1. IAS 33 - Earnings Per Share

2. Academic Resource Center Share-based payments and earnings per share Page 2 Executive summary EPS: ► The accounting and disclosure requirements for IFRS and US GAAP are substantially the same. Both require presentation of basic and diluted EPS on the face of the income statement. Both IFRS and US GAAP specify that diluted EPS shall include incremental shares in the calculations, including the effects of stock options and warrants using the treasury-stock method and the effects of contingently issuable shares using the if-converted method. ► For diluted EPS, incremental shares, using IFRS, are computed as if the entire year-to-date period was “the period.” There is no averaging of the current period (quarter) with each of the prior periods (quarters).

3. Academic Resource Center Share-based payments and earnings per share Page 3 Progress on convergence ► The FASB and the IASB are jointly working on a short-term convergence project to resolve the differences in the standards, with both Boards issuing exposure drafts in August 2008. In April 2009, the Boards decided to delay the EPS convergence project pending completion of other projects.

4. Academic Resource Center Share-based payments and earnings per share Page 4 EPS Basic Requires the disclosure of basic EPS in the statement of income. Similar, although there are a few detailed application differences in the arithmetical model used to calculate the weighted-average shares outstanding. IFRSUS GAAP

5. Academic Resource Center Share-based payments and earnings per share Page 5 EPS Diluted Requires the disclosure of diluted EPS in the statement of income. Diluted EPS includes incremental shares in the calculations, including the effects of stock options and warrants using the treasury-stock method and the effects of contingently issuable shares using the if-converted method. Similar, although there are a few detailed application differences in the arithmetical model used to calculate the weighted-average shares outstanding. IFRSUS GAAP

6. Academic Resource Center Share-based payments and earnings per share Page 6 EPS Diluted IFRS ► Always assumes that contracts that may be settled in cash or shares will be settled in shares. Thus, these types of contracts will always impact the computation of diluted EPS. US GAAP ► Presumes that contracts that may be settled in cash or shares will be settled in shares unless evidence is provided to the contrary. ► Such evidence might include a past history of cash settlements of similar instruments or an explicit requirement that the settlement is made in cash. ► These contracts typically impact the computation of diluted EPS, but could be excluded from the computation of diluted EPS if evidence is provided that the settlement will be made in cash.

7. Academic Resource Center Share-based payments and earnings per share Page 7 Example 5 An entity issues 1,000 convertible bonds on January 1, 2010. The bonds have a five-year term, are issued at a $1,000 face value at 5% interest per year and are convertible into 100 shares of stock for each $1,000 bond at any time through December 31, 2014. The entity has the option to settle the principal amount of the bonds for either 100 shares for each bond or the equivalent cash amount. The entity has no evidence that the contracts will be settled in cash. During 2010, the entity earned $20.0 million and had 1.0 million common shares outstanding. There is no tax rate and no tax effect is considered in the adjustment to net income for the interest on the bonds. Contracts that may be settled in cash or shares example ► Calculate the basic and diluted EPS in 2010 under US GAAP and IFRS. ► Assume that management has evidence that the convertible debt will be settled for cash due to its past history of cash settlements and intent to settle in cash. How would this assumption affect the calculation of diluted EPS under US GAAP and IFRS?

8. Academic Resource Center Share-based payments and earnings per share Page 8 Example 5 solution: Basic EPS The calculation for basic EPS is the same for US GAAP and IFRS. Net income $20,000,000 Common shares outstanding 1,000,000 Contracts that may be settled in cash or shares example = $20

9. Academic Resource Center Share-based payments and earnings per share Page 9 Example 5 solution (continued): Diluted EPS Under US GAAP, the convertible debt is presumed to be settled in shares since there is no evidence to the contrary. IFRS always assumes that the convertible debt would be settled in shares; therefore, the calculation is the same. Net income$20,000,000 Add interest on bonds (1,000 convertible bonds x $1,000 = $1,000,000 x 5% interest = $50,000) 50,000 Adjusted net income$20,050,000 Common shares outstanding 1,000,000 Add assumed conversion of bonds ($1,000,000/1,000 x 100 = 100,000 shares) 100,000 Adjusted shares outstanding 1,100,000 Adjusted net income$20,050,000 Adjusted shares outstanding 1,100,000 = $18.23 Contracts that may be settled in cash or shares example

10. Academic Resource Center Share-based payments and earnings per share Page 10 Example 5 solution (continued): Cash settlement With the evidence that management has provided regarding its cash settlement history and intentions to settle in cash, for US GAAP, there would be no consideration of the dilutive effect of the bonds on the diluted EPS calculation, resulting in a diluted EPS of $20 as calculated above under basic EPS. Under IFRS, this evidence would not be considered and share settlement would be presumed, resulting in the diluted EPS of $18.23 as calculated above. Contracts that may be settled in cash or shares example

11. Academic Resource Center Share-based payments and earnings per share Page 11 EPS Diluted – calculation of weighted shares outstanding IFRS ► The number of incremental shares is computed as if the entire year-to-date period was “the period” (that is, there is no averaging of the current period with each of the other periods). US GAAP ► The number of incremental shares (attributable to options, warrants and contingently issuable shares) is computed using a year-to-date weighted average of the number of incremental shares included in each quarterly calculation.

12. Academic Resource Center Share-based payments and earnings per share Page 12 Example 6 Investors Incorporated (Investors) earned $5.0 million per quarter during 2010, for total net income for the year of $20.0 million. The common shares outstanding remained at 2.0 million shares throughout the year. Investors had 400,000 stock options outstanding during the entire year at an exercise price of $25 per option. No options were exercised during the year. There were no incremental shares calculated during the first and second quarters as the market price of the common stock was below the grant or exercise price. However, Calculation of weighted shares outstanding example ► Calculate the basic and diluted EPS for Investors for each quarter, and annually, in 2010 under US GAAP and IFRS. during the third and fourth quarters, the market price of the stock rose above the grant-date price, thus incremental shares were calculated for these two quarters. The third-quarter average market price was $50 per share and the fourth-quarter average market price was $52.63 per share. The average market price for the year was $34.48 per share.

13. Academic Resource Center Share-based payments and earnings per share Page 13 Example 6 solution: US GAAP: As shown in the calculation below, Investors determined the quarterly incremental shares using the average for the quarter; however, the annual incremental shares are determined using the average of the quarterly incremental shares. * Calculated as net income divided by common shares. ** Calculated as net income divided by dilutive shares. Calculation of weighted shares outstanding example Q1Q2Q3Q4Year to date Net income$5,000,000 $5,000,000 1 $20,000,000 1 Common shares2,000,000 2,000,000 1 Incremental shares (1) -- 200,000 (2) 210,000 (3) 102,500 (4) Dilutive shares2,000,000 2,200,000 12,210,000 12,102,500 1 Basic EPS *$2.50 $10.00 1 Diluted EPS **$2.50 $2.27$2.26$9.51 (5)

14. Academic Resource Center Share-based payments and earnings per share Page 14 Example 6 solution (continued): (1) Incremental shares attributable to the price of common stock exceeding the exercise price of common stock options, based on the average price of common stock for the quarter. (2) Third-quarter calculation of incremental shares: Calculation of weighted shares outstanding example Stock options400,000 Exercise price$25.00 Proceeds to company$10,000,000 Average market price of stock for third quarter$50.00 Shares assumed repurchased200,000 Incremental shares (400,000 - 200,000 = 200,000)200,000

15. Academic Resource Center Share-based payments and earnings per share Page 15 Example 6 solution (continued): (3) Fourth-quarter calculation of incremental shares: (4) Summation of incremental shares for the quarters divided by four. (5) Does not equal the sum of the quarters due to the effect of average incremental shares for the year. Calculation of weighted shares outstanding example Stock options400,000 Exercise price$25.00 Proceeds to company$10,000,000 Average market price of stock for fourth quarter$52.63 Shares assumed repurchased190,000 Incremental shares (400,000 - 190,000 = 210,000)210,000

16. Academic Resource Center Share-based payments and earnings per share Page 16 Example 6 solution (continued): IFRS: As shown in the calculation below, Investors determined the quarterly incremental shares in the same manner as US GAAP using the average for each quarter; however, the annual incremental shares are determined using the average for the year. This results in a diluted EPS that is slightly lower ($.03) than US GAAP. * Calculated as net income divided by common shares. ** Calculated as net income divided by dilutive shares. Calculation of weighted shares outstanding example Q1Q2Q3Q4Year to date Net income$5,000,000 $5,000,000 1 $20,000,000 1 Common shares2,000,000 2,000,000 1 Incremental shares 1) -- 200,000 (2) 210,000 (2) 110,000 (3) Dilutive shares2,000,000 2,200,000 12,210,000 12,110,000 1 Basic EPS *$2.50 $2.50 1$10.00 1 Dilutes EPS **$2.50 $2.27$2.26 1$9.48 (4)

17. Academic Resource Center Share-based payments and earnings per share Page 17 Example 6 solution (continued): (1) Incremental shares attributable to the price of common stock exceeding the exercise price of common stock options, based on the average price of common stock for that period. (2) This calculation is the same as US GAAP as the period is one quarter. (3) Calculation of annual incremental shares using the period of one year: (4) Does not equal the sum of the quarters due to the effect of the average incremental shares for the year. Calculation of weighted shares outstanding example Stock options400,000 Exercise price$25.00 Proceeds to company$10,000,000 Average market price of stock for the year$34.48 Shares assumed repurchased290,000 Incremental shares (400,000 - 290,000 = 110,000)110,000

18. Academic Resource Center Share-based payments and earnings per share Page 18 EPS Diluted – contingently issuable shares IFRS ► Potentially issuable shares are considered “contingently issuable” and are included in diluted EPS using the if-converted method only if the contingencies are satisfied at the end of the reporting period. US GAAP ► Potentially issuable shares are included in diluted EPS using the if-converted method if one or more contingencies exist that relate to the entity’s share price.

19. Academic Resource Center Share-based payments and earnings per share Page 19 Example 7 The EPS Company (EPS) has issued 5% convertible bonds for $1.0 million, which may be converted into 10,000 shares of common stock if the per-share price of the common stock reaches $40 per share. During the year, EPS earned $20.0 million after taxes and had 2.0 million shares of common stock outstanding, of which the average market price for the common stock was $30 per share. At no time during the year did the market price of the common stock exceed $35. EPS’ tax rate is 40%. Contingently issuable shares example ► Calculate the diluted earnings per share for EPS for the year under US GAAP and IFRS.

20. Academic Resource Center Share-based payments and earnings per share Page 20 Example 7 solution: US GAAP: The diluted EPS calculation would include the incremental shares attributable to the bond even if the common price was not met. Contingently issuable shares example Net income$20,000,000 Add interest on bonds less taxes ($1,000,000 x 5% interest x 60% = $30,000) 30,000 Adjusted net income $20,030,000 Common shares outstanding2,000,000 Add assumed conversion of bonds10,000 Adjusted shares outstanding2,010,000 Adjusted net income$20,030,000 Adjusted shares outstanding 2,010,000 = $9.97

21. Academic Resource Center Share-based payments and earnings per share Page 21 Example 7 solution (continued): IFRS: The diluted EPS calculation would not consider the contingently issuable shares as the contingency that gives rise to the conversion feature has not been met. Therefore, the diluted EPS is the same as the basic EPS or $10 calculated as $20.0 million of net income divided by the 2.0 million shares outstanding. Contingently issuable shares example

22. Academic Resource Center Share-based payments and earnings per share Page 22 Presentation and disclosure EPS EPS and basic and diluted EPS computations must be presented on the face of the statement of income each year. The following must be disclosed: ► How the basic and diluted calculations were determined, including the: ► Weighted-average shares outstanding ► Incremental shares ► Amount of net income or loss (as adjusted) ► Basic and diluted EPS for discontinued operations Similar IFRSUS GAAP

23. Academic Resource Center Share-based payments and earnings per share Page 23 Presentation and disclosure EPS IFRS ► Extraordinary items are not permitted. ► Allows adjusted basic and diluted EPS based on alternative earnings measures to be disclosed in the financial statements. US GAAP ► Basic and diluted EPS must be disclosed for extraordinary items. ► Does not allow EPS based on alternative earnings measures to be disclosed in the financial statements.