Measurement

Basic EPS should be calculated by dividing the profit or loss for the period attributable to the parent entity’s ordinary equity holders by the weighted average number of ordinary shares outstanding during the period.

An ordinary share is defined as an equity instrument that is subordinate to all other classes of equity instruments.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Ordinary shares participate in profit only after other types of shares, such as preference shares, have participated. An entity may have more than one class of ordinary shares. Ordinary shares of the same class have the same rights to receive dividends.

Entities that fall within the scope should calculate basic and diluted EPS for the profit or loss attributable to the parent entity’s ordinary equity holders. Basic and diluted EPS should also be calculated for profit or loss from continuing operations separately if these are presented under IFRS 5.

Entities calculating EPS for discontinued operations, as determined in accordance with IFRS 5, apply the same measurement principles under IAS 33 as those applicable to continuing operations.

Basic and diluted EPS disclosures are required for each class of ordinary shares that have different rights to share in profit for the period.

Computation of earnings

Profit or loss from continuing operations, and profit or loss for the period attributable to the parent entity’s ordinary equity holders, are calculated as the relevant profit or loss after tax and non-controlling interest, adjusted for the after-tax effects of preference dividends, differences arising on settlement of preference shares and other similar effects of preference shares classified as equity.

Formula for calculating basic earnings per share

Basic EPS is calculated as follows.

The objective of basic EPS information is to provide a measure of the interests of each ordinary share of a parent entity in the performance of the entity over the reporting period. Basic EPS amounts are required to be calculated for:

• profit or loss attributable to ordinary equity holders of the parent entity; and
• if presented, profit or loss from continuing operations attributable to those equity holders.

Earnings numerator

Starting point for the earnings numerator

The starting point for the earnings numerator (for results both from continuing operations and for the entity as a whole) is the profit or loss after tax attributable to the equity holders of the parent entity (i.e. excluding the amount attributable to non-controlling interests).

Non-controlling interests

The profit or loss attributable to equity holders of the parent will be readily available, because it is required under IAS 1 to be presented in the statement of comprehensive income (or, when applicable, the separate statement of profit or loss) separately from the profit or loss attributable to non-controlling interests.

When applicable, however, the profit for the period from continuing operations presented in the statement of comprehensive income (which is before the allocation to non-controlling interests) will need to be adjusted for the non-controlling interests’ share of those earnings in order to arrive at the amount attributable to equity holders of the parent.

The impact of preference shares

Requirement to adjust for amounts relating to preference shares

The profit or loss attributable to the equity holders of the parent entity will already be after deduction of dividends and other profit or loss effects relating to preference shares classified as liabilities. For the purposes of calculating basic EPS, the profit or loss attributable to the equity holders of the parent entity is further adjusted for the following after-tax amounts relating to preference shares classified as equity:

• preference dividends;
• differences arising on the settlement of such preference shares; and
• other similar effects of such preferences shares.

Preference dividends

The after-tax amount of preference dividends to be deducted in determining the profit or loss attributable to ordinary equity holders of the parent entity is:

• for non-cumulative preference shares classified as equity, the after-tax amount of preference dividends declared in respect of the period; and
• for cumulative preference shares classified as equity, the full after-tax amount of the required preference dividends for the period (whether or not declared). This does not include amounts paid or declared on cumulative preference shares in the current period in respect of previous periods.

An entity that has preference shares in issue, will classify those shares as financial liabilities or equity under IAS 32. An adjustment is required to the profit or loss for the period, to arrive at the profit or loss attributable to ordinary equity holders for the purpose of calculating EPS, if preference shares are classified as equity.

Any dividends and other appropriations would be debited directly to equity under IAS 32. Any dividends or other appropriations for preference shares classified as liabilities should be accounted for as finance costs in arriving at profit or loss for the period. No adjustment is required for the purpose of calculating EPS.

Treatment of preference shares in the EPS calculation An entity has the following preference shares in issue at the end of 20X4: ● 5% redeemable, non-cumulative preference shares; these shares are classified as liabilities. During the year, a dividend was paid on the 5% preference shares. C100,000 ● Increasing-rate, cumulative, non-redeemable preference shares issued at a discount in 20X0, with a cumulative dividend rate from 20X5 of 10%. The shares were issued at C200,000 a discount to compensate the holders, because dividend payments will not commence until 20X5. The accrual for the discount in the current year, calculated using the effective interest method amounted to, say, C18,000. These shares are classified as equity. ● 8% non-redeemable, non-cumulative preference shares. At the beginning of the year, the entity had C100,000 8% preference shares outstanding but, at 30 June 20X4, it repurchased C50,000 of these at a discount of C1,000. C50,000 ● 7% cumulative, convertible preference shares (converted in the year). These shares were classified as equity, until their conversion into ordinary shares at the beginning of the year. No dividend was accrued in respect of the year, although the previous year’s dividend was paid immediately prior to conversion. To induce conversion, the terms of conversion of the 7% convertible preference shares were also amended, and the revised terms entitled the preference shareholders to an additional 100 ordinary shares on conversion with a fair value of C300. nil The profit attributable to ordinary equity holders for the year 20X4 is C150,000. Adjustments for the purpose of calculating EPS are made as follows: C C Profit for the year attributable to the ordinary equity holders 150,000 Amortisation of discount on issue of increasing-rate preference shares 180,0001 Discount on repurchase of 8% preference shares 1,0002 (17,000) Profit attributable to ordinary equity holders for basic EPS 133,0003 -5 Notes 1.The original discount on issue of the increasing-rate preference shares is treated as amortised to retained earnings, and treated as preference dividends for EPS purposes and adjusted against profit attributable to the ordinary equity holders. There is no adjustment in respect of dividends, because these do not commence until 20X5. Instead, the finance cost is represented by the amortisation of the discount in the dividend-free period. In future years, the accrual for the dividend of C20,000 will be deducted from profits. 2.The discount on repurchase of the 8% preference shares has been credited to equity so should be added to profit. 3.The dividend on the 5% preference shares has been charged to the income statement, because the preference shares are treated as liabilities, so no adjustment is necessary to profit. 4. No accrual for the dividend on the 8% preference shares is required, because they are noncumulative. If a dividend had been declared for the year, it would have been deducted from profit for the purpose of calculating basic EPS, because the shares are treated as equity and the dividend would have been charged to equity in the financial statements. 5.The 7% preference shares were converted at the beginning of the year, so there is no adjustment in respect of the 7% preference shares, because no dividend accrued in respect of the year. The payment of the previous year’s cumulative dividend is ignored for EPS purposes, because it will have been adjusted for in the prior year. Similarly, the excess of the fair value of additional ordinary shares issued on conversion of the convertible preference shares over the fair value of the ordinary shares to which the shareholders would have been entitled under the original conversion terms would already have been deducted from profit attributable to the ordinary shareholders, and no further adjustment is required.

The amount of dividends declared in respect of the year should be deducted in arriving at the profit attributable to ordinary shareholders for preference dividends that are non-cumulative.

The dividend for the period should be taken into account, whether or not it has been declared for cumulative preference dividends. If an entity is unable to pay or declare a cumulative preference dividend, the undeclared amount of the cumulative preference dividend (net of tax, if applicable) should still be deducted in arriving at earnings for the purpose of the EPS calculation.

The amount paid is not deducted in arriving at earnings for the purpose of the EPS calculation in the period in which arrears of cumulative preference dividends are paid.

How should other appropriations and adjustments in respect of preference shares treated as liabilities be accounted for? The charges in the income statement in respect of preference shares that are treated as financial liabilities include other elements, such as amortisation of transaction costs and accrual of premium payable on redemption, in addition to the preference and/or participating dividends. These other elements should continue to be deducted in arriving at earnings for EPS calculation purposes. In the year in which the preference shares are redeemed, any premium payable on redemption should be ignored in calculating EPS to the extent that it has been accrued and deducted from earnings in earlier years.

Any original discount or premium is treated as amortised to retained earnings if preference shares are classified as equity, using the effective interest method. This is treated as a preference dividend for the purpose of calculating EPS.

An entity might have issued non-convertible, non-redeemable preference shares at a discount to compensate for non-payment of dividends in earlier years. The discount is amortised to retained earnings. Such shares are often referred to as ‘increasing rate preference shares.

An entity might repurchase preference shares classified as equity. Any excess of the fair value of consideration given over the carrying amount of the shares represents a return to the holders of the preference shares and a charge to retained earnings, and it is included in determining the profit or loss available to ordinary equity holders of the parent entity for the purpose of calculating EPS.

Preference shares classified as equity may be converted early on favourable terms due to changes to the original conversion terms or the payment of additional consideration.

The excess of the fair value of ordinary shares or other consideration paid over the fair value of ordinary shares or other consideration payable under the original terms is included in determining the profit or loss available to ordinary equity holders for the purpose of calculating EPS.

Any excess of the carrying amount of preference shares classified as equity over the fair value of the consideration paid to settle them is included when determining the profit or loss available to ordinary equity holders for the purpose of calculating EPS.

Dividends ‘declared in respect of the period’ For non-cumulative preference shares, dividends ‘declared in respect of the period’ are any dividends on the preference shares that are recognised as a liability during the current period, plus any dividends paid during the period that were not accrued at the end of the prior period. They do not include dividends declared after the end of the period that, in accordance with IAS 10, are not recognised as a liability, or dividends accrued at the end of the prior period whether or not actually paid in the current period.

Liquidating dividends on preference shares – example Company X issued one share of Series A Non-Voting Convertible Preference Shares for CU1 million that has a liquidation preference of CU1 million, plus a 12 per cent cumulative dividend entitlement from the issue date. Company X also issued one share of Series B Non-Voting Convertible Preference Shares for CU2 million that has a liquidation preference of CU2 million, with a non-cumulative dividend entitlement at a rate of 5 per cent per annum plus a 12 per cent cumulative dividend entitlement from the issue date. All payments on both preference shares are at the discretion of Company X and, therefore, they are both presented as equity. In calculating ‘profit or loss attributable to ordinary shareholders’ for EPS purposes, Company X should not deduct the 12 per cent cumulative liquidating dividends for either the Series A or Series B shares. Although cumulative, the liquidating dividends are intended to provide a preference to the Series A and Series B preference shareholders in the event of a liquidation of Company X and, therefore, should not be adjusted in determining profit or loss attributable to ordinary shareholders until a liquidating event occurs.

Differences arising on the settlement of preference shares

Differences may arise on the settlement of preference shares in the following circumstances:

• when the preference shares are repurchased under a tender offer, and the fair value of the consideration paid to the preference shareholders differs from their carrying amount. Any excess of the fair value of the consideration over the carrying amount represents a return to the holders of the preference shares and is adjusted against retained earnings in the period of repurchase. This amount is deducted in calculating the earnings numerator for basic EPS. Any excess of the carrying amount of the shares over the fair value of the consideration is added in calculating the earnings numerator for basic EPS; and
• on early conversion of convertible preference shares, as a result of favourable changes to the original conversion terms or the payment of additional consideration. The excess of the fair value of the ordinary shares or other consideration paid over the fair value of the ordinary shares issuable under the original conversion terms is a return to the preference shareholders, and is deducted in calculating the earnings numerator for basic EPS.

Premium paid on redemption of tracking shares Some entities issue classes of shares characterised as ‘tracking’ or ‘targeted’ shares to measure the performance of a specific business unit or activity of the entity. The terms of tracking shares often allow the entity, at its option, to exchange or redeem one class of tracking shares for another class of tracking shares, such that the entity would have one less class of ordinary shares outstanding. The terms of this feature generally require a premium to be paid to the class being redeemed as a result of the transaction. In the period of redemption, profit or loss attributable to ordinary shareholders (whose shares are being used for the redemption) should be reduced by the premium over market price paid to redeem the tracking shares. The holders of the tracking shares being redeemed have received a benefit that constitutes an additional contractual return to them. The following example illustrates the treatment of this premium for the purpose of calculating EPS. Company X has two classes of ordinary shares outstanding that separately track the results of operations of two different businesses, Company A and Company B. Company X decides to redeem all of its outstanding Company B tracking shares in exchange for Company A tracking shares. The terms of the Company B shares being redeemed provide Company X with the right to redeem the Company B tracking shares, at its discretion, by issuing its Company A tracking shares with a market price equal to a 15 per cent premium over the market price of the Company B tracking shares at the time of redemption. As such, the fair value of Company A tracking shares to be exchanged for the Company B tracking shares will exceed the fair value of the Company B tracking shares by 15 per cent on the date the redemption is announced. When calculating basic EPS for the period in which the Company B tracking shares are redeemed, the profit or loss attributable to the Company A tracking shareholders should be reduced by the amount of the 15 per cent premium.

Premium paid by a parent to redeem preference shares issued by a subsidiary – example Company P, a publicly traded entity, has a wholly-owned subsidiary, Company S. Company S has preference shares outstanding held by parties outside the group that are classified as equity. The preference shares are redeemable at the option of Company S (with Company P’s consent) in whole or in part, at varying dates, at CU100 per share plus accumulated and unpaid distributions to the date fixed for redemption. Company P decides to acquire Company S’s preference shares. The premium paid by Company P to the third-party preference shareholders on the acquisition of Company S’s preference shares is not recognised in the consolidated statement of comprehensive income because this represents a transaction with shareholders. Accordingly, the consolidated entity does not recognise in its statement of comprehensive income any gain or loss from the acquisition. The premium paid to redeem Company S’s preference shares should be deducted in computing profit or loss attributable to ordinary shareholders in the calculation of EPS in Company P’s consolidated financial statements. The premium represents a return on investment to the holders of the preference shares and is not available to ordinary shareholders, similar to preference share dividends and accretion charges. Consistent with the view that the subsidiary’s preference shares represent a non-controlling interest in the parent’s consolidated financial statements, dividends or accretions to a redemption amount should adjust earnings allocated to non-controlling interests when computing profit or loss attributable to ordinary shareholders of Company P in the calculation of earnings per share in Company P’s consolidated financial statements.

Other effects of preference shares

The results for the period will also be adjusted for other appropriations recognised in respect of preference shares classified as equity. For example, preference shares may provide for a low initial dividend to compensate the entity for selling the shares at a discount, or an above-market dividend in later periods to compensate investors for purchasing the shares at a premium. (These are sometimes called increasing rate preference shares.)

When such shares are classified as equity, the discount or premium on issue is amortised to retained earnings using the effective interest method and treated as a preference dividend for the purposes of calculating basic earnings per share.

Increasing rate preference shares Entity D issued non-convertible, non-redeemable class A cumulative preference shares of CU100 par value on 1 January 20X1. The class A preference shares are entitled to a cumulative annual dividend of CU7 per share starting in 20X4. At the time of issue, the market rate dividend yield on the class A preference shares was 7 per cent a year. Thus, Entity D could have expected to receive proceeds of approximately CU100 per class A preference share if the dividend rate of CU7 per share had been in effect at the date of issue. In consideration of the dividend payment terms, however, the class A preference shares were issued at CU81.63 per share, i.e. at a discount of CU18.37 per share. The issue price can be calculated by taking the present value of CU100, discounted at 7 per cent over a three-year period. Because the shares are classified as equity, the original issue discount is amortised to retained earnings using the effective interest method and treated as a preference dividend for earnings per share purposes. To calculate basic earnings per share, the following imputed dividend per class A preference share is deducted to determine the profit or loss attributable to ordinary equity holders of the parent entity: Year Carrying amount of class A preference shares on 1 January Imputed dividend a Carrying amount of class A preference shares 31 December b Dividend paid CU CU CU CU 20X1 81.63 5.71 87.34 – 20X2 87.34 6.12 93.46 – 20X3 93.46 6.54 100.00 – Thereafter 100.00 7.00 107.00 (7.00) A At 7% B This is before dividend payment.

Contingent dividends on preference shares – example Company X, a publicly traded entity, issued to Company Y convertible preference shares that earn a 7 per cent dividend per year although payment is at the discretion of Company X. Conversion is at Company Y’s option. Company X may elect to redeem the preference shares at any time. The terms of the preference shares state that if Company Y were to convert the preference shares into a fixed number of ordinary shares of Company X, then Company Y would not receive any preference share dividends, including any cumulative dividends in arrears. Conversion is at a fixed conversion price determined at the date of issue. If, however, Company X redeems the shares from Company Y, then Company Y would receive cumulative dividends, including any in arrears. Company X classifies the convertible preference shares as equity. IAS 33 requires that preference share dividends should be subtracted from net income available to ordinary shareholders for the purposes of calculating basic EPS. IAS 33 clarifies that the dividends to be subtracted are (1) the after-tax amount of any preference dividends on non-cumulative shares declared in respect of the period, and (2) the after-tax amount of any preference dividends for cumulative preference shares required for the period, regardless of whether the dividends have been declared. However, IAS 33 does not address how to account for dividend payments contingent on future events. In Company X’s situation, the future event is whether Company X redeems the preference shares or Company Y converts the preference shares. The dividends potentially will be paid in the future unless Company Y elects to convert. If Company Y elects to convert the preference shares into ordinary shares of Company X, Company Y no longer has the right to receive the preference share dividends, including any in arrears. By analogy to how IAS 33 treats convertible debt when interest is accrued until conversion occurs, dividends on the preference shares for each period should be deducted from income available to ordinary shareholders for computing basic EPS until the conversion occurs, regardless of whether the dividends have been declared. If conversion occurs, thus removing Company Y’s right to receive the dividends, including those in arrears, the EPS calculation should be adjusted in accordance with IAS 33 in the period that conversion occurs. Company X should not restate prior EPS amounts.

Preference shares issued by a subsidiary to its parent – example Company S is a majority-owned subsidiary of Company P. Company P issued CU100 million 5 per cent preference shares to the public. In connection with the offering, Company S issued CU100 million 5 per cent preference shares to Company P (with the same terms and features as the preference shares issued to the public) primarily as a means of funding the dividends on the preference shares issued to the public, because Company P is a holding company with no independent operations or cash flows. The preference shares issued to the public are not convertible, participating, or mandatorily redeemable, nor are any of the shares held by the non-controlling interests in Company S. The preference shares issued by Company P to the public reduce basic and diluted EPS because the dividends on those shares are deducted to determine the numerator for both measures. The preference shares issued by Company S do not affect the computation of basic and diluted EPS in Company P’s consolidated financial statements because preference shares issued by a subsidiary to its parent and related dividends are eliminated on consolidation.

Different classes of shares

Earnings per share are required to be presented for each class of ordinary shares

IAS 33 requires that EPS should be calculated and presented for each class of ordinary shares that has a different right to share in the profit for the period.

Participating equity instruments and two-class ordinary shares

The application guidance set out in IAS 33 discusses the circumstances when the equity of an entity includes:

• instruments that participate in dividends with ordinary shares according to a predetermined formula (e.g. two for one) with, at times, an upper limit on the extent of participation (e.g. up to, but not beyond, a specified amount per share); and
• a class of ordinary shares with a different dividend rate from that of another class of ordinary shares, but without prior or senior rights.

Instruments that participate in dividends with ordinary shares according to a predetermined formula are described as ‘participating equity instruments’. When there is a class of ordinary shares classified as equity but entitled to a different dividend rate from that for another class of ordinary shares classified as equity, these are described as ‘two-class ordinary shares’.

Care is required in determining whether an instrument is a participating equity instrument. An instrument may participate in dividends with ordinary shares according to a predetermined formula, but this of itself does not mean it is a participating equity instrument. Such instruments may not meet the definition of ordinary shares because they are not subordinate to all other classes of equity instrument.

For the purposes of calculating diluted EPS, conversion is assumed for those instruments described in IAS 33 that are convertible into ordinary shares, if the effect is dilutive. For those instruments that are not convertible into a class of ordinary shares, profit or loss for the period is allocated to the different classes of shares and participating equity instruments in accordance with their dividend rights or other rights to participate in undistributed earnings.

In order to allocate the earnings of the entity between these classes of shares, the following guidance is provided:

• the profit or loss attributable to ordinary equity holders of the parent entity is adjusted by the amount of dividends declared in the period for each class of shares and by the contractual amount of dividends (or interest on participating bonds) that must be paid for the period (e.g. unpaid cumulative dividends);
• the remaining profit or loss is allocated to ordinary shares and participating equity instruments to the extent that each instrument shares in earnings, as if all of the profit or loss for the period had been distributed. The total profit or loss allocated to each class of equity instrument is determined by adding together the amount allocated for dividends and the amount allocated for a participation feature; and
• the total amount of profit or loss allocated to each class of equity instrument is divided by the number of outstanding instruments to which the earnings are allocated to determine the earnings per share for the instrument.

The following example, reproduced from Example 11 of the illustrative examples accompanying IAS 33, illustrates the required treatment.

Example Participating equity instruments and two-class ordinary shares Profit attributable to equity holders of the parent entity CU100,000 Ordinary shares outstanding 10,000 Non-convertible preference shares 6,000 Non-cumulative annual dividend on preference shares (before any dividend is paid on ordinary shares) CU5.50 per share After ordinary shares have been paid a dividend of CU2.10 per share, the preference shares participate in any additional dividends on a 20:80 ratio with ordinary shares (ie after preference and ordinary shares have been paid dividends of CU5.50 and CU2.10 per share, respectively, preference shares participate in any additional dividends at a rate of one-fourth of the amount paid to ordinary shares on a per-share basis). Dividends on preference shares paid CU33,000 (CU5.50 per share) Dividends on ordinary shares paid CU21,000 (CU2.10 per share) Basic earnings per share is calculated as follows: CU CU Profit attributable to equity holders of the parent entity 100,000 Less dividends paid:     Preference 33,000     Ordinary 21,000 (54,000) Undistributed earnings 46,000 Allocation of undistributed earnings: Allocation per ordinary share = A Allocation per preference share = B; B = ¼ A (A × 10,000) + (1/4 × A × 6,000) = CU46,000 A = CU46,000/(10,000 + 1,500) A = CU4.00 B = ¼ A B = CU1.00 Basic per share amounts: Preference shares Ordinary shares Distributed earnings CU5.50 CU2.10 Undistributed earnings CU1.00 CU4.00 Totals CU6.50 CU6.10

Calculation of profit attributable to ordinary shareholders – effect of tax deductions for payments to holders of participating equity instruments – example Entity A has two classes of shares in issue: ordinary shares with rights to discretionary dividends declared by Entity A; and ‘participating equity instruments’ with a right to dividend payments of (in aggregate) 10 times any dividend paid to ordinary shareholders. As discussed, this form of ‘dividend pusher’ mechanism is consistent with Entity A having an unconditional right to avoid an outflow of cash (Entity A could avoid making payments on the participating equity instruments by not declaring a dividend on the ordinary shares). As such, the participating equity instruments are classified as equity. Entity A is also eligible for a tax deduction on payments of dividends to holders of participating equity instruments. The terms of the participating equity instrument state that the benefit of these deductions accrues to ordinary shareholders (i.e. the dividend due to holders of participating equity instruments is calculated on the basis of dividend payments excluding the effect of this deduction). Entity A pays tax at a rate of 30 per cent and its profit and dividend payments in each of Years 1, 2 and 3 are as follows. Year 1 Year 2 Year 3 CU CU CU Profit (excluding effect of tax deductions for dividends) 330 550 110 Dividends paid to ordinary shareholders (before tax deduction) – 30 60 Dividends paid to holders of participating equity instruments – 300 600 Total dividends paid (before tax deduction) – 330 660 Tax benefit (30% of dividends paid to holders of participating equity instruments) – 90 180 Dividends paid to ordinary shareholders in respect of tax benefit – 90 180 Total dividends paid to ordinary shareholders – 120 240 Total dividends paid to holders of participating equity instruments – 300 600 Total dividends paid – 420 840 Regardless of the level of distributions actually made in each reporting period, Entity A should calculate the ‘profit attributable to ordinary shareholders’ for the purpose of its earnings per share calculations assuming full distribution of profits, including the effect of any resulting tax deductions. This ‘hypothetical distribution’ approach is required by IAS 33 and, as reported in the June 2017 IFRIC Update, the IFRS Interpretations Committee concluded that a tax benefit that is a direct consequence of a distribution is included in this calculation. This is the case regardless of whether the tax benefit, when it arises, is recognised in equity or in profit or loss. In the circumstances under consideration, this results in the following ‘profit attributable to ordinary shareholders’ for each of Years 1, 2 and 3 (for the purposes of illustration, it is assumed that the tax benefit of dividends paid to holders of participating instruments is recognised in profit or loss). Year 1 Year 2 Year 3 CU CU CU Profit (excluding effect of tax deductions for dividends) 330 550 110 Tax benefit from payment of dividends to holders of participating equity instruments – 90 180 Profit after tax benefit 330 640 290 Dividends paid to ordinary shareholders – (120) (240) Dividends paid to holders of participating equity instruments – (300) (600) Remaining profit 330 220 (550) In accordance with IAS 33, the remaining profit is then allocated to each class of share in the 10:1 ratio that would apply if all the profit or loss for the period had been distributed. Year 1 Year 2 Year 3 CU CU CU Remaining profit 330 220 (550) Allocation to holders of participating equity instruments 300 200 (500) Allocation to ordinary shareholders 30 20 (50) Tax benefit (30% of hypothetical allocation to holders of participating equity instruments) 90 60 (150) Total allocation of remaining profit to ordinary shareholders 120 80 (200) Also in accordance with IAS 33, the profit attributable to ordinary shareholders is then calculated by adding the dividends declared in the period to the remaining profit allocated to ordinary shareholders. Year 1 Year 2 Year 3 CU CU CU Dividends declared to ordinary shareholders – 120 240 Allocation of remaining profit to ordinary shareholders 120 80 (200) Profit attributable to ordinary shareholders 120 200 40 As illustrated below, the profit attributable to ordinary shareholders can be seen as reflecting the ordinary shareholders’ share of profit for the year plus the tax benefit that would arise from full distribution of that profit. Year 1 Year 2 Year 3 CU CU CU Profit (excluding effect of tax deductions for dividends) 330 550 110 Hypothetical dividends paid to ordinary shareholders (before tax deduction) (A) 30 50 10 Hypothetical dividends paid to holders of participating equity instruments 300 500 100 Total hypothetical dividends paid (before tax deduction) 330 550 110 Hypothetical tax benefit (30% of hypothetical dividends paid to holders of participating equity instruments) (B) 90 150 30 Profit attributable to ordinary shareholders (A + B) 120 200 40

Basic earnings per share and mandatorily convertible bonds – example Entity A has issued a mandatorily convertible instrument that carries a fixed coupon payable up to the date the instrument converts into a fixed number of Entity A’s equity shares. At initial recognition, the instrument is classified as a compound instrument in accordance with IAS 32 with separate recognition of: a liability equal to the present value of the interest payments due under the instrument (the liability component); and an equity component measured at the fair value of the instrument as a whole less the amount recognised as a liability. Subsequently, the liability component is measured at amortised cost in accordance with IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39) and the effective interest rate on the financial liability is recognised as an interest expense in profit or loss. IAS 33 requires “ordinary shares that will be issued upon the conversion of a mandatorily convertible instrument [to be] included in the calculation of basic earnings per share [EPS] from the date the contract is entered into”. Therefore, when calculating basic EPS in the periods between the date of issue of the mandatorily convertible instrument and the date of conversion, Entity A adjusts the denominator for the number of shares to be delivered under the terms of the instrument. When calculating basic EPS in the periods between the date of issue of the mandatorily convertible instrument and the date of conversion, Entity A should not also adjust the earnings numerator by adding back the interest expense recognised in profit or loss in respect of the liability component of the instrument. The earnings numerator for basic EPS should be after deduction of the interest expense recognised in respect of the liability component. Although IAS 33 specifically refers to adjustments to the EPS denominator for mandatorily convertible instruments, no reference is made to such instruments in the paragraphs of the Standard (IAS 33) dealing with adjustments to the earnings numerator; therefore, IAS 33 does not require or permit an adjustment to earnings in respect of the interest cost recognised in profit or loss. This is consistent with the requirements of IAS 33, which states as follows. “All items of income and expense attributable to ordinary equity holders of the parent entity that are recognised in a period, including tax expense and dividends on preference shares classified as liabilities are included in the determination of profit or loss for the period attributable to ordinary equity holders of the parent entity.”

Number of shares

Weighted average number of ordinary shares outstanding during the period

The number of shares used in the denominator for basic EPS should be the weighted average number of ordinary shares outstanding during the period.

The weighted average number of ordinary shares outstanding during the period is the number of shares outstanding at the beginning of the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor.

Adjusting the number of ordinary shares during the period on a time-weighted basis ensures that changes in the capital structure of the entity do not result in misleading measures of EPS being reported. Time apportioning the number of shares ensures that an increase in resources due to a capital raising is apportioned to the period when that capital is available for generating earnings. Conversely, an outflow of resources due to a reduction in capital (e.g. a share buy-back) is apportioned to the period when the resources used for buying capital are no longer available for generating earnings.

The calculation of the weighted average is based on all ordinary shares outstanding during the period. Whether or not a particular class or tranche of shares ranked for dividends in respect of the period is irrelevant (except in the case of partly paid shares).

The time-weighting factor is:

Although the Standard defines the time-weighting factor as being determined on a daily basis, it acknowledges that a reasonable approximation of the weighted average is adequate in many circumstances. Depending on the relative size of share movements, this might, for example, be based on the number of months for which shares were outstanding.

The following example, reproduced from Example 2 of the illustrative examples accompanying IAS 33, illustrates the calculation of the weighted average number of shares. Note that outstanding shares are calculated on a monthly, rather than a daily, basis.

Weighted average number of ordinary shares Shares issued Treasury shares(a) Shares outstanding 1 January 20X1 Balance at beginning of year 2,000 300 1,700 31 May 20X1 Issue of new shares for cash 800 – 2,500 1 December 20X1 Purchase of treasury shares for cash     – 250 2,250 31 December 20X1 Balance at year end 2,800 550 2,250 (a) Treasury shares are equity instruments reacquired and held by the issuing entity itself or by its subsidiaries. Calculation of weighted average: (1,700 × 5/12) + (2,500 × 6/12) + (2,250 × 1/12) = 2,146 shares or (1,700 × 12/12) + (800 × 7/12) – (250 × 1/12) = 2,146 shares

Timing for inclusion of new shares

Timing for inclusion of new shares – general

IAS 33 also provides guidance on determining the date from which the shares are to be considered outstanding and therefore included in the weighted average number of shares for the EPS calculation.

In general, shares are to be considered outstanding from the date that the consideration for the shares becomes receivable, which is usually the date of their issue. The specific terms and conditions attaching to the issue should be examined, however, to ensure that the substance of any contract associated with the issue prevails over its legal form.

The following table illustrates the most common circumstances in which shares are issued, and the date from which such shares are to be considered outstanding, as required by IAS 33.

Shares issued for cash

Even with the guidance outlined, some care may be required in determining the date from which shares issued for cash should be included. The following example illustrates one such circumstance.

Shares issued for cash – example An entity is making a rights issue. Provisional allotment letters for the new shares are posted on 19 October 20X1. Shareholders wishing to take up their entitlement must return the provisional allotment letter together with a remittance for the full amount payable so as to be received not later than 3pm on 17 November 20X1. Consequently, the entity will receive cash on a number of days, up to and including 17 November 20X1. IAS 33 requires that shares issued in exchange for cash be included in the weighted average calculation from the date the cash is receivable. In this example, 17 November 20X1 is the date the cash is receivable (because that is the date by which the entity has asked to receive the cash and if no cash was received until that date, the entity could still validly issue the shares). Accordingly, the shares should be included in the weighted average calculation from 17 November 20X1 (the end of the subscription period). Arrangements for share issues are often more complex in practice and the date the cash is receivable is not necessarily the end of the subscription period in all cases. All facts and circumstances (including an analysis of the legal framework) should be considered in order to determine the date the cash is receivable.

Business combinations

When ordinary shares are issued as part of the consideration transferred in a business combination, they are included in the weighted average number of shares from the acquisition date (which is defined in IFRS 3 as the date on which the acquirer obtains control of the acquiree). This is because the acquirer incorporates into its statement of comprehensive income the results of the acquired entity’s operations from that date.

Partly paid shares

Partly paid shares are treated as a fraction of an ordinary share to the extent that they are entitled to participate in dividends relative to a fully paid-up ordinary share during the period.

As can be seen from the table set out, the thrust of IAS 33 is to include shares in the calculation of EPS from the date the share proceeds start to generate earnings. The Standard’s treatment of partly paid shares is therefore surprising. Rather than treat partly paid shares as a fraction of a share based on the proportion of the proceeds received, the Standard requires them to be treated as a fraction of a share to the extent that they are entitled to participate in dividends relative to a fully paid-up ordinary share during the period. In contrast, shares that are fully paid-up are included in the calculation from the date the consideration is receivable, irrespective of whether they rank for dividend. For example, two CU1 shares, each not ranking for dividend, one CU1 paid and the other CU0.99 paid, will be treated differently in the computation of basic EPS. Both have contributed to earnings but, while the first is included in basic EPS, the second is excluded.

Partly paid shares – example At 1 January 20X2, an entity has 1,000 ordinary shares outstanding. It issues 400 new ordinary shares at 1 October 20X2. The subscription price is CU2.00 per share. At the date of issue, each shareholder pays CU0.50. The balance of CU1.50 per share will be paid during 20X3. Each partly paid share is entitled to dividends in proportion to the percentage of the issue price paid up on the share. In accordance with IAS 33 (see above) and IAS 33:A16, the new shares issued should be included in the calculation of the weighted average number of shares as a fraction of a share to the extent that they are entitled to participate in dividends relative to a fully paid-up ordinary share during the period. In this example, dividend rights are in proportion to the percentage of the issue price paid on the share. The calculation of the weighted average number of shares is therefore as follows. Date/description Shares Fraction of period Weighted average shares At 1 January 20X2 1,000 9/12 750 Issue of new shares for cash*   100 At 1 October 20X2 1,100 3/12   275 Weighted average number of shares 1,025 *  CU0.50/CU2.00 × 400 shares = 100 shares

Contingently issuable shares For a variety of reasons, an entity may issue instruments that oblige it to issue ordinary shares in the future upon the resolution of specified contingencies. Such circumstances may include (1) issuing contingent share purchase warrants to customers that become exercisable based on the attainment of a certain level of purchases, or (2) the guarantee of a minimum share price for shares issued by an acquirer in a business combination that may result in issuing additional shares if the share price is less than the guaranteed price. Contingent share agreements are usually based on the passage of time combined with other conditions (such as the market price of an entity’s shares or a specified level of earnings). Contingently issuable ordinary shares include shares that (1) will be issued in the future upon the satisfaction of specified conditions, or (2) have been placed in escrow and all, or part, must be returned if specified conditions are not met, or (3) have been issued but the holder must return all, or a portion, of the shares, if specified conditions are not met.

Contingency based on an event – example A Limited acquires B Limited on 1 January 20X1. A Limited agrees to issue 100,000 shares to the vendor on 1 January 20X3 if, at any point prior to that date, a new product developed by B Limited is granted a licence. A Limited’s year end is 31 December. The 20X1 financial statements are approved on 22 March 20X2. The product is granted a licence on 4 March 20X2. The 100,000 shares are excluded from the basic EPS calculations for 20X1 and will be included in the basic EPS calculations for 20X2 on a time-apportioned basis as if the shares had been issued on 4 March 20X2 (the date the licence was granted). The ordinary shares are deemed outstanding for basic EPS purposes from 4 March 20X2, even though they will not be issued until 1 January 20X3, because after 4 March 20X2 they are no longer contingently issuable (the only ‘contingency’ that remains is the passage of time).

Contingency based on profits in specified periods – example Company X, a publicly traded entity reporting on a calendar year basis, purchased Subsidiary Y on 1 January 20X1 for CU100 million plus 20,000 Company X ordinary shares for each year within the next five years in which Subsidiary Y has a profit after tax of CU10 million or more. If any ordinary shares are required to be issued, they will be issued on 1 January 20X6. If Company Y’s profit after tax for the year ended 31 December 20X1 is CU12 million, the shares should be included in the denominator for the purpose of calculating basic EPS for only that portion of the year for which the contingency was resolved (i.e. nothing could happen that would cause Company X not to issue the shares). Because the earliest date on which the amount for profit after tax for the year can be calculated is 31 December, the contingency can only be resolved on that date. Therefore, the shares will be included in the denominator for the purpose of calculating basic EPS as if they are issued on 31 December 20X1 (from that date, they are no longer contingently issuable shares). However, they will have no impact on basic EPS for the 20X1 reporting period because they are treated as issued on the last day of that reporting period (and, consequently, the time apportioned to the issue of the shares is nil). In 20X2, the ordinary shares to be issued in respect of the 20X1 earnings contingency should be treated as outstanding for the whole of the 20X2 reporting period. Because there are five separate measurement periods for the contingency, each measurement period in which a finite number of ordinary shares may be issued should be treated as a separate contingency and evaluated for basic EPS based on whether Company X may be required to issue the ordinary shares for each period on a stand-alone basis. If the purchase agreement required Company X to issue 100,000 Company X ordinary shares if Subsidiary Y achieves CU50 million in cumulative profits at the end of five years, no shares would be included for the purposes of calculating basic EPS until the end of the contingency period, and then only if Subsidiary Y had cumulative earnings in excess of CU50 million.

Contingency based on average profits – example A Limited acquires B Limited on 1 January 20X1. A Limited agrees to issue 100,000 shares to the vendor on 1 January 20X4 if B Limited’s profits for the three years to 31 December 20X3 average CU10 million or more. B Limited’s profits for 20X1 and 20X2 are CU17 million each year. The shares are excluded from the calculation of basic EPS for both 20X1 and 20X2. Even if profits are expected for the year 20X3, such that the earnings condition will be met, the shares are excluded from the calculation of basic EPS because it is not certain that all of the necessary conditions will be satisfied until the end of the contingency period; it is possible (although unlikely) that a loss could be made in 20X3 and the earnings condition (for the three years) will not be met.

Contingency based on continuing employment – example Company M, a publicly traded entity, has a mandatory deferred compensation plan whereby covered employees are required to defer the amount of compensation payable in one calendar year in excess of CU500,000 until completion of the deferral period. The deferral period ends when the employee ceases to earn CU500,000 annually or reaches the defined retirement age as an employee of Company M. If the employment is terminated or the employee resigns, he/she is not eligible to receive any distribution under the plan. The compensation deferred under the plan is only payable to the participant in Company M’s ordinary shares over a five-year period once the participant is eligible to receive the distribution. An employee’s deferred compensation is held in an escrow account until the individual is eligible to receive distributions. Distributions from the account are based on the equivalent number of ordinary shares that the cash value of the distribution would convert to, based on the closing price of the shares for the trading day preceding the distribution. The ordinary shares issuable under the plan are considered contingently issuable for the purpose of computing basic EPS, because the ordinary shares will only be earned and, therefore, become issuable if the employee (1) neither has his/her employment terminated nor resigns, and (2) either retires in the employment of Company M or has annual earnings fall below CU500,000. Accordingly, during the deferral period, the ordinary shares issuable under the plan should be excluded from the denominator in computing basic EPS because there is still the possibility that the conditions for the issue of the shares to the employee will not be met.

Contingently issuable shares Ordinary shares outstanding during 20X1 1,000,000 (there were no options, warrants or convertible instruments outstanding during the period) An agreement related to a recent business combination provides for the issue of additional ordinary shares based on the following conditions: 5,000 additional ordinary shares for each new retail site opened during 20X1 1,000 additional ordinary shares for each CU1,000 of consolidated profit in excess of CU2,000,000 for the year ended 31 December 20X1 Retail sites opened during the year: one on 1 May 20X1 one on 1 September 20X1 Consolidated year-to-date profit attributable to ordinary equity holders of the parent entity: CU1,100,000 as of 31 March 20X1 CU2,300,000 as of 30 June 20X1 CU1,900,000 as of 30 September 20X1 (including a CU450,000 loss from a discontinued operation) CU2,900,000 as of 31 December 20X1 Basic earnings per share First quarter Second quarter Third quarter Fourth quarter Full year Numerator (CU) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000 Denominator: Ordinary shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Retail site contingency – 3,333a 6,667b 10,000 5,000c Earnings contingencyd         –         –         –         –         – Total shares 1,000,000 1,003,333 1,006,667 1,010,000 1,005,000 Basic earnings per share (CU) 1.10 1.20 (0.40) 0.99 2.89 A 5,000 shares × 2/3 B 5,000 shares + (5,000 shares × 1/3) C (5,000 shares × 8/12) + (5,000 shares × 4/12) D The earnings contingency has no effect on basic earnings per share because it is not certain that the condition is satisfied until the end of the contingency period. The effect is negligible for the fourth-quarter and full-year calculations because it is not certain that the condition is met until the last day of the period.

Contingently returnable shares – example Company X granted options to its employees. The options vest over a four-year period. However, the employees may exercise their options at any time before their vesting. If an employee initiates this early exercise provision, the employee will receive restricted ordinary shares in Company X that vest under the same schedule as the employee’s original option grants. Shares that are contingently returnable (e.g. subject to repurchase if employment is terminated or the employee resigns prior to the shares vesting fully) should not be considered outstanding for the purposes of computing basic EPS until all necessary conditions that could require return of the shares have been satisfied (i.e. the shares are fully vested). The contingently returnable shares issued to the employee in the circumstances described should be excluded from the denominator in calculating basic EPS.

Deferred shares Although this date will often coincide with the issue date of the shares, this will not be so in the case of deferred shares. Nevertheless, if an asset is acquired, or a service is received, and the cost is to be satisfied by shares to be issued at a future date, then the deferred shares will be included in the calculation of EPS from the date of recognition of the asset or service, which is the consideration for the shares. Deferred shares typically arise in the context of business combinations. As discussed, for a business combination, the shares issued are included in EPS calculations from the acquisition date (i.e. the date from which the results of the acquiree are included in the consolidated statement of comprehensive income). The fact that the issue of some of those shares has been deferred is irrelevant – they are included in the EPS denominator immediately, provided that their issue is not subject to any conditions. For example, A Limited might acquire B Limited, paying 500,000 shares at the date of acquisition and a further 100,000 shares one year after the date of acquisition. All 600,000 shares will be included in the calculation of basic EPS from the date that B Limited is brought into A Limited’s consolidated financial statements if the issue of the shares is not subject to any conditions other than the passage of time. An agreement for the acquisition of a business may provide for further shares to be issued, but with the number of shares yet to be determined. For example, the agreement may provide that shares valued at CU50 million on a specified future date will be issued, the number of shares to be determined by dividing CU50 million by the share price on the specified future date. Although the number of shares to be issued is uncertain, there are no circumstances under which the shares will not be issued. Nevertheless, IAS 33 indicates that such shares are contingently issuable shares. Because the obligation to issue shares to a particular value is a financial liability, no equity instrument exists until the end of the contingency period. Such shares will, however, affect the calculation of diluted EPS.

Redeemable ordinary shares – example Company B, a publicly traded entity, issued redeemable ordinary shares that contain a redemption provision entitling the holder of the ordinary shares to put the shares at fair value to Company B five years after the issuance of the shares, or at any time thereafter. The redeemable ordinary shares represent approximately 20 per cent of total ordinary shares in issue. The redeemable ordinary shares do not meet the definition of equity under IAS 32 because they are not the most subordinate instruments issued by the entity (i.e. the non-redeemable ordinary shares are more subordinate). Under IAS 32, the redeemable ordinary shares are classified as financial liabilities because the entity has an obligation to deliver cash or other financial assets equal to the redemption price. The shares should not be included as outstanding ordinary shares (i.e. included in the denominator) in the calculation of basic EPS because, not being equity instruments, they do not meet the definition of ordinary shares under IAS 33. The redeemable ordinary shares are not ordinary shares during their life because they are not classified as equity (due to the presence of the redemption feature). The shares are also not potentially dilutive because, since they do not entitle the holder to ordinary shares, they do not meet the definition of potential ordinary shares in IAS 33.

Forward purchase contracts and written put options When an entity enters into a forward purchase contract or written put option over its own equity that may be gross physically settled (i.e. cash or other financial assets exchanged for the shares repurchased), IAS 32 requires the entity to recognise a financial liability for the present value of the amount payable under the contract (often referred to as the ‘gross obligation’). IAS 33 does not specify whether shares that are subject to a forward purchase contract or written put option when a gross obligation is recognised should be treated for EPS purposes as if the shares were acquired when the entity entered into the contract. The following two alternative accounting policies are acceptable. The accounting policy adopted should be applied consistently and disclosed if material. Alternative 1 Shares subject to a forward purchase contract or written put option should be treated for EPS purposes as outstanding until the date the shares are acquired under the arrangement (i.e. until the consideration is paid and the shares are delivered to the entity). The number of ordinary shares included in the denominator is, therefore, not reduced by the number of shares that will be acquired under the forward contract, or potentially acquired under the written put option if the option is exercised. Therefore, the ordinary shares subject to delivery under the forward contract or written put option are regarded as potential ordinary shares and may affect diluted EPS. Alternative 2 Shares subject to a forward purchase contract or written put option should be treated for EPS purposes as if the shares were acquired when the entity entered into the arrangement. The number of ordinary shares included in the denominator is reduced by the number of shares that will be acquired under the forward contract, or potentially acquired under the written put option if the option is exercised. Because the ordinary shares subject to delivery under the forward contract or written put option are regarded as acquired at the inception of the contract, they are not potential ordinary shares and, therefore, cannot be dilutive. If the written put option expires unexercised, the number of shares will be added back to the denominator on the expiration date.

Bonus issue of shares – example An entity had the following statement of financial position as at 31 December 20X1. CU Net assets 900,000,000 Share capital 100,000,000 Reserves 800,000,000 900,000,000 On 31 December 20X1, and throughout the year then ended, the share capital comprised 100,000,000 CU1 ordinary shares. On 1 January 20X2, the entity makes a 1:1 bonus issue. The statement of financial position immediately after the bonus issue appears as follows. CU Net assets 900,000,000 Share capital 200,000,000 Reserves (800,000,000 – 100,000,000) 700,000,000 900,000,000 The entity’s net assets do not alter and so the revenue generating ability of the entity is unchanged. Assume that the profit attributable to ordinary shareholders for each of 20X1 and 20X2 is CU20 million. If the bonus issue were treated as an issue of shares for consideration, the result would be as follows. 20X2 20X1 Earnings per share CU0.10 CU0.20 Clearly, these results are not comparable – the profits are identical in each of the years and there has been no inflow or outflow of capital; yet the above result gives the appearance that the entity was less profitable in 20X2 than in 20X1. Consequently, in such circumstances, IAS 33 requires that EPS be adjusted as if the proportionate change in the number of ordinary shares outstanding had taken place at the start of the earliest period for which an EPS is presented. Thus, in this example, the EPS calculated in accordance with IAS 33 is as follows. 20X2 20X1 Earnings per share CU0.10 CU0.10

Adjustments required for changes in share capital with no corresponding change in the entity’s resources

The weighted average number of ordinary shares outstanding during the period and for all periods presented should be adjusted for events, other than the conversion of potential ordinary shares, that have changed the number of ordinary shares outstanding without a corresponding change in resources.

If the number of ordinary or potential ordinary shares outstanding increases as a result of a capitalisation, bonus issue or share split, or decreases as a result of a reverse share split, the calculation of basic and diluted earnings per share for all periods presented is adjusted retrospectively.

Bonus issues are not the only example of a change to the number of shares in issue with no corresponding change in resources. The Standard lists the following examples:

• a bonus or capitalisation issue (sometimes referred to as a ‘stock dividend’);
• the bonus element in any other issue (e.g. a bonus element in a rights issue to existing shareholders);
• a share split; and
• a reverse share split (share consolidation).

The list is not exhaustive.

Bonus issues, share splits and share consolidations are all adjusted for in the same way, i.e. by adjusting proportionately the number of shares outstanding as if the bonus issue, share split or share consolidation had occurred at the start of the earliest period for which EPS information is presented. Specific rules are set out for in-substance share buy-backs, for example when a share consolidation is combined with a special dividend.

For rights issues, and bonus elements in any other issue or buy-back, the Standard specifies a formula to be used to calculate the adjustment to the shares in issue before the rights issue.

Bonus issue, share split or share consolidation

The number of ordinary shares outstanding is adjusted proportionately as if the bonus issue, share split or share consolidation had taken place at the start of the earliest period for which EPS is presented.

When an entity has had a bonus issue, share split or share consolidation and presents a five-year historical summary accompanying its IFRS financial statements, it may, subject to local jurisdictional requirements, be most helpful to adjust the basic EPS figure retrospectively for all years presented to enable a fair comparison. Clear disclosure should be given to explain the adjustments made to the basic EPS figure (e.g. by way of a footnote to the five-year historical summary).

 

Bonus issue Profit attributable to ordinary equity holders of the parent entity 20X0 CU180 Profit attributable to ordinary equity holders of the parent entity 20X1 CU600 Ordinary shares outstanding until 30 September 20X1 200 Bonus issue on 1 October 20X1 2 ordinary shares for each ordinary share outstanding at 30 September 20X1 200 × 2 = 400 Basic earnings per share 20X1 CU600/(200 + 400) = CU1.00 Basic earnings per share 20X0 CU180/(200 + 400) = CU0.30 Because the bonus issue was without consideration, it is treated as if it had occurred before the beginning of 20X0, the earliest period presented.

Stock (share) dividends — impact on EPS IAS 33 states that a bonus issue or capitalisation is sometimes referred to as a ‘stock dividend’. If a stock dividend is equivalent to a bonus issue or capitalisation, there has been a change in the number of shares without a corresponding change in resources and IAS 33 requires that EPS be adjusted as if the proportionate change in the number of ordinary shares outstanding had taken place at the start of the earliest period for which EPS is presented. However, care is needed in determining the substance of a stock dividend and, particularly, whether it is equivalent to a bonus issue or capitalisation, i.e. whether there is a change in share capital with no corresponding change in the entity’s resources. For example, if an entity enters into an arrangement that gives the shareholders the right to a dividend in cash or shares at the shareholder’s option, if the cash is forfeited for shares this can be seen as consideration for the issue of shares. If the cash option is equivalent to the fair value of the shares, this is equivalent to a fresh issue of shares at fair value. In such circumstances, this is not equivalent to a bonus issue or capitalisation and, therefore, restatement of the number of shares outstanding is not appropriate.

In-substance share buy-back — impact on EPS In determining the substance of the arrangement, a thorough understanding is required of the transaction(s) and the underlying intentions. IAS 33 cites the combination of a special dividend and a share consolidation as one means of achieving an in-substance share buy-back. Other transactions that achieve the same effect should be treated consistently. To the extent that the effect of the share consolidation is not equal to the value of the special dividend, care will be needed to understand whether all, or part, of the transaction should be treated as an in-substance share buy-back of ordinary shares at fair value. The following example demonstrates why separate accounting for the dividend and the share consolidation would not reflect the substance of a share buy-back. An entity has 500,000 ordinary shares in issue on 1 January 20X1. The entity wishes to effect a share consolidation, as part of which it will pay a special dividend of CU0.60 per share. Accordingly, on 1 July 20X1, when its share price is CU6, it pays a special dividend of CU300,000 and undertakes a 10:9 share consolidation, issuing nine new shares for every 10 old shares held. As a result, only 450,000 shares are in issue for the remainder of 20X1. Although the entity has carried out a share consolidation, the special dividend has led to a corresponding reduction in resources. The overall effect when the share consolidation is combined with the special dividend is that there has been a share repurchase at fair value; if, instead, the entity had gone into the market and purchased 50,000 shares at the market price of CU6 per share, the overall effect would have been the same (i.e. the entity would also have paid out CU300,000 and reduced the number of shares in issue to 450,000). Therefore, the combination of the special dividend of CU300,000 and the share consolidation will result in the share price continuing to be CU6 [((CU6 × 500,000) – CU300,000)/450,000]. The impact of the special dividend and the share consolidation on the value of the shares is neutral. Earnings for 20X1 total CU360,000. Under the approach required by IAS 33, EPS for 20X1 is calculated as follows: CU360,000/[500,000 – (50,000 × 6/12)] = CU0.76 Note that this is different from the EPS figure that would have resulted from separate accounting for the transactions (i.e. treating the special dividend as a dividend and the share consolidation as a share consolidation). Under such an approach (which would be contrary to IAS 33), EPS for 20X1 would have been calculated as follows: CU360,000/450,000 = CU0.80 Further, separate accounting would have led to restatement of EPS for the comparative period, which would be inappropriate.

Rights issues at less than full market price A rights issue is similar to an issue of options to existing shareholders in that it gives each existing shareholder the right, but not the obligation, to purchase additional shares in the entity at a fixed price. Generally, these rights may be sold by the existing shareholders to other shareholders or potential shareholders. When shares are offered to shareholders in a rights issue, the price at which they are offered is often less than the fair value of the shares. Consider, for example, an entity whose shares are priced at CU10. The entity offers its shareholders one new share for every four held, giving 100,000 new shares, at CU8 per share. Share proceeds of CU800,000 will be received and 100,000 shares issued. This is equivalent to issuing 80,000 shares at fair value (of CU10 per share) and making a bonus issue of 20,000 shares. This is the bonus element of the rights issue. When there is a bonus element in a rights issue, EPS is calculated as if the bonus element (but not the total rights issue) arose proportionately at the start of the earliest period for which an EPS is presented. If there is no bonus element in the rights issue, the new shares issued are treated as an issue for cash at fair value (because that is what they are). The specific circumstances of the bonus element in a rights issue are discussed in the application guidance issued with IAS 33, and illustrated in Example 4 of the illustrative examples accompanying IAS 33. If a rights issue is offered to all existing shareholders, the number of ordinary shares outstanding prior to the rights issue is multiplied by the following factor: Fair value per share immediately before the exercise of rights Theoretical ex-rights fair value per share The theoretical ex-rights fair value per share is calculated as: Aggregate fair value of the shares outstanding immediately before the exercise of rights + proceeds from the exercise of rights Number of shares outstanding after the exercise of rights The Standard specifies that when, before the exercise date, the rights are to be publicly traded separately from the shares, the ‘fair value per share immediately before the exercise of rights’ is measured at the close of the last day on which the shares are traded together with the rights.

Rights issue 20X0 20X1 20X2 Profit attributable to ordinary equity holders of the parent entity CU1,100 CU1,500 CU1,800 Shares outstanding before rights issue 500 shares Rights issue One new share for each five outstanding shares (100 new shares total) Exercise price: CU5.00 Date of rights issue: 1 January 20X1 Last date to exercise rights: 1 March 20X1 Market price of one ordinary share immediately before exercise on 1 March 20X1: CU11.00 Reporting date 31 December Calculation of theoretical ex-rights value per share Theoretical ex-rights value per share = CU10.00 Calculation of adjustment factor Calculation of basic earnings per share 20X0 20X1 20X2 20X0 basic EPS as originally reported:   CU1,100/500 shares CU2.20 20X0 basic EPS restated for rights issue:   CU1,100/(500 shares × 1.1) CU2.00 20X1 basic EPS including effects of rights issue:   CU1,500/[(500 × 1.1 × 2/12) + (600 × 10/12)] CU2.54 20X2 basic EPS: CU1,800/600 shares CU3.00

Changes after the reporting period

If there is any change in the number of ordinary or potential ordinary shares, resulting from a capitalisation or bonus issue, a share split or a reverse share split, after the reporting period but before the financial statements are authorised for issue, the per share calculations for those and any prior period financial statements presented should be based on the new number of shares.

Share dividend or share split after the close of the period but prior to the issuance of the financial statements Adjustments to the number of shares outstanding should only be made when the required approval procedures have been completed and the shares are trading on a post-split or dividend basis. For example, no adjustment should be made for proposed bonus issues that are subject to approval at the general meeting at which the financial statements are to be authorised for issue because the shares are not yet trading on a post-split or dividend basis. It is common for trading to occur the day after the dividend or split has been distributed for larger changes in the share capital structure (i.e. those greater than 20 per cent). In situations in which the share dividend or share split is declared and approved prior to, but distributed subsequent to, the date the financial statements are authorised for issue, EPS should be calculated using the number of shares on a pre-split basis, and disclosure should be made of the post-split effects on EPS in the statement of comprehensive income, with footnote disclosure of the significant terms of the pending share dividend or share split. However, because the timing of the switch to trading on a post-split basis is actually governed by the relevant stock exchange, and may vary depending on the size of the change in the share capital structure, it is necessary to monitor the timing of the switch and adjust the EPS reporting accordingly. Financial statements are considered to be ‘authorised for issue’ as at the date they are authorised for distribution for general use in a format that complies with IFRS Standards.

When per-share calculations have been adjusted to reflect changes in the number of shares as described in the previous paragraphs, that fact should be disclosed.

When ordinary or potential ordinary share transactions other than capitalisation issues, share splits and reverse share splits occur after the reporting period but before the financial statements are authorised for issue, disclosure of such events may be required. Such transactions after the reporting period, which do not affect the amount of capital used to produce profit or loss for the period and, consequently, are excluded from the calculation of EPS, include:

• the issue of shares for cash;
• the issue of shares when the proceeds are used to repay debt or preference shares outstanding at the end of the reporting period;
• the redemption of ordinary shares outstanding;
• the conversion or exercise of potential ordinary shares outstanding at the end of the reporting period into ordinary shares;
• the issue of warrants, options or convertible securities; and
• the achievement of conditions that would result in the issue of contingently issuable shares.

Preference shares with characteristics of ordinary shares – example Company B, a publicly traded entity, issued convertible preference shares to Company C with terms substantially the same as ordinary shares. The relevant terms of the preference shares are as follows: not publicly traded; voting rights are limited to specified events, including liquidation; nominal preference in liquidation of CU0.01 per share; each share is convertible into one ordinary share at any time upon the transfer of the preference shares to a third party; antidilution provisions are limited only to share splits and dividends; no rights to preferential or cumulative dividends; preference shares participate rateably with ordinary shares in the event a dividend is declared on ordinary shares; and in addition, ordinary shareholders may participate rateably in the event a dividend is declared on the preference shares. The holder of the preference shares can sell these shares to a third party at any time, at which point the preference shares would convert into ordinary shares with all the characteristics of the current outstanding ordinary shares. The sale of the preference shares is outside of the issuer’s control and there are no restrictions on the sale of the preference shares. Further, preference shares have exactly the same rights to receive dividends as ordinary shares and have no substantive preference (because the liquidation preference of CU0.01 per share is insignificant). Calculating basic EPS involves determining the amount of profit or loss attributable to ordinary shareholders. If the preference shares are not included in the basic EPS calculation, the calculation will be misleading because it will exclude a group of shareholders that currently have identical rights to earnings and dividends as the ordinary shareholders. There is no substantive difference between these preference shares and ordinary shares because the preference shares have the characteristics of non-voting ordinary shares and should be included in basic EPS. To the extent that the preference shares have a different right to share in profit for the period, they should be presented as a separate class of ordinary shares.

Ordinary shares issued to trusts to fund retirement benefit payments In order to fund retirement benefit payments, an entity may issue ordinary shares to a trust which is consolidated in the financial statements of the entity. In many instances, the trusts created do not protect the assets from creditors in the case of the entity’s bankruptcy (e.g. ‘rabbi trusts’). The ordinary shares of the entity are held until the rabbi trust is required to meet retirement obligations, at which time the shares are sold to the public. The shares held by the trust should not be considered outstanding in the computation of EPS in the consolidated financial statements of the entity because the trust is consolidated by the entity and, therefore, the shares are considered treasury shares in the consolidated financial statements until such time as the trust sells the shares outside the group. The shares held by the trust are excluded from the definition of plan assets in IAS 19.

Shares held by a trust for equity-settled share-based payments – example Company B grants its employees share options that will vest after three years of employment. Company B provides money to a trust to purchase shares in Company B in the market. The shares are then used to satisfy the exercise of the share options on vesting. Company B controls the trust and, therefore, consolidates the trust in accordance with IFRS 10. Basic EPS is determined by reference to the weighted average number of ordinary shares outstanding during the reporting period. In the consolidated financial statements of Company B, the shares held by the trust will be recognised as treasury shares. Treasury shares are not included in the denominator for the purpose of calculating basic or diluted EPS because they do not represent ordinary shares outstanding from the date acquired. Diluted EPS is determined by reference to the weighted average number of ordinary shares and potential ordinary shares outstanding during the reporting period. The employees’ share options represent potential ordinary shares that are considered in determining diluted EPS when the potential ordinary shares are dilutive at year end, in accordance with the guidance in IAS 33.

Adjustments required for errors and changes in accounting policies

Basic and diluted earnings per share of all periods presented are also adjusted for:

• the effects of errors; and
• adjustments resulting from changes in accounting policies accounted for retrospectively.

Participating securities and two-class ordinary shares

‘Participating equity instruments’ participate in dividends with ordinary shares according to a predetermined formula (for example, two for one) with, sometimes, an upper limit on participation.

Are puttable financial instruments, which are presented as equity as a result of IAS 32 amendments, considered as ordinary shares for EPS purposes? Under the IAS 32 amendments, certain puttable financial instruments that would otherwise be presented as liabilities are presented as equity. The IAS 32 amendment does not extend to IAS 33, so these puttable financial instruments do not meet the definition of ordinary shares for EPS purposes. Entities can, however, elect to provide EPS figures for these instruments, similar to the disclosures for other participating instruments.

Participating preference shares are classified as either financial liabilities or equity instruments. Both the fixed and the participating element of participating preference shares classified as liabilities would have been charged in arriving at profit or loss attributable to the parent entity. No further adjustments are necessary.

Conversion of participating preference shares is assumed if the effect is dilutive if they are convertible into equity shares. The conversion shares should be included in outstanding ordinary shares for the purpose of calculating diluted EPS.

An entity might have a class of ordinary shares with a different dividend rate from that of another class of ordinary shares, but without prior or senior rights. Such instruments are termed ‘two-class ordinary shares. An entity with such shares would disclose a number of EPS figures, each attributable to different classes of ordinary shares.

The steps that should be followed in allocating earnings for the purpose of calculating basic EPS, where an entity has different instruments that are not convertible into ordinary shares, are as follows:

• Profit or loss attributable to ordinary equity holders is adjusted by the amount of dividends declared in the period for each class of shares and by the contractual amount of dividends that must be paid for the period (for example, unpaid cumulative dividends).

• The remaining profit or loss is allocated to ordinary shares and participating equity instruments to the extent that each instrument shares in earnings or losses. The allocation is made as if all of the profit or loss has been distributed.

• The total profit or loss allocated to each class of equity instrument is determined by adding together the amount allocated for dividends and the amount allocated for a participation feature. The total amount of profit or loss allocated to each class of equity instrument is divided by the number of outstanding instruments to which the profits or losses are allocated (that is, the instruments in that class), to determine the EPS for that class of instrument.

Allocation of earnings for the purpose of calculating basic EPS where an entity has different classes of ordinary shares and participating equity instruments that are not convertible into ordinary shares The following guidance reflects an agenda decision issued by the Interpretations Committee (the Committee) in June 2017 which addressed the treatment of tax benefits from the hypothetical distribution of profits in the calculation of earnings. The Committee also published an illustrative example as educational material to accompany the agenda decision. An entity has two classes of shares in issue: ·        5,000 non-convertible preference shares ·        10,000 ordinary shares The preference shares, which are classified as equity instruments under IAS 32, are entitled to a discretionary dividend of a fixed C5 per share before any dividends are paid on the ordinary shares. Ordinary dividends are then paid in which the preference shareholders do not participate. Each preference share then participates in any additional ordinary dividend above C2 at a rate of 50% of any additional dividend payable on an ordinary share (excluding any distribution relating to the tax benefit). The dividends on the preference shares are deductible for tax purposes and the ordinary shareholders, not the preference shareholders, benefit from the tax benefit. In this example, the distribution to ordinary shareholders during the period does not include the amount that arises from the tax benefit of the distribution to the preference shareholders during the period. The tax benefit of the dividends of the preference shares is included in the profit allocation and in accordance with the constitution of the company, the profits arising from those tax benefits are all allocated to ordinary shareholders. The tax rate is 30 per cent. The entity’s profit for the year, before the tax benefit that arises from paying dividends to the preference shareholders, is C100,000, and dividends of C2 per share are declared on the ordinary shares. The calculation of basic EPS is as follows: C C Profit (before tax benefit) 100,000 Tax benefit from paying dividends to preference shareholders (5,000 x C5 x 30%) 7,500 107,500 Profit (after tax benefit)1 Less dividends payable for the period: Preference (5,000 × C5) 25,000 Ordinary (10,000 × C2) 20,000 (45,000) Remaining profit 62,500 The remaining profit before the tax benefit of paying dividends of C55,000 (C100,000 – C45,000) is allocated between the ordinary shareholders and the preference shareholders. In accordance with the constitution of the company the tax benefit of C7,500 is allocated to the ordinary shareholders. Allocation of remaining profit before tax benefit: Allocation per ordinary share = A Allocation per preference share = B where B = 50% of A (A × 10,000) + (50% × A × 5,000) = C55,000 A = 55,000 / (10,000 + 2,500) = C4.4 B = 50% of A B = C2.2 Allocation of remaining profit: Remaining profit 62,500 To participating equity holders (C2.2 x 5,000) 11,000 To ordinary shareholders Allocation of remaining profit before any tax benefits (C4.4 x 10,000) 44,000 Add – tax benefit on distribution during the period (C25,000 x 30%) 7,500 Add – tax benefit on hypothetical distribution (C11,000 x 30%) 3,300 54,800 Profit or loss attributable to ordinary shareholders: Dividends declared (C2 x 10,000) 20,000 Remaining profit allocated 54,000 74,800   The basic per share amounts are: Preference shares Ordinary shares C per share C per share Distributed earnings 5.00 2.00 Undistributed earnings 2.20 5.482 Totals 7.20 7.48 Proof: (5,000 × C7.2) + (10,000 × C7.48) = C110,800 (Which is equal to total profit after tax of C107,500 plus the tax benefit at 30% on the hypothetical distribution of C11,000 to the preference shareholders) 1 In this example, the tax payment arising from the payment of dividends is recognised in profit or loss. IAS 33 requires an entity to apply the treatment explained in this example regardless of whether it recognises the tax benefit in profit or loss or equity. 2 54,800/10,000

Computation of the number of ordinary shares

The denominator of the basic EPS calculation is calculated using the weighted average number of those ordinary shares that are outstanding during the period.

Calculation of weighted average number of shares Shares issued Treasury shares Shares outstanding 1 Jan 20X1 Balance at beginning of year 2,400 – 2,400 31 May 20X1 Issue of new shares for cash 800 – 3,200 1 Dec 20X1 Purchase of shares for cash – (200) 3,000 31 Dec 20X1 Balance at end of year 3,200 (200) 3,000 Computation of weighted average: (2,400 × 5/12) + (3,200 × 6/12) + (3,000 × 1/12) = 2,850 shares or (2,400 × 12/12) + (800 × 7/12) − (200 × 1/12) = 2,850 shares

Partly paid shares An entity issues 100,000 ordinary shares of C1 each for a consideration of C2.50 per share. Cash of C1.75 per share was received by the balance sheet date. The partly paid shares are entitled to participate in dividends for the period in proportion to the amount paid. The number of ordinary share equivalents that would be included in the basic EPS calculation on a weighted basis is as follows: 100,000 × C1.75 = 70,000 shares C2.50

Ordinary share issue at full market price Where new ordinary shares are issued during the year for cash at full market price, the earnings should be apportioned over the average number of shares outstanding during the period weighted on a time basis. On 31 December 20X7, the issued share capital of an entity consisted of C4,000,000 in ordinary shares of 25c each and C500,000 in 10% cumulative preference shares of C1 each. On 1 October 20X8, the entity issued 1,000,000 ordinary shares at full market price in cash for the year ended 31 December 20X8. 20X8 20X7 C’000 C’000 Calculation of earnings Profit for the year 550 450 Less: preference dividend (50) (50) Earnings 500 400 500 400 Weighted average number of ordinary shares No (000) No (000) Shares in issue for full year 4,000 4,000 Issued on 1 October 20X8 (1,000,000 × 3/12) 250 – Number of shares 4,250 4,000 Earnings per ordinary share of 25c 11.8c 10.0c The calculation of EPS is based on earnings of C500,000 (20X7: C400,000) and on the weighted average of 4,250,000 ordinary shares in issue during the year (20X7: 4,000,000).

The denominator is the number of ordinary shares outstanding at the year-end if there have been no changes in capital structure during the year. However, if additional ordinary shares have been issued during the year, an apportionment of the earnings for the whole of the year over the larger equity base would not give a fair presentation. Similar considerations apply where shares have been bought back during the year. The entity uses an average of the number of shares weighted by the number of days outstanding (a ‘weighted average ordinary share capital’) in the calculation of the denominator. The time-weighting factor should generally be the number of days that the specific shares are outstanding as a proportion of the total number of days. A reasonable approximation of the weighted average is adequate in most circumstances.

Shares should be included in the weighted average calculation from the date consideration is receivable, generally the date of issue. The date of inclusion should be determined from the terms and conditions attaching to the issue, taking into account the substance of any contract associated with the issue. A number of examples are given in IAS 33, illustrating the timing of inclusion of ordinary shares in the weighted average calculation:

• Ordinary shares issued in exchange for cash are included when cash is receivable.
• Ordinary shares issued on the voluntary reinvestment of dividends on ordinary or preference shares are included when dividends are reinvested.
• Ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are included as of the date when interest ceases accruing.
• Ordinary shares issued in place of interest or principal on other financial instruments are included as of the date when interest ceases accruing.
• Ordinary shares issued in exchange for the settlement of a liability of the entity are included as of the settlement date.
• Ordinary shares issued as consideration for the acquisition of an asset other than cash are included as of the date on which the acquisition is recognised.
• Ordinary shares issued for the rendering of services to the entity are included as the services are rendered.

Ordinary shares issued as part of the cost of a business combination are included from the acquisition date (that is, when the earnings of the acquired business are included in the financial statements of the acquirer).

Shares issued in partly paid form are treated differently to fully paid shares, for which no adjustment is made. Partly paid shares are treated as fractions of shares (payments received to date, as a proportion of the total subscription price) and are included in the calculation of the weighted average number of shares only to the extent that they participate in dividends for the period. Partly paid shares that do not participate in dividends are included in the calculation of diluted EPS.

Purchase and holding of ‘own shares and ESOPs

An entity might hold its own shares in treasury. This situation might arise in a number of ways: where a parent has acquired them in the market, by forfeiture, by surrender in lieu of forfeiture, or by way of a gift; such shares are accounted for as a deduction from shareholders’ funds; where a subsidiary continues to hold the shares in the parent that were acquired before it became a group member; or where an entity holds its own shares where it operates an employee share ownership plan (ESOP) for the benefit of its employees. These shares are excluded from the weighted average number of ordinary shares for the purpose of calculating EPS as they are not outstanding. Shares held by an ESOP are also excluded from the calculation of basic EPS to the extent that they have not vested unconditionally to the employees.

Does a premium paid on the purchase of an entity’s own shares affect EPS? Any premium payable on the purchase of an entity’s own ordinary shares will be charged against reserves and will not affect earnings for the year if the shares are acquired for their market price. No adjustments should be made to the prior year’s EPS.

Contingently issuable shares

Contingently issuable shares are ordinary shares that are issuable for little or no cash or other consideration if and when specified conditions in a contingent share agreement have been met.

Contingently issuable shares are considered to be outstanding and are included in the calculation of basic EPS from the date when all the necessary conditions have been satisfied (that is, the events have occurred). Shares that are issuable solely after the passage of time are not contingently issuable shares, because the passage of time is a certainty and should therefore be included in the calculation from contract inception. Outstanding ordinary shares that are contingently returnable (that is, subject to recall) are not treated as outstanding; they are excluded from the calculation of basic EPS until the date the shares are no longer subject to recall.

Mandatorily convertible instruments

Entities often issue instruments that are convertible into ordinary shares that may be either mandatorily convertible or convertible at the option of the issuer or holder. The issue of ordinary shares is solely dependent on the passage of time for a mandatorily convertible instrument. Ordinary shares that are issuable on the conversion of a mandatorily convertible instrument should be included in basic EPS from the date the contract is entered into.

Are convertible instruments included in basic EPS where there is a conversion option? If the holder or issuer has an option which drives conversion, such shares are treated as potential ordinary shares, because they might never be issued if the conversion option is not exercised. Such potential shares are not considered outstanding for the purpose of calculating basic EPS, but they are considered in the calculation of diluted EPS.

Mandatorily convertible instruments An entity has issued debt that is mandatorily convertible into a fixed number of shares in five years’ time. Neither the issuer nor the holder has any option to require settlement in cash. Interest is payable (in cash) until conversion. How does it affect EPS? For the purpose of EPS, the potential ordinary shares that would be issued on conversion are included in the weighted average number of ordinary shares used in the calculation of basic EPS (and, therefore, also diluted EPS) from the date of issue of the instrument, since their issue is solely dependent on the passage of time. There is no adjustment to the profit or loss attributable to the ordinary equity holders for consequential interest savings, because the shares are treated as if they had already been issued. The interest relates to a separate liability for the interest payments that remain payable.

EPS impact of uncertain events on mandatorily convertible instruments Preference shares might be mandatorily convertible when the entity’s ordinary share price increases to a specified level. Because the conversion is contingent on this uncertain event occurring, the issuable shares are treated as outstanding and are included in the calculation of basic EPS only from the date when all necessary conditions are satisfied (that is, when the ordinary share price has reached the specified level). It is still necessary to consider whether these preference shares are themselves participating equity instruments.

Bonus issue (stock dividends), share split and share consolidation

The weighted average number of ordinary shares outstanding during the period and for all periods presented should be adjusted for events, other than the conversion of potential ordinary shares, that have changed the number of ordinary shares outstanding without a corresponding change in resources.

Examples of such situations include:

• A capitalisation or bonus issue (or stock dividend).

• A bonus element in any other issue, for example a bonus element in a rights issue to existing shareholders.
• A share split.

• A reverse share split or share consolidation.

EPS considerations with a share split Consider a situation where ordinary shares are split into shares of smaller nominal value (a share of C1 nominal value is divided into four shares of 25c each, where C1 = 100c) or consolidated into shares of a higher nominal amount (four shares of 25c each are consolidated into one share of C1). In both of these situations, the number of shares outstanding before the event is adjusted for the proportionate change in the number of shares outstanding after the event. So, if there were 100,000 shares in issue prior to the split or consolidation, the number of shares outstanding before the event becomes 400,000 or 25,000 respectively. This retrospective treatment is required because there was no corresponding change in the entity’s resources.

EPS considerations with a bonus issue On 31 December 20X7, the issued share capital of an entity consisted of C1,000,000 in ordinary shares of 25c each and C500,000 in 10% cumulative preference shares of C1 each. On 1 October 20X8, the entity issued 1,000,000 ordinary shares fully paid, by way of capitalisation of reserves, in the proportion of 1:4 for the year ended 31 December 20X8. 20X8 20X7 C’000 C’000 Calculation of earnings Profit for the year 550 450 Less: preference dividend (50) (50) Earnings 500 400 500 400 Weighted average number of ordinary shares No (000) No (000) Shares in issue for full year 4,000 4,000 Issued on 1 October 20X8 (1,000,000 × 3/12) 1,000 1,000 Number of shares 5,000 5,000 Earnings per ordinary share of 25c 11.8c 10.0c The comparative EPS for 20X7 can alternatively be calculated by adjusting the previously disclosed EPS in 20X7 (in this example, 10c) by the following factor: Number of shares before the bonus issue Number of shares after the bonus issue Adjusted EPS for 20X7: 10c ×4,000 = 8.0c 5,000 This ratio should also be used to restate previous years’ EPS. It would be appropriate to similarly restate other financial ratios (for example, dividend per share) disclosed in the historical summary.

Is the issue of shares below market price an event for which the number of shares prior to the issue is adjusted? Sometimes, shares might be issued at a discount to the market price, such as for the acquisition of an asset or the cancellation of a liability. Although IAS 33 does not specifically deal with this situation, it would be appropriate to calculate the inherent bonus element in the issue for the purpose of adjusting the number of shares before the issue. This treatment is implicit in the wording in IAS 33, which makes reference to a bonus element in any other issue.

The number of shares outstanding increases without an increase in resources (cash flow or earnings) if an entity issues new shares by way of a bonus issue or stock dividend during the period. The shares issued should be treated as outstanding, as if the issue had occurred at the beginning of the earliest period reported. Earnings for the year should be apportioned over the number of shares after the capitalisation. The EPS figure disclosed for previous years should be recalculated as if the event had occurred at the beginning of the earliest period presented.

Rights issues

Entities might raise additional capital by issuing shares to existing shareholders, on a pro rata basis to their existing holdings, in the form of a rights issue. The rights shares can either be offered at the current market price or at a price that is below the current market price. Ordinary shares might be issued during the year by way of a rights issue at a discount to the market price. The weighting calculation should reflect the fact that the discount is effectively a bonus (stock dividend) given to the shareholders in the form of shares for no consideration. This bonus element should be factored into the calculation of the weighted average number of shares. A rights issue is equivalent to a capitalisation issue of part of the shares for no consideration and an issue of the remainder of the shares at full market price. The notional capitalisation issue reflects the bonus element inherent in the rights issue and is measured by the following fraction:

Fair value per share immediately before the exercise of rights

Theoretical ex-rights fair value per share

EPS with a rights issue At 31 December 20X7, the issued capital of an entity consisted of 1.8 million ordinary shares of 10c each, fully paid. The profit for the year ended 31 December 20X7 and 20X8 amounted to C630,000 and C875,000 respectively. On 31 March 20X8, the entity made a rights issue on a 1 for 4 bases at 30c. The market price of the shares immediately before the rights issue was 60c. Calculation of theoretical ex-rights price No C Initial holding 4 Market value 240 Rights taken up 1 Cost 30 New holding 5 Theoretical price 270 Theoretical ex-rights price 270 ÷ 5 =54c The market price is the fair value of the shares immediately prior to the exercise of rights (that is, the actual cum-rights price of 60c). Cost is the amount payable for each new share under the rights issue. Calculation of bonus element The bonus element of the rights issue is given by the fraction: Market price before rights issue                60          10 = Theoretical ex rights price                           54          9 This corresponds to a bonus issue of 1 for 9. The bonus ratio will usually be greater than 1 (that is, the market price of the shares immediately prior to the exercise of rights is greater than the theoretical ex-rights price). If the ratio is less than 1, it might indicate that the market price has fallen significantly during the rights period, which was not anticipated when the rights issue was announced. In this situation, the rights issue should be treated as an issue of shares for cash at full market price. It can be demonstrated, using the figures in the example, that a rights issue of 1 for 4 at 30c is equivalent to a bonus issue of 1 for 9 combined with an issue of shares at full market price of 54c per share. Consider an individual shareholder holding 180 shares: No Value C Original holding 180 Value at 60c per share 108.00 Rights shares (1:4) 45 Value at 30c per share 13.50 Holding after rights issue 225 Value at 54c per share 121.50 The additional 45 rights shares at 30c can be shown to be equivalent to a bonus issue of 1 for 9 on the original holding, followed by an issue of 1:8 at full market price of 54c following the bonus issue, as follows: No Value C Original holding 180 Value at 60c per share 108.00 Bonus issue of 1 for 9 20 Value nil nil 200 Value at 54c per share 108.00 Issue of 1 for 8 at full price 25 Value at 54c per share 13.50 Total holding 225 Value at 54c per share 121.50 The shareholder is therefore indifferent as to whether the entity makes a rights issue of 1 for 4 at 30c per share, or a combination of a bonus issue of 1 for 9 followed by a rights issue of 1 for 8 at full market price of 54c per share. Having calculated the bonus ratio, the ratio should be applied to adjust the number of shares in issue before the rights issue, both for the current year and for the previous year. Therefore, the weighted average number of shares in issue for the current and the previous period, adjusted for the bonus element, would be: Weighted average number of shares 20X8 20X7 Number of actual shares in issue before rights 1,800,000 1,800,000 Correction for bonus issue (1:9) 200,000 200,000 Deemed number of shares in issue before rights issue (1.8m × 10/9) 2,000,000 2,000,000 The number of shares after the rights issue would be: 1.8m × 5/4 = 2,250,000 Therefore, the weighted average number of shares would be: 2.0m for the whole year 2,000,000 2.0m × 3/12 (before rights issue) 500,000 – 2.25m × 9/12 (after rights issue) 1,687,500 – Weighted average number 2,187,500 2,000,000 Calculation of EPS following a rights issue 20X8 20X7 (As previously stated,) Basic EPS C875,000 C630,000 2,187,500 1,800,000 40.0c 35.0c Basic EPS for 20X7 (as restated) C630,000 2,000,000 31.5c In practice, the restated EPS for 20X7 can also be calculated by adjusting the EPS figure of the previous year by the reciprocal of the bonus element factor: 35c × 9/10 = 31.5c

Should the averaging calculation in a rights issue made during the year be performed from the announcement date, the last date of acceptance of the subscription price, or the share issue date following despatch of the share certificates? Consider a situation where we have an expected delay of between 60 to 80 days between the date of announcement of the rights issue and the share issue date. Following the principle in IAS 33, that shares should generally be included from the date when consideration is receivable, it follows that the averaging calculation should be performed from the day following the last date of acceptance of the subscription price, which is also the date when the rights are legally exercised. This is because the entity begins to generate income from all of the proceeds received from that date, which is often midway between the announcement date and the share issue date. Therefore, the new shares should be included in the EPS calculation from the day following the last date on which proceeds are received and not from the announcement date or from the date when the new shares are actually issued.

The factor should be used to adjust the number of shares in issue before the rights issue, in order to correct for the bonus (stock dividend) element in the rights issue. This correction should be made for both the current period prior to the rights issue and all previous periods presented.

The fair value per share immediately before the exercise of rights is the actual closing price at which the shares are quoted on the last date inclusive of the right to subscribe for the new shares. This is often referred to as the ‘cum-rights price’, being the price on the last day of quotation cum-rights. The ‘ex-rights price’, on the other hand, is the theoretical price at which, in a perfect market and without any external influences, the shares would trade after the exercise of the rights. If the rights themselves are publicly traded separately from the shares themselves the fair value for the purpose of the calculation is established at the close of the last day on which the shares are traded together with the rights.

Dividends payable in shares or in cash

An entity may pay its dividends in the form of shares, or give the shareholder the option to receive a dividend in either cash or shares (sometimes referred to as scrip dividends or enhanced scrip dividends). The shares issued increase the weighted average number of shares used in the EPS calculation.

Scrip dividends might be regarded as potential ordinary shares that entitle the recipient to ordinary shares. These potential ordinary shares are converted into ordinary shares when the scrip shares are issued, which is often after the balance sheet date. As IAS 33 requires shares to be included in basic EPS on a weighted average basis from the date they are outstanding, ordinary shares issued through voluntary reinvestment of dividends shares should be included, on a weighted average basis, at the date when the dividends are reinvested. In practice, for scrip dividends, this is the dividend payment date.

Are scrip dividends regarded as an issue at market price, for the purpose of calculating EPS, or below market price? The cash dividend forgone by shareholders electing to take a scrip dividend of shares is taken to be the consideration paid for those shares, which is normally equivalent to the current market value of the shares. This is because the cash dividend forgone by the shareholders electing to take shares instead of cash is effectively reinvested in the entity as fully paid-up shares at market value. As a result, the earnings figure in the numerator already reflects the income generated by the additional cash retained from the dividend payment date. Consequently, for the purpose of the EPS calculation, the issue of scrip shares should be treated as an issue at full market price, and the relevant number of shares should be included in the denominator on a weighted basis from the dividend reinvestment date.

Special dividend followed by share consolidation

Entities might return surplus cash to shareholders. This is normally affected by means of a share repurchase or by a synthetic share repurchase that is achieved by the payment of a special dividend to shareholders followed by a consolidation of share capital (for example, changing five C20 shares into four C25 shares). A share consolidation combined with a special dividend can have the overall effect of a share repurchase at fair value as the reduction in ordinary shares outstanding is the result of a corresponding reduction in resources. The weighted average number of ordinary shares outstanding for the period in which the combined transaction takes place is adjusted for the reduction in the number of ordinary shares from the date the special dividend is recognised.

Share repurchases and share consolidation An entity has in issue 10,000 shares with a nominal value of 10c each. At the beginning of 20X8, it decides either to launch a share repurchase of 1,000 shares at the current market price of C1 per share or pay a special dividend of 10c per share (net) followed by a share consolidation of 9 new shares for 10 old shares. The profit after tax for 20X7 and 20X8 (before the effect of the share transactions) is C2,000. Interest rates are 8% per annum and the entity pays corporation tax at 31%. Balance sheet before transactions Repurchase of 1,000 shares at C1 per share Special dividend of 10c per share followed by share consolidation of 10:9 C C C Net assets 5,000 4,000 4,000 Share capital 10,000 shares at 10c each 1,000 9,000 shares at 10c each 900 9,000 shares at 11.1c each 1,000 Capital redemption reserve 100 Retained earnings 4,000 3,000 3,000 5,000 4,000 4,000 Net assets per share C0.50 C0.44 C0.44   Effect on earnings per share – share repurchase 20X8 20X7 C C Profit for the year 2,000.00 2,000.00 Loss of interest on cash paid out, net of tax (C1,000 × 0.08 × [ 1 – 31%]) 55.20 – Earnings 1,944.80 2,000.00 Number of shares in issue 9,000 10,000 EPS 21.61c 20.00c Effect on earnings per share – special dividend followed by share consolidation The total nominal value of the shares remains unchanged; but whereas there were previously 10,000 shares of 10c each, there are now 9,000 shares of 11.1c each. 20X8 20X7 C C Profit for the year 2,000.00 2,000.00 Loss of interest on cash paid out, net of tax (C1,000 × 0.08 × [ 1 – 31%]) 55.20 – Earnings 1,944.80 2,000.00 Number of shares in issue (unadjusted) 9,000 10,000 EPS unadjusted (correct treatment) 21.61c 20.00c Number of shares in issue (adjusted for consolidation) 9,000 9,000 EPS adjusted (incorrect treatment) 21.61c 22.22c As can be seen, the economic effect, in terms of net asset per share, of an actual share repurchase is identical to a synthetic share repurchase that is achieved by the combination of a special dividend with a share consolidation. It follows that the EPS figures for the two transactions should also be identical. If an adjustment were made to the previous year’s EPS for the share consolidation as shown, there would be an apparent dilution of 2.75% ((22.22 − 21.61)/22.22), that would make the share repurchase look significantly more attractive than the special dividend route. But this would be misleading, because the economic effect of the two transactions is identical.

No adjustment to prior year’s EPS should be made for a special dividend accompanied by a share consolidation, if the economic substance of the transaction is a share repurchase at fair value. If the share repurchase takes place partway through a period, the weighted average number of ordinary shares outstanding is adjusted for the reduction from the date the special dividend is paid (that is, when resources leave the entity).