IAS 2 Inventories
IAS 7 Statement of cash flows – Revisited
IAS 33 Earnings per share – Revisited
IAS 33 Earnings per share Overview
IAS 33 Earnings per share prescribes the principles for Calculating and Presenting earnings per share (EPS) amounts, which is used to improve performance. By comparisons between different entities in the same reporting period and between different reporting periods for the same entity.
Tackle IAS in TWO simple steps:
- Understanding IAS 33
- Accounting treatment for IAS 33
Step 1: Understanding IAS 33 Earnings Per Share
- Earnings are Profits available for equity (ordinary share holders).
- Earnings Per Share (EPS) is a measure of the amount of earnings in a financial period, for each equity share.
- EPS is calculated as reported earnings (adjusted for a few things) and divided by the weighted average number of ordinary shares on that year.
- IAS 33 specifies the Profit figure that should be used and explains how to calculate the appropriate no. of shares, when there have been changes in share capital during the period under review; and
also describes the concept in dilution ( NOT covered here ), which is caused by the existence of Potential ordinary shares.
The following IAS 33 notes are prepared with illustrative examples.
Step 2: Accounting treatment for EPS (Basic)
Basic EPS is calculated by dividing the Profit or loss (Total Earning) on Continuing Operations by the weighted average no. of ordinary shares in issue during the period.
- It is the Profit/loss from the continuing operations after deducting tax and preference dividend.
- In case of consolidated financial statement, after excluding the earnings attributed to Non controlling Interest.
- Total earnings include any income from associates.
- where there is a net loss, total earnings and EPS are Negative.
Total earnings must be adjusted for:
- Preference Share:
Must be classified as equity or liability;
- Equity any dividend relating to the share is recognize in equity. Any dividend must be deducted from P/L from continuing operations.
- Liability (redeemable pre. share) any dividend relating to that share is recognized as a finance cost in P/L . It is already deducted from the P/L from continuing operations and NO further adjustment needs to be made.
2. Cumulative Preference shares:
- where a company fails to declare a preference dividend in a period, the holders are entitled to receive the missed dividend sometimes in future . The dividend accumulates when not declared.
- if there are cumulative preference shares in issue , the dividend must be deducted from P/L from continuing operations, regardless of whether the dividend has been declared or not.
- for Non-cumulative the dividend would have been deducted only in case of declaration.
3. Increasing rate Preference share:
- The amount that arises on discounting the proceeds that will be received in future are amortized using the interest rate and treated as preference dividend for calculation of EPS. Other elements such as transaction cost may also be amortized.
4. Early conversion of Preference share:
- where there is early conversion of Convertible preference share, the excess amount transferred is treated as a return to preference share holders and must be deducted for EPS.
Deduction = Fair value of ordinary shares issued (paid dated) minus Fair value under original terms.
5. Re-Purchase of Preference share:
- where the fair value of the consideration paid to pref. shareholder exceeds the carrying value of the pref. share repurchased, the excess is a return to the pref. shareholders and must be deducted from the profit.
- where the carrying value of pref. share repurchased exceeds the fair value of consideration paid, the excess is added in profit.
- where pref. share are treated as liabilities, NO adjustment is needed.
6. Participating securities and two-class ordinary shares:
The equity of some entities includes;
- instruments that participate in dividends with ordinary shares according to a predetermined formula.
- a class of ordinary shares with a different dividend rate from that of another class of ordinary share.
- Profit or loss (Distributable) is allocated to the two-class shareholders in accordance with their dividend rights.
- the Undistributed Profit [Total profit minus (ordinary plus pref. dividend)] is allocated to the two-class using calculated rates.
There are different ways in which the no. of share may change;
- issue for full consideration.
- issued for no consideration.
IAS 33 earnings per share examples (issued for no consideration)
- Bonus shares
- Shares splits
- Reverse share Splits
- Bonus elements in other issue
iii. Right issue.
Weighted average no. of Shares must be adjusted for:
- Issue at the full market price:
These are included from the date of issue.
- Partly paid shares:
- The no. of ordinary shares is calculated based on the number of fully paid shares. The partly paid shares are included as an equivalent no. of fully paid shares to the extent they are entitled to participation in dividends.
- Bonus issue new shares issued ‘ free of charge ‘ to existing share holders, often by converting equity reserves ( share premium a/c ) into ordinary share capital.
- NO CASH is raised , therefore no earnings boost from the issue. The new no. of shares is found by multiplying the no. of shares before the bonus issue by the bonus issue fraction (i.e = share after bonus issue divide by share before issue).
- bonus issue are treated as if they always been in issue. Therefore multiply every issue before bonus issue with bonus fraction.
- Comparative figures; it would be misleading , as there are no earnings boost due to bonus issue. Therefore , previous year’s EPS is restated by multiplying it with inverse of bonus fraction.
- Rights issue of shares
- It is an issue of new shares for cash, where the issue price is always below the current market price. This means that they include a bonus element which must be taken into account for calculation of weighted average no. of shares.
- just like Bonus issue , any comparative figure must be restated by multiplying previous year’s EPS by inverse of the ‘Right issue bonus fraction’ (Actual cum right price divide by Theoretical ex-right price).
- Actual cum right price is the market price before the right issue
Theoretical ex-rights is the price entity issued that shares.