Question

Zappa is a mining company listed in Australia with a number of subsidiaries. Extracts from the consolidated statement of profit or loss and other comprehensive income of Zappa for the year ended 30 June 2020 appear below: Attributable to Zappa Non-controlling interest Total $’000 $’000 $’000 Profit for the year 39,000 3,000 42,000 Other comprehensive income Total comprehensive income 5,000 ––––––– 44,000 ––––––– Nil –––––– 3,000 –––––– 5,000 ––––––– 47,000 ––––––– Additional information of Zappa comprises: i. 200 000 000 ordinary shares in issue at the beginning of financial year - 1/7/2019. On 1 April 2020, Zappa issued further 50 000 000 new ordinary shares at full market value. ii. 80 000 000 preference shares. These shares were in issue for the whole of financial year ended 30 June 2020. The dividend on these preference shares is discretionary. iii. $180 000 000 in convertible debentures issued on 1 July 2018 and repayable on 30 June 2023. Interest is payable annually in arrears and the interest rate is 10%. These debentures could be converted to 100 000 000 ordinary shares at the option of the debenture holders. In the year ended 30 June 2020, Zappa declared an ordinary share dividend of 10 cents per share and a dividend of 5 cents per share on the preference shares. The corporation tax for Zappa and its subsidiaries is 30%. All transactions have been correctly accounted for in the financial statements of Zappa for the year ended 30 June 2020. Required: a) Explain the meaning of the term ‘potential ordinary shares’ and provide TWO examples of potential ordinary shares OTHER THAN convertible loans. b) Explain how the diluted earnings per share is calculated and when it needs to be disclosed. c) Compute the basic and diluted earnings per share amounts for Zappa for the year ended 30 June 2020 which will be presented in its consolidated financial statement

Answer 1

(a) Potential Ordinary Shares

As per AASB 133 "Earning Per Share"

A Potential Ordinary Shares is a security or instrument that allows its holder to get ordinary shares of an entity. These instruments have the potential to get converted into Ordinary shares on the date of redemption or ay other date.

For Example:

1. Convertible Preference Shares

2. Options and warrants

(b) Diluted Earning Per share and its calculation

For the purpose of calulation of profit and loss for calculation of DEPS, the profit and loss is adjusted with Post Tax effect of all potential ordinary shares (Interest Cost and Weighted AVerage Number of Shares.)

(c) Computation of Basic Earning Per Share:

• Profit attributable to Ordinary Equity Share holders

Weighted Average Number Equity Shares Outstanding during the Period:

Date	Particulars	No. of Shares	No. of days/Months shares were outstanding	Weighted avearge of shares
01-Jul-19	Opening balance of outstanding ordinary shares	200,000,000	12	200,000,000
01-Apr-20	Issue of Ordinary Shares	50,000,000	3	12,500,000
30-Jun-20	Closing balance of outstanding ordinary shares	250,000,000		212,500,000

Basic Earning Per Share

Computation of Diluted Earning Per Share:

To compute Diluted Earning Per share, the profit or loss attributable to ordinary shareholders is the after tax adjusted amount of Interest that will be saved on conversion. The ordinary shares issubale on Potential ordinary shares will be included in Weighted Average Number of Ordinary shares from the beginning of the period.