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A practical guide
Contents
Introduction
10
Introduction
Although IAS 33 Earnings per Share has not changed for several years, it is still a standard that causes
headaches for preparers of financial statements and contains more than a few traps for the unwary.
The practical difficulties experienced in calculating earnings per share often stem from the fact that
IAS 33 is very rules-based. This lack of an underlying principle means that the calculations required can
sometimes give counter-intuitive results, which in turn causes uncertainty for preparers as to whether
they have applied the requirements correctly.
This practical guide has been put together to help you navigate the complexities, avoid the common
pitfalls and ease the process when it comes to calculating earnings per share, or EPS as it is commonly
known. It includes a detailed step-by-step guide to calculating both basic and diluted EPS, as well as
twoworked examples dealing with scenarios that often catch people out.
Key definitions
Profit/(loss) attributable to
ordinary equity holders
Profit after tax, excluding amounts attributable to non-controlling interests, less any amounts accruing to
holders of preference shares which are accounted for asequity.
Ordinary shares
Equity instruments which have the lowest priority of participation in profit for the period. If an entity has
multiple classes of share, it needs to determine which of these has the lowest priority this will be the
'ordinary share' class for EPS purposes. If two or more classes of shares rank equally at the bottom of the
priority list, EPS will need to be calculated for each of these, taking into account the relative rights.
The number of shares outstanding at the beginning of the period, adjusted by the number of shares
bought back or issued during the period on a timeweighted basis.
Potential complexities
Preference shares accounted for as equity
Any amounts charged or credited directly to equity in relation to preference shares accounted for as
equity, whether these are dividends, coupon payments, payments on redemptions made during the
period or other accounting adjustments relating to such shares, are likely to impact the numerator in the
basic EPScalculation.
Shares held by the entity
These are not treated as shares in issue, and are therefore deducted from the denominator in the basic
EPS calculation. The same applies to shares held by an employee benefit/ESOP trust sponsored by
theentity.
Partly paid shares
These are treated as a fraction of a share reflecting the extent to which they give entitlement to
participate in dividends during the period. (N.B the extent to which they carry voting rights is
irrelevant for this test)
Contingently issuable shares
These are not included in the denominator when calculating basic EPS.
The exception to this is that shares which are issuable dependent only on the passage of time, with
all other conditions having been satisfied, are included in the calculation of basic EPS. An example of
this would be mandatorily convertible preference shares, whether classified as partly debt and partly
equity or wholly equity. For such an instrument, the weighted average number of shares is adjusted as
if conversion occurred immediately on the initial date of issue of the convertible instrument. However,
no adjustment should be made to reverse any interest expense or preference dividend payable included
in the profit or loss attributable to ordinary equity holders for this figure, conversion is only factored in
when it actually occurs.
Bonus issues, share splits, share consolidations and any other transactions which change the number
of shares in issue without changing the entitys resources
When a bonus issue or similar transaction takes place, the number of ordinary shares outstanding
is adjusted as if the transaction had taken place at the start of the earliest period for which EPS is
presented, to maintain comparability. This will result in a restatement of prior year EPS figures. Note that
if a bonus issue takes place after the end of the period but before the financial statements are issued,
EPS should be disclosed on a post-bonus issue basis.
Rights issues
A rights issue, where typically shares are issued to existing shareholders for less than the current market
price, is accounted for by adjusting from the start of the earliest period for the bonus element of the
rights issue. The bonus element arises because the transaction could be viewed as issuing some shares
for market value and some for nothing. The bonus element is calculated using a theoretical ex-rights
price and comparing this to the market price prior to the rights issue.
Options, warrants, convertible debt, convertible preference shares anything that could be turned into
ordinary shares. Includes obligations under share-based payments, such as employee share schemes or
contingent consideration arrangements for business acquisitions, even though these may still be partly
contingent on future events.
The effect on earnings per share that conversion of a category of potential ordinary shares into ordinary
shares would have. IAS 33 contains detailed rules on how to calculate this for various types of potential
ordinary share see below.
If-converted method
Method for calculating earnings per incremental share for convertible instruments (debt or equity).
Method for calculating earnings per incremental share for options, warrants and similar items (including
share option schemes).
Potential ordinary shares for which the earnings per incremental share is lower than the following figure:
basic EPS from continuing operations, adjusted for any other categories of potential ordinary share with
a lower earnings per incremental share than this category.
Anti-dilutive potential
ordinaryshares
If the contingency is in the form of total earnings during a period (e.g. total PBT of 3m over the next
three years), this assessment is straightforward e.g. if the 3m has been met at the end of the first year
then the additional ordinary shares are taken into account in the calculation of diluted EPS. However, if
it is expressed as average earnings (PBT of 1 m per year for each of the next three years) this should be
converted to the equivalent total earnings position (total PBT of 3m over the next three years) in order
to make the assessment. So if the profits are 1.5m at the end of the first year, no additional shares
are brought into the calculation. However, if profits are 5m at the end of the first year, the additional
shares are included in the calculation of diluted EPS because, if the end of the first period were the end
of the contingency period, the condition would have been achieved.
Contingently issuable potential ordinary shares
A further level of complexity is introduced where potential ordinary shares may be issuable dependent
on a contingency, for example remuneration schemes where share options may be issued to employees
dependent on the future performance of the company. The general rule is:
1. Apply the requirements for contingently issuable shares to work out whether the potential ordinary
share will be issued.
2. If the contingency is not met for the purposes of IAS 33, ignore the instrument. If it is met, apply the
if-converted or treasury stock method to the instrument as normal.
Employee share options
Employee share option schemes are a particularly common type of contingently issuable potential
ordinary share hence they may have a dilutive effect on EPS even prior to vesting. For unvested
options which are contingent on performance measures, the entity will need to determine whether or
not they are expected to vest, as described above for contingently issuable shares and options. Ifvesting
depends purely on completion of a period of service, the calculation is done on the basis that all
employees in employment at the end of the reporting period complete the period of service.
An earnings adjustment is generally not necessary for share option schemes. The exception to this is for
schemes which can be settled either in cash or in shares at the discretion of the employee. For this type
of award, IFRS 2 requires that cash settlement is assumed but IAS 33 requires that equity settlement
is assumed. Therefore, the charge to the income statement for the cash settled scheme should be
reversed and the charge that would be recognised for an equity-settled scheme included instead.
When applying the treasury stock method to calculate the number of incremental shares for a share
option scheme, for IAS 33 purposes the exercise price of the option is deemed to be the cash exercise
price plus the remaining IFRS 2 charge per share which has not yet been recognised in the income
statement.
ESOP trusts
Where shares are held in an ESOP trust or similar vehicle for the purposes of settling share schemes in
the future, the amount of shares held does not impact the calculation of incremental shares set out
above. The only impact that the number of shares held by an ESOP trust or similar vehicle will have on
the calculation of EPS is that they reduce the number of shares treated as being in issue for the purposes
of calculating the denominator in the basic EPS calculation, as set out above.
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for a detailed description of the legal structure of DTTL and its member firms.
Deloitte LLP is the United Kingdom member firm of DTTL.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the
principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice
before acting or refraining from acting on any of the contents of this publication. DeloitteLLP would be pleased to advise readers
on how to apply the principles set out in this publication to their specific circumstances. DeloitteLLP accepts no duty of care or
liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.
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