IAS 33 - Earnings Per Share (detailed review)

Objective

This standard prescribes the guide lines for the determination of earnings per share and its presentation requirements, which provide comparable basis to evaluate the performance of the entity with other entities or between the different accounting periods of the same entity. There are certain limitations to the earnings per share due to the different accounting policies used in determination of ‘earnings’ however, this standard focuses on the determination of denominator of earnings per share

Scope

The requirements of this standard are applicable to:

a)  The separate financial statements of the entity:

i)  Whose equity instruments (ordinary shares) are traded on the public stock market which may include any domestic, foreign, regional, or local market

ii)  Which is in the process of filing its financial statements with relevant regulatory authorities to issue its equity instruments (ordinary shares) in th public stock market
 
b)  The consolidated financial statements of the entity with the parent entity:

i)  Whose equity instruments (ordinary shares) are traded on the public stock market which may include any domestic, foreign, regional, or local market

ii)  Which is in the process of filing its financial statements with relevant regulatory authorities to issue its equity instruments (ordinary shares) in th public stock market
 
However, if an entity presents separate financial statements and consolidated financial statements both, the earnings per share is required to be disclosed in consolidated financial statements on the basis of consolidated financial information.

Measurement

Basic Earnings per Share

It is calculated on the basis of ordinary shares which are currently in issuance at the end of reporting period as:

The entity will determine the basic earnings per share using the earnings available to ordinary share holders (numerator) divided by weighted average number of shares outstanding during the whole reporting period (denominator)

Earnings

The earnings include the earnings which are available to ordinary shareholder after taking into account the tax effect and dividend on preference shares

Shares

The weighted average number of shares are the ordinary shares which remain outstanding during the whole accounting period.

These are determined using the number of shares outstanding at the start of reporting period multiplied by time factor plus the number of shares issued at full market value during the year multiplied by time factor less the number of shares bought back by the entity during the year multiplied by the time factor.

Shares are taken into the calculation of weighted average number of shares right from the date consideration becomes receivable such as:

• Shares issued for cash will be included in weighted average number of shares, when the cash becomes receivable

• Shares issued in a business combination to acquire control will be included in weighted average number of shares from the date of acquisition onward

• Shares issued for the purchase of an asset will be included in weighted average number of shares, when the asset is recognized

• Shares issued for the settlement of a liability will be included in weighted average number of shares from the date of settlement of liability

• Shares issued for cash will be included in weighted average number of shares, when the cash becomes receivable

The weighted average number of shares outstanding during the current accounting period and for all the period presented should be adjusted for the events which result in increase in number of shares outstanding without the equivalent change in the resources of the entity such as:

• Bonus Share Issue
• Right Share Issue
• Script Issue

Bonus Issue

In case of bonus issue or a share split during the current year, ordinary shares are issued to existing shareholders for no consideration, resultantly the number of shares outstanding during the current accounting period increases without the change in resources of the entity. Therefore, the number of shares outstanding before the bonus issue or a share split is adjusted for the proportionate change by multiplying a ‘bonus fraction’ to reflect as if the event had taken place at the start of the earliest period presented.

Right Issue

In case of right issue, ordinary shares are issued to existing shareholders for consideration which is less than the market value of shares, resultantly the number of shares outstanding during the current accounting period increases without the equivalent change in resources of the entity. Therefore, the number of shares outstanding before the right issue is adjusted for the proportionate change by multiplying a ‘right fraction’ to reflect as if the event had taken place at the start of the earliest period presented.

Diluted Earnings per Share

Diluted earnings per share is calculated on the basis of ordinary shares currently in issuance as well as potentially issuable shares. It reflects the impact of ‘potentially issuable shares’ upon earnings per share of the entity, if these comes in issuance in future.

Potentially issuable shares (such as convertible loan note, share option, share warrants) are the instruments which will result in issue of further shares by the entity, if the right is exercised by the holder

The entity will determine the diluted earnings per share using the earnings (numerator) available to ordinary share holders taking in to account the effect of potentially issuable shares on these earnings (such as interest savings) divided by weighted average number of shares currently in issuance and potentially issuable shares (denominator)

Convertible Debt Instrument in Diluted Earnings per Share

The entity will calculate the diluted earnings per share in case of issued convertible debt instrument as follows:

• Assume that convertible instruments have been converted into ordinary shares at the start of the current accounting period

• The entity will use the earnings (numerator) which are used in basic earnings per share calculation and these will be adjusted for the after tax effect of interest saving which will arise when the convertible debt instruments will be converted into ordinary shares at maturity date

• The shares (denominator) will include the weighted average number of shares currently in issuance and ordinary shares which will be issued when conversion right will be exercised by the convertible instrument holders

Share Options or Share Warrants in Diluted Earnings per Share

The entity will calculate the diluted earnings per share in case of issued share options or share warrants as follows:

• Assume that share options or share warrants have been exercised and related ordinary shares are issued at the start of the current accounting period

• The entity will use the earnings (numerator) which are used in basic earnings per share calculation as there will be no impact upon earnings upon exercise of share options or share warrants

• The shares (denominator) will include the weighted average number of shares currently in issuance and ordinary shares which will be issued when share options or share warrants will be exercised by the instrument holders

Presentation

The entity will disclose the basic and diluted earnings per share both in the statement of profit or loss and other comprehensive income
The entity will disclose the basic and diluted earnings per share both, even if the amounts are negative

Disclosures

The entity is required to disclose the following:

• The details about earnings, which are used in basic and diluted earnings per share calculations
• The details about shares, which are used in basic and diluted earnings per share calculations
• The details about the potentially issuable shares