By: Luqman Rafiq

IAS 33: EARNING PER SHARE

1 Objective:

a) Eliminate alternatives for calculation of EPS.

b) Determination and presentation of Earnings per share in a manner to improve:
i. Performance comparisons between different entities in the same reporting period.
ii. Performance comparisons between different reporting periods for the same entity.

2 Scope:

a) All those companies whose shares are traded in a public market.

b) All those companies who are in the process of getting their shares traded in a public
market.

3 Significance of EPS:

a) A financial Ratio used mostly by Investor and Shareholder.

b) A ratio having massive impact upon stock market.

4 Basic EPS:

An Ordinary Share is an equity instrument that is subordinate to all other classes of equity
instruments.

An Equity instrument is a contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities.

Example 1:
Following are the details about company for the year ended 31st Dec 2001 & 2002.
The preference shares are non- cumulative preference shares.
2001 2002
Profits for the year $500,000 $590,359
6% Non- Redeemable Preference shares $250,000 $390,000
Required:
Calculate the profits attributable to ordinary shareholders for the years 2001 & 2002.

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Example 2:
Following are the details about company for the year ended 31st Dec 2001 / 2002 & 2003.
The company has in issue cumulative preference shares.

Dividends paid by the company in each year are mentioned in the table.
2001 2002 2003
Profits for the year $125,000 $458,123 $658,977
6% Non- Redeemable Preference shares $250,000 $340,000 $420,000
Preference Dividend paid Nil $28,000 $32,600
Required:
Calculate the profits attributable to ordinary shareholders for the years 2001 / 2002/ 2003.

Example 3:
A company has year end of 31st December.
During the year to 31st December 2008, the following details are available.

1 Jan 2008: Number of shares 400,000

1 Apr 2008: Issue of Shares 80,000
31 Oct 2008: Shares bought back 25,000

Required:
Calculate weighted average # of ordinary shares outstanding

5 Other Areas:

• Bonus issue.
• Rights issue
• Calculation of adjustment factor.

6 DILUTED EPS

•A Potential Ordinary Share is a financial instrument or other contract that may entitle its holder
to ordinary shares.

•Anti-dilution is an increase in earnings per share or a reduction in loss per share resulting
from the assumption that
- Convertible instruments are converted
- Options or warrants are exercised

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- Ordinary shares are issued upon satisfaction of specified conditions.

•Dilution is a reduction in earnings per share or an increase in loss per share resulting from
the assumption that
- Convertible instruments are converted '- Options or warrants are exercised
- Ordinary shares are issued upon satisfaction of specified conditions.

7 RETROSPECTIVE ADJUSTMENT TO EPS

- Bonus Issue
- Rights Issue

8 LIMITATIONS OF EPS AS A PERFORMANCE MEASURE.

- Inflation is not accounted for in the calculation.

- Based on historic information
- Effects of accounting policies and capital structure.

Question # 1: (Dec 2009 Q1)

The profit after tax for Barstead for the year ended 30 September 2009 was $15 million. At 1
October 2008 the company had in issue 36 million equity shares and a $10 million 8%
convertible loan note. The loan note will mature in 2010 and will be redeemed at par or
converted to equity shares on the basis of 25 shares for each $100 of loan note at the loan-
note holders’ option. On 1 January 2009 Barstead made a fully subscribed rights issue of one
new share for every four shares held at a price of $2·80 each. The market price of the equity
shares of Barstead immediately before the issue was $3·80. The earnings per share (EPS)
reported for the year ended 30 September 2008 was 35 cents.
Barstead’s income tax rate is 25%.

Required:
Calculate the (basic) EPS figure for Barstead (including comparatives) and the diluted EPS
(comparatives not required) that would be disclosed for the year ended 30 September 2009.

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Question #2:
Niagara Company had profit after tax of $ 2,585,000.

The issued share capital of Niagara on 1 April 2002 was:

Ordinary shares of 25c each $3 million
8% Preference shares $1 million

The preference shares are non-redeemable.

The company also had in issue $2 million 7% convertible loan stock dated 2005. The loan
stock will be redeemed at par in 2005 or converted to ordinary shares on the basis of 40 new
shares for each $100 of loan stock at the option of the stockholders. Niagara’s income tax rate
is 30%.

There are also in existence directors’ share warrants (issued in 2001) which entitle the
directors to receive 750,000 new shares in total in 2005 at no cost to the directors.

The following share issues took place during the year to 31 March 2003:
– 1 July 2002; a rights issue of 1 new share at $1·50 for every 5 shares held. The market price
of
Niagara’s shares the day before the rights was $2·40.
– 1 October 2002; an issue of $1 million 6% non-redeemable preference shares at par.
Both issues were fully subscribed. Niagara’s basic earnings per share in the year to 31 March
2002 was correctly disclosed as 24c.

Required:
Calculate for Niagara for the year to 31 March 2003:
(i) the basic earnings per share including the comparative;
(ii) the fully diluted earnings per share (ignore comparative); and advise a prospective investor
of the significance of the diluted earnings per share figure.