IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 26 / Earnings Per Share (lAS 33)

Practical Insight C lariant Ltd , a Swiss en tity, in its financial statements for December 3 1,2003, adds a note to its financial stateme nts that a proposal is to be made at the Annua l Ge neral Meeti ng to increase its share capital by means of a rights issue . The disclosure fo llows the requiremen ts in lAS 33 (paragraph 70d) to disclose potential ordinary sha re tran sact ions th at occur after the balance sheet da te . Ente rp rise s may issue capit al instruments that give ex isting sha re ho lders the right to purchase o rdi nary sha res at be low-market price. Th ese "rights issues" have the same effec t as issu ing shares at full market price and then immedi atel y making a bonus issue to the shareho lder. In order to re– flect the bonus e leme nt, the number to be used in ca lculating basic earn ings per sha re , for all pe ri– ods prior to the rights issue, is the number or ordi nary shares outstand ing pri or to the rights issue (time apportioned if necessary) and multipl ied by thi s fac tor: Fair value per share immediately prior to the exercise of rights Theoretical ex-rights fair value per share 6.2 The theoretical ex-rights f air value is the sum of the market valu e of the shares outstanding pri or to the exercise of rights and the proceed s of the rights issue, divided by the total shares in iss ue after the exerc ise of the rights. 6.3 After the exercise of rights issue, the number of shares in issue is we ighted for the proporti on of the year remai ning, as would happen with an iss ue at full mar ket price. Hen ce the bonus e leme nt of the rig hts issue is dealt with by app lying the above factor prior to the issue, and the full mar ket pri ce element is dealt wi th by time apportionme nt/weighti ng after the issue. 6. RIGHTS ISSUES 6.1

Case Study 3

Facts Entity B Net profit available for ordinary shareholders year to December 31, 20X I December 3 1, 20X2 The ordinary shares in issue on January I, 20X2, were 800,000.

2,100 3,500

Entity B offered existing shareholders a rights issue of one for five shares at a price of $6 per share to be exercised on April I, 20X2. The market value of Entity B' s shares on that date was $10 per share. Required Calculate the basic earnings per share for the years 20X1 and 20X2. Solution Calculation of factor

(800,000 x $ 10 + 160.000 x $6) 960,000

Theoretical ex-rights value per share is

$9.33

$ 10.00 9.33

Adjustment fac tor is

3,500 [800 x 311 2 x 1.07 + (960 x 9/ 12)] 2,100 800 x 1.07

sazs

Basic earnings per share 20X2

Basic earnings pershare 20X I

$2.45

7. DILUTED EARNINGS PER SHARE 7.1 Diluted ea rni ngs per share is an import ant stat istic for anal ysts and poten tial investors as it shows the effec t on ea rnings per share of all d ilutive potential or di nary shares that we re outstan di ng