Nominal amount $100,000,000. Each $ 1,000 bond is convertible to
20 ordinary shares. There is no amortisation of premium or discount affecting the
determination of interest expense.

Tax rate 40%

Required:
Calculate basic and diluted EPS considering the order in which potential ordinary shares may be
dilutive or anti-dilutive.

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IAS 33 Summary Notes

ANSWER 33A

2008 2007
$550,000 $460,000
BEPS = =$0.611 =$0.575
900,000 W1 800,000

W1
800,000 x 6/12 400,000
1,000,000 x 6/12 500,000
900,000

ANSWER 33B

2008 2007
$550,000 $460,000
BEPS = =$0.458 =$0.383
1,200,000 1,200,000

ANSWER 33C

2008 2007
$550,000 $460,000
BEPS = =$0.509 =$0.479
1,080,000 W1 960,000 W1

W1
2008 2007
800,000 x 6/12 x 3/2.5 480,000 800,000 x 12/12 x 3/2.5 960,000
1,200,000 x 6/12 600,000
1,080,000 960,000

W2 Theoretical ex-right price

Shares Per share Worth
Before 2 $3 $6
Right issue 1 $1.5 $1.5
Total 3 $2.5 $7.5

Note: to restate the EPS for the previous year, you may simply multiply EPS of last year by
inverse of bonus fraction.

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IAS 33 Summary Notes

ANSWER 33D

2012 2011
$650,000 W1 $591,773
BEPS = =$0.163 =$0.148
4,000,000 4,000,000

2012 2011
$650,000 + 70,000 W3 $591,773 + 52,500 W3
DEPS = =$0.13 =$0.125
4,000,000 + 1,550,000 W3 4,000,000 + 1,162,500 W3

W1
2012 2011
PAT – pref. dividend $700,000 – 50,000 = $650,000 $641,773 – 50,000 = $591,773

W2
Maximum number of potential ordinary shares $1,250,000 / 100 x 124 =1,550,000

W3 2012 2011
$100,000 x 70% $75,000 x 70%
IEPS = =$0.045 =$0.045
1,550,000 W2 1,550,000 W2 x 9/12

ANSWER 33E

2007
$500,000
BEPS = =$0.125
4,000,000

2007
$500,000
DEPS = =$0.115
4,000,000 + 333,333 W1

W1
Share Options 1,000,000
Cash resources to be received worth 1,000,000 x $2 / $3 (666,667)
Free shares 333,333

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IAS 33 Summary Notes

ANSWER 33F
Ranking order
Options Ranking
Increase in earnings $ NIL
Incremental shares issued (free shares) 100,000 x (75 – 60) / 75 20,000 1
Incremental EPS $ Nil

Convertible preference shares

Increase in earnings $ 800,000 x 100 x 0.08 $ 6,400,000
Increase in shares 800,000 x 2 1,600,000 3
$4

Convertible debentures
Increase in earnings $ 100m x 5% x (1 – 40%) $ 3,000,000
Increase in shares 100,000 x 20 2,000,000 2
Incremental EPS $ 1.5

Earnings Shares EPS

Basic EPS 10,000,000 2,000,000 5.00 Basic EPS
Options 0 20,000
10,000,000 2,020,000 4.95 Dilutive
5% convertible bonds 3,000,000 2,000,000
13,000,000 4,020,000 3.23 Dilutive
Converible preference shares 6,400,000 1,600,000
19,400,000 5,620,000 3.45 Antidilutive

Dated: 01 September 2016

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