6.4.6.B
Share price-based contingencies
The provisions here are more straightforward. In these cases, if the effect is dilutive, the
calculation of diluted EPS is based on the number of shares that would be issued if the
market price at the end of the reporting period were the market price at the end of the
contingency period. If the condition is based on an average of market prices over a
period of time that extends beyond the end of the reporting period, the average for the
period of time that has lapsed should be used. Again the standard explains that, because
the market price may change in a future period, the calculation of basic earnings per
Earnings per share 2929
share does not include such contingently issuable ordinary shares until the end of the
contingency period because not all necessary conditions have been satisfied. [IAS 33.54].
6.4.6.C Other
contingencies
The requirement regarding contingencies not driven by earnings or share price is as
follows: ‘assuming that the present status of the condition remains unchanged until the
end of the contingency period, the contingently issuable ordinary shares are included
in the calculation of diluted earnings per share according to the status at the end of the
reporting period.’ [IAS 33.56].
The standard illustrates the ‘other contingency’ rules by the example of shares being
issued depending upon the opening of a specified number of retail sites, and such a
contingency is included in the numerical example in the standard (see Example 33.14
at 6.4.6.A above). As is the case for earnings-based contingencies discussed above, it
would seem that such conditions are always deemed to be expressed as a cumulative
hurdle which may or may not be met by the end of the reporting period. Accordingly,
the required treatment would be the same if the condition had been expressed in terms
of achieving a certain average annual level of shop openings.
6.4.7
Potential ordinary shares of investees
A subsidiary, joint venture or associate may issue to parties other than the parent or
investors with joint control of, or significant influence over the investee potential
ordinary shares that are convertible into either ordinary shares of the subsidiary, joint
venture or associate, or ordinary shares of the parent or investors with joint control of,
or significant influence over the investee (the reporting entity). If these potential
ordinary shares of the subsidiary, joint venture or associate have a dilutive effect on the
basic EPS of the reporting entity, they should be included in the calculation of diluted
earnings per share. [IAS 33.40].
The standard requires that such potential ordinary shares should be included in the
calculation of diluted EPS as follows:
(a) instruments
issued
by a subsidiary, joint venture or associate that enable their
holders to obtain ordinary shares of the subsidiary, joint venture or associate
should be included in calculating the diluted EPS data of the subsidiary, joint
venture or associate. Those EPS are then included in the reporting entity’s EPS
calculations based on the reporting entity’s holding of the instruments of the
subsidiary, joint venture or associate; and
(b) instruments of a subsidiary, joint venture or associate that are convertible into the
reporting entity’s ordinary shares should be considered among the potential
ordinary shares of the reporting entity for the purpose of calculating diluted EPS.
Similarly, options or warrants issued by a subsidiary, joint venture or associate to
purchase ordinary shares of the reporting entity should be considered among the
potential ordinary shares of the reporting entity in the calculation of consolidated
diluted EPS. [IAS 33.A11].
For the purpose of determining the EPS effect of instruments issued by a reporting entity
that are convertible into ordinary shares of a subsidiary, joint venture or associate, the
standard requires that the instruments are assumed to be converted and the numerator
2930 Chapter 33
(profit or loss attributable to ordinary equity holders of the parent entity) adjusted as
necessary in accordance with the normal rules (see 6.2.1 above). In addition to those
adjustments, the numerator is adjusted for any change in the profit or loss recorded by the
reporting entity (such as dividend income or equity method income) that is attributable to
the increase in the number of ordinary shares of the subsidiary, joint venture or associate
outstanding as a result of the assumed conversion. The denominator of the diluted EPS
calculation is not affected because the number of ordinary shares of the reporting entity
outstanding would not change upon assumed conversion. [IAS 33.A12].
The computation under (a) above is illustrated in the following example. [IAS 33.IE10].
Example 33.15: Warrants issued by a subsidiary
Parent:
Profit attributable to ordinary equity
€12,000 (excluding any earnings of, or dividends paid by, the
holders of the parent entity
subsidiary)
Ordinary shares outstanding
10,000
Instruments of subsidiary owned by
800 ordinary shares
the parent
30 warrants exercisable to purchase ordinary shares of subsidiary
300 convertible preference shares
Subsidiary:
Profit
€5,400
Ordinary shares outstanding
1,000
Warrants
150, exercisable to purchase ordinary shares of the subsidiary
Exercise price
€10
Average market price of one
ordinary share
€20
Convertible preference shares
400, each convertible into one ordinary share
Dividends on preference shares
€1 per share
No inter-company eliminations or adjustments were necessary except for dividends.
For the purposes of this illustration, income taxes have been ignored.
Subsidiary’s earnings per share
€5,400(a) – €400(b)
Basic EPS
€5.00
calculated:
1,000(c)
€5,400(d)
Diluted EPS
€3.66
calculated:
1,000 + 75(e) + 400(f)
(a)
Subsidiary’s profit.
(b)
Dividends paid by subsidiary on convertible preference shares.
(c)
Subsidiary’s ordinary shares outstanding.
(d)
Subsidiary’s profit attributable to ordinary equity holders (€5,000) increased by €400 preference
dividends for the purpose of calculating diluted earnings per share.
(e)
Incremental shares from warrants, calculated: [(€20 – €10) ÷ €20] × 150.
(f)
Subsidiary’s ordinary shares assumed outstanding from conversion of convertible preference
shares, calculated: 400 convertible preference shares × conversion factor of 1.
Consolidated earnings per share
€12,000(g) – €4,300(h)
Basic EPS
€1.63
calculated:
10,000(i)
�
�12,000 + €2,928(j) + €55(k) + €1,098(l)
Diluted EPS
€1.61
calculated:
10,000
Earnings per share 2931
(g)
Parent’s profit attributable to ordinary equity holders of the parent entity.
(h)
Portion of subsidiary’s profit to be included in consolidated basic earnings per share, calculated:
(800 × €5.00) + (300 × €1.00)
(i) Parent’s
ordinary shares outstanding.
(j)
Parent’s proportionate interest in subsidiary’s earnings attributable to ordinary shares, calculated:
(800 ÷ 1,000) × (1,000 shares × €3.66 per share)
(k)
Parent’s proportionate interest in subsidiary’s earnings attributable to warrants, calculated:
(30 ÷ 150) × (75 incremental shares × €3.66 per share)
(l)
Parent’s proportionate interest in subsidiary’s earnings attributable to convertible preference
shares, calculated: (300 ÷ 400) × (400 shares from conversion × €3.66 per share)
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.
6.4.8
Contingently issuable potential ordinary shares
The standard requires that contingently issuable potential ordinary shares (other than
those covered by a contingent share agreement, such as contingently issuable
convertible instruments) to be included in the diluted EPS calculation as follows:
(a) determine whether the potential ordinary shares may be assumed to be issuable
on the basis of the conditions specified for their issue in accordance with the
provisions of the standard for contingent ordinary shares (see 6.4.6 above); and
(b) if those potential ordinary shares should be reflected in diluted EPS, determine
their impact on the calculation of diluted earnings per share by following the
provisions of the standard for that type of potential ordinary share.
However, exercise or conversion is not to be assumed for the purpose of calculating
diluted earnings per share unless exercise or conversion of similar outstanding potential
ordinary shares that are not contingently issuable is assumed. [IAS 33.57].
7
PRESENTATION, RESTATEMENT AND DISCLOSURE
7.1 Presentation
As discussed in Chapter 3 at 3.2.1, IAS 1 requires that all items of income and expense
be presented either:
(a) in a single statement of profit or loss and comprehensive income; or
(b) in two separate statements:
(i) a statement of profit or loss; and
(ii) a statement, beginning with profit or loss, presenting items of other
comprehensive income. [IAS 1.10A].
If the approach in (b) is followed, the separate statement of profit or loss must be
displayed immediately before the statement of comprehensive income. [IAS 1.10A].
If (a) is adopted, the EPS presentational requirements below apply to that single
statement. If (b) is chosen, the requirements apply to the separate statement of profit or
loss only and not the separate statement of comprehensive income. [IAS 33.4A, 67A, 68A].
2932 Chapter 33
IAS 33 requires the presentation of basic and diluted EPS (with equal prominence and even
if the amounts are negative – i.e. a loss per share) for each period for which a statement of
comprehensive income (or separate income statement) is presented. [IAS 33.66, 69]. This is
required for the profit or loss attributable to ordinary equity holders for:
(a) overall
profit;
(b) profit or loss from continuing operations; and
(c) profit or loss from discontinued operations, if any. [IAS 33.66, 68].
In the case of (a) and (b), separate figures are required for each class of ordinary shares
with a different right to share in profits for the period. The figures for (a) and (b) must be
displayed on the face of the statement. [IAS 33.66]. Those for (c) may be either on the face
or in the notes. [IAS 33.68]. The standard states that if diluted EPS is given for at least one
period it must be given for all periods presented. IAS 33 notes that if basic and diluted EPS
are equal, dual presentation can be accomplished in one line in the statement. [IAS 33.67].
Regarding (c), the wording of the standard is not very clear. In particular, if an entity has
more than one discontinued operation it does not specify whether separate EPS
disclosures are required for each or whether one aggregate figure is needed. The
wording leans to the former, as it uses the singular – ‘An entity that reports a
discontinued operation shall disclose the basic and diluted amounts per share for the
discontinued operation ...’. However, IFRS 5 – Non-current Assets Held for Sale and
Discontinued Operations – only requires the statement of comprehensive income (or
separate income statement) to identify the total result from all discontinued operations.
[IFRS 5.33]. In light of this, we believe aggregate figures are acceptable.
The presentation of EPS data in addition to that required by IAS 33 is discussed at 5.5 above.
7.2 Restatement
IAS 33 contains requirements to restate prior periods’ EPS for events that change the
number of shares outstanding without a corresponding change in resources.
Additionally it specifies circumstances when EPS should not be restated.
Basic and diluted EPS for all periods presented should be adjusted for:
• events (other than the conversion of potential ordinary shares) which change the
number of ordinary shares without a corresponding change in resources (discussed
at 4.3 above); [IAS 33.26, 64]
• the effects of errors and adjustments resulting from changes in accounting policies
accounted for retrospectively (see 5.3 above); [IAS 33.64] and
• the effects of group reorganisations that are accounted for as a pooling of interests
(discussed at 4.6 above).
No adjustment should be made:
• to basic or diluted EPS when a share consolidation is combined with a special
dividend where the overall commercial effect is that of a share repurchase at fair
value (discussed at 4.3.2 above); [IAS 33.29]
• to previously reported diluted EPS due to changes in the prices of ordinary shares
which would have given a different dilutive effect for options and warrants; [IAS 33.47]
Earnings per share 2933
• to prior period diluted EPS as a result of a contingency period coming to an end
without the conditions attaching to contingently issuable shares being met;
[IAS 33.52] or
• to prior period diluted EPS for changes in the assumptions used in the calculations
or for the conversion of potential ordinary shares into ordinary shares. [IAS 33.65].
7.3 Disclosure
IAS 33 requires disclosure of the following:
(a) the amounts used as the numerators in calculating basic and diluted EPS, and a
reconciliation of those amounts to profit or loss attributable to the parent entity
for the period. The reconciliation should include the individual effect of each class
of instruments that affects EPS;
(b) the weighted average number of ordinary shares used as t
he denominator in
calculating basic and diluted earnings per share, and a reconciliation of these
denominators to each other. The reconciliation should include the individual
effect of each class of instruments that affects EPS;
(c) instruments (including contingently issuable shares) that could potentially dilute
basic EPS in the future, but were not included in the calculation because they were
antidilutive for the period(s) presented; and
(d) a description of ordinary share transactions or potential ordinary share
transactions (other than those accounted for in EPS for the year – see 4.3 above –
in which case that fact should be stated), that occur after the end of the reporting
period and that would have changed significantly the number of ordinary shares or
potential ordinary shares outstanding at the end of the period if those transactions
had occurred before the end of the reporting period. [IAS 33.70].
Examples of transactions in (d) include:
(a) an issue of shares for cash;
(b) an issue of shares when the proceeds are used to repay debt or preference shares
outstanding at the end of the reporting period;
(c) the redemption of ordinary shares outstanding;
(d) the conversion or exercise of potential ordinary shares outstanding at the end of
the reporting period into ordinary shares;
(e) an issue of options, warrants, or convertible instruments; and
(f) the achievement of conditions that would result in the issue of contingently
issuable shares.
The standard observes that EPS amounts are not adjusted for such transactions
occurring after the reporting period because such transactions do not affect the amount
of capital used to produce profit or loss for the period. [IAS 33.71]. Changes in ordinary
shares are discussed at 4 above.
The standard observes that financial instruments and other contracts generating
potential ordinary shares may incorporate terms and conditions that affect the
measurement of basic and diluted earnings per share. These terms and conditions may
2934 Chapter 33
determine whether any potential ordinary shares are dilutive and, if so, the effect on the
weighted average number of shares outstanding and any consequent adjustments to
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 583
