international accounting standard 33 (earnings per share)

WELCOME TO THE PRESENTATION

THANKS TO OUR HONORABLE COURSE

INSTRUCTOR

Al Amin

Associate Professor,

Department of Accounting & Information Systems,

University of Dhaka.

PREPARED BY:

RATAN GHOSHUNIVERSITY OF DHAKA

PRESENTATION TOPIC:

IAS 33: EARNINGS PER SHARE

OUTLINES:

Introduction Scope & Objective Simple Capital Structure Complex Capital Structure Determining Dilution Effects Contingent Issuances of Ordinary Shares No Antidilution Presentation & Disclosure

INTRODUCTION

INTRODUCTION:

The IFRS governing the calculation and disclosure of earnings per share (EPS) is IAS 33. It requires that one measure or two measures in the case of those reporting entities having complex capital structures- be presented for each period for which a statement of profit or loss and other comprehensive income being reported. However, investors in particular are devoted users of earning per share data which is considered by many to be the single best predictor of the entity’s performance. Since such data are being computed in widely varying ways, the accounting standard setters decided to at least impose uniform practices.

OBJECTIVE & SCOPE:

Applies to the separate or individual financial statements of an entity and the consolidated financial statements of a group with a parent:

a) Whose ordinary shares or potential ordinary shares are traded in a public market.

b) Those entities that are in the process of issuing ordinary shares or potential ordinary shares in public securities markets.

SIMPLE CAPITAL STRUCTURE:

A corporation’s capital structure consists only of common stock or includes no potentially dilutive convertible securities, options, warrants, or other rights that upon conversion or exercise could dilute earnings per common share.

Computational Guidelines: In its simplest form EPS is calculated As

follows:

ADJUSTMENTS TO THE NUMERATOR & DENOMINATOR:

Numerator: Must reflect any claims against it by holders

of senior securities For cumulative preference shares, the

dividend is to be deducted from profit (declared or not)

Cumulative dividends in arrears that are paid currently do not affect EPS.

However, the amount in arrears should be disclosed.

ADJUSTMENTS TO THE NUMERATOR & DENOMINATOR (CONT’D):

Denominator: The number of shares required should be

excluded from EPS calculations from the date of acquisition.

The number of shares newly issued is included in the computation only for the period after their issuance date.

Share split or share dividend should be given retroactive recognition for all periods presented.

The shares issued in connection with a business combination are considered issued and outstanding as of the date of acquisition and the income of the acquired company is also included.

EPS COMPUTATION – SIMPLE CAPITAL STRUCTURE:

Example: Following data has been extracted from the

financial statements of XYZ Ltd. You are required to compute the earnings per share ratio of the company for the year 2014.

Data Taken From Income Statement:

Particulars Amount

Net Income $1500

Preferred Dividend $180

Income $1320

EPS COMPUTATION – SIMPLE CAPITAL STRUCTURE (CONT’D):

Data Taken From Balance Sheet:

From the given data, EPS is calculated as follows: EPS ratio = 1320 / 158 = 8.35 per share Average number of shares outstanding during

2014:[($2376/$15) + ($2376/$15)] /2= 158

Particulars 2013 2014

Preferred Stock – 6%

$3000 $3000

Common Stock – Par value $15

$2376 $2376

COMPLEX CAPITAL STRUCTURE:

A complex capital structure is the one that has dilutive potential ordinary shares, which are shares or other instruments that have the potential to be converted or exercised and thereby reduce EPS.

The difference between basic EPS and diluted EPS is:

COMPLEX CAPITAL STRUCTURE (CONT’D):

o The effect of any antidilutive potential ordinary shares are not to be included in the computation of diluted earnings per share.

A complex capital structure requires dual presentation of both basic EPS and diluted EPS even when the basic earnings per share is a loss per share.

The profit or loss attributable to ordinary equity holders and the weighted average number of ordinary shares outstanding should be adjusted for the effects of the dilutive potential ordinary shares.

COMPLEX CAPITAL STRUCTURE (CONT’D):

According to IAS 33, the numerator should be adjusted by the after – tax effect, if any, of the following items:

Interest recognized in the period for the convertible debt which constitutes dilutive potential ordinary shares.

Any dividends recognized in the period for the convertible debt which constitutes dilutive potential ordinary shares, where those dividends have been deducted in arriving at net profit attributable to ordinary equity holders

COMPLEX CAPITAL STRUCTURE (CONT’D):

Any other, consequential changes in profit or loss that would result from the conversion of the dilutive potential ordinary shares.

Example: The conversion of debentures into ordinary

shares will reduce interest expense which in turn will cause an increase in the profit for the period.

The denominator should be adjusted by the weighted average number of ordinary shares that would have been outstanding assuming conversion of all dilutive potential ordinary shares.

EXAMPLE: COMPLEX CAPITAL STRUCTURE:

Assume that he company XYZ has a convertible bond issue: 100 bonds, $1000 par value, yielding 10% , issued at par for the total of $100,000. Each bond can be converted into 50 shares of the common stock. The tax rate is 30%. XYZ’s weighted average number of shares, used to compute basic EPS, is 10,000. XYZ reported an NI of $ 12000, and paid preferred dividends of $ 2,000.

What is the basic EPS? What is the diluted EPS? 1) Basic EPS: EPS = (12000 - 2000) / 10,000 = $1.00

EXAMPLE: COMPLEX CAPITAL STRUCTURE (CONT’D):

2) Diluted EPS: Adjustment to the denominator: 100 × 50 =

5000 Adjustment to the numerator: 100 × $1000 ×

0.1 × (1 – 0.3) = $7000 Diluted EPS = (12000 – 2000 + 7000) /

10000+5000 = $ 1.13

DETERMINING DILUTION EFFECTS:

To ascertain whether the effect would be dilutive or antidilutive, each potential ordinary share issue must be evaluated separately from other potential ordinary share issuances.

The most dilutive of the potential ordinary share issues must be dealt with first, then the next most dilutive and so on.

DETERMINING DILUTION EFFECTS (CONT’D):

To determine the sequencing of dilution analysis, it is necessary to use a “trial and error” approach.

Options & Warrants

Convertible Securities

DETERMINING DILUTION EFFECTS (CONT’D):

Options and Warrants: IFRS prescribes the use of the “treasury share

method” to deal with the hypothetical proceeds from the presumed option and warrant exercises.

Treasury Share Method: This method assumes that the proceeds from

the option and warrant exercises would have been used to repurchase outstanding shares, at the average prevailing market share price during the reporting period.

DETERMINING DILUTION EFFECTS (CONT’D):

Treasury Stock Method:Denominator must be increased by net

dilution, as follows:Net dilution = Shares issued – Shares

repurchasedWhere, Share issued = Proceeds received / Exercise

price Shares repurchased = Proceeds received /

Average market price per share

DETERMINING DILUTION EFFECTS (CONT’D):

Example: Apex Inc, reported net income of $250,000 for

the year ended December 31, 2014. On January 1, 2014, it had 100,000 shares of common stock outstanding. No changes to the shares outstanding occurred during 2014. On July 1, 2013, Apex issued 10,000 stock options to its key executives. Each option permits the holder to acquire one share of common stock for $10 per share (exercise price). The average market price of the common stock was $25. Compute basic and diluted EPS for 2014.

DETERMINING DILUTION EFFECTS (CONT’D):

Solution:Basic EPS = $250,000 /100,000 = $2.50Test for dilution of options:- Is exercise price ($10) < Average market

price ($25)?......Yes !!!!Treasury Stock Method:- Assume exercise at later of 6/1/13 or 1/1/14- Proceeds received on assumed exercise =

$100,000 ($10 * 10,000)

DETERMINING DILUTION EFFECTS (CONT’D):

- Number of share assumed repurchased at average market price = 4000 ($100,000 / 2$5)

- Net increase in shares = 6000; {10,000 - 4000}

- Diluted EPS = $250000 / (100,000 + 6,000)= $2.36

Convertible Instruments: These are assumed to be converted when the

effect is dilutive. Convertible preferred shares will be dilutive if –

the preferred dividend declared < Basic EPS

IF-CONVERTED METHOD:

It is not explicitly employed by IAS 33, the methodology of this is used for those securities that are currently sharing in the earnings of the company through the receipt of interest or dividends as senior securities but have the potential for sharing in the earnings as ordinary shares.

IF-CONVERTED METHOD (CONT’D):

Example: Navid Co. reported net income of $750,000

for the year ended 31 december 2014. The company had a weighted average of 690,000 shares of common stock outstanding. In addition, the company has only one potentially dilutive security: $50,000 of 6% convertible bonds, convertible into a tolal of 10,000 shares. Assuming a tax rate of 30%, Calculate Navid’s basic and diluted EPS.

IF-CONVERTED METHOD (CONT’D):

Particulars Basic EPS Diluted EPS (Using If

Converted)

Net Income $750,000 $ 750,000

After tax cost of interest (3000

* .70)

2100

Numerator $750,000 $752,100

Weighted average number of share

outstanding

690,000 690,000

If Converted 0 10,000

Denominator 690,000 700,000

EPS $1.09 $1.07

CONTINGENT ISSUANCES OF ORDINARY SHARES:

Shares whose issuance is contingent on the occurrence of certain events are considered outstanding and included in the computation of diluted EPS only if the stipulated conditions have been met.

If at the end of the reporting period the triggering event has not occurred, issuance of the contingently issuable shares is not to be assumed.

If the condition must be met and then maintained for a subsequent period, such as for a two year period then the effect of the contingent issuance is excluded from basic EPS but is included in the diluted EPS.

CONTINGENT ISSUANCES OF ORDINARY SHARES (CONT’D):

IAS 33 indentifies circumstances in which issuance of contingent shares is dependent upon meeting both future earnings and future share price threshold levels. If both thresholds are met the effect of contingently issuable shares is included in the computation of diluted EPS.

For purposes of computing diluted EPS. The number of retail outlets, level of revenue etc at the end of the reporting period are to be presumed to remain constant until the expiration of the contingency period.

CONTINGENT ISSUANCES OF ORDINARY SHARES (CONT’D):

Example: Contingent shares will be issued at year end

2014, with 1000 shares issued for each retail outlet in excess of the number of outlets at the base date, year end 2013. At year end, 2014, seven new outlets are open. Diluted EPS should include the assumed issuance of 7000 additional shares. Basic EPS would not include this, since the contingency period has not ended and no new shares are yet required to be issued.

CONTRACTS WHICH MAY BE SETTLED IN SHARES OR FOR CASH:

Obligations can be settled in cash or by the issuance of shares, at the option of the debtor (the reporting entity).

It is completely different from convertible debt. It is the debtor not the debt holder which has the right to trigger the issuance of shares.

It is to be presumed that the debtor will elect to issue shares to retire this debt, if this leads to dilute EPS, this should be included in calculation but not in basic one.

CONTRACTS WHICH MAY BE SETTLED IN SHARES OR FOR CASH (CONT’D):

Written call options:A similar result obtains in this case. Creditors

have the right to demand shares instead of cash in settlement of an obligation.

Written Put options: The entity may also write put options giving

shareholders the right to demand that entity repurchase certain outstanding shares. Exercise is to be presumed if the effect is dilutive.

CONTRACTS WHICH MAY BE SETTLED IN SHARES OR FOR CASH (CONT’D):

Example: If the entity is potentially required to buy

back 25000 of its currently outstanding shares at each $40, it must assume that it will raise the required $1,000,000 cash by selling new ordinary shares into the market. If the average market price was $35 during the reporting period, it must be assumed that $1,000,000 / 35 = 28,572 shares would be issued, for a net dilution of about 3572 net ordinary shares, which is used to be compute diluted EPS.

NO ANTI-DILUTION:

No assumption of conversion should be made if the effect would be anti-dilutive.

The goal in computing dilutive EPS is to calculate the maximum dilutive effect.

Hence, the individual issues of converting securities, options, and other items should be dealt with from the most dilutive to the least dilutive to effect this result.

PRESENTATION & DISCLOSURE:

Entities should present both basic EPS and diluted EPS in the statement of profit or loss and other comprehensive income or

In the statement of profit or loss, if presented separately. Equal prominence should be given to both the basic EPS and diluted EPS figures for all periods presented.

An entity that reports discontinued operation shall disclose the basic EPS and diluted EPS.

Entities should present basic EPS and diluted EPS even if the amounts disclosed are negative.

PRESENTATION & DISCLOSURE (CONT’D):

Entities should disclose amounts used as the numerator in calculating basic EPS and diluted EPS along with a reconciliation of those amounts to profit or loss fro the period.

An entity may choose to present per share amounts using a reported component of the separate statement of profit or loss other than profit or loss for the period attributable to ordinary equity holders.

Entities are encouraged to disclose the terms and conditions of financial instruments or contracts generating potential ordinary shares.

PRESENTATION & DISCLOSURE (CONT’D):

If changes in the number of ordinary shares or potential ordinary shares occur after the end of the reporting period but before issuance of the financial statements, it is encouraged to disclose.

An entity is also encouraged to disclose a description of ordinary share transactions or potential ordinary share transactions.

EXAMPLES OF FINANCIAL STATEMENT DISCLOSURES:

XYZ LtdAnnual Report 2014

Notes to the consolidated Financial Statements:

Particulars 2014Millio

ns

2013Millio

ns

Weighted Average Number of shares for basic EPS

50,644

52,408

Effect of dilutive potential shares 314 340

Weighted Average Number of shares for diluted EPS

50,958

52,748

Earnings for Basic & Diluted 6,957 7,968

US GAAP COMPARISON:

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.

US GAAP COMPARISON (CONT’D):

Both IAS 33 and US GAAP requires the disclosure of basic EPS in the statement of income.

Presumes that contracts that may be settled in cash or shares will be settled in shares unless evidence is provided to the contrary whereas IAS 33 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.

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