TOPIC 39 - IAS 33 Earnings Per Share 1
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Basic EPS Example On 1 April 20x1, a company issued $1,250,000 8% Convertible unsecured bonds for cash at par. Each $100 nominal of the loan stock will be convertible in 20x6/20x9 into the number of ordinary shares set out below On 31 December 20x6 124 shares On 31 December 20x7 120 shares On 31 December 20x8 115 shares On 31 December 20x9 110 shares Up to 20x5, the maximum number of shares issuable after the end of the financial year will be at the rate of 124 shares per $100 on $1,250,000 debt, which is 1,550,000 shares. With 4,000,000 already in issue, the total becomes 5,550,000. It is the maximum possible number of shares that can be converted into which is always used. (i.e. Assume Maximum Dilution) Relevant Information Issued Share Capital: $500,000 in 10% cumulative irredeemable preference shares of $1 $1,000,000 in ordinary shares of 25c = 4,000,000 shares Income Taxes are 30% Trading results for the years ended 31 December were as follows 20x2 20x1 $ $ Profit Before Interest & Tax 1,100,000 991,818 Interest on 8% Convertible 100,000 75,000 Unsecured Bonds Profit Before Tax 1,000,000 916,818 Income Tax (300,000) (275,045) Profit After Tax 700,000 641,773 7
Solution Calculation of Basic EPS 20x2 20x1 $ $ Profit After Tax 700,000 641,773 Less: Preference Dividend (50,000) (50,000) Earnings Attributable to Ordinary Shareholders 650,000 591,773 EPS Based on 4,000,000 shares 16.25c 14.8c Question Rights Issue Davis plc s reported Earnings Per Share (EPS) for the year ended 31 October 2008 was 25 cents per share. On 01 November 2008 Davis plc had 18 million ordinary shares in issue. Earnings attributable to ordinary shares for the year ended 31 October 2009 were 6,900,000. On 01 February 2009, Davis plc made a rights issue of one share for every six shares held. The price of this rights issue was 2.10 per share. The market value of the shares prior to the rights issue was 2.36. The rights issue was fully subscribed and paid. Required: Calculate the EPS for the year ended 31 October 2009 for Davis plc, and the comparative EPS figure for the year ended 31 October 2008. 8
Solution: 6 shares @ 2.36 = 14.16 Plus 1 share @ 2.10 = 2.10 Total 16.26 Average price per share = 16.26/7 = 2.32 = Theoretical Ex rights price Actual Cumulative Rights Price = 2.36 Weighted Average Number of Shares: 18,000,000 * 3/12 * 2.36/2.32 = 4,577,586 shares Plus 21,000,000 * 9/12 = 15,750,000 shares Weighted average number of shares 20,327,586 shares EPS for 2009 = 6,900,000/20,327,586 = 34 cents per share EPS for 2008 restated = 25 * 2.32/2.36 = 24.6 cents per share Question - Market Issue & Bonus Issue Annette plc had 2,000,000 ordinary shares in issue on 01 January 2002. On 01 April 2002 it issued 500,000 ordinary shares at full market price. On 01 July 2002 there was a 1 for 2 bonus issue. The financial year end for Annette plc is 31 December each year. In 2001, the Earnings Per Share (EPS) had been calculated as 25 cents per share. The reported earnings for the financial year ended 31 December 2002 was 855,000. Required: Calculate the EPS for Annette plc for the year ended 31 December 2002, and the comparative EPS figure for the year ended 31 December 2001. 9
Solution Date Detail No. Time factor Bonus Frac Weighted av. no. 1 Jan Brought fwd 2,000,000 3/12 3/2 750,000 1 April Mkt price 500,000 2,500,000 3/12 3/2 937,500 1 July 1,250,000 31 Dec Carried fwd 3,750,000 6/12 1,875,000 Weighted average number of shares 3,562,500 EPS for 2002 = 855,000/3562500 = 24 cents per share EPS for 2001 restated = 25c per share * 2/3 = 16.67 cents per share Question - Basic EPS Nottingham Industries Plc reports the following for the year ended 31 March 2009: Profit on ordinary activities before taxation 1,000,000 Tax on ordinary activities ( 420,000) Profit on ordinary activities after taxation 580,000 Additional points: Called up share capital of Nottingham Industries Plc: In issue at 01 April 2008: 16,000,000 ordinary shares of 25c each 1,000,000 10% cumulative preference shares 01 July 2008: Bonus share issue of ordinary shares: 1 for 5 01 October 2008: Market purchase of 500,000 ordinary shares at a price of 1.00 per share In the published accounts for the year ended 31 March 2008, basic EPS was shown as 2.2 cents per share. Required: Compute the basic EPS figures for 2009 and restate the BEPS figure for 2008 10
Solution Basic EPS calculation: 000 Equity earnings: Profit after tax and extraordinary items 580 Preference dividend [10% of 1,000,000] (100) Weighted average number of ordinary shares (25c) Actual no. Weight Bonus Weighted 480 time factor average 1.4.05 in issue 16,000,000 3/12 6/5 4,800,000 1.7.05 bonus issue 3,200,000 1.10.05 purchase (500,000) 19,200,000 3/12 4,800,000 31.3.06 in issue 18,700,000 6/12 9,350,000 Basic EPS for 2009 480,000/18,950,000 = 0.0253 Comparative for 2008 = 0.022 5/6 = 0.0183 18,950,000 11
Other Points: A basic assumption with the area of EPS is that when shares are issued, earnings should increase (due to the availability of extra share capital to grow the business) As the effect of a bonus issue or a bonus issue element contained in a rights issue is permanent, in order to have valid comparisons, we must adjust comparative figures to the new reality. The bonus fractions are applied to periods prior to the relevant share issue only. Pro Forma Table for Calculating Weighted Average Number of Equity Shares for Basic EPS Calculation Date Detail Cumulative Number of Equity Shares Time Fraction Bonus Issue Fraction 1/1/x1 B/fwd xxxxxxx 2/12 No of Shares After BI/No of Shares Before BI 1/3/x1 1/9/x1 1/12/x1 Bonus issue Issue at Full Market Value Rights Issue Rights Issue Fraction Cum Rights Price/Ex Rights Price xxxxxx 6/12 Cum Rights Price/Ex Rights Price xxxxxxx 3/12 Cum Rights Price/Ex Rights Price Weighted Average No. Of Equity Shares xxxxxx xxxxxx xxxxxx xxxxxxx 1/12 xxxxxx 31/12/X1 xxxxxxx xxxxxx (Total Actual Equity Shares in Issue at Year End) (Weighted Average No of Equity Shares in Issue during the Year) Past Exam Questions IAS 33 1. Q3 (7) April 13 2. Q5 Aug 2012 3. Q3 Aug 2011 4. Q3 April 2011 12