International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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requires that the disclosures be restricted to the face of the parent-only statement of
Earnings per share 2893
comprehensive income (or separate income statement) and not be included in the
consolidated financial statements. [IAS 33.4].
In January 2014, the IASB published IFRS 14 – Regulatory Deferral Accounts. This
standard allows a first-time adopter within its scope to continue to account for
regulatory deferral account balances in its first IFRS financial statements in accordance
with its previous GAAP when it adopts IFRS. The standard introduces limited changes
to some previous GAAP accounting practices for regulatory deferral account balances,
which are primarily related to the presentation of these accounts. For entities applying
IFRS 14 certain additional EPS disclosures are required. This is discussed in Chapter 5
at 5.20.6.A.II.
3
THE BASIC EPS
IAS 33 requires the computation of basic EPS for the profit or loss (and, if presented,
the profit or loss from continuing operations) attributable to ordinary equity holders.
[IAS 33.9]. It defines, or rather describes, basic earnings per share in the following manner:
‘Basic earnings per share shall be calculated by dividing profit or loss attributable to
ordinary equity holders of the parent entity (the numerator) by the weighted average
number of ordinary shares outstanding (the denominator) during the period.’ [IAS 33.10].
3.1 Earnings
The starting point for determining the earnings figure to be used in the basic EPS
calculation (both for total earnings and, if appropriate, earnings from continuing
operations) is the net profit or loss for the period attributable to ordinary equity holders.
[IAS 33.12]. This will, in accordance with IAS 1 – Presentation of Financial Statements –
include all items of income and expense, including, dividends on preference shares
classified as liabilities and tax and is stated after the deduction of non-controlling
interests. [IAS 33.13, A1]. This is then adjusted for the after-tax amounts of preference
dividends, differences arising on the settlement of preference shares, and other similar
effects of preference shares classified as equity. [IAS 33.12]. These adjustments are
discussed at 5.2 below.
3.2
Number of shares
An ordinary share is defined as ‘an equity instrument that is subordinate to all other
classes of equity instruments’. [IAS 33.5]. ‘Equity instrument’ has the same meaning as in
IAS 32 – Financial Instruments: Presentation – that is ‘any contract that evidences a
residual interest in the assets of an entity after deducting all of its liabilities’. [IAS 33.8,
IAS 32.11]. IAS 33 goes on to observe that ordinary shares participate in profit for the
period only after other types of share such as preference shares have participated.
[IAS 33.6]. The standard also clarifies that there may be more than one class of ordinary
share and requires the computation and presentation of EPS for each class that has a
different right to share in profit for the period. [IAS 33.6, 66]. In practice, it is usually
straightforward to determine which instruments are ordinary shares for EPS purposes.
The treatment of different classes of shares is discussed at 5.4 below.
2894 Chapter 33
The basic rule in IAS 33 is that all outstanding ordinary shares are brought into the basic
EPS computation – time-weighted for changes in the period (changes in ordinary shares
are discussed at 4 below). [IAS 33.19]. There are three exceptions to this:
• ordinary shares that are issued as partly paid are included in the weighted average
as a fraction of a share based on their dividend participation relative to fully paid
shares (so if although only partly paid, they ranked equally for dividends they
would be included in full); [IAS 33.A15]
• treasury shares, which are presented in the financial statements as a deduction
from equity, are not considered outstanding for EPS purposes for the period they
are held in treasury. Although not stated explicitly in the standard itself, this
requirement is clearly logical (as although the shares are still legally in issue, they
are accounted for as if redeemed) and is illustrated in one of the examples
appended to the standard (see Example 33.1 at 4.1 below); [IAS 33.IE2] and
• shares that are contingently returnable (that is, subject to recall) are not treated as
outstanding until they cease to be subject to recall, and hence are excluded from
basic EPS until that time. [IAS 33.24].
The standard contains some specific guidance on when newly issued ordinary shares
should be considered outstanding. In general, shares are to be included from the date
consideration is receivable (considered by the standard generally to be the date of their
issue), for example: [IAS 33.21]
• shares issued in exchange for cash are included when cash is receivable;
• shares issued on the voluntary reinvestment of dividends on ordinary or
preference shares are included when the dividends are reinvested;
• shares issued as a result of the conversion of a debt instrument to ordinary shares
are included as of the date interest ceases accruing;
• shares issued in place of interest or principal on other financial instruments are
included as of the date interest ceases accruing;
• shares issued in exchange for the settlement of a liability of the entity are included
as of the settlement date;
• shares issued as consideration for the acquisition of an asset other than cash are
included as of the date on which the acquisition is recognised;
• shares issued in exchange for the rendering of services to the entity are included
as the services are rendered; and
• shares that will be issued upon the conversion of a mandatorily convertible
instrument are included in the calculation of basic earnings per share from the date
the contract is entered into. [IAS 33.23].
Most of these provisions are straightforward, however some are worthy of note.
Shares issued in exchange for services will be accounted for in accordance with IFRS 2,
with a charge to income matched by a credit to equity. IAS 33 has some guidance on the
inclusion of such potential shares in diluted EPS (see 6.4.5 below); however there is no
further elaboration of the meaning of ‘included as the services are rendered’. What
seems to be implicit in the phrase is that the shares concerned vest unconditionally as
services are rendered. On that basis, clearly it would be appropriate to include shares in
Earnings per share 2895
basic EPS as entitlement to them vests, notwithstanding that the actual issue of shares
may be at a different time. However, a very common form of share-based remuneration
involves entitlement to shares vesting at the end of an extended period conditional on
future events (typically continued employment and sometimes specific future
performance). Such arrangements are clearly conditionally issuable shares and should
be excluded from basic EPS until vesting. Indeed, when discussing employee share
schemes in the context of diluted EPS the standard is explicit, as follows. ‘Employee
share options with fixed or determinable terms a
nd non-vested ordinary shares are
treated as options in the calculation of diluted earnings per share, even though they may
be contingent on vesting. They are treated as outstanding on the grant date.
Performance-based employee share options are treated as contingently issuable shares
because their issue is contingent upon satisfying specified conditions in addition to the
passage of time.’ [IAS 33.48]. Contingently issuable shares are discussed at 6.4.6 below.
In respect of the final bullet point, the standard does not define what a mandatorily
convertible instrument is. One view would be that the requirement to account for the
shares in EPS from inception must mean it refers to instruments where the proceeds
also are received at inception. On that basis, it would exclude a forward contract for the
issue of shares which (as required by the first bullet above) would increase the
denominator of basic EPS only from the time the cash is receivable. Similarly, in the
reverse situation of a forward contract to redeem ordinary shares the shares would only
be removed from basic EPS when the consideration becomes payable. Another view
would be that all binding agreements to issue or redeem ordinary shares should be
reflected in basic EPS when the entity becomes party to the arrangement. A further
possible complexity is the question of whether or not a symmetrical treatment for the
issue and redemption of shares should be applied for EPS purposes. Whilst that certainly
seems logical, it is not beyond question in all circumstances particularly given the
asymmetrical accounting treatment for certain derivatives over own shares required by
IAS 32 (discussed in Chapter 43 at 5).
More generally, the standard goes on to say the timing of inclusion is determined by the
attaching terms and conditions, and also that due consideration should be given to the
substance of any contract associated with the issue. [IAS 33.21]. Ordinary shares that are
issuable on the satisfaction of certain conditions (contingently issuable shares) are to be
included in the calculation of basic EPS only from the date when all necessary
conditions have been satisfied; in effect when they are no longer contingent. [IAS 33.24].
This provision is interpreted strictly, as illustrated in Example 7 appended to the
standard (see Example 33.14 at 6.4.6.A below). In that example earnings in a year, by
meeting certain thresholds, would trigger the issue of shares. Because it is not certain
that the condition is met until the last day of the year (when earnings become known
with certainty) the new shares are excluded from basic EPS until the following year.
Where shares will be issued at some future date (that is, solely after the passage of time)
they are not considered contingently issuable by IAS 33, as the passage of time is a
certainty. [IAS 33.24]. In principle, this would seem to mean that they should be included
in basic EPS from the agreement date. However, careful consideration of the individual
facts and circumstances would be necessary.
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The calculation of the basic EPS is often simple but a number of complications can arise;
these may be considered under the following two headings:
(a) changes in ordinary shares outstanding; and
(b) matters affecting the numerator.
These are discussed in the next two sections.
4
CHANGES IN OUTSTANDING ORDINARY SHARES
Changes in ordinary shares outstanding can occur under a variety of circumstances, the
most common of which are dealt with below. Whenever such a change occurs during
the accounting period, an adjustment is required to the number of shares in the EPS
calculation for that period; furthermore, in certain situations the EPS for previous
periods will also have to be recalculated.
4.1
Weighted average number of shares
Implicit in the methodology of IAS 33 is a perceived correlation between the capital of an
entity (or rather the income-generating assets it reflects) and earnings. Accordingly, to
compute EPS as a performance measure requires adjusting the number of shares in the
denominator to reflect any variations in the period to the capital available to generate that
period’s earnings. The standard observes that using the weighted average number of
ordinary shares outstanding during the period reflects the possibility that the amount of
shareholders’ capital varied during the period as a result of a larger or smaller number of
shares being outstanding at any time. The weighted average number of ordinary shares
outstanding during the period is the number of ordinary shares outstanding at the
beginning of the period, adjusted by the number of ordinary shares bought back or issued
during the period multiplied by a time-weighting factor. The time-weighting factor is the
number of days that the shares are outstanding as a proportion of the total number of days
in the period; IAS 33 notes that a reasonable approximation of the weighted average is
adequate in many circumstances. [IAS 33.20]. Computation of a weighted average number
of shares is illustrated in the following example: [IAS 33.IE2]
Example 33.1: Calculation of weighted average number of shares
Shares
Treasury
Shares
issued
shares*
outstanding
1 January 2019
Balance at beginning of year
2,000
300 1,700
31 May 2019
Issue of new shares for cash
800
–
2,500
1 December 2019
Purchase of treasury shares for cash
–
250 2,250
31 December 2019
Balance at year end
2,800
550
2,250
Calculation of weighted average:
(1,700 × 5/12) + (2,500 × 6/12) + (2,250 × 1/12)
= 2,146 shares or
(1,700 × 12/12) + (800 × 7/12) – (250 × 1/12)
= 2,146 shares
* Treasury shares are equity instruments reacquired and held by the issuing entity itself or by its
subsidiaries.
The use of a weighted average number of shares is necessary because the increase in
the share capital would have affected earnings only for that portion of the year during
which the issue proceeds were available to management for use in the business.
Earnings per share 2897
4.2
Purchase and redemption of own shares
An entity may, if it is authorised to do so by its constitution and it complies with any
relevant legislation, purchase or otherwise redeem its own shares. Assuming this is done
at fair value, then the earnings should be apportioned over the weighted average share
capital in issue for the year. This was illustrated in Example 33.1 at 4.1 above in relation
to the purchase of treasury shares. If, on the other hand, the repurchase is at significantly
more than market value then IAS 33 requires adjustments to be made to EPS for periods
before buy-back. This is discussed at 4.3.5 below.
4.3
Changes in ordinary shares without corresponding changes in
resources
IAS 33 requires the number of shares used in the calculation to be adjusted (for all
> periods presented) for any transaction (other than the conversion of potential ordinary
shares) that changes the number of shares outstanding without a corresponding change
in resources. [IAS 33.26]. This is also to apply when some, but not all, such changes have
happened after the year-end but before the approval of the financial statements.
The standard gives the following as examples of changes in the number of ordinary
shares without a corresponding change in resources:
(a) a capitalisation or bonus issue (sometimes referred to as a stock dividend);
(b) a bonus element in any other issue, for example a bonus element in a rights issue
to existing shareholders;
(c) a share split; and
(d) a reverse share split (share consolidation). [IAS 33.27].
Another example not mentioned by the standard would be any bonus element in a buy-
back, such as a put warrant involving the repurchase of shares at significantly more than
their fair value. The adjustments required to EPS for each of these is discussed below.
As noted above, IAS 33 requires retrospective adjustment for all such events that
happen in the reporting period. However, it only requires restatement for those in (a),
(c) and (d) if they happen after the year-end but before the financial statements are
authorised for issue. [IAS 33.64].
4.3.1
Capitalisation, bonus issue, share split and share consolidation
4.3.1.A
Capitalisation, bonus issues and share splits
A capitalisation or bonus issue or share split has the effect of increasing the number of
shares in issue without any inflow of resources, as further ordinary shares are issued to
existing shareholders for no consideration. Consequently, no additional earnings will be
expected to accrue as a result of the issue. The additional shares should be treated as
having been in issue for the whole period and also included in the EPS calculation of all
earlier periods presented so as to give a comparable result. For example, on a two-for-
one bonus issue, the number of ordinary shares outstanding before the issue is
multiplied by three to obtain the new total number of ordinary shares, or by two to
obtain the number of additional ordinary shares. [IAS 33.28].