Financial Accounting, IFRS Principles Chapter 6

Tutorial 6.1 Earnings per share Basic level

This question consists of ten short questions:

1. How is the numerator of the earnings per share equation calculated?

2. What does the denominator of the earnings per share equation represent?

3. When is an earnings per share calculation required?

4. Is an earnings per share calculation required for preference shares and if so, when?

5. What disclosure is required if the company has debentures which are convertible into ordinary
shares?

6. When will a prior year's earnings per share figure be restated?

7. Under what circumstances will the issue of ordinary shares during the year not be weighted
from the date of issue?

8. A Ltd issued 100 000 CU1 ordinary shares and 50 000 10% CU1 cumulative preference shares in
order to acquire 80% of B Ltd. The shares were issued on 1 July 01, whereas the profits of B Ltd
were included with those of A Ltd from 31 May 01, because that was the date on which the deal
was finalised. Earnings after tax of A Ltd and B Ltd for the year ended 31 December 01 were
CU50 000 and CU40 000 respectively.
At the end of the year, A Ltd had 125 000 ordinary shares in issue.
Calculate basic earnings per share for A Ltd for the year ended 31 December 01, assuming that
profits were earned evenly throughout the year.

9. There were 100 000 ordinary shares in issue on 1.1.01. On 30.9.01, the company issued 50 000
ordinary shares in terms of a 1 for 2 capitalisation (bonus) issue. On 30.4.02, the company had a 2
for 1 share split. Calculate the number of shares to be used for the earnings per share calculation
for the year ending 31 December 02, together with comparatives.

10. A Ltd had profits attributable to equity holders of the entity (i.e. profit after tax) of CU308 000
in 01. There are 200 000 CU1 cumulative 10% participating preference shares, which are entitled
to 1c for every 4c earned by each ordinary share after the ordinary shareholders received 6c per
share. There are 300 000 ordinary shares in issue. What are the earnings per ordinary share for
01?

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Tutorial 6.2 Earnings per share Basic level

XYZ Ltd made a net profit of CU560m in the financial year ending 31/12/20X7. It has 100m, CU1, 10%
cumulative preference shares that it classifies as equity. No preference dividends were declared during
the year. At 1/1/20X7 it had 23m ordinary shares in issue. On 31/9/20X7 it issued a further 10m ordinary
shares.

1. Calculate the earnings to be used in the Earnings per share calculation.

2. Calculate the WANOS to be used in the Earnings per share calculation.
3. Briefly explain how we account for a share buy back in a group, where a subsidiary buys shares in its
parent company.

ABC Ltd made a profit of CU1 000m in the financial year ending 31/12/20X7. 1 000m shares were
outstanding before a rights issue. During the year a rights issue was made granting existing shareholders 1
share for every 2 outstanding shares at an exercise price of CU20. The last day to exercise the rights was 1
September 20X7. The market price of one ordinary share on 31/8/20X7 was CU40. This information
applies to parts 4 & 5.

4. Calculate the adjustment factor to be used in the EPS calculation

5. Calculate the basic EPS for 20X7.

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Tutorial 6.3 Earnings per share for group Intermediate level

D Ltd is finalising its annual financial statements for the year ended 31 December 20X6. The only
calculation still required is that for earnings per share and, if relevant, diluted earnings per share.

The following information has been extracted from the annual financial statements for the year ended
31 December 20X6:

D Limited
Abridged statement of profit or loss and other comprehensive income for the year
ended 31 December 20X6
CU’m
20X6 20X5
Group Company Group Company

Sales 2 000 400 1 800 380

Cost of sales 1 450 180 1 200 110
Gross profit 550 220 600 270
Net operating costs 210 80 290 70
Profit from operations 340 140 310 200
Finance cost 80 20 100 20
Profit before taxation 260 120 210 180
Taxation 60 30 90 50
Profit after tax 200 90 120 130
Attributable to:
Non-controlling interest 20 - 40 -
Shareholders of the parent 180 90 80 130

No dividends were paid or declared in 20X5 and 20X6.

Notes to the annual financial statements:

1. Share capital 20X6 20X5

Authorised
Ordinary shares of CU1 each CU20 000 000 CU18 000 000
8% Cumulative Participating Pref. shares
of CU1 each CU100 000 000 CU100 000 000

Issued
Ordinary shares of CU1 each CU15 000 000 CU12 500 000
8% Cumulative Participating Pref. shares
of CU1 each CU100 000 000 CU100 000 000

The directors currently have the option to take up 1 250 000 ordinary shares at a price of CU3.20 each.
These options were issued on 1 March 20X6, and expire on the 1 March 20X20.

On 1 May 20X6, 125 000 of the options were exercised when the market price of the shares was CU4.

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The other shares issued during the year were issued on 1 June 20X6 in terms of a rights issue to existing
shareholders. In terms of the issue, shares could be taken up at CU3.50, when the market price was
CU4.20.

The participating preference shareholders are entitled to a fixed dividend of 8%, plus one-tenth the
dividend paid to ordinary shareholders.

Debentures

During the current financial year, D Ltd issued 1 000 000 CU1, 10% convertible debentures. These
debentures are convertible in the ratio of one ordinary share for each 2 debentures held on 1 September
20X9.

The average share price for 20X6 was CU3.80.

REQUIRED:

Full disclosure, in terms of IAS33, ‘Earnings per share’, for inclusion in the 20x6 group annual financial
statements of D Ltd. Comparatives are not required. Where necessary, calculate figures to three decimal
places.

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Tutorial 6.4 Earnings per share for group Intermediate level

Herman Limited (‘Herman’), a JSE-listed entity, owns a 65% controlling interest in Salt Limited (‘Salt’),
since 1 July 20X11. Herman had acquired the interest for CU1 650 000, when the retained earnings of Salt
amounted to CU840 000. All the assets and liabilities of Salt were considered to be fairly valued at the
acquisition date, except for certain items of inventory, which had cost Salt CU400 000 and were
considered to be undervalued by CU60 000 - Salt sold 60% of the inventory before 31 December 20X11
and the remaining 40% in the 20X12 financial year. All these items were sold to unrelated parties.

Salt imports most of its inventory which is stored at a warehouse in Epping. From there, the company
transfers and sells its inventory directly to major wholesalers as well as through a variety of company-
owned outlets and franchises across the country. The company-owned outlets keep separate accounting
records which are incorporated in full when the separate financial statements of Salt are compiled. The
franchises are not owned by Salt, but by independent retailers. However, Salt has always applied a policy
to hold a 25% equity interest in each franchise, and to exert significant influence over the franchisee’s
operational and financial decision-making.

Salt transfers inventory from its warehouse to all the company-owned outlets at cost and to all franchises
at cost plus 20%. The company-owned outlets and franchises receive their entire inventory from the
warehouse only, and then add a further 20% to the transfer price of goods received from the Salt
warehouse, to determine their selling price.

Summary of inventories as obtained from the separate financial records of the respective entities:

Herman Salt Franchisees

Warehouse Company- Inventory acquired
only owned outlets from Salt only
(at cost) only (at transfer price)
(at cost)
Inventory: CU780 000 CU265 000 CU312 000 nil
31/12/20X11
Inventory: CU820 000 CU366 000 CU420 000 CU198 000
31/12/20X12

Summary of profit after tax as presented in the statement of profit or loss and other comprehensive
income for the year ended 31 December 20x12, as obtained from the separate financial records of the
entities (which you should assume to be correct in all respects):

Herman Salt Franchises

(company only) (company only) (total for all franchisees)
Profit after tax CU3 650 000 CU1 312 000 CU575 000

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Dividends declared by each of the respective entities for the financial year ended 31 December 20X12:

Herman Salt Franchisees

(total) (total for all
franchisees)
Dividends declared* CU850 000 CU300 000 CU60 000

* Herman declared dividends to its shareholders on 30 June 20X12. Salt declared its ordinary dividend
on 31 December 20X12.The franchises declared dividends during December 20X12.

A summary of movements in the shares for the year ended 31 December 20X12, as obtained from the
separate financial records of the respective entities is presented below:

Herman Salt
Ordinary shares Ordinary
shares
Class A Class B
No of shares No of shares No of shares
In issue at 1 January 20X12 (note 1) 2 000 000 500 000 1 800 000
Rights issue (note 2) 500 000 -
In issue at 31 December 20X12 2 500 000 500 000 1 800 000

Notes:

1. Herman issued 2 000 000 Class A ordinary shares (at CU2.50 per share) at its date of incorporation
and 500 000 Class B ordinary shares on 1 July 20X9 at CU2 per share. Each Class B ordinary share is
entitled to a fixed dividend of C0.10 per share as well as an additional dividend of 15% of the
dividend declared on each Class A ordinary share. All Class A and Class B ordinary shares are listed.

2. On 1 April 20X12, Herman issued 500 000 Class A ordinary shares in terms of a rights offer. The new
rights shares were offered at 80% of the market price of CU12.50 per Class A ordinary share on the
date of the rights offer, which was 1 March 20X12. On 1 April 20X12, each Class A ordinary share
had a market price of CU13.00.

Ignore vat

REQUIRED:

1. Calculate the group profit of Herman Ltd for the financial year ended 31 December 20X12 before
attribution to the equity holders of Herman Ltd and the non-controlling interest.

2. Assuming that Herman Ltd presents a separate group statement of profit or loss, calculate the
basic earnings per ordinary share amount(s) as it (they) should appear on the face of the group
statement of profit or loss of Herman Ltd for the financial year ended 31 December 20X12.

 Ignore comparatives.
 Ignore note disclosure.

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Tutorial 6.5 Headline earnings per share Intermediate level

Valencia Limited had 14 million ordinary shares in issue on 1 October 20X1, and reported profits of
CU18.622m for the year ended 30 September 20X2. The company’s shares have traded at around
CU12.50 for much of the year and closed at this price.

On 1 February 20X2, Valencia effected a rights issue at CU12 per share on the basis of 18 shares for every
100 held. The company also has CU45m 7% convertible debentures in issue, convertible into ordinary
shares at CU10 per share in 20X5. It has also issued options over 660 000 shares at an average price of
CU5.50.

Valencia’s profits are after impairment of goodwill of CU2.6m, profit on sale of plant and machinery of
CU1.4m and an abnormal write-down of inventory of CU3.0m (all before tax effects; the goodwill
impairment has no tax consequences, whereas the other items have current or deferred tax effects).

REQUIRED:

Calculate diluted headline earnings per share for the year ended 30 September 20X2. The tax rate is 28%.

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Chapter 6 Earnings per share Basic level

Tutorial 6.6

Entity A reported the following information in its financial statements:

30 June 2018 30 June 2017

R R
Profit after tax 225 000 180 000
Other comprehensive income (after tax) 25 000 20 000
Total comprehensive income 250 000 200 000

At 1 July 2016, Entity A had 1 000 000 ordinary shares and 5 000 8% cumulative preference shares at R10
each, in issue. No dividends were declared in 2017 and 2018.

On 1 October 2017, Entity A made a rights issue of 1 new ordinary share for every 4 shares held, to
existing shareholders at R10 per share. The fair value (market price) of the shares immediately before the
exercise date of the rights issue was R15 per share.

Entity A has an existing share option scheme. At 30 June 2018 it had 100 000 options outstanding at an
exercise price of R8 per share. These options were issued on 1 July 2017 and the average fair value
(market price) for the 2018 financial year was R16 per share.

REQUIRED:
Calculate the following amounts:

Basic Earnings per share: 30 June 2018 30 June 2017

Earnings

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WANOS

Earnings per share

(8 marks)

Diluted Earnings per share: 30 June 2018 30 June 2017

Earnings

Not required

WANOS

Not required

Diluted earnings per share

Not required

(2 Marks)

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SAICA competencies:

III1 Self-development
a) Adopt an attitude of life-long learning and stay abreast of current trends and emerging issues
b) Take responsibility for one’s own development needs and opportunities
Actively seek appropriate learning opportunities (technical and other professional development)
c)
in a variety of different ways

Set and monitor personal learning and development objectives through a wide range of life-
d)
long learning opportunities

III2 Adaptive mind set and agility

Acquire new knowledge, skills and experiences to remain relevant, adapt career goals, and
a)
empower others
Identify and distinguish between the need to learn, unlearn and relearn, so as to facilitate
b)
adaptation to changing practices, roles and work contexts
Demonstrate the mind set and behaviours required to work in an agile way to deal with
c)
complexities

Z3 Innovation, creativity and curiosity

Recognise the need to address problems or situations from a fresh perspective and challenge
a)
existing paradigms and ways of doing business
Demonstrate appreciation for the need to explore innovative or different approaches to a
b)
particular problem or situation / Demonstrate a curious mind-set

Y1 Analytical/critical thinking
Source, select and manage information (quantitative as well as qualitative) from multiple
b)
sources and perspectives through research, analysis, synthesis and integration
c) Conceptualise, apply, analyse, synthesize, and evaluate information gathered

Identify, and question/challenge information / assumptions, empirical grounding, and bias

d) behind received and discovered information to gain a high level of understanding and to
interpret the results or analysis

Use critical analysis and reasoning strategies or techniques to uncover key and/or underlying
e)
issues, and identify connections or patterns across diverse situations

Y2 Integrated thinking
Synthesise and make sense of ideas and information from a variety of sources to create a
a) design, formulate a plan, arrive at a viable solution to a problem, obtain a broader
understanding of an issue etc.
Apply the above (a) in the interpretation, analysis and evaluation of financial and non-financial
b)
information for impactful decision-making
Y3 Problem solving

a) Use a questioning mind-set during problem identification and analysis

b) Weigh the relevance and accuracy of information; challenge assumptions, and probe for detail
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Use reasoning, critical analysis and innovative thinking to identify likely impacts of different
c)
issues and the implications of corresponding courses of action
Make decisions and recommendations on a rational and timely basis, supported by facts and
e)
research
Y5 Professional scepticism
a) Obtain and understand information in order to challenge views developed by others
b) Evaluate the integrity of the information, its source, and the appropriateness of the presentation

X6 Self-management
a) Manages self by working independently, diligently
b) Adapt to different professional settings and cultures
Develop time management, planning and task coordination skills and techniques to prioritise
c)
tasks (recognising their resource constraints) so as to achieve professional commitments
e) Set appropriate goals, monitor and self-reflect on own performance

X8 Emotional intelligence
Exercise self-awareness and self-discipline; Apply self-reflection and self- awareness skills and
a) techniques to ensure continuous learning and growth. Accept constructive feedback from
others.
Display the ability to understand, use, and manage your own emotions in positive ways to
b)
communicate effectively, empathise with others, overcome challenges and defuse conflict.
c) Show persistence and resiliency in pursuing goals despite obstacles and setbacks

B1 REPORTING FUNDAMENTALS

B1.1 Fundamental reporting concepts

Identify users’ needs and develop a reporting approach by selecting suitable reporting and
regulatory framework(s) which satisfies most users’ needs in general purpose reporting by: (i)
a) Applying the fundamental theories related to reporting, (ii) Applying the objective, usefulness
and limitations of the available reporting frameworks, (iii) Applying the objective, nature and
characteristics of regulatory frameworks and requirements
b) Apply the qualitative characteristics and principles of useful information
d) Identify, define and evaluate the different elements in reporting frameworks
e) Apply the recognition and de-recognition criteria to an element
f) Select and apply a measurement basis to an element
B1.2 Accounting information systems

a) Maintain an accounting information system that is manual, automated or a combination of both.

PERFORMANCE MEASUREMENT FOR EXTERNAL USERS OF GENERAL PURPOSE

D1
FINANCIAL STATEMENTS
Financial reporting: in accordance with International Financial Reporting Standards
D1.1
(IFRS)
Prepare, analyse and evaluate general purpose financial statements in accordance with IFRS
a) for an entity, which could be a for-profit entity, an SME, a public sector entity or a not-for-profit
entity

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