calculating EPS, it should be assumed that the shares were issued on the acquisition date
(even if the actual date of issue is later), since this will be the date from which the results
of the newly acquired business are recognised. [IAS 33.21(f), 22].
4.6.2 Reverse
acquisitions
Reverse acquisition is the term used to describe a business combination whereby the legal
parent entity after the combination is in substance the acquired and not the acquiring
entity (discussed in Chapter 9 at 14). IAS 33 is silent on the subject; however, an appendix
to IFRS 3 – Business Combinations – contains a discussion of the implications for EPS of
such transactions. Following a reverse acquisition the equity structure appearing in the
consolidated financial statements will reflect the equity of the legal parent, including the
equity instruments issued by it to effect the business combination. [IFRS 3.B25].
For the purposes of calculating the weighted average number of ordinary shares
outstanding during the period in which the reverse acquisition occurs:
(a) the number of ordinary shares outstanding from the beginning of that period to the
acquisition date shall be computed on the basis of the weighted average number of
ordinary shares of the legal acquiree (accounting acquirer) outstanding during the
period multiplied by the exchange ratio established in the merger agreement; and
(b) the number of ordinary shares outstanding from the acquisition date to the end of
that period shall be the actual number of ordinary shares of the legal acquirer (the
accounting acquiree) outstanding during that period. [IFRS 3.B26].
The basic EPS disclosed for each comparative period before the acquisition date is
calculated by dividing the profit or loss of the legal subsidiary attributable to ordinary
shareholders in each of those periods by the legal acquiree’s historical weighted average
number of ordinary shares outstanding multiplied by the exchange ratio established in
the acquisition agreement. [IFRS 3.B27].
IFRS 3 presents an illustrative example of a reverse acquisition, including the EPS
calculation, see Chapter 9 at 14.5.
2904 Chapter 33
4.6.3
Establishment of a new parent undertaking
Where a new parent entity is established by means of a share for share exchange and its
consolidated financial statements have been presented as a continuation of the existing
group (discussed in Chapter 10 at 4.2.1), the number of shares taken as being in issue for
both the current and preceding periods would be the number of shares issued by the
new parent entity. However, EPS calculations for previous periods in the new parent
entity’s financial statements would have to reflect any changes in the number of
outstanding ordinary shares of the former parent entity that may have occurred in those
periods, as illustrated in the example below:
Example 33.5: Calculation of EPS where a new holding company is established
Entity A has been established as the newly formed parent entity of Entity B in a one for one share exchange
on 30 June 2019. At that date, Entity B has 1,000,000 €1 ordinary shares in issue. Previously, on 30 June
2018 Entity B had issued 200,000 €1 ordinary shares for cash at full market price. Both entities have a
31 December year-end and the trading results of Entity B are as follows:
2019
2018
€
€
Profit for equity shareholders after taxation
500,000
300,000
The earnings per share calculation of Entity A is shown below:
2019
2018
6
Number of equity shares
800,000 ×
= 400,000
12
6
1,000,000
×
= 500,000
12
1,000,000
900,000
500,000
300,000
EPS
= €0.50
= €0.33
1,000,000
900,000
If, in the above example, the share exchange did not take place on a one for one basis, but Entity A issued
three shares for every one share held in Entity B, then the number of shares issued by Entity B in 2018 would
have to be apportioned accordingly before carrying out the weighted average calculation. The earnings per
share calculation would, therefore, have been as follows:
2019
2018
6
Number of equity shares
2,400,000
×
= 1,200,000
12
6
3,000,000
×
= 1,500,000
12
3,000,000
2,700,000
500,000
300,000
EPS
= €0.17
= €0.11
3,000,000
2,700,000
Earnings per share 2905
4.7
Adjustments to EPS in historical summaries
In order to ensure comparability of EPS figures, the previously published EPS figures
for all periods presented in IFRS financial statements should be adjusted for subsequent
changes in capital not involving full consideration at fair value (apart from the
conversion of potential ordinary shares) in the manner described at 4.3 above. Often
entities will include EPS figures in historical summaries (typically five years) in the
analyses and discussions accompanying (but not part of) the financial statements. We
believe that all such analyses need similar adjustments in order to be meaningful. We
also believe that the resultant figures should be described as restated.
5
MATTERS AFFECTING THE NUMERATOR
5.1 Earnings
The earnings figure on which the basic EPS calculation is based should be the
consolidated net profit or loss for the year after tax, non-controlling interests and after
adjusting for returns to preference shareholders that are not already included in net
profit (as will be the case for preference shares classified as liabilities under IAS 32).
5.2 Preference
dividends
The adjustments to net profit attributable to ordinary shareholders in relation to returns
to preference shareholders should include:
• the after-tax amount of any preference dividends on non-cumulative preference
shares declared in respect of the period; [IAS 33.14(a)]
• the after-tax amount of the preference dividends for cumulative preference shares
required for the period, whether or not the dividends have been declared. This does
not include the amount of any preference dividends for cumulative preference shares
paid or declared during the current period in respect of previous periods; [IAS 33.14(b)]
• any original issue discount or premium on increasing rate preference shares which
is amortised to retained earnings using the effective interest method. Increasing
rate preference shares are those that provide: a low initial dividend to compensate
an entity for selling them at a discount; or an above-market dividend in later
periods to compensate investors for purchasing them at a premium (see
Example 33.6 below); [IAS 33.15]
• the excess of the fair value of the consider
ation paid to shareholders over the
carrying amount of the preference shares when the shares are repurchased under an
entity’s tender offer to the holders. As this represents a return to the holders of the
shares (and a charge to retained earnings for the entity) it is deducted in calculating
profit or loss attributable to ordinary equity holders of the parent entity; [IAS 33.16]
2906 Chapter 33
• the excess of the fair value of the ordinary shares or other consideration paid over
the fair value of the ordinary shares issuable under the original conversion terms
when early conversion of convertible preference shares is induced through
favourable changes to the original conversion terms or the payment of additional
consideration. This is a return to the preference shareholders, and accordingly is
deducted in calculating profit or loss attributable to ordinary equity holders of the
parent entity; [IAS 33.17] and
• any excess of the carrying amount of preference shares over the fair value of the
consideration paid to settle them. This reflects a gain to the entity and is added in
calculating profit or loss attributable to ordinary equity holders. [IAS 33.18].
The computation of EPS involving increasing rate preference shares is illustrated in the
following example. [IAS 33.IE1].
Example 33.6: Increasing rate preference shares
Entity D issued non-convertible, non-redeemable class A cumulative preference shares of €100 par value on
1 January 2019. The class A preference shares are entitled to a cumulative annual dividend of €7 per share
starting in 2022. At the time of issue, the market rate dividend yield on the class A preference shares was
7 per cent a year. Thus, Entity D could have expected to receive proceeds of approximately €100 per class A
preference share if the dividend rate of €7 per share had been in effect at the date of issue.
In consideration of the dividend payment terms, however, the class A preference shares were issued at €81.63
per share, i.e. at a discount of €18.37 per share. The issue price can be calculated by taking the present value
of €100, discounted at 7 per cent over a three-year period. Because the shares are classified as equity, the
original issue discount is amortised to retained earnings using the effective interest method and treated as a
preference dividend for earnings per share purposes. To calculate basic earnings per share, the following
imputed dividend per class A preference share is deducted to determine the profit or loss attributable to
ordinary equity holders of the parent entity:
Carrying amount of
Carrying amount of
class A preference
Imputed
class A preference
Year paid
shares 1 January
dividend1
shares 31 December2
Dividend
€
€
€
€
2019 81.63
5.71
87.34
–
2020 87.34
6.12
93.46
–
2021 93.46
6.54
100.00
–
Thereafter: 100.00
7.00
107.00
(7.00)
1 at 7% of the carrying amount.
2 This is before dividend payment.
5.3 Retrospective
adjustments
Where comparative figures have been restated (for example, to correct a material error
or as a result of a change in accounting policy), earnings per share for all periods
presented should also be restated. [IAS 33.64].
Earnings per share 2907
5.4
Participating equity instruments and two class shares
As noted at 3.2 above, IAS 33 envisages entities having more than one class of ordinary
shares and requires the calculation and presentation of EPS for each such class.
[IAS 33.66]. Although perhaps not exactly obvious from the definition, some instruments
that have a right to participate in profits are viewed by the standard as ordinary shares.
The standard observes that the equity of some entities includes:
(a) instruments that participate in dividends with ordinary shares according to a
predetermined formula (for example, two for one) with, at times, an upper limit on
the extent of participation (for example, up to, but not beyond, a specified amount
per share); and
(b) a class of ordinary shares with a different dividend rate from that of another class
of ordinary shares but without prior or senior rights. [IAS 33.A13].
Whilst category (a) could encompass some participating preference shares (as
illustrated in Example 33.7 below), not all participating preference shares would
necessarily be treated as ordinary shares for EPS purposes. This is because the
participation features of some instruments could mean that they are not subordinate
to all other classes of equity instrument. The meaning of ordinary shares for EPS
purposes is discussed at 3.2 above.
To calculate basic (and diluted) earnings per share:
(a) profit or loss attributable to ordinary equity holders of the parent entity is adjusted
(a profit reduced and a loss increased) by the amount of dividends declared in the
period for each class of shares and by the contractual amount of dividends (or
interest on participating bonds) that must be paid for the period (for example,
unpaid cumulative dividends);
(b) the remaining profit or loss is allocated to ordinary shares and participating equity
instruments to the extent that each instrument shares in earnings as if all of the
profit or loss for the period had been distributed. The total profit or loss allocated
to each class of equity instrument is determined by adding together the amount
allocated for dividends and the amount allocated for a participation feature; and
(c) the total amount of profit or loss allocated to each class of equity instrument is
divided by the number of outstanding instruments to which the earnings are
allocated to determine the earnings per share for the instrument.
For the calculation of diluted earnings per share, all potential ordinary shares assumed
to have been issued are included in outstanding ordinary shares. [IAS 33.A14]. This is
discussed at 6.4 below.
2908 Chapter 33
Participating equity instruments and two-class ordinary shares are illustrated with the
following example. [IAS 33.IE11].
Example 33.7: Participating equity instruments and two-class ordinary shares
Profit attributable to equity holders of the parent entity
€100,000
Ordinary shares outstanding
10,000
Non-convertible preference shares
6,000
Non-cumulative annual dividend on preference shares
€5.50 per share
(before any dividend is paid on ordinary shares)
After ordinary shares have been paid a dividend of €2.10 per share, the preference shares participate in
any additional dividends on a 20:80 ratio with ordinary shares (i.e. after preference and ordinary shares
have been paid dividends of €5.50 and €2.10 per share, respectively, preference shares participate in any
additional dividends at a rate of one-fourth of the amount paid to ordinary shares on
a per-share basis).
Dividends on preference shares paid
€33,000
(€5.50 per share)
Dividends on ordinary shares paid
€21,000
(€2.10 per share)
Basic earnings per share is calculated as follows:
€ €
Profit attributable to equity holders of the parent entity
100,000
Less dividends paid:
Preference
33,000
Ordinary
21,000
(54,000)
Undistributed earnings
46,000
Allocation of undistributed earnings:
Allocation per ordinary share = A
Allocation per preference share = B; B = 1/4 A
(A × 10,000) + (1/4 A × 6,000) = €46,000
A = €46,000 ÷ (10,000 + 1,500)
A = €4.00
B = 1/4 A
B = €1.00
Basic per share amounts:
Preference
Ordinary
shares
shares
Distributed earnings
€5.50 €2.10
Undistributed earnings
€1.00 €4.00
Totals
€6.50 €6.10
N.B. This example does not illustrate the classification of the components of convertible financial
instruments as liabilities and equity or the classification of related interest and dividends as expenses
and equity as required by IAS 32.
5.4.1
Tax deductible dividends on participating equity instruments
In June 2017 the Interpretations Committee published an agenda decision in response
to a request to clarify the treatment for EPS purposes of tax deductible dividends on
participating equity instruments.1
Earnings per share 2909
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 578
