Earnings per Share: IAS 33

Wiecek and Young

IFRS Primer
Chapter 27
 Earnings per Share

Related standards
IAS 33
Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice

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 Related Standards

FAS 128 Earnings per Share

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 IAS 33 Overview

Objective and scope

Measurement
Presentation
Disclosure

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 IAS 33 Objective and Scope
Amount of earnings that is attributable to each common or ordinary
shareholder is represented by the earnings per share (EPS) numbers

Standard seeks to provide guidance on

How earnings per share should be accounted for
When diluted EPS should be presented
What information should be disclosed

Fairly complex calculations

IASB has provided numerous illustrative examples that accompany but
are not part of the standard

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 IAS 33 Objective and Scope
Ordinary shares
Equity instruments that are subordinate to all other classes of equity instruments
Also referred to as common shares

The EPS calculations focus on these shares as they are residual in nature
Ordinary or common shareholders share in the residual earnings after operating
expenses and dividends on preferred shares

IAS 33 covers financial statements of

Entities that have ordinary shares or potential ordinary shares traded in a public
market
Entities that are in the process of filing their statements with a securities
commission for the purpose of going public

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 IAS 33 Objective and Scope
Potential ordinary shares
Financial instruments (or other contracts) that may entitle the holder to ordinary
shares
Convertible debt, convertible preferred shares, options, warrants, and
contingently issuable shares

Contingently issuable shares

Issuable under the terms of a contingent share agreement
Shares that will be issued for little or no cash when certain conditions in the
agreement are met

EPS is calculated and presented

If there are numerous public shareholders
If the entity files financial statements with a securities regulator
Only in the consolidated statements when non-consolidated statements are
prepared as well

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 IAS 33 Objective and Scope

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 IAS 33 Measurement
Two types of EPS
Basic (BEPS)
Diluted (DEPS)

BEPS
Based on existing earnings and outstanding common/ordinary shares

DEPS
What-if calculation
Illustrates what EPS would be if all the potential ordinary shares were
actually ordinary shares
E.g., the instruments were actually converted into shares or options were
exercised, resulting in additional shares being issued

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 IAS 33 Measurement
Basic earnings per share (BEPS)
BEPS is calculated as follows:
The profit or loss attributable to ordinary equity holders is divided by the
weighted average number of ordinary shares outstanding

The calculation should also be done for income from continuing

operations as well (if presented in the profit and loss statement)

Earnings
Profit or loss attributable to ordinary shareholders (the numerator)
begins with:
Profit or loss from continuing operations (if separately presented)
Profit or loss

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 IAS 33 Measurement
Earnings (continued)

Two separate calculations are done where profit or loss from continuing
operations is presented separately on the profit and loss statement

Adjustments to earnings
Dividends on preferred shares
Only declared dividends relating to non-cumulative preferred shares are deducted
Because they are not owed unless they are declared

Dividends (declared or not) relating to cumulative preferred shares are deducted

Because they are owed whether declared or not

Gains/losses on settlement/repurchase/early conversion of preferred shares

Any related gains/losses are added to/deducted from earnings in calculating EPS

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 IAS 33 Measurement
Shares

The denominator uses the weighted average number of ordinary

shares outstanding during the period
Gives the best indicator of the earnings based on the average outstanding equity

The calculation looks at the number of shares outstanding each day

although a reasonable approximation of the weighted average may
be used

The shares are assumed to be issued on the date that the

consideration is receivable
Although there are several situations that may need clarifying (see next slide)

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 IAS 33 Measurement
Shares (continued)
When shares are issued on conversion of debt
The shares are assumed to be issued on the date that interest ceases to accrue

When shares are issued upon rendering of services

The shares are assumed to be issued as the services are rendered

When shares are issued in a business combination

The shares are assumed to be issued on the acquisition date

Contingently issuable shares are included from the date that all conditions are met

Stock Split, Reverse Split or Stock Dividend

Number of shares issued and outstanding has changed without a corresponding change
in resources
Number of shares is adjusted for all periods presented

Where the financial instrument is mandatorily convertible

13 Treated as ordinary shares from the date that the contract is entered into
 IAS 33 Measurement

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 IAS 33 Measurement
Diluted earnings per share
Shows earnings available to
Ordinary shareholders (assuming all potential common shares are now issued)
Outstanding ordinary shares

Both the numerator (earnings) and the denominator (number of shares) are
adjusted for the what if assumption

Earnings
Adjustments to the profit or loss attributable to ordinary shareholders
After-tax interest/dividends
Would be avoided if the convertible instruments had been converted at the
beginning of the period

Any other changes in profit or loss that would result from the conversion of the
convertible instruments
Discount/premium amortization
15 Changes in bonuses that are based on profit or loss
 IAS 33 Measurement
Earnings (continued)
No adjustment is made to the numerator for options and warrants
In doing the DEPS calculation, it is assumed that either
funds received are used to buy back shares (rather than investing them), or
shares are issued to generate sufficient cash to buy back the shares under option

Shares
The weighted average number of ordinary shares as calculated for BEPS
Would be adjusted for additional ordinary shares that will be issued on conversion or
exercise of potential ordinary shares

The potential ordinary shares are assumed to be issued at the beginning of the year or
the date of issue of the potential ordinary shares if later

If conversion/exercise options lapse during the period, the number of shares would be
pro-rated for the part of the year that the potential common shares were outstanding

The dilutive weighted average common shares are calculated independently for each
16 period presented (interim versus annual)
 IAS 33 Measurement
Dilutive potential ordinary shares

The entity must therefore determine whether potential common shares are
dilutive or anti-dilutive

Potential common shares that result in lower DEPS

Referred to as dilutive
Included in the calculations of DEPS

Potential common shares that would result in a DEPS higher than the BEPS
Referred to as anti-dilutive
Not included in the calculations or final reported DEPS

Process
Entity considers the incremental impact of each potential common share individually,
then each potentially dilutive security in sequence
From the most dilutive to the least dilutive

Options and warrants are always considered to be the most dilutive since the
17 incremental impact to the numerator is assumed to be zero
 IAS 33 Measurement

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 IAS 33 Measurement
Written call options/warrants
When the entity writes a call option or issues a warrant
Gives the holder the right to buy/obtain shares for a predetermined price (exercise price)

When that price is lower than market price

Option is said to be in the money
Incentive for the holder to exercise the option and it would be dilutive to the company

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 IAS 33 Measurement
Written put options and forward purchase contracts
When the entity writes a put option or enters into a forward contract to sell shares
Gives the holder the right to sell the shares to the entity for a predetermined price
(exercise price)

When the price is higher than the market price

Option is in the money
Incentive to exercise the option and sell the share to the entity at the higher price
Dilutive

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 IAS 33 Measurement
Convertible instruments
Convertible instruments are included in the DEPS calculation when dilutive

Convertible preferred shares

Assumed to be anti-dilutive if the related dividend per ordinary share is greater than
BEPS

Convertible debt
Anti-dilutive whenever the after-tax interest per ordinary share is greater than BEPS

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 IAS 33 Measurement
Contingently issuable shares
Included from the beginning of the period if the conditions are satisfied by year end

The conditions often relate to

Earnings levels
Share prices
Other factors such as store openings

If the conditions are not satisfied by year end

Calculation is based on the number of shares that would be issued if the end of the
current period were the end of the evaluation period

Contracts that may be settled in ordinary shares or cash

Where the entity has an option to settle a contract in ordinary shares or cash, it is
assumed that shares will be used
If dilutive, it would be included in the DEPS calculations

If the holder has the option, then the entity would consider the more dilutive of the two
22 and use that in the calculations
 IAS 33 Measurement
Purchased options
Purchased call and put options are not included in the DEPS calculations
Anti-dilutive

If the options are call options

In the money when the exercise price is less than the market price
Entity would exercise the option and be better off

If the options are put options

In the money when the exercise price exceeds the market price
Entity would be able to sell its shares for higher than market

Retrospective adjustments
When the number of shares increases (with no corresponding change in resources)
during or after the reporting period but before the statements are authorized for issue,
all EPS numbers are adjusted

All EPS numbers are adjusted for any effects or errors or changes in accounting
23 policies accounted for retrospectively
 IAS 33 Presentation
The entity must disclose the EPS numbers (with
comparatives) in the statement of comprehensive income

If a separate profit and loss statement is presented, the

EPS numbers are presented there

If discontinued operations are reported, the BEPS and

DEPS for discontinued operations may be presented on
the statement of comprehensive income or in the notes

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 IAS 33 Disclosure
Required additional disclosures

Numerators in the calculations, including a reconciliation to reported profit or loss

Weighted average number of ordinary shares

Any potentially dilutive instruments that were not included in the calculation

Description of any transactions occurring after the reporting period that could
affect the calculations
Such as the issue or redemption of shares

An entity may decide to include additional per share amounts using other
reported components from the statement of comprehensive income
Additional disclosures are required in this case
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 Current GAAP Comparisons

Page 134 of 164 of

http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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 IFRS Financial Statement
Disclosures
Heineken
http://www.annualreport.heineken.com/downloads/Heineken_AnnualReport_EN_
07.pdf

EPS on the Financial Statements page 67 of 160

Earnings per share note page 109 of 160

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 Looking Ahead
Joint convergence project
IASB and FASB are currently studying EPS as part of this project
Objective of the work is to converge and simplify the accounting

Proposals
Use of end of period market prices in calculating DEPS
As well as the carrying amount of any liabilities not remeasured at
fair value

In calculating DEPS and regarding instruments accounted for at

FVTPL
Profit or loss from changes in fair value remain in the numerator
Denominator not include the incremental impact of additional shares

An exposure draft is expected to be issued in late 2008

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 End-of-Chapter Practice

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 End-of-Chapter Practice

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 End-of-Chapter Practice

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