Earnings per Share: IAS 33

1. Earnings per Share: IAS 33

2. IAS 33 – Overview • Objective and scope • Measurement • Presentation • Disclosure

3. 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

4. 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 with a securities commission for the purpose of going public

5. 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 non-consolidated statements are prepared as well

6. 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

7. 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

8. 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

9. 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 they are not owed unless they are declared • Dividends (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 related gains/losses are added to/deducted from earnings in calculating EPS

10. 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)

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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 (= 3.1c • 2016 2.5c x (40m/41733681)= 2.4c

18. 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

19. 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 amortization • Changes in bonuses that are based on profit or loss

20. 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

21. 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)

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. Dec 2009 Barsteadc) • 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.