298 / 488
Chapter
26 /
Earnings Per Share (lAS 33)
289
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 .
6. RIGHTS ISSUES
6.1
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.
Case Study 3
Facts
Entity B Net profit available for ordinary shareholders year to
2,100
3,500
December
31, 20X I
December
3 1, 20X2
The ordinary shares in issue on January I, 20X2, were 800,000.
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
Theoretical ex-rights value per share is
Adjustment fac tor is
$ 10.00
9.33
(800,000
x
$ 10
+
160.000
x
$6)
960,000
$9.33
Basic earnings per share
20X2
Basic earnings pershare
20X I
3,500
[800
x
311 2
x
1.07
+
(960
x
9/ 12)]
2,100
800 x 1.07
sazs
$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