10/28/2024

FINANICIAL REPORTING

IAS 33

Earnings Per
Share

Le Viet, PhD

OBJECTIVE

[IAS 33.1] The objective of IAS 33 is to prescribe principles for determining and
presenting earnings per share (EPS) amounts to improve performance comparisons
between different entities in the same reporting period and between different reporting
periods for the same entity.
EPS is considered a key stock market indicator and maybe a better indication than profit
of the financial performance of an entity as it considers changes in capital during period,
ie new capital only generate return from the date it ss paid into the company.

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Requirement to present EPS on FS

[IAS 33.66]
An entity whose securities are publicly traded (or that is in process of public issuance)
must present, on the face of the statement of comprehensive income, basic and diluted
EPS for:
• profit or loss from continuing operations attributable to the ordinary equity holders of
the parent entity; and
• profit or loss attributable to the ordinary equity holders of the parent entity for the
period for each class of ordinary shares that has a different right to share in profit for the
period.
[IAS 33.68 and 68A]: basic and diluted EPS must be separately disclosed for the
discontinued operations (if any)

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CALCULATION OF EPS
[IAS 33.10] Basic EPS is calculated by dividing profit or loss attributable to ordinary equity
holders of the parent entity (the numerator) by the weighted average number of ordinary
shares outstanding (the denominator) during the period.
𝑐𝑜𝑛𝑠𝑜𝑙𝑖𝑑𝑎𝑡𝑒𝑑 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 − 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠 − 𝑁𝐶𝐼 − 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒𝑠 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐸𝑃𝑆 =
𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑔 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
[IAS 33.5] Ordinary share: also known as a common share or common stock. An equity
instrument that is subordinate to all other classes of equity instruments.

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CALCULATION OF EPS numerator

[IAS 33.12] The earnings numerators (profit or loss from continuing operations and net profit or
loss) used for the calculation should be after deducting all expenses including taxes, non
controlling interests, and preference dividends.
Reason: Some irredeemable preference shares are classified as equity and the dividend is
deducted in the statement of changes in equity. An adjustment is needed; the dividend should
be deducted from the profit figure taken from the statement of profit or loss to arrive at the
profit attributable to the ordinary equity holders.
Whilst Redeemable preference shares are generally classified as liabilities and the finance
charge relating to them (both dividend and any premium on redemption adjustment) should
already ave been recognised in profit or loss as part of finance charges. No adjustment is
needed.

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CALCULATION OF EPS numerator

Illustration
Illustration

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CALCULATION OF EPS numerator

Illustration
Solution

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CALCULATION OF EPS numerator

Cumulate dividend
If the dividends on such shares are cumulative, any dividend not paid in the current year (due,
for example, to lack of distributable profits) will be payable in subsequent years when
distributable profits become available. All such arrears need to be paid off before any ordinary
share dividend is paid.
The treatment of such cumulative dividends for EPS purposes is as follows:
• If the dividend is not paid in the year, then it should still be deducted from profit.
• When the arrears of dividend is subsequently paid, it should be excluded from the EPS calculation.

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CALCULATION OF EPS numerator

Cumulate dividend: illustration
Solution

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CALCULATION OF EPS numerator

Cumulate dividend: illustration
Illustration

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CALCULATION OF EPS denominator

[IAS 33.20-21] The denominator (number of shares) is calculated by adjusting the shares in
issue at the beginning of the period by the number of shares bought back or issued during the
period, multiplied by a time-weighting factor (the number of days that the shares are
outstanding as a proportion of the total number of days in the period)
*bought back: treasury shares

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CALCULATION OF EPS denominator

new issuance for cash at full market price (for new shareholders)
Illustration 1

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CALCULATION OF EPS denominator

new issuance for cash at full market price (for new shareholders)
Illustration 2 X plc has 10 million ordinary shares in issue at 1 January 20X4. Its accounting year
end is 31 December. During 20X4 the following events occur:
• 1 April 20X4 2 million shares are issued to acquire a subsidiary
• 1 October 20X4 2 million shares are issued at full market price
Requirement: What is the weighted average number of ordinary

Solution

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CALCULATION OF EPS denominator

bonus issue (for current shareholders)
When a bonus issue is made:
• additional shares are issued to the ordinary equity holders in proportion to their current
• shareholding, for example one new share for each five shares already owned;
• no cash is received for these shares; and
• reserves are capitalised by a debit to share premium/retained earnings.
In this case the issuing entity has not received any additional resources to help increase earnings.
Each shareholder has more shares, but still has the same proportionate interest in the entity.
For a bonus issue the treatment for the weighted average number of shares is to assume that the
shares have always been in issue. This means that they should be treated as having been issued at
the start of the earliest period for which results are reported, usually the start of the year presented
as the comparative figures.

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CALCULATION OF EPS denominator

bonus issue (for current shareholders)
[IAS 33.64] If there is a bonus issue, right issue, or similar, entity have to do retrospective application
by reciprocal fraction for:
• previous number of shares before issue during current year, and
• previous number of shares of the comparative amount of previous year

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CALCULATION OF EPS denominator

bonus issue (for current shareholders)
Illustration

was adjusted
Solution 20x1
$100,000
$20,000
200,000
10c

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CALCULATION OF EPS denominator

RIGHT issue (for current shareholders)

A rights issue is:

• an issue of shares for cash to the existing ordinary equity holders in proportion to their
current shareholdings; and
• at a discount to the current market price.
Because the issue price is below the market price, a rights issue is in effect a combination of
an issue at full value and a bonus issue.
Usually, right issues offer a discount of market price to existing shareholders

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CALCULATION OF EPS denominator

RIGHT issue (for current shareholders)

(or pre-right fair value of shares)

The pre-rights issue price (or fair value) of the shares is the market price immediately before the
rights issue is announced. The theoretical ex-rights fair value is the theoretical price at which the
shares would trade after the rights issue and takes into account the diluting effect of the bonus
element in the rights issue. For the purpose of these learning materials the term ‘theoretical ex-
rights price’, otherwise known as TERP, is used as an equivalent recognised term.

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CALCULATION OF EPS denominator

RIGHT issue (for current shareholders)
Illustration 1 A 1 for 3 rights issue is made at 132p when the market price is 220p.
Requirement: What is the TERP?
Solution

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CALCULATION OF EPS denominator

RIGHT issue (for current shareholders)
Illustration 2

Solution

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CALCULATION OF EPS
complex illustration (read by your self)

Required:
1. What is the weighted avg no of shares in X1
2. How much is EPS for X1?
3. How much is restated EPS for X0?
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CALCULATION OF EPS
complex illustration

1/1-30/4 30/4-31/7 31/7-30/9 30/9-31/12

2,000,000 shares 2,000,000 shares 2,000,000 shares 2,000,000 shares
outstanding + 270,000 new shares + 270,000 new shares + 270,000 new shares
outstanding + 227,000 right issue + 227,000 right issue shares
shares + bonus issue shares
outstanding outstanding

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CALCULATION OF EPS
complex illustration

𝑡𝑜 "retrospective" due to
right issue on 31/7/x1
𝑡ℎ𝑒𝑜𝑟etical ex right price
𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 10 x $3.1+ 1 x $2
= = 3.0
10+1

after new issuance 2,270,000

of 270,000 shares 𝑡𝑜 "retrospective" due to
bonus issue 1 for 20 on 30/9
after right issues 2,497,000
10% of 2,270,000
after bonus issues 2,621,850
1 for 20 of 2,497,000
2,431,508 shares in average

number of bonuses shares:2,497,000/20 = 124,850

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CALCULATION OF EPS
complex illustration

EPS for X1
= 400,000 / 2,431,508 = $0.165 (or 16.5 cents)

restated EPS for X0

= 18.6 x (3.0/3.1) x (20/21) = 17.1 cents

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Repurchase of shares

When shares are repurchased and held as treasury shares the number of shares in issue
reduces but share capital remains unchanged as the treasury shares are shown in a separate
reserve. An adjustment therefore needs to be made when calculating the weighted average
number of shares as part of the EPS calculation.
If the shares are repurchased at market price, the resources expended on the repurchase are
commensurate with the reduction in the number of shares. If the shares are repurchased for a
price above market value, the resources expended will exceed the reduction in the number of
shares. This reduces EPS and so the prior year EPS must be adjusted to reflect this.
In the exam a share repurchase will always be at market price.

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Repurchase of shares

An entity had 10 million £1 ordinary shares in issue at 1 January 20X8 and on 30 September
20X8 entered into a repurchase arrangement to buy back two million £1 ordinary shares at
market price. The repurchased shares are recognised in a separate reserve as treasury shares.
Requirement
What is the number of shares that will be used to calculate EPS at 31 December 20X8?

Solution
The weighted average number of shares will be calculated as follows:

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Distributable profits
Private company
• Distributable profits are calculated by reference to the individual entity, not the consolidated Group
• Distributable profits are the profits that under the Companies Act 2006 an entity is legally entitled
to distribute to its equity holders.
• Private company: Distributable profits are measured as accumulated realised profits less
accumulated realised losses. Generally this equates to the retained earnings balance determined
under generally accepted accounting principles
• There is specific guidance in the Companies Act 2006 that:
✓ A provision is a realised loss.
✓ A revaluation surplus is an unrealised profit.
✓ Any additional depreciation on revalued non-current assets can be added back to profits for
determining distributable amounts.
✓ When a revalued asset is disposed of, the unrealised surplus or loss on revaluation becomes a
realised profit or loss.

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Distributable profits
Public company
Over and above the rule for private companies there is an additional restriction for public companies;
they may not make a distribution if this reduces its net assets below the total of called-up share capital
and undistributable reserves.
• Undistributable reserves are:
✓ Share premium account
✓ Net unrealised profits (For example: A revaluation surplus)
✓ Any other reserve specified by law or the company’s constitution to be unrealised (for example
a capital redemption reserve)

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Distributable profits
Illustration

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Distributable profits
Solution

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DISCLOSURE

[IAS 33.70]
• the amounts used as the numerators in calculating basic and diluted EPS, and a reconciliation of those
amounts to profit or loss attributable to the parent entity for the period
• the weighted average number of ordinary shares used as the denominator in calculating basic and diluted
EPS, and a reconciliation of these denominators to each other
• instruments (including contingently issuable shares) that could potentially dilute basic EPS in the future,
but not included in the calculation of diluted EPS because they are antidilutive for the period(s) presented
• a description of those ordinary share transactions or potential ordinary share transactions that occur after
the balance sheet date and that would have changed significantly the number of ordinary shares or
potential ordinary shares outstanding at the end of the period if those transactions had occurred before
the end of the reporting period.

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