IFRS Chapter 18 Earnings Per Share

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/


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


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)


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


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


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.


7/30


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


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


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.


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


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.


12/30


Solution202 201


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


13/30


Rights-issue

Capitalization

of bonus issue

Share splitReverse

share split

The events which change the number of

share outstanding


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.


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.


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?


17/30


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.


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


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.


20/30


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


21/30


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.


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.


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.


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.


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.


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


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


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.


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.


30/30

www.xisu.edu.cn

Documents

IFRS Chapter 18 Earnings Per Share