Accounting

# Calculating and Reporting Earnings Per Share (EPS) in Financial Statements (IAS 33)

Applicable Standard

• IAS 33: Earnings Per Share

Basic Earnings Per Share (EPS)

Formula

• Earnings Per Share (EPS) = Profit / (loss) attributable to ordinary shareholders / Weighted average number of shares outstanding over the period
• For Consolidated accounts, EPS is calculated based on the profits attributable to the owners of the Parent (i.e. excludes earnings attributable to non-controlling interests and preferred dividends).
• Weighted average number of shares mean the number of shares outstanding are weighted by the time they are in outstanding in the year.
• If there are any shares that are not fully paid-in, the amount paid-in is used to determine the number of fully-paid shares that would result in an equivalent amount paid-in. That number of fully-paid shares is used in the weighted average computation.

EPS and Bonus Shares Issue

• EPS for both the current year and previous year are calculated as if the bonus shares were issued at the start of the year. It is to ensure comparability of the EPS with the previous year.
• Comparable EPS for previous year = Original EPS for previous year * No. of shares before bonus issue / No. of shares after bonus issue

Rights Offering

• Shareholders get one right for each share of stock they own. They will need to give up a specified number of rights + subscription price of a new share, in order to get a new share.
• Actual Cum Rights Price (ACRP or CRAP) = Market price of the stock just before the rights offering expire
• Theoretical ex-rights price (TERP) = (No. of rights for 1 new share * CRAP + subscription price) / (1 + No. of rights for 1 new share)
• The way to think about this is to consider that after a rights holder exercises his rights (e.g. 2 rights for 1 new share, CRAP = 20, subscription price = 10), he will end up 3 shares with total value of 2*20 + 1*10 = 50.
• The value each share is then 50 / 3 = 16.67, which is the TERP.
• Value of 1 right = CRAP – TERP

EPS and Rights Issue

• Share count for the portion of the year before the new shares (from the rights offering) were issued is adjusted by a factor of CRAP / TERP. Hence if the rights offering is the only shares transaction, the number of shares for current year’s EPS = Number of Shares before Rights Issue * CRAP / TERP
• Comparable EPS for previous year = Original EPS for previous year * TERP / CRAP

Diluted EPS

Calculating Weighted Average Number of Shares

• Assume that the potential ordinary shares are converted at the beginning of the period or the instrument’s issue date, whichever is later.

Convertible Preference Shares & Convertible Bonds

• Numerator
• For Preference Shares, dividend needs to be removed from income statement (since we are assuming that they are converted for the purposes of the dilution computation, dividends would not be paid), so earnings is higher.
• For Convertible Bonds, interest cost (and interest tax shield) needs to be removed from income statement, so earnings is higher.
• Denominator
• To calculate the weighted average no. of shares, assume that the potential ordinary shares are converted at the beginning of the period or the instrument’s issue date, whichever is later.
• If there are multiple conversion rates to common, choose the most dilutive one.
• Diluted EPS must only incorporate conversions that are dilutive. If a conversion is accretive, that instrument is ignored in the Diluted EPS computation.

Share Options and Warrants

• Treasury Stock Method
• Calculate the number of shares that will be issued if all options/warrants are exercised.
• Subtract away the number of shares that can be purchased (using average market price over the period) with the proceeds from the options/warrants exercise. This assumes that the cash proceeds from exercise will be used to repurchase shares to mitigate the dilution.
• That is the additional number of shares for the Diluted EPS denominator.

Contingently-issuable Shares

• These are shares issued if certain conditions are met, e.g. employee performance targets.
• If the conditions are satisfied already, assume that the shares have been issued since the beginning of the period, else assume that no shares issued.

Employee Share Option Plans, Performance Share Plans, Restricted Share Plans

• If there is a performance condition, account for it as contingently-issuable shares.
• Else, account for them as per the rules above, assuming that any vesting conditions are satisfied.

Incorporating Dilution from Multiple Sources

1. Rank each instrument, from most dilutive to least dilutive (individual effect)
2. Start by incorporating the most dilutive instrument first into the Diluted EPS computation, and do that one after the other for the instruments down the ranking.
3. Pick the “most diluted” (i.e. lowest) Diluted EPS figure.

Handling Negative Earnings Per Share

• If EPS is negative, dilution in this case still means making the EPS worse, i.e. even more negative.
• Instruments are incorporated in the Diluted EPS computation only if they are dilutive, and not accretive.
• The methods above would still apply.

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