PartTwoLectureNotes.docx

PartTwoLectureNotes.docx

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PartTwoLectureNotes

ACC2700

FINANCIALREPORTINGSTANDARDS

LECTURENOTES

PARTTWO

TOPICFIVE

EARNINGSPERSHARE

TOPICSIX

TRANSLATINGTHEFINANCIALSTATEMENTSOFFOREIGNOPERATIONS

TOPICSEVEN

ACCOUNTINGFORJOINTVENTURES

TOPICEIGHT

ACCOUNTINGFORTHEEXTRACTIVEINDUSTRIES

TopicFive

EARNINGSPERSHARE

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

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

Note:

Iftherearenodiscontinuingoperations,onlyFormulaOneisappliedanddisclosed.

Activity

ReferWorkedExample27.2ofyourtextbook（Deegan6thed2010）onpages829to831whichdemonstrateshowtocalculatebasicEPSinthepresenceofdiscontinuedoperations.

4.AdjustmentfortheBonusElementinanIssueofOrdinaryShares（Deegan6thed2010p.831to835）

BonusIssues

•haveanimpactontheweighted-averagenumberofordinaryshares

•doesnotchangetotalshareholders’funds-itinvolvesatransferfromretainedprofitstosharecapital（assumingfundedfromretainedearnings）

•thenumberofsharesoutstandingbeforethebon