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IAS 33Case studies (Step 3 of 5)

Case study

Step 3 of 5
Professional fileIAS 33L4 · Expert

File of a listed group: basic and diluted earnings per share, retrospective restatements, presentation and disclosures (IAS 33)

8 documents27 tasks≈ 300 min
0 / 32 items completed
Standards
IAS 33 — Earnings per Share
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Selvane Group SA (fictitious entity), a listed parent, closes its consolidated accounts on 31 December 20X6. In 20X6 it made a rights issue with a bonus element, it has cumulative preference shares, options, a convertible bond and a contingent share agreement, and it disposed of a line of business. A 20X5 error was corrected retrospectively. The preparer builds the earnings per share file, which is submitted to a reviewer. Teaching simulation: the review trail of the file (preparation, reviewer notes and final sign-off) is simulated for demonstration purposes; it is neither a real review nor a validation of the content.

Your assignment

Set out the plan of the file; deal with the rights issue (theoretical value, factor, restated number, weighting); compute the attributable earnings and basic earnings per share for 20X6 and the restated 20X5; compute the adjustments and the incremental shares of each instrument, rank them, compare the steps and determine diluted earnings per share from continuing operations; reconcile the denominators and compute earnings per share from discontinued operations; assess the price retained and the instruments; record the three entries and present their effect; describe the presentation and the reconciliations; answer the information requests, deal with the reviewer notes and conclude.

You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Events

Chronology of the file

  1. January 1 20X6Start of the year · Dated fact of the file

    Document 1

  2. April 1 20X6Date the rights are exercised and the consideration received · Dated fact of the file

    Document 2

  3. July 1 20X6Issue date of the convertible bond · Dated fact of the file

    Document 5

  4. December 31 20X6End of the year · Dated fact of the file

    Document 1

Documents

File documents

8 documents: open each one to read it.

Document 1Memo

Group profile and file conventions

Selvane Group SA (fictitious entity) is the listed parent of a group and closes its consolidated accounts on 31 December 20X6. A disposed line of business is classified as a discontinued operation. File conventions: weighting in whole months out of 12, earnings per share rounded to two decimals (half up), comparisons made on the rounded earnings per share and control number of the dilution test set after preference dividends (rule of the standard: IAS 33, para. 42, which refers to the para. 12 adjustment). Tax rate applicable to interest: 25%, retained by assumption, the tax department not having yet confirmed the rate.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Start of the yearJanuary 1 20X6
End of the yearDecember 31 20X6
Per-share basis (one share)1 unit
Tax rate retained for interest (assumption)25%
Ordinary shares before the exercise of the rights4,000,000 units
Date the rights are exercised and the consideration receivedApril 1 20X6
Shares outstanding after the exercise5,000,000 units
Proceeds of the issue received in cash€5,200,000.00
Amount credited to share capital€1,000,000.00
Amount credited to share premium€4,200,000.00
Last price before the rights are detached€11.20
Value of all the shares before the exercise€44,800,000.00
Cumulative dividend due for 20X6 (not declared)€300,000.00
Cumulative dividend for 20X5 declared in March 20X6€300,000.00
Attributable profit for 20X5 as published€5,360,000.00
Weighted average number published for 20X54,000,000 units
Correction of the 20X5 profit (after tax)€134,000.00
Number of options400,000 units
Exercise price per share€9.00
Average market price for 20X6€12.00
Issue date of the convertible bondJuly 1 20X6
Conversion shares of the bond600,000 units
Interest on the bond before tax€368,000.00
Profit from continuing operations before preference dividends€6,380,000.00
Result of discontinued operations€1,120,000.00
Total profit before preference dividends€7,500,000.00
Shares issuable according to the position at the reporting date150,000 units
Closing price at 31 December 20X6€12.90

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort8

  • Group profile and file conventions

  • Rights issue

  • Cumulative preference shares

  • 20X5 comparative and corrected error

  • Options and convertible bond

  • Results by activity for 20X6

  • Certificate of the position of the contingent share agreement

  • Closing share price

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Which steps does the file follow (retrospective restatements, basic earnings per share, diluted earnings per share, presentation) and what is the control number of the dilution test?

      2. Task 2Analysis

        Compute the value of all the shares after the rights issue and the theoretical ex-rights value.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the value of all the shares after the rights issue and the theoretical ex-rights value.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Theoretical ex-rights value per share

      3. Task 3Calculation

        Compute the adjustment factor of the rights issue.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the adjustment factor of the rights issue.

        1. units

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Calculation

        Restate the number of shares before the exercise of the rights.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Restate the number of shares before the exercise of the rights.

        1. units

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Calculation

        Weight the two periods of 20X6 (before and after the exercise of the rights).

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Weight the two periods of 20X6 (before and after the exercise of the rights).

        1. units
        2. units

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Shares after the exercise weighted (9 months)

      6. Task 6Calculation

        Compute the weighted average number for 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the weighted average number for 20X6.

        1. units

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Compute the earnings attributable to the ordinary shares, for continuing operations and in total.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the earnings attributable to the ordinary shares, for continuing operations and in total.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Total profit attributable to the ordinary shares

      8. Task 8Analysis

        Compute the 20X5 profit attributable to the ordinary shares after the correction of the error.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the 20X5 profit attributable to the ordinary shares after the correction of the error.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      9. Task 9Calculation

        Compute basic earnings per share for 20X6 (continuing operations and total) and for 20X5 (as published and restated).

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute basic earnings per share for 20X6 (continuing operations and total) and for 20X5 (as published and restated).

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Restated basic earnings per share for 20X5

      10. Task 10Calculation

        Compute the tax effect and the adjustment after tax for the convertible bond.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the tax effect and the adjustment after tax for the convertible bond.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Numerator adjustment after tax (bond)

      11. Task 11Calculation

        Compute the weighted conversion shares of the bond.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the weighted conversion shares of the bond.

        1. units

        Checks

        • 0 / 1 step entered
        • Amounts readable

      12. Task 12Calculation

        Compute the price difference and the incremental shares of the options.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the price difference and the incremental shares of the options.

        1. €
        2. units

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Incremental shares of the options

      13. Task 13Calculation

        Compute the contingent shares retained in diluted earnings per share.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the contingent shares retained in diluted earnings per share.

        1. units

        Checks

        • 0 / 1 step entered
        • Amounts readable

      14. Task 14Calculation

        Compute the incremental earnings per share of the three instruments.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the incremental earnings per share of the three instruments.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Incremental earnings per share of the convertible bond

      15. Task 15Analysis

        Rank the instruments and compute the cumulated number of shares and numerator at each step.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Rank the instruments and compute the cumulated number of shares and numerator at each step.

        1. units
        2. units
        3. units
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Numerator after the convertible bond

      16. Task 16Calculation

        Compute earnings per share from continuing operations at each step.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute earnings per share from continuing operations at each step.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Earnings per share after the convertible bond

      17. Task 17Calculation

        Compare each step with the previous one and retain the lower earnings per share.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compare each step with the previous one and retain the lower earnings per share.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Diluted earnings per share from continuing operations

      18. Task 18Calculation

        Reconcile the basic denominator to the diluted denominator by class of instrument.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Reconcile the basic denominator to the diluted denominator by class of instrument.

        1. units

        Checks

        • 0 / 1 step entered
        • Amounts readable

      19. Task 19Calculation

        Compute basic and diluted earnings per share from discontinued operations.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute basic and diluted earnings per share from discontinued operations.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Diluted earnings per share from discontinued operations

      20. Task 20Professional judgement

        Is the last price before detachment an appropriate basis for the adjustment factor?

      21. Task 21Professional judgement

        Are the three instruments retained in diluted earnings per share and on what basis is the test performed?

      22. Task 22Journal entries

        Record the issue of shares under the rights issue.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        TotalsDebit0Credit0

      23. Task 23Journal entries

        Record the cumulative preference dividend for 20X5 declared in March 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      24. Task 24Journal entries

        Record the payment of the interest on the convertible bond.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      25. Task 25Effects on the financial statements

        What is the cumulative effect of the three entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      26. Task 26Analysis

        What must be presented on the face of the income statement and reconciled in the notes?

      27. Task 27Conclusion

        Write the conclusion of the file.

      File review

      Points raised during the review of this file: read them as the preparer would.

      Review notes

      • BlockingResolvedReviewer note (blocking): support the number of contingent shares retained
      • Non-blockingOpenReviewer note: specify the whole-month weighting convention

      Information requests

      • ObtainedRequest to the chief financial officer: position of the contingent agreement at the reporting date
      • Assumption documentedRequest to the tax department: tax rate on interest (assumption documented)

      Completion checklist

      • Retrospective restatements and weighted average number checkedDone
      • Basic earnings per share and comparative agreed to the documentsDone
      • Dilutive instruments ranked and test performed on continuing operationsDone
      • Entries balanced and effect on the financial statements establishedDone
      • Presentation and reconciliations preparedDone
      • Pedagogical assumption on the tax rate, documented by the tax departmentTo review

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 32).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 33 §19
      • IAS 33 §20
      • IAS 33 §21
      • IAS 33 §27
      • IAS 33 §A2
      • IAS 33 §64
      • IAS 33 §52
      • IAS 33 §54
      • IAS 33 §66
      • IAS 33 §68
      • IAS 33 §69
      • IAS 33 §70