Kế toán, kiểm toán - Chapter 17: Earnings per share

CHAPTER 17:EARNINGS per SHARECHAPTER 17: Earnings Per ShareAfter studying this chapter, you should be able to:Understand why earnings per share (EPS) is an important number.Understand when and how earnings per share must be presented, including related disclosures.Calculate earnings per share for companies with a simple capital structure.Calculate earnings per share for companies with a complex capital structure.Understand how analysis helps users of financial statement assess performance. Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future.3Objective of EPSEarnings per share tells common shareholders how much of the available income is associated with the shares they own (their share of the pie)Provides insight to common shareholders about:Future dividend payoutThe value of their shareholdingsImpact of other financial instruments on their potential earnings (Diluted EPS)4EPS CalculationIncome available to common shareholdersEPS=Weighted average number of common shares5EPS CalculationBasic EPSActual earnings and actual number of issued common shares (prorated for the time period that the shares have been outstanding)Diluted EPSEarnings and number of common shares adjusted for “what-if”What would the EPS be if any financial instruments that could be converted to common shares were actually converted6Presentation & DisclosureUnder IFRS, EPS must be reported as part of the income statementException: non public (privately held) corporations (i.e., EPS not required under ASPE)Reported for each income component as reported on the income statementEPS relating to discontinued operations (if applicable) may be presented on face of income statement, or disclosed in notesWhere applicable, both Basic EPS and Diluted EPS reportedPresented for all periods reportedPrior period EPS restated for any stock dividends or stock splits7Presentation & DisclosureIf diluted EPS data are reported for at least one period, they should be reported for all periods that are presented, even if they are the same as basic EPSWhen the results of operations of a prior period have been restated as a result of a prior period adjustment, the EPS should also be restatedThe effect of the restatement should then be disclosed in the year of the restatement8Presentation & Disclosure - ExampleIncome Statement Presentation of EPS ComponentsEarnings per share: Income from continuing operations $4.00 Loss from discontinued operations, net of tax (.60) Net Income $3.409Presentation & Disclosure - ExampleEPS Presentation – Complex Capital StructureEarnings per common share:Basic earnings per share $3.80Diluted earnings per share $3.3510Presentation & Disclosure - ExampleEPS Presentation, with discontinued operations and complex capital structureBasic earnings per share: Income before discontinued operations $3.80 Discontinued operations (.80) Net Income $3.00Diluted earnings per share: Income before discontinued operations $3.35 Discontinued operations (.65) Net Income $2.7011Capital StructureMethod of EPS calculation based on the corporation’s capital structureSimple Capital StructureWhen only common shares and preferred share are issued and/or debt with no conversion rightsBasic EPS calculated and presentedComplex Capital StructureWhen common shares plus dilutive securities are issued (i.e., a potential common shares)Basic and Diluted EPS calculated and presented12Capital StructurePotential/ordinary shares are securities or other financial instruments issued by a corporation that have an option for the holder to convert the security into common sharesThis conversion could have a negative or dilutive effect on EPS (i.e., may cause EPS to decrease)Examples: debt and equity instruments that are convertible into common shares, warrants, and options Contingently issuable sharesShares issued for minimal consideration (asset exchange) once a certain condition has been met13EPS Reporting RequirementsCapital StructureMajor Types of Equity InstrumentsImpact on EPS CalculationsSimpleCommon sharesPreferred sharesBasic EPS onlyComplexCommon sharesPotential Common shares:Convertible preferred sharesConvertible debtOptions/warrantsContingently issuableOtherBasic and Diluted EPS14EPS – Simple Capital StructureCommon shareholders have a residual interest in the company’s income:Therefore, Income Available to Common Shareholders = Net Income - Preferred Share Dividends15EPS - Simple Capital StructureIf the preferred shares are non-cumulativededuct only declared dividendsIf the preferred shares are cumulative deduct only declared dividends, orif no dividends declared, deduct only one year’s dividends16EPS - Simple Capital StructureIf dividends on preferred shares are declared and a net loss occurs, the preferred dividend is added to the loss in calculating the loss per shareIn reporting earnings per share information, dividends declared on preferred shares should be subtracted from income from continuing operations and from net incomeIn other words, dividends on preferred shares should not be deducted in calculating EPS from discontinued operations17EPS - Simple Capital Structure - ExampleGiven: Michael Limited’s Net Income: $3,000,000Shares100,000 Class A preferred, cumulative shares, dividend amount $4.00 per share100,000 Class B preferred, non-cumulative shares, dividend amount $3.00 per shareNo dividends declared or paid in the current yearCalculate the income available to common shareholders18EPS - Simple Capital Structure - ExampleNet Income $3,000,000Amount attributable to Class A: 100,000 x $4.00 400,000 2,600,000Amount attributable to Class B: 100,000 x $0.00 -0-Income available to common shareholders $2,600,000The Class B shares are non-cumulative, with no dividends declared for the year no amount is deducted from Net Income19EPS – Simple Capital StructureThe weighted average number of shares outstanding is weighted by the period of time they were outstandingEach transaction (issue of shares, reacquisition of shares, retirement of shares) represents a weighting period20EPS - Simple Capital Structure - ExampleDateShare ChangesShares OutstandingJanuary 1Beginning balance90,000April 130,000 shares issued120,000July 139,000 shares purchased81,000November 160,000 shares issued141,000December 31Year end balance141,00021EPS - Simple Capital Structure - ExampleDates OutstandingShares OutstandingFraction Weighted SharesPortion of Year OutstandingWeighted SharesJan. 1st to March 31st90,0003/1222,500April 1st to June 30th120,0003/1230,000July 1st to October 31st81,0004/1227,000Nov 1st to Dec 31st141,0002/1223,500Weighted Average Shares Outstanding103,00022EPS - Simple Capital StructureStock splits and stock dividends require restatement of the weighted average number of shares outstanding from the beginning of the yearBecause there has been no change in the company’s assets or in the shareholders’ total investmentBy restating the number, valid comparisons of earnings per share can be made between periods before and after the stock split or stock dividend23EPS - Simple Capital StructureIf there is a stock split or stock dividend after the year end but before the publication of the financial statementsThe weighted average number of shares outstanding must be restatedThis applies to the current year as well as previous years if comparative statements are issued24EPS - Simple Capital Structure - ExampleGiven – Baiye Limited: January 1: 100,000 shares outstanding March 1: Issued 20,000 shares June 1: 50% Stock dividend (60,000 additional shares issued) November 1: Issued 30,000 shares December 31: Ending Balance = 210,000 shares outstanding25EPS - Simple Capital Structure - ExampleDates O/SShares O/SRestatementFraction of YearWeighted SharesJan-Mar100,000X 1.50 X2/12 =25,000Mar-Jun120,000X 1.50 X3/12 =45,000Jun-Nov180,000X5/12 =75,000Nov-Dec210,000X2/12 =35,000Weighted average shares outstanding180,00026Complex Capital StructureComplex capital structure:When corporation has convertible securities, options, warrants or other rights, andWhen converted these could dilute EPSDilution is the reduction in EPS if:Securities, potentially convertible into common stock, are converted (assumed at beginning of the year)Anti-dilutive securitiesSecurities, when converted, increase EPSAnti-dilutive EPS is not reported, only basic EPS27EPS - Complex Capital StructureRequires dual presentation of EPSBasic earnings per sharePresented for each separate class of common shareFully diluted earnings per shareOnly securities that potentially reduce earnings per share (dilutive) are consideredSecurities that potentially increase earnings per share (anti-dilutive) are ignoredThe purpose of presenting both EPS numbers is to inform financial statement users of situations that will likely occur and to provide worst-case situations28EPS - Complex Capital StructureThe dilutive effect of convertible securities is measured by the if-converted methodThe dilutive effect of options and warrants is measured by the treasury stock methodFor computing dilution, the rate of conversion most advantageous to the security holder is used (maximum dilutive conversion rate)29If-Converted MethodThe conversion of the securities into common stock is assumed to occur at the beginning of the yearThe net income must be adjusted for:Interest (net of tax) on the convertible debtDividends on the convertible preferred sharesThe weighted average number of shares is increased by the additional common shares assumed issued (at the beginning of year)30If-Converted Method - ExampleGiven:Net income for the year: $410,000Common shares outstanding during the period: 100,000Additional securities outstanding:6% convertible debenture bond sold at 100 for $1,000,000, convertible to 20,000 common shares10% convertible debenture bond sold at 100 for $500,000, convertible to 32,000 common shares and issued April 1st of current yearCalculate diluted EPS assuming a tax rate of 30%31If-Converted Method - ExampleNet income for the year $410,000Add back: Interest on 6% debentures $60,000 x (1 - .30) 42,000 Interest on 10% debentures $50,000 x (1 - .30) x 9/12 26,250Adjusted Net Income $478,25032If-Converted Method - ExampleWeighted Average Number of Shares 100,000Add: Shares assumed issued: 6% debentures 20,000 10% debentures* 24,000Adjusted Weighted Average Number of Shares 144,000*32,000 shares x 9/1233If-Converted Method - ExampleConversion is always assumed to be at the beginning of the yearIf a convertible security is not outstanding for the full 12 months of the yearConversion is pro-rated for the number of months the convertible security is actually issuedField Corporation 10% debenture was issued April 1st, therefore the conversion is 32,000 shares X 9/12 (outstanding for 9 months of the year)34Example - Field CorporationEPS Calculation and Disclosure: Net income for the year $410,000 Basic EPS($410,000  100,000) $4.10 Diluted EPS($478,250  144,000) $3.3235Options and WarrantsOptions and warrants (and their equivalents) are included in EPS computationsAn option gives the holder the right to either buy or sell sharesGenerally speaking, the holder of options will exercise the right if the options are “in the money” They are “in the money” if the holder of the options will benefit from exercising themIf company sells (or writes) options, they must be included in the diluted EPS calculations if dilutive Purchased options will always be antidilutive since they will only be exercised when they are in the moneyTherefore, they are not included in EPS36Treasury Stock MethodApplies to written call options and equivalentsTwo assumptions under this method:The options are assumed exercised at the beginning of the year The proceeds from the exercise of options are assumed to be used to buy back common sharesThe exercise price per share must be less than the market price per share for dilution to occur37Treasury Stock Method - ExampleGiven: Exercise price of an option (for one share of stock): $30Market price of one share at exercise date: $ 50Options deemed exercised: 1,500Calculate the incremental shares outstanding38Treasury Stock Method - ExampleTotal proceeds from exercise (1,500 x $30) $45,000Shares issued upon exercise of options 1,500Treasury shares purchased with proceeds 900* Incremental shares outstanding 600 * ($45,000/$50) Dilution occurs because, on a net basis, more common shares are assumed to be outstanding after the exercise39Reverse Treasury Stock MethodApplies to written put options and forward purchase contractsTwo assumptions under this method:Enough common shares issued at beginning of the year for the company to purchase shares under the option or forward contractProceeds from the share issue will be used to purchase shares under the option or forward contractThe exercise price per share must be greater than the market price per share for dilution to occur40Reverse Treasury Stock Method - ExampleGiven: Exercise price of an option (for one share of stock): $30Market price of one share at exercise date: $20Options deemed exercised: 1,500Calculate the incremental shares outstanding41Reverse Treasury Stock Method - ExampleAmount needed to buy 1,500 shares (1,500 x $30): $45,000Shares issued to obtain $45,000 ($45,000  $20): 2,250Number of shares purchased under the put option: 1,500 Incremental shares outstanding: 750Dilution occurs because, on a net basis, more common shares are assumed to be outstanding after the exercise42Antidilution RevisitedSecurities that cause an increase in EPS if included in EPS calculations are antidilutiveAntidilution can be identified by:Computing Diluted EPS resulting from the conversion and comparing it to Basic EPSComputing incremental EPS resulting from the conversion and comparing it to Basic EPS43Antidilution - ExampleGiven:Kohl Corporation has $1 million in 6% convertible debt (convertible to 10,000 common shares)Net income is $210,000100,000 common shares outstandingTax rate: 30%Basic EPS = $2.10 per shareDetermine whether the convertible debt is dilutive44Antidilution - ExampleTest for Antidilution (Option #1 – Diluted EPS)Adjusted Net Income:Net Income $210,000After-tax interest adjustment ($1.0m x 6%)(1 - .30) 42,000Adjusted Net Income $252,000Adjusted Number of Shares:Shares outstanding 100,000Shares issued on conversion 10,000Adjusted Number of shares 110,00045Antidilution - ExampleBasic EPS $2.10Diluted EPS ($252,000  110,000) $2.29Antidilutive, therefore not disclosed46Antidilution - ExampleTest for Antidilution (Option #2 – Incremental EPS)Incremental Net Income:After-tax interest adjustment ($1.0m x 6%)(1 - .30) 42,000Adjusted Net Income $42,000Incremental Number of Shares:Shares issued on conversion 10,000Adjusted Number of shares 10,00047Antidilution - ExampleBasic EPS $2.10Incremental EPS ($42,000  10,000) $4.20Antidilutive, therefore not disclosed48Additional DisclosuresDisclosed in notes to financial statements:Amounts used in both numerator and denominator in calculating basic and diluted EPSReconciliation of both the numerator and denominator values for basic and diluted earnings per share calculations for income before discontinued operationsPotentially dilutive securities that were not included in the calculation of EPS because they were antidilutiveDescription of common share transactions after reporting period that could have impacted EPS numbers49AnalysisEPS is one of the most highly visible standards of measurement for assessing:Management stewardship andPredicting a company's future valueThe diluted EPS calculation is especially useful since there are many potential dilutive financial instruments, and shareholders need to understand how these instruments can affect their holdings. 50Comparison of IFRS and ASPEASPE does not include standards for calculating EPSThe EPS standards therefore only apply to publicly accountable entities in Canada and private enterprises that choose to apply IFRS.51Looking AheadEPS standards continue to be revisited as accounting rules for underlying financial instruments evolve52