Earnings Per Share

10 Key excerpts on "Earnings Per Share"

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  eBook - PDF

  Intermediate Accounting, Volume 2

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  Overview 17-3 LEARNING OBJECTIVE 1 Understand why Earnings Per Share (EPS) is an important number and how it should be presented, disclosed, and analyzed. Objective of EPS Common shareholders need to know how much of a company’s available income can be attributed to the shares that they own. This helps them assess future dividend payouts and the value of each share. As noted in Chapters 15 and 16, common shares are different from other forms of financing, such as debt and preferred shares. Common shareholders have a residual interest in the company. The return on investment is not based on a predetermined interest rate, the passage of time, or a face value (as it is for debt). If the company does well, common shareholders are the ones who gain the most. Similarly, if a company does not do well, com- mon shareholders stand to lose the most. This is because there may not be anything left after a company covers its costs and obligations. How big is the common shareholders’ part of the profit pie? How is it affected by financial instruments such as convertible debt and options? Earnings Per Share disclosures help investors (both existing shareholders and potential inves- tors) by indicating the amount of income that is earned by each common share: in other words, the common shareholders’ piece of the earnings pie. Common shares are sometimes called ordinary shares. 1 The basic calculation of EPS is shown in Illustration 17.1. Note that EPS is normally calculated only for common shares. The calculation is done for both basic EPS and diluted EPS. Basic EPS looks at actual earnings and the actual number of common shares outstanding (with this number pro-rated for the amount of time that the shares have been outstanding). Diluted EPS is a “what if” calculation that takes into account the pos- sibility that financial instruments such as convertible debt and options (and others) might have a negative impact on existing shareholder returns and, therefore, the shares’ value.

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  eBook - ePub

  Wiley IFRS

  Practical Implementation Guide and Workbook

  • Abbas A. Mirza, Graham Holt, Liesel Knorr(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Chapter 25Earnings Per Share (IAS 33)

  BACKGROUND AND INTRODUCTION

  Earnings Per Share (EPS) is simply a profit figure divided by a number of shares. The Standard concentrates on determining the number of shares to be used in the computation and gives limited guidance on the computation of the profit figure. The consistent use of the price/earnings ratio (P/E) by users of financial statements as an indicator of corporate performance led to the need for a Standard on Earnings Per Share, which is a key component of the P/E ratio.

  However, any inconsistency of accounting policies between entities will result in a lack of comparability of the Earnings Per Share figure. IAS 33 enhances financial reporting by ensuring that there is at least consistency in the calculation of the denominator in the Earnings Per Share statistic.

  IAS 33 applies to

  • Entities whose ordinary shares or potential ordinary shares are publicly traded or that are in the process of issuing shares in the public markets
  • Entities that voluntarily choose to disclose

  When both parent and group information are presented together, only the Earnings Per Share for the group are required to be disclosed. If the parent discloses Earnings Per Share information in its separate accounts, then this information should not be disclosed in the consolidated financial statements.

  DEFINITIONS OF KEY TERMS(in accordance with IAS 33)

  Ordinary share. An equity instrument that is subordinate to all other classes of equity instrument.

  Potential ordinary share.

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  eBook - ePub

  Financial Reporting Standards

  • David T. Doran(Author)
  • 2012(Publication Date)
  • Business Expert Press

    (Publisher)

  Prior to 2006, U.S. GAAP required most changes in accounting principle be recognized through presentation in the income statement “below the line” and net of tax in the year of the accounting principle change. This is the same presentation format discussed previously in accounting for extraordinary items and discontinued operations. In an effort to harmonize GAAP, the FASB issued Statement No. 154 in 2005 (ASC Topic No. 250). U.S. GAAP now requires retrospective treatment of changes in accounting principle, which is consistent with the accounting required under IFRS.

  Earnings Per Share29

  Earnings Per Share (EPS) is the most common measure of a firm performance cited in the financial press. To accommodate trend analysis, a firm’s earnings performance must be stated in standardized terms. Increases/decreases in aggregate reported income (earnings) of a firm from period to period may or may not indicate better/worse earnings performance. For example, assume a firm reported aggregate earnings of $1 million for the previous year, and this year reports earnings of $1.6 million. Looking at the aggregate earnings amounts seems to indicate current year performance better than last year (a 60% increase in earnings). Assume however that on the first day of the current year, the firm doubled the number of shares of stock outstanding from 200,000 to 400,000 (through a large stock issuance). From a stockholder’s perspective, the firm’s aggregate earnings should have doubled to match last year’s performance. EPS provides a standardized measure of earnings performance over time (not only in the past but also forecasted for the future). A simplified measure of EPS indicates the actual decrease in earnings performance from $5/share last year ($1 million/200k shares) to $4/share this year ($1.6 million/400k shares). EPS can also be used in calculating ratios that are useful in making comparisons across firms. Examples of such commonly used ratios include the price to earnings ratio (market price of firm’s stock/EPS) and dividend payout ratio (dividends per share/EPS).

  Both U.S. GAAP and IFRS require all firms to present “basic” EPS amounts. Depending upon the circumstances, firms may also be required to present “diluted” EPS. Since diluted EPS is computed by using basic EPS as the starting point, basic EPS is discussed first.

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  eBook - PDF

  Intermediate Accounting IFRS

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  The financial press frequently reports Earnings Per Share data. Further, shareholders and potential investors widely use this data in evaluating the profitability of a company. Earnings Per Share indicates the income earned by each ordinary share. Thus, companies report Earnings Per Share only for ordinary shares. For example, if Oscar SA has net income of €300,000 and a weighted average of 100,000 ordinary shares outstanding for the year, Earnings Per Share is €3 (€300,000 ÷ 100,000). Because of the importance of Earnings Per Share infor- mation, companies must report this information on the face of the income statement. [8] The exception, due to the cost constraint, is non-public companies. 11 Generally, companies report Earnings Per Share information below net income in the income statement. Illustration 16.12 shows Oscar SA’s income statement presentation of Earnings Per Share. ILLUSTRATION 16.12 Income Statement Presentation of EPS Net income €300,000 Earnings Per Share €3.00 11 In general, a non-public enterprise is an enterprise whose debt or equity securities are not traded in a public market on a foreign or domestic securities exchange or in the over-the-counter market (including securities quoted locally or regionally). An enterprise is not considered a non-public enterprise when its financial statements are issued in preparation for the sale of any class of securities in a public market. 12 A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares. Examples of potential ordinary shares are (1) convertible debt and convertible preference shares that are convertible into ordinary shares, (2) options and warrants, and (3) shares that would be issued upon the satisfaction of conditions resulting from contractual arrangements, such as the purchase of a business or other assets.

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  eBook - ePub

  Wiley IFRS 2016

  Interpretation and Application of International Financial Reporting Standards

  • (Author)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  27 Earnings Per Share

  1. Introduction
  2. Scope
  3. Definitions of Terms
  4. Concepts, Rules and Examples
     1. Simple Capital Structure
        1. Computational Guidelines
        2. Numerator
        3. Denominator
     2. Complex Capital Structure
     3. Determining Dilution Effects
     4. Options and warrants
     5. Convertible instruments
     6. Contingent Issuances of Ordinary Shares
     7. Contracts Which May Be Settled in Shares or for Cash
     8. Written Put Options
     9. Sequencing of Dilution Effects
     10. Presentation and Disclosure Requirements under IAS 33
  5. US GAAP Comparison

  Introduction

  Many investors and other consumers of corporate financial information find comfort in identifying a “shorthand” means of measuring an entity's performance, notwithstanding oft-voiced concerns that any condensed gauge of earnings inevitably risks being incomplete, and even misleading, as a picture of the entity's results for the period. Investors in particular are devoted users of earning per share data, which is taken by many to be the single best predictor of the entity's future (share price) performance. Ultimately, recognizing that such statistics were being computed in widely varying ways and then broadly disseminated, the accounting standard setters decided to at least impose uniform practices.

  The IFRS governing the calculation and disclosure of Earnings Per Share (EPS) is IAS 33. It requires that one measure—or two measures in the case of those reporting entities having complex capital structures—be presented for each period for which a statement of profit or loss and other comprehensive income is being reported. According to IAS 1, if an entity presents the components of profit or loss in a separate statement of profit or loss, it should present basic and fully diluted EPS (or one EPS measure, if applicable) in that separate statement. The principal goal in these measures is to ensure that the number of shares used in the computation(s) fully reflects the impact of dilutive securities, including those which may not be outstanding during the period, but which, if they were to become outstanding, would impact the actual future earnings available for allocation to current shareholders.

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  eBook - ePub

  Wiley IFRS 2017

  Interpretation and Application of IFRS Standards

  • (Author)
  • 2017(Publication Date)
  • Wiley

    (Publisher)

  27 Earnings Per Share

  1. Introduction
  2. Scope
  3. Definitions of Terms
  4. Concepts, Rules and Examples
     1. Simple Capital Structure
        1. Computational Guidelines
        2. Numerator
        3. Denominator
     2. Complex Capital Structure
     3. Determining Dilution Effects
     4. Options and Warrants
     5. Convertible Instruments
     6. Contingent Issuances of Ordinary Shares
     7. Contracts Which May Be Settled in Shares or for Cash
        1. Written Put Options
     8. Sequencing of Dilution Effects
     9. Presentation and Disclosure Requirements under IAS 33
  5. Example of Financial Statement Disclosures
  6. US GAAP Comparison

  Introduction

  Many investors and other consumers of corporate financial information find comfort in identifying a “shorthand” means of measuring an entity's performance, notwithstanding oft-voiced concerns that any condensed gauge of earnings inevitably risks being incomplete, and even misleading, as a picture of the entity's results for the period. Investors in particular are devoted users of earning per share data, which is taken by many to be the single best predictor of the entity's future (share price) performance. Ultimately, recognising that such statistics were being computed in widely varying ways and then broadly disseminated, the accounting standard setters decided to at least impose uniform practices.

  The IFRS governing the calculation and disclosure of Earnings Per Share (EPS) is IAS 33. It requires that one measure—or two measures in the case of those reporting entities having complex capital structures—be presented for each period for which a statement of profit or loss and other comprehensive income is being reported. According to IAS 1, if an entity presents the components of profit or loss in a separate statement of profit or loss, it should present basic and fully diluted EPS (or one EPS measure, if applicable) in that separate statement. The principal goal in these measures is to ensure that the number of shares used in the computation(s) fully reflects the impact of dilutive securities, including those which may not be outstanding during the period, but which, if they were to become outstanding, would impact the actual future earnings available for allocation to current shareholders.

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  eBook - ePub

  Wiley IFRS 2015

  Interpretation and Application of International Financial Reporting Standards

  • (Author)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  Chapter 27

  Earnings Per Share

  Introduction

  Scope

  Definitions of Terms

  Concepts, Rules, and Examples

  Simple Capital Structure Computational guidelines Numerator Denominator Complex Capital Structure Determining Dilution Effects Options and warrants Convertible instruments Contingent Issuances of Ordinary Shares Contracts Which May Be Settled in Shares or for Cash Written put options Sequencing of dilution effects Presentation and Disclosure Requirements under IAS

  Examples of Financial Statement Disclosures

  US GAAP Comparison

  INTRODUCTION

  Many investors and other consumers of corporate financial information find comfort in identifying a “shorthand” means of measuring an entity’s performance, notwithstanding oft-voiced concerns that any condensed gauge of earnings inevitably risks being incomplete, and even misleading, as a picture of the entity’s results for the period. Investors in particular are devoted users of earning per share data, which is taken by many to be the single best predictor of the entity’s future (share price) performance. Ultimately, recognizing that such statistics were being computed in widely varying ways and then broadly disseminated, the accounting standard setters decided to at least impose uniform practices.

  The IFRS governing the calculation and disclosure of Earnings Per Share (EPS) is IAS 33. It requires that one measure—or two measures in the case of those reporting entities having complex capital structures—be presented for each period for which a statement of profit or loss and other comprehensive income is being reported. According to IAS 1, if an entity presents the components of profit or loss in a separate statement of profit or loss, it should present basic and fully diluted EPS (or one EPS measure, if applicable) in that separate statement. The principal goal in these measures is to ensure that the number of shares used in the computation(s) fully reflects the impact of dilutive securities, including those which may not be outstanding during the period, but which, if they were to become outstanding, would impact the actual future earnings available for allocation to current shareholders.

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  eBook - PDF

  Financial Reporting

  • Janice Loftus, Ken Leo, Sorin Daniliuc, Belinda Luke, Hong Nee Ang, Mike Bradbury, Dean Hanlon, Noel Boys, Karyn Byrnes(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  The ‘earnings’ in EPS is the ‘profit attributable to ordinary equity holders of the parent’. The ‘per share’ in EPS is described as the weighted average number of shares (WANOS). There are two forms of WANOS, which gives rise to two forms of EPS: basic EPS and diluted EPS. Under paragraph 66 of AASB 133/IAS 33, basic and diluted EPS must be presented with equal prominence. LEARNING CHECK AASB 133/IAS 33 applies to the calculation and pre- sentation of EPS by reporting entities whose ordinary shares or potential ordinary shares are publicly traded or in the process of being issued in public markets, or an entity that voluntary discloses EPS. If an entity presents both consolidated and separate fnancial statements, AASB 133/IAS 33 requires EPS only for the consolidated fnancial statements. Basic and diluted EPS must be presented with equal prominence. 20.3 Basic Earnings Per Share LEARNING OBJECTIVE 20.3 Explain the concept of basic Earnings Per Share and how it is calculated. The formula for calculating basic Earnings Per Share is described in paragraph 10 of AASB 133/IAS 33 and shown in figure 20.2. FIGURE 20.2 Basic Earnings Per Share ratio . Profit attributable to ordinary shareholders of the parent entity Weighted average number of ordinary shares outstanding during the reporting period 20.3.1 Earnings The ‘earnings’ amount in the calculation must only include profit or loss attributable to the parent entity. Most annual reports comprise consolidated financial statements, which present the results of a group of companies. Within a group there can be two sets of shareholders: the shareholders of the parent company and the outside shareholders of a subsidiary company in the group. This latter group of shareholders relates to where the parent has less than 100% ownership of the subsidiary; however, the parent company still controls the partly-owned subsidiary and the outside shareholders are called non-controlling interest (or minority interest).

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  eBook - PDF

  Intermediate Accounting

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  Thus, companies report Earnings Per Share only for common stock. For example, if Oscar Co. has net income of $300,000 and a weighted average of 100,000 shares of common stock outstanding for the year, Earnings Per Share is $3 ($300,000 ÷ 100,000). Because of the importance of Earnings Per Share information, most companies must report this information on the face of the income statement. 12 [5] The exception, due to cost-benefit considerations, is nonpublic companies. 13 Generally, companies report Earnings Per Share in- formation below net income in the income statement. Illustration 16.7 shows Oscar Co.’s income statement presentation of Earnings Per Share. Basic Earnings Per Share 12 For articles on the usefulness of reported EPS data and the application of the qualitative characteristics of account- ing information to EPS data, see Lola W. Dudley, “A Critical Look at EPS,” Journal of Accountancy (August 1985), pp. 102–111; and R. Jennings, M.J. LeClere, and R.B. Thompson, “Evidence on the Usefulness of Alternative Earnings Per Share Measures,” Financial Analysts Journal, Vol. 53, No. 6 (1997), pp. 24–33. 13 A nonpublic enterprise is an enterprise (1) whose debt or equity securities are not traded in a public market on a for- eign or domestic stock exchange or in the over-the-counter market (including securities quoted locally or regionally), or (2) that is not required to file financial statements with the SEC. An enterprise is not considered a nonpublic enter- prise when its financial statements are issued in preparation for the sale of any class of securities in a public market. 14 Companies should present, either on the face of the income statement or in the notes to the financial statements, per share amounts for discontinued operations.

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  eBook - PDF

  Wiley Interpretation and Application of IFRS Standards 2018

  • (Author)
  • 2018(Publication Date)
  • Wiley

    (Publisher)

  27 Earnings Per Share Introduction Scope De fi nitions of Terms Concepts, Rules and Examples Simple Capital Structure Computational guidelines Numerator Denominator Complex Capital Structure Determining Dilution Effects Options and warrants Convertible instruments INTRODUCTION 803 Contingent Issuances of Ordinary 803 Shares 813 804 Contracts Which May Be Settled in 805 Shares or for Cash 814 805 Written put options 815 805 Sequencing of Dilution Effects 815 805 Presentation and Disclosure 806 Requirements Under IAS 33 816 809 Example of Financial Statement 810 Disclosures 817 811 812 US GAAP Comparison 818 The IFRS governing the calculation and disclosure of Earnings Per Share (EPS) is IAS 33. According to IAS 1, if an entity presents the components of pro fi t or loss in a separate statement of pro fi t or loss, it should present basic and fully diluted EPS (or one EPS measure, if applicable) in that separate statement. The principal goal in these measures is to calculate the interest of potential ordinary shares in the performance of an entity. When the entity ’ s capital structure is simple, EPS is computed by simply dividing pro fi t or loss by the average number of outstanding equity shares. The computation becomes more complicated with the existence of securities that, while not presently equity shares, have the potential of causing additional equity shares to be issued in future, thereby diluting each currently outstanding share ’ s claim to future earnings. Examples of such dilutive securities include convertible preference shares and convertible debt, as well as various options and warrants. It was long recognised that if calculated EPS were to ignore these potentially dilutive securities, there would be a great risk of misleading current shareholders regarding their claim to future earnings of the reporting entity.

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