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Chapter
26/
Earnings Per Share (lAS 33)
Required
Ca lculate basic and diluted earni ngs per share . (Ass ume that no con version takes place in the year.)
Solution
Basic earnings per share is
$000
~
10,000
=
20c per share
Diluted earnings per share
291
Effect on earnings
Profit for basic earnings per share
Add interest saved
Less tax relief
Adjusted earnings
Number or ordinary shares if loan stock was converted:
Basic earnings per
share-s-ordinary
shares
On conversion, most favorable terms
[800,000
x
(150/100)]
2,000
40
.....ill.)
2028
10,000
1,200
Diluted earnings per share
2 028
=
18
I
11 ,200
. c
7.9
Shar e optio ns and other share purchase a rrang ements are dilutive to the exte nt that th ey re sult
in th e issue o f ordi nary shares fo r less th an fai r value . lAS
33
wants to re flect th is fac t by requiring
thi s tr eatment:
(a) The options /s hare purchase arrangements are deemed to have been exerc ised at the exer–
cise pri ce .
(b) The " deemed" proceeds are th en converted into a number o f shares at fair value.
(c ) The di fference between the shares deemed to have been issue d and th e shares th at would
have been issue d at full mar ket p rice is the diluti on and are shares issued fo r " no consid–
e ra tion."
7.10
Th is method is ofte n called the treasury stock method.
Case Study 5
Facts
Net profit for year 20X1
Ordinary shares outstanding during 20X
I
Average fair value of one ordinary share: year 20XI
Shares under option during 20X I, convertible at $6 per share
Required
Ca lculate basic and diluted earnin gs per share .
Solution
$3 million
$10 million
$8
2 million
Basic earnings per share
$3 million
=
30
10 million c
Diluted earnings per share
Shares under option
Number of shares that would have been issued
at fair value if converted
(2 million x $6
=
$12 million): $12 million/$8
2 million
(1.5 million)