IAS-33 Earning Per Share

1.1 Objective

The objective of IAS 33 is to improve the comparison of the performance of different entities in the
same period and of the same entity in different accounting periods by prescribing methods for
determining the number of shares to be included in the calculation of earnings per share and other
amounts per share and by specifying their presentation.

1.2 Definitions

The following definitions are given in IAS 33 and IAS 32.

• Ordinary shares: an equity instrument that is subordinate to all other classes of equity instruments.

• Potential ordinary share: a financial instrument or other contract that may entitle its holder to
ordinary shares.

• Options, warrants and their equivalents: financial instruments that give the holder the right to
purchase ordinary shares. (IAS 33)

• Financial instrument: any contract that gives rise to both a financial asset of one entity and a financial
liability or equity instrument of another entity.

• Equity instrument: any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities. (IAS 32)

1.2.1 Ordinary shares There may be more than one class of ordinary shares, but ordinary shares of the
same class will have the same rights to receive dividends. Ordinary shares participate in the net profit
for the period only after other types of shares, e.g. preference shares.

1.2.2 Potential ordinary shares IAS 33 identifies the following examples of financial instruments and
other contracts generating potential ordinary shares.

(a) Debt or equity instruments, including preference shares, that are convertible into ordinary shares

(b) Share warrants and options

(c) Employee plans that allow employees to receive ordinary shares as part of their remuneration and
other share purchase plans

(d) Shares that would be issued upon the satisfaction of certain conditions resulting from contractual
arrangements, such as the purchase of a business or other asset.

1.3 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.

(c) Where companies choose to present EPS, even when they have no (potential) ordinary shares which
are traded, they must do so in accordance with IAS 33. 2 Basic EPS

You should know how to calculate basic EPS.

2.1 Measurement

Basic EPS should be 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.

Net profit attributable to ordinary share holders

Basic EPS =
Weighted average number of shares outstanding
2.2 Earnings

Earnings includes all items of income and expense (including tax and non-controlling interests) less net
profit attributable to preference shareholders, including preference dividends. Preference dividends
deducted from net profit consist of:

(a) Preference dividends on non-cumulative preference shares declared in respect of the period

(b) The full amount of the required preference dividends for cumulative preference shares for the
period, whether or not they have been declared (excluding those paid/declared during the period in
respect of previous periods) Note.

2.3 Per share

The number of ordinary shares used should be the weighted average number of ordinary shares during
the period. This figure (for all periods presented) should be adjusted for events, other than the
conversion of potential ordinary shares, 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 is usually adequate.

2.4 Example: Weighted average number of shares

Justina Co, a listed company, has the following share transactions during 20X7.

Date Details Shares issued

1 January 20X7 Balance at beginning of year 170,000

31 May 20X7 Issue of new shares for cash 80,000

31 December 20X7 Balance at year end 250,000

Required Calculate the weighted average number of shares outstanding for 20X7.

Solution

The weighted average number of shares can be calculated in two ways.

(a) (170,000 5/12) + (250,000 7/12) = 216,666 shares

(b) (170,000 12/12) + (80,000 7/12) = 216,666 shares

2.5 Consideration

Shares are usually included in the weighted average number of shares from the date consideration is
receivable which is usually the date of issue; in other cases consider the specific terms attached to their
issue (consider the substance of any contract). The treatment for the issue of ordinary shares in
different circumstances is as follows.
 Consideration Start date for inclusion
In exchange for cash When cash is receivable
As a result of the conversion of a debt Date interest ceases accruing
instrument to ordinary shares
In place of interest or principal on other Date interest ceases accruing
financial instruments
In exchange for the settlement of a liability The settlement date
of the entity
As consideration for the acquisition of an The date on which the acquisition is
asset other than cash recognized
For the rendering of services to the entity As services are rendered

Ordinary shares issued as purchase consideration in an acquisition should be included as of the date of
acquisition because the acquired entity's results will also be included from that date.

If ordinary shares are partly paid, they are treated as a fraction of an ordinary share to the extent they
are entitled to dividends relative to fully paid ordinary shares.

Contingently issuable shares (including those subjects to recall) are included in the computation when
all necessary conditions for issue have been satisfied.

Question Basic EPS

Flame Co is a company with a called up and paid up capital of 100,000 ordinary shares 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 dividend of 42c per share. Assuming an income tax rate of 30% on the given figures show the
trading results and EPS of the company.

Answer

FLAME CO

TRADING 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)

Profit for the period 103,600

103,600
Basic EPS = = 1.036$
100,000
3 Effect on EPS of changes in capital structure

You also need to know how to deal with EPS following changes in capital structure.

3.1 Introduction

We looked at the effect of issues of new shares on basic EPS above. In these situations, the
corresponding figures for EPS for the previous year will be comparable with the current year because, as
the weighted average number of shares has risen, there has been a corresponding increase in resources.
Money has been received when shares were issued. It is assumed that shares are issued at full market
price.

3.2 Example: earnings per share with a new issue

On 30 September 20X2, Boffin Co 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 20X1 and
20X2 is as follows.

20X2 20X1

Shares in issue as at 31 December 9,000,000 8,000,000

Profits after tax and preference dividend $3,300,000 $3,280,000

Required Calculate the EPS for 20X2 and the corresponding figure for 20X1.

Solution 20X2 20X1

Weighted average number of shares

8 million 9/12 6,000,000

9 million 3/12 2,250,000

8,250,000 8,000,000

Earnings $3,300,000 $3,280,000

EPS 40 cents 41 cents.

In spite of the increase in total earnings by $20,000 in 20X2, the EPS is not as good as in 20X1, because
there was extra capital employed for the final 3 months of 20X2.

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.

Four such events are considered by IAS 33.

(a) Capitalization or bonus issue (sometimes called a stock dividend)

(b) Bonus element in any other issue, e.g. a rights issue to existing shareholders

(c) Share split

(d) Reverse share split (consolidation of shares)

3.3 Capitalization/bonus issue and share split/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.

3.4 Example: earnings per share with a bonus issue

Greymatter Co had 400,000 shares in issue, until on 30 September 20X2 it made a bonus issue of
100,000 shares. Calculate the EPS for 20X2 and the corresponding figure for 20X1 if total earnings were
$80,000 in 20X2 and EPS for 20X1 was 18.75c. The company's accounting year runs from 1 January to 31
December.

Solution

20X2

Earnings $80,000

Shares at 1 January 400,000

Bonus issue 100,000

500,000 shares

EPS 16c

The number of shares for 20X1 must also be adjusted if the figures for EPS are to remain comparable.
The EPS for 20X1 is therefore restated as:

(18.75c × 400)/ 500 = 15c

3.5 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; e.g. a 1 for 3 rights issue is an offer of 1 new share at the offer price for every 3 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 of all the theoretical
ex-rights price. This is a weighted average value per share, and is perhaps explained most easily with a
numerical example.

3.6 Example: theoretical ex-rights price

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?

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

$17.00
Theoretical ex-rights price = = $3.40 per share
5
Note that this calculation can alternatively be performed using the total value and number of
outstanding shares.

3.7 Procedures

The procedures for calculating the EPS for the current year and a corresponding figure for the previous
year are now as follows.

(a) The EPS for the corresponding previous period should be 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.

3.8 Example: earnings per share with a rights issue

Brains Co had 100,000 shares in issue, but then makes a 1 for 5 rights issue on 1 October 20X2 at a price
of $1. The market value on the last day of quotation with rights was $1.60.

Calculate the EPS for 20X2 and the corresponding figure for 20X1 given total earnings of $50,000 in
20X2 and $40,000 in 20X1.

Solution

Calculation 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

$9
Theoretical ex-rights price = = $1.5
6
EPS for 20X1

EPS as calculated before taking into account the rights issue = 40c ($40,000 divided by 100,000 shares).
$1.50
EPS = 1.60
= 40𝑐 𝑎𝑝𝑝𝑟𝑜𝑥.
(Remember: this is the corresponding value for 20X1 which will be shown in the financial statements for
Brains Co at the end of 20X2.)

EPS for 20X2

Number of shares before the rights issue was 100,000. 20,000 shares were issued.
1.60
Stage 1: 100,000 x 9/12 x = 80,000
1.50

Stage 2: 120,000 x 3/12 30,000

110,000
$50,000
EPS = 110,000
= 45½c

The figure for total earnings is the actual earnings for the year.

Question Rights issue

Marcoli Co has produced the following net profit figures for the years ending 31 December.

$m

20X6 1.1

20X7 1.5

20X8 1.8

On 1 January 20X7 the number of shares outstanding was 500,000. During 20X7 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: $5.00

Last date to exercise rights: 1 March 20X7

The market (fair) value of one share in Marcoli immediately prior to exercise on 1 March 20X7 = $11.00.

Required Calculate the EPS for 20X6, 20X7 and 20X8.

Solution:

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 right
= No shares outstanding prior to exercise+No of shares issued in exercise

($ 11.00 x 500,000)+($5.00 x 100,000)

= 500000+100000
= $ 10.0
Computation of EPS 20X6 20X7 20X8

$ $ $

20X6 EPS as originally reported 2.20

1,100,000
500000
.

20X6 EPS restated for rights issue 2.00

1,100,000 10
500000
x 11

20X7 EPS including effects of right issue 2.54

1,500,000/(500,000 x 2/12 x 11/10) +(600,000 x10/12)

$1,800,000
20x8 EPS= 600000
3.00

EXAMPLE (Issue of Shares)

On January 1, 2X12, 100,000 shares were issued. On October 1, 2X12, 10,000 of those shares were
reacquired.

Calculate the weighted average common shares outstanding.

Solution:

Date Details Outstanding Shares

1/1/2X12–9/30/2X12 (100,000 x 9/12) 75,000

10/1/2X12–12/31/2X12 (90,000 x 3/12) 22,500

Weighted outstanding common shares 97,500

EXAMPLE (Shares buy-back)

On January 1, 2X12, 10,000 shares were issued. On April 1, 2X12, 2,000 of those shares were bought
back.

Calculate the weighted average common shares outstanding.

Date Details Outstanding Shares

1/1/2X12–3/31/2X12 (10,000 x 3/12) 2,500

4/1/2X12–12/31/2X12 (8,000 x 9/12) 6,000

Weighted outstanding common shares 8,500

EXAMPLE (Stock Split)

The following occurred during the year regarding common stock:

Shares outstanding—1/1 30,000

2-for-1 stock split—4/1 30,000

Shares issued—8/1 5,000

Calculate the weighted average common shares outstanding.

Date Details Outstanding Shares

1/1–3/31 30,000 x 3/12 x 2 15,000

4/1–8/1 60,000 x 4/12 20,000

8/1–12/31 65,000 x 5/12 27,083

Total 62,083

EXAMPLE

The following information is presented for a company:

Preferred stock, $10 par, 6% cumulative, 30,000 shares issued and outstanding $300,000 Common
stock, $5 par, 100,000 shares issued and outstanding 500,000 Net income 400,000

The company paid a cash dividend on preferred stock. The preferred dividend would therefore equal
$18,000 (6% x $300,000).

Calculate the BEPS.

Solution:

EARNINGS AVAILABLE TO COMMON STOCKHOLDERS

Net income $400,000

Less: Preferred dividends (18,000)

Earnings available to common stockholders and outstanding $382,000

Basic EPS = $382,000/100,000 shares = $3.82.

EXAMPLE

On January 1, 2X12, Stacey Company had the following shares outstanding:

6% Cumulative preferred stock, $100 par value 150,000 shares Common stock, $5 par value 500,000
shares 500,000 shares

During the year, the following occurred:

On April 1, 2X12, the company issued 100,000 shares of common stock. On September 1, 2X12, the
company declared and issued a 10% stock dividend. For the year ended December 31, 2X12, the net
income was $2,200,000.

Calculate the BEPS.

Solution:

EARNINGS AVAILABLE TO COMMON STOCKHOLDERS

Net income $2,200,000

Less: Preferred dividend (150,000 shares x $6) (900,000)

Earnings available to common stockholders $1,300,000

WEIGHTED-AVERAGE NUMBER OF OUTSTANDING COMMON SHARES

Date Details Outstanding Shares

1/1/2X12–3/31/2X12 (500,000 x 3/12 x 110%) 137,500

4/1/2X12–8/31/2X12 (600,000 x 5/12 x 110%) 275,000

9/1/2X12–12/31/2X12 (660,000 x 4/12) 220,000

Weighted-average outstanding common shares 632,500