Chapter 20
IAS 33 Earnings per Share
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CHAPTER 20:
IAS 33
Earnings per Share
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EARNINGS PER SHARE (EPS)
Definition:
EPS refers to the earnings made on the shares of its stock.
It is an analysis tool used to assess company’s performance.
High EPS indicates that the company is more profitable and has more profits to
distribute to shareholders.
It is utilised by potential users of the financial statements in its own right and is part of
the Price/ Earnings (P/E) ratio.
PLC’s must disclose both basic and diluted EPS.
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BASIC EPS
Basic EPS:
Shows how much of a company’s net income was allotted to each ordinary share
Earnings (profits attributable to ordinary shareholders)
Basic EPS = ––––––––––––––––––––––––––––––––––––––––––
Weighted average number of ordinary shares
Note:
1. Earnings = PAT – NCI share of profits – irredeemable preference share
dividends
2. Redeemable preference share dividends are not removed from earnings. Because
they should be treated as finance costs so are already incorporated within PAT.
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BASIC EPS………………
Weighted average number of ordinary shares (WAV):
Shares qualify for earnings from the date of issues (date of existence)
Therefore to accurately calculate WAV, the impact of the following types of share
issues must be considered:
full price issues
bonus issues (scrip issues)
rights issues
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Weighted Average Number of Ordinary Shares
Full market price issue in the year
• Multiply number of shares in issue by time weighting
• Despite bringing additional resources to the entity, the impact on the earnings starts
from the date of issue.
• So, the number of shares are apportioned.
E.g. Profit for the year ended
31.12.X7 is $400,000; 1m shares Working:
were in issue at 1.1.X7 and a further
500,000 were issued on 1.8.X7. 1m x 7/12m 583,333
1.5m x 5/12m 625,000
EPS = $400,000 = 33.1c 1,208,333
1,208,333
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Bonus Issue
Has NO consideration – treated as if they were in issue for the whole
period
• Multiply number of shares in issue by time weighting
• Apply bonus fraction to shares in issue before bonus issue (scale
up)
Shares after bonus
Shares before bonus
E.g. Profit for the year ended
Working:
31.12.X8 is $1,500,000; 2m shares
were in issue at 1.1.X8 and a bonus
2 m x 6/12m x 11/10 1,100,000
issue of 1 for 10 made on 1.7.X8.
2.2m x 6/12m 1,100,000
2,200,000
EPS = $1,500,000 = 68.2c
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Comparative EPS after a Bonus Issue
• AS 33 is treating the bonus issue as if it had also occurred in the previous year.
• The impact of the bonus issue on the comparative (last years’) EPS calculation
must be considered.
• Adjusted comparative EPS = Last years’ EPS × inverse of the bonus
fraction
E.g. Profit for the year ended 31.12.X7 was $1,800,000; there
were 2m shares in issue throughout the period.
As previously Recalculated with
“Quick method”
calculated bonus shares
1,800,000 = 90c 1,800,000 = 81.8c
90c x 10/11 = 81.8c
2,000,000 2,200,000
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Activity: Bonus Issue
Webb Co reported profits of $5.45m in the year ended 30 June
20X9. It had 3 million shares in issue at 1 July 20X8 and made a
cash issue of a further 1 million shares on 1 October 20X8. On 1
March 20X9 it made a bonus issue of 1 for 8 shares.
The EPS reported for the year ended 30 June 20X8 was 1.36c.
What EPS (current year and comparative) are presented in the
financial statements for the year ended 30 June 20X9?
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Answer to Activity: Bonus Issue
1. Weighted average no. of shares
1 July – 30 Sept 20X8 3,000,000 x 3/12 x 9/8 843,750
Cash issue 1,000,000
1 Oct 20X8 – 28 Feb 20X9 4,000,000 x 5/12 x 9/8 1,875,000
Bonus issue 500,000
1 March – 30 June 20X9 4,500,000 x 4/12 1,500,000
4,218,750
2. 20X9 EPS: 5,450,000 = $1.29
4,218,750
3. Restate comparative for 20X8: 1.36c x 8/9 = $1.21
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Rights Issue
• Multiply number of shares in issue by time weighting
• Apply rights bonus fraction to shares in issue before rights issue
cum-rights price (Market price of shares pre-rights issue)
TERP
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Rights Issue……………..
• Theoretical ex rights price (TERP) – price of the shares immediately after the
rights issue.
• It is calculated as a weighted average price as follows: e.g. 1 for 4 rights issue for
$3.80. Market value of a share pre-rights issue was $4.50
No. of share Price per share Total value
$ $
Holding (cum-rights) 4 4.5 18.00
Rights 1 3.8 3.80
5 21.80
Therefore TERP = $21.8/5 = $4.36
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Example: Rights Issue
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Activity: Rights Issue
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Answer to Activity: Rights Issue
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Diluted EPS
• It is a measure of a company's earnings if all its convertible (dilutive) securities
were exercised.
• It is the worst case scenario
Profit in basic EPS + income/expense on issue of dilutive potential ordinary shares
Weighted average no. of shares + dilutive potential ordinary shares
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Dilutive Potential Ordinary Shares
Potential ordinary shares
Share options Convertible instruments
No effect on profit; more
Additional profit; more shares
shares
Always dilutive (always Only dilutive if shares
reduce EPS) increase by proportionately
more than profit
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Convertible Instruments – Dilutive or Not?
Basic EPS is 22.5c ($2.75m $1m x 5% x 80% = $40,000 increase
profit/12.2m shares) to profit
$1m 5% convertible debt is Standalone EPS 40,000 = 16c Dilutive
convertible into 250,000 ordinary 250,000
shares at the debt holders’ option
$3m x 7% x 80% = $168,000 increase
to profit
$3m 7% convertible debt is
convertible into 700,000 ordinary Standalone EPS 168,000 = 24c
Anti
dilutive
shares at the debt holders’ option 700,000
The tax rate is 20%
Diluted EPS:$2,750,000 + $40,000 = 22.4c
12,200,000 + 250,000
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Share Options
Always dilutive
No adjustment to profit attributable to ordinary shareholders
Increase weighted ave no. of shares by “free” shares
Proceeds of exercise:
E.g. A company has 800,000 share 800,000 x $6 = $4,800,000
options in issue, with an exercise
price of $6. The average fair value of Shares at market value:
a share in the financial year was $4,800,000/$7.5 = 640,000
$7.50.
Therefore free shares:
800,000 – 640,000 = 160,000
In diluted EPS calculation increase
weighted ave no. of shares by 160,000
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Calculating Diluted EPS
1. Basic EPS $2,750,000 = 22.5c
12,200,000
2. Add in share options $2,750,000 = 22.2c
12,200,000 + 160,000
Fully
3. Add in convertible debt $2,750,000 + $40,000 = 22.1c
diluted
12,200,000 + 160,000 +250,000
EPS
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Significance and limitations of EPS
Benefits
Allows better comparison of performance of companies of different sizes
Used in calculation of P/E ratio (Price earnings ratio)
Drawbacks
Affected by accounting policies because it is based on profit
Historical and cannot be used to predict future earnings
Concentrates on profitability
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Real world example
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Exam focus
Discuss/
EPS
explain/
calculation
analyse
‘Add on’ in
OTQs
Section C
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Chapter 20: Summary
Basic EPS is:
Profit attributable to ordinary shareholders/weighted average number of
ordinary shares
The weighting is for share issues in the reporting period
A bonus fraction is applied to shares in issue prior to a bonus or rights issue
Diluted EPS is calculated by adjusting for dilutive potential ordinary shares
Share options are dilutive when the exercise price is lower than the market
price of a share – the denominator is increased by the number of “free” shares
Convertible instruments may be dilutive:
̶ Increase denominator by the number of potential ordinary shares
̶ Increased numerator by the post-tax interest saving
EPS is disclosed in the SoPL and OCI.
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Chapter 20: Practice questions
Study Question Bank
Earnings per Share 30 mins*
Barstead 20 mins*
* plus time for tutor guidance
For FR
Attempt the Study Question Bank questions listed above after studying this chapter
Attempt Revision Question Bank questions in your revision phase, after studying all chapters
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Thank you
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