In: Finance
Outline the main contents of the International Accounting standard 33 (IAS33) EPS
IAS33 is very broad and detailed standard that lays down the importance and method of presentation of EPS. I have tried to summarize below the main content:
EPS shows net income earned in lieu of each equity share and helps in calculating return on equity and valuation multiples to determine if investment should be made in company’s equity share capital. Increase in EPS over years is indicative of successful management and effective policy and decision-making and vice-versa. Earnings for ordinary shareholders are net income available after preferred dividend payments
Thus BEPS uses actual earnings after preferred stock dividends. Common stock dividends are not subtracted from net income. Weighted average number of common shares is the number of shares outstanding during the year weighted by the period they were outstanding for in a year.
While calculating BEPS, please note that:
Diluted EPS (DEPS) is the EPS if all convertible securities were exercised and is mathematically given as:
Tax rate in the formula above should
be marginal tax rate. DEPS thus accounts for the complex capital
structure of a firm (lack of convertible securities in the capital
structure of a firm make it simple). It is a performance metric
used to gauge the quality of a company's earnings and in a way
presents the worst case scenario for EPS. Convertible securities
refers to all outstanding convertible preferred shares, convertible
debentures, stock options (primarily employee based) and
warrants.
DEPS is thus an extension of earnings per share. It shows net
income earned in lieu of each equity share post accounting for EPS
dilutive securities such as share warrants, convertible debentures
and preference shares. Equivalent equity shares for convertible
securities are added to outstanding equity shares to calculate
diluted EPS. It highlights the impact of EPS dilution and thereby,
dilution of existing investor return due to issue of convertible
securities. A large difference between EPS and diluted EPS for a
company indicates potential reduction in returns for the original
investors.
Thus BEPS uses actual earnings after preferred stock dividends. Common stock dividends are not subtracted from net income. Weighted average number of common shares is the number of shares outstanding during the year weighted by the period they were outstanding for in a year. While calculating BEPS, please note that:
Diluted EPS (DEPS) is the EPS if all convertible securities were exercised and is mathematically given as: 4Diluted Earnings per share=DEPS= Net income-Preferred dividends+Convertible preferred dividend+convertible debt interest*(1-tax rate)Diluted Weighted average nos. of shares outstanding Tax rate in the formula above should be marginal tax rate. DEPS thus accounts for the complex capital structure of a firm (lack of convertible securities in the capital structure of a firm make it simple). It is a performance metric used to gauge the quality of a company's earnings and in a way presents the worst case scenario for EPS. Convertible securities refers to all outstanding convertible preferred shares, convertible debentures, stock options (primarily employee based) and warrants. DEPS is thus an extension of earnings per share. It shows net income earned in lieu of each equity share post accounting for EPS dilutive securities such as share warrants, convertible debentures and preference shares. Equivalent equity shares for convertible securities are added to outstanding equity shares to calculate diluted EPS. It highlights the impact of EPS dilution and thereby, dilution of existing investor return due to issue of convertible securities. A large difference between EPS and diluted EPS for a company indicates potential reduction in returns for the original investors. While calculating DEPS, please note that:
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