Basic Earnings Per Share as per IAS 33 PRESCRIBES the principles for the determination and presentation of Basic EPS among other considerations to IMPROVE comparison over time and between different companies.
Table of Contents
Basic EPS is the ‘Monetary Value‘ of earnings per outstanding share of common stock for a company.
It is a key measure of corporate profitability and is commonly used to price stocks.
It is CALCULATED simply as the net profit or loss for the period attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period.
| Basic Earnings Per Share [EPS Calculation] = Net Profit/(Loss) Attributable to Ordinary Shareholders / Weighted Average Number of Ordinary Shares Outstanding During the Period |
Net profit/(loss) i.e. earnings basically include all items of income and expense including tax and share of non-controlling interests (NCI) LESS the net profit attributable to preference shareholders including preference dividends.
Preference Dividends which shall be DEDUCTED from net profit consist of:
- Preference dividends on non-cumulative preference shares declared in respect of the period; AND
- The full amount of the required preference dividends for cumulative preference shares for the period, whether or not they have been declared (excluding those paid/declared during the period in respect of previous periods).
The No. of ordinary shares used should be the weighted average number of ordinary shares outstanding during the period.
The `Time Weighting Factor´ is the No. of days the shares were outstanding compared with the total number of days in the period; a Reasonable Approximation is usually adequate.
Shares are usually included in the weighted average number of shares from the date their proceeds are receivable which is usually the date of issue. For example,
| (a) In Exchange for Cash | When Cash is Receivable. |
| (b) On the Voluntary Reinvestment of Dividends on Ordinary or Preferred Shares | The Dividend Payment Date. |
| (c) As a Result of the Conversion of a Debt Instrument to Ordinary Shares | Date the Interest Ceases Accruing. |
| (d) In Place of Interest or Principal on Other Financial Instruments | Date the Interest Ceases Accruing. |
| (e) In Exchange for the Settlement of a Liability of the Enterprise | The Settlement Date. |
| (f) As Consideration for the Acquisition of an Asset Other than Cash | The Date on Which the Acquisition is Recognized. |
| (g) For the Rendering of Services to the Enterprise | As Services are Rendered. |
There might be VARIOUS events affecting the No. of shares outstanding during the year the following classification explains that:
| With Corresponding Change in Resources | Without Corresponding Change in Resources |
|---|---|
| – Issue of New Shares at Fair Value | – Bonus Issue of Shares |
| – Purchase of Treasury Shares | – Share Split and Consolidation |
| – Redemption of Own Shares | – Bonus Element in Right Issue |
3.1 With Corresponding Change in Resources
When there has been an issue of new shares or buy-back of shares, the corresponding figures for EPS for the previous year will be comparable with the current year because as the weighted average number of shares has risen or fallen there has also been a corresponding increase or decrease in resources.
Money has been RECEIVED when shares were issued and money has been PAID out on the repurchased shares.
It is assumed that the sale or purchase has been made at full Market Price.
3.2 Without Corresponding Change in Resources
There are events in which there is a change in the No. of ordinary shares Without a Corresponding Change in Resources.
Here, it is necessary to make adjustments to EPS reported in prior years so that the current and prior period’s EPS figures become comparable. It is achieved by adjusting the number of ordinary shares outstanding before the event for the proportionate change in the No. of shares outstanding as if the event had occurred at the beginning of the earliest prior period reported.
Bonus Issue
The entity pays the dividends to its shareholders in form of new shares (instead of cash) for no additional consideration.
Either one share is split into a few shares (‘Share Split’) or the opposite happens when the entity consolidates its share capital (‘Share Consolidation’) also called reverse share split.
There is Zero Increase in the case of split or Zero Decrease in the case of share consolidation of resources.
When there is a bonus issue/share split/share consolidation, then IAS 33 requires ‘Retrospective Adjustment‘ to the weighted average number of shares for both basic and diluted EPS.
IAS 33 refers to such adjustment as ‘Bonus Factor’ and it is calculated using the following formula:
Bonus Factor = [Number of Shares after Bonus Issue/Share Split/Share Consolidation ÷ Number of Shares Before Bonus Issue/Share Split/Share Consolidation]
| For Current Year EPS | For Prior Year EPS |
|---|---|
| To calculate the weighted average number of ordinary shares for the current year EPS, multiply the number of shares before the bonus issue/share split/share consolidation by the bonus factor. | To calculate prior year EPS, EITHER: – Multiply the prior year weighted average number of ordinary shares by the bonus factor; or – Divide prior year EPS with the bonus factor. |
Right Issue
A Right 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 reflects the bonus element that must be incorporated in the EPS calculation.
| How to Adjust No. of Shares for Right Issue? |
|---|
| When there is a bonus element in any issue, then IAS 33 requires Retrospective Adjustment to the weighted average number of shares for both basic and diluted EPS. IAS 33 refers to such adjustment as ‘Bonus Factor’ and it is calculated using the following formula: Bonus Factor = [Market Price Per Share Immediately before the Exercise of Right ÷ Theoretical Ex-Right Price] |
→ Theoretical Ex-Right Price = [(Market Value of Shares Immediately Before the Right Issue + Proceeds from Exercise of Right) ÷ Number of Ordinary Shares After the Exercise of Right]
| For Current Year EPS | For Prior Year EPS |
|---|---|
| To calculate the weighted average number of ordinary shares for the current year EPS, multiply the number of shares before the right issue by the bonus factor. | To calculate prior year EPS, EITHER: – Multiply the prior year weighted average number of ordinary shares by the bonus factor; or – Divide prior year EPS with the bonus factor. |
Synopsis
International Accounting Standard (IAS 33) was REISSUED in December 2003 and applies to annual periods beginning on or after 1 January 2005. IAS 33 sets out how to calculate both Basic Earnings Per Share (EPS) and ‘Diluted Earnings Per Share‘.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)