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WorkpaperIAS 33 — Earnings per ShareL3 · L4

Diluted earnings per share: adjustments, dilutive instruments, ranking by incremental earnings per share and stop at the antidilutive effect

10 missions10 sections to document75 min
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Status
Published

Objective of the workpaper

For each instrument, compute the numerator adjustment after tax and the incremental shares (weighted conversion, treasury stock method, written put, contingent shares), compute the incremental earnings per share, rank the instruments from the lowest to the highest and compare cumulated earnings per share before and after each instrument: an instrument that does not decrease earnings per share is excluded. Document the judgments and prepare the entries and the note. Amounts, prices and rates are case data; comparisons use earnings per share rounded to two decimals (case convention).

10 sections · 52 blocks · 17 calculations · 3 entries

  • IAS 33 §31
  • IAS 33 §33
  • IAS 33 §36
  • IAS 33 §41
  • IAS 33 §42
  • IAS 33 §44
  • IAS 33 §45
  • IAS 33 §46
  • IAS 33 §47A
  • IAS 33 §52
  • IAS 33 §54
  • IAS 33 §58
  • IAS 33 §62
  • IAS 33 §63

Work this workpaper as a mission

Each case that uses this template opens in the mission workspace: data, analysis, calculation, entries, conclusion and review, with your progress saved.

10 instances from the cases: the calculations and entries below are run by the calculation engine.

File and entity
Diluted earnings per share: convertible bonds, options and ranking by incremental earnings per share
Case tasks documented here
  • Compute the tax effect and the numerator adjustment after tax for bonds A and B.
  • Compute the weighted conversion shares of bonds A and B.
  • Compute the price difference of the options.
  • Compute the incremental shares of the options (treasury stock method).
  • Compute the incremental earnings per share of the options and of bonds A and B.
  • Compute the cumulated numerator at each step.
  • Compute earnings per share at each step.
  • Compare each step with the previous one and retain the lower earnings per share.
  • Record the conversion of bond C on 1 January 20X6.
  • Record the payment of the interest on bond A.
  • Should bond B be retained in diluted earnings per share?
1

Facts and data

Inputs

  • Potentially dilutive instruments: terms, issue dates, conversion shares, exercise prices

    Text

  • Contingently issuable shares: conditions, contingency period and position at the reporting date

    Text

  • Contracts settleable in shares or cash, written puts and purchased options

    Text

  • Per-share basis (one share)

    Number

    1 units

  • Earnings attributable to ordinary shares before the instrument (cumulated at the previous step)

    Number

    2,460,000

  • Convertible instrument: interest or dividends before tax

    Number

  • Other instruments: interest or dividends avoided, before tax (0 for contingent shares)

    Number

  • Applicable tax rate (%)

    Number

  • Ordinary shares issued on conversion: number

    Number

  • Months outstanding from the assumed conversion (start of period or issue if later)

    Number

  • Options or warrants: number

    Number

    150,000 units

  • Exercise price per share

    Number

    8

  • Average market price of the period

    Number

    10

  • Other incremental shares: contingent shares or share-settled contract (number)

    Number

  • Written put: shares assumed issued at the average price

    NumberRequired

  • Written put: shares repurchased on exercise

    NumberRequired

  • Cumulated earnings per share before the instrument (rounded to two decimals)

    Number

    2.46

  • Cumulated number of shares after the instrument

    Number

    1,030,000 units

  • Carrying amount of the bond converted into shares

    Number

2

Supporting documents

Evidence

  • Documents obtained and referenced (issue agreements, market prices, interest statements)

    EvidenceRequired

3

Analysis of the potentially dilutive instruments

Analysis

IAS 33 §52IAS 33 §54IAS 33 §58IAS 33 §62IAS 33 §63

  • Points reviewed: diluted earnings per share and ranking of the instruments

    ChecklistRequired

    • All dilutive potential ordinary shares identified
    • Numerator adjusted for interest and dividends no longer incurred, after tax
    • Conversion assumed at the start of the period or at issue if later
    • Options and warrants: treasury stock method at the average market price
    • Options dilutive only if the average price exceeds the exercise price
    • Dilution test performed on profit from continuing operations attributable to the parent
    • Instruments considered separately, from the lowest to the highest incremental earnings per share
    • Contingently issuable shares: number according to the position at the reporting date
    • Contract settleable in shares or cash: share settlement presumed
    • Purchased call and put options: not included
    • Written puts: repurchase obligation funded by shares issued at the average price
    • Employee options: assumed proceeds to document (link with IFRS 2)
4

Adjustments, incremental shares, incremental earnings per share and ranking

Calculations

IAS 33 §63

  • Convertible instrument: tax effect of the adjustment (pre-tax amount × rate)

    Calculation

    Convertible instrument: interest or dividends before tax ; Applicable tax rate (%)

  • Convertible instrument: numerator adjustment after tax

    Calculation

    Convertible instrument: interest or dividends before tax ; Applicable tax rate (%)

  • Other instruments: tax effect of the adjustment (pre-tax amount × rate)

    Calculation

    Other instruments: interest or dividends avoided, before tax (0 for contingent shares) ; Applicable tax rate (%)

  • Other instruments: numerator adjustment after tax

    Calculation

    Other instruments: interest or dividends avoided, before tax (0 for contingent shares) ; Applicable tax rate (%)

  • Options: numerator adjustment (0 in the case data)

    Calculation

    0

  • Written put: numerator adjustment (0 in the case data)

    Calculation

    0

  • Cumulated diluted numerator (earnings before the instrument + adjustment after tax)

    Calculation

    2,460,000

    Earnings attributable to ordinary shares before the instrument (cumulated at the previous step) ; Convertible instrument: numerator adjustment after tax ; Other instruments: numerator adjustment after tax

  • Conversion shares weighted (number × months / 12)

    Calculation

    Ordinary shares issued on conversion: number ; Months outstanding from the assumed conversion (start of period or issue if later)

  • Price difference (average price − exercise price)

    Calculation

    2

    Average market price of the period ; − Exercise price per share

  • Incremental shares from the options (treasury stock method)

    Calculation

    30,000

    Options or warrants: number ; Price difference (average price − exercise price) ; Average market price of the period

  • Incremental shares from the written put (issued − repurchased)

    Calculation

    Written put: shares assumed issued at the average price ; − Written put: shares repurchased on exercise

  • Incremental earnings per share of the convertible instrument

    Calculation

    Convertible instrument: numerator adjustment after tax ; Per-share basis (one share) ; Conversion shares weighted (number × months / 12)

  • Incremental earnings per share of the options

    Calculation

    0

    Options: numerator adjustment (0 in the case data) ; Per-share basis (one share) ; Incremental shares from the options (treasury stock method)

  • Incremental earnings per share of the written put

    Calculation

    Written put: numerator adjustment (0 in the case data) ; Per-share basis (one share) ; Incremental shares from the written put (issued − repurchased)

  • Incremental earnings per share of other instruments (contingent shares, share-settled contract)

    Calculation

    Other instruments: numerator adjustment after tax ; Per-share basis (one share) ; Other incremental shares: contingent shares or share-settled contract (number)

  • Earnings per share after including the instrument (cumulated numerator / cumulated number)

    Calculation

    2.39

    Cumulated diluted numerator (earnings before the instrument + adjustment after tax) ; Per-share basis (one share) ; Cumulated number of shares after the instrument

  • Earnings per share retained at this step (the lower: the instrument is retained only if dilutive)

    Calculation

    2.39

    Cumulated earnings per share before the instrument (rounded to two decimals) ; Earnings per share after including the instrument (cumulated numerator / cumulated number)

5

Illustrative entries

Entries

  • Entry: interest paid on the convertible bond

    Entry

    Debit Finance cost ← Convertible instrument: interest or dividends before tax ; Credit Cash ← Convertible instrument: interest or dividends before tax

  • Entry: interest paid on another instrument (contract settleable in shares or cash)

    Entry

    Debit Finance cost ← Other instruments: interest or dividends avoided, before tax (0 for contingent shares) ; Credit Cash ← Other instruments: interest or dividends avoided, before tax (0 for contingent shares)

  • Entry: conversion of a bond into shares

    Entry

    Debit Convertible bond liability ← Carrying amount of the bond converted into shares ; Credit Share capital ← Carrying amount of the bond converted into shares

6

Judgments: instruments retained, conditions and employee options

Judgment

IAS 33 §52IAS 33 §54IAS 33 §58

  • Instrument retained in or excluded from diluted earnings per share

    JudgmentRequired

    Retained: dilutive

    Retained: dilutive / Excluded: antidilutive / Not a potential ordinary share

    Professional judgment: a potential share is dilutive only if its conversion decreases earnings per share from continuing operations; each instrument is assessed separately, in ascending order of incremental earnings per share.

  • Rationale: incremental earnings per share, control earnings per share and settlement terms

    Text

    INCREMENTAL_EPS_BELOW_CUMULATED_EPS

  • Contingently issuable shares

    JudgmentRequired

    Number according to the position at the reporting date / No shares issuable at the reporting date

    Professional judgment: if the contingency period is not over, the number of shares is the number that would be issued if the reporting date were the end of the contingency period.

  • Rationale: conditions, outcome at the reporting date and contingency period

    Text

  • Employee options: assumed proceeds of exercise

    JudgmentRequired

    Exercise price only / Exercise price and fair value of services still to be received

    Professional judgment: the assumed proceeds of employee options depend on the link with IFRS 2; the treatment is not stated as a rule here.

  • Rationale: plan, vesting conditions and link with IFRS 2

    Text

7

Effect on the financial statements

FS impact

  • Effect derived from the entries

    Table

8

Disclosures on diluted earnings per share

Disclosure

IAS 33 §33IAS 33 §36IAS 33 §41IAS 33 §44IAS 33 §45

  • Points to complete in the note

    ChecklistRequired

    • Numerator adjustments by class of instrument
    • Effect of each class of instrument on the number of shares
    • Instruments excluded because antidilutive
    • Ranking of the instruments by incremental earnings per share documented

  • Draft note: diluted earnings per share

    Text

9

Conclusion

Conclusion

  • Instruments retained and excluded, diluted earnings per share, judgments and entries submitted to the reviewer

    ConclusionRequired

10

Normative references

References

  • Normative references cited in this workpaper

    References

11

Checks and financial statement impact

  • Judgment documentedPass
  • Rationale writtenPass
Assets
0
Liabilities
0
Profit or loss
0
OCI
0
Equity
0