Earnings Per Share

INTERMEDIATE FINANCIAL ACCOUNTING

Assignment 2 part B

REPORT: ABC Ltd

TO: The CEO of ABC Ltd

FROM: Ally

DATE: 28/04/2017

SUBJECT: Queries regarding the calculations of earnings per share

INTRODUCTION

This report was commissioned by the CEO of ABC Ltd regarding the annual reports of XYZ Ltd, one of the companies ABC Ltd has shares in.

Its purpose is to analyse why the basic Earnings per Share (EPS) calculations in XYZ’s annual report appear different to the CEO’s calculations. It will examine relevant reporting standards, and will focus on the steps that need to be taken when calculating the numerator and the denominator to ensure reliable information regarding EPS.

I am limited to the information given by the CEO of ABC Ltd, and no actual dollar amounts have been provided. Because of this, there can be no assumption that the calculations of EPS done by either the CEO or the preparers of the annual reports of XYZ are correct or incorrect. Although diluted EPS are also required to be shown in the financial statements, they are not mentioned in this report, as the CEO only requested an analysis of ordinary EPS.

BODY

1. Basic EPS

The EPS ratio is a way to measure an entities profitability on a shareholder basis, and measures the amount of net income earned per share of stock outstanding. This means that if all the profits were distributed at the end of the year, the EPS is the dollar amount that each share would receive. Any company that has ordinary shares traded in a public market is required to disclose their EPS ratio.

The formula to calculate EPS is:

Numerator: Profit attributable to ordinary shareholders of the parent entity

Denominator: Weighted average number of ordinary shares outstanding during the reporting period

2. Calculating EPS

As mentioned by ABC Ltd.’s CEO, the EPS in the annual report of XYZ Ltd seemed “haphazard” and “way out” in their calculations. Below is a breakdown of these calculations and why the CEO may have this opinion.

2.1

Firstly, we look at the calculation of the numerator.

International Accounting Standard (IAS) 33 sets out the components of earnings used in the calculation of EPS for the amounts attributable to the equity shareholders of a parent entity in paragraphs 12 and 13.

These paragraphs break down what needs to be included in the calculation of the net profit.

Gross profit will have income tax deducted, and preference shares dividends are deducted. Any profit from discontinued operations is deducted, and any prior year dividends paid to cumulative preferred shares are deducted. This leaves a net profit, which is to be the numerator. If any of these steps are left out, this will lead to incorrect calculations on the final EPS figure.

2.2

Secondly, we look at the denominator.

IAS 33 states:” For the purpose of calculating basic