IAS 33 – EARNINGS PER SHARE

INTRODUCTION
Earnings Per Share (EPS) is an unusual accounting ratio in that it has a whole standard devoted to its
calculation and presentation.

USES OF EPS
The uses of EPS as a financial indicator include:
 The assessment of management performance over time.
 Trend analysis of EPS to give an indication of earnings performance.
 An indicator of dividend payouts. The higher the EPS the greater the expectation of an increased
dividend compared to previous periods.
 An important component in determining the entity's price/earnings (P/E) ratio.

DEFINITIONS
Ordinary shares: an equity instrument that is subordinate to all other classes of equity shares.
Potential ordinary shares: a financial instrument or other contract that may entitle its holder to
ordinary shares.
Examples of potential ordinary shares include:
 Convertible debt
 Convertible preference shares
 Share warrants
 Share options

Warrants or options: financial instruments that give the holder the right to purchase ordinary shares.
Dilution: a reduction in EPS or an increase in loss per share resulting from the assumption that
convertible instruments are converted, the options or warranties are exercised, or that ordinary shares
are issued upon the satisfaction of specified conditions.

Antidilution: an increase in EPS or a reduction in loss per share resulting from the assumption that
convertible instruments are converted, the options or warranties are exercised, or that ordinary shares are
issued upon the satisfaction of specified conditions.

BASIC EPS
The basic EPS should be calculated by dividing the net profit or loss attributable to ordinary equity
shareholders by the weighted average number of ordinary shares outstanding during the period.

The net profit is profit after tax and preference dividends.

CHANGES IN THE CAPITAL STRUCTURE

The four most common reasons for adjusting shares in issue at the beginning of the period are:
 Issue of new shares during the period (fully or partly paid)
 Bonus issues
 Rights issues;
 Potential ordinary shares (resulting in calculation of diluted EPS)

Issue of new shares during the period (Fully paid)

Shares should be included in the weighted average calculation from the date consideration is receivable

F7 Revision notes Page 67

Issue of new shares during the period (Partly paid)
Shares should be included in the weighted average calculation from the date consideration is receivable.
Partly paid shares are treated as fractions of shares; based on payments received to date as a proportion of
the total subscription price.

Bonus issue, share split and share consolidation

IAS 33 requires that the bonus shares are treated as if they had occurred at the beginning of the period.
The EPS from the previous period should also be recalculated using the new number of shares in issue to
allow comparison with the current year's EPS, as if the issue had taken place at the beginning of that
period as well.

When calculating the prior period EPS comparator then multiply last year's EPS by the factor:

Number of Shares before bonus issue

Number of Shares after bonus issue

When calculating the weighted average number of shares then the bonus factor to apply is the inverse of
the above, i.e.
Number of Shares after bonus issue
Number of Shares before bonus issue

Similar considerations apply where ordinary shares are split into shares of smaller nominal value or
consolidated into shares of higher nominal value.

RIGHTS ISSUE
With a rights issue additional capital is raised by the issue of the shares. Then when dealing with a rights
issue at a discount, calculation of EPS should mark adjustment for the two elements:

 A bonus issue (reflecting the fact that the cash received would not pay for all the/shares issued if
based on fair values, rather than being discounted).
 An assumed issue at full price (reflecting the fact that new shares are issued in return for cash);

Consequently the number of shares outstanding at the beginning of the year should be adjusted for the
bonus factor to give a deemed number of shares in issue before the rights issue. This should be weighted
for the period up to the date of the rights issue.

The bonus factor is equal to: Fair Value before rights issue
Theoretical ex - rights Price after rights issue

Additionally the number of shares actually in issue after the rights issue is weighted for the period after
the rights issue.
As in the section on bonus issues, the prior period EPS should be adjusted for the bonus factor. This is
achieved by taking the reciprocal of the bonus factor (turn fraction Upside down) and multiplying by last
year's EPS.

F7 Revision notes Page 68

DILUTED EARNINGS PER SHARE
An entity may have in issue at the reporting date a number of financial instruments that give rights to
ordinary shares at a future date. IAS 33 refers to these as potential ordinary shares. Examples of potential
ordinary shares include:

 Convertible debt;
 Convertible preference shares;
 Share warrants
 Share options

Where these rights are exercised they will increase the number of shares. Earnings may also be affected.
The overall effect will tend towards lowering (or diluting) the EPS.

So that existing shareholders can see the potential dilution of their present earnings, IAS 33 requires that
a diluted EPS is calculated.
The calculation is performed as if the potential ordinary shares had been in issue throughout the period. If
the rights were granted during the reporting the period, then time apportion.

The diluted EPS is:

Earnings as per basic eps + Adjustment for dilutive potential ordinary shares
Weighted Average number of shares per basic EPS + Adjustment for dilutive potential
ordinal

Convertible Financial instruments

CALCULATION OF EARNINGS
Adjust:

1. Profits
There will be a saving of interest. Interest is a tax-deductible expense and so the post-' tax effects
will be brought into the adjusted profits.
There will be a saving of preference dividend. There is no associated tax effect

2. The number of shares

The potential ordinary shares are deemed to be converted to ordinary shares at the start of the
period unless they were issued during the reporting period.

SHARE WARRANTS AND OPTIONS

A share option or warrant gives the holder the right to purchase or subscribe for ordinary shares. IAS 33
requires that the assumed proceeds from these shares should be considered to have been received from
the issue of shares at fair value. These would have no effect on EPS.

The difference between the number of shares that would have been issued at fair value and the number of
shares actually issued is treated as an issue of ordinary shares for no consideration. This bonus element
has a dilutive effect with regard to existing shareholders.

F7 Revision notes Page 69