International Accounting Standard 33: Earnings Per Share

International Accounting Standard 33 (IAS 33) provides the global framework for calculating and presenting a company’s earnings per share (EPS). The standard’s goal is to create a consistent method for this calculation to improve the ability to compare financial performance between different companies and across different time periods for a single company. Investors, analysts, and other stakeholders use EPS to gauge the financial health and operational efficiency of an entity. A consistently determined EPS figure allows for more meaningful analysis and better-informed investment decisions.

Scope of the Standard

IAS 33 is mandatory for any company whose ordinary or potential ordinary shares are traded on a public market, including over-the-counter markets. It also applies to companies filing financial statements with a regulatory body to issue ordinary shares to the public. If a parent company presents consolidated financial statements, the EPS calculation is required for the consolidated entity. When an entity presents both consolidated and separate financial statements, the EPS disclosures are only required for the consolidated statements. Any non-public entity that voluntarily discloses EPS must also comply with IAS 33.

Calculating Basic Earnings Per Share

Basic earnings per share is calculated using a straightforward formula: the profit or loss attributable to ordinary shareholders divided by the weighted-average number of ordinary shares outstanding. The standard provides detailed guidance on determining both the numerator (earnings) and the denominator (shares).

The Numerator (Earnings)

The starting point for the numerator is the profit or loss for the period attributable to the parent company’s equity holders. This figure is then adjusted for claims from other classes of equity, most commonly by deducting the after-tax amount of dividends on preference shares (preferred stock). For non-cumulative preference shares, dividends declared for the period are deducted, while for cumulative preference shares, the required dividend for the period is deducted, regardless of whether it has been declared.

The Denominator (Shares)

The denominator is the weighted-average number of ordinary shares outstanding during the reporting period, which accounts for changes in the number of shares throughout the year. To calculate this, the number of shares outstanding at the start of the period is adjusted by any shares issued or repurchased, multiplied by a time-weighting factor. For example, if a company with 1,000,000 shares outstanding at the start of the year issues an additional 200,000 shares on July 1, the initial shares are weighted for the full year while the new shares are weighted for half the year, resulting in a weighted-average of 1,100,000 shares for the denominator. Events like stock splits or bonus issues require a retrospective adjustment to the number of shares for all periods presented, as they change the number of shares without changing the company’s resources.

Calculating Diluted Earnings Per Share

Diluted earnings per share expands on the basic EPS calculation to show the potential reduction in EPS if all dilutive potential ordinary shares were converted into actual ordinary shares. This provides a more conservative measure of performance by considering the impact of securities that could become common stock. The calculation adjusts the basic EPS numerator and denominator to determine what the EPS would have been if these potential shares had been outstanding during the period.

Identify Dilutive Instruments

Potential ordinary shares are financial instruments or contracts that may entitle the holder to ordinary shares, such as convertible debt, convertible preference shares, and share options or warrants. Convertible debt is a bond that the holder can convert into a specified number of ordinary shares. Share options give the holder the right to purchase a company’s shares at a predetermined price. A company must identify all such instruments and evaluate their potential impact on EPS, assuming these conversions or exercises take place.

Adjusting the Calculation

To calculate diluted EPS, both the earnings and the number of shares from the basic EPS calculation are adjusted. For convertible debt, the after-tax interest expense is added back to the net profit, as this expense would not exist if the debt were converted. The denominator is then increased by the number of ordinary shares that would be issued upon conversion.

For share options and warrants, the “treasury stock method” is applied. This method assumes the company receives proceeds from the exercise of the options and uses them to repurchase its own shares at the average market price. The net increase in the denominator is the number of shares issued upon exercise minus the number of shares assumed to have been repurchased.

Anti-Dilution

A potential ordinary share is considered anti-dilutive if its inclusion in the calculation would result in an increase in EPS or a decrease in loss per share from continuing operations. Anti-dilutive securities must be excluded from the diluted EPS calculation because they would misrepresent the maximum potential dilution. To test for dilution, the incremental EPS of each potential ordinary share is calculated. For a convertible bond, this is the after-tax interest saved divided by the number of new shares. If this incremental EPS is less than the basic EPS, the security is dilutive; if it is greater, it is anti-dilutive and is ignored.

Presentation and Disclosure Requirements

IAS 33 is specific about how EPS figures must be presented and disclosed in financial statements. The requirements aim to provide transparency and a complete understanding of the EPS figures.

Presentation

IAS 33 mandates that both basic and diluted EPS be presented with equal prominence on the face of the statement of comprehensive income for all periods shown. Even if the amount is negative (a loss per share), it must be presented. If a company reports a discontinued operation, it must also present basic and diluted EPS for that operation, either on the face of the statement of comprehensive income or in the notes to the financial statements.

Disclosure

IAS 33 requires detailed disclosures in the notes to the financial statements. A company must disclose the amounts used as the numerators in the basic and diluted EPS calculations and provide a reconciliation of these numerators to the company’s profit or loss. Similarly, the weighted-average number of ordinary shares used as the denominator in both calculations must be disclosed, along with a reconciliation between the two. The company must also describe any ordinary share transactions after the reporting period but before the financial statements were authorized for issue that would have significantly changed the EPS figures, as this informs users of potential future changes to the company’s capital structure.