Monday, March 31, 2014

[IFRS] IAS 33 - Earnings per Share

Objective

The objective of this Standard is to prescribe principles for the determination and presentation of earnings per share (EPS). EPS shows trend of earning performance of the Company over different reporting periods and is also enables comparisons between different entities in the same reporting period.

Scope

This standard applies to
  • Separate financial statement: Whose debt or equity instrument are publicly traded (or are in process of being listed on stock exchange)
  • Consolidated financial statement: For group companies, if parent is required to apply this standard to its separate financial statement.

Definition

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, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.
Example: Anti-dilution 
If an entity converts high interest debt to ordinary shares, and the interest saved on conversion increases earnings per share after considering the incremental number of shares issued on conversion.
A contingent share agreement is an agreement to issue shares that is dependent on the satisfaction of specified conditions.
Example: Contingent share agreement  
Shares options issued to employees that becomes exercisable on satisfaction of conditions like completing five years of employment, achieving sales target.
Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement.
Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.
Example: Dilution
If an entity converts low interest debt to ordinary shares, and the interest saved on conversion decreases earnings per share, as the additional shares issued on conversion increases considerably.
Options, warrants and their equivalents are financial instruments that give the holder the right to purchase ordinary shares.
Example: Warrants    
If an entity offers warrant along with bond to attract investor with terms that each warrant will entitle the holder to buy ordinary share at $50 at the time of redemption of bond. If the market price is above $50 at that time, the holder will exercise the warrant to buy a share at a discount. If not, the warrant will not be exercised, as the holder can buy a share cheaper in the market.
An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments. An entity may have more than one class of ordinary shares.
A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares.
Examples: Potential Ordinary Shares
·         Convertible Instrument
·         Share options and warrants
·         shares that would be issued based on contractual arrangements
·         Share purchase plan
Put options on ordinary shares are contracts that give the holder the right to sell ordinary shares at a specified price for a given period.
Example: Put option
Suppose the entity issues class B of ordinary shares at $5 per share with a put option for $15 per share. The put option allows the holder to sell back the share to the company within / after stipulated time for $15. If the price in the market is lower than $15, the holder will sell the share to entity. If the price is higher, the holder will make more profit selling in the market.

Measurement

Basic Earnings per Share

An entity shall calculate basic earnings per share for
  • profit or loss attributable to ordinary equity shareholders and,
  • profit or loss from continuing operations attributable to those equity shareholders

Computation:
Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity by the weighted average number of ordinary shares outstanding during the period.

Example: Basic EPS
Entity A engaged in manufacture of pipes earned profit after tax, preference dividends and minority interests of $ 15 million in 2012. At the end of the year, the number of shares outstanding was 5 million equity shares.

EPS = $15 million / 5 million shares = $3 per share
Earning:
The earnings considered for EPS (numerator) is
  • profit or loss attributable to ordinary equity shareholders and
  • profit or loss from continuing operations attributable to those equity shareholders

Adjusted for
after tax effects of preference dividend,
o   in case of non-cumulative preference shares: the after-tax amount of any preference dividends declared during the period
o   in case of cumulative preference shares: dividends for cumulative preference shares required for the period, whether or not the dividends have been declared
Share:
The number of ordinary shares shall be the weighted average number of ordinary shares outstanding during the period (denominator).
Computation: weighted average number of ordinary shares
  • number of ordinary shares outstanding at the beginning of the period,
  • number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor

The time-weighting factor is the number of days that the shares are outstanding as a proportion of the total number of days in the period. While determining the timing of the inclusion of ordinary shares, the entity must consider the terms and conditions attaching to their issue and the substance of related contract.