Exposure draft simplifying earnings per share

Earlier this month the International Accounting Standards Board (IASB) published their Exposure Draft (ED) Simplifying Earning per Share, proposing amendments to IAS 33 Earnings per Share. This has been published as part of the IASB’s convergence project with the US standard setter the Financial Accounting Standards Board (FASB).

“The aim of the ED is to reduce differences between International Financial Reporting Standards (IFRSs) and US Generally Accepted Accounting Principles (GAAP); to clarify the type of instruments to be included in the average number of shares for the earnings per share (EPS) calculation and to simplify this calculation,” says Sarah Ford, director, Assurance Professional Practice Group at Ernst & Young.

However, due to other differences in the determination of earnings and the classification of financial instruments under IFRS and US GAAP, Ford says that these amendments will not result in the same EPS amount being reported under IFRS and US GAAP.

The ED proposes to establish a principle to determine which instruments are included in the calculation of basic EPS – a current right to share in profit or loss for the period. All instruments giving the holder such a current right are to be included in the weighted average number of ordinary shares. “Therefore, in addition to ordinary shares, basic EPS would reflect instruments that give the holder the right to dividends according to a predetermined formula as well as those instruments that are currently exercisable for little or no cash or other consideration as they are deemed to have a right to share in the profit or loss of the period.”

Ford says that the ED also proposes to simplify the calculation of diluted EPS by not increasing the average number of shares for ordinary shares to be issued on the exercise or conversion of instruments that are measured at fair value through profit or loss. This includes share-based payments that are recognised (or will be recognised) as a liability and measured in accordance with IFRS 2 Share-based Payment. “This is because when an entity measures an instrument at fair value through profit or loss, the change in the fair value of the instrument is recognised in profit or loss for the period. Therefore earnings used in the EPS calculation already reflect the effect of those instruments on ordinary equity holders. If this proposed amendment is accepted companies would need to consider whether they have any such instruments and retrospectively adjust EPS amounts including those in five-year summaries.”

“The disclosure requirements remain largely unchanged. However, the ED proposes to state clearly that additional EPS measures can not be presented on the face of the statement of comprehensive income (income statement). Some South African companies still disclose headline earnings per share on the face of the income statement but the ED is quite categorical that disclosure of amounts such as headline EPS should only be in the notes to the financial statements,” adds Ford.

Ford concludes: “The proposed amendments will benefit preparers and users of financial statements by making earnings per share more understandable and less complex to calculate. However a number of companies will need to reconsider how they present their headline EPS figures if the IASB goes ahead with its ban on alternative EPS amounts being shown on the face of the income statement.”


Other proposed changes:

· Revise the date when ordinary shares are included in the basic EPS calculation
· Clarify the treatment of contracts involving the repurchase of own shares
· Clarify that mandatorily redeemable ordinary shares are treated consistently with the principle to repurchase an entity’s own shares for cash or other financial assets
· Clarify the calculation of basic and diluted EPS for participating instruments and two-class ordinary shares
· Clarify and simplify the calculation of EPS in IAS 33