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International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

Page 575

by International GAAP 2019 (pdf)

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

 

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