IAS 33

Earnings per share

1. IAS 33 Earnings per share

2. Basic EPS

3. Effect on EPS of changes in capital structure

4. Diluted EPS

5. Presentation, disclosure and other matters

 IAS 33 Earnings per share
Earnings per share （EPS） is used to assess
the ongoing financial performance of a
company from year to year, and to compute the
major stock market indicator of performance,
the Price Earnings ratio （PE ratio)
 Key Definition
 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.
 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
 Basic EPS
Calculation of basic EPS:
Net profit /(loss) attributable to ordinary shareholders
Basic EPS 
Weighted average number of ordinary shares outs tan ding during the period

Preference dividends deducted from net profit consist of:

The full amount

… of
Preference dividends the required preference
on non-cumulative dividends for
preference shares …
cumulative preference
deciared in respect of shares for the period,
the period whether or not they
have been declared
 Weighted average number of shares

Example:
Justina Co, a listed company, has the
following share transactions during 20×7
Shares
Date Details issued
1 January 20×7 Balance at beginning of year 170,000
31 May 20×7 Issue of new shares for cash 80,000
31 December 20×7 Balance at year end 250,000

Required
Calculate the weighted average number
of shares outstanding for 20×7.
 Weighted average number of shares

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
 Consideration

Consideration Start date for inclusion

In exchange for cash When cash is receivable

As a result of the conversion of a Date interest ceases accruing

debt instrument to ordinary
shares
In place of interest or principal Date interest ceases accruing
on other financial instruments
In exchange for the settlement The settlement date
of a liability of the entity
As consideration for the The date on which the
acquisition of an asset other acquisition if recognized
than cash
For the rendering of services to As services are rendered
the entity
 Basic EPS
Question
Flame Co is a company with a called up and paid up capital
of 100,000 ordinary share 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 an EPS of the company.
 Basic EPS
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)
Profits for the period 103,600
EARNINGS PER SHARE
103,600/100,000=103.6c
Earnings per share with a new issue
Example
On 30 September 20×2, 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 December. Relevant information for
20×1 and 20×2 is as follows.
20×2 20×1
Share in issue as at 31 December 9,000,000 8,000,000
Profit after tax and preference
dividend $3,300,000 $3,280,000
Required
Calculate the EPS for 20×2 and the corresponding
figure for 20×1.
Earnings per share with a new issue
Solution
20×2 20×1
Weighted average number of shares
8 million×9/12 6,000,000
8 million×3/12 2,250,000
8,250,000 8,000,000

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

EPS 40 cents 41 cents
Earnings per share with a new issue
The events which change the number of
share outstanding

Capitalization
Rights-issue
of bonus issue

……………

Reverse
Share split
share split
 Earnings per share with a bonus issue

Example
Greymatter Co had 400,000 shares in issue,
until on 30 September 20×2 it made a bonus
issue of 100,000 shares. Calculate the EPS
for 20×2 and the corresponding figure for
EPS are to remain comparable.
 Earnings per share with a bonus issue

Solution
20×2 20×1
Earnings $80,000 $75,000
Shares at 1 January 400,000 400,000
Bonus issue 100,000 100,000
500,000 share 500,000 share

EPS 16c 15c

The number of shares for 20×1 must also be

adjusted if the figures for EPS are to remain
comparable.
 Theoretical ex-rights price

Example
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?
 Theoretical ex-rights price

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

Theoretical ex-rights price=$17.00/5=$3.40 per

share
Not that this calculation can alternatively be
performed using the total value and number of
outstanding shares.
 Procedures
(a) The EPS for the corresponding previous period should be
multiplied by the following fraction.

Theoretical ex  rights fair value per share

Fair value per share immediately before the exercise of rights
(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
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).
 Earning per share with a rights issue

Example
Brains Co had 100,000 shares in issue, but
then makes a 1 for 5 rights issue on 1
October 20×2 at a price of $1. The market
value on the last day of quotation with rights
was $1.60.
Calculate the EPS for 20×2 and the
corresponding figure for 20×1 given total
earnings of $50,000 in 20×2 and $40,000 in
20×1.
 Theoretical ex-rights price

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

Theoretical ex-rights price=$9/6=$1.50

EPS for 20×1
EPS as calculated before taking into account the tights
issue=40c
EPS=1.5/1.6×40c=37.5c
 Theoretical ex-rights price

Solution
EPS for 20×2
Number of shares before the tights issue was
100,000.20,000 shares were issued.
stage 1: 100,000×9/12×1.6/1.5 80,000
stage 2: 120,000×3/12 30,000

EPS=$50,000/110,000=45.5c

The figure for total earnings is the actual earnings

for the years.
 Diluted EPS
Diluted EPS is a theoretical measure of
the effect of dilution on basic EPS and is
not used as much as basic EPS by analysts
because of its hypothetical nature.
 Earnings
The earnings calculated for basic EPS should be
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 recognized in the period for the
dilutive potential ordinary shares.
(c) Any other changes in income or expenses
(fees or discount) that would result from the
conversion of the dilutive potential ordinary shares.
 Per share
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 point.
… …

The computation Contingerntly issuable

assumes the most
advantageous conversion
rate or exercise rate from
the standpoint of the holder
of the potential ordinary
shares.
(potential) ordinary shares are
treated as for basis EPS; if the
conditions have not been met,
the number of contingently
issuable shares included in the
computation is based on the
number of shares that would be
issuable if the end of the
reporting period was the end of
the contingency period.
 Diluted EPS
Example
In 20×7 Farrah Co had a basic EPS of 105c
based on earnings of $105,000 and 100,000
ordinary $1 shares. It also had in issue $40,000
15% convertible loan stock which is convertible in
two years time at the rate of 4 ordinary shares for
every %5 of stock. The rate of tax is 30%. In 20×7
gross profit of $200,000 and expenses of $50,000
were recorded, including interest payable of $6,000.
Required
Calculate the diluted EPS.
 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: Farrah Co will save interest
payments of $6,000 but this increase in profits will be
taxed. Hence the earnings figure may be recalculated:
$
Gross profit 200,000
Expenses (50,000-6,000) (44,000)
Profit before tax 156,000
Tax expense (30%) (46,800)
Earnings 109,200
 Diluted EPS

Step 3 Calculation:
Diluted EPS=$109,200/132,000=82.7c
Step 4 Dilution:
the dilution in earnings would be
105c-82.7c=22.3c per share
 Presentation, disclosure and other matters

Presentation
Disclosure must still be made where the EPS
figures (basic and/or diluted) are negative (ie a loss
per share).
Disclosure
An entity should disclose the following.
(a) The amounts used as the numerators in
calculating basic and diluted EPS, and a reconciliation
of those amounts to the net profit or loss for the period.
(b) The weighted average number of ordinary
shares used as the denominator in calculating basic
and diluted EPS, and a reconciliation of these
denominators to each other.
 Presentation, disclosure and other matters

Alternative EPS figures

An entity may present alternative EPS figures if it
wishes. IAS 33 lays out certain rules where this takes
place.
(a) The weighted average number of shares as
calculated under IAS 33 must be used.
(b) A reconciliation must be given between the
component of profit used in the alternative EPS (if it is
not a line item in the statement of comprehensive
income) and the line item for profit reported in the
statement of comprehensive income.
(c) Basic and diluted EPS must be shown with equal
prominence.