EARNINGS PER SHARE

(IAS33)

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 Overview
• Significance of EPS
• Scope of IAS33
• Calculation of basic EPS
• Calculation of the weighted average number of
shares outstanding during an accounting period
• Bonus issues
• Rights issues
• Calculation of diluted EPS
• Presentation and disclosure requirements

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 Significance of EPS
• EPS is widely used as a means of assessing a
company’s financial performance
• EPS feeds into the Price/Earnings ratio, which is an
important indicator of investment potential
• Important that EPS should be calculated on a
consistent basis so that comparisons can be made
between accounting periods and between
companies
• As with all ratios, the EPS figure is affected by the
company’s accounting policies
• EPS is the only ratio which is defined by an
international standard (IAS33)
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 Scope of IAS33
IAS33 applies to companies whose shares
are publicly traded.
It also applies to companies in process to
go public.
Companies that voluntarily want to
disclose EPS need to follow IAS 33
The consolidated financial statements of a
group of companies disclose EPS for the
group as a whole. 4
 Calculation of Basic EPS
Basic EPS for an accounting period is calculated by
dividing the amount of the profit (or loss) for that period
which is attributable to the ordinary shareholders by the
weighted average number of ordinary shares outstanding
during the period.
• Profit attributable to the ordinary shareholders is the
profit after tax and preference dividends.
• Shares are outstanding from the date on which they are
issued.
Basic EPS must be disclosed for the previous accounting
period as well as for the current accounting period.

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EPS = Earnings attributable to Ordinary Shareholders
Weighted average number of ordinary shares
outstanding at year end

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 Calculation of the weighted
average number of shares
The weighted average number of ordinary shares for
an accounting period is calculated by adding:
a) the number of ordinary shares outstanding at the
beginning of the period, and
b) the number of ordinary shares issued during the
period, multiplied by a time weighting factor
and then subtracting the number of ordinary shares
bought back by the company during the period (if
any) multiplied by a time weighting factor.

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Types of share issue:
1. For consideration at Full Market Price.
2. No consideration: bonus issue
3. For consideration with elements of
bonus.

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Calculation of the weighted average number of shares

1. Shares issued at Full Market Price

1 Jan 2008: 20m ordinary shares were in existence.

1 July 2008: issue of 4m ordinary shares

weighted average number of shares = 20m + (4m x 6/12)= 22m

OR

= ( 20m X 6/12 ) + ( 24 X 6/12 ) = 22m

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 Bonus issues

A bonus issue is an issue of free extra shares to existing

shareholders in proportion to their existing holdings.
A bonus issue increases the number of issued shares but
not the company’s capacity to earn profits.
This reduces EPS and distorts comparisons with previous
periods.

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 Bonus issues
IAS33 requires that a bonus issue is treated as if it had
occurred at the beginning of the earliest period
presented in the financial statements. This is usually
the previous accounting period (for which
comparatives are given). – Retrospective application

The financial statements for a period in which there has

been a bonus issue must restate EPS for the previous
period, calculated as if the bonus shares had existed
throughout that period.

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Calculation of the weighted average number of shares
2. Bonus Issue of shares
 Bonus issue must be applied retrospectively.
 Bonus fraction must be multiplied to number of shares before
the bonus issue.
Example
Bonus issue of 1 share of every 5 already in existence was made
in June 2009.
10,000 ordinary shares were already in existence. Earnings
attributable at the end of year 2009 were $ 15,000.
 Bonus Fraction = 6/5
 After bonus issue, total number of shares = 6/5 X 10,000 =
12,000
 EPS = $15,000/12,000 = $ 1.25
 As the number of shares increases, EPS falls.
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Calculation of the weighted average number of shares
2. Bonus Issue of shares
Example continued:
 Due to retrospective application of bonus issue, the
comparative EPS must be adjusted.
 Comparative EPS must be multiplied by the inverse of the
Bonus Fraction.
 If earnings attributable to ordinary shareholders at the end
of 2008 were $10,000,
 EPS of last year = $10,000 = $1
10,000
 After bonus issue in 2009,
 EPS in 2008 = $10,000 / 12,000 = $0.833
 OR EPS = $1 X inverse of bonus fraction = $1 x 5/6 =
$0.833
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 Rights issues
A rights issue is an issue of shares (for which a price
is charged) to existing shareholders in proportion to
their existing holdings. If a rights issue is not made at
full market price it contains a "bonus element".
IAS33 requires that a rights issue that is not made at
full market price be split into two components:
a) an issue of bonus shares
b) an issue of shares at full market price
Each of these components is then treated in the usual
way.
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Calculation of the weighted average number of shares

3. Rights issue not made at full market price but with a

bonus element.
 The bonus element will have a retrospective application
 Bonus fraction is multiplied to the number of shares in
existence before the rights issue.
 Bonus fraction = Market Value of share
Theoretical Ex Rights Price

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Calculation of the weighted average number of shares
3. Rights issue not made at full market price but with a
bonus element
Example
Earnings attributable to ordinary shareholders in 2007 was
$300,000 and in 2008 it was $380,000. Before the rights
issue on the 1 March 2008, 50,000 ordinary shares were
in existence.
The right was 1 for every 5 held.
Exercise price was $5 and Full Market Price was $11.

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Calculation of the weighted average number of shares
3. Rights issue not made at full market price but with a
bonus element
Bonus fraction = Market Value of share = $11 = 1.1
Theoretical Ex Rights Price $10
Theoretical Ex Rights Price: 5@$11= $55

1@$5 = $ 5
$60

Theoretical Ex Rights Price (TERP) = $60/6 = $10

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Calculation of the weighted average number of shares
3. Rights issue not made at full market price but with a bonus
element

Weighted average number of shares:

(50,000 x 1.1) + (10,000 – 5,000)10/12 = 59,167
OR
(50,000 x 1.1 x 2/12) + (60,000 x 10/12) = 59,167

 2008 EPS = $380,000/59,167 = $6.42

 2007 EPS before rights issue in 2008 = $300,000/50,000
=$6
 2007 EPS after rights issue in 2008 = $300,000/55,000 =
$5.46 OR $6 X 10/11 = $5.46
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 Calculation of Diluted EPS
Diluted EPS is the EPS figure that would arise if all
dilutive potential ordinary shares were issued.
• Potential ordinary shares generally occur in
connection with convertible loan stocks and
share options.
• Shares are regarded as dilutive if the effect of
their issue would be to reduce basic EPS.

Diluted EPS must be disclosed for the previous

accounting period as well as for the current accounting
period.

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Calculation of Diluted EPS

Diluted EPS =
Earnings as per basic + effect of dilutive potential ordinary share
Number of ordinary shares as per basic + effect of dilutive
potential ordinary share

Earnings = earnings as per basic + savings on interest (net of tax)

of convertible debts + savings on non-equity dividends that are
convertible.

Potential ordinary shares are deemed to have been issued at the

beginning of the financial period or on specified date of issue.

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 IAS33 presentation and
disclosure requirements
• Basic EPS and diluted EPS must be presented in
the statement of comprehensive income.
• EPS figures must be presented even if they are
negative (i.e. if there is a loss per share).
• The earnings figures used in EPS calculations must
be disclosed and reconciled to the profit or loss
shown in the financial statements.
• The weighted average number of shares used in
the calculation of basic EPS and diluted EPS must
be disclosed and reconciled to each other.
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