IAS 33 Earnings per Share Summary

IAS 33 is mandatory for entities whose ordinary shares (or potential ordinary shares) are publicly traded, and for entities in the process of issuing ordinary shares to the public. EPS is a widely used performance indicator, but it has real limits as a comparator: different entities use different accounting policies in arriving at 'profit,' and EPS says nothing about the quality or sustainability of that profit, or about how much capital was used to generate it — comparing EPS across entities with very different capital structures can be misleading without also looking at measures such as return on capital employed.

Basic EPS = profit attributable to ordinary equity holders of the parent (after deducting preference dividends) ÷ the weighted average number of ordinary shares outstanding during the period.

The weighted average time-weights shares by the portion of the period they were in issue, and three situations change how that weighting works:

• A full-price issue partway through the year (for example a placing for cash): the new shares are time-weighted from their issue date to the period end — no restatement of comparatives is needed, because no shareholder received something for nothing.
• A bonus issue (or share split) at any point during the year: the additional shares are treated as if they had always been in issue, from the start of the earliest period presented — comparative EPS figures are restated for the bonus issue even though no new resources came into the entity.
• A rights issue below fair value: because a rights issue is part bonus element (shares issued below fair value) and part full-price issue, it is split into the two components using a theoretical ex-rights price (TERP) adjustment factor, computed as the fair value per share immediately before the rights issue divided by the theoretical ex-rights price per share.

Diluted EPS asks what basic EPS would have been if every dilutive potential ordinary share outstanding — convertible bonds, convertible preference shares, share options and warrants, and some contingently issuable shares — had actually converted into ordinary shares at the start of the period (or the date of issue, if later).

For a convertible bond or convertible preference share, both the numerator and the denominator change if conversion is assumed: profit is adjusted by adding back the after-tax finance cost (interest) or preference dividend that would no longer be paid, and the number of shares is increased by the shares that would be issued on conversion.

Options and warrants are not assumed to generate new shares in full. Instead, the treasury stock method assumes the proceeds the entity would receive on exercise are used to buy back shares at the average market price for the period; only the difference between the shares issued on exercise and the shares that notional buyback could fund — the 'bonus element' of the option — is treated as dilutive.

Contingently issuable shares are included in diluted EPS based on the number of shares that would be issuable if the end of the reporting period were the end of the contingency period, assuming the conditions are met at that date. An instrument is excluded from diluted EPS entirely if including it would increase EPS (or decrease a loss per share) rather than decrease it — such an instrument is antidilutive, and antidilutive and dilutive instruments are never netted against each other.

Basic and diluted EPS are presented on the face of the statement of profit or loss with equal prominence, for profit or loss from continuing operations and, where applicable, for total profit or loss. Comparative EPS figures are restated for the effects of bonus issues, share splits and similar events that change the number of shares without a corresponding change in resources, but not for the effects of a full-price share issue.