IAS 33 - Earnings Per Share. Academic Resource Center Share-based payments and earnings per share Page 2 Executive summary EPS: ► The accounting and disclosure

IAS 33 - Earnings Per Share

Academic Resource Center

Share-based payments and earnings per share Page 2

Executive summary

EPS:► The accounting and disclosure requirements for IFRS and US GAAP are substantially the same.

Both require presentation of basic and diluted EPS on the face of the income statement. Both IFRS and US GAAP specify that diluted EPS shall include incremental shares in the calculations, including the effects of stock options and warrants using the treasury-stock method and the effects of contingently issuable shares using the if-converted method.

► For diluted EPS, incremental shares, using IFRS, are computed as if the entire year-to-date period was “the period.” There is no averaging of the current period (quarter) with each of the prior periods (quarters).



Progress on convergence

► The FASB and the IASB are jointly working on a short-term convergence project to resolve the differences in the standards, with both Boards issuing exposure drafts in August 2008. In April 2009, the Boards decided to delay the EPS convergence project pending completion of other projects.



EPSBasic

Requires the disclosure of basic EPS in the statement of income.

Similar, although there are a few detailed application differences in the arithmetical model used to calculate the weighted-average shares outstanding.

IFRSUS GAAP



EPSDiluted

Requires the disclosure of diluted EPS in the statement of income.

Diluted EPS includes incremental shares in the calculations, including the effects of stock options and warrants using the treasury-stock method and the effects of contingently issuable shares using the if-converted method.

Similar, although there are a few detailed application differences in the arithmetical model used to calculate the weighted-average shares outstanding.

IFRSUS GAAP



EPSDiluted

IFRS

► Always assumes that contracts that may be settled in cash or shares will be settled in shares. Thus, these types of contracts will always impact the computation of diluted EPS.

US GAAP

► Presumes that contracts that may be settled in cash or shares will be settled in shares unless evidence is provided to the contrary.

► Such evidence might include a past history of cash settlements of similar instruments or an explicit requirement that the settlement is made in cash.

► These contracts typically impact the computation of diluted EPS, but could be excluded from the computation of diluted EPS if evidence is provided that the settlement will be made in cash.



Example 5An entity issues 1,000 convertible bonds on January 1, 2010. The bonds have a five-year term, are issued at a $1,000 face value at 5% interest per year and are convertible into 100 shares of stock for each $1,000 bond at any time through December 31, 2014. The entity has the option to settle the principal amount of the bonds for either 100 shares for each bond or the equivalent cash amount. The entity has no evidence that the contracts will be settled in cash. During 2010, the entity earned $20.0 million and had 1.0 million common shares outstanding. There is no tax rate and no tax effect is considered in the adjustment to net income for the interest on the bonds.

Contracts that may be settled in cash or shares example

► Calculate the basic and diluted EPS in 2010 under US GAAP and IFRS.

► Assume that management has evidence that the convertible debt will be settled for cash due to its past history of cash settlements and intent to settle in cash. How would this assumption affect the calculation of diluted EPS under US GAAP and IFRS?



Example 5 solution:

Basic EPS

The calculation for basic EPS is the same for US GAAP and IFRS.

Net income $20,000,000

Common shares outstanding 1,000,000


= $20



Example 5 solution (continued):

Diluted EPS

Under US GAAP, the convertible debt is presumed to be settled in shares since there is no evidence to the contrary. IFRS always assumes that the convertible debt would be settled in shares; therefore, the calculation is the same.


Add interest on bonds

(1,000 convertible bonds x $1,000 = $1,000,000 x 5% interest = $50,000) 50,000

Adjusted net income $20,050,000


Add assumed conversion of bonds ($1,000,000/1,000 x 100 = 100,000 shares) 100,000

Adjusted shares outstanding 1,100,000


Adjusted shares outstanding 1,100,000 = $18.23





Cash settlement

With the evidence that management has provided regarding its cash settlement history and intentions to settle in cash, for US GAAP, there would be no consideration of the dilutive effect of the bonds on the diluted EPS calculation, resulting in a diluted EPS of $20 as calculated above under basic EPS. Under IFRS, this evidence would not be considered and share settlement would be presumed, resulting in the diluted EPS of $18.23 as calculated above.




EPSDiluted – calculation of weighted shares outstanding

IFRS

► The number of incremental shares is computed as if the entire year-to-date period was “the period” (that is, there is no averaging of the current period with each of the other periods).

US GAAP

► The number of incremental shares (attributable to options, warrants and contingently issuable shares) is computed using a year-to-date weighted average of the number of incremental shares included in each quarterly calculation.



Example 6

Investors Incorporated (Investors) earned $5.0 million per quarter during 2010, for total net income for the year of $20.0 million. The common shares outstanding remained at 2.0 million shares throughout the year. Investors had 400,000 stock options outstanding during the entire year at an exercise price of $25 per option. No options were exercised during the year.

There were no incremental shares calculated during the first and second quarters as the market price of the common stock was below the grant or exercise price. However,

Calculation of weighted shares outstanding example

► Calculate the basic and diluted EPS for Investors for each quarter, and annually, in 2010 under US GAAP and IFRS.

during the third and fourth quarters, the market price of the stock rose above the grant-date price, thus incremental shares were calculated for these two quarters. The third-quarter average market price was $50 per share and the fourth-quarter average market price was $52.63 per share. The average market price for the year was $34.48 per share.



Example 6 solution:

US GAAP: As shown in the calculation below, Investors determined the quarterly incremental shares using the average for the quarter; however, the annual incremental shares are determined using the average of the quarterly incremental shares.

* Calculated as net income divided by common shares. ** Calculated as net income divided by dilutive shares.


Q1 Q2 Q3 Q4 Year to date

Net income $5,000,000 $5,000,000 $5,000,000 1 $5,000,000 1 $20,000,000 1

Common shares 2,000,000 2,000,000 2,000,000 1 2,000,000 1 2,000,000 1

Incremental shares(1) - - 200,000 (2) 210,000 (3) 102,500 (4)

Dilutive shares 2,000,000 2,000,000 2,200,000 1 2,210,000 1 2,102,500 1

Basic EPS * $2.50 $2.50 $2.50 $2.50 $10.00 1

Diluted EPS ** $2.50 $2.50 $2.27 $2.26 $9.51 (5)



Example 6 solution (continued):(1) Incremental shares attributable to the price of common stock exceeding the exercise price of common stock options, based on the average price of common stock for the quarter.(2) Third-quarter calculation of incremental shares:


Stock options 400,000

Exercise price $25.00

Proceeds to company $10,000,000

Average market price of stock for third quarter $50.00

Shares assumed repurchased 200,000

Incremental shares (400,000 - 200,000 = 200,000) 200,000



Example 6 solution (continued):(3) Fourth-quarter calculation of incremental shares:

(4) Summation of incremental shares for the quarters divided by four.(5) Does not equal the sum of the quarters due to the effect of average incremental shares for the

year.





Average market price of stock for fourth quarter $52.63






IFRS: As shown in the calculation below, Investors determined the quarterly incremental shares in the same manner as US GAAP using the average for each quarter; however, the annual incremental shares are determined using the average for the year. This results in a diluted EPS that is slightly lower ($.03) than US GAAP.

* Calculated as net income divided by common shares. ** Calculated as net income divided by dilutive shares.


Q1 Q2 Q3 Q4 Year to date

Net income $5,000,000 $5,000,000 $5,000,000 1 $5,000,000 1 $20,000,000 1

Common shares 2,000,000 2,000,000 2,000,000 1 2,000,000 1 2,000,000 1

Incremental shares 1) - - 200,000 (2) 210,000 (2) 110,000 (3)

Dilutive shares 2,000,000 2,000,000 2,200,000 1 2,210,000 1 2,110,000 1

Basic EPS * $2.50 $2.50 $2.50 $2.50 1 $10.00 1

Dilutes EPS ** $2.50 $2.50 $2.27 $2.26 1 $9.48 (4)



Example 6 solution (continued):(1) Incremental shares attributable to the price of common stock exceeding the exercise price of common stock options, based on the average price of common stock for that period.(2) This calculation is the same as US GAAP as the period is one quarter. (3) Calculation of annual incremental shares using the period of one year:

(4) Does not equal the sum of the quarters due to the effect of the average incremental shares for the year.





Average market price of stock for the year $34.48





EPSDiluted – contingently issuable shares

IFRS

► Potentially issuable shares are considered “contingently issuable” and are included in diluted EPS using the if-converted method only if the contingencies are satisfied at the end of the reporting period.

US GAAP

► Potentially issuable shares are included in diluted EPS using the if-converted method if one or more contingencies exist that relate to the entity’s share price.



Example 7

The EPS Company (EPS) has issued 5% convertible bonds for $1.0 million, which may be converted into 10,000 shares of common stock if the per-share price of the common stock reaches $40 per share. During the year, EPS earned $20.0 million after taxes and had 2.0 million shares of common stock outstanding, of which the average market price for the common stock was $30 per share. At no time during the year did the market price of the common stock exceed $35. EPS’ tax rate is 40%.

Contingently issuable shares example

► Calculate the diluted earnings per share for EPS for the year under US GAAP and IFRS.



Example 7 solution:

US GAAP:

The diluted EPS calculation would include the incremental shares attributable to the bond even if the common price was not met.



Add interest on bonds less taxes ($1,000,000 x 5% interest x 60% = $30,000) 30,000



Add assumed conversion of bonds 10,000

Adjusted shares outstanding 2,010,000


Adjusted shares outstanding

2,010,000= $9.97




IFRS:

The diluted EPS calculation would not consider the contingently issuable shares as the contingency that gives rise to the conversion feature has not been met. Therefore, the diluted EPS is the same as the basic EPS or $10 calculated as $20.0 million of net income divided by the 2.0 million shares outstanding.




Presentation and disclosureEPS

EPS and basic and diluted EPS computations must be presented on the face of the statement of income each year.

The following must be disclosed:

► How the basic and diluted calculations were determined, including the:

► Weighted-average shares outstanding► Incremental shares► Amount of net income or loss (as adjusted)► Basic and diluted EPS for discontinued

operations

Similar

Similar

IFRSUS GAAP



Presentation and disclosureEPS

IFRS

► Extraordinary items are not permitted.

► Allows adjusted basic and diluted EPS based on alternative earnings measures to be disclosed in the financial statements.

US GAAP

► Basic and diluted EPS must be disclosed for extraordinary items.

► Does not allow EPS based on alternative earnings measures to be disclosed in the financial statements.

Documents

IAS 33 - Earnings Per Share. Academic Resource Center Share-based payments and earnings per share Page 2 Executive summary EPS: ► The accounting and disclosure