IAS 33

EARNINGS PER SHARE

(Conceptual Framework and
Standards)
 IAS 33 EARNINGS PER SHARE

Earnings per share is a measure of the amount of profits earned by a company

for each ordinary share. Earnings are profit after tax and after dividends.
Objective
To prescribe principles for determining and presenting earnings per share (EPS)
amounts to improve performance comparisons between different entities in the same
reporting period and between different reporting periods for the same entity.

Definition of Terms
Ordinary Shares- An equity instrument that is subordinate to all other classes of equity
instrument.
Potential Ordinary Shares- A financial instrument or other contract that may entitle its
holder to ordinary shares.
Options, warrants and their equivalents- Financial instruments that give the holder
the right to purchase the ordinary shares
Equity Instrument- Any contract that evidences a residual interest in the asset of an
entity after deducting all of the liabilities.
Financial Instrument- Any contract that gives rise to both a financial asset of one entity
and a financial liability or equity instrument of another entity.

Ordinary Shares
Ordinary shares of the same class will have the same rights to receive dividends.
Ordinary shares participate in the net profit for the period only after other types of
shares.
Potential Ordinary Shares
a. Debt or equity instruments, including preference shares, that are convertible into
ordinary shares.
b. Share warrants and options
c. Employee plans that allow employees to receive ordinary shares as part of their
remuneration and other share purchase plans.
d. Shares that would be issued upon the satisfaction of certain conditions resulting
from contractual arrangements, such as purchase of a business or other assets.
Scope
a. Only companies with potential ordinary shares which are publicly traded need to
present EPS
b. EPS need only be presented on the basis of consolidated results where the
parent’s result are shown as well.
c. Where companies choose to present EPS, even when they have no ordinary
shares which are traded, they must do it in accordance to IAS 33

Basic EPS
Basic EPS is calculated by dividing the net profit or loss for the period attributable to
ordinary shareholders by the weighted average number of ordinary shares outstanding
during the period.
Measurement
Basic EPS should be calculated by dividing the net profit or loss for the period
attributable to ordinary shareholders by the weighted average number of ordinary
shares outstanding during the period.

Basic EPS=
Net profit /loss attributable ¿ ordinary shareholders ¿
Weighted Average Number of Ordinary Shares outstanding dur

Earnings
Earnings includes all items of income and expenses less the result of discontinued
operations where these are presented less net profit attributable to preference
shareholders, including preference dividends.
Preference dividends deducted from net profit
a. Preference dividends on non-cumulative preference shares declared in respect
of the period.
b. The full amount of the required preference dividends for cumulative preference
shares for the period, whether or not they have been declared.

Per Share
The number of ordinary shares used the weighted average number of ordinary shares
during the period. This figure 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.
Consideration
Shares are usually included in the weighted average number of shares from the day
consideration is receivable which is usually the date of issue. The treatment for the
issue of ordinary shares in different circumstances is as follows.
Ordinary shares issued as purchase consideration in an acquisition should be included
as of the date of acquisition because the acquired entity’s results will also be included
from that date.
Effects on EPS of Changes in Capital Structure
The effect of issues of new shares on basic EPS, its corresponding figures for the
previous years will be comparable with the current year because, as the weighted
average number of shares has risen, there has been a corresponding increase in
resources.
Four such events are considered by IAS 33:
a. Capitalization or bonus issue
b. Bonus element or any other issue
c. Share split
d. Reverse share split

Capitalization/Bonus Issue and Share Split/Reverse Share Split

These two events can be considered together as they have similar effect. In both cases,
ordinary shares are issued to existing shareholders for no additional consideration. The
number of ordinary shares has increased without an increase in resources.

CAPITALIZATION/BONUS ISSUE
In a bonus issue, ordinary shares are issued to existing shareholders for no
considerations. Therefore, the number of ordinary shares is increased without increase
in resources. A bonus issue is actually a stock dividend.
In this case, the number of ordinary shares outstanding is adjusted for the proportionate
change in the number of ordinary shares outstanding as if the bonus issue has occurred
at the beginning of the earliest period presented.
SHARE SPLIT/REVERSE SHARE SPLIT
 In a share split, the corporation reduce the par or stated value of its share capital
and issues additional shares to its shareholders for no considerations. Therefore, the
number of ordinary shares is increased without increase in resources.
In this case, the number of ordinary share outstanding is adjusted for the
proportionate change in the number of ordinary shares outstanding as if the bonus issue
has occurred at the beginning of the earliest period presented.

RIGHTS ISSUE
Rights issue of shares - An issue of new shares to existing shareholders at a price
below the current market value. The offer of new shares is made on the basis of (x) new
share at the offer price for every (y) shares currently held. The rights issue includes a
bonus element.

“To arrive for EPS when a right issue is made, calculate first the theoretical ex-rights
value”
Theoretical ex-rights value- This is a weighted average value per share.

PROCEDURES FOR CALCULATING EPS

A. The eps for the corresponding previous period should be multiplied by the following
fraction
B. To obtain the eps for the current year
i. Multiply the number of shares before the rights issue by the fraction of the year
before the date of issue and by the following.
ii. Multiply the number of shares after the rights issue by the fraction of the year
after the date of issue and add to the figure arrived at in (i).

THE TOTAL EARNINGS SHOULD THEN BE DIVIDED BY THE TOTAL NUMBER OF

SHARES SO CALCULATED.
DILUTED EARNINGS PER SHARE
Calculated by adjusting the net profit due to continuing operations attributable to
ordinary shareholders and the weighted average number of shares outstanding for the
effects of all dilutive potential ordinary shares.
DILUTION- –
 Arise when the inclusion of the potential ordinary shares decreases the basic
earnings per share or increases the basic loss per share. In this case, the potential
ordinary shares are dilutive shares.
POTENTIAL ORDINARY SHARES
- Is a financial instrument or other contract that may entitle the holder to ordinary
shares.
A. CONVERTIBLE PREFERENCE SHARES/ CONVERTIBLE BOND PAYABLE
If there is a convertible preference share/ bond payable, the computation of
diluted earnings per share assumes that the preference share/ bond payable is
converted into ordinary shares.
The number of ordinary shares outstanding is increased by the number of
ordinary shares that would have been issued upon the conversion of the preference
shares/ bond payable.
B. SHARE OPTIONS AND SHARE WARRANTS
SHARE OPTIONS- granted to employees enabling them to acquire ordinary
shares of the entity at a specified price during a definite period of time.
SHARE WARRANTS- granted to shareholders enabling them to acquire ordinary
shares of the entity at a specified price during a definite period of time.
C. SHARE OPTIONS AND SHARE WARRANTS
By definition, options and warrants have no cash yield but they derive their value
from the right to obtain ordinary shares at a specified price that is usually lower than the
prevailing market price.
Options and warrants are dilutive if the exercise price or option price is less than
the average market price of the ordinary share

Treatment of Options
- It is assumed that options are exercised and that the assumed proceeds would
have been received from the issue of shares at fair value
- Options are brought into the dilution calculation in the year in which they are
issued, weighted as appropriate
Dilution
- Options and other share purchase arrangements are dilutive when they would
result in the issue of ordinary shares for less than fair value.
 Amount of dilution : Fair value less the issue price

Two Parts of the Transaction for the Calculation of Diluted EPS

a. A contract to issue a certain number of ordinary shares at their average market
price during the period.
b. A contract to issue the remaining ordinary shares for no consideration.
Dilutive Potential Ordinary Shares
- According to IAS 33, potential ordinary shares should be treated as dilutive
when, and only when, their conversion to ordinary shares would decrease net
profit per share from continuing operations.

PRESENTATION, DISCLOSURE AND OTHER MATTERS

Presentation
- Basic and Diluted EPS should be presented by an entity in the statement of
profit or loss and other comprehensive income for each class of ordinary share
that has different right to share in the net profit for the period.
- Disclosure still must be made where the EPS figures are negative. (loss per
share)
Disclosure.
- Amounts used as numerators in calculation basic and diluted EPS, and
reconciliation of those amounts to the net proft or loss of the period
- Weighted average number of ordinary shares used as denominator, and a
reconciliation of these denominators to each other.
Rules for Alternative EPS Figures
- The weighted average number of shares as calculated under IAS 33 must be
used.
- A reconciliation must be given if necessary between the component of profit used
in the alternative EPS and the line item for profit reported in the statement of P/L
and other comprehensive income
- Basic and diluted EPS must be shown with equal prominence.
Significance of Earnings per Share
- Gives more accurate picture of the actual return to investors than reported
profits, which do not show the dilutive effect of share issues.
- Serves as a means of assessing the stewardship and management role
performed by company directors and managers.