Earnings & Headline Earnings Per Share

Transcription

1 Earnings & Headline Earnings Per Share

2 Background to HEPS HEPS is a South African measure of financial performance which is MANDATORY for all JSE listed entities to disclose. Reported on both full year and interim and provisional financial reports. HEPS is not synonymous with Normalised Earnings or Sustainable Earnings.

3 Issued by

4 It is a measure of performance SAICA acknowledges that HEPS is only one of a range of possible measures of an entity s performance... Furthermore, HEPS is not a mechanism to use in order to adjust an entity s financial results for disagreements an entity might have with the application of IFRS, or to circumvent the correct accounting treatment.

5 Why HEPS? The HEPS survey carried out by SAICA in 2006 and subsequent interviews with various user groups, including fund managers, analysts and financial institutions, showed a large demand from users in general for a clearly defined reference number (other than the earnings per share in terms of IAS 33 Earnings per Share), which can be used for reporting and comparative purposes.

6 The starting point in its calculation is Earnings Per Share!

7 Recapping IAS 33 Earnings per Share An entity is required to calculate basic earnings per share (EPS) amounts for profit or loss attributable to ordinary equity holders of the parent entity. EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity by the weighted average number of ordinary shares outstanding during the period.

8 Scope Applies to: Separate or individual financial statements of an entity that has shares/ potential shares that are traded in a public market or is in the process of seeking a listing; Consolidated financial statements of a group whose parent has shares/ potential shares that are traded in a public market or is in the process of seeking a listing.

9 IAS 33 Earnings Earnings are adjusted for: the after-tax amounts of preference dividends; differences arising on the settlement of preference shares; and other similar effects of preference shares that are classified as equity.

10 IAS 33 Shares For the purpose of calculating EPS, the number of ordinary shares is the weighted average number of ordinary shares outstanding during the period. New shares issued are included from the date consideration becomes receivable (which is generally the date of their issue).

11 IAS 33 Shares Ordinary shares issued as part of a business combination are included in the weighted average number of shares from the acquisition date. Contingently issuable shares are treated as outstanding and are included in the calculation of EPS only from the date when all necessary conditions are satisfied (i.e. the contingent events have occurred).

12 IAS 33 Shares The weighted average number of ordinary shares outstanding during the period and for all periods presented are adjusted for events, other than the conversion of potential ordinary shares, that have changed the number of ordinary shares outstanding without a corresponding change in resources. Such As?

13 IAS 33 Shares Bonus Issues Capitalisation Issues Share splits Share consolidation

14 Diluted EPS For the purpose of calculating diluted EPS (DEPS), a reporting entity is required to adjust profit or loss attributable to ordinary equity holders of the parent entity, and the weighted average number of shares outstanding, to take into account the effects of all dilutive potential ordinary shares.

15 Diluted EPS Adjust Normal Earnings for the affect tax effect of 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 Potential ordinary shares are treated as dilutive when conversion would decrease EPS from continuing operations.

16 Diluted EPS Adjust Normal Earnings for the tax effect of any interest recognised in the period related to dilutive potential ordinary shares; and any other changes in income or expense that would result from the conversion of dilutive potential ordinary shares.

17 Date of conversion of dilutive potential ordinary shares Dilutive potential ordinary shares are 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.

18 So how is HEPS different?

19 Calculation of HEPS Start with IAS 33 measure, Then adjust for re-measurements to be excluded from HEPS, No deviation from rules acceptable even where entity believes that this will result in a more appropriate result.

20 What does HEPS measure? HEPS should not be seen as a divergence or departure from the recognition criteria for revenue, expenses, gains and losses in IFRS. Instead, it is a way of dividing the IFRS reported profit between remeasurements that are more closely aligned to the operating/ trading activities of the entity, from those that relate to the platform used to create those results.

21 Key Definitions Operating/ trading activities are those activities that are carried out using the platform. Includes the cost associated with financing those activities. The platform is the capital base of the entity. Capital transactions reflect and affect the resources committed in producing operating/ trading performance and are not the performance itself.

22 What is a Remeasurement? An amount recognised in the Statement of profit or loss and other comprehensive income relating to any change (whether realised or unrealised) in the carrying amount of an asset or liability that arose after the initial recognition of such asset or liability.

23 What is a Remeasurement? It may be recognised in the Statement of profit or loss and other comprehensive income either when it occurs or subsequently Deferral in equity through other comprehensive income that will be recycled to profit or loss at a later stage.

24 What is not a Remeasurement? A Remeasurement can NEVER be the initial recognition of an asset or liability at fair value; or the expensing of a cost which fails to meet the definition of an asset; or a gain recognised directly in equity, such as a revaluation surplus on property, plant and equipment.

25 So what s included? The following Remeasurements are INCLUDED in HEPS Gains and losses that have been determined as normally relating to the operating/ trading activities of the entity. Gains and losses that relate to the usage (as reflected by depreciation) of a non-current asset, which is an operating/ trading activity of the entity.

26 So what s included? Gains and losses that relate to current assets or current liabilities, and thus relate to the operating/ trading activities of the entity Exception Other than current assets or liabilities that are part of a disposal group within the measurement scope of IFRS 5.

27 So what s included? Gains and losses that are foreign exchange movements on monetary assets and liabilities and thus relate to the operating/ trading activities of the entity, Exception except for those relating to foreign operations upon recycling.

28 So what s included? Gains and losses that are financial instrument adjustments arising from the application of IAS 39/ IFRS 9 (whether the result of revaluation, impairment or amortisation), except for all recycled gains and losses other than those relating to cash flow hedges..

29 So what s included?..gains and losses that are recycled items relating to IAS 39 Cash flow hedges because these amounts are matched with those relating to the hedged item.

30 So what s included? IFRS 3 Business Combinations Transaction costs now expensed and therefore now also included in HEPS as it s not a re-measurement (previous IFRS 3 included these costs in the determination of Goodwill and where therefore out of HEPS). Subsequent re-measurement of Contingent Liabilities included in HEPS i.e. if the contingency is subsequently extinguished with no outflow of economic resources, this will result in an increase in HEPS.

31 So what s included? IFRS 3 Business Combinations Subsequent amortisation of Reacquired Rights included in HEPS as it is an included re-measurement (reacquired rights would have formed part of Goodwill previously). Subsequent re-measurement of Contingent Consideration included in HEPS i.e. if the contingency is subsequently extinguished with no outflow of economic resources, this will result in an increase in HEPS.

32 So what s included? IFRS 3 Business Combinations Subsequent recognition of additional Contingent Consideration included in HEPS as this is not a remeasurement.

33 Think! Cosworth included R200m as a contingent consideration amount in ascertaining the purchase price on the acquisition of Rolls Royce in Year 0 and determining the goodwill arising. In year 3, after all warranties were met, Cosworth paid R265m in contingent consideration. How is this difference in amounts accrued and actually paid accounted for?

34 Calculating goodwill Fair value of consideration transferred add Amount of any NCI add Fair value of any previously held interest less Fair value of identifiable assets and liabilities acquired (100%) equals Goodwill / Gain from a bargain purchase Measurement choice: net assets (excluding goodwill) fair value (including goodwill) Gain or loss recognised in the income statement Goodwill only measured at the acquisition date Includes contingent consideration at fair value

35 There are some exceptions IFRS 3 Business Combinations Gains/ Losses on deemed disposal of previous interest held accounted for in terms of accounting treatment in terms of the rules table: A previous interest accounted for as associate in terms of IAS 28 is excluded from HEPS; A previous interest accounted for as IAS 39 investment at fair value through profit and loss included in HEPS; Previous interest accounted for as available for sale investment excluded from HEPS.

36 There are some exceptions IAS 16 Property, Plant & Equipment Assets held principally for rental to customers which are routinely sold are reclassified to inventory at their carrying amounts on the date the intention of use changes. Proceeds on the disposal of such items are therefore revenue and the carrying amounts included in Costs of Sale. Consequently the gain/ loss on such items is included in HEPS (previously it was excluded from HEPS).

37 There are some exceptions IFRIC 17 Distributions of non-cash assets to owners The HEPS treatment will be determined on the basis that would have applied if the assets in question had been disposed of. e.g. If an entity distributes items of Inventory to owners, any adjustment in the Statement of profit or loss and other comprehensive income required in terms of IFRIC 17 on settlement of the liability would be included in HEPS whereas if an intangible asset was distributed the adjustment would be excluded from HEPS.

38 Think! Cosworth has a division that rents out vehicles and routinely disposes of such vehicles to renew the age of its fleet. Cosworth distributes 2000 vehicles to its owners in lieu of dividends and subsequently recognises a gain of R25m in total comprehensive income on the settlement of the liability to owners in terms of IFRIC 17. How should Cosworth treat the gain for HEPS?

39 There are some exceptions Tax Effect on HEPS Ensures that the tax effects of items excluded from headline earnings are also excluded from HEPS regardless of the period in which these were recognised.

40 Think! You borrow the company car on 28 th of December. On the 29 th, you drive it into a dam on the 18 th hole of the Zimbali Golf Club. On the 30 th of December, the car is assessed and scrapped. The car is insured and the insurance company confirms the claim on the 5 th of January. The car is then replaced on the 14 th of January. The company has a 31 December year end. How should it account for the above, and what is the impact on HEPS?

41 There are some exceptions Accounting for Compensation received Refers to Compensation received from third parties for items of property, plant and equipment that were impaired, lost or given up. Treatment of such compensation is consistent with the related impairment or other loss recognised.

42 IAS 16/ 38 Changes in Compensation Received Addresses the accounting for any changes in the compensation receivable from third parties such as insurers on the loss of an item of Property, Plant and Equipment or an Intangible asset. Changes to such expected compensation subsequent to initial recognition are also excluded from HEPS.

43 IFRS 5 Non-current assets held for sale and Discontinued Operations For the past 18 months Cosworth has reflected one of its divisions as a disposal group in terms of IFRS 5 due to its plans and activities to dispose of it. During the current period a new CEO was appointed and was able to convince the board to abandon those disposal plans but to rather to reintegrate the division under a new strategy formulated following the acquisition of Rolls Royce. How will this decision affect the results of Cosworth and what would be the effect on HEPS?

44 IFRS 5 Change of Plan When an entity changes its plans (abandons or no longer highly probable) with regard to an asset held for sale or disposal group it remeasures such items at the lower of: the previous carrying amount before applying IFRS 5 adjusting for any depreciation or impairment that would have been applied had IFRS 5 not been applied, or the recoverable amount at the date of change in plan.

45 IFRS 5 Change of Plan Depreciation: In HEPS Impairment: Out of HEPS

46 IAS 17 Sale & Leaseback Arrangements Cosworth seeks to raise finance for certain key projects and decides to enter into a sale and leaseback transaction over its head office building. Cosworth has concluded that the 10 year lease should be classified as a finance lease. The building had a carrying amount of R350m but was sold for R450m, its fair value at transaction date. How will this transaction affect the results of Cosworth and what would be the effect on HEPS?

47 IAS 17 Sale & Leaseback Arrangements Finance lease - the excess of sale proceeds over carrying amount of the asset is not recognised immediately in income but is amortised over the lease term (deferred income). Operating lease if sale price is: At fair value: recognise income immediately. Not at fair value: recognise profits or losses immediately except for profits/ losses where it is compensated by below/ above market lease payments in which case defer and amortise over period of use of asset (normally lease term).

48 IAS 17 Sale & Leaseback Arrangements Finance lease - Excess proceeds amortisation: In HEPS Operating lease - Profit on disposal: Out of HEPS Operating lease - Amortisation of any profits/ losses: In HEPS

49 IFRIC 1 Decommissioning Liabilities Any change in the carrying amount of a decommissioning liability recognised in profit or loss is included in HEPS.

50 IFRIC 18 Transfer of Assets from Customers When an entity recognises an asset that is transferred from a customer in terms of IFRIC 18, the related income is revenue and is therefore included in HEPS.

51 SIC 25 Income taxes- changes in tax status of an entity or its shareholders Any changes in current or deferred tax included in profit or loss as a result of a change in tax status is included in HEPS except to the extent that the adjustments relate to items previously excluded from HEPS in the current or prior periods.

52 TABLE OF RULES Circular 2/ 2013 Common misconceptions Widely applicable items

53 Disclosure of HEPS IAS allows disclosure of additional performance numbers in the notes to the annual financial statements. States that basic and diluted amounts per share relating to such a component shall be disclosed with equal prominence and presented in the notes to the financial statements.

54 Format of the HEPS reconciliation Reconciliation must be shown separately from the Statement of profit or loss and other comprehensive income It must be based on the earnings number, not on a per share basis

55 Long form of the reconciliation Is required disclosure in the annual financial statements of reporting entity. Shows the gross and net amounts of each remeasurement to be excluded from HEPS. No need to show the tax and NCI relating to each reconciling item. Disclose these items if material and beneficial to users.

56 Example of long-form HEPS reconciliation

57 Short form of the reconciliation May be used in interim, preliminary, provisional and abridged reports. Shows disclosure of the gross amount of each remeasurement adjustment. does not require separate disclosure of the related tax and the noncontrolling interest amounts of each adjustment. related tax and the non-controlling interest amounts are each shown in aggregate for all of the re-measurement adjustments. Consideration the need to provide additional commentary to enable users to understand the related tax and the noncontrolling interest amounts.

58 Example of short-form HEPS reconciliation

59 Impact of IFRS Impact of future changes in IFRS Changes to specific IFRS will continue. HEPS will need to be updated.