IAS 33, or International Accounting Standard 33, “Earnings Per Share,” is an accounting standard issued by the International Accounting Standards Board (IASB) that provides guidance on the calculation and presentation of earnings per share (EPS) in the financial statements of an entity. EPS is a financial performance measure that indicates the amount of profit or loss attributable to each ordinary share outstanding during a specific period.
Calculation of Basic EPS:
Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. The following example illustrates the calculation of basic EPS:
Example: ABC Inc has a profit attributable to ordinary shareholders of $1,000,000 for the year ended December 31, 2022. The weighted average number of ordinary shares outstanding during the year is 1,000,000 shares. The calculation of basic EPS is as follows:
Profit attributable to ordinary shareholders: $1,000,000 Weighted average number of ordinary shares outstanding: 1,000,000 shares
Basic EPS = Profit attributable to ordinary shareholders / Weighted average number of ordinary shares outstanding = $1,000,000 / 1,000,000 shares = $1 per share
Presentation of Basic EPS:
Basic EPS is typically presented as a separate line item in the income statement or in the notes to the financial statements.
Calculation of Diluted EPS:
Diluted EPS takes into consideration the potential dilutive effects of convertible instruments, such as convertible bonds or stock options, that could potentially be converted into ordinary shares and affect the EPS calculation. The following example illustrates the calculation of diluted EPS:
Example: XYZ Corp has a profit attributable to ordinary shareholders of $1,500,000 for the year ended December 31, 2022. In addition, XYZ Corp has outstanding convertible bonds that could be converted into 200,000 ordinary shares. The weighted average number of ordinary shares outstanding during the year is 1,000,000 shares. The calculation of diluted EPS is as follows:
Profit attributable to ordinary shareholders: $1,500,000 Weighted average number of ordinary shares outstanding: 1,000,000 shares Potential dilutive effect of convertible bonds: 200,000 shares (assuming conversion)
Diluted EPS = (Profit attributable to ordinary shareholders + Potential dilutive effect of convertible instruments) / (Weighted average number of ordinary shares outstanding + Potential dilutive effect of convertible instruments) = ($1,500,000 + $0) / (1,000,000 shares + 200,000 shares) = $1.25 per share
Presentation of Diluted EPS:
Diluted EPS is typically presented as a separate line item in the income statement or in the notes to the financial statements, along with a reconciliation of the numerator and denominator used in the calculation.
Disclosure Requirements:
IAS 33 also requires entities to provide extensive disclosures related to EPS, including the components of the EPS calculation, the reconciliation of the numerators and denominators used in the basic and diluted EPS calculations, and any potential dilutive instruments that were not included in the diluted EPS calculation due to being anti-dilutive.
It’s important for entities to carefully consider the requirements of IAS 33 and any relevant local regulations when calculating and presenting EPS in their financial statements to ensure compliance with the applicable accounting standards. Professional judgment and expertise may be required to properly apply the guidance in IAS 33 to the specific circumstances of an entity’s financial instruments and potential dilutive effects.