Advanced Financial Accounting –

AC 304
 Topic 1: IAS 33 – Earnings Per
Share

 By James Moses

Earnings Per Share

1
Objectives of the Chapter

 To distinguish between a simple and a

complex capital structure.

 To calculate basic earnings per share.

 To calculate diluted earnings per share

for a company with a complex capital
structure.
Earnings Per Share
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Earning per Share (EPS)
 Earnings per share (EPS) is widely used
by investors as a measure of a company's
performance and is of particular importance
in:
 (a) Comparing the results of a company
over a period of time
 (b) 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.
Earnings Per Share
3
Earning per Share (EPS)
 EPS is widely defined as
a company's profit divided by the number of common
stock shares it has outstanding. EPS shows how much
money a company makes for each share of its stock. A
higher EPS the better.
 Earnings per share is perceived to be the single
measure that can best summarize the performance of a
company
 There are two types of EPS
 Basic EPS

 Diluted EPS

 All of these are guided by IAS 33 issued by IASB

Earnings Per Share
4
IAS 33 Objectives
 The earning per share is guided by IAS 33
 This is straight forward standard –rule based
standard
 Its Objective is
 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 and they way to calculate and
present EPS.
Earnings Per Share
5
Important Definition in the Chapter.
 • 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.
 • Financial instrument: any contract that is 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.Earnings Per Share 6
Scope of IAS 33
 IAS 33 listed out companies who are eligible
to calculate EPS
 Any company that wishes to do so may voluntary
present EPS
 All companies with ordinary shares or potential ordinary
shares, which are publicly traded must disclose EPS.
 Also a company applying to be listed in Stock
Exchange,
A Parent Company which prepares combined
consolidated and separate financial statements may
present EPS on Consolidated basis only.

Earnings Per Share

7
Calculations of EPS
 Calculation of EPS can be divided into two
groups
 Companies with Simple Capital Structure
 Only have common stock (C.S.) and non-convertible
preferred stock.

 Companies with Complex Capital Structure

 Have also potential ordinary shares…. Convertible debts
or bonds, convertible preference shares etc…

Earnings Per Share

8
Simple Capital Structure – Basic EPS

 For a simple capital structure, the basic

earnings per share (EPS) computation
is:

Profit/(Loss) attributable to ordinary

equity holders
= ---------------------------------------------------
Weighted Average Number of Common
Shares Outstanding
Earnings Per Share
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 Basic EPS
 Profit or loss attributable to ordinary equity
holders means – profit after tax, excluding
amounts attributable to non-controlling
interests, less any amounts accruing to
holders of preference shares.
 Ordinary shares – these are equity
instruments which have the lowest priority of
participation in the profit for the period.

Earnings Per Share

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 Basic EPS
 Weighted Average number of ordinary
shares outstanding –
means the number of shares outstanding
at the beginning of the period, adjusted by
the number of shares bought back or
issued during the period on a time-
weighted basis.

Earnings Per Share

11
 Basic EPS
 The Calculation of Basic EPS can be
learned in the following cases
Simple case – Issue of new Shares
Bonus issue
Share split
Right Issue

Earnings Per Share

12
 Simple Capital Structure
Exhibit 1: Basic EPS
ABC Corporation have a share capital at the beginning of the
year 2012 of TZS 8,000,000 @ TZS 1000. On 30th September
2012 the Company issued 1,000 shares at the market price
as quoted by DSE. At the end of the year, on 31st December
2012, the company made a profit after tax of TZS 3,300,000
which is higher by TZS 20,000 from the previous year profit.
Required: Calculate
a. Basic EPS of 2011
b. Weighted Average Number of Ordinary Shares Outstanding
on 31st December 2012
c. Basic EPS on 2012 and comment on the performance of the
company.

Earnings Per Share

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Solution Exhibit 1: Basic EPS
 Basic EPS 2011
 (TZS 3,300,000 - 20,000)/ 8000 shares*
 Basic EPS for 2011 = TZS 410 per share
 Weighted Average # of OS outstanding.
 8000 shares x 9/12 = 6000 shares
 9000 shares x 3/12 = 2250 shares
 Total 8,250 shares
 Basic EPS 2012
 TZS 3,300,000/ 8250 shares = TZS 400 per share
 Basic EPS in 2011 is better than Basic EPS in 2012.

Earnings Per Share

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Class QUIZ 01– Basic EPS
 AZONTO Company Ltd, made a profit after tax of TZS
1,000,000 during the year ended 31st December 2018. At
the beginning of the year the company had the following
capital structure:
 Ordinary share (2000 shares @ 5000/=) TZS 10,000,000
 8% Preference share TZS 1,000,000
 During the year AZONTO Ltd issued 1000 shares and 400
shares on 31st May and 30th November 2018.
 Required: Calculate Basic EPS to presented in the face of
statement of comprehensive income of AZONTO Ltd.

Earnings Per Share

15
Bonus Issue
 Bonus Issue affect the Denominator in the
calculation of Basic EPS. However the
increase in number of shares is without the
increase in resources. Therefore it needs to
be dealt with precautions.
 Moreover, for comparability issue basic EPS
for previous year needs to be restated…

Earnings Per Share

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Exhibit 2: Bonus Issue
 Born To Shine Plc. is listed in the DSE with the following
capital structure:
 Ordinary share capital
 10000 shares@ TZS 2000 20 Million
 On 31st May Management decided to give a bonus shares
of 5 for every 2 shares held.
 At the end of the year, 31st December 2018, it reported
Profit attributable to ordinary shareholders of TZS
2,400,000.
 Required: Calculate Basic EPS for 2018
 Re-state the 2017 Basic EPS, given it recorded basic
EPS of TZS 200 per share.
Earnings Per Share
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Solution to Exhibit 2: Bonus Issue
 Basic EPS for 2018
TZS 2,400,000/(10,000 x 5/2 = 25000
shares) = TZS 96 per share.
Note, the assumption is that bonus
element occurred at the start of the
year…
 Re-Stated Basic EPS for 2017
TZS 200 x 2/5 = TZS 80 per share…
 This is necessary, unless the performance of 2018 would have been lower despite
the increase in profitability.
Earnings Per Share
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Share Split and Stock dividend
 A stock split is a corporate action in which a
company divides its existing shares into
multiple shares,
without any increase in the resources.
 A stock dividend is a dividend payment
made in the form of additional shares rather
than a cash payout.
 All of the above increased number of shares
without any increase in the resources of the
business…
Earnings Per Share
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Share split and Stock dividend
 Hence all of the above are dealt in the same
way as the Bonus issue, in the calculation of
Basic EPS.
Remember to assume that, stock split or
dividend have occurred at the start of the
year and to re-state the previous year
Basic EPS for comparability issues.
Exhibit 3, shows how to deal with stock
split or dividend…
Earnings Per Share
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Exhibit 3: Stock Dividend
 Sovran Financial Corporation reported Profit after tax of
TZS 154 million in 2009. Its capital structure included:
 Common Stock
 Jan 1 60 million common shares
outstanding
 March 1 12 million new shares were issued
 June 17 A 10% stock dividend was distributed
 Calculate Basic EPS
 In 2008 PAT was TZS 115 M and 55 million weighted-
average share , Restate 2008 Basic EPS

Earnings Per Share

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Solution to Exhibit 3: Stock dividend
 Basic EPS (2009)
 Weighted-average shares
 60 x 1.1 x 2/12 = 11 M shares
 (60 + 12) x 1.1 x 10/12 = 66 M shares
 Total 77 M shares
 Basic EPS = TZS 154 M/ 77 M shares = TZS 2
per share
 Re-stated EPS (2008)
 TZS 115 M/ (55 M shares x 1.1) = TZS 1.90 per
share
Earnings Per Share
22
Class QUIZ 02 – Reacquired Shares
 Sovran Financial Corporation reported Profit after tax of
TZS 154 million in 2009. Its capital structure included:
 Common Stock
 Jan 1 60 million common shares
outstanding
 March 1 12 million new shares were issued
 June 17 A 10% stock dividend was distributed
 Oct 1 8 million shares were re-purchased by the
company as treasury stock
 Calculate Basic EPS

Earnings Per Share

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Solution to Class QUIZ 02


Earnings Per Share

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Right Issue
 A rights issue is an invitation to existing
shareholders to purchase additional new shares in
the company. This type of issue gives existing
shareholders securities called rights.
 With the rights, the shareholder can purchase
new shares at a discount to the market price
on a stated future date.
 The right issue comes with a bonus element, given
they have been offered at a price below the market
price…

Earnings Per Share

25
Steps of Calculating Basic EPS –
with Right Issue


Earnings Per Share

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Exhibit 4: Right Issue
 BB plc had 100,000 shares in issue, but
then makes a 1 for 5 rights issue on 1
October 20X2 at a price of $1. The market
value on the last day of quotation with rights
was $1.60.
 Required: Calculate the EPS for 20X2 and
the corresponding figure for 20X1 given total
earnings of $50,000 in 20X2 and $40,000 in
20X1.

Earnings Per Share

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Solution to Exhibit 4: Right Issue
1. Calculation of Theoretical Ex-right Price (TERP).
 This is the price at which the share should trade at in theory, after accounting for the
dilution in value caused by the new shares being issued at a discount.
 5 shares x 1.6 = $8
 1 shares x 1.0 = $1
 6 shares = $9 =…. $9/6 shares = $ 1.5 per share
2. Re-state 20X1 EPS
 ($ 40,000/100,000 shares) x 1.5/1.6 = $ 0.375 per share
3. Calculating Weighted Average Number of Shares
 Jan 1 100,000 x 1.6/1.5 x 9/12 = 80,000 shares
 Oct 1 120,000 x 3/12 = 30,000 shares
 Total weighted average number of shares = 110,000 shares
4. Basic EPS for 20X2
 $ 50,000/ 110,000 shares = $ 0.4545 per share
Earnings Per Share
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Complex Capital Structure
 For a company that have potential ordinary share in its
capital structure it is necessary to calculate two EPS
 Basic EPS
 Diluted EPS
 It is necessary due to it shows the impact on EPS
assuming the potential ordinary shares were
converted…
 Potential ordinary shares includes convertible
preference stock, convertible bonds, stock options,
rights or warrants and contingently issuable securities.

Earnings Per Share

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Diluted EPS

Earnings Per Share

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Diluted EPS
 Diluted EPS is a calculation used to gauge
the quality of a company's earnings per
share (EPS) if all convertible securities were
exercised.
 The presence of potential ordinary share
have impact on the denominator and
numerator in the EPS calculations. Hence
dilute the Basic EPS…i.e. lowers EPS.
 Therefore the next slides focus on each type
of potential ordinary shares…
Earnings Per Share
31
Stock Option, Rights or Warrants
 Stock option is a benefit in the form of an option given by a
company to an employee to buy shares in the company at a
specified exercise price within some specified number of
years from the date of the grant.
 Options and other share purchase arrangements are
dilutive when they would result in the issue of ordinary
shares for less than fair value.
 In the calculation of Diluted EPS, as a result of Stock
Options, only denominator will be impacted…
 Incremental shares is equal to share assumed issued and
those assumed reacquired.
 IAS 33 assume, the proceeds from the exercise of the options were
used to reacquire shares as treasury stock at the average market
price…(treasury stock method)
Earnings Per Share
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Exhibit 5: Stock Option
 Sovran Financial Corporation reported profit after tax of
TZS 154 Million in 2018. Its capital structure includes:
 Common stock 75 million shares
 The average market price of common shares during
2018 was TZS 25 per share.
 Preferred Stock, Nonconvertible
 5 million 8%, TZS 10 par, shares

 Incentive Stock Options

 Executive stock options granted in 2014, exercisable
after 2017 for 15 million common shares at an
exercise price of TZS 20 per share
 Required: Calculate Basic EPS and Diluted EPS.
Earnings Per Share
33
Solution to Exhibit 5: Stock Option


Earnings Per Share

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Convertible Securities
 It may include convertible preferred stock, bonds or
notes payable that can be converted into common
share at the option of the holder of the security.
 EPS will be affected if and when such securities
are converted and new common shares are
issued.
 By the if converted method, assumes conversion
takes place at the beginning of the period (or at
the time convertible security is issued)
 Moreover, Convertible securities affect both
numerator and denominator in the calculation of
EPS. Earnings Per Share
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Exhibit 6: Convertible Bond
 Sovran Financial Corporation reported profit after tax of
TZS 154 Million in 2018. Its capital structure includes:
 Common stock 75 million shares
 The average market price of common shares during
2018 was TZS 25 per share.
 Preferred Stock, Nonconvertible
 5 million 8%, TZS 10 par, shares

 Convertible Bonds
 10%, TZS 300 million face amount issued in 2017,
convertible into 12 million common shares.
 Required: Calculate Basic EPS and Diluted EPS. Note tax
rate being 40%.
Earnings Per Share
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Solution to Exhibit 6: Convertible bonds

Earnings Per Share

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Multiple Potential Ordinary Shares
 Incase the company capital structure
contains multiple potential ordinary shares,
one needs to identify dilutive and antidilutive
securities.
 Antidilutive securities are those which their
effect of their conversion or exercise result in
an increase in EPS rather than decrease.
Antidilutive securities are ignored in the
EPS calculations.
Earnings Per Share
38
Antidilutive Securities
 Options, Warrants and Rights
 These are antidilutive when exercise price of the option
or warrant is higher than the market price…
 Convertible securities
 One needs to calculate their incremental EPS:-
 Incremental earnings/ incremental shares…

 This will determine the order of entry for multiple

convertible securities…
 The order start with those with lower incremental
EPS…

Earnings Per Share

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Exhibit 7: Multiple Potential Shares
 At 31st December 2018, the FS of Triple C Ltd included the following
 Net Income for 2018 $ 500 million
 Common stock, $ 1 per:
 Shares outstanding on 1st Jan 150 million shares
 Shares retired for cash on 1st Feb 24 million shares
 Shares issued for cash on 1st Sept 18 million shares
 2-for-1 split on July 23
 Preferred Stock, 10%, $ 60 par, cumulative, non-convertible $ 70 million
 Preferred Stock, 8%, $ 50 par, cumulative, convertible into 4 million
shares of common stock $ 100 million
 Incentive stock options outstanding, fully vested, for 4 million shares of
common stock; the exercise price is $ 15
 Bonds payable, 12.5%, convertible into 20 million shares of common
stock; $ 200 million
Earnings Per Share
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Exhibit 7: Multiple Potential Shares
 Additional Data:
 The Market Price of common stock averaged $ 20 during 2018
 The convertible preferred stock and the bonds payable had been
issued at par in 2016. The tax rate for the year was 40%...
 Required:
 Compute Basic EPS
 Compute Diluted EPS for the year ended 31st December 2018.

Earnings Per Share

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Solution to Exhibit 7: Multiple Potential Shares

Basic EPS
Profit Attributable to ordinary share holders TZS
Net Income for 2018 500,000,000
Less: Preference Dividend

TZS 70,000,000 x 10% (7,000,000)

TZS 100,000,000 x 8% (8,000,000)

485,000,000 A

Weighted Average Number of Ordinary Shares Outstanding Shares

Jan 1: 150,000,000 x 2.00 x 1/12 25,000,000
Feb 1: 126,000,000 x 2.00 x 7/12 147,000,000
Sept 1: 270,000,000 x 4/12 90,000,000
262,000,000 B
Basic EPS 1.85 A/B

Earnings Per Share

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Diluted EPS
 Steps involved in Calculating Diluted EPS
1. Identify Potential Ordinary Shares
2. Calculate incremental EPS
3. Establish Order of Entry i.e. Ranking
4. Calculate Diluted EPS

Earnings Per Share

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Diluted EPs

Diluted EPS

Step 1: Identify Potential Ordinary Shares

1. 8% Convertible Preferrence Stock

2. Stock Option

3. Convertible Bonds Payable

Earnings Per Share

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 Diluted EPS
Step 2: Calculate Incremental EPS Incremental Earnings Incremental Shares Incremental EPS Ranking
1. 8% Convertible Preferrence Stock TZS Shares
Preferrence stock dividend saved 8,000,000
Number of Shares after conversion 4,000,000 2.00 3
2. Stock Option -
Number of shares exercised 4,000,000
Number of shares re-acquired (3,000,000)
Incremental number of shares 1,000,000 - 1
3. Bonds Payable
Incremental Earnings
Interest after tax (200M x 12.5% x (1-0.4)) 15,000,000
Shares converted 20,000,000 0.75 2
Earnings Per Share
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Diluted EPS
Step 4: Calculate Diluted EPS Earnings Shares EPS Status
Basic EPS 485,000,000 262,000,000 1.8511
1. Stock Options - 1,000,000
485,000,000 263,000,000 1.8441 Diluted
2. Convertible Bonds payable 15,000,000 20,000,000
500,000,000 283,000,000 1.7668 Diluted
3. 8% Convertible preferrence stock 8,000,000 4,000,000
508,000,000 287,000,000 1.7700 Antidilutive
Basic 1.8511
Therefore; Diluted EPS 1.7668
Earnings Per Share
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Contingently Issuable Shares
 These are agreements that specifies some
additional shares of common stock will be
issued, contingent upon the occurrence
of some future circumstances i.e.
contingent performance e.g. desired level of
income, target stock price
These are considered in the calculation of
Diluted EPS and affects only the
denominator in the EPS computations.

Earnings Per Share

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Contingently Issuable Shares
 When, specified conditions are met, and
those conditions are currently being met,
then add to the denominator contingently
issuable shares.
 However, if the conditions are, specified conditions are
met and those conditions are not currently being
met, then none should be done as regard to these
contingently issuable shares.

Earnings Per Share

48
Presentation and Disclosure
 Basic and diluted EPS should be presented
by an entity in the statement of
comprehensive income for each class of
ordinary share that has a different right to
share in the net profit for the period.
 The basic and diluted EPS should be
presented with equal prominence for all
periods presented.

Earnings Per Share

49
Disclosure as per IAS 33
 An entity should disclose the following.
 (a) The amounts used as the numerators in calculating
basic and diluted EPS, and a reconciliation of those
amounts to the net profit or loss for the period
 (b) The weighted average number of ordinary shares used
as the denominator in calculating basic and diluted EPS,
and a reconciliation of these denominators to each
other.
 See examples of Disclosure of various Companies listed in
DSE…
 Disclosure of IAS 33 of Tanzania Company.pdf

Earnings Per Share

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See you in the Next


Lecture

Earnings Per Share

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