Topic list Syllabus reference

Number	Level	Marks
Time
»	-	25	45 mins

320


17: Reporting financial performance Financial Reporting


BPP
LEARNING MEDIA

Topic list	Syllabus reference
1 IAS 33 Earnings per Share	B9
2 Basic EPS	B9
3 Effect on EPS of changes in capital structure	B9
4 Diluted EPS	B9
5 Presentation, disclosure and other matters	B9.C3

Introduction
Earnings per share (EPS) is widely used by investors as a measure of a company's performance and is of particular importance in:

1. 
   Comparing the results of a company over a period of time
   
2. 
   Comparing the performance of one company's equity against the performance of another company's equity, and also against the returns obtainable from loan stock and other forms of investment
   

The purpose of any earnings yardstick is to achieve as far as possible clarity of meaning, comparability between one company and another, one year and another, and attributability of profits to the equity shares. IAS 33 Earnings per Share goes some way to ensuring that all these aims are achieved.
Study guide

		Intellectual level
B9	Reporting financial performance
(e)	Earnings per share (eps)
	(i) Calculate the eps in accordance with relevant accounting standards (dealing with bonus issues, full market value issues and rights issues)	2
	(ii) Explain the relevance of the diluted eps and calculate the diluted eps involving convertible debt and share options (warrants)	2
C3	Limitations of interpretation techniques
(f)	(i) Explain why the trend of eps may be a more accurate indicator of performance than a company's profit trend and the importance of eps as a stock market indicator	2
	(ii) Discuss the limitations of using eps as a performance measure	2

FAST FORWARD J
11AS 33 Earnings per Share
Earnings per share is a measure of the amount of profits earned by a company for each ordinary share. Earnings are profits aftertax and preference dividends.

1. 
   Objective
   

The objective of IAS 33 is to improve the comparison of the performance of different entities in the same period and of the same entity in different accounting periods by prescribing methods for determining the number of shares to be included in the calculation of earnings per share and other amounts per share and by specifying their presentation.

2. 
   Definitions
   

Key terms
The following definitions are given in IAS 33 and IAS 32.

• 
  Ordinary shares. An equity instrument that is subordinate to all other classes of equity instruments.
  
• 
  Potential ordinary share. A financial instrument or other contract that may entitle its holder to ordinary shares.
  
• 
  Options, warrants and their equivalents. Financial instruments that give the holder the right to
  

purchase ordinary shares. (IAS 33: para. 5)

• 
  Financial instrument. Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.
  
• 
  Equity instrument. Any contract that evidences a residual interest in the assets of an entity after
  

deducting all of its liabilities. (IAS 32: para. 11)

1. 
   Ordinary shares
   

There may be more than one class of ordinary shares, but ordinary shares of the same class will have the same rights to receive dividends. Ordinary shares participate in the net profit for the period only after other types of shares, eg preference shares. (IAS 33: para. 5)
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2. 
   Potential ordinary shares
   

IAS 33 identifies the following examples of financial instruments and other contracts generating potential ordinary shares.

1. 
   Debt or equity instruments, including preference shares, that are convertible into ordinary shares
   
2. 
   Share warrants and options
   
3. 
   Employee plans that allow employees to receive ordinary shares as part of their remuneration and other share purchase plans
   
4. 
   Shares that would be issued upon the satisfaction of certain conditions resulting from contractual
   

arrangements, such as the purchase of a business or other assets (IAS 33: para. 7)

3. 
   Scope
   

IAS 33 has the following scope restrictions:

1. 
   Only companies with (potential) ordinary shares which are publicly traded need to present EPS (including companies in the process of being listed).
   
2. 
   EPS need only be presented on the basis of consolidated results where the parent's results are shown as well.
   
3. 
   Where companies choose to present EPS, even when they have no (potential) ordinary shares
   

which are traded, they must do so in accordance with IAS 33. (IAS 33: paras. 2-4)