IAS 33 – Earnings per Share

IAS 33 prescribes principles for the determination and presentation of earnings per share (EPS).

Earnings per share (EPS) is a ratio that is widely used by financial analysts, investors and others to gauge an entity’s profitability and to value its shares.

Earnings per share (EPS) is a common financial metric used to express the profitability of a company.

EPS is normally calculated in the context of ordinary shares of the entity. Earnings attributable to ordinary shareholders are therefore determined by deducting from net income the earnings attributable to holders of more senior equity instruments.

IAS – 33 Earnings Per Share sets out how to calculate

• Basic earnings per share, and
• Diluted earnings per share.

IAS 33 deals with the calculation and presentation of earnings per share (EPS). It applies to entities whose ordinary shares or potential ordinary shares (for example, convertibles, options and warrants) are publicly traded. Non-public entities electing to present EPS must also follow the Standard.

Scope

• IAS 33 applies to entities whose securities are publicly traded or that are in the process of issuing securities to the public.
• If both parent and consolidated statements are presented in a single report, EPS is required only for the consolidated statements.

Measurement

1. Basic Earnings per Share

It is calculated on the basis of ordinary shares which are currently in issuance at the end of reporting period as:

• The entity will determine the basic earnings per share using the earnings available to ordinary shareholders (numerator) divided by weighted average number of shares outstanding during the whole reporting period (denominator).

Basic EPS = (net income – preferred dividends) / weighted average number of common shares outstanding.

• Numerator for basic EPS is profit after all expenses, tax, minority interest and preference dividends.
• Denominator for basic EPS is weighted average outstanding ordinary shares which means that if any change in share capital by issuing new shares than wt. average should be taken on prorated basis.

How Earnings per Share calculated?

Zulfiquar Hospital in Lahore earns a profit of Rs.8,000,000 after taxes in Dec 2022. There are 4,000,000 common shares outstanding at the beginning of 2022. In addition, it issued 1,000,000 shares on July 1, 2022.

Calculate Earnings per Share.

 Calculation:

First calculates the weighted-average number of common shares as

Basic EPS = (net income – preferred dividends) / weighted average number of common shares outstanding.
EPS = 8,000,000 / 4,500,000  

Basic EPS = 1.78

2. Diluted Earning per Share

Dilution is a reduction in the ownership percentage of a share of stock caused by the issuance of new shares.
Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

Diluted earnings per share is calculated on the basis of ordinary shares currently in issuance as well as potentially issuable shares. It reflects the impact of ‘potentially issuable shares’ upon earnings per share of the entity, if these comes in issuance in future.

Potentially issuable shares (such as convertible loan note, share option, share warrants) are the instruments which will result in issue of further shares by the entity, if the right is exercised by the holder.

The entity will determine the diluted earnings per share using the earnings (numerator) available to ordinary share holders taking in to account the effect of potentially issuable shares on these earnings (such as interest savings) divided by weighted average number of shares currently in issuance and potentially issuable shares (denominator).

Diluted EPS = (net income – preferred dividends) / weighted average number of common shares outstanding + Diluted Shares

Basic & Diluted EPS

• Diluted EPS is always less than its basic EPS.
• Disclose basic and diluted net income per ordinary share on the face of the income statement with equal prominence.
• EPS to be shown even if it is negative i.e., a loss per share.
• Future increase in number of ordinary shares will cause a diluted or watering down of equity.
• Diluted EPS also reflects potential reduction of EPS from options, warrants, rights, convertible debt, convertible preferred, and other contingent issuances of ordinary shares.
• Earnings per share (EPS) take into account only common shares, while diluted EPS includes convertible securities, employee stock options, and secondary offerings.
• Basic EPS is used for companies with a simple capital structure, where as diluted EPS is used for companies with more complex capital structures.

Disclosure

If EPS is presented, the following disclosures are required:

• the amounts used as the numerators in calculating basic and diluted EPS, and a reconciliation of those amounts to profit or loss attributable to the parent entity for the period.
• 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.
• instruments (including contingently issuable shares) that could potentially dilute basic EPS in the future, but were not included in the calculation of diluted EPS because they are antidilutive for the period(s) presented.

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Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of the world’s largest brands in Canada and Dubai. He is a tax and IFRS coach and the founder of accountingblogger.com