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Ias-33 Eps
Ias-33 Eps
PRESENTATION
PRESENTATION TOPIC:
The following terms are used in this Standard with the meanings
specified:
Antidilution is an increase in earnings per share or a reduction in loss
per share resulting from the assumption that convertible instruments
are converted, that options or warrants are exercised, or that ordinary
shares are issued upon the satisfaction of specified conditions.
A contingent share agreement is an agreement to issue shares that is
dependent on the satisfaction of specified conditions.
Contingently issuable ordinary shares are ordinary shares issuable for
little or no cash or other consideration upon the satisfaction of
specified conditions in a contingent share agreement.
Dilution is a reduction in earnings per share or an increase in loss per
share resulting from the assumption that convertible instruments are
converted, that options or warrants are exercised, or that ordinary
shares are issued upon the satisfaction of specified conditions.
SCOPE: CONTI
Potential ordinary shares are weighted for the period they are outstanding.
Potential ordinary shares that are cancelled or allowed to lapse during the
period are included in the calculation of diluted earnings per share only for the
portion of the period during which they are outstanding. Potential ordinary
shares that are converted into ordinary shares during the period are included in
the calculation of diluted earnings per share from the beginning of the period
to the date of conversion; from the date of conversion, the resulting ordinary
shares are included in both basic and diluted earnings per share.
A subsidiary, joint venture or associate may issue to parties other than the
parent, venturer or investor potential ordinary shares that are convertible into
either ordinary shares of the subsidiary, joint venture or associate, or ordinary
shares of the parent, venturer or investor (the reporting entity). If these
potential ordinary shares of the subsidiary, joint venture or associate have a
dilutive effect on the basic earnings per share of the reporting entity, they are
included in the calculation of diluted earnings per share.
DILUTIVE POTENTIAL ORDINARY SHARES
Potential ordinary shares shall be treated as dilutive when, and only when, their
conversion to ordinary shares would decrease earnings per share or increase loss per share
from continuing operations.
For the purpose of calculating diluted earnings per share, an entity shall assume the
exercise of dilutive options and warrants of the entity. The assumed proceeds from these
instruments shall be regarded as having been received from the issue of ordinary shares at
the average market price of ordinary shares during the period. The difference between the
number of ordinary shares issued and the number of ordinary shares that would have been
issued at the average market price of ordinary shares during the period shall be treated as
an issue of ordinary shares for no consideration.
Convertible preference shares are antidilutive whenever the amount of the dividend on
such shares declared in or accumulated for the current period per ordinary share
obtainable on conversion exceeds basic earnings per share. Similarly, convertible debt is
antidilutive whenever its interest (net of tax and other changes in income or expense) per
ordinary share obtainable on conversion exceeds basic earnings per share
SIMPLE CAPITAL STRUCTURE:
A corporation’s capital structure consists only of common
stock or includes no potentially dilutive convertible
securities, options, warrants, or other rights that upon
conversion or exercise could dilute earnings per common
share.
Computational Guidelines:
In its simplest form EPS is calculated As follows:
ADJUSTMENTS TO THE NUMERATOR &
DENOMINATOR:
Numerator:
Must reflect any claims against it by holders of senior
securities
For cumulative preference shares, the dividend is to be
deducted from profit (declared or not)
Cumulative dividends in arrears that are paid currently
do not affect EPS.
However, the amount in arrears should be disclosed.
ADJUSTMENTS TO THE NUMERATOR &
DENOMINATOR (CONT’D):
Denominator:
The number of shares required should be excluded from
EPS calculations from the date of acquisition.
The number of shares newly issued is included in the
computation only for the period after their issuance date.
Share split or share dividend should be given retroactive
recognition for all periods presented.
The shares issued in connection with a business
combination are considered issued and outstanding as of
the date of acquisition and the income of the acquired
company is also included.
EPS COMPUTATION – SIMPLE CAPITAL
STRUCTURE:
Example:
Following data has been extracted from the financial
statements of XYZ Ltd. You are required to compute the
earnings per share ratio of the company for the year
2014.
Data Taken From Income Statement:
Particulars Amount
Net Income $1500
Preferred Dividend $180
Income $1320
EPS COMPUTATION – SIMPLE CAPITAL
STRUCTURE (CONT’D):
Data Taken From Balance Sheet:
Options &
Warrants
Convertible
Securities
DETERMINING DILUTION EFFECTS
(CONT’D):
Options and Warrants:
IFRS prescribes the use of the “treasury share method” to
deal with the hypothetical proceeds from the presumed
option and warrant exercises.
Treasury Share Method:
This method assumes that the proceeds from the option
and warrant exercises would have been used to
repurchase outstanding shares, at the average prevailing
market share price during the reporting period.
DETERMINING DILUTION EFFECTS
(CONT’D):
Treasury Stock Method:
Denominator must be increased by net dilution, as follows:
Net dilution = Shares issued – Shares repurchased
Where,
Share issued = Proceeds received / Exercise price
Shares repurchased = Proceeds received / Average market
price per share
DETERMINING DILUTION EFFECTS
(CONT’D):
Example:
Apex Inc, reported net income of $250,000 for the year
ended December 31, 2014. On January 1, 2014, it had
100,000 shares of common stock outstanding. No
changes to the shares outstanding occurred during 2014.
On July 1, 2013, Apex issued 10,000 stock options to its
key executives. Each option permits the holder to
acquire one share of common stock for $10 per share
(exercise price). The average market price of the
common stock was $25. Compute basic and diluted EPS
for 2014.
DETERMINING DILUTION EFFECTS
(CONT’D):
Solution:
Basic EPS = $250,000 /100,000 = $2.50
Test for dilution of options:
- Is exercise price ($10) < Average market price
($25)?......Yes !!!!
Treasury Stock Method:
Assume exercise at later of 6/1/13 or 1/1/14
Convertible Instruments:
These are assumed to be converted when the effect is
dilutive. Convertible preferred shares will be dilutive if –
the preferred dividend declared < Basic EPS
IF-CONVERTED METHOD:
It is not explicitly employed by IAS 33, the methodology
of this is used for those securities that are currently
sharing in the earnings of the company through the
receipt of interest or dividends as senior securities but
have the potential for sharing in the earnings as ordinary
shares.
IF-CONVERTED METHOD (CONT’D):
Example:
Navid Co. reported net income of $750,000 for the year
ended 31 December 2014. The company had a weighted
average of 690,000 shares of common stock outstanding.
In addition, the company has only one potentially
dilutive security: $50,000 of 6% convertible bonds,
convertible into a total of 10,000 shares. Assuming a tax
rate of 30%, Calculate Navid’s basic and diluted EPS.
IF-CONVERTED METHOD (CONT’D):
Particulars Basic EPS Diluted EPS (Using If
Converted)
Net Income $750,000 $ 750,000
After tax cost of interest 2100
(3000 * .70)
Numerator $750,000 $752,100
Weighted average 690,000 690,000
number of share
outstanding
If Converted 0 10,000
Denominator 690,000 700,000
EPS $1.09 $1.07
CONTINGENT ISSUANCES OF ORDINARY
SHARES:
Shares whose issuance is contingent on the occurrence of
certain events are considered outstanding and included in
the computation of diluted EPS only if the stipulated
conditions have been met.
If at the end of the reporting period the triggering event
has not occurred, issuance of the contingently issuable
shares is not to be assumed.
If the condition must be met and then maintained for a
subsequent period, such as for a two year period then the
effect of the contingent issuance is excluded from basic
EPS but is included in the diluted EPS.
CONTINGENT ISSUANCES OF ORDINARY
SHARES (CONT’D):
IAS 33 indentifies circumstances in which issuance of
contingent shares is dependent upon meeting both future
earnings and future share price threshold levels. If both
thresholds are met the effect of contingently issuable
shares is included in the computation of diluted EPS.
For purposes of computing diluted EPS. The number of
retail outlets, level of revenue etc at the end of the
reporting period are to be presumed to remain constant
until the expiration of the contingency period.
CONTINGENT ISSUANCES OF ORDINARY
SHARES (CONT’D):
Example:
Contingent shares will be issued at year end 2014, with
1000 shares issued for each retail outlet in excess of the
number of outlets at the base date, year end 2013. At
year end, 2014, seven new outlets are open. Diluted EPS
should include the assumed issuance of 7000 additional
shares. Basic EPS would not include this, since the
contingency period has not ended and no new shares are
yet required to be issued.
CONTRACTS WHICH MAY BE SETTLED
IN SHARES OR FOR CASH:
Obligations can be settled in cash or by the issuance of
shares, at the option of the debtor (the reporting entity).
It is completely different from convertible debt. It is the
debtor not the debt holder which has the right to trigger
the issuance of shares.
It is to be presumed that the debtor will elect to issue
shares to retire this debt, if this leads to dilute EPS, this
should be included in calculation but not in basic one.
CONTRACTS WHICH MAY BE SETTLED
IN SHARES OR FOR CASH (CONT’D):
Written call options:
A similar result obtains in this case. Creditors have the
right to demand shares instead of cash in settlement of an
obligation.
Written Put options:
The entity may also write put options giving shareholders
the right to demand that entity repurchase certain
outstanding shares. Exercise is to be presumed if the
effect is dilutive.
CONTRACTS WHICH MAY BE SETTLED
IN SHARES OR FOR CASH (CONT’D):
Example:
If the entity is potentially required to buy back 25000 of
its currently outstanding shares at each $40, it must
assume that it will raise the required $1,000,000 cash by
selling new ordinary shares into the market. If the
average market price was $35 during the reporting
period, it must be assumed that $1,000,000 / 35 = 28,572
shares would be issued, for a net dilution of about 3572
net ordinary shares, which is used to be compute diluted
EPS.
NO ANTI-DILUTION:
No assumption of conversion should be made if the
effect would be anti-dilutive.
The goal in computing dilutive EPS is to calculate the
maximum dilutive effect.
Hence, the individual issues of converting securities,
options, and other items should be dealt with from the
most dilutive to the least dilutive to effect this result.
PRESENTATION & DISCLOSURE:
Entities should present both basic EPS and diluted EPS
in the statement of profit or loss and other
comprehensive income or
In the statement of profit or loss, if presented separately.
Equal prominence should be given to both the basic EPS
and diluted EPS figures for all periods presented.
An entity that reports discontinued operation shall
disclose the basic EPS and diluted EPS.
Entities should present basic EPS and diluted EPS even
if the amounts disclosed are negative.
PRESENTATION & DISCLOSURE
(CONT’D):
Entities should disclose amounts used as the numerator
in calculating basic EPS and diluted EPS along with a
reconciliation of those amounts to profit or loss fro the
period.
An entity may choose to present per share amounts using
a reported component of the separate statement of profit
or loss other than profit or loss for the period attributable
to ordinary equity holders.
Entities are encouraged to disclose the terms and
conditions of financial instruments or contracts
generating potential ordinary shares.
PRESENTATION & DISCLOSURE
(CONT’D):
If changes in the number of ordinary shares or potential
ordinary shares occur after the end of the reporting
period but before issuance of the financial statements, it
is encouraged to disclose.
An entity is also encouraged to disclose a description of
ordinary share transactions or potential ordinary share
transactions.
EXAMPLES OF FINANCIAL STATEMENT
DISCLOSURES:
XYZ Ltd
Annual Report 2014
Notes to the consolidated Financial Statements: