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Просмотров: 10312 стр.How to easily compute the EPS of your company by Deloitte

Sep 10, 2016

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How to easily compute the EPS of your company by Deloitte

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How to easily compute the EPS of your company by Deloitte

© All Rights Reserved

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A practical guide

Contents

Introduction

10

Introduction

Although IAS 33 Earnings per Share has not changed for several years, it is still a standard that causes

headaches for preparers of financial statements and contains more than a few traps for the unwary.

The practical difficulties experienced in calculating earnings per share often stem from the fact that

IAS 33 is very rules-based. This lack of an underlying principle means that the calculations required can

sometimes give counter-intuitive results, which in turn causes uncertainty for preparers as to whether

they have applied the requirements correctly.

This practical guide has been put together to help you navigate the complexities, avoid the common

pitfalls and ease the process when it comes to calculating earnings per share, or EPS as it is commonly

known. It includes a detailed step-by-step guide to calculating both basic and diluted EPS, as well as

twoworked examples dealing with scenarios that often catch people out.

As well as setting out how EPS should be calculated, IAS 33 also sets out which entities are required to

present EPS information and what information they should present.

Which companies need to present earnings per share?

Any company that wishes to do so may voluntarily present EPS. However, if it does so, both basic and

diluted EPS must be calculated and presented in accordance with IAS 33 (or, for those companies

using old UK GAAP, FRS 22).

All companies with ordinary shares or potential ordinary shares (such as options or convertible debt)

which are publicly traded must disclose EPS. In addition, any company applying for a listing must also

disclose EPS in its prospectus.

A parent company which prepares combined consolidated and separate financial statements may

present EPS on a consolidated basis only.

IAS 34 Interim Financial Reporting requires that interim reports for companies wihin the scope of

IAS 33 contain EPS disclosures in the same form as required by IAS 33 for full financial statements,

presented for the current and all comparativeperiods.

What needs to be presented?

IAS 33 sets out two measures of EPS which must be disclosed on the face of the Income Statement

basic and diluted EPS. In addition, if an entity has any discontinued operations as defined by

IFRS5Noncurrent Assets Held for Sale and Discontinued Operations, basic and diluted EPS should

be presented separately for both continuing and discontinued operations, as well as for the entity as

awhole.

Companies may disclose other adjusted EPS measures, but these should not be given more prominence

than the required measures. Entities wishing to disclose an adjusted EPS figure may choose any number

as the numerator, provided they disclose a reconciliation from it to a number in the income statement.

However, adjusted EPS must be presented on both a basic and diluted basis, with the denominator in

each calculation determined in accordance with IAS 33.

Disclosures about how all EPS measures presented have been calculated are also required in the notes to

the financial statements.

Basic EPS is calculated as follows:

Profit/(loss) attributable to ordinary equity holders

Weighted average number of ordinary shares outstanding

Key definitions

Profit/(loss) attributable to

ordinary equity holders

Profit after tax, excluding amounts attributable to non-controlling interests, less any amounts accruing to

holders of preference shares which are accounted for asequity.

Ordinary shares

Equity instruments which have the lowest priority of participation in profit for the period. If an entity has

multiple classes of share, it needs to determine which of these has the lowest priority this will be the

'ordinary share' class for EPS purposes. If two or more classes of shares rank equally at the bottom of the

priority list, EPS will need to be calculated for each of these, taking into account the relative rights.

ordinary shares outstanding

The number of shares outstanding at the beginning of the period, adjusted by the number of shares

bought back or issued during the period on a timeweighted basis.

Potential complexities

Preference shares accounted for as equity

Any amounts charged or credited directly to equity in relation to preference shares accounted for as

equity, whether these are dividends, coupon payments, payments on redemptions made during the

period or other accounting adjustments relating to such shares, are likely to impact the numerator in the

basic EPScalculation.

Shares held by the entity

These are not treated as shares in issue, and are therefore deducted from the denominator in the basic

EPS calculation. The same applies to shares held by an employee benefit/ESOP trust sponsored by

theentity.

Partly paid shares

These are treated as a fraction of a share reflecting the extent to which they give entitlement to

participate in dividends during the period. (N.B the extent to which they carry voting rights is

irrelevant for this test)

Contingently issuable shares

These are not included in the denominator when calculating basic EPS.

The exception to this is that shares which are issuable dependent only on the passage of time, with

all other conditions having been satisfied, are included in the calculation of basic EPS. An example of

this would be mandatorily convertible preference shares, whether classified as partly debt and partly

equity or wholly equity. For such an instrument, the weighted average number of shares is adjusted as

if conversion occurred immediately on the initial date of issue of the convertible instrument. However,

no adjustment should be made to reverse any interest expense or preference dividend payable included

in the profit or loss attributable to ordinary equity holders for this figure, conversion is only factored in

when it actually occurs.

Bonus issues, share splits, share consolidations and any other transactions which change the number

of shares in issue without changing the entitys resources

When a bonus issue or similar transaction takes place, the number of ordinary shares outstanding

is adjusted as if the transaction had taken place at the start of the earliest period for which EPS is

presented, to maintain comparability. This will result in a restatement of prior year EPS figures. Note that

if a bonus issue takes place after the end of the period but before the financial statements are issued,

EPS should be disclosed on a post-bonus issue basis.

Rights issues

A rights issue, where typically shares are issued to existing shareholders for less than the current market

price, is accounted for by adjusting from the start of the earliest period for the bonus element of the

rights issue. The bonus element arises because the transaction could be viewed as issuing some shares

for market value and some for nothing. The bonus element is calculated using a theoretical ex-rights

price and comparing this to the market price prior to the rights issue.

The steps for calculating diluted EPS are as follows:

1. Identify all potential ordinary shares that the company has in issue.

2. For each category of potential ordinary share, calculate the earnings (or loss) per incremental share

fromcontinuing operations (see overleaf for how to do this).

3. Rank the potential ordinary shares, with the most dilutive (those with the lowest earnings per

incremental share or biggest loss per incremental share) at the top of the list.

4. Basic EPS is adjusted by each in order until the earnings per incremental share of subsequent classes

is greater than thecurrent adjusted figure. So compare the top figure on the list with your basic EPS

fromcontinuing operations. If it is bigger than the basic EPS figure, all of your potential ordinary

shares are antidilutive and your diluted EPS figure is the same as your basic EPS figure. (Note that if you

have a basic loss per share, only potential ordinary shares with a bigger loss per incremental share could

be dilutive). If not, adjust the numerator and denominator in the basic EPS calculation as follows:

Earnings figure per basic EPS calculation for continuing operations

+ earnings impact of the first category of potential ordinary shares

No. of shares per basic EPS calculation for continuing operations

+ No. of shares impact of the first category of potential ordinary shares

5. Compare this adjusted figure with the earnings per incremental share of the next category of

potential ordinary shares on your list from step 3. If the earnings per incremental share is bigger,

youhave finished calculating dilutive EPS all of your other categories of potential ordinary shares

are anti-dilutive. If not, adjust again by factoring in the impact of the next category of potential

ordinary shares on the numerator and denominator.

6. Repeat step 5 until you reach a point where all remaining categories of potential ordinary shares are

anti-dilutive or you reach the end of your list of categories of potential ordinary shares. You have now

calculated your diluted EPS figure from continuing operations.

7. Calculate diluted earnings per share from discontinued operations and for the business as a whole,

by adjusting the basic EPS calculation to factor in those potential ordinary shares that were

included in the calculation of diluted EPS from continuing operations. This means that in rare

circumstances it is possible for diluted EPS for the business as a whole to be greater than basic

EPS, where there are potential ordinary shares that have a dilutive effect on EPS from continuing

operations but an anti-dilutive effect on overall EPS.

Key definitions

Potential ordinary shares

Options, warrants, convertible debt, convertible preference shares anything that could be turned into

ordinary shares. Includes obligations under share-based payments, such as employee share schemes or

contingent consideration arrangements for business acquisitions, even though these may still be partly

contingent on future events.

The effect on earnings per share that conversion of a category of potential ordinary shares into ordinary

shares would have. IAS 33 contains detailed rules on how to calculate this for various types of potential

ordinary share see below.

If-converted method

Method for calculating earnings per incremental share for convertible instruments (debt or equity).

Method for calculating earnings per incremental share for options, warrants and similar items (including

share option schemes).

shares

Potential ordinary shares for which the earnings per incremental share is lower than the following figure:

basic EPS from continuing operations, adjusted for any other categories of potential ordinary share with

a lower earnings per incremental share than this category.

Anti-dilutive potential

ordinaryshares

Earnings effect

The effect on earnings is generally the actual charge to P&L that would be avoided by conversion:

For a convertible instrument, this will be interest costs less any associated tax deductions for liabilities

held at amortised cost, or fair value movements taken to the P&L for liabilities held at fair value

through the profit and loss.

For an option or warrant, this will be nil if it is classified as equity (as it will have no earnings impact)

or the post-tax amount of the fair value movement during the period if it is accounted for at fair value

through profit or loss.

For a share-based payment scheme, there will generally be no adjustment to earnings for the charge

incurred as a result of applying the requirements of IFRS 2 Share-based Payment, unless the scheme

offers a choice of settlement in cash or shares but is accounted for as cash-settled.

Number of shares effect

When calculating the number of incremental shares in relation to a category of potential ordinary

shares, the approach used to determine the numerical effect depends on the type of instrument:

For convertible debt, convertible preference shares or other similar convertible instruments,

thedenominator is increased by the number of shares that would be issued if the instrument were

converted this is referred to as the if-converted method. This can give slightly counter-intuitive

answers, as conversion is assumed even if the conversion option is out of the money.

Options (and warrants) can only ever be dilutive if the exercise price is less than the average share

price for the period. To calculate the number of incremental shares:

a) Calculate the total proceeds that will be received if all of the options or warrants are exercised.

b) Calculate the number of shares that this would buy based on market prices by dividing the total

proceeds of the exercise of the options by the companys average share price for the period.

c) Calculate the difference between the answer to (b) and the total number of shares that will be

issued when the options or warrants are exercised. IAS 33 uses the resulting number of free shares

as the number of shares effect of the options or warrants.

This is referred to as the treasury stock method and, unlike the if-converted method, does take into

account if the option is in the money or not.

For both categories of instrument, any potential ordinary shares that are dilutive are deemed to be

converted into shares at the beginning of the reporting period, or the date of issue if this is later.

Potential complexities

Contingently issuable shares

Contingently issuable shares are shares which may be issued in the future, depending on performance

criteria. IAS 33 specifies that these should be included in the calculation of diluted EPS based on

the number of shares which would be issued if the end of the reporting period were the end of the

contingency period. Contingently issuable shares never have an earnings impact, so they will always

bedilutive.

If the contingency is in the form of total earnings during a period (e.g. total PBT of 3m over the next

three years), this assessment is straightforward e.g. if the 3m has been met at the end of the first year

then the additional ordinary shares are taken into account in the calculation of diluted EPS. However, if

it is expressed as average earnings (PBT of 1 m per year for each of the next three years) this should be

converted to the equivalent total earnings position (total PBT of 3m over the next three years) in order

to make the assessment. So if the profits are 1.5m at the end of the first year, no additional shares

are brought into the calculation. However, if profits are 5m at the end of the first year, the additional

shares are included in the calculation of diluted EPS because, if the end of the first period were the end

of the contingency period, the condition would have been achieved.

Contingently issuable potential ordinary shares

A further level of complexity is introduced where potential ordinary shares may be issuable dependent

on a contingency, for example remuneration schemes where share options may be issued to employees

dependent on the future performance of the company. The general rule is:

1. Apply the requirements for contingently issuable shares to work out whether the potential ordinary

share will be issued.

2. If the contingency is not met for the purposes of IAS 33, ignore the instrument. If it is met, apply the

if-converted or treasury stock method to the instrument as normal.

Employee share options

Employee share option schemes are a particularly common type of contingently issuable potential

ordinary share hence they may have a dilutive effect on EPS even prior to vesting. For unvested

options which are contingent on performance measures, the entity will need to determine whether or

not they are expected to vest, as described above for contingently issuable shares and options. Ifvesting

depends purely on completion of a period of service, the calculation is done on the basis that all

employees in employment at the end of the reporting period complete the period of service.

An earnings adjustment is generally not necessary for share option schemes. The exception to this is for

schemes which can be settled either in cash or in shares at the discretion of the employee. For this type

of award, IFRS 2 requires that cash settlement is assumed but IAS 33 requires that equity settlement

is assumed. Therefore, the charge to the income statement for the cash settled scheme should be

reversed and the charge that would be recognised for an equity-settled scheme included instead.

When applying the treasury stock method to calculate the number of incremental shares for a share

option scheme, for IAS 33 purposes the exercise price of the option is deemed to be the cash exercise

price plus the remaining IFRS 2 charge per share which has not yet been recognised in the income

statement.

ESOP trusts

Where shares are held in an ESOP trust or similar vehicle for the purposes of settling share schemes in

the future, the amount of shares held does not impact the calculation of incremental shares set out

above. The only impact that the number of shares held by an ESOP trust or similar vehicle will have on

the calculation of EPS is that they reduce the number of shares treated as being in issue for the purposes

of calculating the denominator in the basic EPS calculation, as set out above.

Scenario

ABC Plc has 1,000,000 1 ordinary shares and 1,000 100 10% convertible bonds (for simplicity

assumed to be issued at par), each convertible into 20 ordinary shares on demand, all of which

have been in issue for the whole of the reporting period. ABC Plcs share price is 4.50 per share

and earnings for the period are 500,000. The tax rate applicable to the entity is 21%.

EPS calculations

Basic EPS is 50p per share (500,000/1,000,000).

The earnings per incremental share for the convertible bonds is calculated as follows:

Earnings effect =

No. of bonds x nominal value x interest cost, less tax deduction at 21%

= 1,000 x 100 x 10% x (1-21%) = 7,900

Incremental shares calculation

Assume all bonds are converted to shares, even though this converts 100 worth ofbonds into 20

shares worth only 90 and is therefore not economically rational. This gives 1000 x 20 = 20,000

additional shares.

7,900

Earnings per incremental share =

= 39.5p

20,000

Therefore the bonds are dilutive.

500,000 + 7,900

Diluted EPS =

= 49.8p per share

1,000,000 + 20,000

Scenario

ABC Plc has 50 employees, each of whom has 1,000 unvested share options in a share option

scheme. The exercise price of the options is 5 and the fair value of services still to be rendered

by each employee, calculated in accordance with IFRS 2, is 1,200. ABC Plc has 1,000,000

ordinary shares in issue and the average share price for the period was 10. Earnings for the

period are 500,000.

EPS calculations

Basic EPS is 50p per share (500,000/1,000,000).

The earnings per incremental share for the employee share options is calculated using the treasury

stockmethod as follows:

Earnings effect = nil

Incremental shares calculation

Total exercise price of share options = nominal exercise price + remaining IFRS 2 charge per option

1,200

=5 +

=6.20

1,000

Number of full price shares =

Average price for the period

50 x 1,000 x 6.2

= 31,000

10

= 50,000 31,000 = 19,000

500,000 + 0

Diluted EPS =

= 49.1p per share

1,000,000 + 19,000

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee, and

its network of member firms, each of which is a legally separate and independent entity. Pleasesee www.deloitte.co.uk/about

for a detailed description of the legal structure of DTTL and its member firms.

Deloitte LLP is the United Kingdom member firm of DTTL.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the

principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice

before acting or refraining from acting on any of the contents of this publication. DeloitteLLP would be pleased to advise readers

on how to apply the principles set out in this publication to their specific circumstances. DeloitteLLP accepts no duty of care or

liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

2015Deloitte LLP. Allrights reserved.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675and its registered

office at 2New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44(0) 2079363000Fax: +44(0) 2075831198.

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