Earnings Per Share

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earnings per share, the number of ordinary shares shall be the weighted average number of ordinary shares outstanding during the period “(IAS 33 paragraph 19).

The denominator contains only common share capital. However, the calculation cannot be just based on the shares on issue at the end of the year. The denominator needs to be calculated by adjusting the shares in issue at the beginning of the time period by the number of shares brought back or issued during the period, multiplied by a time weighting factor (Deloitte, 2016). If the amount of ordinary shares increases as a result of capitalisation, bonus issue, share split, or decreases as a result of a reverse share split, the calculation of basic and diluted earnings per share for all periods presented shall be adjusted retrospectively. (IAS 33 paragraph 65).

An example of a share sale and calculating a weighted average share amount is as follows.

If a company had 8 million shares issued at the beginning of the period, and half way through the reporting period they sold 100 thousand shares, the amount of shares needs to be multiplied by the months they were in issue divided by 12.

Date Shares Weighting (months) Weighted Average

January 1 8,000,000 12/12 8,000,000

July 1 100,000 6/12 50,000

8,050,000

This calculation gives a weighted average, which is to be used as the denominator.

CONCLUSION

There is a lot of potential for error when calculating EPS. If the CEO did not weight the average of the shares, his calculations will be wrong, and will be very different from the figures in the annual reports of XYZ, which will make them seem “haphazard”. Without seeing any actual figures, it is impossible to ascertain what figures are right, but if the calculations are performed according to IAS 33, the EPS result will be correct.

References

33, I. (2016). Internation Accounting Standard 33. Earnings Per Share.

Deloitte. (2016). IAS Plus. Retrieved from Deloitte: http://www.iasplus.com/en/standards/ias/ias33