View
228
Download
0
Category
Preview:
Citation preview
7/28/2019 IFRS Chapter 18 Earnings Per Share
1/30
Chapter 18
Earnings per sharewww.xisu.edu.cn
http://www.xisu.edu.cn/http://www.xisu.edu.cn/7/28/2019 IFRS Chapter 18 Earnings Per Share
2/30
Contents
1. IAS 33 Earnings per share
2. Basic EPS
3. Effect on EPS of changes in capital structure
4. Diluted EPS
5. Presentation, disclosure and other matters
7/28/2019 IFRS Chapter 18 Earnings Per Share
3/30
IAS 33 Earnings per share
Earnings per shareEPS is used to assessthe ongoing financial performance of acompany from year to year, and to compute themajor stock market indicator of performance,
the Price Earnings ratio
PE ratio)
7/28/2019 IFRS Chapter 18 Earnings Per Share
4/30
Key Definition
Ordinary shares. An equity instrument that
is subordinate to all other classes of equityinstruments. Potential ordinary share. A financial
instrument or other contract that may entitleits holder to ordinary shares.
Options, warrants and their equivalents.Financial instruments that give the holder theright to purchase ordinary shares.
Financial instrument. Any contract thatgives rise to both a financial asset of one
entity and a financial liability or equityinstrument of another entity. Equity instrument. Any contract that
evidences a residual interest in the assets ofan entity after deducting all of its liabilities
7/28/2019 IFRS Chapter 18 Earnings Per Share
5/30
Basic EPS
Preference dividends
on non-cumulative
preference shares
deciared in respect ofthe period
The full amount of
the required preference
dividends for
cumulative preference
shares for the period,whether or not they
have been declared
Calculation of basic EPS:
Preference dividends deducted from net profit consist of:
/( )
tan
Net profit loss attributable to ordinary shareholdersBasic EPSWeighted average number of ordinary shares outs ding during the period
7/28/2019 IFRS Chapter 18 Earnings Per Share
6/30
Weighted average number of shares
Example:
Justina Co, a listed company, has the
following share transactions during 207
Shares
Date Details issued1 January 207 Balance at beginning of year 170,000
31 May 207 Issue of new shares for cash 80,000
31 December 207 Balance at year end 250,000
RequiredCalculate the weighted average number
of shares outstanding for 207.
7/28/2019 IFRS Chapter 18 Earnings Per Share
7/30
Weighted average number of shares
Solution
The weighted average number of sharescan be calculated in two ways.
(a) (170,0005/12)+(250,0007/12)
=216,666 shares
(b) (170,00012/12)+(80,0007/12)
=216,666 shares
7/28/2019 IFRS Chapter 18 Earnings Per Share
8/30
Consideration
Consideration Start date for inclusion
In exchange for cash When cash is receivable
As a result of the conversion of adebt instrument to ordinary
shares
Date interest ceases accruing
In place of interest or principalon other financial instruments
Date interest ceases accruing
In exchange for the settlementof a liability of the entity
The settlement date
As consideration for theacquisition of an asset otherthan cash
The date on which theacquisition if recognized
For the rendering of services tothe entity
As services are rendered
7/28/2019 IFRS Chapter 18 Earnings Per Share
9/30
Basic EPS
QuestionFlame Co is a company with a called up and paid up capital
of 100,000 ordinary share of $1 each and 20,000 10%
redeemable preference shares of $1 each. The company
manufactures gas appliances. During its financial year to 31
December the company had to pay $50,000 compensation
and costs arising from an uninsured claim for personal injuries
suffered by a customer while on the company premises.
The gross profit was $200,000. Flame Co paid the required
preference share dividend and declared an ordinary dividendof 42c per share. Assuming an income tax rate of 30% on the
given figures show the trading results an EPS of the company.
7/28/2019 IFRS Chapter 18 Earnings Per Share
10/30
Basic EPS
Answer
FLAME COTRADING RESULTS FOR YEAR TO 31 DECEMBER $
Gross profit 200,000
Expense (50,000+2,000 preference dividend) (52,000)
Profit before tax 148,000
Tax at 30% (44,400)
Profits for the period 103,600
EARNINGS PER SHARE
103,600/100,000=103.6c
7/28/2019 IFRS Chapter 18 Earnings Per Share
11/30
Earnings per share with a new issue
ExampleOn 30 September 202, Boffin Co made an issueat full market price of 1,000,000 ordinary shares.The companys accounting year runs from 1January to December. Relevant information for
20
1 and 20
2 is as follows.202 201
Share in issue as at 31 December 9,000,000 8,000,000
Profit after tax and preference
dividend $3,300,000 $3,280,000
RequiredCalculate the EPS for 202 and the corresponding
figure for 201.
7/28/2019 IFRS Chapter 18 Earnings Per Share
12/30
Earnings per share with a new issue
Solution202 201
Weighted average number of shares
8 million9/12 6,000,000
8 million
3/12 2,250,0008,250,000 8,000,000
Earnings $3,300,000$ 3,280,000
EPS 40 cents 41 cents
7/28/2019 IFRS Chapter 18 Earnings Per Share
13/30
Earnings per share with a new issue
Rights-issue
Capitalization
of bonus issue
Share splitReverse
share split
The events which change the number of
share outstanding
7/28/2019 IFRS Chapter 18 Earnings Per Share
14/30
Earnings per share with a bonus issue
Example
Greymatter Co had 400,000 shares in issue,
until on 30 September 202 it made a bonus
issue of 100,000 shares. Calculate the EPS
for 202 and the corresponding figure for
EPS are to remain comparable.
7/28/2019 IFRS Chapter 18 Earnings Per Share
15/30
Earnings per share with a bonus issue
Solution202 201
Earnings $80,000 $75,000
Shares at 1 January 400,000 400,000
Bonus issue 100,000 100,000500,000 share 500,000 share
EPS 16c 15c
The number of shares for 201 must also be
adjusted if the figures for EPS are to remain
comparable.
7/28/2019 IFRS Chapter 18 Earnings Per Share
16/30
Theoretical ex-rights price
Example
Suppose that Egghead Co has 10,000,000
shares in issue. It now proposes to make a 1
for 4 rights issue at a price of $3 per share.
The market value of existing shares on the
final day before the issue is made is $3.50
(this is the with rights value). What is the
theoretical ex-rights price per share?
7/28/2019 IFRS Chapter 18 Earnings Per Share
17/30
Theoretical ex-rights price
Solution
$Before issue 4 shares, value $3.50 each 14.00
Rights issue 1 share, value $3 3.00
Theoretical value of 5 shares 17.00
Theoretical ex-rights price=$17.00/5=$3.40 per
share
Not that this calculation can alternatively beperformed using the total value and number of
outstanding shares.
7/28/2019 IFRS Chapter 18 Earnings Per Share
18/30
Procedures
(a) The EPS for the corresponding previous period should be
multiplied by the following fraction.
(b) To obtain the EPS for the current year you should:
(i) Multiply the number of shares before the rights issue by thefraction of the year before the date of issue and by the following
fraction.
(ii) Multiply the number of shares after the rights issue by thefraction of the year after the date of issue and add to the figure
arrived at in (i).
Fair value per share immediately before the exercise of rights
Theoretical ex rights fair value per share
Theoretical ex rights fair value per share
Fair value per share immediately before the exercise of rights
7/28/2019 IFRS Chapter 18 Earnings Per Share
19/30
Earning per share with a rights issue
Example
Brains Co had 100,000 shares in issue, but
then makes a 1 for 5 rights issue on 1
October 202 at a price of $1. The market
value on the last day of quotation with rights
was $1.60.
Calculate the EPS for 202 and the
corresponding figure for 201 given total
earnings of $50,000 in 202 and $40,000 in
201.
7/28/2019 IFRS Chapter 18 Earnings Per Share
20/30
Theoretical ex-rights price
SolutionCalculation of theoretical ex-rights price:
$
Before issue 5 shares, value$1.60 8.00
Rights issue 1 share, value $1.00 1.00
Theoretical value of 6 shares 9.00
Theoretical ex-rights price=$9/6=$1.50
EPS for 201
EPS as calculated before taking into account the tightsissue=40c
EPS=1.5/1.640c=37.5c
7/28/2019 IFRS Chapter 18 Earnings Per Share
21/30
Theoretical ex-rights price
SolutionEPS for 202
Number of shares before the tights issue was
100,000.20,000 shares were issued.
stage 1: 100,000
9/12
1.6/1.5 80,000stage 2: 120,0003/12 30,000
EPS=$50,000/110,000=45.5c
The figure for total earnings is the actual earnings
for the years.
7/28/2019 IFRS Chapter 18 Earnings Per Share
22/30
Diluted EPS
Diluted EPS is a theoretical measure of
the effect of dilution on basic EPS and is
not used as much as basic EPS by analysts
because of its hypothetical nature.
7/28/2019 IFRS Chapter 18 Earnings Per Share
23/30
Earnings
The earnings calculated for basic EPS should be
adjusted by the post-tax (including deferred tax)
effect of:
(a) Any dividends on dilutive potential ordinary
shares that were deducted to arrive at earnings for
basic EPS.
(b) Interest recognized in the period for the
dilutive potential ordinary shares.
(c) Any other changes in income or expenses(fees or discount) that would result from the
conversion of the dilutive potential ordinary shares.
7/28/2019 IFRS Chapter 18 Earnings Per Share
24/30
Per share
The computationassumes the most
advantageous conversion
rate or exercise rate from
the standpoint of the holder
of the potential ordinary
shares.
Contingerntly issuable(potential) ordinary shares are
treated as for basis EPS; if the
conditions have not been met,
the number of contingently
issuable shares included in the
computation is based on thenumber of shares that would be
issuable if the end of the
reporting period was the end of
the contingency period.
It should be assumed that dilutive ordinary shares were
converted into ordinary shares at the beginning of the
period or, if later, at the actual date of issue. There are two
other point.
7/28/2019 IFRS Chapter 18 Earnings Per Share
25/30
Diluted EPS
ExampleIn 207 Farrah Co had a basic EPS of 105c
based on earnings of $105,000 and 100,000
ordinary $1 shares. It also had in issue $40,000
15% convertible loan stock which is convertible intwo years time at the rate of 4 ordinary shares for
every %5 of stock. The rate of tax is 30%. In 207
gross profit of $200,000 and expenses of $50,000
were recorded, including interest payable of $6,000.
Required
Calculate the diluted EPS.
7/28/2019 IFRS Chapter 18 Earnings Per Share
26/30
Diluted EPS
Solution
Diluted EPS is calculated as follows:Step 1 Number of shares: the additional equity
on conversion of the loan stock will be40,0004/5=32,000 shares
Step 2 Earnings: Farrah Co will save interestpayments of $6,000 but this increase in profits will betaxed. Hence the earnings figure may be recalculated:
$Gross profit 200,000
Expenses (50,000-6,000) (44,000)Profit before tax 156,000Tax expense (30%) (46,800)Earnings 109,200
7/28/2019 IFRS Chapter 18 Earnings Per Share
27/30
Diluted EPS
Step 3 Calculation:
Diluted EPS=$109,200/132,000=82.7c
Step 4 Dilution:
the dilution in earnings would be
105c-82.7c=22.3c per share
7/28/2019 IFRS Chapter 18 Earnings Per Share
28/30
Presentation, disclosure and other matters
PresentationDisclosure must still be made where the EPS
figures (basic and/or diluted) are negative (ie a lossper share).
DisclosureAn entity should disclose the following.(a) The amounts used as the numerators in
calculating basic and diluted EPS, and a reconciliationof those amounts to the net profit or loss for the period.
(b) The weighted average number of ordinaryshares used as the denominator in calculating basicand diluted EPS, and a reconciliation of thesedenominators to each other.
7/28/2019 IFRS Chapter 18 Earnings Per Share
29/30
Presentation, disclosure and other matters
Alternative EPS figuresAn entity may present alternative EPS figures if it
wishes. IAS 33 lays out certain rules where this takesplace.
(a) The weighted average number of shares as
calculated under IAS 33 must be used.(b) A reconciliation must be given between thecomponent of profit used in the alternative EPS (if it isnot a line item in the statement of comprehensiveincome) and the line item for profit reported in thestatement of comprehensive income.
(c) Basic and diluted EPS must be shown with equalprominence.
7/28/2019 IFRS Chapter 18 Earnings Per Share
30/30
www.xisu.edu.cn
Recommended