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The EPS calculation involving a bonus issue is illustrated in the following example.
[IAS 33.IE3].
Example 33.2: A bonus issue
Profit attributable to ordinary equity holders of the parent entity 2018
€180
Profit attributable to ordinary equity holders of the parent entity 2019
€600
Ordinary shares outstanding until 30 September 2019
200
2 ordinary shares for each ordinary share
Bonus issue 1 October 2019
outstanding at 30 September 2019
200 × 2 =
400
€600
Basic earnings per share 2019
= €1.00
(200 + 400)
€180
Basic earnings per share 2018
= €0.30
(200 + 400)
Because the bonus issue was without consideration, it is treated as if it had occurred before the beginning of
2018, the earliest period presented.
Again, although the standard is silent on the matter, we believe that any financial ratios
disclosed for earlier periods, which are based on the number of equity shares at a year-
end (e.g. dividend per share) should also be adjusted in a similar manner.
4.3.1.B Stock
dividends
Stock or scrip dividends refer to the case where an entity offers its shareholders the
choice of receiving further fully paid up shares in the company as an alternative to
receiving a cash dividend. It could be argued that the dividend foregone represents
payment for the shares, usually at fair value, and hence no restatement is appropriate.
Alternatively, the shares could be viewed as being, in substance, bonus issues which
require the EPS for the earlier period to be adjusted. IAS 33 seems to suggest the latter
view, as it notes that capitalisation or bonus issues are sometimes referred to as stock
dividends. However, entities often refer to these arrangements as dividend reinvestment
plans which suggests the acquisition of new shares for valuable consideration.
In our view, this distinction should be a factual one. If an entity (say, through proposal
and subsequent approval by shareholders) has a legal obligation to pay a dividend in
cash or, at the shareholder’s option, shares then the cash payment avoided if the stock
dividend is taken up is consideration for the shares. This may be equivalent to an issue
at fair value or it may contain some bonus element requiring retrospective adjustment
of EPS. In practice the fair value of shares received as a stock dividend alternative may
exceed the cash alternative; this is often referred to as an enhanced stock dividend. In
these cases IAS 33 requires a bonus element to be identified, and prior EPS figures
restated accordingly. This is essentially the same as adjustments for the bonus element
in a rights issue, discussed at 4.3.3 below.
Furthermore, in this scenario, during the period between the obligation coming into
existence and its settlement (in cash or shares) it could be argued to represent a written
call option and hence potentially affect diluted EPS (see 6.4.2.B below). Given that the
Earnings per share 2899
standard is silent on this aspect of some stock dividends we do not believe that such an
approach was intended. In any event, we generally do not believe the effect on diluted
EPS would be significant. Conversely, if the entity issues new shares instead of a
dividend it would be a bonus issue requiring full retrospective adjustment to EPS.
4.3.1.C Share
consolidations
Occasionally, entities will consolidate their equity share capital into a smaller number
of shares. Such a consolidation generally reduces the number of shares outstanding
without a corresponding outflow of resources, and this would require an adjustment to
the denominator for periods before the consolidation. [IAS 33.29].
4.3.2
Share consolidation with a special dividend
Share consolidations as discussed at 4.3.1.C above normally do not involve any outflow of
funds from the entity. However, entities may return surplus cash to their shareholders by
paying special dividends accompanied by a share consolidation, the purpose of which is to
maintain the value of each share following the payment of the dividend. This issue is
specifically addressed by IAS 33. The normal rule of restating the outstanding number of
shares for all periods for a share consolidation is not applied when the overall effect is a share
repurchase at fair value because in such cases the reduction of shares is the result of a
corresponding reduction in resources. In such cases the weighted average number of shares
is adjusted for the consolidation from the date the special dividend is recognised. [IAS 33.29].
4.3.3 Rights
issue
A rights issue is a popular method through which entities are able to access the capital
markets for further capital. Under the terms of such an issue, existing shareholders are
given the opportunity to acquire further shares in the entity on a pro-rata basis to their
existing shareholdings.
The ‘rights’ shares will usually be offered either at the current market price or at a price
below that. In the former case, the treatment of the issue for EPS purposes is as
discussed at 4.1 above. However, where the rights price is at a discount to market it is
not quite as straightforward, since the issue is equivalent to a bonus issue (see 4.3.1
above) combined with an issue at full market price. In such cases, IAS 33 requires an
adjustment to the number of shares outstanding before the rights issue to reflect the
bonus element inherent in it. [IAS 33.26-27].
The bonus element of the rights issue available to all existing shareholders is given by
the following adjustment factor, sometimes referred to as the bonus fraction: [IAS 33.A2]
Fair value per share immediately before the exercise of rights
Theoretical ex-rights fair value per share
The fair value per share immediately before the exercise of rights is the actual price at which
the shares are quoted inclusive of the right to take up the future shares under the rights issue.
Where the rights are to be traded separately from the shares the fair value used is the closing
price on the last day on which the shares are traded inclusive of the right. [IAS 33.A2].
2900 Chapter 33
The ‘ex-rights fair value’ is the theoretical price at which the shares would be expected
to be quoted, other stock market factors apart, after the rights issue shares have been
issued. It is calculated by adding the aggregate fair value of the shares immediately
before the exercise of the rights to the proceeds from the exercise, and dividing by the
number of shares outstanding after the exercise. [IAS 33.A2]. The EPS calculation
involving a rights issue is illustrated in the following example. [IAS 33.IE4].
Example 33.3: Rights issue at less than full market price
2017
2018
2019
Profit attributable to ordinary equity
€1,100
€1,500 €1,800
holders of the parent entity
Shares outstanding before rights issue
500 shares
Rights issue
One new share for each five
outstanding shares (100 new
shares total)
Exercise
price:
€5.00
Date of rights issue: 1 January 2018
Last date to exercise rights: 1 March 2018
Market price of one ordinary share
immediately before exercise on
€11.00
1 March 2018
Reporting date
31 December
Calculation of theoretical ex-rights value per share
Fair value of all outstanding shares
Total amount received
+
before the exercise of rights
from exercise of rights
=
Number of shares outstanding
Number of shares issued
+
before exercise
in the exercise
(€11.00 × 500 shares) + (€5.00 × 100 shares)
500 shares + 100 shares
Theoretical ex-rights value per share = €10.00
Calculation of adjustment factor
Fair value per share before exercise of rights
€11.00
=
= 1.10
Theoretical ex-rights value per share
€10.00
Calculation of basic earnings per share
2017
2018
2019
2017 basic EPS as originally reported:
€1,100 ÷ 500 shares =
€2.20
2017 basic EPS restated for rights issue:
€1,100 ÷ (500 shares × 1.1) =
€2.00
2018 basic EPS including effects of rights
issue:
€1,500
=
€2.54
(500 × 1.1 × 2/12) + (600 × 10/12)
2019 basic EPS:
€1,800 ÷ 600 shares =
€3.00
Earnings per share 2901
Rather than multiplying the denominator by 11/10ths, the previous year’s EPS (and any
EPS disclosures in a historical summary) could alternatively be arrived at by multiplying
the original EPS by 10/11ths.
During the period that the rights are outstanding they represent, strictly speaking, a
written call option over the entity’s shares which could have implications for diluted
EPS (see 6.4.2 below).
It is possible that shares could be issued as a result of open offers, placings and other
offerings of equity shares not made to existing shareholders, at a discount to the market
price. In such cases it would be necessary to consider whether the issue contained a
bonus element, or rather simply reflected differing views on the fair value of the shares.
In our opinion the latter is a more realistic alternative. Accordingly the shares should be
dealt with on a weighted average basis without calculating any bonus element when
computing the EPS.
4.3.4
B share schemes
One method by which some entities have returned capital to shareholders is the so-
called ‘B share scheme’. These schemes involve issuing ‘B shares’ (usually undated
preference shares with low or zero coupons) to existing shareholders, either as a
bonus issue or via a share split. These are then repurchased for cash and cancelled,
following which the ordinary shares are consolidated. The overall effect is intended
to be the same as a repurchase of ordinary shares at fair value, and accordingly no
retrospective adjustment to EPS is necessary, assuming that the intention is achieved.
[IAS 33.29].
4.3.5
Put warrants priced above market value
As noted at 4.3 above, an example of a change in the number of shares outstanding
without a corresponding change in resources 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 accounting requirements for such
instruments are discussed in Chapter 43 at 5.
IAS 33 does not give an illustrative calculation for a put warrant at significantly more
than fair value, but it does for the more familiar rights issue (which are discussed
at 4.3.3 above). In a rights issue new shares are issued at a discount to market value,
whereas with put warrants shares are bought back at a premium to market value. In
both cases the remaining shares are viewed as being devalued for the purposes of
comparing EPS over time. Applying the logic of adjusting EPS when there is a change
in the number of shares without a corresponding change in resources would seem to
require that put warrants are treated as a reverse rights issue. This would mean
calculating a similar ‘adjustment factor’, and applying it to the number of shares
outstanding before the transaction. The difference in the calculation would be that
the number of shares issued and the consideration received for them would be
replaced by negative amounts representing the number of shares put back to the entity
and the amount paid for them.
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An illustration of what this might entail is as follows:
Example 33.4: Put warrants priced above market value
The following example takes the same scenario as Example 33.3 above (a rights issue), altered to illustrate a
put warrant scheme. In that example the shares are issued at a discount of €6.00 to the €11.00 market price
on a one for five basis two months into the year. Reversing this would give a put warrant to sell shares back
to the company at a €6 premium, again on a one for five basis. All other details have been left the same for
comparability, although in reality the rising earnings following a rights issue may well become falling
earnings after a buy-back. The calculation would then become:
Calculation of theoretical ex-warrant value per share
Fair value of all outstanding shares
Total amount paid on
–
before the exercise of warrants
exercise of warrants
=
Shares outstanding before exercise
–
Shares cancelled in the exercise
(€11 × 500) – (€17 × 100)
= €9.50
500 – 100
Calculation of adjustment factor
Fair value per share before exercise of warrants
€11
=
= 1.16
Theoretical ex-warrant value per share
€9.5
Calculation of basic earnings per share
2017
2018
2019
€ € €
2017 EPS as originally reported:
€1,100 ÷ 500 shares =
2.20
2017 EPS restated for warrants:
€1,100 ÷ (500 shares × 1.16) =
1.90
2018 EPS including effects of warrants:
€1,500
=
3.49
(500 × 1.16 × 2/12) + (400 × 10/12)
2019 basic EPS:
€1,800 ÷ 400 shares =
3.49
Whilst the above seems a sensible interpretation of the requirements, as the procedure
is not specified there may be scope for other interpretations.
4.4
Options exercised during the year
Shares issued as a result of options being exercised should be dealt with on a weighted
average basis in the basic EPS. [IAS 33.38]. Furthermore, options that have been exercised
&n
bsp; during the year will also affect diluted EPS calculations. If the options in question would
have had a diluting effect on the basic EPS had they been exercised at the beginning of
the year, then they should be considered in the diluted EPS calculation as explained
in 6.4.2 below, but on a weighted average basis for the period up to the date of exercise.
The exercise of options is a ‘conversion of potential ordinary shares’. The standard
excludes such conversions from the general requirement (see 4.3 above) to adjust
Earnings per share 2903
prior periods’ EPS when a change in the number of shares happens without a
corresponding change in resources. [IAS 33.26].
4.5
Post balance sheet changes in capital
The EPS figure should not reflect any changes in the capital structure occurring after the
reporting period, but before the financial statements are authorised for issue, which was
effected for fair value. This is because any proceeds received from the issue were not
available for use during the period. However, EPS for all periods presented should be
adjusted for any bonus element in certain post year-end changes in the number of shares,
as discussed at 4.3 above. When this is done that fact should be disclosed. [IAS 33.64].
4.6
Issue to acquire another business
4.6.1 Acquisitions
As a result of a share issue to acquire another business, funds or other assets will flow
into the reporting entity and extra profits will be expected to be generated. When
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