acca 4 dipac earnings ps and fin instruments.docx

7/30/2019 ACCA 4 DIPAC Earnings PS and Fin Instruments.docx

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| P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies

ncome Tax.

ONTENTS:

O BE SCANNED IN STILL ...........................................................................................................................................................................

ARNINGS PER SHARE IAS33. CIRC 03/09 ...........................................................................................................................................

Special things to remember: ..............................................................................................................................................................................................

SCOPE: ..........................................................................................................................................................................................................................................

Definitions and Measurement. ..........................................................................................................................................................................................MEASUREMENT .......................................................................................................................................................................................................................

Different classes of shares: ..................................................................................................................................................................................................

CHANGES IN CAPITAL STRUCTURE: ..............................................................................................................................................................................

Headline Earnings. ..................................................................................................................................................................................................................

Dividends Per Share. ..............................................................................................................................................................................................................

PrEsentation: .............................................................................................................................................................................................................................

disclosure: ...................................................................................................................................................................................................................................


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ncome Tax.

o be scanned in still

1.2.


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ncome Tax.

Earnings per Share IAS33. Circ 03/09

SPECIAL THINGS TO REMEMBER:

:To Calc. Basic Earnings : (remember if given a retained earnings amount, transfers to reserves and dividends paid wou

have BEEN subtracted -ie treated as After not Before- so must be added back to get the basic earnings to work from)Rem: For Free issue of Bonus shares :DO NOT go and add again to the final year - remember that somewhere in the final

that Bonus Issue had to have been recorded anyway! So it is already in the total number of shares for the end of the year

does not have to be added again! . But you must add it to the total shares for the Comparative Years figures though- it w

definitely not be in there yet!

Remember to always SUBTRACT THE PREFERENCE DIVIDENDS FROM NET PROFIT FOR YEAR BEFORE YOU GO AND WORK O

ANY Earnings Per Share you always for get to do this!

REMEMBER to always check the pref & cumulative & other types of shares to see if the dividend was carried over to the n

year or not, or if it was maybe not paid for that year in an exam.They give you figures where the dividends seem to have

paid this year but they are from last years cumulatve that was not paid then, and then you also have to take it out last ye

profit to get the actual profit to calc. Basic Earnings etc.

Remember to do the Total column on the very left in the weighted number of shares calculation- you always forget

SCOPE:

Earnings per Share & Dividends Per Share are 2 of the most widely used ratios by investors and analysts of shares. Theref

guidelines must be laid out (IAS33/AC104) for the calculation of these shares so that ratios from different companies can

compared with the certainty that they are actually comparable and worked out in the same way by each company.

IAS33/ AC104 is applicable to ONLY :

a) Companies listed on a recognized stock exchange such as the JHB stock exchange, or any.b) Other companies whose shares are publicly traded, on any public market , even over the counter , that is unlisted pu

companies.

c) Companies other than 1 and 2 such as any private company that prefers to disclose earnings & dividends per share, muse IAS33.

DIVIDENDS:

a) per SHARE: IAS 33 contains nothing about dividends, that is in IAS 1 , ONLY, which states dividends AND together witdividends per share must be disclosed in the Notes OR in the StChEq , AND also ,

b) Any Dividends declared AFTER Yr End but before Fin Stats are issued must ALSO be disclosed separately in the noteswhere 1- dividends as well as 2- dividends per share should be disclosed for each .

c) NEVER use weighted for dividends : this is needed so you can calculate the Dividends (dividends is only ever calc. usiactual number of shares on hand when the dividend was paid out ,not the EPS, that is done with weighted!)

EFINITIONS AND MEASUREMENT.

The following definitions contained in IAS 33 /AC 104 are extremely important, and should be checked up in IAS and stud

thoeroughly.

a) ORDINARY SHARES:i) Definition: An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments

(1) Equity Instrument Definition: as per companies act the companies issued share capital and shares , excludany part thereof which , neither in respect of dividends nor in respect of capital, carries any right to participat

beyond a specific amount in a distribution.

(2) Note: Pref.shares which do not share in the asset surplus or dividends over and above their fixed preference , also do not form part of a companies equity share capital.

(3) Ordinary shares only participate in profit after other types of shares have been allocated their portion.b) POTENTIAL ORDINARY SHARES:


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ncome Tax.

i) Definition: A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordshares.

(1) Examples :(a) Debt or Equity instruments , incl. pref shares , that are convertible into ordinary shares.(b) Share Warrants and options : (these are financial instruments that give the holder the right to purchase

ordinary shares)

(c) Contractual arrangements: shares which would be issued on satisfaction of certain conditions resulting frcontractual arrangements , such as the purchase of a business or other assets.

c) CUMULATIVE PREFERENCE DIVIDENDS :i) Definition : The preference dividends for the current period are taken into account irrespective of whether or no

are paid or declared. This amount excludes any dividend paid or declared to cumulative preference shares in resp

of previous periods.

d) NON-CUMULATIVE PREFERENCE DIVIDENDS:i) Definition : This preference dividend is only taken into account if the dividend was declared during the period un

review.

e) BASIC EARNINGS:i) Definition: Basic Earnings are the profit or loss for the period attributable to ordinary shareholders after deductin

preference dividends. All items of income and expense that are recognised in a period, including tax expense and

{???non-controlling interests?- I think actual dividends paid to non-controlling interests by the subsidiary-rem thasubsidiaries dividends paid to non-cnrtl. Interests } are included in the determination of the profit or loss for the

period. No ordinary dividends or transfers to reserves are deducted.

ii) Where a loss is incurred for a period, the same calculation is done as for earnings per share.iii) The amount of preference dividends that is deducted from the profit for the period is as follows :

(1) PARTICIPATING PREFERENCE DIVIDENDS.: you regard all the dividends from these type of shares as PreferenDividends, so the part that is from Participating in the ordinary shares over and above the fixed pref.

dividends is not seen as part of Ordinary Dividends , it is seen as part of the Preference dividends and th

deducted from Net Profit to get the basic earnings, unlike ordinary dividends which are not deducted.

(2) CUMULATIVE PREFERENCE DIVIDENDS: only the current years pref.dividends are deducted from net profit tbasic earnings, not last years ones-as per matching concept.

iv) BASIC EARNINGS IS CALCULATED AS FOLLOWS:(1) It includes all PROFIT / LOSS that is calculated:

(a) AFTER(i) Tax plus including deferred tax.( it is treated as plain tax)(ii) Preference share dividends paid outthe fixed portion incl. from cumulative pref. shares.(iii)Attributable profit after tax of associates and non-consolidated subsidiaries which has been accounte

by the equity method.????

(b) BEFORE(i) Before transfers to and from reserves : (remember if given a retained earnings amount, transfers

reserves and dividends paid would have BEEN subtracted -ie treated as After not Before- so must

added back to get the basic earnings to work from)

(2) An alternative way of working it out is :(a) Retained Earnings end of year(b) Less :Retained earnings beginning of year(c) Add Back: Transfer to reserve(d)Add Back : Ordinary dividends.

f) WEIGHTED AVERAGE NUMBER OF SHARES :i) Definition: the number of ordinary shares outstanding at the beginning of the period, adjusted by the number o

ordinary shares bought back or issued during the period multiplied by a time-weighting factor.

ii) the time weighting factor is the number of days that that the specific shares are outstanding as a proportion of thtotal number of days in the period. A reasonable approximation of the weighted average is adequate in many

circumstances.

iii) In most cases shares are included in the weighted average number of shares from the date consideration is receiv( which is generally the date of issue) for example: ordinary shares issued for in exchange for cash are included w


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ncome Tax.

cash is receivable. The date on which the shares were ISSUED is of no importance in the calculation if that is a

different day from the day when CONSIDERATION IS RECEIVABLE.You ONLY use the date from which consideratio

receivable.

iv) METHOD TO CALCULATE WEIGHTED AVERAGE NUNBER OF SHARES :(1) ADD The FOLLOWING:

(a) Number of ISSUED ORDINARY shares at beginning of year(b) Plus : any ordinary shares issued during the year X days shares were owned by new shareholder/ div.by/

in a year(360 or 365) : ie Shares X days/365 or 360

(c) If any shares were bought back :then minus : number of X days in year they were NOT owned by oldshareholder / div by /365 or 360

v) Share Premium: any premium gained on the issue of any shares is completely ignored in any calculations forWeighted average number of shares or for Basic earnings or even dividends.just forget it.

g) BASIC EARNINGS PER SHARE:i) Basic earnings per share should be calculated by dividing the profit or loss(I think you should rather say BASIC

EARNINGS ) for the period attributable to ordinary shareholders (less any fixed Pref. Share Dividends paid) by th

weighted average number of ordinary shares outstanding during the period.

ii)

So : BASIC EARNINGS / Weighted Average Number of Shares = Basic Earnings per Share.

Rights Issue at Fair Value: A rights issue is an issue to existing shareholders of the company for consideration.

Rights Issue at Less than Fair Value (or called a Bonus Element In A Rights Issue: If a company raises capital by m

of a rights issue and the issue price is less than the fair value of the company's shares when issued, a bonus element arise

he number of ordinary shares to be used in calculating basic earnings per share for all periods prior to the rights issue is the

umber of ordinary shares outstanding prior to the issue,multiplied by the following factor:

OMMENTWhere the rights themselves are to be publicly traded separately from the shares prior to the exercise date, fair value is

ablished at the close of the last day on which the shares with the rights are traded. In above formula outstanding shares

present issued shares.-Bonus Element In A Rights Issue

-Share Split

-Reverse Share Split

MEASUREMENT

IAS 33.9: says BEPS must be shown on SCI face for 1) total profit as well as 2) continuing operations, and shown on face o

(not in notes) , and the textbook says it should also be done for 3) discontinued operations separately as well just to be

thorough but this last one can be shown either on SCI or in Notes.

IAS 33 also says BEPS must be shown for EACH CLASS of ordinary shares , so if there are 2 classes of shares , there could b

figures disclosed : for Class A and B : total, continued, discontinued = 2*3 = 6!

a) Note: Participating Preference shares are NOT considered a separate class per IAS33.13&14.


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ncome Tax.

IAS 33.10 : BEPS is calc. by divide Earnings= Numerator by WEIGHTED no. of shares = Denominator.

CLASS A & B SHARES : MULTIPLE CLASS ORDINARY SHARES:

a) All equity shares with same rights to shares in profit/loss without seniority or prior rights- go in a class.b) The BEPS is calc. by sharing the EARNINGS between the classes per their right to receive profits eg: 2:1 etc.- then calc

from there. ( first deduct pref. dividends from profit first as usual of course)

DECIMAL PLACES : for EPS : give the answer in cents, with 2 decimal places, rounded-off per usual, for each cent eg: 5.4

cents EPS

BASIC EPS : THE EARNINGS:

a) Profit must be adjusted for : non-controlling interest in subsidiaries is not included, after tax effect of pref. dividendsdifference on the settlement of pref shares etc. before it is used as EARNINGS to calc. EPS.

Preference Shares Dividends:

Basics:

(1) The pref dividends must be deducted from the earnings before it is used to calc. EPS since pref. dividends arseen as a wrong kind of equity no ownership really exists, more funding finance.

(2) Cum Pref Shares Dividends: whether the cum.pref.dividends get carried over to next year or paid this yearmust still be used in the calc. and deducted from earnings for the calc. AND if they are paid in a later year fo

former year when they were not paid, that amount is NOT used in the EPS calc. for that future year at all- no

carry forwards!

(3) After tax amount: the amount of the pref. dividends to be used in the EPS calc. must be the AFTER TAX amoso STC must be deducted first from the dividend before it is used in a calc.(because tax reduces earnings of

course)

(4) STC: funny thing: just watch out for this a bit :dont forget : if a cum pref div is not paid one year but carried next yr, one mos still uses it in the unpaid yr to deduct from earnings for EPS calc., and the related STC in the

unpaid yr is also deducted from it before it is used of course. BUT that STC is never paid because no dividend

have been paid , so the taxman dosnt tax you on it yet THE PROBLEM comes in as follows:

(a) in the later year: when the cum pref div does get paid out :- you mos pay STC that year on last years pref.dividends that you pay out this year cause that is how taxman works(taxman says it is only seen as

declared in year it is actually paid out) . So book says the STC amount in the SCI that incl. this must bereduced by the STC from last year it must be removed- before it is deducted from current years declare

pref.share.div to get the after tax amount to actually use in the EPS calculation that year. So this mean

they give you a profit after tax figure for later YEAR YOU MUST ADD BACK THAT OLD STC SEPARATELY

because it has been deducted for tax but should not go in EPS calc. this Yr..

(b) In the year it is not paid and carried forward : no STC is actually paid/accrued that Yr so if they give you profit to use in EPS calculation for that year, rem to deduct the STC from this profit because it wont get

deducted by the tax in the books because it wont be in the tax in the books for that year. YOU MUST DED

THE STC SEPARATELY.

(5) Equity/Liability :Only Pref.Shares that are classified as equity may be used to make adjustments, if classified liabilites or as both equity&liabilities they may not be incl. in the calc. at all IAS 32 must be used to determin

whether they are equity or liabilities.

Increasing Rate Pref Shares:

(1) Increasing rate prf shares are where pref shares are issued at a discount and then the first few initial futuredividends are decreased to compensate the company for this OR they are issued at a premium and then the

initial future dividends are increased to compensate the share buyer for this.

(2) IAS 33 says: the discount/premium on issue of the shares must get amortised to retained earnings using theeffective interest rate method and treated as a preference dividend for EPS purposes.- this means each year

a lower/higher dividend gets paid you use add/subtract an amortised special amount to your pref.dividends t

deduct for EPS purposes. So instead of being zero it will be some amortised figure (or if much higher than usu

will be made a less by an amortised amount)

(a)

CALCULATION:(HOW DOES EFFECTIVE RATE METHOD work here ? also please explain the effective rate


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ncome Tax.

method. This is a very tricky calc.you must ask lecturer to explain what happens if the issue price is NOT

same as fair value so the pref div % cannot work as the % to use to calc. the yearly amount to be deduct

also generally how it works with the effective interest rate method do you use the pref share % or the ma

interest rate? Pg 516 tx.book) you say 100/ 70 * issue price if the discount was 30% to get the price the sh

were supposed to be before discount. Then take discounted issue price and * pref.share % for first year a

buyings dividend. Second year and all future yrs is (discounted issue price + all previous years

imaginarydividends )*pref share %. = that yrs imaginary dividend.- this carries on until the lower dividen

years runs out and normal dividends start getting paid again. Funny method-cant explain just do it.see bopg 516

(3) Imaginary book value amount BUT IAS33 only applies to EPS and NEVER to ACCOUNTING RECORDS , so thjust an imaginary amortise to retained earnings thing and only used for purposes of the EPS calculation.

Buy Back of Preference Shares

1) If pref shares are bought backby the company it is seen as equity (IAS32) so a CRRF reserve must becreated.So in the books it does not go into SCI or profit.

2) BUT for EPS purposes NOT the full amount paid BUT any excess/under the carrying amount of the pref sharepaid to repurchase them must be added/subtracted from profit to get the earnings to use for a EPS

calculation(because its mos a loss/gain so it is a part of actual earnings mos just that its not treated like tha

the books since its equity)

Incentive for early conversion of Pref shares.

1) Sometimes a company offers to pay some cash on top of it, or give more shares than previously agreed tconvert pref. shares held by a shareholder into ordinary shares. Say the convertible pref shares were is

on the basis that 1 ordinary share will be exchanged for 1 pref share if they are ever converted. So now t

company offers an incentive to induce this conversion by offering instead 2 ordinary shares for every 1

share.

2) Any excess over the original terms must be added to profit before you use profit as the earnings to calc E(since in the books it is all treated as pure equity CRRF etc but mos it is a loss of sorts so it must coim

into earnings somehow)

Participating Pref Shares :

(1)These are not a class of ordinary shares for purposes of EPS calculations so ALLdividends from theseshares must be deducted from profit to get earnings for EPS

(2)REM: if for some reason you could have to work it out, the fair value of any preference share is a perpetie: dividends / divided by / interest rate in decimals . this interest rate can be the interest rate of the

debentures , or even the current market interest rate for similar debt at similar risk it seems , (orim not s

but I think they even just use also the current bank interest rate it seems not even same risk or similardebt (see quest.6 pg36.vigario corporate mngmnt finance)

(3)

DIFFERENT CLASSES OF SHARES:

Participating Preference Shares :

ote :Allways specially subtract the fixed pref. dividend from the net profit because it is never done before Net Profit is calcu

the SCI, it is always done last, even if it is seen as debt and not equity type of thing.

articipating preference shares are shares whose holders are entitled, in addition to receiving their fixed preference dividend

hare along with the ordinary shareholders in the remainder of the distributable profit, either pro rata or after ordinary

hareholders have received a certain minimum dividend.

ote that these shares dividends which they receive over and above the fixed part of their dividends ie the participating pa

ust also be deducted from Net Profit in order to calculate Basic Earnings. So the participating part of the dividends are not

ordinary dividends but as Pref.Dividends basicly.


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ncome Tax.

he Earnings per Share and Dividends that go to Participating Pref. Shares must be shown separately next to the EPS&Divden

r ordinary shares and each other type of share.- NOT LEFT OUT.

part from this It is important to take careful note of the conditions of issue and of the capital structure, for example:

ote the following Complex Calculations:

ote :Allways specially subtract the fixed pref. dividend from the net profit because it is never done before Net Profit is calcu

the SCI, it is always done last, even if it is seen as debt and not equity type of thing.

TYPE 1 : ``One cent per share for every four cents per share paid to ordinary shareholders''

a) does not necessarily mean that preference shareholders share one-fifth of the profits. Ie: if there are equal number both types it will be 1 : 5, but if there are less /more Partic.Pref.Shares than Ordinary Shares the ratio will be differen

you must actually work it out with the FULL METHOD below, not just use ratios.

TYPE 2: If participating pref.shares are to share in dividends in the ratio 1 : 8 or 1/8 of total dividend earned by ordinary

shareholders:

a) VERY TRICKY: it is NOT 1/8 & 7/8= 8/8 total, NOR 9/8 TOTAL: you must do instead algebra so you say x + 1/8x =100000profit therefore x(1+1/8)= 100000 therefore x=100000/(1

1/8 ) {note:you cannot say 100000/9/8, you must pu

brackets around (8/9) or it will come out wrong! and take it from there.NOTHING else will work.( the book says there

8/8 + 1/8 parts , so there are 9 parts, so 1/9 is for pref and 8/9 is for ordinarythis method can also be used if you can

remember it)

TYPE 3: Each participating preference share is entitled to one-half of the ordinary dividend per share after the payment

dividends of 10 cents per share to the ordinary shareholders. Profit after tax for the year ended 31 December 19.1 amouto R1 130 000. An ordinary dividend of 15 cents per share was paid during 19.1.

4,000,000 Ordinary shares of 25 c each :1,000,000

500,000 10% Cumulative Participating Preference Shares :500,000

a) Participating Rights: you first have to get the % of the total profit that goes to each type of share after 1-The minimumdividends are paid to ordinary shares & 2- After pref.share fixed % is paid out. This is 2 double percentages that wor

each other : ratio of number of pref:to:ordinary and ratio of dividends payable to each. To work out this double

percentage see 1 below in example.(you can also say 2:1 instead of 1 : 1/2) )

METHOD TO WORK OUT DIVIDENDS DIVIDED BETWEEN ORDINARY & PREFERENCE SHARES.

See example below :

i) PARTICIPATING RIGHTS:(1) As in example below: each ones total is divided by the total of both together at the bottom to get the

Percentages%.

ii) EARNINGS PER SHARE :(1) This is calculated in separate columns for Ordinary & Preference & each other type 1 per column eg: Participa

pref.One needs this calc. because you use this to work out EPS for the Notes & SCI.

(a) NOTE: Pref shares have THEIR OWN EPS and Ordinary shares have their own EPS, and each other class ofshares has its own EPSeg cumulative/participating etc. Each one is separate from the other and is show

separately as a separate figure in the SCI and Notes!

iii) DIVIDENDS:(1) These amounts must be calculated separatelyfor each class of shares in order to get the totalsper class so yo

can work out the Dividends per share for the SCI and Notes.

iv) NUMBER OF SHARES : this is needed so you can calculate the Dividends (dividends is only ever calc. using actualnumber of shares on hand when the dividend was paid out ,not the EPS, that is done with weighted!)

v) WEIGHTED AVERAGE NUMBER OF SHARES: THIS IS NEEDED so you can calc. the EPS-{Earnings per Share} (not tDividends- dividends are only ever calculated using the number of shares on hand when the dividend was paid ou

not averages of dividends on hand)

vi) FIGURES TO DISCLOSE: here you just work out all the 1-EPS and 2-Dividends per share to disclose in SCI below NeProfit and in Notes Remember the EPS and dividends per share for pref. and cumulative and participating shares

get worked out separately and shown as separate figures from the exact amount those type of shares earned tha

year- eg for pref. it is only the fixed % that they get that is taken as basic earnings for that type of share to use

the calc. of EPS for pref. shares, and so forth.


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ncome Tax.

b)

CHANGES IN CAPITAL STRUCTURE:

(A) TYPE 1 : Shares ISSUED FOR CONSIDERATION:

Shares are included in the weighted average number of shares from the: date consideration is receivable ( which is gen

the date of issue) for example: ordinary shares issued for in exchange for cash are included when cash is receivable. The d

on which the shares were ISSUED is of no importance in the calculation if that is a different day from the day when

CONSIDERATION IS RECEIVABLE. You ONLY use the date from which consideration is receivable.

SHARES ARE CONSIDERED OUTSTANDING : WHAT DOES this phrase mean.

DATES ON WHICH SHARES ARE INCLUDED IN THE CALCULATION FOR EARNINGS PER SHARE.

DATES ON WHICH SHARES ARE INCLUDED IN THE CALCULATION FOR EARNINGS PER SHARE

FOR : SHARES ISSUED FOR A CONSIDERATION (FOR MONEY)

Consideration received

for share issue

Date of inclusion in calculation of earnings per share


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0 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies ncome Tax.

1-For any situation where the

date of payment is After/Before

date of Issueing of Ordinary

Shares/Pref Shares/ Debentures.

See the 2 sections below on issueing shares in return for getting shares in another

company.The sections in there on Before/After situations are approximately what yo

do.

2-Cash When cash is receivable

3-Voluntary reinvestment of

dividends on

ordinary or preference shares

Dividend payment date

4-Conversion of a debt instrument

to ordinary shares.

Date interest ceases to accrue

5-Interest on other financial

instrument

Date interest ceases to accrue

6-Settlement of a liability Settlement date

7-Acquisition of an asset other

than cash

Date on which the acquisition is recognized

8-Issueing shares is return for

getting shares in anothercompany.

Date on which the earnings from the shares in other company are included in your S

For Ordinary or Pref. SharesIssued BEFORE or AFTER date of acquisition as paymen

It says in unisa book it is a problem due to matching concept that if Pref.Shares or

Debentures are issued in return for shares in another company but the date from wh

one may include earnings from these shares in your SCI is After/Before date which y

gave Pref.Shares/Debentures and thus have to pay interest/fixed dividends on them

(a) BASIC EARNINGS :

To calc. the Preference Dividend which must be subtracted from the Net Prof

get Basic

Earnings you can do any of the following : To accomplish the matching of cos

with profit,

the preference dividend should be provided for by one of

following methods :

(1) Use The Date To Calculate Pref. Dividends. as if it were from the timshares in the other company become yours (actually the time you ca

include profits from their shares in your SCI), so even if you issued y

own Pref. shares in return 2 months later/before and in reality only

dividends from then, you ignore this and use false figures and make

you pay dividends from date you acquired the interest.(???where d

you disclose this fact that you used fanciful figures)???

(2) OR : the better way is to include the dividends from the actual date ystart paying them, and just disclose the fact in the Fin.Stats. ie: that t

fact that profit is included for eg :9 months and dividends are providfor only eg :6 months (or more/less) must be disclosed in the Notes,

similar way to example below , and added as a sentence just below i

same paragraph(I Think- check how this works!).

(b) WEIGHTED AVERAGE NUMBER OF SHARES:

(a) You use the Date from when you Aquired; the interest inthe other company, not the true date you Issued the

Ordinary shares so even if they were issued before

/after instead of using the correct date you use a

false date. But this must be disclosed in the Notes as

shown in example above. So you actually rank the shares from the date

you can include earnings in your SCI from the subsidiary ie: the date

you obtain control over subsidiary, EVEN if the shares are only issued

later or were issued before that date.rank means include for payments etc so it wouldmean include in the Weighted Average Number of Shares


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Calculation.

9-Rendering of services Date or period for which the services are rendered.

10-Ordinary shares issued as part

of the

purchase consideration of a

business

combination that is an

acquisition: So if a business

becomes your subsidiary and you

pay for it in shares.

1-From the date of acquisition because the acquirer incorporates the results of the

operations of the acquiree into its statement of comprehensive income as from the

of

acquisition.

2- Note that when doing the Basic Earnings Calculation you must only include the pof the subsidiary in your own profit for that period of the yearpro rata- that yo

owned the subsidiary- as per Consolidations/ Groups rules the profit from Be

Aquisition was paid for by you in the purchase price.

Example: :Oorke is the newly acquired subsidiary and profits for the year were 10000not 75000.

3-For Ordinary or Pref. SharesIssued BEFORE or AFTER date of acquisition as paym

It says in unisa book it is a problem due to matching concept that if Pref.Shares or

Debentures are issued in return for shares in another company but the date from whone may include earnings from these shares in your SCI is After/Before date which y

gave Pref.Shares/Debentures and thus have to pay interest/fixed dividends on them

(a) BASIC EARNINGS :

To calc. the Preference Dividend which must be subtracted

from the Net Profit to get Basic Earnings you can do any of

the following : To accomplish the matching of cost with profit,

the preference dividend should be provided for by one of

following methods :

(3) Use The Date To Calculate Pref. Dividends. as if it were from the timshares in the other company become yours and you can include prof

from their shares in your SCI, so even if you issued your own Pref. s

in return 2 months later/before and in reality only pay dividends fro

then, you ignore this and use false figures and make as if you pay

dividends from date you acquired the interest.

(4) OR : the better way is that the fact that profit is included for eg :9 mand dividends are provided for only eg :6 months (or more/less) mu

disclosed in the Notes, in a similar way to example below , and adde

a sentence just below it in same paragraph(I Think- check how this

works!).

(b) WEIGHTED AVERAGE NUMBER OF SHARES:

(a) You use the Date from when you Aquired; the interest in

the other company, not the true date you Issued the


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Ordinary shares so even if they were issued before

/after instead of using the correct date you use a

false date. But this must be disclosed in the Notes as

shown in example above.

11-Ordinary shares which are

issuable upon the satisfaction of

certain conditions (contingently

issuable shares)

Are considered outstanding, and included in the computation of basic earnings per s

from the date when all necessary conditions have been satisfied.

12-Rights Issue at Fair Value: At Fair Value means that it was sold at the price that it was valued at not for less

more.It is treated as if the shares were bought for cash on the Day of the rights issue

-A rights issue is an issue to existing shareholders of the company for consideration.-

NOTE-The shares are therefore taken into account in the calculation of the weighted number of

shares from the date that the company has additional earnings capacity because of the new

shares issued, for example if the shares are issued for cash, then the earnings capacity of the

company will only increase from the date that the additional cash is available to that company.

NOTE-Please note that none of the above examples will influence the calculation of the number

of shares of the previous year.

METHOD TO CALCULATE AND DISCLOSE EARNINGS per share :

a) SEE EXAMPLE BELOW- NOTE: it is done per year IN COLUMNS you can work all the way down with right up to EPS adividends.

b) The recon is simple- start with the EPS you calculated and work down to Net Profit for the Year by adding backpref.dividends etc.


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EXAMPLES:

(B) Type 2 : Shares issued for no consideration:

Where reserves, such as non-distributable reserves, are capitalised by issuing equity shares, the earnings and dividend per sh

ust be based on the increased weighted average number of issued shares after the capitalisation issue. When there is a

pitalisation issue, no additional capital is acquired and the company merely makes a book entry. The reserves that were

pitalised and for this reason the number of shares issued as a capitalisation issue are not weighted for the period of issue. T

omparative figures (earnings and dividends per share) should also be adjusted by the increase in the number of shares, if th

e to be comparable. Where shares are split, say from R1 shares to 50c shares, or where shares are consolidated and no

payment of capital takes place, the same principle applies as in the case of capitalisation issues. Ordinary shares may be iss

r the number of shares outstanding may be reduced without a corresponding change in resources. This means that even tho

e number of shares changed during the year, no consideration was received, therefore the earnings capacity of the compan

ot change. Examples include the following :

a capitalisation or bonus issue a bonus element in a rights issue a share split a reverse share split (consolidation of shares)

ote that in the above cases the number of shares are not weighted when calculating basic earnings per share. The number o

rdinary shares outstanding before the event is adjusted for the proportionate change in the number of ordinary shares

utstanding as if the event had occurred at the beginning of the earliest reported period i.e. the beginning of the prior year. T

umber of shares are only weighted if the capitalisation issue (or other examples mentioned above) follows a rights issue in t

me year. The capitalisation issue is then only weighted with regard to this rights issuemeaning that..?????????????????


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DATES ON WHICH SHARES ARE INCLUDED IN THE CALCULATION FOR EARNINGS PER SHARE

FOR : SHARES ISSUED FOR NO CONSIDERATION (FOR FREE BASICLY)

IND OF SHARE ISSUE Date of inclusion in calculation of earnings per share

crease in equity share capital:

& 2 below:

-Capitalisation Issue/Bonus Issue. 1-BASIC EARNINGS:The only thing that could have any effect on the calc. of Basic Earnings in these c

if Pref.Shares were issued as a Bonus Issue or Capitalisation issue and the dividend

to them must be subtracted from Basic Earnings somehow. IT DOES NOT SAY IN TH

BOOK BUT I THINK JUST TREAT THEM AND THEIR DIVIDENDS AS IF PAID FROM

BEGINNING OF ANY YEAR DEALT WITH, INCL. ANY COMPARATIVE YEARS.-exactly th

same as in (2-) below. Also always remember to deduct Pref.Dividends from Net Pr

the Earnings-you often forget them!

2-WEIGHTED AVERAGE NUMBER OF SHARES.

1-You DO NOT EVER WEIGHT THIS TYPE OF SHARE. It is treated as a full year if it

included at all.

2-If there are any other weird capitalization issues or Rights issues at less than F

Value etc. before the capitalization issue,you use the figure you have worked out

the date of the current capitalization issue as your beginning of year figure to wo

with, as the total amount of shares for any calc. SO you do NOT use the REAL ACTU

number of shares at that time , you use the false one you got so far. This is a weir

to do it , but it is some mathematical thing. ALSO: For the previous years Compara

Figures: you adjust it starting with the first Capitalisation (or other weird type) of

from the current year, then use that figure to do the next adjustment in line and so

you get your answer. This is for Multiple Capitalisation or other weird Issues in the

year. Remember a capitalisation issue is never weighted by months though, but ot

types might be!

3-You Treat the Extra shares which were issued for free by the Capitalisation issu

they were issued at the beginning of the year of the Financial stats - BUT for theComparative Yearif shown in the Fin.Stats. you only add the capitalization figure

this total in the ratio as to how many shares there were in issue/outstanding at the

of that year. So if there was a Capitalisation issue of 1 for every 1 shares held, and

end of Current Fin.Year there were 500 shares you add 500 to this=1000 end this y

not weight it at all) Then if end last year there were 200 in issue- you ONLY ADD TH

SAME NUMBER OF SHARES that was in issue/outstanding at that time to last years

therefore 200+200=400.So current year gets 500 and last year get 200. The logic b

this is that the equity of the shares issued was part of reserves anyway at the time

must then get shown, if the 2 years are to be comparable.(but what happens if the

reserves only appeared halfway through this period?- so if they were NOT there at

beginning of the years concerned??) But if the question does not say the ratio thecapitalization took place in then just add them to the totals as they come.

Rem: For Free issue of Bonus shares :DO NOT go and add again to the final year -

remember that somewhere in the final year that Bonus Issue had to have been rec

anyway! So it is already in the total number of shares for the end of the year it do

have to be added again! . But you must add it to the total shares for the Comparati

Years figures though- it will definitely not be in there yet!

ALLWAYS USE THE FOLLOWING METHOD TO WORK THEM OUTNEVER ANYTHING

IT JUST CAUSES MISTAKES.


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This is the way you write up the Note for where year 1 and year 2 each get differ

amounts added :(a bit minimalistic though!!!??)

-Rights Issue at Less than Fair

alue (or called a Bonus Element

A Rights Issue)

If a company raises capital by means of a rights issue and the issue price is less tha

fair value of the company's shares when issued, a bonus element arises.

1-BASIC EARNINGS :

Done as per usual-nothing special (remember to deduct Pref.Dividends)????Pref.

Dividends is probabley calculated in the same way as done below for ordinary shar

the Pref.Dividends were also Issued at less than fair value???

2-WEIGHTED AVERAGE NUMBER OF SHARES:

(a)Here you must backdate any rights issues as if it happened at the beginning of t

year.So you must treat it as if it happened at beginning of year. If the rights issue w

the middle of the year and there were other issues before that that had to be weig

by month, then you just work down the list in order of dates (???I dont think you

weight a normal issue before the rights issue as out of say 3/6 months if the rights

after it was half way through the year and it happened in the 3rd month- I think you

weight it as normal- add it up to the previous ones and work from there!???_)

(b)For periods prior to rights issue: You only use the following calculation for the

purposes of any Months before the rights issue and for Comparitive Figures on t

Fin.Stats. nowhere else at all!

So here you do not

The number of ordinary shares to be used in calculating basic earnings per share fo

periods prior to the rights issue is the number of ordinary shares outstanding prior

issue,multiplied by the following factor:

Note: Fair Value means what the management judge to be what the shares are wothe time, not the Current Book Value of the shares or also not the current plain ma

value- just the Fair Value in managements estimation at the time.-(not quite sure-

ask)

(i) FOR No-PAR VALUE SHARES :(I think)


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(ii) FOR PAR VALUE SHARES: (I think)

EXAMPLE:

COMMENT

-(1)Where the rights themselves are to be publicly traded separately from the shar

prior to the exercise date, fair value is stablished at the close of the last day on whi

shares with the rights are traded. In above formula outstanding shares represent is

shares.

-(2)If there are any multiple issues in the Current financial year before the rights a

than fair value issue then each period in between each issue is simply treated alon

using the same formula and above and then just weighted and added together wit

others to get the final answer.i think??? NOT SURE???

(b) For periods after rights issue:

as per usual use the exact number of shares , just weight it by time =months/12 ,

not use the formula above. So if the Shares at less than Fair Value were issued h

through the year- then the first 6 months are done by taking the TOTAL shares IN ISthen ,using the special formula above, and then multiplied by 6/12 for half the yea

logic of it would be part of your reserves because it is free) , BUT the 2nd

6 mnths a

done using the exact number of TOTAL shares now IN ISSUE (not using the funny

formula) and also multiplied by 6/12.This is added together to get the total Weigh

Average for the year. Note: you do not ever use the formula on only the amount o

shares issued- ONLY on the TOTAL shares THE COMPANY HAS EVER ISSUED and wh

still there at that time.

The Previous years Comparitive Figures must also be adjusted by using the specia

formula above, for the purposes of Comparative figures for the Fin Stat.(for the w

of that year)Example: Notes for the year of a rights issue at below fair value( it was very compbut they just wrote this simple thing here? A bit minimalistic! You should at least

the previous years figures were adjusted in accordance

Example of a right issue at below fair value


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eduction in Equity Share Capital:

&4&5below

The share split or reverse share split is the change in the nominal value of the shar

leading to a change in the number of shares as shown below.

-Share Split - the number of shares remain unchanged and only the nominal value per share isaffected.In this case no adjustment is necessary for basic earnings per share.

1-BASIC EARNINGS:

Same as normalbut not sure if you split pref.shares which date you take them f

the date of split or for the whole year?

2- WEIGHTED AVERAGE NUMBER OF SHARES

You simply take the new number of shares you get after the split and use that as

number of shares- BUT you must convert the Comparative figures for the previous

to the same formatie split them too, AND also if the split takes place in the middl

the year you must treat it as if it happened at the beginning of the year- No weight

months is used at all here just very plain splitting the shares and changing all yea

that format so it is comparable.To do the write-up in the NOTES it is done as follows:

3-DIVIDENDS per SHARE

Dividends per share is calculated for both years using the new figures for numbe

shares worked out above- so for Comparative year the number after the split is a

used

In the NOTES one must disclose under a separate heading how dividends per sh

was adjusted after the split , as shown in example below:

You must check how exactly one discloses this it is done in 3 or 4 different ways i

book!

-Reverse Share Split (or Share

onsolidation)

- the number of shares are reduced, in which case the basic earnings

per share are based on the reduced number of equity shares after the consolidatioshares. The basic earnings per share for the preceding year are adjusted proportio

-EARNINGS PER SHARE

Works exactly the same as for a share split but just the other way around.see ab

-WEIGHTED AVERAGE NUMBER OF SHARES

Works exactly the same as for a share split but just the other way around.see ab

Number of shares remain unchanged

nd only the nominal value per share

affected

In this case no adjustment is necessary for basic earnings per share.


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HEADLINE EARNINGS.

The headline earnings are just the Net Profit LESS ANY :profit/loss on sale of Property Plant & Equipment or Profit/loss fro

Revaluation of Assets. So it is just basicly meant to be profit from operations.

NOTES to the Fin Stats : One must do a reconciliation in the Notes to recon. headline earnings to net profit . See example

below.

eadline earnings is defined as all trading profits or losses of the company, including those

ems that are of such a nature and size that their disclosure is relevant to explain the

erformance of the enterprise, after tax, non-controlling interest and preference dividends but

xcluding separately identifiable remeasurements.

measurement is an amount recognised in the statement of comprehensive income relating to

ny change (realised or unrealised) in the carrying amount of an asset or liability that arose

ter the initial recognition of such asset or liability.

isclosureompanies should disclose the following in the annual financial statements:

- earnings per share calculated in accordance with IAS 33/AC 104;- headline earnings per share- an itemised reconciliation between headline earnings and earnings in accordance with IAS 33/AC 104. The reconciliat

should detail the nature and amount of each reconciling item.

DIVIDENDS PER SHARE.

AC 104 does not require the disclosure of dividends per share. However par 95 of IAS 33/AC 101 Presentation of Financial

atements requires the disclosure of dividends per share.However,there are no specific guidelines in any of the current

ccounting statements on the calculation of dividends per share.

Calculationor the purpose of this course, the following guidelines should be followed on the calculation of dividends per share:

vidends declared for the period divided by the number of issued shares on the date when the dividends were declared.

he calculation of dividends per share is therefore based on the number of issued shares and not on the weighted average

umber of issued shares. Comparative figures for dividends per share are only adjusted in the following instances:

. Capitalisation issues, bonus issues, a share split or a share consolidation . Reduction in equity share capital

In the case where dividends are declared more than once during the period under review, a separate dividends per share m

e calculated for each dividend payment. The sum of the separate dividends per share calculated can be disclosed in the

atement of comprehensive income or the dividends per share for each declaration can be disclosed.

An adjusted dividend per share must be calculated if the company issued capitalisation shares,bonus issues or a share split

hare consolidation occurred in the current year. The result of these share transactions is that the number of shares increase


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ecrease but the R-value of issued share capital remains unchanged. The number of issued shares of the previous year is

erefore adjusted and this requires an adjusted dividend per share calculation.

Disclosure requirementhe revised IAS1 requires disclosure of dividends per share in cents for each class of equity shares for the period under review

e corresponding prior period in the statement of changes in equity or alternatively in the notes.

OW TO DISCLOSE IN THE FIN.STATS (RATHER DO A SEPARATE FIGURE FOR INTERIM AND A SEPARATE FIGURE FO

NAL AND THEN A TOTAL BELOW THESE FOR BOTH- ALL 3 SEPARATE FOR EACH YEAR SHOWN): AS FOLLOWS

PRESENTATION:

s per IAS/AC and Act :

n enterprise should present:

. on the face of the statement of comprehensive income, . for each class of ordinary shares, . with equal prominence, . for all periods presented,

asic earnings per share (including a loss per share).

DISCLOSURE:

n enterprise should disclose the following for basic earnings per share:

. Earnings:

. The earnings amount used in the calculation. . Reconciliation of the earnings amounts used in the calculation to the profit or loss for the

period in the statement of comprehensive income.Per share:

. The weighted average number of ordinary shares used. . Reconciliation between the number of shares used for basic earnings per share.

ote: If an enterprise discloses, in addition to basic earnings per share, per share amounts using a

ported component of profit other than profit or loss for the period attributable to ordinary

hareholders, such amount should be calculated using the weighted average number of

rdinary shares.

ote: If a component of profit is used which is not reported as a line item in the statement of

omprehensive income, a reconciliation should be provided between the component used and

line item which is reported in the statement of comprehensive income.


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INANCIAL INSTRUMENTS IAS 39 IAS 32 IFRS 7 IFRS 9

BASIC BUILDING BLOCKS OF FINANCIAL INSTRUMEMTS:

1. DEFINITION OF A FINANCIAL ASSET : Any CONTRACT that gives rise to a FINANCIAL ASSET of one entity and a FINANCLIABILITY or equity instrument of another entity.

a. There are 3 parts that must be present to form A FINANCIAL INSTRUMENT ,i. CONTRACT, (need not be in writing,enforcable by law, between 2 or more parties.)

ii. FINANCIAL ASSET on one sideiii. FIN LIABILITY Or EQUITY INSTRUMENT on other side.

2. DEFINITION OF A FINANCIAL ASSET : Afinancial assetis any asset that isa. (a) cash;b. (b) an equity instrument of another entity;c. (c) a contractual right:

i. (i) to receive cash or another financial asset from another entity; orii. (ii) to exchange financial assets or financial liabilities with another entity under conditions that are

potentially favourable to the entity; or

d. (d) a contract that will or maybe settled in the entitys own equity instruments and is: (subject to certainconditionssee IAS32 Definition)

3. FINANCIAL ASSET EXAMPLES:a. PPE :b. LEASED ASSET S BY LESSEE:c. LEASED ASSETS BY LESSOR:d.

4. DEFINITION OF A FINANCIAL LIABILITY : A financial liability is any liability that is:(1) a contractual obligation :

(a) (i) to deliver cash or another financial asset to another entity; or(b) (ii) to exchange financial assets or financial liabilities with another entity under conditions that are poten

unfavourable to the entity; or

(a) a contract that will or may be settled in the entitys own equity instruments and is:(subject to certainconditionssee IAS 32 deinitions)

b)

acca 4 dipac earnings ps and fin instruments.docx

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