Chapter 4 - IAS 33
Chapter 4 - IAS 33
Chapter 4 - IAS 33
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Content
1. Introduction
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1. Introduction
What is EPS?
Capital Structure
Complex capital structure
Preference Shares
Changes in Shares
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What is EPS
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1. Issue of new shares during the year for cash or other assets
2. Issue of new shares in the form of a bonus issue or share split
3. Issue of new shares at a discounted price as a result of the exercise of a
rights issue
4. Consolidation of existing shares through a reverse split
5. Issue of new shares from the conversion of potential ordinary shares
such as convertible bonds or convertible preference shares
6. Issue of new shares from the exercise of potential ordinary shares
such as stock options issued to employees or creditors
7. Contingently issuable shares become actual issues when conditions have
been met (IFRS 2)
8. Purchase of treasury shares and issue of previously purchased treasury
shares
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Reserves
Reserves
(Retained
earnings
+ Capital Bonus issue
reserves) Total Total
Equity Equity
Share
capital
Share
capital
shareholders
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Content
1. Introduction
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Basic EPS
Calculating Basic EPS for Various Scenarios
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VNM
Numerator:
• After deducting amounts due to preference shareholders in respect of:
– Preference dividends (lưu ý PP hạch toán cổ tức ưu đãi)
– Gains/losses arising on the repurchase or early conversion of preference
shares –(standard PS vs convertible PS)
– Amortization of discount or premium on increasing rate preference
shares
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Scenario Treatment
Non-cumulative preference shares Deducted when declared
Cumulative preference shares Deducted when due
Increasing rate preference shares Amortization of discount/premium
treated as part of preference dividend
Preference shares repurchased in a tender Excess deducted from net profit
offer (FV > carrying value) attributable to ordinary equity holders of
Dr- PS- Equity: 10 parent entity
Cr- Cash: 9 & Cr- P/L (gain): 1
Early conversion of preference shares This is a loss to the issuer and a return to
(Consideration > FV of ordinary shares the preference shareholders. Deduct loss
issuable) – P9-2 from net profit attributable to ordinary
Dr- PS(Equity) & Dr- P/L(loss) equity holders of parent entity
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(b
24Year Carrying amount Imputed (a) Carrying amount of ) Dividend
of dividend class A preference paid
class A preference shares 31 December
shares 1 January
20X1 81.63 5.71 87.34 –
20X2 87.34 6.12 93.46 –
20X3 93.46 6.54 100.00 –
Thereafter: 100.00 7.00 107.00 (7.00)
(a) at 7%
(b) This is before dividend payment.
1/1/X1 31/12/X1 31/12/X2 31/12/X3 31/12/X4
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(i) -> tăng tiền/nguồn lực cho DN/ảnh hưởng đến P/L
-> Thời điểm-> tính trọng số
(ii) Không tăng tiền/nguồn lực -> không tính trọng số/ hồi tố
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1. ordinary shares issued in exchange for cash are included when cash is
receivable;
2. ordinary shares issued on the voluntary reinvestment of dividends on ordinary
or preference shares are included when dividends are reinvested;
3. ordinary shares issued as a result of the conversion of a debt instrument to
ordinary shares are included from the date that interest ceases to accrue;
4. ordinary shares issued in place of interest or principal on other financial
instruments are included from the date that interest ceases to accrue;
5. ordinary shares issued in exchange for the settlement of a liability of the entity
are included from the settlement date;
6. ordinary shares issued as consideration for the acquisition of an asset other
than cash are included as of the date on which the acquisition is recognised; and
7. ordinary shares issued for the rendering of services to the entity are included
as the services are rendered.
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$800,000
Basic EPS =
(5,000,000 x ½) + (8,000,000 x ½)
= 5,000,000 + (3,000,000 x ½)
= 12.3 cents
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• Treatment:
– Any bonus issues taking place in a period are assumed to be issued
at the beginning of the period. (no time-weighting)
– Retroactively restate previous year’s EPS comparatives based on
new number of shares.
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20x4 20x3
²$2,000,000/10,000,000
Basic EPS (cents) 17.33¹ 20²
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Scenario 3 &4:
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• The market price immediately before the exercise of rights issue was $3.00
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• If the issue was made at full market price, only 2,500,000 new shares
needed to be issued ($7,500,000/$3)
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10.000.000 OS
10.000.000 OS
5.000.0000 OS:
10 mil *0,2 = 2 mil (Bonus) : 2,5 mil -> bonus S -> Retro
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→ Earnings increase
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• One contract was secured on 1 June 20x5 and another on 1 Dec 20x5
• There had been no issue of new ordinary shares during the year
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• IAS 32:33: The entity that reacquires its own equity instruments should
deduct these instruments (“treasury shares”) from equity. No gain or
loss is recognized in P/L.
• For shares repurchased and held since the beginning of the previous
financial year, they should not be included in the weighted average
number of ordinary shares for both prior and current period.
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30 September
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X5
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Content
1. Introduction
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Report basic EPS only Report basic and diluted EPS only
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Diluted EPS
On 1 Jan 20X0, an entity with 10,000,000 units of ordinary shares outstanding
issued a 10,000,000 $ bond that gave the holder the right to convert every $ 1,000
bond to 500 ordinary shares. The entity used the proceeds of the bond issue to
inverst in a project that increased the net profit of the entity. On 1 Jan 20X3, all
holders of the bond exercised their conversion rights.
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Basic EPS
Numerator:
• After deducting amounts due to preference shareholders in respect of:
– Preference dividends (lưu ý PP hạch toán cổ tức ưu đãi)
– Gains/losses arising on the repurchase or early conversion of preference
shares –(standard PS vs convertible PS)
– Amortization of discount or premium on increasing rate preference
shares
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Diluted EPS
• It is EPS under the assumption of full conversion or exercise of potential
ordinary shares or issuance on satisfaction of specified conditions
− Potential ordinary shares are financial instruments or contracts that give
rise to ordinary shares at the exercise or conversion by the holder or on
satisfaction of specified conditions
• It is the “worst-case scenario” EPS
• What is the purpose of presenting diluted EPS?
– Enhance comparability for firms with complex capital structures
➢ Focuses on profitability rather than timing of actual conversions
– Provides indication of dilutive impact of existing potential ordinary
shares
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Anti-dilution
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Anti-dilution
yes no
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After-tax interest and amortization expenses Added back to net profit after
on convertible bond tax
Other expense (income) relating to potential Added back (deducted from)
ordinary shares NPAT
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Scenario 1: Options/Warrants/right
• Options and warrants are instruments that give their holder the right but not the
obligation to subscribe for shares in the issuing firm at a specified price for a
specified period
• Assumption: all options and warrants are exercised either at the beginning of
the period or at the date of issue if issued during the period
• Call options and warrants are only dilutive if they are “in-the-money”
− Average market price of ordinary shares during the period exceeds the
exercise price
• Use the treasury method to calculate dilutive EPS (the same method as
applied to calculate EPS for a rights issue)
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Scenario 1: Options/Warrants/right
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The following information pertains to Supreme Corporation for the year ended
31/12/20X6:
Net profit $ 2,000.000
Preference shares None
Ordinary shares oustanding 2,000,000
Shares to be issued under option 400,000
Date options issued 1/1/20X6
Exercise price under option during 20X6 $6
Average market price of one ordinary share during 20X6 $8
Proceeds from the assumed exercise of 400,000 options $ 2,400,000
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Since diluted EPS > basic EPS, the convertible preference shares are
anti-dilutive and excluded from the calculation of diluted EPS
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•On 1 Jan 20x5, Alpha Company acquired Beta Corporation, a franchisor for a
reputable brand of footwear
•Consideration was paid entirely in cash
•Terms of acquisition included a contingent share agreement that required Alpha
Company to issue 10,000 additional new shares to the shareholders of Beta
Corporation for each franchise contract secured in 20x5
•One contract was secured on 1 June 20x5 and another on 1 Dec 20x5
•Alpha’s share capital is comprised solely of 100,000 ordinary shares
•There had been no issue of new ordinary shares during the year
•Alpha’s Company interim financial statements were prepared half-yearly
Assume: no other potential ordinary shares than the contigently issuable shares
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• Potential ordinary shares are present when a firm enters into a contract
that gives the issuer or the holder the option for settlement of the
contract in ordinary shares or cash
• If the option lies with the entity, presumption is that the contract will
be settled in ordinary shares
− Resulting potential ordinary shares are to be included in diluted EPS if
the shares are dilutive
• If the option for settlement lies with the holder of the instrument, the
more dilutive of the two options of cash settlement and share
settlement is assumed in calculating EPS
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Market price = MP
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