Topic list Syllabus reference

Example: earnings per share with a new issue

On 30 September 20X2, Boffin Co made an issue at full market price of 1,000,000 ordinary shares. The company's accounting year runs from 1 January to 31 December. Relevant information for 20X1 and 20X2 is as follows.

Shares in issue as at 31 December Profits after tax and preference dividend	20X2 9,000,000 $3,300,000	20X1 8,000,000 $3,280,000
Required Calculate the EPS for 20X2 and the corresponding figure for 20X1.
Solution
Weighted average number of shares	20X2	20X1
8 million x 9/12	6,000,000
9 million x 3/12	2,250,000
	8,250,000	8,000,000
Earnings	$3,300,000	$3,280,000
EPS	$0.40	$0.41

In spite of the increase in total earnings by $20,000 in 20X2, the EPS is not as good as in 20X1, because there was extra capital employed for the final three months of 20X2.

There are other events, however, which change the number of shares outstanding, without a corresponding change in resources. In these circumstances it is necessary to make adjustments so that the current and prior period EPS figures are comparable.
Four such events are considered by IAS 33.

1. 
   Capitalisation or bonus issue (sometimes called a stock dividend)
   
2. 
   Bonus element in any other issue, eg a rights issue to existing shareholders
   
3. 
   Share split
   
4. 
   Reverse share split (consolidation of shares) (IAS 33: para. 27)
   

3. 
   Capitalisation/bonus issue and share split/reverse share split
   

These two types of event can be considered together as they have a similar effect. In both cases, ordinary shares are issued to existing shareholders for no additional consideration. The number of ordinary shares has increased without an increase in resources. (IAS 33: para. 27)
This problem is solved by adjusting the number of ordinary shares outstanding before the event for the proportionate change in the number of shares outstanding as if the event had occurred at the beginning of the earliest period reported. (IAS 33: para. 28)

4. 
   Example: earnings per share with a bonus issue
   

Greymatter Co had 400,000 shares in issue, until on 30 September 20X2 it made a bonus issue of 100,000 shares. Calculate the EPS for 20X2 and the corresponding figure for 20X1 if total earnings were $80,000 in 20X2 and EPS for 20X1 was $0.1875. The company's accounting year runs from 1 January to 31 December.
Solution
20X2
Earnings $80,000
Shares at 1 January 400,000
Bonus issue 100,000
500,000 shares
EPS $0.16
The number of shares for 20X1 must also be adjusted if the figures for EPS are to remain comparable.
The EPS for 20X1 is therefore restated as:
$0.1875 x — =$0.15
500

5. 
   Rights issue
   

A rights issue of shares is an issue of new shares to existing shareholders at a price below the current market value. The offer of new shares is made on the basis of x new shares for every у shares currently held; eg a 1 for 3 rights issue is an offer of one new share at the offer price for every three shares currently held. This means that there is a bonus element included. (IAS 33: Арр A2)
To arrive at figures for EPS when a rights issue is made, we need to calculate first of all the theoretical ex-rights value. This is a weighted average value per share, and is perhaps explained most easily with a numerical example.

6. 
   Example: theoretical ex-rights value
   

Suppose that Egghead Co has 10,000,000 shares in issue. It now proposes to make a 1 for 4 rights issue at a price of $3 per share. The market value of existing shares on the final day before the issue is made is $3.50 (this is the with rights' value). What is the theoretical ex-rights value per share?

$
14.00
3.00
17.00