Eps PDF
Eps PDF
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IAS 33 handbook
September 2014
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Contents
Simplifying EPS 1 6 Retrospective adjustments 141
6.1 Why retrospective adjustments? 141
About this publication 2
6.2 Capitalisation or bonus issue, share split and
1 Introduction 3 reverse share split (share consolidation) 144
1.1 Background to EPS 3 6.3 Rights issue 150
1.2 Overview of currently effective requirements 3 6.4 Reverse acquisitions 155
6.5 Retrospective treatment of errors and
2 Scope, presentation and disclosure 5
accounting policies 159
2.1 Introduction 5
2.2 Mandatory presentation of EPS information 6 7 Basic and diluted EPS – Comprehensive worked
2.3 Voluntary presentation of EPS information 9 example 162
2.4 Disclosure requirements 9 7.1 Introduction 162
7.2 Calculating basic EPS 167
3 Basic EPS – The foundations 11
7.3 Calculating diluted EPS 173
3.1 Introduction 11
3.2 Step 1: Determine the numerator 12 8 EPS in interim financial statements 184
3.3 Step 2: Determine the denominator 22 8.1 Introduction 184
3.4 Applying the three-step approach 25 8.2 Scope 185
8.3 Year-to-date calculation 185
4 Diluted EPS – The foundations 28
8.4 Presentation and disclosure 195
4.1 Introduction 28
4.2 Step 1: Identify POSs 29 9 Other per-share measures 196
4.3 Step 2: For each class of POSs, determine EPIS 30 9.1 Introduction 196
4.4 Step 3: Rank POSs based on EPIS 38 9.2 Per-share measures based on alternative
4.5 Step 4: Determine basic EPS from continuing earnings measures 196
operations 38 9.3 Dividends per share 197
4.6 Step 5: Identify dilutive POSs and determine
Keeping in touch 198
diluted EPS 39
4.7 Applying the five-step approach 42 Acknowledgements 200
5 Consideration of specific instruments 45 Detailed contents 201
5.1 How to read this section 45
5.2 Ordinary shares issued in full for cash 48
5.3 Partly paid ordinary shares 49
5.4 Stock, scrip or share dividends 53
5.5 Ordinary shares issued to settle liabilities 58
5.6 Ordinary shares issued to acquire assets 61
5.7 Ordinary shares issued to acquire a business 63
5.8 Unvested ordinary shares (and ordinary shares
subject to recall) 68
5.9 Options, warrants and their equivalents 75
5.10 Contingently issuable ordinary shares 86
5.11 Convertible instruments 100
5.12 Contracts that may be settled in shares or in
cash 107
5.13 Preference shares 115
5.14 Written put options and forwards 117
5.15 Purchased puts and calls 122
5.16 Instruments over shares in, or issued by, a
subsidiary, joint venture or associate 123
5.17 Share-based payment arrangements 132
Simplifying EPS
EPS is an important metric that is widely used by analysts and other external users
of financial statements, as well as by management. However, despite IAS 33
Earnings per Share being in existence for some years, questions on how to apply
this standard are still frequent.
The International Accounting Standards Board has tried to address the application
issues – publishing proposed improvements in August 2008 – but had to shelve the
project in view of other priorities following the financial crisis.
Undoubtedly, applying the standard is challenging. Gaps in its coverage or
apparent inconsistencies with other standards have not been addressed and the
requirements for calculating the impact on EPS for some instruments often seem to
be based on ‘rules’ rather than principles.
Using a step-by-step approach and examples, this handbook will take you from
simple basic and diluted EPS calculations to the challenges of more complex
application issues related to IAS 33. Based on actual questions that have arisen in
practice around the world, this handbook explains the conclusions that we have
reached on many interpretative issues. It includes illustrative examples to clarify
the practical application of IAS 33 and highlights the impact on EPS for specific
instruments. It supplements our current interpretative guidance contained within
Chapter 5.3 of our publication Insights into IFRS.
We hope that this publication will help you in the practical application of IAS 33.
Kim Bromfield
David Littleford
Agnieszka Sekita
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2 | Earnings per share: IAS 33 handbook
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1 Introduction 3
1.2 Overview of currently effective requirements
1 Introduction
1.1 Background to EPS
EPS measures are intended to represent the income earned (or loss incurred) by
each ordinary share during a reporting period and therefore provide an indicator of
reported performance for the period.
The EPS measure is also widely used by users of financial statements as part of
the price-earnings ratio, which is calculated by dividing the price of an ordinary
share by its EPS amount. This ratio is therefore an indicator of how many times
(years) the earnings would have to be repeated to be equal to the share price of
the entity.
Users of financial statements also use the EPS measure as part of the dividend
cover calculation. This measure is calculated by dividing the EPS amount for a
period by the dividend per share for that period. It therefore provides an indication
of how many times the earnings cover the distribution being made to the ordinary
shareholders.
Basic and diluted EPS for both continuing and total operations
are presented in the statement of profit or loss and OCI, with
IAS 33.66–67A 2.2.10
equal prominence, for each class of ordinary shares that has a
differing right to share in the profit or loss for the period.
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Handbook
reference Key points
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2 Scope, presentation and disclosure 5
2.1 Introduction
2 Scope, presentation
and disclosure
2.1 Introduction
This section contains details about the scope, and the presentation and disclosure
requirements, of IAS 33.
Chapters 2.1 and 2.2 consider cases in which entities are required by IAS 33 to
present EPS information in their financial statements, and the corresponding
presentation requirements, covering:
–– which entities are affected;
–– in which set of financial statements EPS amounts are presented;
–– for which classes of instruments EPS amounts are presented; and
–– which components of earnings are used in the calculation of EPS amounts.
Chapter 2.3 considers cases in which entities are not required by IAS 33 to present
EPS information, but nevertheless fall in the scope of IAS 33 because they choose,
or are required by local regulations, to present such information.
Chapter 2.4 concludes the section with the disclosure requirements of IAS 33.
IAS 33.2–3 IAS 33 applies to any entity that presents EPS information in its financial
statements, even if the entity provides the disclosures voluntarily and is not
otherwise in the scope of the standard. Local legal and regulatory requirements
may contain further requirements on the presentation of EPS information. This
handbook focuses on the requirements of IAS 33 and does not consider the
requirements of any particular jurisdiction.
IAS 33.73–73A IAS 33 also applies to any disclosure of additional amounts per share that are
calculated using a reported component of the statement of profit or loss and OCI
(see Chapter 9.2).
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2 Scope, presentation and disclosure 7
2.2 Mandatory presentation of EPS information
If an entity’s ordinary shares are untraded at the reporting date but are publicly
traded by the time the financial statements are authorised for issue, then the
entity would generally have been in the process of filing its financial statements
with a securities commission or other regulatory organisation for this purpose at
the reporting date. Accordingly, we believe that the entity should disclose EPS
information in its financial statements.
An entity’s ordinary shares or POSs may be publicly traded for only a portion of
the current period – e.g. because they were only listed for the first time during the
period. In our view, in this situation the entity should present EPS information for
all periods for which statements of profit or loss and OCI are presented, and not
only for the periods during which the entity’s ordinary or potential ordinary shares
were publicly traded.
Publicly traded markets and/or regulators often impose additional disclosure
requirements for financial statements. Therefore, even if an entity is outside the
scope of IAS 33, these other regulatory requirements may nevertheless mandate
the disclosure of EPS information.
Company X has two classes of shares, A and B. The holders of class B shares
are entitled to dividends equal to 50% of any dividends declared on the class A
shares, but the shares are otherwise identical to class A shares. Both classes
are subordinate to all other classes of equity instruments with respect to
participation in profit.
In this example, X concludes that both class A and class B shares are ordinary
shares despite the difference in entitlement to dividends. Disclosure of
separate EPS amounts is therefore required for both class A and class B
ordinary shares.
In our view, an entity is not required to present separate EPS information for
participating preference shares that are not considered to be a separate class of
ordinary shares.
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IAS 32.16A–16F, 96B–96C In our view, puttable instruments that qualify for equity classification instead of
financial liability classification under IAS 32 Financial Instruments: Presentation are
not ordinary shares for the purposes of IAS 33. We believe that it is not appropriate
to apply by analogy the limited scope exemption under IAS 32 for EPS calculation
purposes. Accordingly, we believe that the EPS presentation is not required for,
or as a result of the existence of, such instruments. However, when determining
the earnings that are attributable to the ordinary shareholders, the terms of these
instruments should be evaluated to determine if they are participating instruments
(see 3.2.60).
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2 Scope, presentation and disclosure 9
2.4 Disclosure requirements
IAS 33.67, 70 In such cases, the entity is still required to disclose both basic and diluted EPS.
This could be achieved by presenting only one line in the statement of profit or
loss and OCI, labelled ‘basic and diluted EPS’. In our view, if basic and diluted
EPS are equal, then the entity does not need to disclose a reconciliation of the
weighted-average number of ordinary shares used in the EPS calculation to the
diluted EPS calculation, which would otherwise be required (see Chapter 2.4).
IAS 33.70(c) If diluted EPS is reported for at least one period, then it should be reported for
all periods presented, even if it equals basic EPS. In addition, an entity discloses
POSs that potentially could dilute EPS in the future, but are anti-dilutive for the
current period presented.
IAS 33.70(a)
Numerator – Disclose the amounts used as the numerators (earnings)
in calculating basic and diluted EPS.
– Reconcile these numerators to the profit or loss
that is attributable to the entity for the period. The
reconciliation includes the individual effect of each
class of instruments that affect EPS.
IAS 33.70(b)
Denominator – Disclose the amounts used as the denominators
(weighted-average number of shares) in calculating basic
and diluted EPS.
– Reconcile these denominators to each other. The
reconciliation includes the individual effect of each class
of instruments that affect EPS.
IAS 33.70(c)
POSs not – Disclose instruments (including contingently issuable
included in shares) that could potentially dilute basic EPS in the
diluted EPS future, but were not included in the calculation of diluted
EPS because they were anti-dilutive (see 4.6.10).
IAS 33.64
Adjusting – If EPS reflects changes in the number of shares due to
events after the events after the reporting date (see Chapter 6.2), then
reporting date disclose that fact.
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10 | Earnings per share: IAS 33 handbook
IAS 33.73
Additional per- – An entity may disclose, in addition to basic and diluted
share amounts EPS, amounts per share using a reported component of
the statement of profit or loss and OCI other than one
required by IAS 33 (see Chapter 9.2). If such amounts are
presented, then it discloses in the notes and not in the
statement of profit or loss and OCI:
- basic and diluted amounts per share relating to such a
component with equal prominence;
- the basis on which the numerators are denominated,
including whether amounts per share are before or
after tax; and
- a reconciliation between the component used and a
line item that is reported in the statement of profit or
loss and OCI, if the component is not reported as a line
item in the statement of profit or loss and OCI.
Our guides to financial statements illustrate the disclosure requirements of IAS 33.
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3 Basic EPS – The foundations 11
3.1 Introduction
IAS 33.1 Although IAS 33 focuses on the denominator, it also contains certain requirements
in respect of the numerator.
Fact pattern
– Company P’s profit attributable to its ordinary shareholders for Year 1
is 4,600,000.
– P has a simple capital structure comprising 3,000,000 ordinary shares.
– The number of outstanding ordinary shares remains the same throughout
Year 1.
Basic EPS calculation
– Profit attributable for Year 1 to ordinary shareholders of P: 4,600,000.
– Weighted-average number of ordinary shares outstanding during Year 1:
3,000,000.
Basic EPS for Year 1 is therefore 1.53 (4,600,000 / 3,000,000).
In practice, the basic EPS calculation may be more complex than Example 3.1 and
adjustments may be required to the numerator and denominator.
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The rest of this handbook approaches the basic EPS calculation following a
three‑step approach.
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3 Basic EPS – The foundations 13
3.2 Step 1: Determine the numerator
IAS 33.15 + Post-tax dividends on cumulative preference shares required for the period,
declared or not
IAS 33.12, 16–18
+/- Any original issue discount (premium) on increasing-rate preference shares
+/- Any differences on settlement
Fact pattern
– Company P’s net profit for Year 1 is 4,600,000.
– P has 500,000 equity-classified preference shares in issue throughout Year 1:
- each preference share provides for a cumulative discretionary dividend
each year of 1.2; and
- preference shares have no further rights to participate in dividends with
ordinary shares.
– There are no tax effects on payment of preference dividends.
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Fact pattern
Assume the same facts as in Example 3.2A, except that the preference
dividends are non-cumulative. The following facts regarding preference
dividends are also relevant.
– Scenario 1: P declares and authorises dividends for Year 1 before the end of
Year 1.
– Scenario 2: P declares and authorises dividends for Year 1 after the end of
Year 1 but before its financial statements for Year 1 are authorised for issue.
– Scenario 3: P does not declare any dividends for Year 1 until after its financial
statements for Year 1 are authorised for issue.
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3 Basic EPS – The foundations 15
3.2 Step 1: Determine the numerator
IAS 33.15 The amortisation of any original issue discount or premium on increasing-rate
preference shares is effectively an adjustment to the returns to preference
shareholders. Accordingly, the amortisation of the discount or premium is treated
as a preference dividend in the numerator for EPS purposes. This impact is
illustrated in Example 3.3, which is based on Illustrative Example 1 of IAS 33.
Although the amortisation of the discount to retained earnings is reflected in the
calculation of EPS, this reclassification in equity is not a requirement under IFRS.
Year 4
Year Year 1 Year 2 Year 3 onwards
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Fact pattern
On 1 January Year 1, Company B issues 50,000 equity-classified cumulative
preference shares with a par value of 100 each. Total proceeds amount to
5,000,000. Each share is entitled to a cumulative discretionary dividend of 7
each year. This is equal to the market yield on instruments with similar terms at
the time of issue.
In light of the availability of surplus funds and declining market yields, B agrees
with the preference shareholders to redeem the preference shares issued,
with a carrying amount of 5,000,000. On 1 January Year 2, B completes the
redemption for a total consideration of 6,000,000.
B’s net profit for Year 2 is 5,000,000. Because the preference shares are
settled at the beginning of the year, there is no requirement to pay preference
dividends for Year 2.
IAS 33.17 An example of the ‘other similar effects’ referred to above is an inducement
for early conversion of equity-classified convertible preference shares, either
by favourably amending the original conversion terms or by paying additional
consideration to the preference shareholders. Similar to differences on settlement,
such an inducement is not recognised in profit or loss but nevertheless represents
a return to preference shareholders for which the numerator is adjusted.
IAS 33.17 If the fair value of the ordinary shares or other consideration paid exceeds the fair
value of the ordinary shares issuable under the original conversion terms, then this
excess is a return to preference shareholders and is deducted from net profit or
loss in arriving at the numerator for basic EPS, as illustrated in Example 3.5.
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3 Basic EPS – The foundations 17
3.2 Step 1: Determine the numerator
Fact pattern
On 1 January Year 1, Company C issues convertible preference shares with a
par value of 1,000,000. The preference shares bear a discretionary dividend of
10 each year and are convertible at the holders’ option into 500,000 ordinary
shares of C. C classifies the preference shares as equity instruments.
During Year 2, in light of changes in market yields, C wishes to induce early
conversion of the preference shares. To achieve this, C agrees with the
preference shareholders to modify the conversion terms such that the
preference shares are convertible into 600,000 ordinary shares – i.e. 100,000
additional ordinary shares will be issued on a full conversion. All of the
preference shares are converted into ordinary shares on 30 June Year 2, when
the market price per ordinary share of C is 2.50.
C’s net profit for Year 2 is 1,000,000. No dividends are declared for Year 2.
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Adjust net profit or loss by the amount of dividends declared in the period
Step A for each class of shares, and by the contractual amount of dividends or
interest not recognised in profit or loss for the period that has yet to be paid
– e.g. unpaid cumulative dividends.
Fact pattern
– Company D has two classes of equity instruments, X and Y, with the
following rights.
- Holders of class X are entitled to a fixed dividend per share and have the
right to participate in any additional dividends declared. Dividends are
discretionary.
- Holders of class Y participate equally with holders of class X with respect to
any additional discretionary dividends only.
- Both classes of shares participate equally in residual assets on winding up.
– The following information is also relevant.
- Net profit of D for the period: 2,500.
- Dividends paid to holders of class X: 600.
- Dividends paid to holders of class Y: 500.
- Number of shares outstanding for the period: 100 for both class X and
class Y.
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3 Basic EPS – The foundations 19
3.2 Step 1: Determine the numerator
Step A: Adjust net profit or loss for dividends declared and unpaid cumulative dividends
Fact pattern
– Company E has two classes of equity instruments, A and B.
– Holders of class A participate in dividends at a rate of 1% more than holders
of class B.
– The following information is also relevant.
- Net profit of E for the period: 100,000.
- E did not declare or pay any dividends for the period.
- Number of shares outstanding for the period: 30,000 for class A and 10,000
for class B.
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Step A: Adjust net profit or loss for dividends declared and unpaid cumulative dividends
X represents the dividend per share to holders of class B. The undistributed net profit is
attributable to the holders of the two classes as follows.
(X x 10,000) + (X x 1.01 x 30,000) = 100,000
X = 2.48 (rounded)
There are no dividends declared or paid in the period and therefore no adjustments to the
amounts calculated in Step B.
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3 Basic EPS – The foundations 21
3.2 Step 1: Determine the numerator
Fact pattern
– Company P has an 80% interest in Subsidiary S.
– P’s consolidated net profit for the year (excluding its share of S’s results):
5,000.
– S’s loss for the year: 750.
However, if P is obliged to cover the losses attributable to NCI, then P’s basic
EPS in its consolidated financial statements is as follows.
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Fact pattern
On 1 January Year 1, Company F has 1,000,000 shares outstanding.
On 1 July Year 1, it issues 500,000 shares for cash.
On 1 September Year 1, it issues a further 500,000 shares for cash.
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3 Basic EPS – The foundations 23
3.3 Step 2: Determine the denominator
Number Weighted-
of shares Time average number
outstanding weighting of shares
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3 Basic EPS – The foundations 25
3.4 Applying the three-step approach
IAS 33.26, 29, 64 However, the number of outstanding ordinary shares may increase or decrease
without a corresponding change in resources. For example, the number of shares
may increase as a result of a capitalisation, bonus issue or share split, or decrease
as a result of a share consolidation (i.e. reverse share split). In such cases, ordinary
shares are effectively issued or cancelled for no consideration and therefore these
events do not contribute to the earning capacity of an entity. As such, to follow
the approach mentioned above by taking into account the change in the number
of ordinary shares only from the date of these capital events would give an
erroneous impression of a change in an entity’s profitability when there is merely a
redenomination of shares.
IAS 33.26, 29 As a result, when there is a capitalisation or bonus issue or a (reverse) share
split that has the effect of changing the number of shares outstanding without
a corresponding change in resources, the weighted-average number of shares
outstanding for the entire period is retrospectively adjusted as if the change had
occurred at the beginning of the first period of EPS information presented.
IAS 33.64 Furthermore, such retrospective adjustment is required when these changes
occur after the reporting date but before the financial statements for that reporting
period are authorised for issue.
Retrospective adjustment is further considered in Section 6.
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26 | Earnings per share: IAS 33 handbook
Basic EPS
1 January – opening
balance 2,500,000
15 January – bonus
issue 125,000 1
1 January to
31 January 2,625,000 1/12 218,750
1 February –
repurchase of shares (200,000)
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3 Basic EPS – The foundations 27
3.4 Applying the three-step approach
Note
1. The bonus issue changed the number of shares outstanding without a
corresponding change in resources. For this reason, the number of shares
is retrospectively adjusted to 1 January. The bonus issue also impacts prior-
period EPS amounts (see Section 6).
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4 Diluted EPS – The foundations 29
4.2 Step 1: Identify POSs
Further examples on how adjustments are made for different types of POSs can
be found in Section 5.
The rest of this handbook approaches diluted EPS calculation following a five-step
approach.
IAS 33.23 Although instruments that are convertible into ordinary shares are generally POSs,
those that are mandatorily convertible are not. Mandatorily convertible instruments
are regarded as outstanding ordinary shares from the date on which the contracts
are entered into; they are therefore included in the denominator for basic EPS from
that date (see 3.3.20 and Chapter 5.11).
IAS 33.38 Because POSs are generally weighted for the period they are outstanding
(see 4.3.20), the identification of POSs is not limited to those that remain
outstanding at the reporting date, but also includes those that had been
outstanding during the reporting period but were cancelled, allowed to lapse or
converted into ordinary shares during the period.
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The second step to calculating diluted EPS is to determine the EPIS for each
class of POSs, which is then used to determine whether each of these classes is
dilutive and therefore whether it should be included in diluted EPS.
Determining the EPIS for a particular class of POSs is similar to calculating the EPS
for that class of POSs. Determining the EPIS for different classes of POSs helps in
identifying which of these classes is dilutive and is therefore ultimately included in
the denominator for diluted EPS (see Chapter 4.6). The EPIS for a class of POSs is
determined using the following formula.
=
(numerator adjustment)
EPIS
Weighted-average number of outstanding POSs
(denominator adjustment)
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4 Diluted EPS – The foundations 31
4.3 Step 2: For each class of POSs, determine EPIS
IAS 33.33 With the exception of equity-settled share-based payment costs (see
Chapter 5.17), the numerator is adjusted for the post-tax effect of:
–– any dividends, interest and other items related to the dilutive POSs that are
deducted in arriving at the profit or loss attributable to ordinary shareholders;
and
–– any other changes in income or expense that would result from the assumed
conversion of dilutive POSs.
For example, an entity has issued convertible debt that is accounted for wholly as
a financial liability under IAS 32 Financial Instruments: Presentation, because the
conversion feature is a derivative that does not meet the definition of equity (e.g.
because the conversion price is not fixed). If the convertible debt is dilutive, then
the adjustments under the first bullet point above include:
–– the post-tax effect of interest expense (which includes any amortisation of
initial transaction costs and discounts accounted for using the effective interest
method under IAS 39 Financial Instruments: Recognition and Measurement),
which would have been saved from the assumed conversion of the convertible
debt, net of the related tax effects (see Chapter 5.11 for an illustration of this
adjustment);
–– the post-tax effect of foreign exchange gain or losses in profit or loss, if the
instrument is denominated in a foreign currency; and
–– the post-tax effect of any fair value remeasurement associated with the
derivative component.
IAS 33.35 In addition, IAS 33 goes a step further to require adjustments for ‘any other
changes in income or expense that would result from the assumed conversion
of dilutive POSs’, noting that the conversion of POSs may lead to consequential
changes in profit or loss. Continuing the example, examples of other consequential
effects on profit or loss may be:
–– a decrease in depreciation expense if part of the interest on the debt is
capitalised under IAS 23 Borrowing Costs; and
–– an increase in the expense related to a non-discretionary employee profit-
sharing plan.
In our view, for an item to be treated as having a consequential effect on profit
or loss as a result of an assumed conversion of dilutive POSs, there should be a
direct or automatic adjustment to profit or loss.
Fact pattern
– On 1 January Year 1, Company G issues a bond that is convertible into its
ordinary shares. During Year 1, the interest expense recognised on the debt
is 1,000.
– G has a non-discretionary employee profit-sharing plan that pays 5% of its
net profit annually to all eligible employees.
– All expenses are tax-deductible. The applicable income tax rate is 30%.
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Numerator adjustment
To determine the EPIS for the convertible bond, G assumes that the bond is
converted into ordinary shares from the beginning of Year 1.
With the assumed conversion, the interest on the bond would not have been
recognised in Year 1. This would have resulted in an increase in profit for Year 1
and, consequently, would have led automatically to an increase in the employee
profit-sharing plan expense.
Therefore, G determines the numerator adjustment for the EPIS as follows.
(300)
Decrease in interest expense 1,000 [1,000 x 30%] 700
Increase in employee profit-sharing (50) 15
expense [1,000 x 5%] [50 x 30%] (35)
Numerator adjustment 950 (285) 665
Fact pattern
– On 1 January Year 1, Company H issues a bond that is convertible into its
ordinary shares.
– During Year 1, the interest on the bond recognised is 9,000, of which 6,000 is
recognised in profit or loss and 3,000 is capitalised into the cost of property,
plant and equipment in accordance with IAS 23. There are no other borrowing
costs that would be capitalised if the instrument had been converted.
– Of the interest of 3,000 that is capitalised during Year 1, 500 is recognised as
part of depreciation expense in Year 1.
– All expenses are tax-deductible. The applicable income tax rate is 30%.
Numerator adjustment
To determine the EPIS for the convertible bond, H assumes that the bond is
converted into ordinary shares from the beginning of Year 1.
With the assumed conversion, the interest on the bond would not have been
recognised in Year 1. In addition to the reduction in the interest expensed, this
would have resulted in a reduction in the interest capitalised and, consequently,
would have resulted in a reduction in depreciation expense recognised during
Year 1 in respect of such capitalised interest.
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4 Diluted EPS – The foundations 33
4.3 Step 2: For each class of POSs, determine EPIS
(1,800)
Decrease in interest expense 6,000 [6,000 x 30%] 4,200
(150)
Decrease in depreciation expense 500 [500 x 30%] 350
Numerator adjustment 6,500 (1,950) 4,550
Fact pattern
Company J issues share options to its employees. To fulfil its obligations in this
regard, J writes a call option to Bank B to purchase its own shares at market
price.
Numerator adjustment
In this example, J concludes that this call option is not a derivative, because the
value of the option does not depend on an underlying variable – it always has a
fair value of zero.
Therefore, as far as the call option between J and B is concerned, the assumed
conversion of the employee share options would not have any consequential
change to profit or loss. Accordingly, no numerator adjustment should be made
to the EPIS in this regard.
Fact pattern
Continuing Example 4.3A, to reduce its exposure to an increase in the market
price of its shares when the options become exercisable, Company J enters
into a share swap with Bank C.
– J takes a notional loan from C, with the principal amount equal to the purchase
price of a notional number of shares at a notional share price.
– J pays interest on the notional loan and C pays dividends on the notional
number of shares when J declares dividends.
– J may change the number of notional shares implicit in the notional loan by
notifying the bank in advance, and has the intention of reducing the number
of notional shares in line with the reduction in share options outstanding.
The difference between the notional price and the market price of shares is
refunded by C if the number of shares decreases, and vice versa.
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34 | Earnings per share: IAS 33 handbook
Numerator adjustment
Although J may intend to adjust the notional amount under the swap
arrangement to hedge the share-based payment liability, the adjustment is not
automatic and J has the discretion to adjust its exposure.
Therefore, we believe that there is insufficient linkage between the swap
arrangement with C and the exercise of options to consider changes in
the swap arrangement with C to be a consequential change to profit or
loss. Accordingly, no numerator adjustment should be made to the EPIS in
this regard.
IAS 33.58–59 In our view, the numerator should not be adjusted for equity-settled share-based
payment costs when calculating diluted EPS (see 5.17.50). However, if there is a
remeasurement expense from a liability of a cash-settled share-based payment
that may also be settled in shares, then the numerator is adjusted for such an
amount when calculating diluted earnings (see 5.17.80).
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4 Diluted EPS – The foundations 35
4.3 Step 2: For each class of POSs, determine EPIS
Fact pattern
Company B has the following transactions involving its non-cumulative
preference shares during Year 1. All of these preference shares are convertible
into ordinary shares on the same conversion terms.
– 1 January: 2,000 preference shares are outstanding.
– 1 April: 500 preference shares are converted into ordinary shares.
– 1 July: another 1,000 preference shares are issued.
Weighted-
Number of average
preference number of
shares Time preference
outstanding weighting shares
IAS 33.45--46 Notwithstanding the general principles above, additional specific requirements
apply to the determination of the denominator adjustment for different types of
POSs. For example, for options, warrants or their equivalents, rather than simply
adding to the denominator the weighted-average number of ordinary shares to be
issued from the assumed conversion of the options, IAS 33 prescribes another
method, commonly referred to as the ‘treasury share method’, under which only
the bonus element of the issue is reflected in the denominator. The following
diagram summarises the treasury share method.
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36 | Earnings per share: IAS 33 handbook
‘Exercise price’
×
Calculate the assumed proceeds
Step i Calculate the proceeds that would have been received
from the assumed exercise of all options (see 5.9.50). number of
options
Number of
shares that
Determine the bonus element would be issued
Calculate the difference between the number of
Step iii ordinary shares that would be issued at the exercise -
of the options and the number of ordinary shares number of
deemed to be repurchased at the average market price. shares deemed
to be
repurchased
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4 Diluted EPS – The foundations 37
4.3 Step 2: For each class of POSs, determine EPIS
Fact pattern
Consider the same fact pattern as presented in Example 4.4. The following facts
are also relevant.
– The preference shares are classified as financial liabilities. During Year 1, the
interest expense on preference shares is 1,000.
– All expenses are tax-deductible. The applicable income tax rate is 30%.
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38 | Earnings per share: IAS 33 handbook
More than Rank POSs from the lowest to the highest EPIS
one class – POSs with adjustments only to
of POSs denominator are included first
IAS 33.42, 44 An entity may have more than one class of POSs in existence during a reporting
period. For example, it may have both convertible debt and share options
that entitle the holders to the entity’s ordinary shares. In another example, an
entity may have more than one type of share options, each with a different
exercise price.
IAS 33.44 When determining diluted EPS, it is necessary to establish whether an entity’s
POSs are dilutive – i.e. whether the assumed conversion of the POSs would
decrease net profit per share from continuing operations (see Chapter 4.6). If an
entity has more than one class of POSs, then dilution is judged by the cumulative
impact of POSs. Because the objective of diluted EPS is to reflect the maximum
dilutive effect taking into account all of an entity’s POSs as a whole, the effects of
any anti‑dilutive POSs are ignored.
IAS 33.44 To make this determination, each class of POSs identified in Step 1 is considered
in sequence. To work out this sequence, it is necessary to calculate the effect that
the assumed conversion of each class of POSs would have on both net profit from
continuing operations and the weighted-average number of ordinary shares, by
determining the EPIS for each class of POSs. Classes of POSs are then ranked in
order from the most dilutive (the class with the lowest EPIS) to the least dilutive
(the class with the highest EPIS). This is often referred to as the ‘ranking’ of POSs.
IAS 33.44 Classes of POSs that have denominator adjustment but do not have numerator
adjustment are ranked the most dilutive. An example of these instruments is an
equity-classified share option (see Chapter 5.9).
=
The attributable to ordinary shareholders
‘control
number’ Weighted-average number of outstanding ordinary
shares during the reporting period
IAS 33.41–42 As is further explained in Chapter 4.6, IAS 33 uses ‘profit or loss from continuing
operations attributable to an entity’s ordinary shareholders’ as the ‘control
number’ in determining whether POSs are dilutive or anti-dilutive. Items relating
to discontinued operations under IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations are excluded from this control number.
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4 Diluted EPS – The foundations 39
4.6 Step 5: Identify dilutive POSs and determine diluted EPS
Diluted EPS
Fact pattern
Company P’s net profit (loss) for Year 1, Year 2 and Year 3 is as follows.
At 31 December Year 1, Year 2 and Year 3, the market price of S’s ordinary shares
is above 150.
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40 | Earnings per share: IAS 33 handbook
Dilutive or anti-dilutive?
The treatment of contingently issuable ordinary shares is discussed in detail
in Chapter 5.10. Although P would not issue any ordinary shares under its
agreement with S’s former shareholders until the specified market price target
is met in Year 4, its agreement to issue ordinary shares contingent on the market
price target may entitle the former shareholders of S to P’s ordinary shares for
no further consideration. Accordingly, the agreement gives rise to POSs that
would result in an adjustment to diluted EPS if they are dilutive.
Generally, to reflect the potential decrease in the profit entitlement of P’s
existing ordinary shares, the denominator for diluted EPS includes the number
of ordinary shares that would be issued if the market price at the reporting
date were the market price at the end of the contingency period, and the effect
would be dilutive. This means that, when P determines diluted EPS for Years 1
to 3, it assumes that the 20,000 contingently issuable ordinary shares were
outstanding ordinary shares in each of the three years, to evaluate whether the
assumed conversion would decrease EPS from continuing operations in each of
these years.
Basic EPS
This example illustrates the ‘control number’ notion: once certain POSs are
regarded as dilutive for a reporting period because they reduce the EPS from
continuing operations, they are included in the denominators for all diluted EPS
measures for that period. For example, P includes 20,000 POSs in its diluted
EPS from continuing operations in Year 2 because the resulting amount is
dilutive (the inclusion reduces the EPS from continuing operations from 5 to
4.55); consequently, P includes the same 20,000 POSs in its diluted loss per
share from total operations in Year 2, even though the resulting amount is anti-
dilutive to the comparable basic loss per share amount from total operations
(the inclusion reduces the loss per share from 10 to 9.09).
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4 Diluted EPS – The foundations 41
4.6 Step 5: Identify dilutive POSs and determine diluted EPS
By contrast, in Year 3 the 20,000 shares are not included in diluted EPS because
they are not dilutive for continuing operations, even though they would be for
total operations (the inclusion would reduce the EPS from total operations from
10 to 9.09).
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42 | Earnings per share: IAS 33 handbook
This example expands on Example 3.10 (see Chapter 3.4) and illustrates the
determination of diluted EPS when an entity has more than one class of POSs.
Movements in Company P’s shares and POSs during Year 1 are presented as
below.
Contingently
Dates in Ordinary Treasury Preference issuable
Year 1 Transaction shares shares shares shares
The following information remains relevant for this example for Year 1.
– P’s net profit for the year is 4,600,000.
– On 15 November, non-cumulative preference dividends of 1.20 per share are
declared. The dividends are paid on 15 December. Preference shares do not
participate in additional dividends with ordinary shares.
– Dividends on non-cumulative preference shares are deductible. The applicable
income tax rate is 30%.
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4 Diluted EPS – The foundations 43
4.7 Applying the five-step approach
Diluted EPS
Identify POSs
1
This entity has two classes of outstanding POSs:
i. the preference shares, which are convertible in the future into
ordinary shares; and
ii. the contingently issuable shares, which may be issued as ordinary
shares at the end of Year 2.
For the contingently issuable shares under (ii), the conditions related
to share price would be met if the reporting date were the end of the
contingent period. Accordingly, they are considered in the diluted EPS
calculation. For further discussion of contingently issuable ordinary
shares, see Chapter 5.10.
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44 | Earnings per share: IAS 33 handbook
Weighted-
average
number of
Earnings shares EPS
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5 Consideration of specific instruments
5.1 How to read this section
This section builds on the basic principles introduced in Sections 3 and 4, and sets out the specific basic and diluted EPS
implications of the following types of instruments.
Chapter Instruments
Generally, each chapter provides a comprehensive treatment of the EPS calculations relevant to a particular type of instrument.
However, an instrument may contain multiple features that are the subjects of different sections. For example, some share options
may be settleable in cash, and therefore both Chapters 5.9 (which deals with share options in general) and 5.12 (which deals with
instruments with settlement options) would be relevant. In such cases, cross-references between chapters are provided.
Each chapter is organised in the following way.
Overview of the Outlines the general characteristics of the instrument and defines the chapter’s scope. Although it
instrument also gives an overview of the accounting considerations that impact the EPS calculations for that
instrument, this section does not provide a comprehensive analysis of the accounting requirements in
other standards.
For further guidance on accounting for the instruments, see our publication Insights into IFRS:
Chapter 2.6 for business combinations, Chapter 4.5 for share-based payments, Chapter 7.2 for
derivatives and embedded derivatives, Chapter 7.3 for equity and financial liabilities and Chapter 7.6 for
the measurement of financial instruments and gains and losses.
EPS implications Outlines the potential EPS implications of the instrument, split into basic EPS and diluted EPS. Symbols
highlight whether the instrument may impact the numerator, the denominator or both.
The instrument impacts that measure of EPS. For basic EPS, this
Numerator means the instrument may impact the calculation before ordinary
shares are actually issued. For diluted EPS, this means the instrument
Denominator is taken into account, although whether adjustments are actually
required depends on whether the instrument is dilutive or anti-dilutive.
Numerator X / Whether the instrument impacts that measure of EPS will depend on
Denominator X / specific facts, as explained further.
Element What it does
Dilutive or anti- Outlines the general features that determine whether an instrument is dilutive or anti-dilutive for
dilutive? diluted EPS.
Worked examples Following the three-step and five-step approaches to basic and diluted EPS set out in Sections 3 and 4.
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Numerator X
Denominator Denominator X
The weighted-average number of outstanding ordinary shares for a period is the Ordinary shares are not POSs. Accordingly, there are no additional diluted EPS
denominator in basic EPS. Ordinary shares issued in full for cash consideration are implications.
included in the weighted average of outstanding ordinary shares from the date on
which the cash consideration is receivable (see 3.3.20).
5.3 Partly paid ordinary shares
5.3.10 Overview of the instrument
This chapter deals with ordinary shares that are only partly paid-up in cash, with the balance of the subscription price required to
be paid only as and when it is called for by the issuing entity. The rights of the holders of such shares to dividends, on winding-up
or liquidation of the entity, and the rights of the entity if the balance is not paid when it is required, will differ depending on the
applicable laws and/or the entity’s constitutional documents.
Numerator X Numerator X
Denominator Denominator
To the extent that a partly paid ordinary share is entitled to participate in dividends To the extent that a partly paid ordinary share is not entitled to participate in
during the period relative to a fully paid ordinary share, it is treated as a fraction of an dividends during the period, it is treated as the equivalent of an option or warrant
January to March 3,000,000 3/12 750,000 Step i Subscription price 10.00 (B)
April to December 3,800,000 9/12 2,850,000 Average market price of ordinary shares 12.00 (D)
Step ii Number of ordinary shares deemed to (E) =
12/12
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Weighted average for the year 3,600,000 Step iii Bonus element 33,333 (A) - (E)
The denominator is therefore 3,600,000. The bonus element is weighted for the period the ordinary shares are not fully
paid.
Weighted-
average
number of
Earnings shares Per share Dilutive?
Numerator X
Denominator Denominator X
IAS 33 indicates that ordinary shares issued on the voluntary reinvestment of Ordinary shares issued as stock dividends are not POSs. Accordingly, there are no
dividends are included in the denominator for EPS calculations from the date on additional diluted EPS implications.
which the dividends are reinvested. However, the standard provides ‘stock dividend’
as an example of a bonus issue in which ordinary shares are issued without a
corresponding change in resources, which suggests that some stock dividends
require retrospective adjustment to the denominator. [IAS 33.21(b), 27(a)]
In our view, the treatment of stock dividends in the EPS calculation depends on
whether the shareholders have an option to receive cash and whether there is an
inherent bonus element.
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Example 5.4A: Stock dividends with cash alternative – Without bonus element
Solution
The EPS computations for Year 1 are as follows.
12/12
Basic EPS = 4,600,000 / 3,480,000 = 1.32 Because there are no POSs, diluted EPS is the same as basic EPS.
Diluted EPS = 1.32
Example 5.4B: Stock dividends with cash alternative – With bonus element
(G) =
Theoretical ex-rights fair value per share 4.697 ((E) + (C)) / (F)
Accordingly, the adjustment factor for the bonus element in the stock
dividends is multiplied by the outstanding shares before the stock dividend
(i.e. 1 May) to determine the retrospective adjustment.
Basic EPS Diluted EPS
Numerator X
Denominator Denominator X
Generally, ordinary shares issued are included in the denominator from the date on Ordinary shares issued to settle liabilities are not POSs. Accordingly, there are no
which consideration is receivable. Therefore: additional diluted EPS implications.
– ordinary shares issued in place of interest or principal on debt or other financial
instruments are included from the date on which the interest ceases to accrue;
and
ordinary shares issued in exchange for the settlement of a liability are included
from the settlement date. [IAS 33.21(d)–(e)]
Example 5.5: Ordinary shares issued to settle liabilities
On 1 October, P agrees with certain third party creditors to issue 250,000 ordinary shares in settlement of interest-bearing loan
notes of 450,000. Based on the terms of the agreement, the loan notes cease to bear interest from this date. The shares are
issued on 15 October.
Assume that the carrying amount of the liabilities equals the fair value of the shares issued.
Solution
The EPS computations for Year 1 are as follows.
Basic EPS Diluted EPS
Determine the numerator Identify POSs
1 1
No adjustment is necessary. The numerator is 4,600,000. The shares issued to settle liabilities are not POSs. Therefore, Steps 2–4 do
not apply.
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Number of Time Weighted Determine the basic EPS from continuing operations
shares weighting average
4 Not applicable.
January to June 3,000,000 6/12 1,500,000
1 July – shares issued to settle
shareholders’ loans 200,000
July to September 3,200,000 3/12 800,000
1 October – shares issued to settle loan
notes 250,000
October to December 3,450,000 3/12 862,500
12/12
Weighted average for the year 3,162,500
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 5
Basic EPS = 4,600,000 / 3,162,500 = 1.45 Because there are no POSs, diluted EPS is the same as basic EPS.
Diluted EPS = 1.45
5.6 Ordinary shares issued to acquire assets
5.6.10 Overview of the instrument
This chapter deals with ordinary shares issued to acquire an asset or a group of assets that does not constitute a ‘business’
as defined in IFRS 3 Business Combinations. Generally, if an entity receives goods – e.g. inventories, property, plant and
equipment, intangible assets or other non-financial assets – or services as consideration for its own equity instruments, then
IFRS 2 Share-based Payment applies. [IFRS 2.2(c)]
This chapter does not deal with:
– the issuance of ordinary shares to acquire a business: see Chapter 5.7; and
– the issuance of ordinary shares subject to conditions other than the passage of time: see Chapters 5.8 and 5.10.
Numerator X
Denominator Denominator X
Generally, ordinary shares issued for the acquisition of an asset other than cash are Ordinary shares issued to acquire assets are not POSs as long as the issue is not
included in the denominator as of the date on which the acquisition is recognised, as subject to conditions other than the passage of time. Accordingly, there are no
long as the issue is not subject to conditions other than the passage of time. This is additional diluted EPS implications.
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irrespective of whether the ordinary shares may be issued at a later date. [IAS 33.21(f)]
12/12
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 Basic EPS = 4,600,000 / 3,100,000 = 1.48
5 Because there are no POSs, diluted EPS is the same as basic EPS.
Diluted EPS = 1.48
5.7 Ordinary shares issued to acquire a business
5.7.10 Overview of the instrument
This chapter deals with ordinary shares issued by an acquirer in a business combination in exchange for control of an acquiree.
Share consideration in a business combination can be broadly classified into the following three categories:
– shares issued at the date of acquisition;
– shares that will be issued at a future date but whose issue is not subject to any conditions other than the passage of time
(deferred consideration); and
– shares that may be issued (or returned) if specified future events occur or conditions are met (contingent consideration).
An acquirer presents contingent consideration settleable in ordinary shares as a liability or as equity in accordance with IAS 32
Financial Instruments: Presentation. For example, if the acquirer may be required to issue additional ordinary shares to the
value of a specified monetary amount, then the contingent consideration is presented as a financial liability that is subsequently
measured at fair value. [IFRS 3.40, 58, IAS 32.11]
In some business combinations, the entity that issues shares to acquire the interest in another entity is identified as the acquiree
for accounting purposes. Such business combinations – referred to as ‘reverse acquisitions’ – present a specific challenge in
determining EPS amounts. For details on the EPS implications of a reverse acquisition, see Chapter 6.4.
Numerator X Numerator X
12/12
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 Basic EPS = 4,600,000 / 3,233,333 = 1.42
5 Because there are no POSs, diluted EPS is the same as basic EPS.
Solution
The EPS computations for Year 1 are as follows.
Basic EPS Diluted EPS
Basic EPS = 4,600,000 / 3,000,000 = 1.53 The potential impact of the contingently issuable ordinary shares is
determined as follows.
Numerator X / Numerator X /
Denominator X Denominator
Unvested ordinary shares are not regarded as outstanding until they are vested. Unvested ordinary shares are treated as options in diluted EPS.
Ordinary shares issued as compensation for services received are included in the
Generally, no adjustment is necessary in the numerator because unvested ordinary
denominator as the services are received. [IAS 33.21(g)]
shares and shares subject to recall are classified as equity. However, to the extent
Ordinary shares may be entitled to non-forfeitable dividends during the vesting that these shares are entitled to dividends, adjustments to basic EPS (see left) are
period. If this is the case, then to the extent that these dividends have not been added back to the numerator in diluted EPS.
recognised in profit or loss, in our view the numerator should be adjusted for these
The potential adjustment to the denominator is determined using the treasury share
dividends and any undistributed earnings attributable to these shares, in accordance
method (see 5.9.40). [IAS 33.48]
with their participating rights (see 3.2.60). This is because the numerator is intended
to reflect amounts that are attributable to outstanding ordinary shares, and unvested
shares are not regarded as outstanding. [IAS 33.10, 24, A13–A14]
5.8.30 Dilutive or anti-dilutive?
Because unvested ordinary shares are treated as options in diluted EPS, they are generally dilutive if the average market price of
ordinary shares during the period exceeds the assumed proceeds (generally, the fair value of services to be supplied to the entity
in the future).
However, to the extent that these shares are entitled to dividends, the numerator may also be impacted by the adjustments in
basic EPS that are added back to the numerator for diluted EPS (see above). In such cases, the shares may be anti-dilutive even if
the market price of ordinary shares exceeds the assumed proceeds.
1 325,000 - - 325,000
Weighted-average POSs
The denominator is therefore 3,050,000. outstanding 100,000 (E) 2
Step iii
Bonus element 86,111 (E) - (D)
Notes
1. In this step, the proceeds are those from future services to be rendered by the employee
for the remaining period not vested. P applies Approach 1 in Example 5.17 and the assumed
proceeds are the unearned IFRS 2 expense at 31 December Year 1: 83,334.
2. POSs outstanding is the weighted average for the period (see 5.17.60)
[Tranche 2 (50,000 x 365 / 365) + Tranche 3 (50,000) = 100,000].
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 Basic EPS = 4,600,000 / 3,050,000 = 1.51
5
The unvested shares are dilutive because no adjustment to the numerator for
EPIS is required.
Weighted-
average
number of
Earnings shares Per share Dilutive?
Solution
The EPS computations for Year 1 are as follows.
Basic EPS Diluted EPS
Note
Note
1. In this step, proceeds are those from future services to be rendered by the employee for the
remaining period not vested. P applies Approach 1 in Example 5.17 and the assumed proceeds
are the unearned IFRS 2 expense at 31 December Year 1: 5.75 x 300,000 x 1/2 = 862,500.
Basic EPS = 4,181,818 / 3,000,000 = 1.39 This step does not apply, because shares subject to recall are the only class of
POS.
Weighted-
average
number of
Earnings shares Per share Dilutive?
To the extent that ordinary shares subject to recall are anti-dilutive, their
impact is not considered in diluted EPS, which results in the same amount as
basic EPS.
Diluted EPS = 1.39
5.9 Options, warrants and their equivalents
5.9.10 Overview of the instrument
For EPS purposes, ‘options, warrants and their equivalents’ (collectively, ‘options’ in this chapter) are financial instruments that
give holders the right to purchase ordinary shares. Options in this chapter are generally written calls that give holders the right,
but not the obligation, to acquire an entity’s ordinary shares with cash and/or by providing goods or services. If an entity receives
goods or services in exchange for the options, then the transaction generally falls in the scope of IFRS 2 Share-based Payment;
other options are generally in the scope of IAS 32 Financial Instruments: Presentation. [IFRS 2.2, IAS 33.5]
In addition, the options discussed in this chapter are those that may require settlement in ordinary shares. An option that is always
settled net in cash does not entitle its holder to ordinary shares; this option is therefore not a POS and is ignored in diluted EPS. [IAS 33.5]
This chapter covers the EPS implications for options in general. Some instruments may require additional consideration, which are
set out in the following chapters:
– written put options and forwards: see Chapter 5.14;
– purchased puts and calls: see Chapter 5.15;
– options embedded in other financial instruments: see Chapter 5.11;
– options subject to performance conditions other than service conditions: see Chapter 5.10; and
– options to purchase convertible instruments: see 5.11.70.
Additional considerations in the context of share-based payment arrangements are set out in Chapter 5.17.
Generally, options impact only diluted EPS. If the options are vested and require little or no further consideration to be exercised,
then in our view they should be included in basic EPS. Understanding the accounting for these options is also relevant, because it
determines whether their assumed conversion would have a consequential effect on profit or loss.
Numerator X Numerator X /
Denominator X / Denominator
Options are generally ignored in basic EPS because they are not ordinary shares. To the extent that they are not yet taken into account in basic EPS, options are POSs.
However, if options are exercisable for little or no further consideration after vesting,
The potential adjustment to the numerator depends on the accounting for the
then in our view they should be included in the denominator from the vesting date.
options under IFRS 2 or IAS 32, which is driven by their manner of settlement, as
follows.
If IFRS 2 applies If IAS 32 applies
Potential Potential
Accounting for numerator Accounting numerator
Manner of settlement options adjustment? for options adjustment?
Equity-settled,
Settlement options – either cash-settled Yes (for any
Derivative
net in cash, net in shares or or compound cash-settled Yes
liability
gross in shares instrument element)
(see 5.17.30)
Exercise price’
×
Calculate the assumed proceeds
Step i
Calculate the proceeds that would have been received from the assumed
exercise of all options (see 5.9.50). number of options
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Some of the key inputs in the above formulas are further explained below.
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Share options
Number of Time Weighted
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July to December 3,700,000 6/12 1,850,000 Assumed proceeds 12,500,000 5,000,000 (C) = (A) x (B)
Notes
1. In this step, the weighted-average number of options under Option B reflects the exercise
of 500,000 options on 30 June – i.e. ((1,000,000 x 12) + (500,000 x 6)) / 12 = 1,250,000. The
weighted-average number of options under Option C reflects the fact that the options were
issued on 1 July – i.e. 500,000 x 6/12 = 250,000.
2. The options under Option C are anti-dilutive and therefore are ignored in the denominator,
because the exercise price is higher than the average market price for the period during which
these options are outstanding.
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 Basic EPS = 4,600,000 / 3,450,000 = 1.33
5
The options under Option B are dilutive because no adjustment to the
numerator for EPIS is required and the exercise price is lower than the average
market price of an ordinary share during the period.
Weighted-
average
number of
Earnings shares Per share Dilutive?
Solution
The EPS computations for Year 1 are as follows.
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(D) =
Assumed proceeds 15,500,000 ((A) x (B)) - (C)
Weighted-
average
number of
Earnings shares Per share Dilutive?
Options exercised by
tendering notes 30,000 36,842
Yes No
Yes No
These conditions are tested at the reporting date and do not reflect expectations about the future. In other words, if the specified
conditions would not be met if the reporting date were the end of the contingency period, then the contingently issuable ordinary
shares are ignored in diluted EPS even if it is probable that the conditions will be met afterwards. This EPS treatment is different
from the way in which similar conditions are accounted for under IFRS 2 (see Chapter 5.17).
Potential impact on basic EPS Potential impact on diluted EPS
Numerator X Numerator X /
Denominator X / Denominator
By definition, contingently issuable ordinary shares are issuable for little or no further To the extent that they are not yet taken into account in basic EPS, contingently
consideration on the satisfaction of specified conditions. Accordingly, they are issuable ordinary shares are POSs.
included in the denominator from the vesting date – i.e. the date when all conditions
The potential adjustment to the numerator depends on the accounting for the
are met (see 5.10.20). This is irrespective of whether the ordinary shares may be
contingently issuable ordinary shares under IFRS 2 or IAS 32 Financial Instruments:
issued at a later date. [IAS 33.24]
Presentation, which is driven by their manner of settlement, similar to options
(see 5.9.20). An example of a contingently issuable ordinary share that requires
a numerator adjustment is contingent consideration in a business combination
classified as a financial liability (see Example 5.7B).
If the effect would be dilutive, then the number to be included in the denominator is
based on the number of ordinary shares that would be issuable if the reporting date
were the end of the contingency period. In this case, it is included from the beginning
of the period (or from the date of the contingent share agreement if this is later).
Restatement is not permitted in a later period if the conditions are not met when the
contingency period actually expires. [IAS 33.52]
as liabilities under IFRS 2 or IAS 32, the numerator adjustment could vary (see above) and therefore could affect whether the
instruments are regarded as dilutive.
5.10.40 How to apply the test for different conditions in a contingent share agreement
Scenario 1
Company B hires a consultant on 1 January Year 1 to evaluate its operating costs and recommend ways to reduce them. The
consultancy agreement includes the following performance targets.
– If operating costs are reduced by at least 350 in Year 1 or Year 2, and the cost reduction is sustained in the following year, then
the consultant will receive 1% of B’s issued ordinary shares.
– If operating costs are reduced by at least 700 in Year 1 or Year 2, and the cost reduction is sustained in the following year, then
the consultant will receive 2% of B’s issued ordinary shares.
The status of the performance targets and the EPS implications are set out below.
Reporting date Performance against condition Basic EPS implications Diluted EPS implications
End of Year 1 200 cost savings achieved in the year The contingent share agreement is ignored The contingent share agreement is ignored
because none of the specified conditions because none of the specified conditions
is met. would be met if the end of Year 1 were the
end of the contingency period.
End of Year 2 400 cost savings achieved in the year The contingent share agreement is ignored 1% of outstanding shares issuable under
because only one part of the specified the contingent share agreement are
conditions is met. The cost savings included in the denominator from the
exceed 350 but the savings have not beginning of Year 2 because the relevant
been sustained. conditions would be met if the end of Year 2
were the end of the contingency period.
End of Year 3 500 cost savings achieved in the year Cost savings exceeding 350 were achieved 1% of the outstanding shares issuable
in Year 2 and sustained in Year 3. Shares under the contingent share agreement are
issued under the contingent share added to the denominator in diluted EPS
agreement (1% of outstanding shares) for the period they are outstanding until
are included in the denominator from the vesting date (the date the shares are
the vesting date, which would be the included in basic EPS) because the relevant
reporting date. conditions are met at the reporting date.
Therefore, the 1% of shares is included in
diluted EPS from the beginning of Year 3
until the end of Year 3, when they vest.
5.10.60 Contingencies related to price levels
Example condition: Ordinary shares are contingently issuable subject to achieving a specific future market price for the entity’s
ordinary shares.
General principle: In such cases, the number of additional shares included in the denominator for diluted EPS is based on the
number of ordinary shares that would be issued if the market price at the reporting date were the market price at the end of the
contingency period. In our view, even if the share price has declined below the trigger level after the reporting date but before the
financial statements are authorised for issue, then the share price at the reporting date is still used as the trigger in the calculation
of the diluted EPS for the period. [IAS 33.54]
Scenario 2
Company C enters into a share-based payment agreement with an employee on 1 January Year 1. The employee will receive
100,000 of C’s shares for each 10% increase in market price of the shares on 31 December Year 3 compared with 1 January Year 1.
The following amounts are the market prices for the relevant dates:
– 1 January Year 1: 100
– 31 December Year 1: 105
– 31 December Year 2: 125
– 31 December Year 3: 118.
The status of the market target and the EPS implications are set out below.
Reporting date Performance against condition Basic EPS implications Diluted EPS implications
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End of Year 1 5% increase in the price of the share The contingent share agreement is ignored The contingent share agreement is ignored
[(105 / 100) - 1] because the specified condition is not met. because no shares would be issued if
the market price at 31 December Year 1
were the market price at the end of the
contingency period.
Company D enters into an agreement related to a business combination on 1 January Year 1 in which it would be required to issue
5,000 additional shares for each new retail site opened during Year 1.
– On 1 May Year 1, D opens a new retail site.
– On 1 September Year 1, D opens another new retail site.
The EPS implications are set out below.
Reporting date Performance against condition Basic EPS implications Diluted EPS implications
End of Year 1 Two new retail sites opened during Year 1 Because the condition is met during the Because the status of the condition at the
year, additional shares are included in the reporting date is the opening of two new
denominator for basic EPS from the date on retail sites, additional shares are included
which the condition is met – i.e. 5,000 from in the denominator for diluted EPS from
1 May and 5,000 from 1 September. the beginning of the period to the date on
which they are included in the denominator
for basic EPS – i.e. 5,000 from 1 January
to 30 April and 5,000 from 1 January to
31 August.
Solution
The EPS computations for Year 1 are as follows.
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 Basic EPS = 4,600,000 / 3,000,000 = 1.53
5
The contingently issuable ordinary shares are dilutive because no adjustment
to the numerator for EPIS is required.
Weighted-
average
number of
Earnings shares Per share Dilutive?
Contingently issuable
ordinary shares - 300,000
Numerator X Numerator X /
Denominator X / Denominator
By their nature, contingently issuable POSs are generally ignored in basic EPS. This IAS 33 prescribes a two-step approach for determining whether a contingently
is because, on satisfying the specified conditions, POSs – as opposed to ordinary issuable POS is included in diluted EPS. [IAS 33.57]
shares – will be issued, and these would not generally result in outstanding ordinary
Step i. Should the contingently issuable POS be assumed to be issuable?
shares until they are exercised or otherwise converted. However, if any options
that are contingently issuable can be exercised immediately for little or no further This is the same assessment as that for contingently issuable ordinary shares
consideration, then the resulting options are included in the denominator from the (see 5.10.20 and 5.10.40) – i.e. if the reporting date were the end of the contingency
vesting date (see 5.9.20). period, then would the POS be issuable? If the instrument passes the test in Step (i),
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The following additional facts are also relevant for this example.
– On 1 January Year 1, P grants certain share options to its CEO, under an equity-settled share-based payment, conditional on the
CEO remaining in P’s employ for three years. These options will vest at the end of Year 3 if the following performance conditions
are met.
- Plan A: 800,000 options subject to a cumulative earnings target of at least 7,500,000 at the end of Year 3.
- Plan B: 700,000 options subject to a cumulative increase in share price of at least 10% at the end of Year 3.
– Each option is convertible into one ordinary share.
– The following amounts are also relevant.
Average
during the
Year / period 1 January 31 December period
Year 1 38 44 39
Year 2 44 41 43
Solution
The EPS computations for Year 1 are as follows.
Also, there is no change in the number of outstanding shares during the year.
The denominator is therefore 3,000,000. Because the contingently issuable POSs are options, the impact on diluted
EPS is determined using the treasury share method.
Potential adjustment to the numerator for EPIS: No adjustment is required
because the options are equity-settled (see 5.17.60).
(D) =
Assumed proceeds 25,200,000 ((A) x (B)) + (C)
Note
1. In this step, proceeds include the fair value of future services to be rendered by the employee
for the remaining period not vested. P applies Approach 1 in Example 5.17 and the assumed
proceeds are the unearned IFRS 2 expense at 31 December Year 1:
6.75 x 700,000 x 2/3 = 3,150,000
Weighted-
average
number of
Earnings shares Per share Dilutive?
No adjustment is necessary. The numerator is 3,500,000. Options under both Plan A and Plan B are POSs.
Because the options contain performance conditions, they are contingently
issuable POSs. To determine whether they are included in diluted EPS, the
two-step approach in 5.10.110 is followed.
Step i. Should the contingently issuable POSs be assumed to be issuable?
Note
1. In this step, proceeds include the fair value of future services to be rendered by the employee
for the remaining period not vested. P applies Approach 1 in Example 5.17 and the assumed
proceeds are the unearned IFRS 2 expense at 31 December Year 2:
7.25 x 800,000 x 1/3 = 1,933,333.
Basic EPS Diluted EPS
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 Basic EPS = 3,500,000 / 3,000,000 = 1.17 5 The options under Plan A are dilutive because no adjustment to the numerator
for EPIS is required and the aggregate amount of the exercise price plus the
fair value of future services to be rendered is lower than the average market
price of an ordinary share during the period.
Weighted-
average
number of
Earnings shares Per share Dilutive?
Numerator X Numerator
Denominator X / Denominator
Generally, ordinary shares issued on the conversion of convertible instruments Convertible instruments, other than those that are mandatorily convertible, are POSs
are included in the denominator from the date on which interest ceases to accrue because they may entitle their holders to an entity’s ordinary shares.
(see 3.3.20). [IAS 33.21(d)]
The potential adjustments to the numerator include the post-tax amount of any
However, ordinary shares to be issued under a mandatorily convertible instrument dividends or interest, fair value gains or losses and other consequential changes in
are included in the denominator from the date on which the contract is entered into income or expense that would result from the assumed conversion. An example of
(see 3.3.20). [IAS 33.23] ‘other consequential changes in income or expense’ may be the adjustment to the
depreciation expense if the interest on a convertible instrument has been capitalised
into the cost of property, plant and equipment in accordance with IAS 23 Borrowing
Costs (see 4.3.10). [IAS 33.33–35, 49]
Potential impact on basic EPS Potential impact on diluted EPS
If early conversion of convertible preference shares classified as equity is induced The potential adjustment to the denominator is based on the additional ordinary
through favourable changes to the original conversion terms or the payment of shares resulting from the assumed conversion. Conversion is assumed to have
additional consideration, then an adjustment in the numerator may be required occurred at the beginning of the period or, if later, on the date of issuance of the
(see 3.2.50). convertible instrument. [IAS 33.36]
words, no numerator adjustment for this excess is required for the remaining outstanding convertible preference shares in diluted
EPS. [IAS 33.51]
Solution
The EPS computations for Year 1 are as follows.
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 5
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Basic EPS = 4,600,000 / 3,000,000 = 1.53 The potential impact of convertible bonds is determined as follows.
Weighted-
average
number of
Earnings shares Per share Dilutive?
Solution
The EPS computations for Year 1 are as follows.
with reference to the guidance that applies to the type of POS. Understanding the accounting for these contracts is also relevant,
because it determines whether their assumed conversion would have a consequential effect on profit or loss.
Numerator
Denominator X Denominator
The settlement assumption for EPS is independent of the classification of the contracts under IFRS 2 or IAS 32. It is also
independent of the entity’s or the counterparty’s intended or (previous/actual) manner of settlement.
– P has an option to settle the principal amount in ordinary shares (every 10 bonds are convertible into one ordinary share) or cash
on settlement date.
Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 Basic EPS = 4,600,000 / 3,000,000 = 1.53
5 The potential impact of convertible bonds is determined as follows.
Weighted-
average
number of
Earnings shares Per share Dilutive?
- The equity component is measured as the difference between the equity-settlement choice (share options) and the cash-
Note
(D) =
Assumed proceeds 12,600,000 ((A) x (B)) + (C)
Note
1. In this step, proceeds include the fair value of future services to be rendered by the CEO for the
remaining period not vested. P applies Approach 1 in Example 5.17 and the assumed proceeds
are the unearned IFRS 2 expense at 31 December Year 1:
1 x 1,200,000 x 1/2 = 600,000
Yes No
No Yes
Ignore for basic EPS Adjust numerator for basic EPS Present separate EPS amounts
Numerator X / Numerator X /
Denominator X Denominator X /
Preference shares that are wholly classified as liabilities under IAS 32 are not Preference shares that are convertible into ordinary shares, other than those that are
ordinary shares. The returns to the holders of these shares – e.g. post-tax amounts of mandatorily convertible, are POSs (see Chapter 5.11).
preference dividends – have generally been recognised in profit or loss and therefore For equity-classified convertible preference shares, the potential adjustment:
no further adjustment to the numerator is necessary. [IAS 33.13]
– to the numerator includes the returns to the holders of these shares adjusted in
For preference shares that are wholly or partly classified as equity instruments under the calculation of basic EPS (see left); and
IAS 32, the numerator is adjusted for any returns to the holders of these shares,
which include the post-tax amounts of preference dividends and any differences – to the denominator is based on the additional ordinary shares resulting from the
arising on settlement. For additional considerations and examples of adjustments for assumed conversion.
equity-classified preference shares in basic EPS, see Chapters 3.2 and 3.4. [IAS 33.12] Conversion is assumed to have occurred at the beginning of the period (or, if later,
In addition, separate disclosure of EPS amounts is required for equity-classified the date of issuance of the convertible preference shares). For an example of
preference shares that form a separate class of ordinary shares. [IAS 33.66] adjustments for equity-classified convertible preference shares in diluted EPS, see
Chapter 4.7.
For liability-classified convertible preference shares, the potential adjustment:
– to the numerator includes the post-tax amount of any dividends and other
consequential changes in income or expense that would result from the assumed
conversion; and
– to the denominator is based on the additional ordinary shares resulting from the
assumed conversion.
Conversion is assumed to have occurred at the beginning of the period (or, if
later, the date of issuance of the convertible preference shares). For an example
of adjustments for convertible instruments containing a liability component, see
Chapter 5.12.
Numerator X / Numerator
Denominator Denominator
In our view, ordinary shares subject to written puts or forwards should be excluded We believe that although ordinary shares subject to written puts or forwards should
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from the denominator, similar to unvested shares and shares subject to recall be excluded from basic EPS, their potentially dilutive effect should be considered.
(see 5.8.20). [IAS 33.63, A10]
If the ordinary shares that are subject to the written puts or forwards are also The potential adjustment to the numerator depends on the accounting for the written
entitled to profit, then in our view the numerator should also be adjusted for any puts or forwards. For those that are accounted for as financial liabilities (see 5.14.10),
non-forfeitable dividends and any undistributed earnings attributable to these shares, the post-tax remeasurement income or expense is included as an adjustment to the
to the extent that these amounts have not yet been recognised in profit or loss numerator. [IAS 33.35]
Step i
Calculate the proceeds assumed to be raised
Calculate the proceeds that would need to be raised to satisfy the contract.
×
number of shares subject to written put
or forward purchase contracts
Calculate the ‘new’ shares deemed to have been issued Assumed proceeds
Step ii Calculate the number of ordinary shares that would be issued at the average
market price during the period to raise proceeds to satisfy the contract. average market price of shares
Solution
The EPS computations for Year 1 are as follows.
Weighted-
average
number of
Earnings shares Per share Dilutive?
Denominator X Denominator X
These options are ignored in basic EPS because they are not ordinary shares. These options are ignored in diluted EPS because their assumed conversion is
always anti-dilutive. There is an assumption that these options would be exercised
only when they are in-the-money. [IAS 33.62]
5.16 Instruments over shares in, or issued by, a subsidiary, joint venture or associate
5.16.10 Overview of the instrument
POSs in or issued by a subsidiary, joint venture or associate (investees) present specific challenges in determining the EPS amounts
for the parent’s or the investor’s consolidated or individual financial statements. In this chapter, ‘instruments over shares in an
investee’ refers to those instruments issued to parties other than entities in the group to which they belong, which are convertible
into either ordinary shares in the subsidiary, joint venture or associate, or ordinary shares in the parent or the investor. [IAS 33.40]
In our view, the guidance in this chapter should also be applied if options or warrants that entitle the holder to ordinary shares in a
subsidiary are issued by the parent, rather than by the subsidiary itself.
Numerator
5.16 Instruments over shares in, or issued by, a subsidiary, joint venture or associate
Denominator X Denominator X /
POSs over shares in or issued by an investee are ignored in basic EPS because they The following points apply to instruments of an investee that may entitle their holders
are not ordinary shares of the parent or the investor. to ordinary shares of the investee.
– They are included based on a two-step approach.
- Step i: They are first included in the diluted EPS of the investee. The impact on
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the investee’s diluted EPS depends on the form of the instruments (see other
chapters in Section 5, as appropriate).
- Step ii: The resulting diluted EPS of the investee is then included in the parent’s
or investor’s diluted EPS based on the parent’s or investor’s holding of the
instruments of the investee.
– Unlike other POSs, the denominator of the diluted EPS of the parent or the investor
The following points apply to instruments issued by the parent or the investor that are
convertible into ordinary shares of an investee.
– They are assumed to be converted and the numerator is adjusted as necessary by
the post-tax effect in the parent’s or investor’s profit or loss.
– The numerator is also adjusted for any changes in profit or loss recorded by
the parent or investor (such as dividend income or equity-method income) that
is attributable to the increase in the number of outstanding ordinary shares of
the investee as a result of the assumed conversion. Unlike other POSs, the
denominator is not affected because the number of outstanding ordinary shares of
the parent or investor would not change on assumed conversion. [IAS 33.A12]
Solution
The EPS computations in P’s consolidated financial statements for Year 1 are as follows.
5.16 Instruments over shares in, or issued by, a subsidiary, joint venture or associate
they are nevertheless relevant for P’s diluted EPS.
Determine the denominator For each POS, calculate EPIS
2 There is no change in the weighted-average number of ordinary shares
2 Impact on diluted EPS in S’s own financial statements
outstanding during the year. The denominator is therefore 3,000,000.
Potential adjustment to the numerator for EPIS: No adjustment is required.
Potential adjustment to the denominator for EPIS: The adjustment is
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Determine basic EPS Identify dilutive POSs and determine diluted EPS
3 Basic EPS = 4,600,000 / 3,000,000 = 1.53 5 The two-step approach is considered to determine the diluted EPS of P
(see 5.16.20).
Notes
1. Consolidated net profit less profit related to earnings of S – i.e. 4,600,000 - 2,700,000.
2. Number of S’s ordinary shares owned by P x S’s diluted EPS – i.e. 900,000 x 2.94.
3. Bonus element in S’s share options x (number of S’s share options owned by P / Total number
of S’s share options) x S’s diluted EPS – i.e. 20,000 x (20,000 / 100,000) x 2.94.
5.16 Instruments over shares in, or issued by, a subsidiary, joint venture or associate
– Approach 1: Apply the guidance applicable to POSs of a subsidiary (see 5.16.20) to NCI puts. This is on the basis that, although
paragraph A11(a) of IAS 33 does not address NCI puts, the approach that a subsidiary is required to apply to a written put option
on its own shares in accordance with paragraph 63 of IAS 33 should also be applied in the consolidated financial statements of
the parent for NCI puts. Under this approach, it is assumed that the subsidiary would issue new shares to raise financing to buy
the shares subject to the NCI put.
– Approach 2: Ignore the NCI puts. This is on the basis that paragraph A11(a) of IAS 33 does not address NCI puts. This approach
does not assume that the subsidiary would issue new shares to raise financing to buy the shares subject to the NCI put.
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Therefore, there would be no POSs because once the NCI put is exercised the underlying shares would not be outstanding
from the group’s perspective.
We believe that this accounting policy choice is available regardless of whether the NCI puts are written by the parent or the
subsidiary – i.e. whether it is the parent or the subsidiary that has the obligation to settle. This is because economically, at a
consolidated level, it makes no difference which group entity has written the instrument.
Numerator X /
Denominator X Denominator X
NCI puts are ignored in the parent’s basic EPS because they do not affect the number If the parent chooses to apply Approach 1, then any dilutive impact of NCI puts at the
of parent’s ordinary shares. subsidiary level would ‘flow up’ to the consolidated level, and have a potential impact
on the numerator for the parent’s diluted EPS.
Under this approach, the NCI puts are included based on the two-step approach
in 5.16.20.
– Step i. They are first included in the diluted EPS of the subsidiary. The impact on
the subsidiary’s diluted EPS is determined based on the guidance for written puts
(see Chapter 5.14).
– Step ii. The resulting diluted EPS of the subsidiary is then included in the parent’s
diluted EPS based on the parent’s holding of the instruments of the subsidiary.
Solution
The EPS computations in P’s consolidated financial statements for Year 1 are as follows.
5.16 Instruments over shares in, or issued by, a subsidiary, joint venture or associate
P’s diluted EPS.
Determine the denominator For each POS, calculate EPIS
2 There is no change in the weighted-average number of ordinary shares
2 Impact on S’s diluted EPS
outstanding during the year. The denominator is therefore 3,000,000.
In this example, the NCI puts are written by P, rather than S. P considers that
the NCI puts impact its own consolidated diluted EPS even if the puts are
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not written by S (see 5.16.60). P calculates the impact of the NCI puts in S’s
diluted EPS for the purpose of calculating the consequential impact on its own
diluted EPS. However, S does not consider the impact of these instruments on
its own financial statements, because the exercise of the NCI puts does not
change the number of S’s ordinary shares outstanding and/or its profit or loss.
Potential adjustment to the numerator for EPIS: Because the assumed
Diluted EPS
5.16 Instruments over shares in, or issued by, a subsidiary, joint venture or associate
of S 2,490,000 900,000 2.77
Note
1. 2,400,000 = 3,000,000 x (800,000 / 1,000,000). In S’s basic EPS for the purposes of P’s
consolidated EPS, ordinary shares subject to the written put are excluded. To the extent that
they have dividend rights, there is an impact on the numerator because they are treated as
participating equity instruments (see 5.14.20).
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Accordingly, S’s diluted EPS for the purposes of P’s consolidated EPS is 2.77.
Step ii. ‘Flow up’ S’s diluted EPS into P’s diluted EPS
Notes
Notes
1. Consolidated net profit less profit related to earnings of S – i.e. 4,600,000 - 2,400,000.
2. The amount of P’s share in S’s diluted EPS is multiplied by S’s diluted EPS – i.e. 800,000 x 2.77.
Accordingly, P includes the impact of the NCI written put in diluted EPS.
Diluted EPS = 1.47
132 | IFRS Handbook: Earnings per share
Handbook
Factor Explanation reference
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5 Consideration of specific instruments 133
5.17 Share-based payment arrangements
Handbook
Factor Explanation reference
Settlement alternatives:
share-based payments under IFRS 2
Equity-settled Cash-settled
Settlement choice (equity
share-based share-based
instruments or cash) for either
payment payment
the entity or the counterparty
transactions transactions
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134 | IFRS Handbook: Earnings per share
Although IAS 33 does not include any specific references to the IFRS 2
classification of a share-based payment, a share-based payment instrument
impacts EPS only if it will or may be settled in ordinary shares, as illustrated in the
above diagram. In other words, a share-based payment arrangement impacts EPS
only if it is an equity-settled share-based payment (see 5.17.60) or a share-based
payment with settlement choices (see 5.17.80). A ‘pure’ cash-settled share-
based payment that will never be settled in ordinary shares does not impact EPS
(see 5.17.70).
IAS 33 distinguishes between equity-settled and other share-based payments and
so approaches the matter from a slightly different angle. This difference from IFRS 2
becomes especially relevant when there are settlement choices. These cases are
further explained in 5.17.80, whereas 5.17.60 and 5.17.70 relate only to ‘pure’ equity-
settled or ‘pure’ cash-settled share-based payments.
Non-market performance
Market conditions
conditions
It becomes clear that any share-based payment transaction under IFRS 2 could
involve any combination of manner of settlement and conditions (or combination of
conditions). The instruments to be issued might also be different from case to case
(shares, options, share appreciation rights or redeemable shares), as might be the
consideration that the entity will receive for these instruments.
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5 Consideration of specific instruments 135
5.17 Share-based payment arrangements
Not service-related:
Service-related:
non-vesting
vesting conditions
conditions
Performance conditions
Only service
(always in combination
conditions with service condition)
See Chapter 5.8. See Chapter 5.9. See 5.10.10–80. See 5.10.90–120.
Generally: Generally: Generally: Generally:
no basic EPS no basic EPS no basic EPS no basic EPS
impact until impact until impact until impact until
exercise date exercise date vesting date; exercise date
(unless (or vesting and (or vesting
entitled to date if include as date if
dividends); exercisable POS in diluted exercisable for
and for little or no EPS the little or no
use treasury consideration); number that consideration);
share method and would be and
for diluted use treasury issuable at use IAS 33
EPS share method reporting date two-step
for diluted approach for
EPS diluted EPS
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136 | IFRS Handbook: Earnings per share
In addition to the general considerations above, there are two specific aspects
relevant to the determination of diluted EPS if there are equity-settled share-based
payments. These relate to adjustments to the numerator for diluted EPS and the
denominator for diluted EPS with application of the treasury share method (see
below).
The consequence of this is that, holding other factors constant, a particular POS
will generally become increasingly dilutive during the period over which the
IFRS 2 cost is recognised. This is because the amount of the fair value of goods
or services that will be recognised as a cost in future periods will reduce, and
therefore the assumed proceeds will reduce over time.
IAS 33.45, 47A IAS 33 is unclear regarding the basis to be used for the estimation of the future
services component and a number of approaches may be acceptable. Two possible
acceptable approaches are explained below.
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5 Consideration of specific instruments 137
5.17 Share-based payment arrangements
Fact pattern
Company M is calculating its basic and diluted EPS for Year 1. M grants an
option scheme to employees on 1 January Year 1.
On 1 January Year 1, M issues, for no consideration, 100 options to each of
10 employees – i.e. 1,000 options. The arrangement is conditional on the
completion of three years of service – i.e. the options vest on 31 December
Year 3.
– M estimates, at both grant date and the reporting date, that seven
employees will meet the service condition – i.e. an overall vesting rate of
70%. Two employees leave on 30 June Year 1 – i.e. an actual forfeiture rate
to date of 20%. At 31 December Year 1, management continues to estimate
that 70% of the options will vest – i.e. that overall, 30% will be forfeited.
– The employees’ options settle in shares at the completion of three years of
service. The exercise price of the options is 31.50.
– The market price of M’s shares is 40 at 1 January Year 1 and the grant-date
fair value of the employee option is 6.75.
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138 | IFRS Handbook: Earnings per share
Under the first approach, M calculates the assumed proceeds and the bonus
element as follows.
Weighted-average number of
options outstanding (and shares
to be issued on exercise of the
options) 900 (A) 1
Step i Exercise price 31.50 (B)
(D) = ((A) x
Assumed proceeds 31,950 (B)) + (C)
Average market price of ordinary
shares 44.00 (E)
Step ii
Number of ordinary shares
deemed to have been issued 726 (F) = (D) / (E)
Step iii Bonus element 174 (A) - (F)
Notes
1. The consideration to be received by M is based on the deemed exercise of the weighted-average
number of options as described in paragraphs 36 and 48 of IAS 33, being the sum of 1,000
options outstanding at the beginning of the period (i.e. from grant date on 1 January Year 1) and
the 800 options outstanding at the end of the period (i.e. 31 December Year 1), giving a weighted
average of 900.
2. The assumed proceeds from future services are based on outstanding options considering actual
forfeitures – i.e. on the unearned IFRS 2 charge for the remaining eight employees over the
remaining vesting period of two years.
Unearned compensation at the end of the period (800 x 6.75 x 2/3) 3,600
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5 Consideration of specific instruments 139
5.17 Share-based payment arrangements
Approach 2
Under the second approach, M calculates the assumed proceeds and the bonus
element as follows.
Treasury share method steps Notes
(D) = ((A) x
Assumed proceeds 33,525 (B)) + (C)
Average market price of ordinary shares 44.00 (E)
Step ii Number of ordinary shares
deemed to have been issued 762 (F) = (D) / (E)
Step iii Bonus element 136 (A) - (F)
Notes
1. The consideration to be received by M is based on the deemed exercise of the weighted-
average number of options outstanding during the period, as in Approach 1.
2. The assumed proceeds from future services under this approach are based on average unearned
compensation for the period.
Unearned compensation at the end of the period (800 x 6.75 x 2/3) 3,600
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140 | IFRS Handbook: Earnings per share
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6 Retrospective adjustments 141
6.1 Why retrospective adjustments?
6 Retrospective
adjustments
6.1 Why retrospective adjustments?
Generally, the numbers of outstanding ordinary shares or POSs used in the
denominators for basic and diluted EPS are the weighted averages for a reporting
period. Weighted-average amounts are used so that the effect of increases or
decreases during a period is related only to the portion of the period during which
the related resources are available for use in an entity’s operations.
Some changes to the capital structure of an entity – e.g. a capitalisation, bonus
issue, share split or reverse share split (share consolidation) – result in a change in
the number of outstanding ordinary shares. However, these changes do not come
with a corresponding change in the entity’s resources or capital base. In these
cases, using a simple weighted-average number of outstanding ordinary shares
in the EPS calculation may not appropriately reflect the change in the entity’s
earning capacity.
Fact pattern
Company B’s profits attributable to its ordinary shareholders are 15,000,000 for
both Year 1 and Year 2.
During Year 1, the number of ordinary shares is 1,000,000.
On 1 July Year 2, B issues bonus shares to all of its ordinary shareholders, such
that each shareholder receives two new shares for each existing share held.
Determination of basic EPS
B’s bonus issue on 1 July Year 2 results in an increase in the number of
outstanding ordinary shares. However, it does not result in a corresponding
change in resources.
If a simple weighted-average number of ordinary shares were used without any
retrospective adjustment, then the basic EPS amounts for Year 1 and Year 2
would be as follows.
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142 | IFRS Handbook: Earnings per share
Step Year 1
Step Year 2
12/12
B’s basic EPS calculated on the above basis decreases from 15 to 7.5. This is
irrespective of the fact that B has the same amount of profit for both years, and
has in substance the same capital base – the bonus issue during Year 2 is simply
a re-denomination of shares. Consequently, there is an erroneous impression of
deterioration of performance on a per-share basis.
To correct for the above, the bonus issue is assumed to have occurred from the
beginning of Year 1, rather than 1 July Year 2, as follows.
Step Year 1
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6 Retrospective adjustments 143
6.1 Why retrospective adjustments?
Step Year 2
The effect of the bonus issue during Year 2 is to triple the number of outstanding
ordinary shares without any corresponding change in B’s resources. With
retrospective adjustment, the basic EPS amounts for Year 1 and Year 2 do not
reflect the actual number of ordinary shares outstanding during the years.
However, the adjusted amounts are comparable and more appropriately reflect
the absence of change to shareholders’ entitlement between the two years.
IAS 33.26, 64 As shown in Example 6.1, to more appropriately reflect an entity’s earning capacity
and to enhance comparability over time, IAS 33 requires the denominators for
basic and diluted EPS during a reporting period and for all periods presented to
be adjusted for events, other than the conversion of POSs, that have changed
the number of ordinary shares outstanding without a corresponding change
in resources.
IAS 10.22(f), 33.64, 70(d), 71 Ordinary shares or POS transactions that occur after the reporting date, other
than those that change the number of ordinary shares outstanding without a
corresponding change in resources, do not result in retrospective adjustments
to EPS amounts. However, these transactions are disclosed in the financial
statements if they are material (see Chapter 2.4).
The conversion of POSs into ordinary shares – e.g. the exercise of share options –
does not usually require a retrospective adjustment to basic EPS. This is because
POSs are usually issued for fair value, resulting in a proportionate change in
the resources available to the entity. Accordingly, the resulting ordinary shares
are dealt with in the denominators from the date on which the shares become
outstanding, without any retrospective adjustment (see Chapter 3.3 and 4.3.20).
IAS 33.65 Similarly, diluted EPS is not retrospectively adjusted for subsequent conversions
of POSs, or any subsequent changes in the assumptions made in determining the
dilutive effects of POSs, such as whether contingently issuable shares would be
issued (see 5.10.20).
Retrospectively adjusting EPS amounts for a bonus issue (as in Example 6.1),
capitalisation, share split or reverse share split appears intuitive; however, the
principle has a wider application – i.e. it also applies to other changes to an
entity’s capital structure and when there is a retrospective correction of errors or
retrospective application of accounting policies during a reporting period. Additional
considerations on various transactions or accounting changes are addressed in the
rest of this section.
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144 | IFRS Handbook: Earnings per share
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6 Retrospective adjustments 145
6.2 Capitalisation or bonus issue, share split and reverse share split (share consolidation)
Example 6.2: Basic EPS – Bonus issue after the reporting date
Issue
300
1-for-1
shares
bonus
at fair
issue
value for
cash
10 Jan 1 Feb
Year 3 Year 3
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146 | IFRS Handbook: Earnings per share
Fact pattern
– Company C’s profits attributable to its ordinary shareholders are 15,000,000
for both Year 1 and Year 2.
– During Year 1, the number of ordinary shares remains unchanged at 1,000,000.
– On 1 January Year 1, Company C has issued 500,000 vested share options
under an equity-settled share-based payment that are exercisable for a
fixed price. Each option entitles the holder to one ordinary share when it
is exercised.
– The exercise price of the options is 10 and is below the average market price
of C’s ordinary shares for Year 1, which is 18.
– On 1 July Year 2, C issues one bonus share for each outstanding ordinary
share. After the bonus issue, the market price of C’s ordinary shares falls to 9
and remains the same for the rest of the year.
– The terms and conditions of the share options are such that the exercise
price and the number of shares issued on exercise are adjusted automatically
for the bonus issue – i.e. the exercise price per share will decrease in
proportion to the bonus, to 5, and each share option will entitle the holder to
two shares when it is exercised.
Determination of basic EPS
Step Year 1 – Retrospective adjustment
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6 Retrospective adjustments 147
6.2 Capitalisation or bonus issue, share split and reverse share split (share consolidation)
Identify POSs
1 The options are exercisable for more than little consideration and are therefore
POSs for the period during which they are outstanding.
Because the terms and conditions of the options are such that the exercise price
is adjusted automatically for the bonus issue – i.e. the exercise price and the
number of shares issued on exercise are adjusted in proportion to the bonus
element – an adjustment is made in determining the bonus element associated
with the options. Also, because the terms and conditions provide for an exact
proportionate adjustment, the bonus element will be adjusted for the same ratio as
the weighted-average number of ordinary shares. Therefore, the bonus element for
the retrospective adjustment is 444,444 (222,222 x 2).
Weighted-
average
number of
Earnings shares Per share Dilutive?
Basic and diluted EPS amounts for Year 2 would be the same as Year 1.
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148 | IFRS Handbook: Earnings per share
Assume the same facts as in Example 6.3A, except that if the terms and
conditions of C’s share options were that the exercise price of the options or
the conversion ratio would not adjust automatically following the bonus issue.
In this case, the exercise price of the options may end up above the average
market price of C’s ordinary shares for Year 2 and therefore the options would
be anti-dilutive for the diluted EPS for Year 2.
Fact pattern
– On 1 January Year 1, Company D has 1,000,000 ordinary shares.
– Company D’s profits attributable to its ordinary shareholders are 15,000,000.
– On 1 October Year 1, D carries out the following transactions to return surplus
funds to its shareholders:
- it pays a special dividend of 2 per share in cash to all existing shareholders –
i.e. a total of 2,000,000; and
- it carries out a 10:6 share consolidation, such that the number of
outstanding ordinary shares is reduced from 1,000,000 to 600,000.
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6 Retrospective adjustments 149
6.2 Capitalisation or bonus issue, share split and reverse share split (share consolidation)
–– The market price of D’s ordinary shares immediately before the special
dividend and share consolidation is 5 per share.
–– There are no other changes in D’s capital structure during Year 1 and up to the
date on which D’s financial statements are authorised for issue.
Outstanding shares as at
1 January 1,000,000
1 January to 30 September 1,000,000 9/12 750,000
1 October – repurchase of
shares for cash (400,000)
12/12
Weighted average for the
year 900,000
Had there not been a special dividend to shareholders, or had the share
consolidation been treated separately from the special dividend when
determining the EPS amounts, D would have retrospectively adjusted the
denominator as if the share consolidation had been carried out at the beginning
of the earliest period presented in its financial statements.
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150 | IFRS Handbook: Earnings per share
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6 Retrospective adjustments 151
6.3 Rights issue
Fact pattern
Company E issues bonus warrants on the basis of one bonus warrant for every
10 ordinary shares outstanding for zero consideration. Each bonus warrant
entitles the warrant holder to subscribe in cash for one new ordinary share at an
exercise price of 2.5 during the exercise period. The market price of E’s shares
when the warrant is issued is 6.
Bonus element
The market price of E’s shares exceeds the exercise price; therefore, there is a
bonus element. The bonus element is applied retrospectively – i.e. it requires a
restatement of the previous period’s basic and diluted EPS. The adjustment to
the basic amounts is calculated by adjusting the cumulative weighted-average
number of shares outstanding at the time of the bonus issue. Adjustments may
also be made to diluted EPS amounts, but only if the POSs are outstanding at
the date on which the shares with a bonus element are issued. For example,
a bonus issue occurs on 31 March Year 1 and options are issued on 30 April
Year 1; no adjustment to the diluted EPS calculation is made in relation to the
options because they are issued after the date of the bonus share issue.
× ×
Market Number Number
Exercise
price of
shares
of
shares
+ price
of
rights
Number of shares
Number of shares + issued on the
exercise of the rights
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152 | IFRS Handbook: Earnings per share
T1 T3 T5
T2 T4 T6
Underwriters
Announcement
Issue of rights pay for
of the rights
balance, if
issue
applicable
* After this date, shares are traded without the rights attached – i.e. the rights belong to the
holders of existing shares on this date.
** The date by which holders of rights have to exercise their rights and the date on which any
consideration for new shares issuable under the rights is receivable.
In our experience, there is typically a period rather than a single date on which the
rights can be exercised (from T3 to T4 in the timeline above), but in our experience
neither the existence of this period nor the fact that the rights are to be traded
separately would have an effect on determining the date on which the fair value of
ordinary shares should be regarded as the ‘fair value per share immediately before
the exercise of rights’.
IAS 33.A2 For rights that are to be publicly traded separately from the shares before the
exercise date, it is clear that IAS 33 requires the use of the closing price of the
shares on the last day on which the shares are traded together with the rights –
i.e. the closing price on T2.
However, for rights that will not be publicly traded, it is less clear what ‘fair value
immediately before the exercise of rights’ means.
In our view, to the extent that the effect is material, the ‘fair value per share
immediately before the exercise of rights’ to be used should be the market price
of the ordinary shares immediately before it goes ‘ex-rights’ – i.e. the closing
‘cum-rights’ price on T2; this is irrespective of whether the rights are to be traded
separately from the shares before the exercise date. We believe that this price
is the most consistent with the assumptions underlying the calculation of the
‘theoretical ex-rights fair value’ and would therefore best reflect the bonus element
when used to determine the adjustment factor for a rights issue. To use the price
of ordinary shares on any later date would incorporate price movements caused by
factors other than the split of the rights in the determination of the bonus element.
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6 Retrospective adjustments 153
6.3 Rights issue
Fact pattern
On 1 February Year 2, Company E offers all of its ordinary shareholders the right
to subscribe to one new ordinary share for every three ordinary shares that they
hold.
The following additional facts are also relevant.
–– Number of outstanding ordinary shares before the rights issue: 3,000.
–– Last date on which the shares are traded ‘cum-rights’: 15 February Year 2.
–– Market price (closing rate) of ordinary shares on 15 February Year 2:11.
–– Last date to exercise rights: 1 March Year 2. All rights are exercised on this
date.
–– Exercise price for the rights: 7.
–– The basic EPS in Year 1 and Year 2 without taking into consideration this
transaction is 2.2, calculated as earnings for that year of 6,600 divided by the
average number of shares outstanding for those years of 3,000.
11
× 3,000
shares + 7
× 1,000
rights
1,000 shares
3,000 shares + for rights
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154 | IFRS Handbook: Earnings per share
12/12
Weighted average for the
period 3,883
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6 Retrospective adjustments 155
6.4 Reverse acquisitions
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156 | IFRS Handbook: Earnings per share
Profit or loss of
the legal acquiree
Consolidated profit or loss of the combined entity attributable
Numerator
attributable to ordinary shareholders for the period to ordinary
shareholders for the
period
Weighted-average
Weighted-average
number of ordinary
number of ordinary
shares of the
shares of the legal
Weighted-average legal acquiree
acquiree outstanding
number of ordinary outstanding pre-
pre-acquisition
+
acquisition
×
shares of the
×
Denominator
legal acquirer
outstanding post-
Exchange ratio acquisition Exchange ratio
established in the
established in
acquisition agreement
the acquisition
(see 6.4.20)
agreement
Fact pattern
On 30 September Year 2, Company S issues ordinary shares to acquire 100% of
Company P. The transaction is determined to be a reverse acquisition in which P
is identified as the accounting acquirer.
The following information is also relevant for this example.
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6 Retrospective adjustments 157
6.4 Reverse acquisitions
Before After
S P S P
Shareholders Shareholders Shareholders Shareholders
40% 60%
S P S
100%
– P’s net profit for Year 1 is 600. P’s consolidated net profit for Year 2 (which
includes S’s net profit from the date of acquisition) is 800.
– Apart from the above, there are no changes in the number of P’s ordinary
shares outstanding during Year 1 and Year 2. The number of shares is as
follows.
Number of Number of
Date shares in S shares in P
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158 | IFRS Handbook: Earnings per share
Step Year 2
Ordinary shares of P 60
12/12
Weighted average for
the period (adjusted for
rounding) 175
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6 Retrospective adjustments 159
6.5 Retrospective treatment of errors and accounting policies
Fact pattern
Set out below are the results of Company P for the year ended 31 December
Year 2, both as previously reported and as restated following a change in its
accounting policies
Year Year 2 (original) Year 2 (restated)
– The adoption of a new accounting policy in Year 3 has resulted in the profits
for the year ended 31 December Year 2 being restated, with the profits
attributable to continuing operations reduced by 2,000,000.
– In the year ended 31 December Year 2, the average number of ordinary
shares outstanding for P was 200,000 shares.
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160 | IFRS Handbook: Earnings per share
– P has only one type of POS, being 20,000 contingently issuable shares. These
shares are issuable to the former shareholders of Subsidiary S at the end of
Year 3 if the market price of the shares in S is above 150 as at 30 September
Year 3.
– At 31 December Year 2, the market price of the shares in S is above 150.
1
Numerator 1,000,000 (3,000,000) (2,000,000) (1,000,000) (3,000,000) (4,000,000)
2
Denominator 200,000 200,000 200,000 200,000 200,000 200,000
3
Basic EPS 5 (15) (10) (5) (15) (20)
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6 Retrospective adjustments 161
6.5 Retrospective treatment of errors and accounting policies
Diluted EPS
Step Year 2 – original Year 2 – restated
2
EPIS
(adjustment of
Anti-dilutive: Anti-dilutive: Anti-dilutive:
denominator) 20,000 20,000 20,000 N/A N/A N/A
3
Rank Only 1 class Only 1 class Only 1 class N/A N/A N/A
4
Basic EPS See above See above See above See above See above See above
5
Diluted EPS 4.55 (13.64) (9.09) (5.00) (15.00) (20.00)
IAS 33.A3
Originally, in the year ended 31 December Year 2, the inclusion of the 20,000
POSs increased the number of outstanding ordinary shares to 220,000. This
resulted in a diluted EPS amount for continuing operations (i.e. the control
number) that was lower than the basic EPS for continuing operations (4.55
(1,000,000 / 220,000) is lower than 5 (1,000,000 / 200,000)). Therefore, in Year 2
the increased number of shares of 220,000 was used for each of the diluted
EPS calculations.
However, in the restated amounts for the year ended 31 December Year 2, the
inclusion of the 20,000 POSs to increase the number of outstanding ordinary
shares to 220,000 would result in a diluted loss per share amount for continuing
operations that is lower than the basic loss per share for continuing operations
– 4.55 (1,000,000 / 220,000) is a lower loss than 5 (1,000,000 / 200,000).
Therefore, because this is a decrease in the loss per share from continuing
operations, they are not brought into the diluted EPS calculation because they
would be anti-dilutive. So in the restatements for Year 2, just the number of
ordinary shares of 200,000 is used for each of the diluted EPS calculations.
This results in the restated diluted EPS for the year ended 31 December Year 2
being different from the amounts that were originally presented and being
affected in a manner that is more than just the change in the adjustment to
profits that arose from the application of the new accounting policy.
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162 | IFRS Handbook: Earnings per share
Fact pattern
Company P earns a consolidated net profit of 4,600,000 during the year ended
31 December Year 1 and 5,600,000 during the year ended 31 December
Year 2. The total number of ordinary shares outstanding on 1 January Year 1
is 3,000,000.
Various POSs are issued before 1 January Year 1 and during the years ended
31 December Year 1 and Year 2. During this period, the outstanding number of
ordinary shares also changes.
The table below summarises the actual movements in the outstanding number
of ordinary shares, followed by detailed information about such movements and
POSs outstanding during the periods.
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7 Basic and diluted EPS – Comprehensive worked example 163
7.1 Introduction
Contingently
Instrument issuable Partly paid Convertible
(see Ordinary Treasury ordinary ordinary preference Share Convertible
(In thousands) below) shares shares shares shares shares options loan notes
2. Treasury shares
Before 1 January Year 1, P reacquired and held in treasury 500,000 ordinary
shares.
On 1 February Year 1, Subsidiary S acquires 200,000 shares in P.
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164 | IFRS Handbook: Earnings per share
5. Stock dividends
On 1 July Year 1, P declares an interim dividend. Shareholders can choose
whether to receive cash, or ordinary shares to the value of the cash alternative.
Some shareholders choose the share alternative.
On 1 August Year 1, the dividends are reinvested; and 20,000 ordinary shares
are issued in connection with the share alternative.
b. Acquisition of Company C
On 1 August Year 1, P acquires the entire equity interests of Company C.
Consequently, P obtains control over C and starts to consolidate C’s results
from that date. The acquisition constitutes a business combination under
IFRS 3.
The consideration transferred in exchange for control over C includes the
following ordinary shares issued/to be issued by P:
– 400,000 ordinary shares are issued on 1 September Year 1; and
– another 100,000 ordinary shares are to be issued on 30 June Year 2, but only
if the net profit of C for the eight months ending 31 March Year 2 exceeds
700,000.
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7 Basic and diluted EPS – Comprehensive worked example 165
7.1 Introduction
P accounts for the 100,000 ordinary shares that may be issued on the
satisfaction of the net profit target as contingent consideration in connection
with the acquisition of C. Because the contingent consideration would be
settled in a fixed number of ordinary shares of P, it is accounted for as equity
and is therefore not subsequently remeasured.
C’s net profits for the relevant periods are as follows:
– five months ended 31 December Year 1: 710,000
– eight months ended 31 March Year 2: 850,000.
7. Share options
a. Share options issued outside a share-based payment arrangement
Before Year 1, P writes certain call options over its ordinary shares to third party
investors.
At 1 January Year 1, 300,000 of these options are outstanding. Each option
entitles its holder to one of P’s ordinary shares with an exercise price of 15.
All of these options are exercised on 1 March Year 1.
b. Share options issued under a share-based payment arrangement
On 1 February Year 1, under an equity-settled share-based payment
arrangement, P grants 25,000 share options to each of its 10 employees – i.e.
250,000 in total. Each grant is conditional on the employee working for P over
the next three years.
The forfeiture details are as follows.
– At the grant date, P estimates that three of the employees will leave during
the three-year period and will therefore forfeit their rights to the share
options.
– On 30 June Year 1, two employees leave.
– At 31 December Year 1, P maintains its original estimate of forfeiture.
– No additional employees leave during Year 2 and P continues to estimate at
31 December Year 2 that 70% of the options will vest.
Additional information relating to the share option is as follows.
– Exercise price of each option: 18.
– Grant-date fair value of each option in accordance with IFRS 2 Share-based
Payment: 3.7.
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166 | IFRS Handbook: Earnings per share
9. Convertible instruments
a. Voluntarily convertible loan notes
On 1 September Year 1, P issues 1,000,000 convertible loan notes at their face
value of 15,000,000. Interest is payable annually in arrears. In addition, they
are convertible into a total of 500,000 ordinary shares at the discretion of the
holder at any time before 31 August Year 3; if the holder’s conversion right is not
exercised by 31 August Year 3, then the loan notes are to be repaid fully in cash
on that date. The holder does not convert the notes during Year 1 and Year 2.
The total annual interest expense relating to the liability component of the
convertible loan is 500,000 for Year 1 and 1,500,000 for Year 2. Interest is tax-
deductible.
b. Mandatorily convertible bonds
On 1 October Year 1, P issues convertible bonds at their face value of 7,500,000.
These bonds are mandatorily convertible into 250,000 ordinary shares on
1 November Year 2. The notes are classified as equity.
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7 Basic and diluted EPS – Comprehensive worked example 167
7.2 Calculating basic EPS
Additional information
– P’s tax rate is 30%.
– The average market price of P’s shares during the following periods is:
- 1 January to 1 March Year 1: 25
- 1 April to 30 June Year 1: 27
- 1 February to 31 December Year 1: 33
- 1 April to 31 December Year 1: 35
- 1 January to 31 March Year 2: 35
- 1 January to 31 December Year 2: 38.
These average market prices for P’s shares already include an adjustment as a
result of the bonus issue on 15 January Year 1.
Basic EPS
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168 | IFRS Handbook: Earnings per share
Weighted-
Reference Number average
in of shares Time number of
Chapter 7.1 outstanding weighting shares Notes
1 January
Balance 3,000,000
15 January
Bonus issue
(Cumulative effect of the
bonus issue) 10 125,000 5,208 ii
15 to 31 January 2,625,000 1/24 109,375
1 February
Share repurchase 2 (200,000) i
1 to 28 February 2,425,000 1/12 202,083
1 March
Shares issued on exercise
of options 7(a), 10 315,000
1 March to 31 May 2,740,000 3/12 685,000
1 June
Shares issued for acquiring B 6(a) 375,000 iii
12/12
Weighted average number
of shares for Year 1 3,577,083
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7 Basic and diluted EPS – Comprehensive worked example 169
7.2 Calculating basic EPS
Notes
i. Treasury shares: Treasury shares are not treated as outstanding ordinary shares and are
deducted from the denominator. These include P’s shares held by P’s subsidiaries that are
presented as treasury shares in P’s consolidated financial statements (see 3.3.50).
ii. Bonus issue: The bonus issue represents an increase in the number of shares
outstanding without a corresponding change in resources and is retrospectively adjusted
as if the bonus issue had occurred at the beginning of the earliest period presented (see
Chapter 6.2).
weighted-average number of shares for the period before the bonus issue x adjustment
factor = 104,167 x 5% = 5,208
iii. Shares issued to acquire a business: When an entity issues ordinary shares as part of
the consideration transferred in a business combination, these shares are included in the
denominator from the date of acquisition, unless they are contingently issuable ordinary
shares (see Chapter 5.7).
Therefore, although the 375,000 shares are issued on 1 August, they are treated as
outstanding from 1 June, being the date on which P acquires control and starts to
consolidate B’s results.
Similarly, the 400,000 shares issued on 1 September as consideration for the acquisition
of C are treated as outstanding from 1 August.
iv. Partly paid ordinary shares: To the extent that partly paid shares are entitled to participate
in dividends during the period relative to a fully paid ordinary shares, they are treated as a
fraction of an ordinary share (see Chapter 5.3).
Therefore, these shares are included as fractions of ordinary shares in the denominator as
they are paid up. Because the first instalment (50%) of the subscription price is receivable
on 30 June, they are treated as 50% of an ordinary share in the denominator from this
date – i.e. 1,000,000 x 50% = 500,000 shares.
v. The time weighting for a single day is assumed to be immaterial in this example.
vi. Stock dividends: Because the interim stock dividends contain no bonus element, the
shares issued as stock dividends are added to the denominator on a prospective basis
(see Chapter 5.4).
The 20,000 shares issued are treated as outstanding from 1 August Year 1, being the date
on which the cash dividends are reinvested.
vii. Mandatorily convertible bonds: Ordinary shares that are to be issued on a mandatory
conversion of a convertible instrument are included in the denominator from the date on
which the contract is entered into (see 3.3.20 and 5.11.20).
viii. Note that the denominator for basic EPS need not be the same as the actual number of
ordinary shares outstanding as shown in the table earlier.
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170 | IFRS Handbook: Earnings per share
4,935,000
Partly paid shares that are included as fractions of shares (500,000)
Shares issuable under mandatorily convertible instruments 250,000
Number of shares outstanding in EPS calculation at
31 December Year 1 4,685,000
Basic EPS
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7 Basic and diluted EPS – Comprehensive worked example 171
7.2 Calculating basic EPS
Weighted-
Reference Number average
in of shares Time number of
Chapter 7.1 outstanding weighting shares Notes
Notes
i. The number of ordinary shares outstanding for the purposes of basic EPS is brought
forward from the previous calculation. As noted in the Year 1 basic EPS calculation above,
this number is not necessarily equal to the actual number of ordinary shares outstanding
at that date.
ii. Partly paid ordinary shares: The second instalment (50%) of the subscription price for the
partly paid shares was receivable on 31 March. From this date, these shares become fully
paid and are fully entitled to dividends. Therefore, the remaining fraction – i.e. 1,000,000
x 50% = 500,000 shares – is included in the weighted-average number of shares from
31 March.
iii. Shares issued to acquire a business (contingent consideration): The ordinary shares that
are issuable under the contingent consideration arrangement in connection with the
acquisition of C are contingently issuable ordinary shares. Contingently issuable ordinary
shares are treated as outstanding and included in the denominator from the date on which
all of the conditions are met (see Chapter 5.10).
The earnings target in respect of C’s net profit for the eight months ended 31 March Year 2
is met. Therefore, the 100,000 additional shares are treated as outstanding from the date on
which the conditions are satisfied – i.e. 31 March.
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172 | IFRS Handbook: Earnings per share
Observations
Item 10 in the fact pattern above refers to a bonus issue occurring on 15 May
Year 3, when P makes a bonus issue of one ordinary share for every one share
held – i.e. 100%. The financial statements for the year ended 31 December
Year 2 are authorised for issue on 1 May Year 3, before the bonus issue takes
place. Therefore, this Year 3 bonus issue is not relevant to the EPS amounts
disclosed in P’s financial statements for the years ended 31 December Year 1 or
Year 2.
However, if the bonus issue were to occur before the financial statements for
the year ended 31 December Year 2 are authorised, then the post-year end
bonus issue would need to be reflected in the EPS amounts included in the
Year 2 financial statements (see Chapter 6.2).
The summary of the amounts used to calculate the basic EPS for Year 2 and the
comparative information for Year 1 would then be as follows.
Year 1 Year 2
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7 Basic and diluted EPS – Comprehensive worked example 173
7.3 Calculating diluted EPS
Diluted EPS
Identity POSs
1 The POSs are as follows.
Reference
in Chapter
Instruments 7.1 POSs? Why?
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174 | IFRS Handbook: Earnings per share
Convertible
preference shares 1, 10 600,000 1,050,000 12/12 1,050,000 0.57 i
Partly paid
ordinary shares 4 ii
– first 50%
instalment - 37,037 3/12 9,259 -
– second 50%
instalment - 142,857 9/12 107,143 -
Contingent
consideration in
connection with
acquisition of C 6(b) - 100,000 5/12 41,667 - iii
Share options
– options
outside
share-based
payment 7(a) - 143,520 2/12 23,920 iv
– options under
share-based
payment 7(b) - See note v See note v 77,231 v
Contingently
issuable ordinary
shares 8 - - N/A - N/A vi
Voluntarily
convertible loan
notes 9(a) 350,000 500,000 4/12 166,667 2.10 vii
Notes
i. Convertible preference shares
Potential adjustment to the numerator for EPIS: The convertible preference shares, if they
are fully converted, would increase the numerator by the amount of dividends declared on
preference shares during the year (600,000).
Potential adjustment to the denominator for EPIS: The convertible preference shares, if they
are fully converted, would increase the number of outstanding shares by 1,050,000 – i.e.
500,000 x 2.1. The assumed conversion reflects the adjusted conversion ratio as a result of
the bonus issue issued on 15 January Year 1.
Potential adjustment to the denominator for EPIS: The adjustment is determined using the
treasury share method (see 5.9.40), as follows.
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7 Basic and diluted EPS – Comprehensive worked example 175
7.3 Calculating diluted EPS
Note
1. This reflects the adjusted conversion ratio as a result of the bonus issue (instrument 10 in
Chapter 7.1).
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176 | IFRS Handbook: Earnings per share
The potential adjustment to the denominator for EPIS is determined using the treasury share
method (see 5.9.40), as follows.
Weighted-average number
of options (and shares to be
issued on exercise) 204,167 (A) 1
Step i Exercise price 18.00 (B)
Notes
1. i.e. (250,000 x 5/12) + (200,000 x 6/12).
2. In this step, proceeds include the fair value of future services to be rendered by the
employee for the remaining period not vested. P applies Approach 1 in Example 5.17
and the assumed proceeds are the unearned IFRS 2 charge for the eight employees that
remain at 31 December Year 1 – i.e. 3.7 x 25 / 36 x 200,000.
If 31 December Year 1 were the end of the contingency period, then the specified conditions
regarding the basic EPS amounts for Year 2 and Year 3 would not be met. Accordingly, these
shares are ignored when determining the diluted EPS.
Potential adjustment to the numerator for EPIS: The convertible loan notes, if they are fully
converted on issue, would increase profit or loss for the year by the post-tax amount of the
interest expense:
(interest expense on the convertible loan notes) x (1 - income tax rate) = (500,000) x (1 -
30%) = 350,000
Potential adjustment to the denominator for EPIS: The convertible bonds, if they are fully
converted on issue, would increase the number of outstanding shares by 500,000.
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7 Basic and diluted EPS – Comprehensive worked example 177
7.3 Calculating diluted EPS
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178 | IFRS Handbook: Earnings per share
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7 Basic and diluted EPS – Comprehensive worked example 179
7.3 Calculating diluted EPS
Diluted EPS
Identity POSs
1 The POSs are as follows.
Reference in
Instruments Chapter 7.1 POSs? Why?
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180 | IFRS Handbook: Earnings per share
Convertible
preference
shares 1 - 1,050,000 12/12 1,050,000 - i
Partly paid
ordinary
shares –
second 50%
instalment 4 - 142,857 3/12 35,714 - ii
Contingent
consideration in
connection with
acquisition of C 6(b) - 100,000 3/12 25,000 - iii
Share options
– options under
share-based
payment 7(b) - 98,231 12/12 98,231 - iv
Contingently
issuable ordinary
shares 8 - - N/A - N/A v
Voluntarily
convertible loan
notes 9(a) 1,050,000 500,000 12/12 500,000 2.10 vi
Notes
i. Convertible preference shares
Potential adjustment to the numerator for EPIS: No adjustment is required,
because no dividends are declared.
Potential adjustment to the denominator for EPIS: The convertible preference
shares, if they are fully converted, would increase the number of outstanding
shares by 1,050,000 – i.e. 500,000 x 2.1. The assumed conversion reflects the
adjusted conversion ratio as a result of the bonus issue issued on 15 January
Year 1.
ii. Partly paid ordinary shares
Potential adjustment to the numerator for EPIS: No adjustment is required.
Potential adjustment to the denominator for EPIS: The adjustment is determined
using the treasury share method (see 5.9.40), as follows.
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7 Basic and diluted EPS – Comprehensive worked example 181
7.3 Calculating diluted EPS
Second instalment
Weighted-average
number of options (and
shares to be issued on
exercise) 200,000 (A)
Step i Exercise price 18.00 (B)
Note
1. In this step, proceeds include the fair value of future services to be rendered by
the employee for the remaining period not vested. The entity applies Approach 1 in
Example 5.17 and the assumed proceeds are the unearned IFRS 2 charge for the eight
employees that remain at 31 December Year 1 – i.e. 3.7 x 13 / 36 x 200,000.
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182 | IFRS Handbook: Earnings per share
If 31 December Year 2 were the end of the contingency period, then the specified conditions
regarding the basic EPS amounts for Year 2 and Year 3 would not be met. Accordingly, these
shares are ignored when determining the diluted EPS.
Potential adjustment to the numerator for EPIS: The convertible loan notes, if they are fully
converted on issue, would increase profit or loss for the year by the post-tax amount of the
interest expense:
(interest expense on the convertible loan notes) x (1 - income tax rate) = (1,500,000) x (1 -
30%) = 1,050,000
Potential adjustment to the denominator for EPIS: The convertible bonds, if they are fully
converted on issue, would increase the number of outstanding shares by 500,000.
Reference in
Instruments Chapter 7.1 EPIS
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7 Basic and diluted EPS – Comprehensive worked example 183
7.3 Calculating diluted EPS
The diluted EPS is increased by the voluntarily convertible loans notes. Therefore, the
convertible loan notes are anti-dilutive.
Diluted EPS = 0.88
Observations
Similarly to Chapter 7.2, if a bonus issue were to occur before the financial
statements are authorised for issue, then it would also need to be reflected in
diluted EPS. However, as discussed in Chapter 6.2, the terms and conditions
underlying the POSs are considered when determining whether the weighted-
average number of POSs needs to be adjusted.
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184 | IFRS Handbook: Earnings per share
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8 EPS in interim financial statements 185
8.3 Year-to-date calculation
8.2 Scope
IAS 34.11–11A An entity presents basic and diluted EPS in the interim financial statements if it is
in the scope of IAS 33 (see 2.2.10).
Neither IAS 33 nor IAS 34 is clear about the requirements to disclose EPS
information when an entity’s ordinary shares are untraded at the interim reporting
date but are publicly traded by the time its interim financial statements for that
period are authorised for issue. As noted in 2.2.10, in such circumstances the
entity would generally have been in the process of filing its financial statements
with a securities commission or other regulatory organisation for this purpose at
the interim reporting date. Accordingly, in our view the entity should disclose EPS
information in these interim financial statements.
In addition, neither IAS 33 nor IAS 34 is clear about the requirements to disclose
EPS information when an entity’s ordinary shares are publicly traded for only a
portion of the current interim period – e.g. because the entity’s ordinary shares or
POSs were only listed for the first time during the period. As noted in 2.2.10, in
our view in this situation the entity should present EPS information in the interim
financial statements for all periods for which statements of profit or loss and OCI
are presented, and not only for the periods in which the entity’s ordinary shares or
POSs are publicly traded.
Publicly traded markets and/or regulators often impose additional disclosure
requirements for interim financial statements. Therefore, even if an entity is
believed to be outside the scope of IAS 33 or IAS 34, these other regulatory
requirements may nevertheless mandate the disclosure of EPS information.
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186 | IFRS Handbook: Earnings per share
period (or from the date of the contingent share agreement, if this is later),
rather than weighted for the interim periods in which they were included in the
computation of diluted EPS.
Consequently, for an entity that presents quarterly reports, the sum of the diluted
EPS for the first quarter and that for the second quarter may not be the same as
that for the half-year period.
IAS 33.IE7, IE12 A more detailed understanding of how this year-to-date approach is applied
in respect of POSs can be derived from Illustrative Examples 7 and 12 that
accompany IAS 33. Example 12 is set out below, with the format adapted from
that used in IAS 33.
Fact pattern
This example illustrates the quarterly and annual calculations of basic and
diluted EPS in Year 1.
The following basic facts relate to Company P in Year 1.
–– Net profit (loss) attributable to ordinary shareholders for each quarter and for
the year is as follows.
Fourth
First quarter Second Third quarter quarter
(Q1) quarter (Q2) (Q3) (Q4) Year 1
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8 EPS in interim financial statements 187
8.3 Year-to-date calculation
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188 | IFRS Handbook: Earnings per share
The basic EPS computations for each quarter in Year 1 and for the full year are as
follows.
Basic EPS
Determine the numerator
1 The numerator is adjusted by the dividend paid on the preference shares
that are classified in equity but that are not ordinary shares.
Q1 Q2 Q3 Q4 Year Note
Less: Dividend on
preference shares (40,000) (10,000) (10,000) (10,000) (70,000) 1
Note
1 In Q1, dividends are based on 800,000 preference shares – i.e. 800,000 x 0.05. From Q2,
dividends consider the conversion of 600,000 preference shares on 1 June – i.e. 200,000
x 0.05.
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8 EPS in interim financial statements 189
8.3 Year-to-date calculation
Weighted- Weighted-
average Time average
Number Time number of weighting number of
of shares weighting for shares for for the shares for
outstanding the quarter the quarter year the year
1 March Issue of
ordinary
shares 200,000
Weighted-average number of
shares for Q1 5,066,666
1 April Conversion
of bonds 480,000
1 June Conversion
of preference
shares 600,000
Weighted-average number of
shares for Q2 5,880,000
1 September Exercise of
warrants 600,000
Weighted-average number of
shares for Q3 6,480,000
Weighted-average number of
shares for Q4 6,880,000
Weighted-average number of
shares for the year 12/12 6,076,667
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190 | IFRS Handbook: Earnings per share
Q1 Q2 Q3 Q4 Year
Loss from
discontinued
operations - - (2,000,000) - (2,000,000) (D)
The diluted EPS computations for each quarter in Year 1 and for the full year are as
follows.
Diluted EPS
Identity POSs
1 The following instruments are POSs for the year, because they are
outstanding for at least part of the year and if they are converted or
exercised, then ordinary shares will be issued:
– convertible bonds;
– convertible preference shares;
– share warrants; and
– share options.
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8 EPS in interim financial statements 191
8.3 Year-to-date calculation
Convertible bonds i
Adjustments to
the numerator 90,000 - - - 90,000
Adjustments to
the denominator 480,000 - - - 120,000
Convertible
preference shares ii
Adjustments to
the numerator 40,000 10,000 10,000 10,000 70,000
Adjustments to
the denominator 800,000 600,000 200,000 200,000 450,000
Adjustments to
the numerator - - - - -
Adjustments to
the denominator - 50,000 61,538 - 14,035
Share options iv
Adjustments to
the numerator - - - - -
Adjustments to
the denominator - - - - -
Notes
i. Convertible bonds
Potential adjustment to the numerator for EPIS: Because the bonds are converted by the end
of Q1, the adjustment is the post-tax amount of the interest expense and is the same for
both Q1 and the year:
Potential adjustment to the denominator for EPIS: The number of outstanding shares issued
on conversion. The adjustment is weighted for the period during which the convertible bonds
are outstanding but not converted:
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192 | IFRS Handbook: Earnings per share
Q2 Q3 Year Note
Weighted-average number
of warrants (and shares to
be issued on exercise of the
warrants) 600,000 400,000 400,000 (A) 1
Note
1. Weighted-average number of warrants for Q3: 600,000 x 2/3 = 400,000.
Weighted-average number of warrants for the year: 600,000 x 8/12 = 400,000.
No adjustment is required in Q1 because in this period the warrants are not in-the-money
(the exercise price of 55 exceeds the average market price for the period of 49); therefore,
they are anti-dilutive (see 5.9.30).
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8 EPS in interim financial statements 193
8.3 Year-to-date calculation
Q1 Q2 Q3 Q4 Year
Q1
Weighted-
average
number of
Earnings shares Per share Dilutive?
Q2
Weighted-
average
number of
Earnings shares Per share Dilutive?
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194 | IFRS Handbook: Earnings per share
Q3
Weighted-
average
number of
Earnings shares Per share Dilutive?
Year
Weighted-
average
number of
Earnings shares Per share Dilutive?
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8 EPS in interim financial statements 195
8.4 Presentation and disclosure
Q1 Q2 Q3 Q4 Year
Loss from
discontinued
operations - - (2,000,000) - (2,000,000) (D)
IAS 33.28 As noted in Chapter 6.2, for the purposes of annual financial statements both
basic and diluted EPS are retrospectively adjusted for a capitalisation or bonus
issue, share split or reverse share split that occurs after the reporting date but
before the financial statements are authorised for issue. The issue of retrospective
adjustments in the context of condensed interim financial statements is not
explicitly addressed in IAS 33 or IAS 34. However, in line with the general principle
in IAS 34 that the same accounting policies as are applied in annual financial
statements should be applied in interim financial statements, similar adjustments
are made in condensed interim financial statements if a capitalisation or bonus
issue, share split or reverse share split occurs after the interim reporting date but
before the interim financial statements are authorised for issue.
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196 | IFRS Handbook: Earnings per share
9 Other per-share
measures
9.1 Introduction
So far, this handbook has covered EPS in both annual and interim financial
statements as required by IAS 33 and IAS 34 Interim Financial Reporting. This
section considers other per-share measures, covering:
–– measures per share based on alternative earnings measures of EPS; this is an
area on which IAS 33 provides requirements and guidance (see Chapter 9.2);
and
–– dividends per share; this is in the context of the requirements in IAS 1
Presentation of Financial Statements (see Chapter 9.3).
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9 Other per-share measures 197
9.3 Dividends per share
IAS 33.73–73A In addition, both basic and diluted amounts per share relating to the component
are disclosed in the notes to the financial statements only, and not in the
statement of profit or loss and OCI. These basic and diluted amounts per share are
also disclosed with equal prominence.
IAS 33.73–73A In respect of these additional amounts per share, IAS 33 also requires the
following disclosures:
–– the basis for determining the numerator, which should be consistent over time,
including whether the amounts per share are before or after tax; and
–– a reconciliation of the numerator to a line item that is reported in the statement
of profit or loss and OCI, if that component is not reported as a line item in that
statement.
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198 | IFRS Handbook: Earnings per share
Keeping in touch
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Whether you are new to IFRS or a current user, you can find digestible summaries
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Keeping you informed | 199
Leases Revenue
Other topics
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combinations and and disclosures
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Sector updates
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200 | IFRS Handbook: Earnings per share
Acknowledgements
This handbook has been developed by current and former members of the KPMG
International Standards Group (part of KPMG IFRG Limited), including the following
principal authors.
Oliver Geier
David Littleford
Marcio Rost
Agnieszka Sekita
Jim Tang
David Ward
Additional reviewers
We also would like to thank the professionals from KPMG member firms who are
on KPMG’s global IFRS presentation topic team for their significant contributions:
Kim Bromfield South Africa
Matthew Cook Russia
Holger Erchinger US
Yoshiaki Hasegawa Japan
Se Bong Hur Korea (Republic of)
Gabriela Kegalj Canada
Wietse Koster Netherlands
Luis Preciado Mexico
Ruchi Rastogi India
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Detailed contents | 201
Detailed contents
Simplifying EPS............................................................................................................................................................... 1
Content....................................................................................................................................................................................... 2
Abbreviations............................................................................................................................................................................. 2
1 Introduction........................................................................................................................................................... 3
2.1 Introduction..................................................................................................................................................................... 5
3.1 Introduction................................................................................................................................................................... 11
Example 3.1: Basic EPS – A simple example...................................................................................................................11
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202 | IFRS Handbook: Earnings per share
4.1 Introduction................................................................................................................................................................... 28
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Detailed contents | 203
5.16 Instruments over shares in, or issued by, a subsidiary, joint venture or associate............................................... 123
Example 5.16A: POSs in a subsidiary........................................................................................................................... 124
Example 5.16B: NCI puts.............................................................................................................................................. 128
6.2 Capitalisation or bonus issue, share split and reverse share split (share consolidation).................................... 144
Example 6.2: Basic EPS – Bonus issue after the reporting date................................................................................... 145
Example 6.3A: Diluted EPS – Options with anti-dilution provisions.............................................................................. 146
Example 6.3B: Diluted EPS – Options without anti-dilution provisions......................................................................... 148
Example 6.4: Share consolidation accompanied by special dividend – Denominator for basic EPS............................. 148
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204 | IFRS Handbook: Earnings per share
Acknowledgements..................................................................................................................................................... 200
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