A Comprehensive Slide Presentation on the IAS 33 (Earnings Per Share)

1. WELCOME TO THE
PRESENTATION

2. THANKS TO OUR HONORABLE
COURSE INSTRUCTOR
Al Amin
Associate Professor,
Department of Accounting & Information Systems,
University of Dhaka.

3. PREPARED BY:
RATAN GHOSH
UNIVERSITY OF DHAKA

4. PRESENTATION TOPIC:
IAS 33: EARNINGS PER
SHARE

5. OUTLINES:
 Introduction
 Scope & Objective
 Simple Capital Structure
 Complex Capital Structure
 Determining Dilution Effects
 Contingent Issuances of Ordinary Shares
 No Antidilution
 Presentation & Disclosure

6. INTRODUCTION

7. INTRODUCTION:
The IFRS governing the calculation and disclosure
of earnings per share (EPS) is IAS 33. It requires
that one measure or two measures in the case of
those reporting entities having complex capital
structures- be presented for each period for which a
statement of profit or loss and other comprehensive
income being reported. However, investors in
particular are devoted users of earning per share
data which is considered by many to be the single
best predictor of the entity’s performance. Since
such data are being computed in widely varying
ways, the accounting standard setters decided to at
least impose uniform practices.

8. OBJECTIVE & SCOPE:
Applies to the separate or individual financial
statements of an entity and the consolidated
financial statements of a group with a parent:
a) Whose ordinary shares or potential ordinary
shares are traded in a public market.
b) Those entities that are in the process of issuing
ordinary shares or potential ordinary shares in
public securities markets.

9. SIMPLE CAPITAL STRUCTURE:
A corporation’s capital structure consists only of
common stock or includes no potentially dilutive
convertible securities, options, warrants, or other
rights that upon conversion or exercise could dilute
earnings per common share.
Computational Guidelines:
In its simplest form EPS is calculated As follows:

10. ADJUSTMENTS TO THE NUMERATOR &
DENOMINATOR:
Numerator:
 Must reflect any claims against it by holders of
senior securities
 For cumulative preference shares, the dividend is to
be deducted from profit (declared or not)
 Cumulative dividends in arrears that are paid
currently do not affect EPS.
 However, the amount in arrears should be
disclosed.

11. ADJUSTMENTS TO THE NUMERATOR &
DENOMINATOR (CONT’D):
Denominator:
 The number of shares required should be excluded
from EPS calculations from the date of acquisition.
 The number of shares newly issued is included in
the computation only for the period after their
issuance date.
 Share split or share dividend should be given
retroactive recognition for all periods presented.
 The shares issued in connection with a business
combination are considered issued and outstanding
as of the date of acquisition and the income of the
acquired company is also included.

12. EPS COMPUTATION – SIMPLE CAPITAL
STRUCTURE:
Example:
Following data has been extracted from the financial
statements of XYZ Ltd. You are required to
compute the earnings per share ratio of the
company for the year 2014.
Data Taken From Income Statement:
Particulars Amount
Net Income $1500
Preferred Dividend $180
Income $1320

13. EPS COMPUTATION – SIMPLE CAPITAL
STRUCTURE (CONT’D):
Data Taken From Balance Sheet:
From the given data, EPS is calculated as follows:
EPS ratio = 1320 / 158 = 8.35 per share
Average number of shares outstanding during 2014:
[($2376/$15) + ($2376/$15)] /2
= 158
Particulars 2013 2014
Preferred Stock –
6%
$3000 $3000
Common Stock –
Par value $15
$2376 $2376

14. COMPLEX CAPITAL STRUCTURE:
 A complex capital structure is the one that has
dilutive potential ordinary shares, which are shares
or other instruments that have the potential to be
converted or exercised and thereby reduce EPS.
The difference between basic EPS and diluted EPS
is:

15. COMPLEX CAPITAL STRUCTURE (CONT’D):
o The effect of any antidilutive potential ordinary
shares are not to be included in the computation of
diluted earnings per share.
 A complex capital structure requires dual
presentation of both basic EPS and diluted EPS
even when the basic earnings per share is a loss
per share.
 The profit or loss attributable to ordinary equity
holders and the weighted average number of
ordinary shares outstanding should be adjusted for
the effects of the dilutive potential ordinary shares.

16. COMPLEX CAPITAL STRUCTURE (CONT’D):
According to IAS 33, the numerator should be
adjusted by the after – tax effect, if any, of the
following items:
 Interest recognized in the period for the convertible
debt which constitutes dilutive potential ordinary
shares.
 Any dividends recognized in the period for the
convertible debt which constitutes dilutive potential
ordinary shares, where those dividends have been
deducted in arriving at net profit attributable to
ordinary equity holders

17. COMPLEX CAPITAL STRUCTURE (CONT’D):
 Any other, consequential changes in profit or loss
that would result from the conversion of the dilutive
potential ordinary shares.
Example:
The conversion of debentures into ordinary shares
will reduce interest expense which in turn will cause
an increase in the profit for the period.
 The denominator should be adjusted by the
weighted average number of ordinary shares that
would have been outstanding assuming conversion
of all dilutive potential ordinary shares.

18. EXAMPLE: COMPLEX CAPITAL STRUCTURE:
Assume that he company XYZ has a convertible
bond issue: 100 bonds, $1000 par value, yielding
10% , issued at par for the total of $100,000. Each
bond can be converted into 50 shares of the
common stock. The tax rate is 30%. XYZ’s
weighted average number of shares, used to
compute basic EPS, is 10,000. XYZ reported an NI
of $ 12000, and paid preferred dividends of $ 2,000.
What is the basic EPS? What is the diluted EPS?
1) Basic EPS:
EPS = (12000 - 2000) / 10,000 = $1.00

19. EXAMPLE: COMPLEX CAPITAL STRUCTURE
(CONT’D):
2) Diluted EPS:
Adjustment to the denominator: 100 × 50 = 5000
Adjustment to the numerator: 100 × $1000 × 0.1 × (1
– 0.3) = $7000
Diluted EPS = (12000 – 2000 + 7000) / 10000+5000
= $ 1.13

20. DETERMINING DILUTION EFFECTS:
 To ascertain whether the effect would be dilutive or
antidilutive, each potential ordinary share issue
must be evaluated separately from other potential
ordinary share issuances.
 The most dilutive of the potential ordinary share
issues must be dealt with first, then the next most
dilutive and so on.

21. DETERMINING DILUTION EFFECTS (CONT’D):
To determine the sequencing of dilution analysis, it
is necessary to use a “trial and error” approach.
Options &
Warrants
Convertible
Securities

22. DETERMINING DILUTION EFFECTS (CONT’D):
Options and Warrants:
IFRS prescribes the use of the “treasury share
method” to deal with the hypothetical proceeds from
the presumed option and warrant exercises.
Treasury Share Method:
This method assumes that the proceeds from the
option and warrant exercises would have been
used to repurchase outstanding shares, at the
average prevailing market share price during the
reporting period.

23. DETERMINING DILUTION EFFECTS (CONT’D):
Treasury Stock Method:
Denominator must be increased by net dilution, as
follows:
Net dilution = Shares issued – Shares repurchased
Where,
Share issued = Proceeds received / Exercise price
Shares repurchased = Proceeds received / Average
market price per share

24. DETERMINING DILUTION EFFECTS (CONT’D):
Example:
Apex Inc, reported net income of $250,000 for the
year ended December 31, 2014. On January 1,
2014, it had 100,000 shares of common stock
outstanding. No changes to the shares outstanding
occurred during 2014. On July 1, 2013, Apex issued
10,000 stock options to its key executives. Each
option permits the holder to acquire one share of
common stock for $10 per share (exercise price).
The average market price of the common stock was
$25. Compute basic and diluted EPS for 2014.

25. DETERMINING DILUTION EFFECTS (CONT’D):
Solution:
Basic EPS = $250,000 /100,000 = $2.50
Test for dilution of options:
- Is exercise price ($10) < Average market price
($25)?......Yes !!!!
Treasury Stock Method:
- Assume exercise at later of 6/1/13 or 1/1/14
- Proceeds received on assumed exercise =
$100,000 ($10 * 10,000)

26. DETERMINING DILUTION EFFECTS (CONT’D):
- Number of share assumed repurchased at average
market price = 4000 ($100,000 / 2$5)
- Net increase in shares = 6000; {10,000 - 4000}
- Diluted EPS = $250000 / (100,000 + 6,000)= $2.36
Convertible Instruments:
These are assumed to be converted when the effect
is dilutive. Convertible preferred shares will be
dilutive if –
the preferred dividend declared < Basic EPS

27. IF-CONVERTED METHOD:
It is not explicitly employed by IAS 33, the
methodology of this is used for those securities that
are currently sharing in the earnings of the
company through the receipt of interest or
dividends as senior securities but have the potential
for sharing in the earnings as ordinary shares.

28. IF-CONVERTED METHOD (CONT’D):
Example:
Navid Co. reported net income of $750,000 for the
year ended 31 december 2014. The company had
a weighted average of 690,000 shares of common
stock outstanding. In addition, the company has
only one potentially dilutive security: $50,000 of 6%
convertible bonds, convertible into a tolal of 10,000
shares. Assuming a tax rate of 30%, Calculate
Navid’s basic and diluted EPS.

29. IF-CONVERTED METHOD (CONT’D):
Particulars Basic EPS Diluted EPS (Using If
Converted)
Net Income $750,000 $ 750,000
After tax cost of
interest (3000 * .70)
2100
Numerator $750,000 $752,100
Weighted average
number of share
outstanding
690,000 690,000
If Converted 0 10,000
Denominator 690,000 700,000
EPS $1.09 $1.07

30. CONTINGENT ISSUANCES OF ORDINARY
SHARES:
 Shares whose issuance is contingent on the
occurrence of certain events are considered
outstanding and included in the computation of
diluted EPS only if the stipulated conditions have
been met.
 If at the end of the reporting period the triggering
event has not occurred, issuance of the
contingently issuable shares is not to be assumed.
 If the condition must be met and then maintained
for a subsequent period, such as for a two year
period then the effect of the contingent issuance is
excluded from basic EPS but is included in the
diluted EPS.

31. CONTINGENT ISSUANCES OF ORDINARY
SHARES (CONT’D):
 IAS 33 indentifies circumstances in which issuance
of contingent shares is dependent upon meeting
both future earnings and future share price
threshold levels. If both thresholds are met the
effect of contingently issuable shares is included in
the computation of diluted EPS.
 For purposes of computing diluted EPS. The
number of retail outlets, level of revenue etc at the
end of the reporting period are to be presumed to
remain constant until the expiration of the
contingency period.

32. CONTINGENT ISSUANCES OF ORDINARY
SHARES (CONT’D):
Example:
Contingent shares will be issued at year end 2014,
with 1000 shares issued for each retail outlet in
excess of the number of outlets at the base date,
year end 2013. At year end, 2014, seven new
outlets are open. Diluted EPS should include the
assumed issuance of 7000 additional shares. Basic
EPS would not include this, since the contingency
period has not ended and no new shares are yet
required to be issued.

33. CONTRACTS WHICH MAY BE SETTLED IN
SHARES OR FOR CASH:
 Obligations can be settled in cash or by the
issuance of shares, at the option of the debtor (the
reporting entity).
 It is completely different from convertible debt. It is
the debtor not the debt holder which has the right to
trigger the issuance of shares.
 It is to be presumed that the debtor will elect to
issue shares to retire this debt, if this leads to dilute
EPS, this should be included in calculation but not
in basic one.

34. CONTRACTS WHICH MAY BE SETTLED IN
SHARES OR FOR CASH (CONT’D):
Written call options:
A similar result obtains in this case. Creditors have
the right to demand shares instead of cash in
settlement of an obligation.
Written Put options:
The entity may also write put options giving
shareholders the right to demand that entity
repurchase certain outstanding shares. Exercise is
to be presumed if the effect is dilutive.

35. CONTRACTS WHICH MAY BE SETTLED IN
SHARES OR FOR CASH (CONT’D):
Example:
If the entity is potentially required to buy back 25000
of its currently outstanding shares at each $40, it
must assume that it will raise the required
$1,000,000 cash by selling new ordinary shares
into the market. If the average market price was
$35 during the reporting period, it must be assumed
that $1,000,000 / 35 = 28,572 shares would be
issued, for a net dilution of about 3572 net ordinary
shares, which is used to be compute diluted EPS.

36. NO ANTI-DILUTION:
 No assumption of conversion should be made if the
effect would be anti-dilutive.
 The goal in computing dilutive EPS is to calculate
the maximum dilutive effect.
 Hence, the individual issues of converting
securities, options, and other items should be dealt
with from the most dilutive to the least dilutive to
effect this result.

37. PRESENTATION & DISCLOSURE:
 Entities should present both basic EPS and diluted
EPS in the statement of profit or loss and other
comprehensive income or
 In the statement of profit or loss, if presented
separately. Equal prominence should be given to
both the basic EPS and diluted EPS figures for all
periods presented.
 An entity that reports discontinued operation shall
disclose the basic EPS and diluted EPS.
 Entities should present basic EPS and diluted EPS
even if the amounts disclosed are negative.

38. PRESENTATION & DISCLOSURE (CONT’D):
 Entities should disclose amounts used as the
numerator in calculating basic EPS and diluted EPS
along with a reconciliation of those amounts to
profit or loss fro the period.
 An entity may choose to present per share amounts
using a reported component of the separate
statement of profit or loss other than profit or loss
for the period attributable to ordinary equity holders.
 Entities are encouraged to disclose the terms and
conditions of financial instruments or contracts
generating potential ordinary shares.

39. PRESENTATION & DISCLOSURE (CONT’D):
 If changes in the number of ordinary shares or
potential ordinary shares occur after the end of the
reporting period but before issuance of the financial
statements, it is encouraged to disclose.
 An entity is also encouraged to disclose a
description of ordinary share transactions or
potential ordinary share transactions.

40. EXAMPLES OF FINANCIAL STATEMENT
DISCLOSURES:
XYZ Ltd
Annual Report 2014
Notes to the consolidated Financial Statements:
Particulars 2014
Millio
ns
2013
Million
s
Weighted Average Number of shares for basic
EPS
50,644 52,408
Effect of dilutive potential shares 314 340
Weighted Average Number of shares for diluted
EPS
50,958 52,748
Earnings for Basic & Diluted 6,957 7,968

41. US GAAP COMPARISON:
The accounting and disclosure requirements for
IFRS and US GAAP are substantially the same.
Both require presentation of basic and diluted EPS
on the face of the income statement. Both IFRS and
US GAAP specify that diluted EPS shall include
incremental shares in the calculations, including the
effects of stock options and warrants using the
treasury-stock method and the effects of
contingently issuable shares using the if-converted
method.

42. US GAAP COMPARISON (CONT’D):
 Both IAS 33 and US GAAP requires the disclosure
of basic EPS in the statement of income.
 Presumes that contracts that may be settled in cash
or shares will be settled in shares unless evidence
is provided to the contrary whereas IAS 33
assumes that contracts that may be settled in cash
or shares will be settled in shares. Thus, these
types of contracts will always impact the
computation of diluted EPS.

43. THANK YOU !!!!!