Earnings Per Share (IAS 33 Advanced)

IAS 33 applies to entities whose ordinary shares (or potential ordinary shares) are publicly traded, or who are in the process of issuing such shares in public markets. Other entities may voluntarily disclose EPS — but if they do, they must comply with IAS 33.

Presentation requirement: BOTH basic and diluted EPS must be presented on the face of the statement of profit or loss — with equal prominence for all periods presented. EPS is presented even if the amounts are negative (loss per share).

Basic EPS formula:

Earnings (numerator):

• Profit/loss from continuing operations attributable to the parent's ordinary shareholders
• Deduct preference dividends (cumulative — whether declared or not; non-cumulative — only when declared)
• Deduct NCI's share of profit (already excluded if using "attributable to parent" profit figure)
• Differences between cost of repurchased preference shares and their original issuance value — typically adjust earnings

Weighted average number of ordinary shares (denominator):

• Shares outstanding at the beginning of the period
• + Shares issued during the period, weighted by the time outstanding (e.g., shares issued 1 July with December year-end = weight 6/12)
• − Shares repurchased/cancelled, weighted by the time they were not outstanding
• Issues for consideration other than cash: include from the date the consideration is receivable (usually the issue date)

Separately for discontinued operations: if applicable, also present EPS from continuing operations and from discontinued operations separately.

A bonus issue (also known as a scrip issue or capitalisation issue) is an issuance of additional shares to existing shareholders for no consideration — out of reserves. There is NO new investment by shareholders; each shareholder simply gets more shares in proportion to their existing holding.

Economic reality: The company's assets and earnings are unchanged. Shareholders have more shares but each share represents a smaller fraction of the same pie. For EPS to be meaningful across time, all prior periods' EPS figures (and the weighted average shares calculation) must be adjusted retrospectively as if the bonus shares had always been in issue.

Treatment:

• The bonus shares are treated as if they had been in issue from the beginning of the earliest period presented (or the earlier date of the bonus issue, if later)
• Apply the bonus fraction to the weighted average shares for ALL periods presented (including comparatives)
• Bonus fraction = (existing shares + bonus shares) / existing shares. For example, a 1-for-4 bonus issue → fraction = 5/4

Example: A company had 1,000,000 shares in issue throughout 20X0 and 20X1. On 1 July 20X1, it makes a 1-for-5 bonus issue. 20X1 profit is £500,000; 20X0 profit was £400,000 (previously reported EPS 40p).

• Bonus fraction: 6/5 (5 existing + 1 bonus per 5)
• 20X1 weighted average shares = 1,000,000 × 6/5 = 1,200,000 (treated as if in issue from start of 20X1)
• 20X1 basic EPS = £500,000 / 1,200,000 = 41.7p
• Restated 20X0 EPS (comparative): 1,000,000 × 6/5 = 1,200,000 shares; EPS = £400,000 / 1,200,000 = 33.3p (restated from 40p)

A rights issue is an issue of new shares to existing shareholders at a discount to the prevailing market price. It is a hybrid transaction:

• Partly a full-price issue — shareholders pay something for the shares (raising cash)
• Partly a bonus issue — they pay less than market price (a "free" element)

Therefore the treatment combines features of both: the full-price element is time-apportioned, and the bonus element is treated retrospectively.

The TERP — Theoretical Ex-Rights Price:

Example: 1,000,000 shares at £4 market price. Rights issue: 1 new share for every 4 existing at £2.50.

• Existing value: 1,000,000 × £4 = £4,000,000
• Rights issue: 250,000 shares × £2.50 = £625,000
• Total value: £4,625,000
• Total shares after: 1,250,000
• TERP = £4,625,000 / 1,250,000 = £3.70

Bonus fraction for the rights issue:

Continuing example: Bonus fraction = £4 / £3.70 = 1.081. This fraction represents the "bonus" element of the rights issue.

Applying to EPS calculation:

1. Shares before rights issue: multiply by the bonus fraction (1.081) — this restates them to reflect the "free" element
2. Time-apportion the shares: BEFORE the rights issue × bonus fraction × months/12; AFTER the rights issue (full number of shares) × months/12
3. Apply the bonus fraction retrospectively to all comparative EPS figures too

Worked example (full year calculation — see worked examples section for numerical detail): A company had 1,000,000 shares at the start of 20X1. On 1 October 20X1, it made a 1-for-4 rights issue at £2.50 (cum-rights price £4, TERP £3.70, bonus fraction 1.081).

• 1 Jan – 30 Sep (9 months): 1,000,000 × 1.081 × 9/12 = 810,811 weighted shares
• 1 Oct – 31 Dec (3 months): 1,250,000 × 3/12 = 312,500 weighted shares
• Total weighted average shares = 810,811 + 312,500 = 1,123,311

The comparative (20X0) EPS is also restated: the 20X0 weighted average shares × 1.081 = new denominator; divide 20X0 earnings by this.

Diluted EPS shows what EPS would be if all potentially dilutive instruments were converted into ordinary shares. It captures the effect of instruments that could, in the future, result in more ordinary shares being in issue — reducing EPS.

Potentially dilutive instruments include:

• Convertible debt (convertible bonds)
• Convertible preference shares
• Share options (employee options or otherwise)
• Warrants
• Contingently issuable shares (if conditions would be met at reporting date)

Dilutive vs anti-dilutive:

• An instrument is DILUTIVE if its conversion/exercise would decrease EPS (or increase loss per share)
• An instrument is ANTI-DILUTIVE if its conversion/exercise would increase EPS — in which case it is EXCLUDED from the diluted EPS calculation (to avoid overstating dilution)

General approach:

1. Calculate basic EPS first
2. For each potential dilutive instrument, calculate the effect on the numerator (earnings) and denominator (shares) if it were converted/exercised
3. Determine if the instrument is dilutive (decreases EPS). If YES, include in diluted EPS. If NO (anti-dilutive), exclude.
4. For multiple potential ordinary shares: consider them in order of increasing "earnings per incremental share" — most dilutive first. Include incrementally only those that continue to decrease EPS.

Why order matters: It's possible for an instrument in isolation to be dilutive, but become anti-dilutive once other more dilutive instruments have already been included. The standard tests each potential ordinary share in order of its own EPS effect.

Method: "If-converted" method. Assume the instrument was converted at the beginning of the period (or at date of issue, if later in the year).

Convertible bonds:

• Numerator adjustment: ADD BACK the after-tax interest expense (and any amortisation of the bond's discount) that would have been avoided if the bonds had been converted
• Denominator adjustment: ADD the number of ordinary shares that would have been issued on conversion, weighted for the time the bonds were actually outstanding (typically from start of period unless issued mid-year)

Example: A company has £1m of convertible bonds carrying 6% annual interest. Conversion terms: 100 shares per £100 bond (so 1,000,000 shares if fully converted). Tax rate 25%.

• Annual interest: £60,000
• After-tax interest saving (to add back to earnings): £60,000 × (1 − 25%) = £45,000
• Additional shares: 1,000,000
• Calculate the "earnings per incremental share": £45,000 / 1,000,000 = 4.5p
• If basic EPS is above 4.5p, these bonds are DILUTIVE (will bring EPS down). If basic EPS is below 4.5p, they are anti-dilutive.

Convertible preference shares:

• Numerator adjustment: ADD BACK the preference dividends (that had been deducted in calculating basic earnings)
• Denominator adjustment: ADD the number of ordinary shares that would have been issued on conversion

Method: Treasury stock method (also called the "incremental shares" method).

Logic: If options/warrants were exercised, the company would receive cash at the exercise price. In theory, this cash could be used to repurchase shares at the market price. The NET new shares issued = total shares on exercise − shares "bought back" with the proceeds. This gives the "free shares" to include in the denominator.

Formula:

Example: 200,000 share options with an exercise price of £3. Average market price during the period: £5.

• Cash proceeds on exercise: 200,000 × £3 = £600,000
• Shares that could be bought back with proceeds: £600,000 / £5 = 120,000
• Incremental (dilutive) shares = 200,000 − 120,000 = 80,000

Alternatively: 200,000 × (£5 − £3) / £5 = 200,000 × 0.4 = 80,000. Same result.

No numerator adjustment for options/warrants — they don't affect earnings (no interest is saved; exercise simply raises equity).

Anti-dilutive options:

• Options are only dilutive if the exercise price is BELOW the average market price (otherwise no one would exercise them; or mathematically, the formula would give a negative incremental shares)
• "Out-of-the-money" options (exercise > market) are ANTI-DILUTIVE → exclude

Contingently issuable shares: Include in diluted EPS if the conditions for issuance would have been met AT THE REPORTING DATE (i.e., if the period ended and conditions were satisfied, shares would be issued).

When multiple potentially dilutive instruments exist, they must be considered in the order of their dilutive effect — most dilutive first. This is to ensure maximum dilution is calculated (but only including instruments that ARE dilutive).

Ordering approach: For each instrument, calculate the "earnings per incremental share" (= incremental earnings / incremental shares). List in INCREASING order of this number (from most dilutive to least).

Worked test example:

Assume basic EPS = 30p. Three potential instruments exist:

• Convertible bond A: EP incremental share = 15p → most dilutive (adding first will bring EPS from 30p down toward 15p)
• Options B: EP incremental share = 0 (options never add to numerator) → second most dilutive
• Convertible bond C: EP incremental share = 28p → least dilutive but still dilutive (below basic 30p)

Procedure:

1. Add in the most dilutive first (options at 0p): new EPS calculated
2. Is the new EPS lower than basic? YES (because options have 0p per incremental share — adding shares with no earnings dilutes)
3. Add next (bond A at 15p): new EPS calculated again
4. Still lower? YES
5. Add next (bond C at 28p): recalculate EPS
6. Did EPS go DOWN? Check: compare new EPS to the EPS after bonds A and options
7. If yes → continue including bond C. If no → bond C is anti-dilutive at this point — EXCLUDE

Loss per share: If the entity has a loss from continuing operations, ALL potential ordinary shares are anti-dilutive (including them would DECREASE the loss per share — making it look better). So diluted LPS = basic LPS in a loss-making period.

Discontinued operations: When there is a discontinued operation, separate EPS figures must be presented:

• Basic and diluted EPS from continuing operations
• Basic and diluted EPS for the profit/loss for the period (overall, including discontinued)
• Separately disclose (on the face or in the notes) EPS for the discontinued operations

The same weighted average number of shares (for basic) and the same diluted-share calculation are used for all three EPS figures. Only the earnings numerator differs (continuing / discontinued / total).

Presentation requirements:

• Basic and diluted EPS must be presented on the face of the statement of profit or loss (or statement of comprehensive income if presented as two statements)
• Equal prominence for basic and diluted
• Present even if negative (loss per share)
• Present for each class of ordinary shares that has different rights to share in profit
• If basic = diluted, can present in a single line (clearly labelled) — rare

Disclosure requirements:

• The earnings amounts used as numerator (and reconciliation to profit/loss for the period)
• The weighted average number of ordinary shares used as denominator for basic and for diluted
• Instruments that could potentially dilute basic EPS in the future but are anti-dilutive in the current period — disclose separately
• Description of ordinary share transactions or potential ordinary share transactions that occurred AFTER the reporting date which would have significantly changed the number of shares outstanding (non-adjusting subsequent events)

Retrospective adjustment: If the weighted average share count is affected by changes AFTER the reporting date (e.g., a bonus issue in the subsequent period), IAS 33 requires the EPS calculation to be restated even for post-reporting-date events. This is an unusual exception to the normal IAS 10 rule.