Basic EPS is determined by dividing the earnings of the entity for the
reporting period by the weighted-average number of shares of the entity.
Paragraph 10 of AASB 133 states:
Basic earnings per share shall be calculated by dividing profit or loss attributable to
ordinary equity holders of the parent entity (the numerator) by the weighted average
number of ordinary shares outstanding (the denominator) during the period.
Earnings are determined after deducting any preference share dividends
appropriated for the financial year to the extent they have not been
treated as expenses of the entity. Preference share dividends are
deducted to provide earnings on the basis that the EPS is calculated
from the perspective of ordinary shareholders.
In considering subtracting preference dividends for the purpose of
calculating EPS, it is necessary to determine, in those periods where the
preference dividend is not paid, whether the preference shares are
cumulative or not. The characteristic of a cumulative dividend preference
share is that where dividends are not paid in a particular year, they must
be paid in later years before ordinary shareholders are entitled to receive
any dividends out of profits. If the preference dividend is not cumulative,
and no amount has been appropriated for the year, then it may be
ignored for the purpose of the EPS calculation.
AASB 133 also requires that earnings must be calculated to exclude the
following items:
Any portion attributable to outside equity interests; and
Any costs of servicing equity, paid or provided for, other than dividends on ordinary
shares and partly-paid shares.
As indicated above, in determining the number of shares we use a weighted average.
Specifically, paragraph 19 of AASB 133 states:
For the purpose of calculating basic earnings per share, the number of ordinary
shares shall be the weighted average number of ordinary shares outstanding during
the period.
In determining the weighted average number of shares, AASB 133 indicates that the number
is determined as the total of the number of ordinary shares of the entity outstanding as at the
reporting period adjusted as follows:
271
(i)
(ii)
decreased by reductions in the number of ordinary shares during the reporting period,
including by way of share buy-backs.
where (i) and (ii) are weighted by reference to the number of days from, respectively, the date
of issue of those shares, or the date of reduction, to the reporting date as a proportion of the
total number of days in the reporting period. The weighted average number of shares also has
to take into account mandatorily convertible securitiesthat is, securities that must
ultimately be converted to ordinary shares. As paragraph 23 of AASB 133 states:
Ordinary shares that will be issued upon the conversion of a mandatorily convertible
instrument are included in the calculation of basic earnings per share from the date the
contract is entered into.
The weighted average number of ordinary shares also needs to take into account partly paid
ordinary shares unless the partly paid ordinary shares carry no rights to participate in
earnings.
(b)
Diluted EPS is calculated and disclosed where an entity has on issue potential ordinary
shares that are dilutive. To determine diluted EPS, the weighted average number of shares
will be determined in accordance with the calculations provided for basic EPS, with the
inclusion of an additional factor based upon the weighted average number of potential
ordinary shares that the company may have had on issue throughout all, or part, of the
financial year. A potential ordinary share is broadly defined at AASB 133 as a financial
instrument or other contract that may entitle its holder to ordinary shares.
AASB 133 requires that in determining the weighted average number of shares for diluted
EPS we start with the number used to calculate basic EPS and then make adjustments to this
number. Paragraph 36 states:
For the purpose of calculating diluted earnings per share, the number of ordinary
shares shall be the weighted average number of ordinary shares calculated in
accordance with paragraphs 19 and 26, plus the weighted average number of ordinary
shares that would be issued on the conversion of all the dilutive potential ordinary
shares into ordinary shares. Dilutive potential ordinary shares shall be deemed to have
been converted into ordinary shares at the beginning of the period or, if later, the date
of the issue of the potential ordinary shares.
Specifically, we add the following (to the extent they are dilutive) to the weighted average
number of shares used to calculate basic EPS:
272
been issued since the beginning of the reporting period and remain
outstanding at reporting date are weighted by reference to the number
of days from their date of issue to the reporting date.
There is a general rule that if a potential ordinary share issue would increase EPS, it is not
considered to be dilutive and would be excluded from the calculation of diluted EPS. As
paragraph 41 of AASB 133 states:
Potential ordinary shares shall be treated as dilutive when, and only when, their
conversion to ordinary shares would decrease earnings per share or increase loss per
share from continuing operations.
Each type of potential ordinary shares (for example, convertible
preference shares, convertible notes and share options) must be
considered separately. Consideration must also be given to the
probability of conversion. If the conversion is at the option of the entity,
and the conversion is probable, then the potential ordinary shares must
be included in the diluted EPS calculation, even if their inclusion does not
dilute EPS.
In calculating earnings for diluted EPS we have to consider the effects on
earnings that would have occurred if those potential ordinary shares that
are dilutive were converted to ordinary shares. We work out revised
earnings as if the conversion of the potential ordinary shares had
actually occurred. Paragraph 33 of AASB 133 states:
For the purpose of calculating diluted earnings per share, an entity shall adjust profit
or loss attributable to ordinary equity holders of the parent entity, as calculated in
accordance with paragraph 12, by the after-tax effect of:
(a) any dividends or other items related to dilutive potential ordinary shares deducted
in arriving at profit or loss attributable to ordinary equity holders of the parent
entity as calculated in accordance with paragraph 12;
(b) any interest recognised in the period related to dilutive potential ordinary shares;
and
(c) any other changes in income or expense that would result from the conversion of
the dilutive potential ordinary shares.
(i) dividends, interest or other financing costs associated with dilutive potential
ordinary shares that have been recognised as expenses during the reporting
period; and
(ii) any other non-discretionary changes in revenues or expenses for the reporting
period that would result from the conversion of the dilutive potential ordinary
shares.
27.2
Potential ordinary shares are dilutive if the EPS is recalculated on the basis that the securities
were converted to ordinary shares, and the recalculated diluted EPS figure is less than the basic
EPS (which is based on the ordinary shares on issue). Potential ordinary shares would emanate
from such instruments as share options, convertible debentures and convertible preference shares.
273
27.3
27.4
Diluted EPS must be shown where an entity has on issue potential ordinary shares that are
dilutive. Paragraph 66 of AASB 133 states:
An entity shall present on the face of the income statement basic and diluted earnings per
share for profit or loss from continuing operations attributable to the ordinary equity
holders of the parent entity and for profit or loss attributable to the ordinary equity holders
of the parent entity for the period for each class of ordinary shares that has a different right
to share in profit for the period. An entity shall present basic and diluted earnings per share
with equal prominence for all periods presented.
Paragraph 67 further states:
Earnings per share is presented for every period for which an income statement is
presented. If diluted earnings per share is reported for at least one period, it shall be
reported for all periods presented, even if it equals basic earnings per share. If basic and
diluted earnings per share are equal, dual presentation can be accomplished in one line on
the income statement.
It is possible for earnings to be negative in a particular period. In this regard, paragraph 69 states:
An entity shall present basic and diluted earnings per share, even if the amounts are
negative (i.e. a loss per share).
274
27.5
Yes, if there is a bonus issue we do need to adjust the previous periods EPS. The adjustment
factor is provided on page 855 of the textbook.
27.6
It should be noted that given that the preference dividends are cumulative, it does not matter
whether or not they have been paid. If they were non-cumulative, the right to the preference
dividend would be lost if they had not been declared, and, hence, for non-cumulative preference
shares, the dividend will only be deducted from earnings if the dividend has been appropriated.
Hence, earnings would be calculated as:
After-tax net profit
Less: Preference share dividends
Earnings for basic EPS
$1 200 000
(50 000)
$1 150 000
Period
Fully paid ordinary shares
1/7/0931/10/09
1/11/0928/2/10
1/3/1030/6/10
Partly-paid ordinary shares
1/6/1030/6/10
No. outstanding
Weighted
average
no. of shares
123/365
120/365
122/365
400 000
480 000
430 000
134 795
157 808
143 726
30/365
100 000($1.00/$2.00)
4 110
440 439
Basic earnings per share, therefore, is $1 150 000 440 439 = $2.6110
27.7
Earnings calculation
Net profit after tax
Less: Preference share dividends
Net profit after-tax less preference dividends
Theoretical ex bonus price
($3.00)(5) + 0
5+1
$1 000 000
(6 000)
$ 994 000
=
2.50
275
Calculation of the weighted average number of ordinary shares and ordinary share equivalents
Portion
of year
Period
Fully-paid ordinary shares
1/7/0830/9/08
1/10/0830/4/09
1/5/0930/6/09
No.
outstanding
Adjustment
factor
600 000
750 000
900 000
0.8333
0.8333
92/365
212/365
61/365
Weighted
average
no. of shares
181 487
522 761
150 411
854 659
Basic earnings per share for 2009 would be: $994 000 854 659 = $1.1630
The comparative figures for 2008 would be adjusted for the bonus issue. The adjusted figure
would be: $2.30 0.8333 = $1.9166. Note that when determining the weighted average
number of shares for the current financial year, the number of shares outstanding prior to the
bonus issue is divided by the adjustment factor.
Failure to adjust previous periods earnings would provide misleading figures as it would appear
that the company was not performing as well, when in fact the reduction in EPS may be due to
the bonus issue.
27.8
Weighted
average
ordinary
shares
0.50
2.00
Earnings
$
Basic
EPS
$
15 000 000
308 219
100 308 219 $410 000 000 $4.09
276
27.9
365
365
181
365
61
365
Weighted
average of
outstanding
ordinary
shares
3 200 000
2 400 000/0.75*
600 000/0.75*
396 712
1 000 000
167 123
3 763 835
Earnings
$
600 000**
EPS
$
$0.1594
Px
Po
(Po No) + Pr
No + 1
Where Po = last sale price or, if higher, the last bid price cum rights
No = the number of ordinary shares required for one right
Pr = the subscription price of the right (or the present value of the subscription
price payable in instalments) plus the present value of dividends forgone in
respect of ordinary shares required for one right not presently participating
in dividends
Px =
Px =
Px
Po
(1.50 3) + 0
4
1.125
=
1.125
1.50
** Earnings
Profit after tax
Less outside equity interests
Less preference dividends
$ 800 000
(100 000)
(100 000)
$ 600 000
277
27.10
Earnings
Basic $ (290 000 20 000)
Conversion of preference shares
1 000 000
Saved preference dividend
Shares
$270 000
2 000 000
500 000
20 000
$290 000
=
=
2 500 000
$290 000
2 500 000
$0.116
365 days
365 days
9 750 000*
9 750 000
278
51 days
365 days
394 878
10 144 878
EPS
=
=
$3 750 000***
10 144 878
$0.3696
27.13 The profit after tax earnings for each 6-month period is calculated using the first two columns
given in the question, as follows:
12 Months
to 30/6/09
17 500 000
5 500 000
12 000 000
Profit
Income tax expense
Profit after tax
6 Months
to 31/12/08
7 035 800
1 756 000
5 279 800
6 Months
to 30/6/09
10 464 200
3 744 000
6 720 200
Basic EPS
365 days
365 days
5 000 000
EPS
5 000 000
=
$2.40
Diluted EPS
Options
As the options had not been on issue for the entire year, we must weight
them for the time they were outstanding. The Standard requires that we
consider the number of shares that would effectively be issued for no
consideration if these options are exercised. To determine this we make the
following calculation:
Options issued on 15 September 2008
Number of shares issuable:
Number of shares that would be issued at market price for
the actual proceeds of $25 000 000 = $25 000 000 $2.20
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan
10 000 000
11 363 636
279
(1 363 636)
As the above calculation is negative, meaning no shares would be issued for no consideration given
the current market price, and as the exercise of the options is not mandatory, then the above option
issue is not dilutive and can be ignored for the purposes of calculating diluted EPS.
Options issued on 25 March 2009
Number of shares issuable:
Number of shares that would be issued at market price for
the actual proceeds of $2 000 000 = $2 000 000 $2.20
Number of shares deemed issued for no consideration
1 000 000
909 091
90 909
As these options were not in place at the beginning of the year, they will be weighted for the
number of days they have been on issue: 90 909 107/365 = 26 650
Calculation of diluted EPS
$12 000 000
5 000 000 + 26 650
$2.3873
$
Earnings
Basic EPS
90 000 000
5 000 000
249 315
835 616
96 084 931
$0.2394c
The effective date to commence weighting is after 31 March 2010i.e. 1 April 2010. At this
point the dividend became payable.
**
Partly-paid shares should be included in Basic EPS by calculating the fully-paid equivalent
number of shares. When a call is made in the period, the time weighting should commence
from the date the call is due and payable. In this case the closing date is 28 February 2010.
2710
exercised, or the call is paid. For the options, the Accounting Standard assumes that there will
only be an inflow of funds if the exercise price is less than the market price. The weighted average
number of shares used to calculate diluted EPS is adjusted for options and partly-paid ordinary
shares by adjusting for the number of ordinary shares that are assumed to be issued for no
consideration (this can be contrasted to convertible instruments, such as convertible notes or
convertible preference shares, where the adjustment takes into account the maximum number of
ordinary shares to be issued as well as an adjustment to earnings).
Calculate earnings per incremental share
Partly-paid shares
There is no adjustment to earnings for the capital inflow associated with the partly-paid shares.
Their conversion is deemed to be mandatory, hence they would be ranked last if we apply the
trigger test. To determine the number of shares deemed issued for no consideration, we must
acknowledge that at least $0.50 was outstanding on the partly-paid shares for the entire year, with
$1.00 being outstanding until 28 February.
To account for period to call date of 28 February:
Number of shares issuable: 10m ($1.00 $2.00) = 5m
Number of shares that would be issued at market
price for the actual proceeds of $10: ($10m $2.50) = 4m
Number deemed issued for no consideration
1m (243 365)
To account for period from call date of 28 February:
Number of shares issuable: 10m ($0.50 $2.00) = 2.5m
Number of shares that would be issued at market
price for the actual proceeds of $10: ($5m $2.50) = 2m
Number deemed issued for no consideration
0.5m (122 365)
665 753
167 123
832 876
2711
Ordinary shares
96 084 931
Options
Nil
1 600 000
Partly-paid
shares
Nil
832 876
98 517 807
2712
1 July 2010
Fully-paid
ordinary
shares
75 000 000
1 May 2011
304
365
61
365
0.8514*
16 712 329
90 080 609
=
=
* Theoretical ex-rights price
((2.50 0.035) 3) + 1
3+1
Adjustment factor
2.09875
2.465
0.8514
73 368 280
= 2.09875
10 000 000
8 000 000
2 000 000
Given that the Standard requires that there is no adjustment to earnings in relation to the
options, the earnings per incremental share is $nil. 2 000 000 shares will be added to the
denominator to calculate diluted EPS.
Convertible notes
If the notes were converted to ordinary shares, the pre-tax earnings
would be increased by $500 000 (the interest expense which would no
longer be payable which is equal to 2 000 000 $2.50 10%). This
would lead to an after-tax increase in earnings of $300 000, which is
$500 000 (1 0.40).
As an additional 2 000 000 shares would be created, the increase in
earnings attributable to ordinary shareholders on conversion of the
convertible debentures would, on an incremental share basis, be: $300
000 2 000 000 = $0.15
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan
2713
We must now rank the above potential ordinary shares in order from greatest to least
dilution
AASB 133 requires that when we consider whether potential ordinary shares are dilutive, each
issue or series of potential ordinary shares must be considered separately, rather than in
aggregate. Each issue or series of potential ordinary shares must be considered in sequence
from the most dilutive (smallest earnings per incremental share) to the least dilutive (largest
earning per incremental share). In this question, the order from most dilutive to least dilutive
is:
Options
Convertible notes
Increase in shares
2 000 000
2 000 000
Earnings per
incremental share
$nil
$0.15
2714
Profit and
adjustments
Net profit from
continuing ordinary
operations
Ordinary
shares
90 080 609
Nil
2 000 000
92 080 609
$300 000
2 000 000
94 080 609
Options
Convertible notes
EPS
Dilutive?
$0.7771
$0.7602
Yes
$0.7472
Yes
In the above calculation, profit or loss from continuing operations is the starting point in the
trigger test. After this point, each potential ordinary share is considered in order of smallest
earnings per incremental share to largest earnings per incremental share. If a particular security
does not dilute EPS then it is not to be included when calculating diluted EPS, unless the
conversion is mandatory, or conversion is probable and at the option of the entity.
Calculation of diluted EPS
Profit
As reported for basic
EPS
Options
Convertible
debentures
Ordinary shares
90 080 609
Nil
2 000 000
$300 000
2 000 000
94 080 609
27.16
Calculation of Basic Earnings
Profit attributable to Members of the Parent Entity
$16 488 000
Less Preference Share Dividends (30/9/2008)
$360 000
Less Cumulative Preference Dividends not paid, nor Provided for (31/3/2009)
[$6 000 000 x 0.06]
$360 000
Basic Earnings, based upon Total Profit
$15 768 000
Add Loss from Discontinuing Operations after related Income Tax
Basic Earnings, based upon Profit from Continuing Operations
$492 000
$16 260 000
2715
The preference shares issued on 1 March 2009 were not entitled to dividends at 30 June 2009
and no partial dividend entitlement has been accrued.
Calculation of Basic Weighted Average Number of Shares
Share Issue
Weighting
Original 1/7/2008
Public Issue 1 December 2009
Partly Paid Shares
Rank for Dividends 1 April
2009
Share Buy Back 1 May 2009
Total
1 = 365/365
212/365
91/365
61/365
Number of Shares
4 600 000
8 000 000
= 480 000 x 0.3
= 144 000
Weighted average
num
ber
of
share
s
4 600 000
4 646 575
35 901
(260 000)
(43 452)
9 239 024
=
=
15 768 000
9 239 024
2716