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BU397 (49)
Chapter 17

Chapter 17 Notes.docx

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Wilfrid Laurier University
Allan Foerster

EPS Importance of EPS - Highly visible standards of measurement for assessing o Management stewardship o Predicting a company’s future value - EPS tells ordinary shareholders how much of the available income is associated with the shares they own o Their share of the earnings pie - Gives shareholders insight about o Future dividend payout o The value of their shares o Impact of other financial instruments on their potential earnings  Return on investment does not depend on the passage of time, if the company does well, shareholders gain the most - Basic calculation o Uses actual earnings and actual number of issued ordinary shares o = income available to common shareholders/weighted average number of common shares - Diluted calculations o Uses earnings and number of ordinary shares adjusted for “what if”  What would the EPS be if any financial instruments that could be converted to ordinary shares were actually converted EPS Disclosure - It is required under IFRS to be reported as part of the income or comprehensive incomes statement o Always based on Net Income o Under PE GAAP no need to disclose  Because of cost benefit considerations and the fact that the corporations may be closely held - Generally, EPS is recorded in the income statement below net income - It is reported for each income component as reported on the income statement o When there are income from discontinued operations, EPS should be calculated and recorded for  Discontinued, continued and net income  For discontinued there is a choice to record on the income statement or in the notes - EPS is reported for income attributed to equity holders of the parent company - Where applicable, both basic EPS and Diluted EPS should be reported o Diluted follows the same rules as EPS when recording: discontinued etc. - Should be presented for all periods reported o Prior periods EPS restated for any stock dividends or stock splits issued in the year using the new # of outstanding shares - If diluted EPS data is reported for at least one period, it should be reported for all periods that are reported o Even if it’s the same as basic - When results of operations in a prior period have been restated, the corresponding EPS should also be restated o The restatements effects should then be restated in the notes - On the income statement o Income from continuing operations o Loss from discontinued operations, net of tax o Net income - If a corporation’s capital structure is complex, EPS would look like o Basic earnings per share o Diluted earnings per share o And if there was discontinued operations, it would follow the same format as on the income statement but with diluted and basic Capital Structure - A company is said to have a complex capital structure if the structure includes securities that could have a dilutive effect on EPS o The potential dilutive securities are known as potential common shares  Securities or contracts that may give its holder the right to obtain common shares during or after the end of the reporting period o Contingently issuable shares  Shares that are issued for little to no consideration once a condition involving uncertainty has been met - Complex must show diluted and basic, simple only has to show basic EPS – Simple Capital Structure - Income available to common shareholders o Net income – preferred dividends  If preferred shares are non-cumulative, only deduct declared dividends  If they are cumulative  Deduct one year’s dividend whether declared or not o If preferred dividends are declared an a net loss occurs  Preferred dividend increases the loss in calculated the loss per share o When reporting  Preferred dividends declared on preferred shares should be subtracted from income from continuing ops and from net income  It should not be deducted from discontinued ops - Weighted average # of shares outstanding o Number of shares issued is weighted by the period of time they were outstanding o Each transaction represents a weighting period o Two ways:  If you had 90,000 shares as of Jan. 1 and no transactions were made until April 1 regarding the # of outstanding shares  90,000 receives a weight of 3/12  You weight the opening balance over the entire year, and then each transaction you weight the increase or decrease over the remaining time in the year o Stock splits and stock dividends require restatement of the outstanding # of shares in from the beginning of the year  In other words, the for all transactions prior to the actual s/s or s/d you assume the s/d or s/s happened just after that transaction  The way to account for these when weighting  You set up the spreadsheet like normal, but then for each transaction prior to the s/s or s/d you multiply by 1.s/s or s/d%  If a 50% stock dividend happened in June, and you had 100 shares as of Jan.1 and issued 20 in march and 30 in November  Balance in January = 100 x 1.5 x 2/12  Balance in March = 120 x 1.5 x 3/12  Balance in June = 180 x 5/12  Balance in November = 210 x 2/12  Retrospective application to ensure comparability  If the s/s or s/d occur after year end but before publication of FS  The weighted average number of shares outstanding must be restated to the current year and previous years if comparative statements are issued o Mandatory convertible instruments are assumed that conversion had already taken place for EPS purposes o Same foes for contingently issuable shares depended on the passage of time Complex Capital Structure - Anti-dilutive securities are securities that when converted increase EPS - Requires basic earnings per share presented for each separate class of ordinary share - Requires diluted earnings per share o Includes securities that would reduce earnings per share if converted and ignores anti-dilutive securities - Presenting both will inform FS users of situations that will likely occur and
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