- IAS 33 provides guidance on calculating and presenting earnings per share (EPS) and related disclosures. It covers entities with publicly traded ordinary shares or potential ordinary shares. - EPS is calculated as basic EPS and diluted EPS. Basic EPS uses existing shares, while diluted EPS shows what EPS would be if all potential ordinary shares were issued. Both require adjusting earnings and shares for various factors. - The standard outlines specific calculation methods and requires disclosure of EPS amounts and reconciliations in the financial statements.

1. Earnings per Share: IAS 33 Wiecek and Young IFRS Primer Chapter 27

2. Earnings per Share Related standards IAS 33 Current GAAP comparisons IFRS financial statement disclosures Looking ahead End-of-chapter practice

3. Related Standards FAS 128 Earnings per Share

4. IAS 33 – Overview Objective and scope Measurement Presentation Disclosure

5. IAS 33 – Objective and Scope Amount of earnings that is attributable to each common or ordinary shareholder is represented by the earnings per share (EPS) numbers Standard seeks to provide guidance on • How earnings per share should be accounted for • When diluted EPS should be presented • What information should be disclosed Fairly complex calculations IASB has provided numerous illustrative examples that accompany but are not part of the standard

6. IAS 33 – Objective and Scope Ordinary shares Equity instruments that are subordinate to all other classes of equity instruments Also referred to as common shares The EPS calculations focus on these shares as they are residual in nature Ordinary or common shareholders share in the residual earnings after operating expenses and dividends on preferred shares IAS 33 covers financial statements of • Entities that have ordinary shares or potential ordinary shares traded in a public market • Entities that are in the process of filing their statements with a securities commission for the purpose of going public

7. IAS 33 – Objective and Scope Potential ordinary shares Financial instruments (or other contracts) that may entitle the holder to ordinary shares Convertible debt, convertible preferred shares, options, warrants, and contingently issuable shares Contingently issuable shares Issuable under the terms of a contingent share agreement Shares that will be issued for little or no cash when certain conditions in the agreement are met EPS is calculated and presented If there are numerous public shareholders If the entity files financial statements with a securities regulator Only in the consolidated statements when non-consolidated statements are prepared as well

8. IAS 33 – Objective and Scope

9. IAS 33 – Measurement Two types of EPS Basic (BEPS) Diluted (DEPS) BEPS Based on existing earnings and outstanding common/ordinary shares DEPS “ What-if” calculation Illustrates what EPS would be if all the potential ordinary shares were actually ordinary shares E.g., the instruments were actually converted into shares or options were exercised, resulting in additional shares being issued

10. IAS 33 – Measurement Basic earnings per share (BEPS) BEPS is calculated as follows: The profit or loss attributable to ordinary equity holders is divided by the weighted average number of ordinary shares outstanding The calculation should also be done for income from continuing operations as well (if presented in the profit and loss statement) Earnings Profit or loss attributable to ordinary shareholders (the numerator) begins with: • Profit or loss from continuing operations (if separately presented) • Profit or loss

11. IAS 33 – Measurement Earnings (continued) Two separate calculations are done where profit or loss from continuing operations is presented separately on the profit and loss statement Adjustments to earnings • Dividends on preferred shares Only declared dividends relating to non-cumulative preferred shares are deducted Because they are not owed unless they are declared Dividends (declared or not) relating to cumulative preferred shares are deducted Because they are owed whether declared or not • Gains/losses on settlement/repurchase/early conversion of preferred shares Any related gains/losses are added to/deducted from earnings in calculating EPS

12. IAS 33 – Measurement Shares The denominator uses the weighted average number of ordinary shares outstanding during the period Gives the best indicator of the earnings based on the average outstanding equity The calculation looks at the number of shares outstanding each day although a “reasonable approximation of the weighted average” may be used The shares are assumed to be issued on the date that the consideration is receivable Although there are several situations that may need clarifying (see next slide)

13. IAS 33 – Measurement Shares (continued) • When shares are issued on conversion of debt The shares are assumed to be issued on the date that interest ceases to accrue • When shares are issued upon rendering of services The shares are assumed to be issued as the services are rendered • When shares are issued in a business combination The shares are assumed to be issued on the acquisition date • Contingently issuable shares are included from the date that all conditions are met • Stock Split, Reverse Split or Stock Dividend Number of shares issued and outstanding has changed without a corresponding change in resources Number of shares is adjusted for all periods presented • Where the financial instrument is mandatorily convertible Treated as ordinary shares from the date that the contract is entered into

14. IAS 33 – Measurement

15. IAS 33 – Measurement Diluted earnings per share Shows earnings available to Ordinary shareholders (assuming all potential common shares are now issued) Outstanding ordinary shares Both the numerator (earnings) and the denominator (number of shares) are adjusted for the “what if” assumption Earnings Adjustments to the profit or loss attributable to ordinary shareholders After-tax interest/dividends Would be avoided if the convertible instruments had been converted at the beginning of the period Any other changes in profit or loss that would result from the conversion of the convertible instruments Discount/premium amortization Changes in bonuses that are based on profit or loss

16. IAS 33 – Measurement Earnings (continued) No adjustment is made to the numerator for options and warrants In doing the DEPS calculation, it is assumed that either • funds received are used to buy back shares (rather than investing them), or • shares are issued to generate sufficient cash to buy back the shares under option Shares The weighted average number of ordinary shares as calculated for BEPS Would be adjusted for additional ordinary shares that will be issued on conversion or exercise of potential ordinary shares The potential ordinary shares are assumed to be issued at the beginning of the year or the date of issue of the potential ordinary shares if later If conversion/exercise options lapse during the period, the number of shares would be pro-rated for the part of the year that the potential common shares were outstanding The dilutive weighted average common shares are calculated independently for each period presented (interim versus annual)

17. IAS 33 – Measurement Dilutive potential ordinary shares The entity must therefore determine whether potential common shares are dilutive or anti-dilutive Potential common shares that result in lower DEPS Referred to as dilutive Included in the calculations of DEPS Potential common shares that would result in a DEPS higher than the BEPS Referred to as anti-dilutive Not included in the calculations or final reported DEPS Process Entity considers the incremental impact of each potential common share individually, then each potentially dilutive security in sequence From the most dilutive to the least dilutive Options and warrants are always considered to be the most dilutive since the incremental impact to the numerator is assumed to be zero

18. IAS 33 – Measurement

19. IAS 33 – Measurement Written call options/warrants When the entity writes a call option or issues a warrant Gives the holder the right to buy/obtain shares for a predetermined price (exercise price) When that price is lower than market price Option is said to be “in the money” Incentive for the holder to exercise the option and it would be dilutive to the company

20. IAS 33 – Measurement Written put options and forward purchase contracts When the entity writes a put option or enters into a forward contract to sell shares Gives the holder the right to sell the shares to the entity for a predetermined price (exercise price) When the price is higher than the market price Option is “in the money” Incentive to exercise the option and sell the share to the entity at the higher price Dilutive

21. IAS 33 – Measurement Convertible instruments Convertible instruments are included in the DEPS calculation when dilutive Convertible preferred shares Assumed to be anti-dilutive if the related dividend per ordinary share is greater than BEPS Convertible debt Anti-dilutive whenever the after-tax interest per ordinary share is greater than BEPS

22. IAS 33 – Measurement Contingently issuable shares Included from the beginning of the period if the conditions are satisfied by year end The conditions often relate to Earnings levels Share prices Other factors such as store openings If the conditions are not satisfied by year end Calculation is based on the number of shares that would be issued if the end of the current period were the end of the evaluation period Contracts that may be settled in ordinary shares or cash Where the entity has an option to settle a contract in ordinary shares or cash, it is assumed that shares will be used If dilutive, it would be included in the DEPS calculations If the holder has the option, then the entity would consider the more dilutive of the two and use that in the calculations

23. IAS 33 – Measurement Purchased options Purchased call and put options are not included in the DEPS calculations Anti-dilutive If the options are call options “ In the money” when the exercise price is less than the market price Entity would exercise the option and be better off If the options are put options “ In the money” when the exercise price exceeds the market price Entity would be able to sell its shares for higher than market Retrospective adjustments When the number of shares increases (with no corresponding change in resources) during or after the reporting period but before the statements are authorized for issue, all EPS numbers are adjusted All EPS numbers are adjusted for any effects or errors or changes in accounting policies accounted for retrospectively

24. IAS 33 – Presentation The entity must disclose the EPS numbers (with comparatives) in the statement of comprehensive income If a separate profit and loss statement is presented, the EPS numbers are presented there If discontinued operations are reported, the BEPS and DEPS for discontinued operations may be presented on the statement of comprehensive income or in the notes

25. IAS 33 – Disclosure Required additional disclosures • Numerators in the calculations, including a reconciliation to reported profit or loss • Weighted average number of ordinary shares • Any potentially dilutive instruments that were not included in the calculation • Description of any transactions occurring after the reporting period that could affect the calculations Such as the issue or redemption of shares An entity may decide to include additional per share amounts using other reported components from the statement of comprehensive income Additional disclosures are required in this case

26. Current GAAP Comparisons Page 134 of 164 of http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

27. IFRS Financial Statement Disclosures Heineken http://www.annualreport.heineken.com/downloads/Heineken_AnnualReport_EN_07.pdf EPS on the Financial Statements page 67 of 160 Earnings per share note page 109 of 160

28. Looking Ahead Joint convergence project IASB and FASB are currently studying EPS as part of this project Objective of the work is to converge and simplify the accounting Proposals Use of end of period market prices in calculating DEPS As well as the carrying amount of any liabilities not remeasured at fair value In calculating DEPS and regarding instruments accounted for at FVTPL Profit or loss from changes in fair value remain in the numerator Denominator not include the incremental impact of additional shares An exposure draft is expected to be issued in late 2008

29. End-of-Chapter Practice

30. End-of-Chapter Practice

31. End-of-Chapter Practice

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