0% found this document useful (0 votes)
70 views17 pages

Chapter 2 - EPS - IAS 33 - 2 - Basic EPS

The document discusses the calculation of basic earnings per share (EPS). It provides three examples of calculating basic EPS under different scenarios: 1) A company issued new shares during the year. Basic EPS is calculated using a weighted average of shares. 2) Similar to the first example, but with additional information about preference share dividends. 3) A company issued increasing rate preference shares at a discount that is amortized over time. Basic EPS is calculated after deducting imputed preference share dividends. The document also provides an illustration involving preference shares, repurchase of shares, and the calculation of basic EPS for two years.

Uploaded by

Xuyên Lương
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
70 views17 pages

Chapter 2 - EPS - IAS 33 - 2 - Basic EPS

The document discusses the calculation of basic earnings per share (EPS). It provides three examples of calculating basic EPS under different scenarios: 1) A company issued new shares during the year. Basic EPS is calculated using a weighted average of shares. 2) Similar to the first example, but with additional information about preference share dividends. 3) A company issued increasing rate preference shares at a discount that is amortized over time. Basic EPS is calculated after deducting imputed preference share dividends. The document also provides an illustration involving preference shares, repurchase of shares, and the calculation of basic EPS for two years.

Uploaded by

Xuyên Lương
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 17

1/19/2021

IAS 33 (2)-Earnings per Share


(basic)
Trình bày: Nguyễn Thị Thu Hiền

1 Thu Hien -20

Content

1. Introduction

2. Basic Earnings per Share

3. Diluted Earnings per Share

Thu Hien -20


2

1
1/19/2021

2. Basic Earnings per Share

 Basic EPS
 Calculating Basic EPS for Various Scenarios

3 Thu Hien -20

Basic EPS

Net profit attributable to ordinary shareholders of a parent entity*


Basic EPS =
Weighted average no. of ordinary shares during a reporting period

*after deduction of non-controlling interests’ share of net profit or loss

Numerator:
• After deducting amounts due to preference shareholders in respect of:
– Preference dividends (lưu ý PP hạch toán cổ tức ưu đãi)
– Gains/losses arising on the repurchase or early conversion of preference
shares –(standard PS vs convertible PS)
– Amortization of discount or premium on increasing rate preference
shares

Thu Hien -20


4

2
1/19/2021

Example 1 – Basic EPS with share issue for cash


 Question:
 ABC company had a share capital of 10 000 ordinary shares of CU 1 each and
1000 redeemable preference shares of CU 1 each as of 1 January 20X1.
 On 1 June 20X1 ABC issued new share capital of 2 000 ordinary shares (CU 1
each) for cash.
 In 20X1 ABC’s profit after tax was CU 20 000. ABC paid the preference dividend
of CU 0.20 per share during 20X1 and it was included as a finance charge within
the net profit.
 Calculate the basic EPS.
Weighted average n.
Dates N. of days N. of ordinary shares
of ord.shares
1 January – 31 May 151 10 000 4 137
1 June – 31 December 214 12 000 7 036
Total 365 n/a 11 173
Or: = 10.000 + 2.000 *(214/365) = 11.173
*Note 1: Weighted average n. of shares is calculated with the n. of days as weighting factor,
e.g. 151/365*10 000 = 4 137
*Note 2: During the exam, you can use months instead of days.
Basic EPS = CU 20 000 / 11 173 = CU 1.79 per shareThu Hien -20
5

Example 2– Basic EPS with share issue for cash


 Question:
 ABC company had a share capital of 10 000 ordinary shares of CU 1 each and
1.000 redeemable preference shares of CU 1 each as of 1 January 20X1. Dividend
pay for preferential stocks is CU 0.2/share
 On 1 June 20X1 ABC issued new share capital of 2 000 ordinary shares (CU 1
each) for cash.
 In 20X1 ABC’s profit after tax & before preference dividend was CU 20 000.
 Calculate the basic EPS.
Weighted average n.
Dates N. of days N. of ordinary shares
of ord.shares
1 January – 31 May 151 10 000 4 137
1 June – 31 December 214 12 000 7 036
Total 365 n/a 11 173

*Note 1: Weighted average n. of shares is calculated with the n. of days as weighting


factor, e.g. 151/365*10 000 = 4 137
*Note 2: During the exam, you can use months instead of days.
Thu Hien -20
Basic
6
EPS = (CU 20 000 – (1.000 *0,2)) / 11 173 = CU 1.61 per share

3
1/19/2021

Example 3 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, ie 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.

7 Thu Hien -20

Example 3 Increasing rate preference shares

(b
8 Year Carrying amount Imputed (a) Carrying amount of ) Dividend
of dividend class A preference paid
class A preference shares 31 December
shares 1 January
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.
1/1/X1 31/12/X1 31/12/X2 31/12/X3 31/12/X4

87,34/(1+7%) 93,46/(1+7%) 100/(1+7%) 107/(1+7%) 107


=81,63 =87,34 =93,46 =100

Thu Hien -20

4
1/19/2021

Example 3 Increasing rate preference shares

D company had a share capital of 10 000 ordinary shares of CU 1 each as of 1


January 20X1.
• Net profit (after tax & before preference dividends) for 20x1 and 20x2, 20X3 &
20X4 were the same $300,000.
• Calculate the basic EPS.

Solution: 20X1: (300.000 -5,71)/ 10.000


20X2: (300.000 – 6,12)/10.000
20X3: (300.000- 6,54)/10.000
20X4: (300.000 -7)/10.000

9 Thu Hien -20

Illustration 12.1: Preference Shares and Basic EPS

GTO’s capital structure comprises the following:


− 5,000,000 ordinary shares
− 2,000,000 non-cumulative 6% preference shares
− 1,000,000 cumulative 4.5% preference shares
• Net profit for 20x3 and 20x4 were $300,000 and $5,000,000 respectively
• No dividend was declared or paid in 20x3
• In 20x4, dividends were declared and paid on the non-cumulative preference
shares and cumulative preference shares (for both 20x3 and 20x4)
• During 20x4, 500,000 cumulative preference shares were repurchased in a
tender offer at a premium of 50 cents over their carrying value
• Assume that the preference dividends and gains or losses on repurchase of
preference shares have no tax effects

10 Thu Hien -20

5
1/19/2021

Illustration 12.1: Preference Shares and Basic EPS


20x4 20x3
Net profit attributable to ordinary shareholders $5,000,000 $300,000
Less preference dividends:
Non-cumulative (120,000)
Cumulative (45,000) (45,000)
Repurchase of preference shares (250,000)
Net profit attributable to ordinary shareholders $4,585,000 $255,000
Number of ordinary shares 5,000,000 5,000,000
Basic EPS 91.7 cents 5.1 cents

Actual amount of preference dividends paid in 20x4 is $210,000 ($120,000 being


the non-cumulative preference dividend and $90,000 being the cumulative
preference dividend)

11 Thu Hien -20

Changes in Shares Issued during the Year

1. Issue of new shares:


1. for cash or other assets:
2. in the form of a bonus issue or share split
3. at a discounted price as a result of the exercise of a rights issue
4. from the conversion of potential ordinary shares such as convertible bonds
or convertible preference shares
5. from the exercise of potential ordinary shares such as stock options issued
to employees or creditors
2. Consolidation of existing shares through a reverse split
3. Purchase of treasury shares and issue of previously purchased treasury shares

(i) -> tăng tiền/nguồn lực cho DN/ảnh hưởng đến P/L
-> Thời điểm-> tính trọng số
(ii) Không tăng tiền/nguồn lực -> không tính trọng số/ hồi tố

Thu Hien -20


12

6
1/19/2021

Changes in Shares Issued during the Year

13
1. ordinary shares issued in exchange for cash are included when cash is
receivable;
2. ordinary shares issued on the voluntary reinvestment of dividends on ordinary
or preference shares are included when dividends are reinvested;
3. ordinary shares issued as a result of the conversion of a debt instrument to
ordinary shares are included from the date that interest ceases to accrue;
4. ordinary shares issued in place of interest or principal on other financial
instruments are included from the date that interest ceases to accrue;
5. ordinary shares issued in exchange for the settlement of a liability of the entity
are included from the settlement date;
6. 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; and
7. ordinary shares issued for the rendering of services to the entity are included
as the services are rendered.

Thu Hien -20

Calculating Basic EPS for Various Scenarios


Scenario 1: Issue of new shares for cash or other assets
Scenario 2: Issue of bonus shares (stock dividends)

Scenario 3: Share splits

Scenario 4: Consolidation of existing shares through reverse splits


Scenario 5: Rights issue at a discount to market price

Scenario 6: New issue of shares from the conversion of debt

Scenario 7: Contingently issuable shares

Scenario 8: Share repurchase and Treasury shares


14 Thu Hien -20

7
1/19/2021

Scenario 1: Issue of new shares for cash or other assets

• Issue of new shares for cash or other assets increases the


resources available to the firm

• Additional resources have a positive impact on net


earnings from the date they flow into the firm

− Hence, number of shares has to be time-weighted

15 Thu Hien -20

Illustration 12.2: Issue of New Shares at Fair Value


•Company A had issued share capital of 5,000,000 ordinary shares at the
beginning of the year.
• On 30 June, it issued 3,000,000 shares at fair market value for cash.
• Net profit attributable to ordinary shares was $300,000 for the first 6 months and
$800,000 for the full year.

Net profit = $300,000 Net profit = $500,000

1 January 30 June 31 December


No. of shares No. of shares No. of shares
= 5,000,000 = 8,000,000 = 8,000,000

$800,000
Basic EPS =
(5,000,000 x ½) + (8,000,000 x ½)

= 5,000,000 + (3,000,000 x ½)
= 12.3 cents
16 Thu Hien -20

8
1/19/2021

Scenario 2: Issue of bonus shares (stock dividends)


• Bonus shares are issued out of reserves, such as capital reserves or
retained earnings.

• Share capital increases, total number of shares increase, reserves


decrease, total shareholders’ equity remains unchanged
 No inflow of resources  not time-weighted

• Treatment:
– Any bonus issues taking place in a period are assumed to be issued
at the beginning of the period. (no time-weighting)
– Retroactively restate previous year’s EPS comparatives based on
new number of shares.

17 Thu Hien -20

Illustration 12.3: Issue of Bonus Shares (or Stock Dividend)

•Company A had a paid up share capital of $10,000,000 comprising 10,000,000


ordinary shares at the beginning of 20x3
• Net profit attributable to ordinary shareholders for YE 31 Dec 20x3 and 20x4 were
$2,000,000 and $2,600,000 respectively
• On 30 Jun 20x4, company declared a 1-for-2 bonus issue, the bonus shares being
issued from capital reserves
• Total number of shares increased from 10,000,000 to 15,000,000

¹$2,600,000/15,000,000 Without retroactive restatement to 20x3 comparative figure:

20x4 20x3
²$2,000,000/10,000,000
Basic EPS (cents) 17.33¹ 20²
³$2,000,000/15,000,000 With retroactive restatement to 20x3 comparative figure:
20x4 20x3 (restated)
Basic EPS (cents) 17.33¹ 13.33³

18 Thu Hien -20

9
1/19/2021

Scenario 3 &4:

Scenario 3: Share splits


• An existing share is split into 2 or more shares

• No inflow of resources  not time-weighted

• Retroactive restatement of comparative EPS

Scenario 4: Consolidation of existing shares through reverse splits


• 2 or more shares are consolidated into one share

• No inflow of resources  not time-weighted

• Retroactive restatement of comparative EPS

19 Thu Hien -20

Scenario 5: Rights issue at a discount to market price

• Entitlement of existing shareholders to a rights issue is such that after


subscribing to the new shares, their proportionate interest in the firm
after the rights issue remains the same as before
• Number of shares issued comprises of:
1. Number of shares that would have been issued at the full market price
to achieve the same total proceeds
2. Number of shares that is deemed to be issued for no consideration or
the “bonus element”

20 Thu Hien -20

10
1/19/2021

Illustration 12.4: Rights Issue

• On 30 Sep 20x4, Atlantis Co. made a one-for-two rights issue at a subscription


price of $1.50 per share to existing shareholders (2 shares -> 1 rights)

• The market price immediately before the exercise of rights issue was $3.00

• Atlantis Co’s paid-up capital consisted of 10,000,000 shares as at 1 Jan 20x4

• The company reported net profit attributable to ordinary shareholders of


$2,500,000 for the year ended 31 Dec 20x4

21 Thu Hien -20

Illustration 12.4: Rights Issue

• Total proceeds from the rights issue = $7,500,000 (5,000,000 x $1.50)

 inflow of new resources  time-weighting involved

• If the issue was made at full market price, only 2,500,000 new shares
needed to be issued ($7,500,000/$3)

• No. of shares in bonus element = 2,500,000

Total new shares issued 5,000,000


Comprising:
Shares deemed issue at full market price 2,500,000
Shares deemed issued as bonus shares 2,500,000
5,000,000

22 Thu Hien -20

11
1/19/2021

Illustration 12.4: Rights Issue

Reasoning – the treasury method:


• Company B needs to buy back 2,500,000 shares from the open market to issue
to shareholders, with the proceeds it collected from the rights issue of $7,500,000.

• An additional 2,500,000 are issued as bonus shares.


− Actual number of shares issued = 15,000,000
− Number of shares issued for cash = 12,500,000
• Bonus issue factor is 1.2 (15,000,000/12,500,000) shares for every 1 existing
share held
• Bonus factor should be applied retrospectively to outstanding shares before the
rights issue

23 Thu Hien -20

Bonus issue factor Full market price = 3$


in right issue
= 1,2 Theoretical ex-right price = 2,5$

Fair value of shares


Theoretical ex-right after the right
price

Total number of shares after the right


issue

Value of existing shares (3$* 10 mil)+


Theoretical ex-right Proceeds from the rights issue (1,5$*5mil)
price ($2,5)

Total number of shares after the right


issue (10Mil+5mil)

24 Thu Hien -20

12
1/19/2021

1/1/X4 1/10/X4 31/12/X4

10.000.000 OS
10.000.000 OS
5.000.0000 OS:
10 mil *0,2 = 2 mil (Bonus) : 2,5 mil -> bonus S -> Retro

: 2,5 Mil: cash

From 1 January 20x4 to 30 Sep 20x4 10,000,000 x 1.2 x 9/12 9,000,000

From 1 October 20x4 to 31 Dec 20x4 15,000,000 x 3/12 3,750,000


Weighted average no of shares 12,750,00
Net profit attributable to ordinary
$2,500,000
shareholders
Basic EPS (20x4) 19.6 cents

- Trọng số CP thường (1/1):


.....................................................................................10.000.000
- Trọng số CP thường phát hành thu tiền1/10: 2.500.000 * 3/12:…………….625.000
- Cố phiếu thưởng (không tính trọng số:)
2.000.000*12/12+ 500.000*3/12………………………………= 2.125.000
Tổng mẫu số..........................................................................................12.750.000
25 Thu Hien -20

Scenario 6: New issue of shares from the conversion of debt

• No inflow of cash, but reduction of debt

 Increases net assets of issuer

• Interest expense on debt is saved

 Earnings increase

• Therefore, time-weighting should be applied

26 Thu Hien -20

13
1/19/2021

Illustration 12.5: Additional Shares Issued on the Conversion of Debt


• Capital Ltd had the following capital structure at Jan 20x5:
− 10,000,000 ordinary shares
− $10,000,000 8% convertible bond
• Conversion ratio of bond: every $1,000 nominal value of bond was
convertible into 500 ordinary shares
• On 1 Jul 20x5, 40% of the bond holders exercised their conversion rights
• Net profit for YE 31 Dec 20x5 was $3,300,000 which included interest
expense save because of the partial conversion of the bonds

1/1 1/7 31/12

10M OS 10M OS 12M OS


(+) 2MOS
Number of new shares issued = 40% x $10,000,000/$1,000 x 500
= 2,000,000
Weighted average number of shares = (10,000,000 x ½) + (12,000,000 x ½)
= 11,000,000
Basic EPS = $3,300,000/11,000,000= 30 cent
27 Thu Hien -20

Scenario 7: Contingently issuable shares

• IAS 33:5: These are ordinary shares issuable for little/no


cash or other consideration upon the satisfaction of
specified conditions in a contingent share agreement

• When contingent events have occurred, such shares are


time-weighted, even if the shares have yet to be issued.

28 Thu Hien -20

14
1/19/2021

Illustration 12.6: Contingently Issuable Shares

• On 1 Jan 20x5, Alpha Company acquired Beta Corporation, a franchisor for a


reputable brand of footwear

• Consideration was paid entirely in cash

• Terms of acquisition included a contingent share agreement that required Alpha


Company to issue 10,000 additional new shares to the shareholders of Beta
Corporation for each franchise contract secured in 20x5

• One contract was secured on 1 June 20x5 and another on 1 Dec 20x5

• Alpha’s share capital is comprised solely of 100,000 ordinary shares

• There had been no issue of new ordinary shares during the year

• Alpha’s Company interim financial statements were prepared half-yearly

29 Thu Hien -20

Illustration 12.6: Contingently Issuable Shares

First half Second half Full year


Net profit attributable to ordinary
$138,000 $250,000 $388,000
shareholders
Ordinary share outstanding 100,000 100,000 100,000
Contingently issuable shares 1,667¹ 11,667² 6,667³
Total shares 101,667 111,667 106,667
Basic EPS $1.36 $2.24 $3.36

¹10,0000 x 1/6 (one month for the first half-year)


²10,0000 (issuable as at 1 Jul 20x5) + 10,0000 x 1/6 (one month for the
second half-year)
³(10,000 x 7/12) + (10,000 x 1/12)

30 Thu Hien -20

15
1/19/2021

Scenario 8: Share repurchase and Treasury shares

• IAS 32:33: The entity that reacquires its own equity instruments should
deduct these instruments (“treasury shares”) from equity. No gain or
loss is recognized in P/L.

• After repurchase, these shares should not be included in the weighted


average number of ordinary shares. If bought back during the year, they
should be time-weighted.

• For shares repurchased and held since the beginning of the previous
financial year, they should not be included in the weighted average
number of ordinary shares for both prior and current period.

31 Thu Hien -20

Illustration 12.7: Impact of Treasury Shares


• On 31 Jan 20x5, Company X issued share capital of 4m ordinary shares
• Profit for the year attributable to ordinary shareholders amounted to $1.2 million.
• In 20x3, a total of 500k were repurchased from the market under the company’s
share repurchase mandate and held in treasury.
• On 30 Sep 20x5, X bought back another 800k shares from the market. Similarly,
these shares are not cancelled and are held in treasury.
• Movement in the share capital account:

30 September

Calculate weighted average number of ordinary shares and basic EPS

32 Thu Hien -20

16
1/19/2021

Illustration 12.7: Impact of Treasury Shares

X5

Basic EPS = 1,200,000/3,300,000 = 0.36 or 36 cents

No of Shares = 4.000.000 – 500.000*12/12 – 800.000*3/12 =


3.300.000
or = 3.500.000 *9/12 + 2.300.000 *3/12 =3.300.000

33 Thu Hien -20

34 Thu Hien -20

17

You might also like