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FRS 133: Earnings Per Share

FRS 133: Earnings Per Share. Introduction. FRS 133 2006 (i) Replaces FRS 133 2004 (ii) To be applied for annual periods beginning on or after 1/1/2006 (iii) IASB developed the revised FRS 133 as part of its project on Improvements to IASs

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FRS 133: Earnings Per Share

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  1. FRS 133: Earnings Per Share

  2. Introduction FRS 1332006 (i) Replaces FRS 133 2004 (ii) To be applied for annual periods beginning on or after 1/1/2006 (iii) IASB developed the revised FRS 133 as part of its project on Improvements to IASs (results of queries and criticism by securities regulators, professional accountants & related parties; to reduce/eliminate alternatives, redundancies and conflicts within Stds, to deal with convergence issues and improvements) (iv) IASB maintains fundamental approach to determination and presentation of EPS in IAS 33

  3. Continue….Revision (i) Limited revision…. (ii) Mainly… to provide addl. guidance and illustrative examples on selected complex matters : (a) the effects of contingently issuable shares (b) Potential ordinary shares of subsidiaries, joint ventures and associates – Para 5 (c) Participating equity instruments (d) written put options (e) Purchased put and call options (f) Mandatory convertible instruments (See further Para 5, 6, 7)

  4. Continue….Why EPS important? EPS is frequently used by s/h and Directors to demonstrate the growth in co’s performance over time Care is required to ensure no of shares stated consistently to avoid distortionsarising from changes in capital structure that changed no of shares outstdg without correspdg change in resources during whole or part of the finl period. Hence, ESSENTIAL, to set consistent approach for EPS computation

  5. Continue…. EPS is used in earning yield percentage calculation, which is more acceptable basis for comparing performance than figures such as dividend yield percentage as x affected by distribution policy of directors

  6. Continue… • Mostly publicised ratio for PLC is PE ratio; Widely employed for invest dec. • Combing PE with a forecast of company earnings, analyst can decide whether shares of co over or undervalued • PE = Market Price/ Earnings = Multiple of EPS where the multiple represents no of yrs earnings required to recoup the price paid for share

  7. What factors affect PE ratio? PE reflects investors’ confidence and hopes about internatl scene, national economy, industry sector and current yr’s perform of co. It needs to be interpreted in consideration of co’s info, competitors and industry it operates High PE ~ Reflects investor confidence in existg mgt team Low PE ~ Lack of confidence in current mgt, high gearg, little growth prospect or capital input Factors above,.. reasons for a difference in PE ratios of companies

  8. Limitations of EPS as performance measure? • Earnings ~ based on historical figure, Mgt might made dec in the past to encourage current earnings growth at the expense of future growth, eg reducg amt for cap invest., R&D; EPS x be relied as predictor for growth in future • EPS x take inflation into a/c • Earnings affected by choice of actg policies.. • EPS affected by change in cap. structure

  9. Main Focus • Determination of basic EPS • Determination of diluted EPS [i.e. Earnings and weighted average no of ord shares outsdg adjusted from the amt appear in P&L for the effect of all dilutive (earning spread over larger no of ord shares) potential ordinary shares (finl instru entitle holder to OS)] • Presentation and Disclosure of EPS

  10. EPS: Determination and Presentation To improve performance comparisons bet. different entities and bet. different reportg periods for the same entities Limitations ….earnings measure used depends on entity’s actg policies However, consistently determined denominator enhances finl reporting THE FOCUS OF FRS133

  11. Scope FRS 133: Applied to entities whose ord. shares or potential ord. shares publicly traded and entities in process of issuing ord. shares or potential in public mkts WRT FRS 127: (i) CFS: Preparation…to apply disclosure req of FRS 133 based on consolidated info (ii) Separate F/S: Preparation…EPS computed based on sep. fin stat. to be presented only here, X in CFS.

  12. Measurement: Basic Earnings Per Share (BEPS) Basic EPS: Para 9 -11 Earnings : Overall Profit or loss attr. to ordinary equity holders of parent’s entity and if presented, profit or loss from continuing operations attr. to respective equity holder (if this value different to overall profit for the period) (Adj. for the after tax amt, settlement and/or similar effects of pref. dividends) Basic EPS: Profit or Loss attr. to Parent’s s/h Weighted Average No. of Ord. Sh. Outstanding during the period (Para 19) ~ Measure interest of each ord. shares of parent entity

  13. Earnings • Continuing operations (Para 9) • After tax (Para12) • Exclude (Deduct) dividends for MI (Para13) • Exclude (Deduct) dividends for • Non-cummulative preference shares • Cummulative preference shares for the period (Para 14)

  14. Para 13 All items of income and expense (including tax expense and dividendson pref shares classified as liab) attr. to parent’s ord. equity holders, included in determination of profit or loss for the parent’s equity holder : (i)non-cumulative : Deduct amt of dividend after tax (dividends declared amt) in the period (ii) cumulative: deduct amt of dividendthe after tax (whether dividends declared or not) in the period

  15. Example (i)The following is Statement of Changes in Equity for year ended 31/12/x4The Co has in issue: 10% convertible debentures of RM400K which may be come convertible beginning 1/1/x9 into 100K ordinary shares. Tax rate 25%.Required: Calculate BEPS

  16. Continue….Answer BEPS = PAT – Preference dividends No. of Ord Shares = 200K – 30K* 500K = 34 cent per share [Pref dividend = 400K x 10% x (100%-25%)] * Regardless declared or not If pref shares are non-cumulative (declared), EPS: = RM200K-RM14.4K = 37 cent per share 500K

  17. Para 20: No. of Ord. Shares Weighted average no. of ord.shares outstdg : (1) No. of OS outstdg at the beginng( Multiply time-weighting factor) adjusted shares bought back (deduct) ( Multiply time-weighting factor) adjusted new sharesissued (add) ( Multiply time-weighting factor) during the financial period {i.e. [Ord Shares (begin) Xa /365 days] - (OS bought back Xb/365days] + [New OS issued Xc/365 days]} See Alternative Computation II Time-weighting factor ~ No of days the shares are outstding as a proptn. of the total no of days in the period

  18. Continue…Weighted Average Ord Shares (2) Reflects possibility…that amt of shareholders capital varied during the period as a result of a larger or smaller no. of shares being outstanding at any time.

  19. Shares – Illustration 1 • 1st Jan: 2,000,000 OS outstanding • 1st April: 200,000 OS bought back • 1st Sept: 300,000 new OS issued Weighted No of Shares = ??? = (2Mil x 3/12) + [(2Mil -0.2M)x 9/12] + (0.3M x 4/12) =1.95MIL

  20. Alternative Computation I Shares – illustration (balance) Shares = 2,000,000 x 3/12 (1st Jan – 1st Apr SBB) + 1,800,000 x 5/12 (1st Apr – 1st Sept New) + 2,100,000 x 4/12 (1st Sept – 31st Dec) = 1,950,000

  21. Continue…Alternative Comp II • Shares – illustration (portion) Shares = 2,000,000 x 12/12 (1st Jan) - 200,000 x 9/12 (1st Apr SBB) + 300,000 x 4/12 (1st Sept New) = 1,950,000

  22. Shares usually included in weighted average calculation from the date the consideration is receivable (generally the date of their issue). For e.g: (a) Ord shares issued in exchange for cash is included when cash is receivable (b) Ord sh issued on voluntary reinvestment of divd on ord or pref shares included when divd reinvested (c) Ord sh issued as a result of the conversion of a debt instrument to ord shares included from date interest ceases to accrue (Para 23) (d) Ord sh issued in place of interest or principal on other finl instru included from date interest ceases to accrue (e) Ord. shares issued in exchange for the settlement of a liability of the entity included from settlement date (f) Ord. shares issued as consideration for the acq of an asset other than cash.. included as of the date on which acqn recogd. (Para 22) (g) Ord. shares issued for the rendering of services to the entity are included as the services are rendered Timing of the inclusion of the shares det. by terms & condn of issue; substance of contract emphasized Para 21…Shares included in Weighted Average for BEPS compt.

  23. Para 24 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 (ie the events have occurred). Para 5: Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other consideration upon satisfaction of specified conditions in a contingent share agreement. Outstdg ord shares that are contingently returnable (i.e. subject to recall) x treated as outstdg and excluded from basic EPS until date the shares x subject to recall.

  24. Para 26 The weighted average no. of ord shares outstdg during the period and for all periods presented shall be adjusted for events (other thanconversion of potential ord shares), that have changed no. of ord. shares outstanding without changing the resources

  25. Para 27 Issuance of Ord shares or Reduction in no of ord shares outsdg which X result in change in resources. E.g: (a) Capitalisation or bonus issue (or stock dividend) (b) Bonus element in any other issue, e.g. a bonus element in right issue to existing s/h. (c) Share split (d) A reverse share split (consolidation of shares)

  26. Para 28 Capitalisation or bonus issue or a share split: Issued to existg s/h for NO add. consideration. Hence, No of Ord Shares Outsdg is without in resource. No of ord shares outsdg before the events (being bonus issue or share split) adjustedfor the proportionate change in no of ord shares outstandg as if the eventhad occurred at the beginng of the earliest period presented. Eg: 2-for-1 bonus issue (i.e 2 bonus issue for 1 share) , No of ord shares outstdg b4 the issue is multiplied by 3 to obtain new total no of ord shares, or by 2 to obtain number of addl shares. Beginng 1000 ordinary shares outstdg. After 2-for-1 bonus issue total outstd shares is 3000 [i.e.(1000x 3) or 1000 + (2 x 1000)]

  27. Illustration 2 • 1st Jan: 2,000,000 OS outstanding • 1st April: 200,000 OS bought back • 1st Sept: 300,000 new OS issued • 31st Dec: declare bonus shares (Results :INCREASE outsdg shares) • 1 for every 100 (excluding new shares) • 1 for every 100 (for new issued shares) 1,800,000: 1 for every 100 = 1,800,000/100 = 18,000 x 12/12 = 18K shares 300,000: 1 for every 100 = 300,000/100 = 3,000 x 4/12 = 1 K shares • + 18,000 x 12/12 (bonus – prop. computed retrospectively Para 64) • + 3,000 x 4/12 (bonus – proportion computed as at issue date) Total no of shares outstanding = 1,950,000 + 18,000 +1,000 = 1,969,000

  28. Para 29 Consolidation of ord. shares generally REDUCES no of ord. shares without correspondg reduction in resources. HOWEVER, if overall effect is share repurchase at FV, reductn in no of ord shares will result in correspdg reduction in resources (FV changes) . E.g: Share consolidation combined with a special dividend The weighted average no of ord shares outstanding for the period in which combined transaction takes place is adj. for the reductn. in the no of ord shares from the date the special dividend is recogd.

  29. Example 1: Basic EPS calculation ABC Plc had PAT for 20X7 of RM1.25M and an issued share capital of RM1.5M comprising 1 Mil ord shares of 50 cents each and 1,000,000 RM1 10% preference shares. The basic EPS for 20X7 is calculated at RM1.15 as follows: RM Profit on ordinary activities after tax = 1.25M Less: Pref. Div (RM1M x 10%) x75% = (0.075M) Profit attr. to ord. s/h = 1.175M BEPS = RM1.175M / 1M ord. shares = RM1.18

  30. Example 2: Bonus Issue Assumed ABC increased its shares in issue in 20X7 by the issuance of another 1Mil shares via bonus issue. BEPS = RM1.175 / 2 Mil ord shares = 0.588 BEPS would be immediately halved from RM1.175 to RM0.588. This is bec company capitalises reserve to give existing s/h shares. In real terms neither s/h nor co is giving or receiving immediate finl benefits. The process indicates reserves x be available for dist. but will remain invested in physical assets of the co. However the s/h have > shares than at the beginning Dr P&L/Reserve Dr Bonus Issue Cr Bonus Issue Cr Share Capital (To record issue of bonus (To record issue of shares to shares) shareholders)

  31. Example 3: Share splits When the mkt value of shares becomes high, some co. may decide to increase the no of shares held by each s/h. The effect is to reduce the mkt price per share but for each s/h to hold same total value. Share split would be treated the same way as bonus issue. For instance, share split of 1 into 2 share , if prior to split, each share had a share value of RM4 and co had a total mkt capitalisation of RM4Mil, after the split each share would have a market price of RM2 and co mkt capitalisation remain unchanged. No of shares outstanding increase from 1M to 2 Mil

  32. Example 4: New Issue at Full Mkt. Value Selling > shares to raise fund, should generate add. earngs~ Hence real change in co’s capital. However problem arises in the yr the issue took place. Unless the issue took place 1st day of finl yr. the new funds would have been available to gen. profits for only part of the yr. Time-weighted average method need to be used to compute the no. of shares outstdg. Assume Profit Attr to Ord S/h = 1.15Mil Eg: Given following info of ABC Plc outstdg shares No. of shares Shares (nominal value 50 cents) in issue at 1/1/20x7 1 Mil Shares issued for cash at mkt pr on 30/9/20x7 0.5 Mil The time weighted no. of shares for EPS comp. at 31/12/20x7 will be No. of shares Shares in issue for 9 mths date of issue (1 Mil x 9/12) 0.75Mil Shares in issue for 3 mths (1.5 Mil x 3/12)0.375Mil 1.125Mil BEPS = RM1.15Mil / 1.125Mil ord shares = RM1.02

  33. Example 5: Buyback at Mkt Value Co prompted buy back own shares when fall in stock mkt. Reasons: (i) To reduce cost of capital when cost eq > debt (ii) Shares undervalued (iii) To return surplus cash to s/h (iv) To increase BEPS growth rate (reduce denominator) See furtherExamples 14sept09.doc

  34. Continue…. Assume ABC PLC has followg info: No of shares Share (50 cents nominal value) in issue 1/1/20x8 1 Mil Shares bought back on 31/5/20x8 0.24Mil Profit attr. to ord. shares RM1.15Mil Time weighted average of no of outstdg shares at 31/12/20x8 1/1/20x8 Shares in issue for 5 mth to date of buyback 1Mil x 5/12 416,667 31/5/20x8 No of shares bought back by co (0.24Mil) 31/12/20x8 Opening Cap less bought back 0.76Mil x 7/12 443,333 Time weighted shares 860,000 BEPS = RM1.15 Mil / 860,000 = RM 1.34 (Result increase in BEPS from RM1.15 , Mgt mechanism to lift BEPS and achieve EPS growth)

  35. Bonus Issue and Share Split • 1st Jan: 2,000,000 OS outstanding • 1st April: 200,000 OS bought back • 1st Sept: 300,000 new OS issued - 31st Dec: declare bonus shares • 1 for every 100 (excluding new shares) • 1 for every 100 (for new issued shares) • 31st Dec: share split  1-into-2 (i.e. shareholders would be holding in total 2 shares for every 1 share in their possession) Weighted Average No of Shares: + 18,000 x 12/12 (bonus – retrospective) = 18K + 3,000 x 4/12(bonus – issue date) = 1K + 1,800,000 x 12/12 (split for initial shares outstanding) [Addl share hold] = 1800K + 300,000 x 4/12 (split for new shares) [Addl share hold] =100K =1,950K + 18K + 1K + 1800K + 100K = 3869K

  36. Rights Issue (i) Giving existing s/h ‘right’ to buy a set no of addl. shares at pr <FV (i.e current mkt pr) (ii) Has 2 characteristics: (a) Cash Issue (b) Bonus Issue – Bec the new shares issued at price < FV Hence, these 2 rules need to be applied for computg time-weighted no of shares

  37. Continue…4 steps for time weighted shares • Calculate average pr. of shares b4 and after rights issue to identify amt of bonus shares • The weighted average no of shares is calculated for current yr • The BEPS for current yr is calculated • The previous yr BEPS is adjusted for the bonus element of the rights issue (i.e. BEPS compute using the outstandg no of shares at beginning of current finl yr)

  38. Example 6 • Examples 14sept09.doc and handout

  39. BEPS – Rights Issue • New shares issued < fair value, Hence there’s element of bonus shares (i.e. weighted average no of shares will incorporate bonus shares + new shares issued) Fair value - RM3.50 (“cum-rights”) Rights - RM2.00 No. shares outstdg at beging = 1000, with right issue = 1750 Notional bonus Assuming notional bonus is 750, this amtadded to shares outstanding at the beginning of the year

  40. Weighted average no of shares outstanding for Rights Issue Total weighted average of shares outstanding = Total no of shares outstanding B4 rights issue X time weightg + New shares issued under rights issue X time weightg

  41. BEPS – Rights Issue Total shares outstanding before rights: No. of shares outstanding before the right issue X FV per share immediately before the exercise Theoretical “ex – rights” FV per share

  42. Alternatively: Total shares outstdg B4 Rights Issue = No of shares outstanding at the beginning + Notional bonus shares

  43. BEPS – Rights Issue Theoretical “ex-rights” FV per share: aggregate market value of shares immediately before the exercise + proceeds of from the exercise Number of shares outstanding after the exercise of the rights Units before rights x price before rights + Units under rights x exercise price Units after rights No of shares outstdg b4 right issue + New shares issued under right issue

  44. Alternatively: Theoretical ‘ex-rights’ price = [No of shares outstanding at the beginning x cum right price (FV price)] + [No of new shares issued under rights x Exercise Price] No of shares Outstdg b4 right issue + New shares issued under right issue

  45. Basic – rights issue Notional bonus: Units before rights x [“Cum-rights” price – “ex-rights” price] “ex-rights” price

  46. Illustration 3 – Rights Issue 1st Jan – 2,000,000 units outstanding 1st Aug – Rights Issue: 1-for-5 at RM2.00 – cum-rights: RM3.50 Shares for EPS = + 400,000 x 5/12 (Usual new shares issued for cash) Total shares outstanding before rights =2,000,000 x (12/12) + (153,846x 7/12)

  47. Illustration 3 – Workings Units issued under rights = 400,000 units (2,000,000/5) Theoretical ex-rights price = RM3.25 Notional bonus = 153,846 units Total shares outstanding before rights =2,089,743.5

  48. Illustration 3 – Answers Total number of shares for the purpose of EPS = = 2,089,743.5 units + 400,000 x 5/12 = (2,000,000 x 7/12) + (153,846 x 7/12) + (2,000,000 x 5/12) + (400,0000 x 5/12) 2,256,410 units

  49. Earnings – Diluted • Potential ordinary shares  Basic AND Diluted EPS • Earnings of BEPS Adjusted for: • Any dividends related to the conversion of the instrument (E.g. Convertible Preference Shares) into potential ordinary shares -- Added to Earnings • Any interest (e.g. related to Convertible Debt) recognised in the period --- Added to Earnings • Other changes in income or expense resulted from conversion (Please read FRS 133: Para 30, 31, 32, 33, 34 & 35)

  50. Example: Earnings – Diluted • CPS – RM500,000 with 4% interest  RM20,000 • CD – RM1,000,000 with 5% interest  RM50,000 Earnings + RM20,000 + RM50,000

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