What is the issue?
Companies reporting under IFRS or UK GAAP with listed ordinary shares are required to report earnings per share (EPS), in accordance with the requirements of IAS 33, ‘Earnings per share’, in their interim and annual reports.
EPS is a well-understood key performance indicator (KPI) and, whilst the basic calculation (company’s profit or loss divided by the number of its ordinary shares) appears simple, applying IAS 33 can be challenging where more complex arrangements are involved.
EPS is widely used by investors and management to assess and describe performance, and consequently a material error could have a significant effect on decisions made by users of the company’s financial statements.
Review scope
The review by the Financial Reporting Council (FRC) focused mainly on IAS 33’s requirements, but it also considered the use by companies of adjusted EPS measures presented as alternative performance measures (APMs). The FRC considered the extent to which such measures comply with IAS 33 and the requirements of the ‘Guidelines on Alternative Performance Measures’, issued by the European Securities and Markets Authority (ESMA).
Key observations
The FRC’s report makes the following key observations:
  • Determination of weighted average number of shares – The weighted average number of ordinary shares outstanding is key to the calculation of EPS, but IAS 33 does not require specific disclosures to explain how the number has been determined. The FRC found that, for more complex arrangements where ordinary shares are held as treasury shares or by an employee benefit trust, it is not always clear from a company’s disclosures how the weighted average number of shares relates to the number of shares in issue and potential ordinary shares.
  • Share reorganisations – A company might have made judgements about the substance of a share reorganisation or other arrangement that affects how it is treated in the EPS calculation. The FRC identified that it is rarely possible to tell from disclosures when this has been the case. Examples include capitalisation or bonus issues (that is, rights issues), share splits and reverse share splits (that is, consolidation of shares).
  • IAS 33 requirements are misunderstood – Certain requirements of IAS 33 appear to have been overlooked or not well understood by companies. Examples include companies inappropriately assessing whether potential ordinary shares are dilutive or antidilutive. In addition, where a loss is reported for continuing operations, the diluted loss per share for continuing operations cannot be lower than the basic loss per share for continuing operations.
The FRC believes that these points can be addressed by more transparent disclosures, and a greater awareness of what IAS 33 requires.
What is the impact?
Clear expectations and reminders for reporting going forward
The FRC has set out the following key expectations:
  • Companies should provide further information to explain the basis for the weighted average number of shares, if it is significantly different from information disclosed about issued ordinary shares and potential ordinary shares.
  • Judgements that have a material effect on EPS are expected to be disclosed in accordance with paragraph 122 of IAS 1 (or para 8.6 of FRS 102, for companies reporting under that standard).
  • Disclosures provided for adjusted EPS are expected to meet the requirements of the ESMA Guidelines on APMs and to explain the methodology applied in calculating adjusted EPS, including the basis used for tax on adjusting items.
The FRC has also set out the following key reminders:
  • The IAS 33 definition of whether potential ordinary shares are dilutive or antidilutive is based on the profit or loss from continuing operations.
  • Share reorganisations that involve a bonus element require retrospective adjustment in the weighted average number of ordinary shares used for EPS for all periods presented.
  • Where preference shares are classified as equity, earnings used for EPS are adjusted for all the effects of those preference shares, including dividends and any premiums arising on redemption.
  • A company whose listing was achieved using a reverse acquisition should apply the methodology set out in IFRS 3 for calculating the weighted average number of shares for the period of the reverse acquisition and for comparative periods.
When does it apply?
The FRC expects entities to consider the guidance immediately, and to incorporate the guidance in their reporting and disclosures, where necessary, going forward.
Where do I get more details?
Refer to this link for the FRC’s report.
Please reach out to your usual PwC contact if you have any queries with regard to the guidance contained within this In brief.
PwC users should click here for contact information.
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