1. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-1 Chapter 27 Earnings per share

2. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-2 Objectives of this lecture Be able to define and calculate basic earnings per share Know how to adjust the calculation of basic earnings per share to take account of the existence of a bonus or rights entitlement Understand what potential ordinary shares are, and be able to determine whether they are dilutive Understand how to calculate diluted earnings per share

3. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-3 Introduction to accounting for earnings per share Relevant accounting standard is AASB 133 Earnings per Share Requires disclosure of basic earnings per share and diluted earnings per share on the face of the statement of comprehensive income (per AASB 133, par. 66) Applies to: –all companies listed on the Australian Securities Exchange –other entities that are listed or have on issue ordinary shares or partly paid ordinary shares –entities in the process of listing –entities that voluntarily disclose earnings per share

4. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-4 Introduction to accounting for earnings per share (cont.) An entity must disclose earnings per share on the face of the statement of comprehensive income and must be presented even if the amounts are negative (loss per share) under AASB 133, par. 69 Comparatives must also be shown Standard need only apply to the consolidated financial statements

5. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-5 Computation of basic earnings per share Need to consider at least two issues 1.How earnings are defined 2.How the number of shares is determined Prior to standard being issued: –inconsistency in computing earnings and/or number of shares issues –inconsistencies made inter-firm comparisons difficult Basic earnings per share determined by dividing the earnings of the entity for the reporting period by the weighted-average number of shares of the entity

6. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-6 Computation of basic earnings per share (cont.) Earnings determined after deducting: –any preference share dividends appropriated for the financial year to the extent that they have not been treated as expenses of the entity Preference share dividends are deducted to provide earnings on the basis that EPS is calculated from the perspective of the ordinary shareholders—EPS relates to earnings per ordinary share

7. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-7 Computation of basic earnings per share (cont.) Preference dividends In periods where preference dividend not paid, need to consider whether or not preference shares are cumulative –If cumulative, dividends not paid in one year must be paid in later years before ordinary shareholders are entitled to dividends –If not cumulative and no preference dividend paid, it is ignored for purposes of calculating earnings per share Refer to AASB 133 (par. 14)

8. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-8 Computation of basic earnings per share (cont.) Earnings must be calculated to exclude the following: Any portion attributable to non-controlling interests Any costs of servicing equity, paid or provided for, other than dividends on ordinary shares and partly paid shares

9. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-9 Computation of basic earnings per share (cont.) Calculating weighted-average number of ordinary shares –Need to consider:  definition of ordinary shares  number of shares  weighting to consider both fully and partly paid shares

10. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-10 Computation of basic earnings per share (cont.) Definition of ordinary shares (AASB 133, par. 5) An equity instrument that is subordinate to all other classes of equity instruments For the purposes of the standard, it does not matter what the shares are called If they have the above characteristics, they are treated as ordinary shares—standard applies a substance- over-form test

11. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-11 Computation of basic earnings per share (cont.) Determining number of shares Number of ordinary shares outstanding at beginning of financial year adjusted as follows: –increased by ordinary shares issued during year from unissued capital, weighted by reference to the number of days from the date of issue of those shares to the reporting date as a proportion of the total number of days in the reporting period, and –decreased by ordinary shares bought back during financial year, weighted by reference to the number of days from the date of reduction to reporting date as a proportion of the total number of days in the reporting period

12. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-12 Computation of weighted-average number of ordinary shares For example, if a company has 1 000 000 ordinary shares issued at the beginning of the year (say, 1 July 2011) and it issues 200 000 fully paid shares on 1 March 2012, as well as buying back 100 000 shares on 1 April 2012, the weighted-average number of shares would be calculated as: Number of Proportion shares Weighted Period of year outstanding average Fully paid ordinary shares 1/7/11–28/2/12 243 ÷ 365 1 000 000 665 753 1/3/12–31/3/12 31 ÷ 365 1 200 000 101 918 1/4/12–30/6/12 91 ÷ 365 1 100 000 274 247 365 days Total weighted-average number of ordinary shares 1 041 918

13. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-13 Computation of basic earnings per share (cont.) Considering partly paid shares in weighted average Weighted average number of ordinary shares (denominator when calculating EPS) also needs to take into account partly paid shares Partly paid shares will be included only to the extent that they carry rights to participate in dividends relative to an ordinary share (AASB 133, par. 15) Where the partly paid ordinary shares carry no rights to participate in earnings, they would not be included in the weighted-average number of ordinary shares

14. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-14 Computation of basic earnings per share (cont.) Mandatory convertible securities Entities might also have on issue mandatory convertible securities (securities that must ultimately be converted to ordinary shares) Ordinary shares that will be issued upon the conversion of a mandatory convertible instrument are included in the calculation of basic earnings per share from the date the contract is entered into (AASB 133, par. 23) Refer to Worked Example 27.1 on p. 828—Calculation of basic EPS

15. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-15 Worked Example 27.1—Calculation of basic EPS For the year ending 30 June 2011, Kirra Ltd reports net profit after tax of $900 000. As at 1 July 2010 Kirra Ltd had 200 000 fully paid ordinary shares. The following issues and purchases were subsequently made during the year: 100 000 fully paid ordinary shares issued on 1 September 2010 at the prevailing market price 25 000 fully paid ordinary shares purchased back on 1 February 2011 at the prevailing market price 70 000 partly paid ordinary shares issued on 1 April 2011 at an issue price of $2.00. The shares were partly paid to $1.30. The partly paid shares carry the right to participate in dividends in proportion to the amount paid as a fraction of the issue price For the entire financial year Kirra Ltd had 1 million $1.00 preference shares, which provide dividends at a rate of 10% per year. The dividend rights are cumulative. The preference share dividends were not treated as part of interest expense REQUIRED Compute the basic earnings per share amount for 2011

16. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-16 Worked Example 27.1—Solution To determine earnings for EPS purposes we exclude preference dividends. Given that the preference dividends are cumulative, it does not matter whether or not they have been paid as the dividend will still need to be deducted. Hence earnings for EPS purposes would be calculated as: Profit after tax $900 000 less Preference share dividends ($100 000) Earnings for basic EPS $800 000 Determination of the weighted-average number of ordinary shares Number Proportion of shares Weighted Period of year outstanding average Fully paid ordinary shares 1/7/10–31/8/10 62 ÷ 365 200 000 33 973 1/9/10–31/1/11 153 ÷ 365 300 000 125 753 1/2/11–30/6/11 150 ÷ 365 275 000 113 014 365 days Partly paid ordinary shares 1/4/11–30/6/11 (91 ÷ 365)($1.30 ÷ $200) 70 000 11 344 Total weighted-average number of ordinary shares 284 084 Basic EPS therefore is $800 000 ÷ 284 084 = $2.816

17. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-17 Adjustment for the effect of discontinuing operations A discontinuing operation is defined in AASB 5 as: –a component of an entity that either has been disposed of or is classified as held for sale and: (a)represents a separate major line of business or geographical area of operations (b)is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or (c)is a subsidiary acquired exclusively with a view to resale In the presence of discontinuing operations, two EPS figures must be calculated and disclosed Calculated as basic earnings based upon profit from continuing operations divided by the weighted average number of ordinary shares See Worked Example 27.2 (p. 829)—Calculation of basic EPS in the presence of discontinued operations

18. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-18 Computation of basic earnings per share (cont.) Adjustment for bonus issues Bonus issues have an impact on the weighted-average number of ordinary shares The bonus issue does not change total shareholders’ funds—it involves a transfer from retained earnings to share capital (assuming funded from retained earnings) The number of shares outstanding before the bonus issue should be increased as if the bonus has been in place for the entire reporting period Weighted-average number of ordinary shares prior to rights or other issue is divided by an adjustment factor Refer to AASB 133 (pars 27 and 28)

19. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-19 Computation of basic earnings per share (cont.) Adjustment for bonus issues (cont.) If one-for-one bonus issue, number of shares would double Given no effect on earnings, doubling shares would halve EPS Prior period comparatives for EPS are also adjusted for the bonus issue so that comparisons can be made as if the bonus shares had been issued in the previous period If shares issued at the prevailing market price, there is no bonus element, and no adjustment is necessary

20. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-20 Computation of basic earnings per share (cont.) Calculation of adjustment factor Adjustment factor = P x ÷ P o, where: –P x = theoretical ex-rights price = [(P o x N o ) + P r ] ÷ (N o + 1) –P o = last sales price or, if higher, last bid price cum rights –N o = no. of shares required for one right –P r = subscription price of right + present value of dividends forgone in respect of ordinary shares required for one right not presently participating in dividends Refer to Exhibit 27.1 on p. 832—Adjustment factor for EPS in respect of the bonus element in an issue of ordinary shares Refer to Worked Example 27.3 on p. 833—Calculation of EPS in the presence of a bonus issue

21. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-21 Worked Example 27.3—Calculation of EPS in the presence of a bonus issue For the year ending 30 June 2012, Margaret River Ltd reports a net profit after tax of $700 000. At the beginning of the year, Margaret River Ltd had 500 000 fully paid ordinary shares on issue. It also had 200 000 $1.00,10%, cumulative preference shares outstanding. The preference shares were classified as equity On 1 September 2011 the company issued a further 100 000 fully paid ordinary shares On 1 May 2012 the company issued another 100 000 fully paid shares on the basis of a one-for-six bonus issue The last sale price per ordinary share prior to the bonus issue was $4.00 The basic EPS for the year ending 30 June 2011 was $2.10 REQUIRED Compute the basic EPS amount for 2012 and provide the adjusted comparative EPS for 2011

22. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-22 Worked Example 27.3—Solution Earnings calculation Profit after tax $700 000 less Preference share dividends ($20 000) Profit after tax less preference dividends $680 000 Theoretical ex-bonus price = ($4.00)(6) + 0 6 + 1 = 3.4286 Adjustment factor = 3.4286 ÷ 4.00 = 0.8571 Calculation of the weighted-average number of ordinary shares and ordinary share equivalents Multiply by number Divide by Proportion of shares adjustment Weighted Period of year outstanding factor average Fully paid ordinary shares 1/7/11–31/8/11 62 ÷ 365 500 000 0.8571 99 092 1/9/11–30/4/12 242 ÷ 365 600 000 0.8571 464 133 1/5/12–30/6/12 61 ÷ 365 700 000 116 986 680 211 Basic earnings per share for 2012 would be: $680 000 ÷ 680 211 = $0.9997 The comparative figures for 2011 would be adjusted for the bonus issue. The adjusted figure would be: $2.10 × 0.8571 = $1.80

23. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-23 Computation of basic earnings per share (cont.) Rights issue Existing shareholders may be provided with rights to acquire additional shares at a price below the current market price of the firm’s shares If exercise price is less than the market price of the shares, the rights issue includes a bonus element Where there is a bonus element the weighted-average number of shares needs to be adjusted using the previous formula Refer to Worked Example 27.4 on p. 836—Calculation of EPS in the presence of a rights issue with a bonus element

24. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-24 Diluted earnings per share AASB 133 requires that diluted EPS be disclosed together with basic EPS on the face of the statement of comprehensive income Diluted EPS must be calculated where an entity has on issue ‘potential ordinary shares’ that are, in fact, dilutive Refer to AASB 133, par. 31

25. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-25 Diluted earnings per share (cont.) Potential ordinary shares (AASB 133, par. 5) A financial instrument or other contract that may entitle its holder to ordinary shares Potential ordinary shares are considered dilutive when and only when the conversion to, calling of, or subscription for ordinary shares would decrease (or increase) net profit (or loss) from continuing ordinary operations per share

26. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-26 Diluted earnings per share (cont.) Potential ordinary shares (cont.) If securities currently on issue might be converted to ordinary shares, this will increase the number of ordinary shares on issue, leading to a decrease in EPS Users of financial statements need to know about this potential reduction (dilution) in EPS Diluted earnings per share will show how EPS would fall if the potential ordinary shares were actually converted to ordinary shares—aim is to inform investors about how EPS could be affected in the future

27. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-27 Diluted earnings per share (cont.) Examples of potential ordinary shares Convertible preference shares Share options Convertible bonds Convertible notes

28. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-28 Diluted earnings per share (cont.) To determine diluted EPS Weighted-average number of shares calculated as per basic EPS –Adjusted by a factor based on weighted-average number of potential ordinary shares that the company had on issue throughout all or part of the financial year General rule applies that if a potential ordinary share issue would increase EPS, it is not considered to be dilutive –Excluded from calculation of diluted EPS

29. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-29 Diluted earnings per share (cont.) To determine diluted EPS (cont.) Each type of potential ordinary share needs to be considered separately If the conversion is at the option of the entity, and the conversion is probable, the potential ordinary shares must be included in the diluted EPS calculation—even if their inclusion does not dilute EPS If conversion of potential ordinary shares to ordinary shares is mandatory, they would have already been included in basic EPS calculation

30. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-30 Diluted earnings per share (cont.) Calculating earnings for diluted EPS Start with earnings used to calculate basic EPS and make adjustments for the after-tax effect of (AASB 133, par 33): (a)any dividends or other items related to dilutive potential ordinary shares deducted in arriving at profit or loss attributable to ordinary equity holders of the parent entity as calculated in accordance with paragraph 12 (b)any interest recognised in the period related to dilutive potential ordinary shares (c)any other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares Refer also to AASB 133, pars 32 and 35

31. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-31 Diluted earnings per share (cont.) Calculating the weighted-average number of shares for diluted EPS –Start with number used to calculate basic EPS and add the following:  weighted-average number of shares deemed to be issued for no consideration  weighted-average number of shares that are contingently issued Dilutive potential ordinary shares are weighted by the number of days they were outstanding

32. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-32 Diluted earnings per share (cont.) Shares issued for no consideration If the price paid for the shares is less than the market price: Refer to AASB 133, pars 46 and 47 In the case of options, for example, there is a need to calculate the number of shares issued for no consideration—this number is added to the number of ordinary shares (to the denominator) in the computation of EPS

33. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-33 Diluted earnings per share (cont.) Contingently issuable shares Ordinary shares issued for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement (AASB 133, par. 5) Refer to AASB 133, par. 52

34. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-34 Diluted earnings per share (cont.) Refer to Worked Example 27.5 on pp. 838–40—Calculation of basic and diluted EPS –Need to initially calculate basic EPS –Each potential ordinary share to be considered separately, i.e. convertible debentures, share options, convertible cumulative preference shares –Potential ordinary shares need to be ranked from greatest to least dilution –A trigger test needs to be applied to determine whether potential ordinary shares are, in fact, dilutive—if a particular security does not dilute EPS, it is not to be included when calculating diluted EPS (unless conversion is mandatory or probable and at the option of the entity) –Potential ordinary shares found to be dilutive based on trigger test are used in calculation of diluted EPS

35. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-35 Worked Example 27.5—Calculation of basic and diluted EPS For the year ending 30 June 2012, Lennox Ltd earns a profit after tax of $1.05 million. Dividends on 400 000 convertible, cumulative preference shares amount to $200 000. The preference dividends are not treated as expenses in the accounts of Lennox Ltd (the preference shares have been disclosed as equity in the statement of financial position). As at 1 July 2011 there were 500 000 fully paid ordinary shares. There were no additional share issues during the year As at 1 July 2011 there were also: $250 000 in convertible debentures, which paid interest at a rate of 10% per year, and which could be converted to 125 000 ordinary shares, at the option of the debenture holder 20 000 share options currently on issue, with an exercise price of $2.00 the 400 000 convertible, cumulative preference shares, which were issued in 2010 and are convertible into 120 000 ordinary shares at the option of the preference shareholders Assume the tax rate is 33% and that the average market price for ordinary shares during the year was $5 REQUIRED Calculate Lennox Ltd’s: (a) basic EPS (b) diluted EPS

36. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-36 Worked Example 27.5—Solution (a) Basic EPS for Lennox Ltd Profit after tax $1 050 000 less Preference dividends ($200 000 ) Profit after tax and preference dividends $850 000 Basic EPS = $850 000 ÷ 500 000 = $1.70 per share

37. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-37 Worked Example 27.5—Solution (cont.) (b) Diluted EPS for Lennox Ltd Each security must be considered separately Convertible debentures If the debentures are converted to ordinary shares, the pre-tax earnings would be increased by $25 000. This would lead to an after-tax increase in earnings of $16 750, which is $25 000 × (1 – 0.33) As an additional 125 000 shares would be created, the increase in earnings attributable to ordinary shareholders on conversion of the convertible debentures would, on an incremental share basis, be: $16 750 ÷ 125 000 = $0.134 Share options As the options have been on issue for the entire year, we treat them as potentially dilutive as of the beginning of the year The standard requires that we consider the number of shares that would effectively be issued for no consideration if these options are exercised. To determine this we perform the following calculation: Number of shares issuable 20 000 Number of shares that would be issued at market price for the actual proceeds of $40 000 = $40 000 ÷ $5 8 000 Number of shares deemed issued for no consideration 12 000 Given that there is no adjustment to earnings recognised in relation to the options, the earnings per incremental share are $nil. Twelve thousand shares will be added to the denominator to calculate diluted EPS

38. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-38 Worked Example 27.5—Solution (cont.) Convertible, cumulative preference shares If the preference shares are converted, dividends of $200 000 would be saved. Their conversion would lead to an increase in ordinary shares by 120 000. The increase in earnings per incremental share (because the preference share dividends were initially excluded when calculating EPS) would be: $200 000/120 000 = $1.667 Ranking the potential ordinary shares from greatest to least dilution AASB 133 requires that when we consider whether potential ordinary shares are dilutive, each issue or series of potential ordinary shares must be considered separately, rather than in aggregate. Each issue or series of potential ordinary shares must be considered in sequence from the most dilutive (smallest earnings per incremental share) to the least dilutive (largest earnings per incremental share)

39. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-39 Worked Example 27.5—Solution (cont.) In this example, the order from most dilutive to least dilutive is: Increase in Earnings per shares incremental share Options 12 000 $nil Convertible debentures 125 000 $0.134 Convertible preference shares 120 000 $1.667 The sequence in which potential ordinary shares are considered might affect whether or not they are dilutive. If potential ordinary shares are not dilutive, the standard generally requires that they be ignored when calculating diluted EPS Determining the ‘trigger test’ If the shares cause EPS to decrease from the initial amount determined for the trigger test, they are considered dilutive. The standard uses profit or loss from continuing operations attributable to the parent entity as the initial amount for the trigger test to determine whether potential ordinary shares are dilutive Profit used to calculate basic EPS $850 000 less Adjustments $nil Net profit from continuing operations for the trigger test $850 000 $850 000 ÷ 500 000 = $1.70

40. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-40 Worked Example 27.5—Solution (cont.) Applying the trigger test We have already determined the order in which to include potential ordinary shares in the calculation of diluted EPS. Profit and Ordinary adjustments shares EPS Dilutive? Net profit from continuing operations $850 000 500 000 $1.70 Options Nil 12 000 $850 000 512 000 $1.6602 Yes Convertible debentures $16 750 125 000 $866 750 637 000 $1.3607 Yes Convertible preference shares $200 000 120 000 $1 066 750 757 000 $1.4092 No In the above calculation, profit or loss from continuing operations is the starting point in the trigger test. After this point, each potential ordinary share is considered in order of smallest earnings per incremental share to largest earnings per incremental share. If a particular security does not dilute EPS, it is not to be included when calculating diluted EPS

41. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-41 Worked Example 27.5—Solution (cont.) Calculation of diluted EPS While net profit from continuing operations is used to assess whether or not potential ordinary shares are dilutive, AASB 133 requires that net profit or loss be used in the calculation of diluted EPS. As noted above, the earnings figure used in the actual calculation of diluted EPS includes discontinuing operations, adjustments for changes in accounting policies and corrections of material errors. As with basic EPS, the preference dividends paid are excluded Profit Ordinary shares As reported for basic EPS $850 000 500 000 Options Nil 12 000 Convertible debentures $16 750 125 000 $866 750 637 000 Diluted EPS = $866 750 ÷ 637 000 = 1.3607 Again, as the preference shares are not dilutive, they are not included in the calculation of diluted EPS

42. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-42 Summary Australian-listed entities and those in the process of listing are required, pursuant to AASB 133, to disclose information about EPS in their annual reports EPS is calculated from the perspective of the ordinary shareholder Determined by dividing the earnings of the company by the weighted-average number of ordinary shares outstanding during the year In determining earnings, preference share dividends are excluded Need to consider the implications of a bonus issue or a rights issue and the use of an adjustment factor in the calculation of weighted-average number of shares

43. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 27-43 Summary (cont.) Diluted EPS is also disclosed together with basic EPS on the face of the statement of comprehensive income In calculating diluted EPS, the adjusted earnings (calculated on the notional basis that the various securities have actually been converted to ordinary shares) are to be divided by the weighted-average number of ordinary and potential ordinary dilutive shares Each type of potential ordinary share must be considered separately when calculating diluted EPS If a particular type of potential ordinary share (e.g. convertible notes, convertible preference shares, or share options) is not considered to be dilutive, it should be excluded from the calculation of diluted EPS