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Examples On Eps.
Examples On Eps.
EXAMINATION PREPARATION
WEBINAR
3 OCTOBER 2022
EARNINGS PER SHARE
Basic EPS: Obtained by dividing earnings attributable to ordinary shareholders by the weighted
average number of shares in issue during the year.
Headline EPS: Obtained by dividing ‘Headline Earnings’ by the weighted average number of
shares in issue during the year.
Diluted EPS: This calculates the maximum potential dilution of shareholders’ earning in the
future (worst case scenario for the future).
2
A.BASIC EARNINGS PER SHARE
EXAMPLE 1: No Preference Shares in Issue
A company has 20 000 ordinary shares in issue throughout 20X1. The company earns a profit after
tax of R150 000.
1.1 Required: Calculate the basic earnings per ordinary share.
Solution:
Basic Earnings
Basic EPS=
Weighted Average number of Shares
R 150 000
¿
20 000
¿ R 7.50 per ordinary share
20X1
Basic Earnings R
Profit (Loss) for the year per SOCI 150 000
Less: fixed preference dividends (0)
Less: share of profits belonging to participating preference (0)
Basic earnings (Earnings belonging to ordinary shareholders) 150 000
Hydrogen Limited has the following shares in issue throughout 20X1: 100 000 ordinary shares and 10
000 non-redeemable 10% preference shares. Preference dividends are discretionary and non-
cumulative and based on a deemed value of R5 per share. The company earns a profit after tax of
R250 000. Hydrogen declared the full 20X1 dividends owing to the preference shareholders.
2.1. Required: Calculate the basic earnings per ordinary share.
Solution:
1. There are non-participating preference shares in issue:
2. Discretionary non-cumulative dividends = Dividend distribution
3. Preference share dividends were declared.
Basic Earnings
Basic EPS=
Weighted Average number of Shares
R 245 000
¿
100 000
¿ R 2.45 per ordinary share
20X1
Basic Earnings R
Profit (Loss) for the year per SOCI 250 000
Less: fixed preference dividends (10 000 x 10% x R5 = R5 000) (5 000)
Less: share of profits belonging to participating preference (0)
Basic earnings (Earnings belonging to ordinary shareholders) 245 000
Hydrogen Limited has the following shares in issue throughout 20X1: 100 000 ordinary shares and 10
000 non-redeemable 10% preference shares. Preference dividends are discretionary and non-
cumulative and based on a deemed value of R5 per share. The company earns a profit after tax of
R250 000. Hydrogen did not declare the 20X1 dividends owing to the preference shareholders.
3.1. Required: Calculate the basic earnings per ordinary share.
Solution:
1. There are non-participating preference shares in issue:
1. Discretionary non-cumulative dividends = Dividend distribution
2. Preference share dividends were NOT declared = NO DIVIDENDS.
Basic Earnings
Basic EPS=
Weighted Average number of Shares
R 250 000
¿
100 000
¿ R 2.50 per ordinary share
20X1
Basic Earnings R
Profit (Loss) for the year per SOCI 250 000
Less: fixed preference dividends (Non-cumulative p.s. not declared) (0)
Less: share of profits belonging to participating preference (0)
Basic earnings (Earnings belonging to ordinary shareholders) 250 000
4
EXAMPLE 4: Ordinary shares & Participating Preference Shares in Issue
The company earns a profit after tax of R10 000 000. The preference shares participate to the
extent of ¼ of the dividends declared to ordinary shareholders. The total ordinary dividend
declared for 20X1 was R400 000. OSP declared the full 20X1 dividends owing to the
preference shareholders.
Solution:
1. There are participating preference shares in issue:
2. Participating pref. shares participate in sharing according to the ratio: 1:4
20X1
Basic Earnings R
Profit (Loss) for the year per SOCI 10 000 000
Less: fixed preference dividends (100 000 x10% x R20) (200 000)
Earnings attributable to ordinary & participating preference shares 9 800 000
Less: Variable dividends to participating preference shareholders (1/5) (1 960 000)
Basic Earnings (Earnings belonging to ordinary shareholders) 7 840 000
4.3 the total dividend belonging to the participating preference shareholders; and
20X1
R
Fixed preference dividends (100 000x10%xR20) 200 000
Variable dividends (1/4 x R400 000) 100 000
Total dividend belonging to the participating preference shareholder 300 000
20X1
R
Variable dividends declared to ordinary shareholders (given) 400 000
Variable dividend to part. pref. shareholders: (R400 000 x ¼ or C5 000 x 1/5) 100 000
Total variable dividends declared 500 000
EXAMPLE 5: Old & New Ordinary Shares in Issued at beginning of the year
Octopux Limited had 1 000 000 ordinary shares in issue during the year ended 31 December
2020. There was a share issue of 1 000 000 ordinary shares at market price on the first day of
the year ended 31 December 2021. During the year ended 31 December 2020, Octopux Limited
earned R2 000 000 and the earnings per share year was R2 per share (= R2 000 000/1 000 000
shares).
6
5.1. Required: Assuming absolutely no change in circumstances have occurred since the 2020,
explain what the user of the financial statements of Octopux Limited would expect the profits
and earnings per share to be for the year ended 31 December 2021.
Solution:
1. The capital raised from the existing 1 000 000 shares contributed to the earnings for all 12
months of the 2021 year.
2. The capital raised from the newly issued 1 000 000 shares also contributed to the earnings
for all 12 months of the 2021 year (shares were issued on the first day of the current year).
*Opening balance: 1 000 000 shares for 12 months (1000 000 x 12/12) = 1 000 000
**New shares issued: 1000 000 shares for 12 months (1000 000x12/12) = 1 000 000
Since the capital base doubled, the user would expect the profits to double too. If the profits in
the current year did, in fact, double to R4 000 000, this would then mean that the earnings per
share would remain comparable at R2 per ordinary share (R4 000 000/ 2 000 000 shares).
Basic Earnings
Basic EPS=
Weighted Average number of Shares
R 4 000 000
¿
2000 000
¿ R 2.00 per ordinary share
EXAMPLE 6: Old & New Ordinary Shares Issued during the year
Radasys Limited had 1 000 000 ordinary shares in issue during the previous year. There was a share
issue of 1 000 000 ordinary shares (at market price) 3 months before the end of the current year.
Solution:
1. The capital raised from the existing 1 000 000 shares contributed to the earnings for all 12
months of the 2021 year.
2. The capital raised from the newly issued 1 000 000 shares contributed to the earnings for
only the last 3 months of the 2021 year (shares were issued on the first day of the current
year).
*Opening balance: 1 000 000 shares for 12 months (1 000 000 x 12/12) = 1 000 000
**New shares issued: 1 000 000 shares for 12 months (1 000 000 x 3/12) = 250 000
Although the capital base doubled, the user would only expect the annual profits to increase in
proportion the time for which the capital was deplored into the company’s operations (3 months before
the end of the year). with the result that this extra injection of capital could only have had an effect on
the profits earned during the last 60 days of the period.
The shareholder could only reasonably expect the earnings in the last 3 months to double.
He/she would thus hope that the earnings for the current year totals R2 500 000 (R2 000 000 +
R2 000 000 x 3/12).
Basic Earnings
Basic EPS=
Weighted Average number of Shares
R 2 500 000
¿
1 250 000
¿ R 2.00 per ordinary share
EXAMPLE 7: Old & New Ordinary Shares Issued for no value during the year
A company had 1 000 000 ordinary shares in issue during 20X1. On 1 April 20X2, 1 200 000
shares were issued at market value of R5 per share. On 1 June 20X2, there was a share split
where every 2 shares became 5 shares. The basic earnings were R15 000 000 (20X1) and
R26 125 000 (20X2).
8
Required: Calculate the basic earnings per share for the years ended 31 December 20X1 and
20X2.
Solution:
*Opening balance: 1 000 000 shares for 12 months (1 000 000 x 12/12) = 1 000 000
**New shares issued: 1200 000 shares for 12 months (1 200 000 x 9/12) = 900 000
#
Shares issued in terms of share split: (5 500 000 – 2 200 000) = 3 300 000
##
Current year share split adjustment: 1 900 000/2 200 000 x 3 300 000 = 2 850 000
***Prior year share split adjustment: 1 000 000 /2 200 000 x 3 300 000 = 1 500 000
*^The ratio between the current and prior year is currently 1 900 000:1 000 000 = 1,9: 1
++
Check ratio the same: 4750 000: 2 500 000 = 1,9: 1
Basic Earnings
Basic EPS (20 X 1)=
Weighted Average number of Shares
R 15 000 000
¿
2 500 000
¿ R 6.00 per ordinary share
Basic Earnings
Basic EPS (20 X 2)=
Weighted Average number of Shares
R 26 125 000
¿
4 750 000
¿ R 5.50 per ordinary share
EXAMPLE 8: Old & New Shares Issued for no value & New Shares Issued for value during the
year
Pendulum plc had an issued share capital at 1 May 2019 of R63 million 25 cent equity shares.
On 15 August 2019, Pendulum made a 1 for 3 bonus issue followed on 1 October 2019 by a 1
for 7 rights issue at 36 cents per share. Mid-market price on 1 October was 52 cents and the
rate of corporate income tax was 25%.
Required: Profit after tax for the year was R70m. What is the earnings per share figure for the
year ended 30 April 2020?
Solution:
7 old shares @R0.52 + 1new right issue @R0.36 = R3.64 + R0.36 = R4.00
R 4.00
Expected price per share= =R 0.50
8
R 63 m
Number of shares on 1 May 2019= =252 m
R 0.25
R 252 m
Bonus issue on 15 August 2019= =84 m
3
5 52
Weighted no . of shares for 5 months=336 m× × =145.6 m
12 50
Rights Issue:
336 m
Rights issue on 1October 2019= =48 m
7
7
Weighted no . of shares for 7 months=384 m × =224 m
12
R 70 m
¿
145.6 m+224 m
10
R 70 m
¿
369 ,6 m
¿ 18.94 cents
EXAMPLE 9: Old & New Shares Issued for no value & New Shares Issued for value during the
year
Mountvalley plc had an issued share capital at 1 April 2019 of R42 million 50 cent equity shares.
On 15 August 2019, Mountvalley plc made a 2 for 5 bonus issue followed on 1 November 2019
by an issue at full market price of 20 million shares at 75 cents each.
This was followed on 1 January 2020 by a 1 for 4 rights issue at 60 cents per share exercise
price. Mid-market price at the start of 2020 was 80 cents.
Required: What is the weighted average number of shares in issue for Mountvalley plc in the
years to 31 March 2020?
Solution:
4 old shares @R0.80 + 1new right issue @R0.60 = R3.20 + R0.60 = R3.80
R 3.80
Expected price per share= =R 0.76
5
R 42 m
Number of shares on 1 April 2019= =84 m
R 0.50
R 84 m
Bonus issue on 15 August 2019=2 × =33.6 m
5
7 80
Weighted no . of shares for 7 months=117.6 m× ×
12 76
¿ 72 210526
2 80
Weighted no . of shares for 2 months=137.6 m× ×
12 76
¿ 24 140 351
137.6 m
Rights issue on 1 Jauaury 2020= =34.4 m
4
3
Weighted no . of shares for 3 months=172 m× =43 000 000
12
EXAMPLE 10: Old & New Shares Issued for no value & New Shares Issued for value during the
year
Mountainview plc had an issued share capital at 31 December 2020 of R52 million equity
shares of R1.00 each. On 1 March 2020, Mountainview plc had made a 2 for 5 bonus issue
followed on 31 July 2020 by an issue at full market price of 10 million shares at R1. 75 each.
Required: What is the weighted average number of equity shares in issue for Mountainview plc
in the year to 31 December 2020?
Solution:
R 52m
Number of shares on 31 December 2020= =52 m
R 1.00
If there are 52 million shares at the end of December 2020 after an issue of 10 million shares at
the full price on 31 July, then on 30 July there must have been 42 million shares in issue.
12
2 7X
Number of shares on 1 March 2020= X + X = =42 m
5 5
If there are 42 million shares in issue after a 2 for 5 issue on 1 March, then on 28 February there
must have been only 30 million shares in issue.
¿ 46 166 667
The calculation of ‘headline EPS’ excludes income and expenses of a capital nature and those
that are ‘highly abnormal’.
Headline earnings are a better indicator of ‘maintainable earnings’.
Disclosure:
But JSE Listings Requirements require the calculation of headline earnings and
disclosure of a detailed reconciliation of headline earnings to the earnings numbers used
in the calculation of basic EPS in accordance with the requirements of IAS 33.
Considered additional disclosure and not a replacement for the disclosure of basic EPS &
diluted EPS.
The disclosure of headline earnings has been a requirement for JSE-listed companies
since 2000.
Disclosure: HEPS together with the required reconciliation.
When calculating Headline earnings, we would NOT adjust basic earnings for the following item
(i.e., the items below should legitimately be part of the headline earnings) [Do NOT change the
Basic earning any case of the ff):
Depreciation or amortisation
Inventory write-down
Increase in deferred tax expense due to initial recognition of a deferred tax liability
Gain on cash flow hedge in other comprehensive income (OCI) reclassified to P/L;
Foreign exchange loss due to the effect of the weakening of the local currency on an
amount payable by the entity;
When calculating Headline earnings, we would adjust basic earnings for the following item (i.e.,
the items below should NOT legitimately be part of the headline earnings).
14
CHANGE the Basic earning in case of any of the following:
An impairment of goodwill
EXAMPLE 1:
Required:
1. Calculate the basic earnings and the headline earnings.
2. Disclose the headline earnings per share for the year-ended 31 December 2020
Headline earnings
Basic earnings 98 000
Adjusted as follows:
Add: impairment of building 35 000
Less: Profit on sale of plant (22 400)
Headline earnings 110 600
2. Disclose the headline earnings per share for the year-ended 31 December 20X2
Disclosure of headline earnings per share
Kin Limited
Notes to the Statement of Comprehensive Income for the year ended 31 December:
2020 2019
R R
Headline earnings per share R110 600/10 000 11.06 XXX
EXAMPLE 2:
16
2.1 Calculate the basic earnings and the headline earnings; and
2.2 Disclose the headline earnings per share for the year ended 31 December 2020
SOLUTION:
Headline earnings
Basic earnings 301 100
Adjusted as follows:
Add: impairment of building 128 000
Less: Profit on sale of plant (46 400)
Headline earnings 382 700
2.2. Disclose the headline earnings per share for the year-ended 31 December 2020
Disclosure of headline earnings per share
Hardin Limited
Notes to the Statement of Comprehensive Income for the year ended 31 December:
2020 2019
R R
Headline earnings per share R382 700/24 000 15.95 XXX
The following information is available in respect of the GTM Ltd Group for the year ended 31
December 20X6:
Note R
Profit before tax 1 279 286
Income tax expenses (79 286)
Profit for the year 200 000
Additional information:
1. Profit before tax was calculated after taking into account the following
R
Fair value adjustment on investment property (land) (50 000)
Gain on sale of fixed property (base cost R100 000, proceeds on sale R180 000) 80 000
The income tax rate is 30%. The inclusion rate for capital gains tax is 50%
2. 200 000 18% preference share of R1 each are in issue in the books of GTM Ltd.
3. The following relate to ordinary shares of GTM Ltd
1 January 20X6 – 300 000 existing shares in issue
1 April 20X6 – a capitalisation issue of one for three is made.
30 June 20X6 – a rights issue of one for four at a price of R5 per share takes place. The
market value at the time was R10 per share which was considered to be the fair value of
the shares.
30 September 20X6 – issued 100 000 shares for value.
Required:
1. Calculate the consolidated basic earnings per share.
2. Calculate the headline earnings per shares and prepare the reconciliation between the two
earnings figures for the year ended 31 December 20X6
SOLUTION
1. Calculate the consolidated basic earnings per share.
¿ R 104 000
Basic EPS=Earnings attributable¿ ord . shareholders = =21cents
Weighted average number of share 497 222
18
2.Calculate the headline earnings per shares and prepare the reconciliation between the two earnings
figures for the year ended 31 December 20X6
WORKINGS:
20X6
Basic Earnings R
Profit attributable to ordinary equity holders of the parent (200 000 - 60 000) 140 000
Less: preference dividends (200 000 x 18% x R1) (36 000)
Basic earnings (IAS 33 earnings) 104 000
Headline earnings
Basic earnings 104 000
Adjusted as follows:
Add: Fair value adjustment on investment – land (IAS 40) [1 – 0,3x0,5]x 50 42 500*
000
Less: Gain on sale of fixed property (IAS 16) [1 – 0,3x0,5]x 80 000 (68 000)*
Headline earnings 78 500
R 45
Expected price per share= =R 9
5
300 000
Bonus issue on 1 April 20 X 6= =100 000
3
Rights issue:
400 000
Rights issue on 30 June 20 X 6= =100 000
4
6
Weighted no . of shares for 6 months=500 000 × =250 000
12
Value issue:
3
Weighted no . of shares for 9 months=100 000 × =25 000
12
20
DILUTED EARNINGS PER SHARE:
DILUTED EPS: the same earnings have to be shared amongst more shareholders than
are currently in existence.
DEPS shows the lowest EPS possible by assuming the dilutive potential shares currently
in existence are converted into ordinary shares in the future (i.e., options held by
Directors).
The DEPS shows users of FSs the maximum potential dilution of their earnings in the
future (i.e. the worst-case scenario)
It logically follows that diluted earnings per share can never be higher than basic earnings
per share.
DEPS is calculated for both basic and headline earnings per share.
Potential shares (dilutive instruments) are contracts that could potentially increase the
number of shares in issue and thus lead to a dilution (i.e. reduction) in the EPS.
Different dilutive instrument has a different effect on diluted earnings (the numerator) and/
or the weighted number of shares outstanding (the denominator).
Examples:
Options,
2020
There are 300 000 ordinary shares in issue (all issued at R2 each). The directors of the
company hold 100 000 options, at strike price of R2 each. Of these options, 100% vested on 1
July 2020. During 2020 the average market price of the company’s shares was R5
Required: Calculate the BEPS and DEPS for 2020 ascertainable from the information provided.
Required: Calculate the DEPS for 2020 ascertainable from the information provided.
22
W2: Diluted EPS in 2020
100 000 × R 2
No . of shares sold ¿ exercise the options= =40 000
R5
CONVERTIBLE INSTRUMENTS
Convertible instruments are instruments that may be converted into ordinary shares
(known as potential ordinary shares) at some time in the future.
ASSUMPTION: The holders of the convertible instrument will convert it into ordinary
shares thus increasing the total number of shares in issue.
Preference dividends 0
Adjustments for:
Required: Calculate basic EPS and diluted EPS to be included in the statement of
comprehensive income for the year ended 31 December 2020.
Profit for the year ended 2020 was R345 000, including finance costs on convertible debentures of R50
000 (before tax). Tax is levied at 30%. There are:
70 000 convertible debentures in issue (the conversion rate is: 1 ord. share for each debenture;
all were issued at R2 each).
24
Required: Calculate basic earnings and diluted earnings per share to be included in the statement of
comprehensive income for the year ended 31 December 2020.
EXAMPLE 2:
On 1 October 20X4, Hoy Co had $2.5 million of equity share capital (shares of 50 cents each) in
issue.
No new shares were issued during the year ended 30 September 20X5, but on that date there
were outstanding share options which had a dilutive effect equivalent to issuing 1.2 million
shares for no consideration.
Hoy’s profit after tax for the year ended 30 September 20X5 was $1,550,000.
Required. In accordance with IAS 33 Earnings Per Share, what is Hoy’s diluted earnings per
share for the year ended 30 September 20X5?
Workings:
Profit attributable¿ ordinary shareholders=$ 1,550,000
$ 2.5 m
Number of ordinary shares on 1 October 20 X 4= =5 million
R 0.50
EXAMPLE 3:
Gemsbok Ltd, a company with a financial year end of 31 December entered into an agreement on 1
April 2018 with senior management in terms of which 20 000 shares will be issued to them at no cost if
the market price of the company’s shares exceeds R50.00 per share in December 2021.
Assume that the market price of the shares was as follows on the following dates:
31 December 2018 R55.00
31 December 2019 R49.00
31 December 2020 R59.00
Required:
Assuming the earnings attributable to ordinary shareholders of Gemsbok Ltd was R1 000 000 and the
number of shares in issue was 100 000 on each of the various years above, calculate the diluted
earnings per share for the various years.
SOLUTION
1. As the share price exceeds the R50.00 target, the contingently issuable shares are expected to be
issued.
EPS=Earnings attributable ¿ ordinary shareholders ¿
Weighted average number of share
R 1000 000
¿
9
100000+ × 20 000∗¿ ¿
12
R 1000 000
¿
100000+15 000∗¿¿
R 1000 000
¿
115 000
¿ R 8.70 per share
*Note that the shares are weighted as the contract was entered into on 1 April 2018
2.As the price of the shares does not exceed the R50.00 target, the contingently issuable shares will
have no effect on the diluted EPS
EPS=Earnings attributable ¿ ordinary shareholders ¿
Weighted average number of share
R 1 000 000
¿
100 000
¿ R 10.00 per share
3. As the share price exceeds the R50.00 target, the contingently issuable shares are expected to be
issued.
EPS=Earnings attributable ¿ ordinary shareholders ¿
Weighted average number of share
R 1000 000
¿
100000+20 000
26
R 1 000 000
¿
120 000
¿ R 8.33 per share