IAS 33 Earnings per Share

06
INTRODUCTION |1

EPS is widely accepted as the most important indicator of a company’s

performance. It is important that users of financial statements:
Importance
 Are able to compare the EPS of different entities
 Are able to compare the EPS of the same entity over the years
IAS 33 achieves comparability by:
How IAS 33
 Defining earnings
achieves
 Prescribing methods to determine the number of shares
comparability?
 Requiring standard presentation and disclosure
Scope The entities whose ordinary shares are publicly traded

BASIC EPS
Earnings attributable to ordinary shareholders
BEPS =
Weighted average number of shares

Earnings = Profit after tax – NCI share – preference dividend

Shares = Weighted average number of ordinary shares outstanding during the year

ISSUE OF SHARES AT FULL MARKET PRICE

Earnings No impact
The weighted average equity shares are to be considered taking into account of
Shares the date any new shares are issued during the year since the shares issued
during the year generate additional resources only for part of year.

QUESTION 01
A company issued 200,000 shares at full market price (Rs.3) on 1 July 2008. Relevant
information is:
2008 2007
Profit attributable to ordinary shareholders for the year Rs.550,000 Rs.460,000
Number of ordinary share in issue at Dec 31 1,000,000 800,000

Required:
Calculate the EPS for each of the years.
BONUS ISSUE (OR CAPITALISATION ISSUE OR SCRIP ISSUE)
Earnings No impact
The bonus shares are deemed to have been issued at the start of the
Shares comparative period because there is no change in resources before and after
the issue.
QUESTION 02
A company makes a bonus issue of one new share for every five existing shares held on 1
July 2008. Relevant information is:
2008 2007
Profit attributable to ordinary shareholders for the year Rs.550,000 Rs.460,000
Number of ordinary share in issue at Dec 31 1,200,000 1,000,000
Required:
Calculate the EPS for each of the years.
 ICMAP S1 AFA&CR

RIGHT ISSUE BELOW MARKET VALUE

Earnings No impact
A bonus fraction is calculated and applied to shares in issue before the rights
issue as share issue below market price gives the company additional resources
Shares
while at the same it includes a bonus element.
The bonus fraction = Actual cum right price / Theoretical ex-right price
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QUESTION 03
A company issued one new share for every two existing shares held by way of rights at
Rs.1.5 per share on 1 July 2008. The market price of share before right issue was Rs.3 per
share.
2008 2007
Profit attributable to ordinary shareholders for the year Rs.550,000 Rs.460,000
Number of ordinary share in issue at Dec 31 1,200,000 800,000

Required:
Calculate the EPS for each of the years.

DILUTED EPS
Equity share capital may change in future owing to circumstances which exist now due to
some potential ordinary shares which may affect EPS in the future. DEPS attempts to alert
shareholders to the potential adverse effect of potential ordinary shares on EPS. Potential
ordinary shares include:
 Convertible bonds
 Convertible preference shares
 Share options and warrants

Calculate the incremental EPS and if it is dilutive (less than BEPS) then the impact is
included in calculation of DEPS.

Earnings under BEPS + Incremental earnings

DEPS =
Shares under BEPS + Incremental shares

Earnings had the potential ordinary shares were in issue

IEPS = Maximum possible number of shares convertible or free shares under
options

CONVERTIBLES AND OPTIONS

In case of convertible preference shares, if they are assumed to be converted
the company earnings would increase by the amount of preference dividend.

Earnings In case of convertible debt, if they are assumed to be converted the company
earnings would increase by the amount of Interest (net of tax).

In case of options, there is no impact on earnings.

In case of convertibles (pref shares & debt) the maximum possible increase in
shares is taken into account.

In case of options, free shares are taken into account. Free shares are
Shares calculated as follows.

Shares to be issued under options XXX

Shares to be issued x Exercise price / Average fair value per share (XXX)
Free shares XXX

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 Class Notes

QUESTION 04
On 1 April 2011, a company issued Rs.1,250,000 8% convertible unsecured bonds for cash
at par. Each Rs.100 nominal of loan stock will be convertible in 2016 or 2017 into the
number of ordinary shares set out below:
On 31 December 2016 124 shares
On 31 December 2017 120 shares
|3
Issued share capital:
Rs.500,000 in 10% cumulative irredeemable preference shares of Rs.1
Rs.1,000,000 in ordinary share of 25 cents each = 4,000,000 shares

Income tax rate are 30%

Trading results for the years ended 31 December were as follows:

2012 Rs. 2011 Rs.
Operating profit 1,100,000 991,818
Interest on 8% bonds (100,000) (75,000)
Profit before tax 1,000,000 916,818
Income tax (300,000) (275,045)
Profit after tax 700,000 641,773
Calculate the basic and diluted EPS.

QUESTION 05
On 1 January 2007, a company has 4 million ordinary shares in issue and issues options
over another million shares. The net profit for the year is Rs.500,000. During the year to 31
December 2007 the average fair value of one ordinary share was Rs.3 and the exercise
price for the shares under option was Rs.2.

Calculate basic and diluted EPS for the year ended 31 December 2007.

IMPORTANCE AND LIMITATIONS

The uses of EPS as a financial indicator include:
 The assessment of management performance over time.
 Trend analysis of EPS to give an indication of earnings performance.
Uses of
 An indicator of dividend payouts. The higher the EPS the greater the
EPS
expectation of an increased dividend compared to previous periods.
 An important component in determining the entity's price/earnings
(P/E) ratio.
 it shows what the current year’s EPS would be if all the dilutive
potential ordinary shares in issue had been converted
Uses of
 it can be used to assess trends in past performance
DEPS
 in theory, it serves as a warning to equity shareholders that the return
on their investment may fall in future periods.
Although EPS is believed to have a real influence on the market price of
shares, it has several important limitations as a performance measure:
 It does not take account of inflation. Apparent growth in earnings may
not be real.
 It is based on historic information and therefore it does not necessarily
Limitations have predictive value.
 An entity’s earnings are affected by the choice of its accounting
policies. Therefore it may not always be appropriate to compare the
EPS of different companies.
 DEPS is only an additional measure of past performance despite
looking at future potential shares.

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 ICMAP S1 AFA&CR

QUESTION 06
Profit attributable to ordinary shareholders Rs.10,000,000
Ordinary shares outstanding 2,000,000
Average market price of one ordinary share during year Rs. 75

Potential ordinary shares

4|  Options 100,000 with exercise price of Rs. 60
 Convertible preference shares 800,000 shares with a par value of Rs. 100 entitled to
a cumulative dividend of Rs. 8 per share. Each preference share is convertible to two
ordinary shares.
 5% convertible bonds Nominal amount Rs.100,000,000. Each Rs. 1,000 bond is
convertible to 20 ordinary shares. There is no amortisation of premium or discount
affecting the determination of interest expense.

Tax rate 40%

Required:
Calculate basic and diluted EPS considering the order in which potential ordinary shares
may be dilutive or anti dilutive.

QUESTION 07 EPS PE Mod 2013 Q4b

On 1st Jan 2011 KDC company announced one right share for each four share outstanding,
the exercise price of right issue was Rs.9.00 per share and last date ofe xercise of right was
1st April 2011. Market price of one ordinary share immediately before exercise date was
Rs.14 per share. Following is the profit of the company from 2010 to 2012:
Profit attributable to ordinary shareholders for the year Rs.
ended:
June 30, 2010 90,000,000
June 30, 2011 99,000,000
June 30, 2012 106,250,000
The company had 5 million shares outstanding before issuance of right share and average
market price/share for 2010-11 was Rs.12.50 and for 2011-12 was Rs.15.00.

Required:
Calculate the basic and revised earnings per share for the year ended June 30, 2010-2012.
(10)
QUESTION 08 EPS PE Ex 2014 Q3c
Holding plc acquired 75% ordinary shares of Subsidiary Limited on July 1, 2012. Following is
the relevant data for the year ended June 30, 2013:
Particulars Rs. in
million
Holding plc
Profit after tax 32.00
Shareholders’ equity (Rs.10 each) 20.00
Subsidiary Limited
Shareholders’ equity (Rs.10 each) 10.00
Basic EPS Rs.12/ share

Required:
Calculate Consolidated Earnings per Share assuming that no intercompany eliminations or
adjustments are necessary. (04)

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 Class Notes

QUESTION 09 EPS PE Feb 2013 Q4

Following data related to AC Company and its subsidiary DC Company for the year ended
June 30, 2012:
AC Company: (in .000. )
Profit attributable to ordinary s hare holders of AC Company Rs 25,000
Ordinary shares outstanding 10,000
Instruments of DC Company owned by AC Company: |5
Ordinary shares outstanding 900
Warrants exercisable to purchase ordinary share of DC Company 300
Convertible preference shares 375
DC Company:
Profit for the year (after tax) Rs. 8,000
Ordinary shares outstanding 1,200
Warrants exercisable to purchase ordinary shares of DC Company 600
Convertible preference shares (convertible into 1 equity share) 500

 Exercise price is Rs.10

 Average market price is Rs. 20
 Dividend on preference shares is Re.1 per share

Required:
Calculate basic earnings per share and diluted earnings per share for the subsidiary and
group. Ignore income tax and assume that no inter-company elimination or adjustment is
necessary except for dividends. (12)

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 ICMAP S1 AFA&CR

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 Class Notes

ANSWERS 06
ANSWER 01

2008 2007 |7
Rs.550,000 Rs.460,000
BEPS = =Rs.0.611 =Rs.0.575
900,000 W1 800,000

W1
800,000 x 6/12 400,000
1,000,000 x 6/12 500,000
900,000
ANSWER 02

2008 2007
Rs.550,000 Rs.460,000
BEPS = =Rs.0.458 =Rs.0.383
1,200,000 1,200,000

ANSWER 03

2008 2007
Rs.550,000 Rs.460,000
BEPS = =Rs.0.509 =Rs.0.479
1,080,000 W1 960,000 W1

W1 2008 2007
800,000 x 6/12 x 3/2.5 480,000 800,000 x 12/12 x 3/2.5 960,000
1,200,000 x 6/12 600,000
1,080,000 960,000

W2 Theoretical ex-right price

Shares Per share Worth
Before 2 Rs.3 Rs.6
Right issue 1 Rs.1.5 Rs.1.5
Total 3 Rs.2.5 Rs.7.5

Note: to restate the EPS for the previous year, you may simply multiply EPS of last year by
inverse of bonus fraction.

ANSWER 04

2012 2011
Rs.650,000 W1 Rs.591,773
BEPS = =Rs.0.163 =Rs.0.148
4,000,000 4,000,000

2012 2011
Rs.650,000 + 70,000 W3 Rs.591,773 + 52,500 W3
DEPS = 4,000,000 + 1,550,000 W3 =Rs.0.13 4,000,000 + 1,162,500 =Rs.0.125
W3

W1 2012 2011
Rs.700,000 – 50,000 = Rs.641,773 – 50,000 =
PAT – pref. dividend
Rs.650,000 Rs.591,773

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 ICMAP S1 AFA&CR

W2
Maximum number of potential ordinary shares Rs.1,250,000 / 100 x 124 =1,550,000

W3 2012 2011
Rs.100,000 x 70% Rs.75,000 x 70%
IEPS = =Rs.0.045 =Rs.0.045
1,550,000 W2 1,550,000 W2 x 9/12
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ANSWER 05

2007
Rs.500,000
BEPS = =Rs.0.125
4,000,000

2007
Rs.500,000
DEPS = =Rs.0.115
4,000,000 + 333,333 W1

W1
Share Options 1,000,000
Cash resources to be received worth 1,000,000 x Rs.2 / Rs.3 (666,667)
Free shares 333,333

ANSWER 06
Ranking order
Options Ranking
Increase in earnings Rs. NIL
Incremental shares issued (free shares) 100,000 x (75 – 60) / 75 20,000 1
Incremental EPS Rs. Nil

Convertible preference shares

Increase in earnings Rs. 800,000 x 100 x 0.08 Rs. 6,400,000
Increase in shares 800,000 x 2 1,600,000 3
Rs. 4

Convertible debentures
Increase in earnings Rs. 100m x 5% x (1 – 40%) Rs. 3,000,000
Increase in shares 100,000 x 20 2,000,000 2
Incremental EPS Rs. 1.5

Earnings Shares EPS

Basic EPS 10,000,000 2,000,000 5.00 Basic EPS
Options 0 20,000
10,000,000 2,020,000 4.95 Dilutive
5% convertible bonds 3,000,000 2,000,000
13,000,000 4,020,000 3.23 Dilutive
Converible preference shares 6,400,000 1,600,000
19,400,000 5,620,000 3.45 Antidilutive

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 Class Notes

ANSWER 07 EPS PE Mod 2013 Q4b

Calculation of bonus element
No of Price per Market
shares share capitalization
Before right issue 5,000,000 14.00 70,000,000
Right issue (5,000,000 / 4) 1,250,000 9.00 11,250,000
After the right issue 6,250,000 13.00 81,250,000 |9

Bonus adjustment: 5,000,000 x 14 / 13 = 5,384,615 shares

Bonus element: 5,384,615 - 5,000,000 = 384,615

Calculation of Weighted Average No of Shares

No of shares Time Average
Ordinary share 5,000,000 12/12 5,000,000
Bonus elements 384,615 12/12 384,615
Full market price element 865,385 3/12 216,346
6,250,000 5,600,961
Basic EPS 2009-2010: (90,000,000 / 5,000,000) = 18.00/-
Revised EPS 2009-2010: (90,000,000 / 5,384,615) = 16.71/-
Basic EPS 2010-2011: (99,000,000 / 5,600,961) = 17.68/-
Basic EPS 2011-2012: (106,250,000 / 6,250,000) = 17.00/-

ANSWER 08 EPS PE Ex 2014 Q3c

Basic EPS = Rs. 41m / 2m = Rs. 20.5 per share

Earnings = Rs. 32 m Holding plc + Rs. 12 million subsidiary x 75% = Rs. 41m
No of shares = Rs. 20m / Rs. 10 each = 2m shares

ANSWER 09 EPS PE Feb 2013 Q4

Earnings per share and Diluted earnings per share of subsidiary
Basic EPS of subsidiary Rs. 000
Profit (w-1) 7,500
No of shares 1,200
Basic EPS (7,500 /1,200) 6.25

Diluted EPS Rs. 000

Profit 7,500 + 500 preference dividend incremental earnings 8,000
No of shares (W2) 2,000
Diluted EPS (8,000/2,000) 4

W1 Rs. 000
Profit 8,000
Dividend paid to preference shareholders (500)
7,500

W2 Rs. 000
Ordinary shares 1,200
Incremental shares from warrants
(600x10)/20 300
Convertible preference shares 500
2,000

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 ICMAP S1 AFA&CR

For Group
Basic EPS of subsidiary Rs. 000
Profit (w-1) 31,000
No of shares 10,000
Basic EPS (31,000 /10,000) 3.10
Diluted EPS Rs. 000
10| Profit (W2) 30,700
No of shares 10,000
Diluted EPS (30,000/10,700) 3.07
W1 Rs. 000
Profit 25,000
Portion of DC’s profit (375x1)+(900x6.25) 6,000
31,000
W2 Rs. 000
Profit 25,000
Add: DC’s earning attributable to ordinary shareholders
(1,200 x 4 x 75%) 3,600
Add: DC’s earning attributable to warrants (300 x 4 x 50%) 600
Add: DC’s earning attributable to preference shares (500 x 4 x 75%) 1,500
30,700

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