4
IFRIC Update, September 2011.
Segments, July 2013, p.6.
5
IASB Update, September 2011.
12 ED/2017/2, Introduction.
6
ED/2017/2, Improvements to IFRS 8 Operating
13 ED/2017/2, [Draft] Amendment to IAS 34
Segments – Proposed amendments to IFRS 8
Interim Financial Reporting, para. 45A.
and IAS 34, para. 22(c).
14 IASB Update, March 2018.
7
Report and Feedback Statement Post-
15 IASB Work Plan – as at 9 September 2018,
implementation Review: IFRS
8 Operating
Maintenance Projects, Improvements to IFRS 8
Segments, July 2013, p.19.
Operating Segments (Amendments to IFRS 8 and
8 Request for Information Post-implementation
IAS 34).
Review: IFRS
8 Operating Segments,
Introduction, p.4.
9
Report and Feedback Statement Post-
implementation Review: IFRS
8 Operating
Segments, July 2013.
2887
Chapter 33
Earnings per share
1 INTRODUCTION .......................................................................................... 2891
1.1
Definitions ............................................................................................................ 2891
2 OBJECTIVE AND SCOPE OF IAS 33 ............................................................ 2891
2.1
Objective .............................................................................................................. 2891
2.2 Scope
....................................................................................................................
2892
3 THE BASIC EPS .......................................................................................... 2893
3.1
Earnings ............................................................................................................... 2893
3.2 Number
of
shares
...............................................................................................
2893
4 CHANGES IN OUTSTANDING ORDINARY SHARES ..................................... 2896
4.1
Weighted average number of shares ............................................................. 2896
4.2
Purchase and redemption of own shares ...................................................... 2897
4.3
Changes in ordinary shares without corresponding changes in
resources ............................................................................................................. 2897
4.3.1
Capitalisation, bonus issue, share split and share
consolidation ...................................................................................... 2897
4.3.1.A
Capitalisation, bonus issues and share splits ........... 2897
4.3.1.B Stock
dividends
.............................................................
2898
4.3.1.C Share
consolidations .................................................... 2899
4.3.2
Share consolidation with a special dividend ................................ 2899
4.3.3 Rights
issue.......................................................................................... 2899
4.3.4
B share schemes ................................................................................. 2901
4.3.5
Put warrants priced above market value ...................................... 2901
4.4
Options exercised during the year ................................................................. 2902
4.5
Post balance sheet changes in capital ............................................................ 2903
4.6
Issue to acquire another business ................................................................... 2903
4.6.1
Acquisitions ........................................................................................ 2903
4.6.2 Reverse
acquisitions
.........................................................................
2903
2888 Chapter 33
4.6.3
Establishment of a new parent undertaking ................................. 2904
4.7
Adjustments to EPS in historical summaries ................................................ 2905
5 MATTERS AFFECTING THE NUMERATOR ................................................. 2905
5.1
Earnings ............................................................................................................... 2905
5.2 Preference
dividends
........................................................................................
2905
5.3 Retrospective
adjustments ............................................................................... 2906
5.4
Participating equity instruments and two class shares ............................... 2907
5.4.1
Tax deductible dividends on participating equity
instruments ......................................................................................... 2908
5.5
Other bases ......................................................................................................... 2909
6 DILUTED EARNINGS PER SHARE ................................................................ 2910
6.1
The need for diluted EPS ................................................................................. 2910
6.2 Calculation
of
diluted EPS ................................................................................ 2911
6.2.1
Diluted earnings .................................................................................. 2911
6.2.2 Diluted
number
of shares .................................................................. 2912
6.3
Dilutive potential ordinary shares ................................................................... 2912
6.3.1
Dilution judged by effect on profits from continuing
operations ............................................................................................ 2913
6.3.2
Dilution judged by the cumulative impact of potential
shares .................................................................................................... 2913
6.4
Particular types of dilutive instruments ......................................................... 2915
6.4.1
Convertible instruments .................................................................... 2915
6.4.1.A
Convertible debt ............................................................ 2916
6.4.1.B Convertible
preference
shares
....................................
2917
6.4.1.C
Participating equity instruments and two class
shares with conversion rights ...................................... 2917
6.4.2
Options, warrants and their equivalents ..................
...................... 2918
6.4.2.A
The numerator ............................................................... 2918
6.4.2.B
Written call options ...................................................... 2920
6.4.2.C
Written put options and forward purchase
agreements ...................................................................... 2921
6.4.2.D
Options over convertible instruments ...................... 2922
6.4.2.E
Settlement of option exercise price with debt
or other instruments of the entity ............................. 2922
6.4.2.F
Specified application of option proceeds ................ 2922
6.4.3
Purchased options and warrants .................................................... 2923
6.4.4
Partly paid shares ............................................................................... 2923
6.4.5 Share-based
payments ..................................................................... 2924
6.4.6 Contingently
issuable shares ........................................................... 2925
6.4.6.A
Earnings-based contingencies .................................... 2926
Earnings per share 2889
6.4.6.B
Share price-based contingencies ............................... 2928
6.4.6.C Other
contingencies
.....................................................
2929
6.4.7
Potential ordinary shares of investees .......................................... 2929
6.4.8 Contingently
issuable
potential ordinary shares .......................... 2931
7 PRESENTATION, RESTATEMENT AND DISCLOSURE ................................ 2931
7.1
Presentation ......................................................................................................... 2931
7.2 Restatement
........................................................................................................
2932
7.3 Disclosure ............................................................................................................ 2933
8 APPENDIX ................................................................................................... 2934
List of examples
Example 33.1:
Calculation of weighted average number of shares ................... 2896
Example 33.2:
A bonus issue ...................................................................................... 2898
Example 33.3:
Rights issue at less than full market price ..................................... 2900
Example 33.4:
Put warrants priced above market value ...................................... 2902
Example 33.5:
Calculation of EPS where a new holding company is
established ........................................................................................... 2904
Example 33.6:
Increasing rate preference shares .................................................. 2906
Example 33.7:
Participating equity instruments and two-class ordinary
shares ................................................................................................... 2908
Example 33.8:
Calculation of weighted average number of shares:
determining the order in which to include dilutive
instruments .......................................................................................... 2914
Example 33.9:
Treatment of convertible bonds in diluted EPS
calculations .......................................................................................... 2916
Example 33.10:
Convertible bonds settled in shares or cash at the issuer’s
option .................................................................................................... 2916
Example 33.11:
Effects of share options on diluted earnings per share .............. 2920
Example 33.12:
Partly paid shares ............................................................................... 2924
Example 33.13:
Determining the exercise price of employee share options ..... 2925
Example 33.14:
Contingently issuable shares ........................................................... 2926
Example 33.15:
Warrants issued by a subsidiary...................................................... 2930
2890 Chapter 33
2891
Chapter 33
Earnings per share
1 INTRODUCTION
Earnings per share (EPS) is one of the most widely quoted statistics in financial analysis.
It came into great prominence in the US during the late 1950s and early 1960s due to the
widespread use of the price earnings ratio (PE) as a yardstick for investment decisions.
As a result, standard setters in some jurisdictions (notably the US and the UK) have had
rules on EPS for many years. However, it was not until 1997 that an international
accounting standard on the subject was published.
IAS 33 – Earnings per Share – was introduced for accounting periods beginning on or
after 1 January 1998. In December 2003, as part of the improvements project, the IASB
updated IAS 33 to provide more detailed guidance in some complex areas. There have
been no substantive changes since. The requirements of IAS 33 are discussed at 2 to 7
below, and the standard’s illustrative examples of particular issues are included in the text
of the chapter, whilst its comprehensive worked example is included as an Appendix.
1.1 Definitions
IAS 33 defines a number of its terms and these are dealt with in the text of this chapter
where appropriate. One term which is particularly pervasive is ‘fair value’. This term is
defined and explained in IFRS 13 – Fair Value Measurement – and is discussed in
Chapter 14. [IAS 33.8]. However, in the context of share-based payments the term fair
value has the meaning used in IFRS 2 – Share-based Payment. The relevance of share-
based payment to EPS is discussed at 6.4.5 below; IFRS 2 is discussed in Chapter 30.
[IAS 33.47A].
2
OBJECTIVE AND SCOPE OF IAS 33
2.1 Objective
IAS 33 sets out its objective as follows: ‘to prescribe principles for the determination
and presentation of earnings per share, so as to improve performance comparisons
between different entities in the same reporting period and between different
reporting periods for the same entity. Even though earnings per share data have
limitations because of the different accounting policies that may be used for
2892 Chapter 33
determining “earnings”, a consistently determined denominator enhances financial
reporting. The focus of this Standard is on the denominator of the earnings per
share calculation.’ [IAS 33.1].
The standard requires the computation of both basic and diluted EPS, explaining the
objective of each as follows:
• the objective of basic earnings per share information is to provide a measure of the
interests of each ordinary share of a parent entity in the performance of the entity
over the reporting period; [IAS 33.11] and
• the objective of diluted earnings per share is consistent with that of basic earnings
per share – to provide a measure of the interest of each ordinary share in the
performance of an entity – while giving effect to all dilutive potential ordinary
shares outstanding during the period. [IAS 33.32].
The underlying logic here is that EPS, including diluted EPS, should be an historical
performance measure. This impacts particularly on the reporting of diluted EPS, in
steering it away from an alternative purpose: to warn of potential future dilution. Indeed
the tension between these differing objectives is evident in the standard. As discussed
more fully at 6.4.6 below, IAS 33 sets out a very restrictive regime for including certain
potentially dilutive shares in the diluted EPS calculation. Yet diluted EPS is only to take
account of those potential shares that would dilute earnings from continuing operations
(see 6.3.1 below) which seems to have more of a forward looking ‘warning signal’ flavour.
Discontinued operations are discussed in Chapter 4.
2.2 Scope
IAS 33 applies to:
(a) the separate or individual financial statements of an entity:
(i) whose ordinary shares or potential ordinary shares are traded in a public
market (a domestic or foreign stock exchange or an over-the-counter market,
including local and regional markets); or
(ii) that files, or is in the process of filing, its financial statements with a securities
commission or other regulatory information for the purpose of issuing
ordinary shares in a public market; and
(b) the consolidated financial statements of a group with a parent:
(i) whose ordinary shares or potential ordinary shares are traded in a public
market (a domestic or foreign stock exchange or an over-the-counter market,
including local and regional markets); or
(ii) that files, or is in the process of filing, its financial statements with a securities
commission or other regulatory information for the purpose of issuing
ordinary shares in a public market. [IAS 33.2].
IAS 33 also applies to any other entity that discloses earnings per share. [IAS 33.3].
Where both the parent’s consolidated and separate financial statements are presented,
the standard only requires consolidated earnings per share to be given. If the parent
chooses to present EPS data based on its separate financial statements the standard
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 575
