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Measurement - Basic EPS
Basic EPS is computed by dividing net profit or
loss attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding
during the period [IAS33R.10].
Earnings - basic
Basic earnings are calculated as the net profit
or loss attributable to ordinary shareholders less
preference dividends [IAS33R.12].
Preference dividends include
any non-cumulative preference share dividends declared
during the period, and any cumulative preference
share dividends, whether or not declared [IAS33R.14].
Per share - basic
Ordinary shares are usually straightforward to identify.
Ordinary shares are equity instruments that are
subordinate to all other classes of equity instruments
and have rights to the residual net assets when
the entity is dissolved [IAS33R.5] .
The weighted average number of ordinary shares
outstanding is the opening balance of ordinary shares
issued less treasury shares , adjusted
for the time-weighted effect of increases and decreases
in ordinary and treasury shares issued and bought
back throughout the period [IAS33R.20] .
Shares are usually classified as issued on
the date the consideration for such shares is recognised
[IAS33R.21] .
Ordinary shares issued in a business combination,
accounted for using the purchase method, are considered
outstanding from the acquisition date [IAS33R.22].
The EPS calculation will be affected for all periods
presented if the business combination is a uniting
of interests. The weighted average number of shares
for each period is the total of the weighted average
number of shares of the combined entity for that
period, adjusted into the equivalent shares of the
newly combined entity [IAS33R.22]
.
Part-paid shares are included in the weighted average
number of ordinary shares as fractional shares to
the extent that they are entitled to participate
in dividends relative to fully-paid shares. Fractional
shares are calculated as entitlement to dividend
divided by the dividend entitlement of fully-paid
shares [IAS33R.A15] .
Ordinary shares may be issued on the satisfaction
of some event or condition (contingently issuable
shares). These shares are part of the weighted average
number of ordinary shares from the date when conditions
for their issue have been satisfied .
Contingently returnable shares are not treated as
outstanding. They are excluded from the calculation
of basic EPS until no longer subject to recall [IAS33R.24-25].
The weighted average number of ordinary shares
should be adjusted for events that change the number
of shares outstanding without a corresponding change
in the entity's resources [IAS33R.26]. Examples
of these types of events include bonus issues, share
splits, and share rights issuances. The number of
shares outstanding is adjusted as if the event had
occurred at the beginning of the earliest period
presented [IAS33R.27-28] .
The computation of the weighted average number
of ordinary shares is more complex when the entity
issues shares at less than fair value, such as in
a rights issue. The number of shares at the beginning
of the earliest period presented is restated to
take account of additional shares issued, adjusted
for the effect of the share's ex rights value [IAS33R.A2]
.
Measurement - diluted EPS
The calculation of diluted EPS is consistent with
the calculation of basic EPS. However, management
adjusts earnings and the weighted average number
of ordinary shares to give effect to all dilutive
potential ordinary shares that were outstanding
during the period [IAS33R.32].
Earnings - diluted
Diluted earnings is the net profit or loss attributable
to ordinary shareholders, adjusted for the after-tax
effect of changes in income and expenses as if the
conversion of potential ordinary shares had occurred
[IAS33R.32]. For example, expenses are reduced by:
dividends saved on convertible preference shares,
interest saved on convertible debt and fees, discounts
or premiums that are accreted as yield adjustments
.
Consequential changes in items of income and expense
must also be considered. For example, the reduction
in interest expense related to potential ordinary
shares and the resulting increase in net profit
might increase the entity's contribution to its
non-discretionary employee profit-sharing plan [IAS33R.33-34]
.
Dilutive potential ordinary shares
A potential ordinary share is defined as a financial
instrument or other contract that may entitle its
holder to ordinary shares [IAS33R.5]. Conversion
may be in the power of either the issuer or the
holder. Warrants and options are common examples
of potential ordinary shares [IAS33R.7] [IAS33R.46].
Potential ordinary shares are treated as dilutive,
and included in the calculation of diluted EPS,
when their deemed conversion to ordinary shares
would decrease net profit per share from continuing
ordinary operations, also known as the 'control
number' (Disposal groups and discontinued operations) [IAS33R.41-42]. In contrast, potential
ordinary shares are anti-dilutive when their conversion
would increase EPS or decrease the loss from ordinary
operations. The effects of anti-dilutive shares
are ignored in calculating diluted EPS [IAS33R.43]
.
Each issue or series of issues of potential ordinary
shares should be considered individually to determine
its potential for dilution. The sequence may affect
whether or not potential ordinary shares are dilutive
or anti-dilutive. To maximize the dilution of basic
EPS, each series is considered from the most dilutive
to the least dilutive [IAS33R.44].
Potential ordinary shares should be included in
the calculation of diluted EPS for the period that
they were actually outstanding. Potential ordinary
shares that are converted to ordinary shares during
the period should be included in diluted EPS from
the beginning of the period to the date of conversion;
and in both basic and diluted EPS thereafter [IAS33R.38].
Any potential ordinary shares that expired or were
cancelled during the period are included in the
diluted EPS calculation for the portion of the period
for which they were outstanding [IAS33R.38].
Per share - diluted
The weighted average number of shares for diluted
EPS is the weighted average number of shares as
for basic EPS; plus the weighted average dilutive
potential ordinary shares [IAS33R.36].
The number of ordinary shares that would be issued
in the conversion of dilutive potential ordinary
shares is determined from the terms of conversion,
for example an option's exercise price. The computation
should assume the most advantageous conversion rate
from the holder's perspective [IAS33R.39].
Where options and other share purchase arrangements
entitle the holder to an ordinary share at less
than fair value, then the dilutive effect should
be calculated in two steps: a contract to issue
a certain number of shares at fair value (these
shares are neither dilutive nor anti-dilutive);
and a contract to issue a certain number of shares
for no consideration. The latter shares are dilutive
and included in the computation of diluted EPS [IAS33R.45]
.
Written put options indexed to and potentially
settled in an entity's own shares that are in the
money during the reporting period should be included
in the weighted average calculation, as of the beginning
of the period, if dilutive. The entity should assume
that the proceeds used to buy back ordinary shares
will be raised from issuing shares at the average
market price during the period. Any difference between
the issue price of the new shares and the repurchase
price should be treated as an issue of ordinary
shares for no consideration and included in the
weighted average of dilutive shares [IAS33R.63].
The inclusion of potential ordinary shares in the
denominator of a diluted EPS computation will generally
result in an anti-dilutive per share amount when
an entity has a loss from continuing ordinary operations.
Potential ordinary shares are excluded from the
computation of diluted EPS when this is the case,
even if the enterprise reports net income [IAS33R.41].
Treasury shares held to satisfy share options should
be considered as potential ordinary shares. Options
that can only be satisfied by the entity's future
purchase of shares in the market should not be treated
as potential ordinary shares and should not be included
in the calculation of diluted EPS. An example would
be an entity that is unable to issue additional
ordinary shares. Management's intention with respect
to the issue of new shares or the purchase of existing
shares in the market should be disregarded. Share
options should be treated as potential ordinary
shares if management has the ability to issue new
shares [IAS33R.58-61] .
Share-based awards should be considered outstanding
at grant date for computing diluted EPS even though
exercise may be contingent on vesting .
The number of contingently issuable shares
included in the diluted EPS calculation is based
on the number of shares that would be issuable if
the end of the reporting period was the end of the
contingency period [IAS33R.52]. The assumed exercise
price, for the purposes of determining the incremental
shares issued for no consideration, comprises the
sum of (a) the amount the employee must pay on exercise,
(b) the amount of compensation cost attributable
to future services but not yet recognised, and (c)
the amount of excess tax benefits, if any, that
would be credited to additional paid-in capital,
assuming the options were exercised. Excess tax
benefits can arise in certain tax jurisdictions
when the fair value of the share-based awards is
greater at exercise date than the amount used for
purposes of determining compensation expense .
Group reporting
Any potential ordinary shares issued by a subsidiary,
joint venture or associate, that are potentially
convertible into ordinary shares of the subsidiary,
joint venture, associate or parent, should be included
in the consolidated diluted earnings per share calculation
of the parent to the extent that the potential ordinary
shares are dilutive [IAS33R.40]. For example, options,
warrants and convertible securities issued by a
subsidiary have an effect on consolidated EPS. The
effect is clear when the instruments are convertible
into ordinary shares of the parent company. A similar
effect can arise if the instruments result in potentially
issued shares of the subsidiary and there is a significant
minority interest in the subsidiary .
Restatement
Where the number of shares outstanding increases
because of bonus issues, share splits and other
similar events, basic and diluted EPS for all periods
presented should be restated. The EPS calculations
should give effect to these changes if these events
occur after the balance sheet date, but before the
financial statements are issued [IAS33R.64] .
EPS calculations should also be adjusted for the
effects of errors and changes in accounting policies
accounted for retrospectively, and the effects of
a business combination accounted for as a uniting
of interests [IAS33R.64].
Restatement of prior-period diluted EPS amounts
is not allowed for a change in the previous assumptions
used, for example assumed conversion of contingently
issuable shares, or for the conversion of potential
ordinary shares into ordinary shares outstanding
[IAS33R.65]. However, disclosure of such events
is encouraged where non-disclosure would affect
the ability of the financial statement users to
make decisions [IAS33R.70(d), 71].
Presentation and disclosure
An entity is encouraged to disclose share transactions
which occur after the balance sheet date .
Separate EPS presentation on the face of the income
statement is required for each class of ordinary
shares, even where the amounts are negative. Basic
and diluted EPS should be presented with equal prominence
[IAS33R.66].
When basic and diluted EPS are the same, presentation
can be accomplished in one line on the income statement.
If an entity chooses to present per share amounts
for a reported component of income in addition to
those required by IFRS (for example, restructuring
provisions or results of discontinued operations),
such per share amounts are computed using the weighted
average number of ordinary shares determined in
accordance with IFRS. If the per share amount is
for a component of net profit which is not reported
as a line item on the face of the income statement,
a reconciliation between the amount used and a reported
amount should also be provided [IAS33R.73] .
An entity should disclose [IAS33R.70(a),(b)]:
| a) |
the amounts used as the numerator
in calculating basic and diluted EPS, and a
reconciliation of the amounts to the net profit
or loss for the period; and |
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| b) |
the weighted average number of shares
used as the denominator in calculating basic
and diluted earnings per share, and a reconciliation
of these denominators to each other |
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