Question

Earnings per share Bass Ltd, a leading producer of construction, mining and electrical equipment, suffered a significant drop in the demand of the company’s products due to COVID-19 in 2020 that significantly threatens the financial stability of the company. Bass in order to survive in this critical situation decides to restructure its strategy for forthcoming years. Changes in company strategies and accounting policies have a significant impact on reported profit. The basic earnings per share and diluted earnings per share presented in the company’s current year financial statements in accordance with “AASB 133 Earnings per Share” were comparatively higher than that of the last year. In contrast, company share prices have dropped by 20% at the reporting date, according to Yahoo finance.

While most shareholders seem unhappy to own company shares for the meagre dividend attached to them the question of whether Bass Ltd are fully valued at their current share prices continues to linger.

The directors of Bass Ltd are not sure how to calculate and include basic and diluted earnings per share in the company’s financial statements in accordance with AASB 133, and called for a report from the Finance Manager of the company.

On 30 June 2020, Bass Ltd had the following equity:

Preference shares (issued at $ 2 each) 500 000 shares Ordinary shares (issued at $ 3 each) $ 3 000 000 Retained earnings $1 250 000 Reserves $ 520 000 Total equity $ 5 770 000 During the year ended 30 June 2020, the company earned after tax profit of $1 240 000 from ordinary activities. The additional information is available.

i. On 20 November 2019, the company made a one-for-five bonus issue, and on 30 March 2020, the company made a rights issue of 400 000 ordinary shares.

ii. On 20 July 2017, the company issued $ 750 000 of 8% convertible notes. Each $ 100 note was convertible into 50 ordinary shares. There was no conversion during the year ended 30 June 2020.

iii. On 28 February 2019, the company issued options to purchase 10 000 shares at $ 3.50 each. No options were exercised during the year ended 30 June 2020.

iv. The company income tax rate is $ 0.30 in the dollar and the company’s ordinary shares are trading at $ 5 per share on 30 June 2020.

v. The company paid preference dividends of $ 40 000.  

Required 1. Briefly describe the requirements of AASB 133 ‘earnings per share’ for the calculation of earnings per share.

2. Distinguish between basic and diluted earnings per share.

Following the requirements of AASB 133:

3. Calculate basic earnings per share.

4. Calculate diluted earnings per share.

Answer 1

1

1. Basic earnings per share :

• The numerator is calculated by including the profi t and loss for continuing operations, and net profi t and loss, and deducting non-controlling interest, tax and preference dividends.

• The denominator is calculated by fi nding the weighted number of ordinary shares for the period.

2. Diluted earnings per share:

• The numerator is calculated as the profi t or loss attributable to ordinary equity holders of the parent entity, adjusted by the after-tax effect of : − any dividends or other items related to dilutive potential ordinary shares are deducted in arriving at profi t or loss attributable to ordinary equity holders of the parent entity − any interest recognised in the period related to dilutive potential ordinary shares − any other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares.

• The denominator is calculated as the number of shares (calculated as per the basic EPS) plus the weighted total number of ordinary shares assuming all (dilutive) potential ordinary shares are taken up.

2.

Earnings per share is calculated two separate ways:

1. Basic earnings per share (EPS)

Profi t or loss attributable to ordinary equity holders of the parent entity devided by The weighted average number of ordinary shares outstanding during the period

2. Diluted EPS

It is the EPS adjusted for the effects of all outstanding dilutive potential ordinary shares

3.

Basic Earnings per Share = (Net Income - Preferred Dividend) / (Weighted Average Shares Outstanding + Bonus issue)

Net Income - Preferred Dividend = $1,240,000 - $40,000

= $1,200,000

Weighted Average Shares Outstanding = $3,000,000 / $3

= 1,000,000 shares

Bonus Issue = 1,000,000 / 5 = 200,000

Basic EPS = $1,200,000 / (1,000,000 + 200,000)

= $1 per Share

4.

Diluted Earnings per Share = (Net Income - Preferred Dividend + ) / (Weighted Average Shares Outstanding + Diluted Shares)

Net Income - Preferred Dividend = $1,240,000 - $40,000

= $1,200,000

Weighted Average Shares (including Bonus issue) = 1,200,000

Diluted Shares = Right issue + Convertible notes + Options

Right issue = 400,000

Convertible notes = $750,000 / $100 = $7,500

$7,500 x 50 shares = 375,000 shares

Options = 10,000

Diluted shares = 400,000 + 375,000 + 10,000

= 785,000 shares

Diluted EPS = $1,200,000 / (1,200,000 + 785,000)

= $0.605 per Share