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ACCOUNTINGFORJOINTVENTURES
TOPICEIGHT
ACCOUNTINGFORTHEEXTRACTIVEINDUSTRIES
TopicFive
Introduction
Themainobjectiveofthistopicistoconsiderthecalculationofearningspershare(EPS).AsnotedinAASB133(para66)thereisarequirementthatbasicearningspershare,anddilutedearningspersharearetobedisclosedonthefaceoftheincomestatement.GiventhatEPSprovidesusefulinformationforexternalusers,particularlywithrespecttoinvestmentdecisions,thepurposeofthistopictherefore,istoconsiderhowEPSistobecalculated(basicanddiluted)undertherequirementsoftherelevantaccountingstandard(AASB133).
Objectives/LearningOutcomes
Onsuccessfulcompletionofthistopicyoushouldbeableto:
defineandcalculatebasicearningspershare
knowhowtoadjustthecalculationofbasicearningspersharetotakeaccountoftheexistenceofabonusorrightsentitlement
understandwhatpotentialordinarysharesare,andbeabletodeterminewhethertheyaredilutiveand
understandhowandwhywecalculatedilutedearningspershare.
Topic/ModuleContent
ThistopicaddressesthetopicofcalculatingEarningsperShareincludingbasicEPSanddilutedEPSaspertherelevantaccountingstandard,AASB133.Implicitinthistopicistheneedtocalculate‘earnings’and‘weightedaveragenumberofordinaryshares’forthebasicearningspersharecalculation;
theneedtoandnatureoftheadjustmentrequiredinrespectof‘discontinuedoperations’;
theimplicationsofbonusorrightsentitlements;
andfinallytheconceptof‘potentialordinaryshares’andtheprocessbywhichtheyareconsideredtobe‘dilutive’ornotdilutiveandtheprocedurestobeappliedincalculating‘diluted’earningspershare.
LearningActivities
LearningactivitiesarecentredaroundapplyingtheprovisionsofAASB133‘EarningsperShare’.Inthisrespect,activitiesinvolvereviewingthemajorprovisionsoftheaccountingstandard,readingtherelevantchapterofthetext(Deegan6thed2010)whichdescribesappropriateaccountingtreatmentsandmajorissuesrelatedtothetopicandthencompletionofanumberofsetexercisesandproblems.
Reading:
TextbookandAccountingStandards
TherelevantreadingforthistopicisChapter27ofthetextbook(Deegan,6thed2010)andAASB133“EarningsperShare”.
1.IntroductiontoAccountingforEarningsperShare(Deegan6thed2010p.825)
AASB133‘EarningsperShare’issuedinJuly2004andrequiresthedisclosureofbasicearningspershareanddilutedearningspershareonthefaceoftheincomestatement(perAASB133para66).
Appliesto:
•allcompanieslistedontheAustralianStockExchange
•otherentitiesthatarelistedorhaveonissueordinarysharesorpartlypaidordinaryshares
•entitiesintheprocessoflistingand
•entitiesthatvoluntarilydiscloseearningspershare
2.ComputationofBasicEarningsperShare(Deegan6thed2010p.826to828)
Needtoconsideratleasttwoissues:
-howearningsaredefined
-howthenumberofsharesaredetermined
Priortostandardbeingissued:
-inconsistencyincomputingearningsand/ornumberofsharesissues
-inconsistenciesmadeinter-firmcomparisonsdifficult
Basicearningspersharedeterminedbydividingtheearningsoftheentityforthereportingperiodbytheweighted-averagenumberofsharesoftheentity
Earningsdeterminedafterdeducting:
-anypreferencesharedividendsappropriatedforthefinancialyeartotheextentthattheyhavenotbeentreatedasexpensesoftheentity
Note:
PreferencesharedividendsaredeductedtoprovideearningsonthebasisthatEPSiscalculatedfromtheperspectiveoftheordinaryshareholders-EPSrelatestoearningsperordinaryshare
PreferenceDividends
•inperiodswherepreferencedividendnotpaid,needtoconsiderwhetherpreferencesharesarecumulativeornot
-ifcumulative,dividendsnotpaidinoneyearmustbepaidinlateryearsbeforeordinaryshareholdersareentitledtodividends
Forthecalculationsof‘earnings’forEPSwewillneedtoadjust‘earnings’foranycumulativepreferencedividends(eitherpaidordeclaredduringtheperiod).However,adjustmentsarerequiredtobemadetoearningsfortheEPScalculationforanynoncumulativepreferencedividendsonlyiftheyhavebeenpaidduringtheperiod.Iftheyarenoncumulativeandnotpaidduringtheperiodthennoadjustmenttoearningsisrequired
-ifnotcumulativeandnopreferencedividendpaid,itisignoredforpurposesofcalculatingearningspershare
ReferAASB133(para14)
Earningsmustbecalculatedtoexcludethefollowing:
-anyportionattributabletonon-controllinginterests
-anycostsofservicingequity,paidorprovidedfor,otherthandividendsonordinarysharesandpartly-paidshares
CalculatingWeighted-averageNumberofOrdinaryShares
Needtoconsider:
(a)definitionofordinaryshares
(b)numberofshares
(c)weightingtoconsiderbothfullyandpartlypaidshares
(a)DefinitionofOrdinaryShares(perAASB133para5):
-anequityinstrumentthatissubordinatetoallotherclassesofequityinstruments
-forthepurposesofthestandard,itdoesnotmatterwhatthesharesarecalled
-iftheyhavetheabovecharacteristics,theyaretreatedasordinaryshares-standardadoptsasubstance-over-formtest
(b)DeterminingNumberofShares
Numberofordinarysharesoutstandingatbeginningoffinancialyearadjustedasfollows:
-increasedbyordinarysharesissuedduringyearfromunissuedcapital,weightedbyreferencetothenumberofdaysfromthedateofissueofthosesharestothereportingdateasaproportionofthetotalnumberofdaysinthereportingperiodand
-decreasedbyordinarysharesboughtbackduringfinancialyear,weightedbyreferencetothenumberofdaysfromthedateofreductiontoreportingdateasaproportionofthetotalnumberofdaysinthereportingperiod
(c)WeightingtoConsiderbothPartlyandFullyPaidShares
ConsideringPartlyPaidSharesinWeightedAverage
•weightedaveragenumberofordinaryshares(denominatorwhencalculatingEPS)alsoneedstotakeintoaccountpartlypaidshares
•partlypaidshareswillbeincludedonlytotheextentthattheycarryrightstoparticipateindividendsrelativetoanordinaryshare(AASB133para15)
•wherethepartlypaidordinarysharescarrynorightstoparticipateinearnings,theywouldnotbeincludedintheweighted-averagenumberofordinaryshares
MandatoryConvertibleSecurities
•entitiesmightalsohaveonissuemandatoryconvertiblesecurities(securitiesthatmustbeultimatelybeconvertedtoordinaryshares)
•ordinarysharesthatwillbeissuedupontheconversionofamandatoryconvertibleinstrumentareincludedinthecalculationofbasicearningspersharefromthedatethecontractisenteredinto(AASB133para23)
Activity
ReferWorkedExample27.1ofyourtextbook(Deegan6thed2010)onpage828-CalculationofBasicEPS
3.AdjustmentfortheEffectofDiscontinuedOperations(Deegan6thed2010p.829to831)
Discontinuedoperationaredefined(perAAB5‘Non-currentAssetsHeldforSaleandDiscontinuedOperations’(Appendix)as:
acomponentofanentitythateitherhasbeendisposedoforisclassifiedasheldforsaleand:
(a)representsaseparatemajorlineofbusinessorgeographicalareaofoperations;
(b)ispartofasingleco-ordinatedplantodisposeofaseparatemajorlineofbusinessorgeographicalareaofoperations;
or
(c)isasubsidiaryacquiredexclusivelywithaviewtoresale.
Implications?
Ifthereisadiscontinuedoperation,theentitymustdisclosetheprofitorlosscontinuingoperationsseparatelyfromtheprofitorlossfromdiscontinuedoperations.Refertoparas33to36ofAASB5fordetaileddisclosurerequirementsconcerningtheseparatedisclosureofresultsforcontinuinganddiscontinuingoperations.
WhatHappensinRelationstoEPS?
IfanentityisrequiredtoseparatelydiscloseresultsfromdiscontinuedoperationsperAASB5,thentwoEPSfiguresmustbecalculatedanddisclosedinaccordancewithAASB133.
AASB133(para9):
Anentityshallcalculatebasicearningspershareamountsforprofitorlossattributabletoordinaryequityholdersoftheparententityand,ifpresented,profitorlossfromcontinuingoperationsattributabletothoseequityholders.
Result?
AASBrequiresthattwobasicEPSfiguresbecalculatedanddisclosed(aswellastwodilutedEPSfigures–referlatersection).
FormulaOne:
BasicEPSBasicEarnings,BasedonTotalProfit
BasicWeighted-AverageNumberofOrdinaryShares
FormulaTwo:
BasicEPSBasicEarnings,BasedonProfitFromContinuingOperations
BasicWeighted-AverageNumberofOrdinaryShares
Iftherearenodiscontinuingoperations,onlyFormulaOneisappliedanddisclosed.
ReferWorkedExample27.2ofyourtextbook(Deegan6thed2010)onpages829to831whichdemonstrateshowtocalculatebasicEPSinthepresenceofdiscontinuedoperations.
4.AdjustmentfortheBonusElementinanIssueofOrdinaryShares(Deegan6thed2010p.831to835)
BonusIssues
•haveanimpactontheweighted-averagenumberofordinaryshares
•doesnotchangetotalshareholders’funds-itinvolvesatransferfromretainedprofitstosharecapital(assumingfundedfromretainedearnings)
•thenumberofsharesoutstandingbeforethebon