IAS 33: EARNINGS PER
SHARE
Scope
IAS 33 has the following scope restrictions:
•(a) Only companies with (potential) ordinary shares which are publicly traded need to present EPS (including companies in the process of
being listed).
•(b) EPS need only be presented on the basis of consolidated results
where the parent's results are shown as well.
Basic ES Calculation
• Basic EPS is calculated by dividing the net profit or loss for the period attributable to ordinary
shareholders by the weighted average number of ordinary shares outstanding during the period.
• Basic EPS = Net profit / (loss) attributable to ordinary shareholders Weighted average number of ordinary shares outstanding
during the period
Earnings
•Earnings include all items of income and expense (including tax and non-controlling interests) less net profit attributable to preference shareholders,
including preference dividends.
Per share
•The number of ordinary shares used is the weighted average number of ordinary shares during the period.
•This figure (for all periods presented) should be adjusted for events that have changed the number of shares outstanding without a
corresponding change in resources.
•The time-weighting factor is the number of days the shares were
outstanding compared with the total number of days in the period; a
reasonable approximation using whole months is usually adequate.
Example: weighted average number of shares
• Justina Ltd, a listed company, has the following share transactions during 2014.
Shares
• Date Details issued
• 1 January 2014 Balance at beginning of year 170,000
• 31 March 2014 Issue of new shares for cash 80,000 ---
• 31 December 2014 Balance at year end 250,000
========
• Required
• Calculate the weighted average number of shares outstanding for 2014.
Solution
•The weighted average number of shares can be calculated in two ways.
•(a) (170,000 x 3/12) + (250,000 x 9/12) = 230,000 shares
•(b) (170,000 x 12/12) + (80,000 x 9/12) = 230,000 shares
Question: Basic EPS
• Adom Ltd is a company with capital of 100,000 ordinary shares each and 20,000 10% redeemable preference shares of GHS1 each.
• The gross profit was GHS200,000 and trading expenses were GHS50,000.
• Adom paid the required preference share dividend and an ordinary dividend of 42Gp per share.
• The tax charge for the year was estimated at GHS40,000.
Calculate basic EPS for the year.
• Answer
GHS
• Gross profit 200,000
• Expense (50,000 + 2,000 preference dividend) (52,000)
• Profit before tax 148,000
• Income tax expense (40,000)
• Profit for the year 108,000
• EARNINGS PER SHARE
GHS108,000 = 108 pesewas 100,000 shares
Example: earnings per share with a new issue
• On 30 September 2014, Boafo Ltd made an issue at full market price of 1,000,000 ordinary shares.
• The company's accounting year runs from 1 January to 31 December.
Relevant information for 2013 and 2014 is as follows.
2014 2013
• Shares in issue as at 31 December 9,000,000 8,000,000
• Profits after tax and preference dividend
[GHS] 3,300,000 3,280,000
• Required
• Calculate the EPS for 2014 and the corresponding figure for 2013.
Solution
2014 2013
•Weighted average number of shares
•8 million x9/12 6,000,000
•9 million x 3/12 2,250,000
8,250,000 8,000,000
•Earnings [GHS] 3,300,000 3,280,000
•EPS (in pesewas) 40 41
• In spite of the increase in total earnings by GHS20,000 in 2014, the EPS is not as good as in 2013, because there was extra capital employed for the final three months of 2014.
• There are other events, however, which change the number of shares outstanding, without a corresponding change in resources.
• In these circumstances it is necessary to make adjustments so that the current and prior period EPS figures are
comparable .
Capitalisation/bonus issue /reverse share split
• These two types of event can be considered together as they have a similar effect.
• In both cases, ordinary shares are issued to existing shareholders for no additional consideration.
• The number of ordinary shares has increased without an increase in resources.
• This problem is solved by adjusting the number of ordinary shares
outstanding before the event for the proportionate change in the
number of shares outstanding as if the event had occurred at the
beginning of the earliest period reported.
Example: earnings per share with a bonus issue
• Adom Ltd had 400,000 shares in issue, until on 30 September 2014 it made a bonus issue of 100,000 shares.
• The company's accounting year runs from 1 January to 31 December.
• Calculate the EPS for 2014 and the corresponding
figure for 2013 if total earnings were GHS80,000 in
2014 and GHS75,000 in 2013.
2014
• Earnings GHS80,000
• Shares at 1 January 400,000
• Bonus issue 100,000 ---
500,000 shares
• EPS = GHS80,000/500,000 shares = 16Gp
• The number of shares for 2013 must also be adjusted if the figures for EPS are to remain comparable.
• The EPS for 2013 [as comparative to 2014] is therefore restated as: 18.75Gp × 400/500 = 15 p
Rights issue
• A rights issue of shares is an issue of new shares to existing shareholders at a price below the current market value.
• The offer of new shares is made on the basis of x new shares for every y shares currently held; eg a 1 for 3 rights issue is an offer of one new share at the offer price for every three shares currently held.
• This means that there is a bonus element included.
• To arrive at figures for EPS when a rights issue is made, we need to calculate first the theoretical ex-rights price.
• This is a weighted average value per share, and is perhaps explained
most easily with a numerical example.
Example: theoretical ex-rights price
• Suppose that Egghead Ltd has 10,000,000 shares in issue.
• It now proposes to make a 1 for 4 rights issue at a price of GHS3 per share.
• The market value of existing shares on the final day before the issue is made is GHS3.50 (this is the 'with rights' value).
• What is the theoretical ex-rights price per share?
• Solution GHS
• Before issue 4 shares, value GHS3.50 each 14.00
• Rights issue 1 share, value GHS3 3.00
• Theoretical value of 5 shares 17.00
• Theoretical ex-rights price = GHS17.00 5
= GHS3.40 per share
• Note that this calculation can alternatively be performed using the total value and number of outstanding shares.
Procedures
• The procedures for calculating the EPS for the current year and a corresponding figure for the previous year are:
• (a) The EPS for the corresponding previous period is multiplied by the following fraction.
• (Note. The market price on the last day of quotation is taken as the fair value immediately prior to exercise of the rights, as required by the standard.
Theoretical ex – rights fair value per share
Fair value per share immediately before the exercise of rights (cum
rights price)
• (b) To obtain the EPS for the current year you should:
• (i) Multiply the number of shares before the rights issue by the fraction of the year before the date of issue and by the following fraction
Fair value per share immediately before the exercise of rights (cum rights price)
Theoretical ex – rights fair value per share
• (ii) Multiply the number of shares after the rights issue by the fraction of the year after the date of issue and add to the figure arrived at in (i)
The total earnings should then be divided by the total number of shares so calculated.
Example: earnings per share with a rights issue
• Brains Ltd had 100,000 shares in issue, but then makes a 1 for 5 rights issue on 1 October 2014 at a price of GHS1. The market value on the last day of quotation with rights was GHS1.60.
• Calculate the EPS for the year ended 31 December 2014 and the
corresponding figure for 2013 given total earnings of GHS50,000 in
2014 and GHS40,000 in 2013.
Solution
Calculation of theoretical ex-rights price:
GHS
•Before issue 5 shares, value x GHS1.60 8.00
•Rights issue 1 share, value x GHS1.00 1.00
•Theoretical value of 6 shares 9.00
•Theoretical ex-rights price = GHS9/6= GHS1.50
• EPS for 2013
• EPS as calculated before taking into account the rights issue = 40Gp (GHS40,000 divided by 100,000 shares).
• EPS = 1.50 / 1.60 x 40 p = 37½Gp
• (Remember. This is the corresponding value for 2013 which will be
shown in the financial statements at the end of 2014.)
EPS for 2014
•Number of shares before the rights issue was 100,000. 20,000 shares were issued.
•Stage 1: 100,000 x 9/12 x 1.60 1.50 80,000
•Stage 2: 120,000 x3/12 30,000 110,000
•EPS = GHS50,000
110,000 = 45½Gp
•The figure for total earnings is the actual earnings for the year.
Question Rights issue
• Somanya Ltd has produced the following net profit figures for the years ending 31 December.
GHSm
• 2013 1.1
• 2014 1.5
• 2015 1.8
• On 1 January 2014 the number of shares outstanding was 500,000.
During 2015 the company announced a rights issue with the following
details.
• Rights: 1 new share for each 5 outstanding (100,000 new shares in total)
• Exercise price: GHS5.00
• Last date to exercise rights: 1 March 2014
• The market (fair) value of one share in Somanya immediately prior to exercise on 1 March 2014 = GHS11.00.
• Required
• Calculate the EPS for 2013, 2014 and 2015.
Answer
Computation of theoretical ex-rights price
•This computation uses the total fair value and number of shares.
Fair value of all outstanding shares+ total received from exercise of rights
No shares outstanding prior to exercise +no shares issued in exercise
= (GHS11.00×500,000)+(GHS5.00×100,000) 500,000+100,000
= GHS10.00
• Computation of EPS
2013 2014 2015 GHS GHS GHS
• 2013 EPS as originally reported
GHS1,100,000 2.20
500,000
• 2013 EPS restated for rights issue
GHS1,100,000 x10/11 (2.20 x10/11) 2.00
500,000
• 2014 EPS including effects of rights issue 2014 2015 GHS1,500,000
(500,000×2 /12×11/10)+(600,000×10 /12) 2.54
• 2015
• EPS = GHS1,800,000
600,000 3.00
Diluted EPS
• Diluted EPS is calculated by adjusting the net profit due to continuing operations attributable to ordinary shareholders and the weighted average number of
shares outstanding for the effects of all dilutive
potential ordinary shares.
Introduction
• At the end of an accounting period, a company may have in issue
some securities which do not (at present) have any 'claim' to a share of equity earnings, but may give rise to such a claim in the future.
These securities include:
• (a) A separate class of equity shares which at present is not entitled to any dividend, but will be entitled after some future date
• (b) Convertible loan stock or convertible preferred shares which give their holders the right at some future date to exchange their
securities for ordinary shares of the company, at a pre-determined conversion rate
• (c) Options or warrants
• In such circumstances, the future number of ordinary shares in issue might increase, which in turn results in a fall in the EPS.
• In other words, a future increase in the number of ordinary shares will cause a dilution or 'watering down' of equity,
and it is possible to calculate a diluted earnings per share (ie the EPS that would have been obtained during the financial period if the dilution had already taken place).
• This will indicate to investors the possible effects of a future
dilution.
Earnings
• The earnings calculated for basic EPS should be based on continuing operations and 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 recognised in the period for the dilutive potential ordinary shares (convertible debt)
• (c) Any other changes in income or expenses (fees or discount) that
would result from the conversion of the dilutive potential ordinary
shares
• The conversion of some potential ordinary shares may lead to changes in other income or expenses.
• For example, the reduction of interest expense related to potential ordinary shares and the resulting increase in net profit for the period may lead to an increase in the expense relating to a non-discretionary employee profit-sharing plan.
• When calculating diluted EPS, the net profit or loss for the period is
adjusted for any such consequential changes in income or expense.
Per share
• The number of ordinary shares is the weighted average
number of ordinary shares calculated for basic EPS plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential
ordinary shares into ordinary shares.
• 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 points :
• (a) The computation assumes the most advantageous conversion rate or exercise rate from the standpoint of the holder of the potential ordinary shares.
• (b) Contingently issuable (potential) ordinary shares
are treated as for basic EPS.
Diluted EPS
• In 2014 Baba Ltd had a basic EPS of 105p based on earnings of GHS105,000 and 100,000 ordinary shares.
• It also had in issue GHS40,000 15% convertible loan stock which is convertible in two years' time at the rate of 4
ordinary shares for every GHS5 of stock.
• The rate of tax is 30%.
• Required
• Calculate the diluted EPS.
Solution
• Diluted EPS is calculated as follows.
• Step 1 Number of shares: the additional equity on conversion of the loan stock will be 40,000 × 4/5 = 32,000 shares.
• Step 2 Earnings: Baba will save interest payments of GHS6,000
(40,000 x 15%) but this increase in profits will be taxed. Hence the earnings figure may be recalculated:
• (105,000 + (6,000 x 70%)) = GHS109,200
• Step 3 Calculation: Diluted EPS = GHS109,200/ 132,000 = 82.7Gp
• Step 4 Dilution: the dilution in earnings would be 105Gp -82.7Gp =
22.3Gp per share.
Question Diluted EPS
• Asem Ltd has 5,000,000 ordinary shares in issue. It has also issued GHS1,000,000 of 14% convertible loan stock, convertible in three years' time at the rate of two shares per GHS10 of stock and
GHS2,000,000 of 10% convertible loan stock, convertible in one year's time at the rate of three shares per GHS5 of stock.
• The total earnings in 2015 were GHS1,750,000.
• The rate of income tax is 35%.
• Required
• Calculate the basic EPS and diluted EPS.
Solution
• (a) Basic EPS = GHS1,750,000 5 million = 35Gp
• (b) We must decide which of the potential ordinary shares (ie the loan stocks) are dilutive (ie would decrease the EPS if converted).
• For the 14% loan stock, incremental EPS = 0.65×GHS140,000 200,000 shares = 45.5Gp
• For the 10% loan stock, incremental EPS = 0.65×GHS200,000
1.2m shares = 10.8Gp
• The effect of converting the 14% loan stock is therefore to increase
the EPS figure, since the incremental EPS of 45.5Gp is greater than the basic EPS of 35Gp.
• The 14% loan stock is not dilutive and is therefore excluded from the diluted EPS calculation.
• The 10% loan stock is dilutive.
• Diluted EPS = GHS1.75m+GHS0.13m
5m+1.2m = 30.3Gp
• Note. The calculation of DEPS should always be based on the
maximum number of shares that can be issued. For instance, if the 14% loan stock above had the following conversion rights.
• 2015: 4 shares per GHS10
• 2016: 3 shares per GHS10
• 2017: 2 shares per GHS10
• DEPS would be calculated at 4 shares per GHS10.
Treatment of options
• It should be assumed that options are exercised and that the assumed proceeds would have been received from the issue of shares at fair
value.
• Fair value for this purpose is calculated as the average price of the ordinary shares during the period.
• Options are brought into the dilution calculation in the year in which they are issued, weighted as appropriate.
• For instance, if the year end is 31 December 2014 and options had
been granted on 1 July 2014, the number of dilutive shares under the
options will be × 6/12.
• Options and other share purchase arrangements are dilutive when they would result in the issue of
ordinary shares for less than fair value.
• The amount of the dilution is fair value less the issue price.
• In order to calculate diluted EPS, each transaction of
this type is treated as consisting of two parts:
• (a) A contract to issue a certain number of ordinary shares at their average market price during the period. These shares are fairly priced and are assumed to be neither dilutive nor antidilutive. They are ignored in the computation of diluted earnings per share.
• (b) A contract to issue the remaining ordinary shares for no
consideration. Such ordinary shares generate no proceeds
and have no effect on the net profit attributable to ordinary
shares outstanding.
• Therefore such shares are dilutive and they are added to the number of ordinary shares outstanding in the computation of diluted EPS.
• To the extent that partly paid shares are not entitled to participate in dividends during the period, they are
considered the equivalent of warrants or options.
Question EPS 2
• B Ltd has the following results for the year ended 31 December 20X7.
• Net profit for year GHS1,200,000
• Weighted average number of ordinary shares
outstanding during year 500,000 shares
• Average fair value of one ordinary share during year GHS20.00
• Weighted average number of shares under option
during year 100,000 shares
• Exercise price for shares under option during year GHS15.00 Required
• Calculate both basic and diluted earnings per share.
Answer
Per share Earnings Shares GHS
•Net profit for year 1,200,000
•Weighted average shares outstanding during 20X7 500,000
•Basic earnings per share 2.40
•Number of shares under option 100,000
•Number of shares that would have been issued
•At fair value: (100,000 GHS15.00 / GHS20.00) 75,000 Diluted earnings per share 2.29 1,200,000 525,000
