HKAS 33 - Earnings per Share

HKAS 33 - Earnings per Share (EPS)

OBJECTIVE (Paragraph 1)

The objective of HKAS 33 is to prescribe principles for the determination and presentation of earnings per share, so as to improve performance comparisons between different entities in the same reporting period and between different reporting periods for the same entity.

Key Point: The focus of HKAS 33 is on the denominator of the EPS calculation, not the numerator.

SCOPE (Paragraphs 2-4)

Entities Required to Apply HKAS 33

HKAS 33 shall apply to:

(a) Separate or individual financial statements of an entity:

Whose ordinary shares or potential ordinary shares are traded in a public market (domestic or foreign stock exchange, over-the-counter market, including local and regional markets); OR

That files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing ordinary shares in a public market

(b) Consolidated financial statements of a group with a parent:

Whose ordinary shares or potential ordinary shares are traded in a public market; OR

That files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing ordinary shares in a public market

Voluntary Disclosure

An entity that discloses EPS shall calculate and disclose EPS in accordance with this Standard (paragraph 3).

Consolidated vs Separate Financial Statements

When an entity presents both consolidated and separate financial statements:

Disclosures need be presented only on the basis of consolidated information

If an entity chooses to disclose EPS based on its separate financial statements, such EPS information shall be presented only in its statement of comprehensive income

An entity shall not present such EPS information in the consolidated financial statements (paragraph 4)

Presentation in Separate Statement

If an entity presents items of profit or loss in a separate statement (as described in HKAS 1 paragraph 10A), it presents EPS only in that separate statement (paragraph 4A).

DEFINITIONS (Paragraphs 5-8)

Term	Definition
Antidilution	An increase in EPS or a reduction in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions
Contingent share agreement	An agreement to issue shares that is dependent on the satisfaction of specified conditions
Contingently issuable ordinary shares	Ordinary shares issuable for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement
Dilution	A reduction in EPS or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions
Options, warrants and their equivalents	Financial instruments that give the holder the right to purchase ordinary shares
Ordinary share	An equity instrument that is subordinate to all other classes of equity instruments
Potential ordinary share	A financial instrument or other contract that may entitle its holder to ordinary shares
Put options on ordinary shares	Contracts that give the holder the right to sell ordinary shares at a specified price for a given period

Characteristics of Ordinary Shares (Paragraph 6)

Ordinary shares participate in profit for the period only after other types of shares (such as preference shares) have participated

An entity may have more than one class of ordinary shares

Ordinary shares of the same class have the same rights to receive dividends

Examples of Potential Ordinary Shares (Paragraph 7)

Financial liabilities or equity instruments, including preference shares, that are convertible into ordinary shares

Options and warrants

Shares that would be issued upon the satisfaction of conditions resulting from contractual arrangements, such as the purchase of a business or other assets

Terms Defined in Other Standards (Paragraph 8)

HKAS 32 defines: financial instrument, financial asset, financial liability, equity instrument

HKFRS 13 defines fair value

MEASUREMENT

Basic Earnings per Share (Paragraphs 9-29)

Basic Formula (Paragraphs 9-10)

Basic EPS = Profit or loss attributable to ordinary equity holders of the parent entity ÷ Weighted average number of ordinary shares outstanding during the period

An entity shall calculate basic EPS amounts for:

Profit or loss attributable to ordinary equity holders of the parent entity

If presented, profit or loss from continuing operations attributable to those equity holders

Earnings - Numerator (Paragraphs 12-18)

Adjustments to Profit or Loss:

For calculating basic EPS, the amounts attributable to ordinary equity holders of the parent entity in respect of:

(a) profit or loss from continuing operations attributable to the parent entity; and

(b) profit or loss attributable to the parent entity

Shall be adjusted for the after-tax amounts of:

Preference dividends

Differences arising on the settlement of preference shares

Other similar effects of preference shares classified as equity

Preference Dividends Treatment (Paragraph 14):

The after-tax amount of preference dividends deducted from profit or loss is:

(a) The after-tax amount of any preference dividends on non-cumulative preference shares declared in respect of the period

(b) The after-tax amount of the preference dividends for cumulative preference shares required for the period, whether or not the dividends have been declared

Important: The amount of preference dividends for the period does NOT include the amount of any preference dividends for cumulative preference shares paid or declared during the current period in respect of previous periods.

Increasing Rate Preference Shares (Paragraph 15):

Any original issue discount or premium on increasing rate preference shares is amortised to retained earnings using the effective interest method

Treated as a preference dividend for EPS calculation purposes

Repurchase of Preference Shares (Paragraph 16):

The excess of the fair value of consideration paid over the carrying amount of preference shares represents a return to holders

This amount is deducted in calculating profit or loss attributable to ordinary equity holders

Induced Conversion of Convertible Preference Shares (Paragraph 17):

The excess of fair value of ordinary shares or other consideration paid over the fair value of ordinary shares issuable under original conversion terms is a return to preference shareholders

This amount is deducted in calculating profit or loss attributable to ordinary equity holders

Settlement of Preference Shares (Paragraph 18):

Any excess of carrying amount over fair value of consideration paid to settle them is added in calculating profit or loss attributable to ordinary equity holders

Shares - Denominator (Paragraphs 19-29)

Weighted Average Number of Shares (Paragraphs 19-20):

The number of ordinary shares shall be the weighted average number of ordinary shares outstanding during the period.

The weighted average reflects the possibility that shareholders' capital varied during the period.

Calculation:

Number of ordinary shares outstanding at beginning of period

Adjusted by shares bought back or issued during the period

Multiplied by a time-weighting factor (number of days shares are outstanding ÷ total number of days in the period)

Timing of Inclusion of Shares (Paragraph 21):

Type of Issue	Date Included
Shares issued for cash	When cash is receivable
Shares issued on voluntary reinvestment of dividends	When dividends are reinvested
Shares issued on conversion of debt instrument	From date interest ceases to accrue
Shares issued in place of interest or principal	From date interest ceases to accrue
Shares issued for settlement of liability	From settlement date
Shares issued as consideration for acquisition of non-cash asset	From date acquisition is recognised
Shares issued for rendering of services	As services are rendered

Business Combinations (Paragraph 22):

Ordinary shares issued as part of consideration in a business combination are included from the acquisition date

Mandatorily Convertible Instruments (Paragraph 23):

Ordinary shares that will be issued upon conversion are included from the date the contract is entered into

Contingently Issuable Shares (Paragraph 24):

Treated as outstanding and included only from the date when all necessary conditions are satisfied

Shares issuable solely after the passage of time are NOT contingently issuable (passage of time is a certainty)

Outstanding ordinary shares that are contingently returnable are excluded until the date they are no longer subject to recall

Adjustments for Changes in Share Capital Without Resource Change (Paragraphs 26-29):

The weighted average number of ordinary shares shall be adjusted for events, other than conversion of potential ordinary shares, that have changed the number of ordinary shares outstanding without a corresponding change in resources.

Examples include:

(a) Capitalisation or bonus issue (stock dividend)

(b) Bonus element in any other issue (e.g., rights issue)

(c) Share split

(d) Reverse share split (consolidation of shares)

Treatment of Bonus Issue/Share Split (Paragraph 28):

Number of ordinary shares outstanding before the event is adjusted for the proportionate change

Treated as if the event occurred at the beginning of the earliest period presented

Example: On a two-for-one bonus issue, the number of ordinary shares outstanding before the issue is multiplied by three to obtain the new total.

Share Consolidation (Paragraph 29):

Generally reduces number of ordinary shares outstanding without corresponding reduction in resources

Exception: When overall effect is a share repurchase at fair value (e.g., consolidation combined with special dividend)

Weighted average adjusted for reduction from date special dividend is recognised

Diluted Earnings per Share (Paragraphs 30-63)

Basic Principle (Paragraphs 30-32)

Diluted EPS = Adjusted profit or loss attributable to ordinary equity holders ÷ Adjusted weighted average number of shares (including dilutive potential ordinary shares)

An entity shall calculate diluted EPS for:

Profit or loss attributable to ordinary equity holders of the parent entity

If presented, profit or loss from continuing operations attributable to those equity holders

Objective: To provide a measure of the interest of each ordinary share while giving effect to all dilutive potential ordinary shares outstanding during the period.

Effects of Dilution:

(a) Profit or loss attributable to ordinary equity holders is increased by the after-tax amount of dividends and interest recognised in the period in respect of dilutive potential ordinary shares, adjusted for any other changes in income or expense that would result from conversion

(b) Weighted average number of ordinary shares is increased by the weighted average number of additional ordinary shares that would have been outstanding assuming conversion of all dilutive potential ordinary shares

Earnings Adjustments for Diluted EPS (Paragraphs 33-35)

For calculating diluted EPS, profit or loss attributable to ordinary equity holders shall be adjusted by the after-tax effect of:

(a) Any dividends or other items related to dilutive potential ordinary shares deducted in arriving at profit or loss attributable to ordinary equity holders

(b) Any interest recognised in the period related to dilutive potential ordinary shares

(c) Any other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares

Rationale (Paragraph 34):

After potential ordinary shares are converted, the items in (a)-(c) no longer arise. Instead, new ordinary shares are entitled to participate in profit or loss.

Consequential Changes (Paragraph 35):

Conversion may lead to consequential changes in income or expenses (e.g., reduction of interest expense may increase expense related to a non-discretionary employee profit-sharing plan). These shall also be adjusted.

Share Adjustments for Diluted EPS (Paragraphs 36-40)

Number of shares for diluted EPS = Weighted average number of ordinary shares (basic) + Weighted average number of ordinary shares that would be issued on conversion of all dilutive potential ordinary shares

Timing of Conversion Assumption (Paragraph 36):

Dilutive potential ordinary shares shall be deemed to have been converted at the beginning of the period or, if later, the date of issue of the potential ordinary shares

Period Determination (Paragraph 37):

Dilutive potential ordinary shares shall be determined independently for each period presented

The number included in the year-to-date period is NOT a weighted average of those included in each interim computation

Weighting of Potential Ordinary Shares (Paragraph 38):

Potential ordinary shares are weighted for the period they are outstanding

Those cancelled or lapsed during the period are included only for the portion of the period they were outstanding

Those converted during the period are included from beginning of period to date of conversion; from conversion date, resulting ordinary shares are included in both basic and diluted EPS

Multiple Conversion Bases (Paragraph 39):

When more than one basis of conversion exists, the calculation assumes the most advantageous conversion rate or exercise price from the standpoint of the holder

Subsidiaries, Joint Ventures, Associates (Paragraph 40):

Potential ordinary shares of a subsidiary, joint venture, or associate that are convertible into ordinary shares of the reporting entity are included in diluted EPS if they have a dilutive effect

Dilutive vs Antidilutive Potential Ordinary Shares (Paragraphs 41-44)

Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary shares would decrease EPS or increase loss per share from continuing operations.

Control Number (Paragraph 42):

An entity uses profit or loss from continuing operations attributable to the parent entity as the control number to establish whether potential ordinary shares are dilutive or antidilutive

This is adjusted in accordance with paragraph 12 and excludes items relating to discontinued operations

Antidilutive Shares (Paragraph 43):

Potential ordinary shares are antidilutive when their conversion would increase EPS or decrease loss per share from continuing operations

The calculation of diluted EPS does NOT assume conversion, exercise, or other issue of potential ordinary shares that would have an antidilutive effect

Order of Consideration (Paragraph 44):

Each issue or series of potential ordinary shares is considered separately rather than in aggregate

To maximise dilution of basic EPS, each issue or series is considered in sequence from most dilutive to least dilutive

Options and warrants are generally included first because they do not affect the numerator

Options, Warrants and Their Equivalents (Paragraphs 45-48)

Treasury Stock Method (Paragraph 45):

For diluted EPS, an entity shall assume the exercise of dilutive options and warrants. The assumed proceeds shall be regarded as having been received from the issue of ordinary shares at the average market price of ordinary shares during the period. The difference between the number of ordinary shares issued and the number that would have been issued at average market price shall be treated as an issue of ordinary shares for no consideration.

Dilutive Condition (Paragraphs 46-47):

Options and warrants are dilutive when they would result in the issue of ordinary shares for less than the average market price during the period

They have a dilutive effect only when the average market price exceeds the exercise price (i.e., they are "in the money")

Previously reported EPS are not retroactively adjusted to reflect changes in prices

Calculation Approach:

(a) Contract to issue a certain number of ordinary shares at average market price → fairly priced, neither dilutive nor antidilutive → ignored

(b) Contract to issue remaining ordinary shares for no consideration → dilutive → added to number of ordinary shares outstanding

Share-Based Payments (Paragraph 47A):

For share options and other share-based payment arrangements under HKFRS 2, the issue price and exercise price shall include the fair value of any goods or services to be supplied to the entity in the future

Employee Share Options (Paragraph 48):

Employee share options with fixed or determinable terms and non-vested ordinary shares are treated as options in diluted EPS calculation

Treated as outstanding on the grant date

Performance-based employee share options are treated as contingently issuable shares

Convertible Instruments (Paragraphs 49-51)

General Rule (Paragraph 49):

The dilutive effect of convertible instruments shall be reflected in diluted EPS

Antidilutive Test (Paragraph 50):

Convertible preference shares are antidilutive when the dividend per ordinary share obtainable on conversion exceeds basic EPS

Convertible debt is antidilutive when its interest (net of tax and other changes) per ordinary share obtainable on conversion exceeds basic EPS

Partial Redemption/Conversion (Paragraph 51):

When redemption or induced conversion affects only a portion of previously outstanding convertible preference shares, any excess consideration is attributed to those shares that are redeemed or converted

Shares redeemed or converted are considered separately from those not redeemed or converted

Contingently Issuable Shares (Paragraphs 52-57)

Inclusion in Diluted EPS (Paragraph 52):

Contingently issuable ordinary shares are treated as outstanding and included in diluted EPS if the conditions are satisfied

Included from the beginning of the period (or from date of contingent share agreement, if later)

If conditions are not satisfied, the number included is based on the number that would be issuable if the end of the period were the end of the contingency period

Restatement is NOT permitted if conditions are not met when the contingency period expires

Earnings Condition (Paragraph 53):

If attainment or maintenance of a specified amount of earnings is the condition, and that amount has been attained at the end of the reporting period but must be maintained beyond the end of the period, additional ordinary shares are treated as outstanding if dilutive

Calculation is based on the number that would be issued if earnings at the end of the reporting period were the amount at the end of the contingency period

Market Price Condition (Paragraph 54):

If the number depends on future market price, and the effect is dilutive, calculation is based on the number that would be issued if the market price at the end of the reporting period were the market price at the end of the contingency period

If condition is based on an average of market prices over a period extending beyond the reporting period, the average for the period that has lapsed is used

Both Earnings and Market Price Conditions (Paragraph 55):

Number included is based on both conditions (earnings to date and current market price at the end of the reporting period)

Not included unless both conditions are met

Other Conditions (Paragraph 56):

If the number depends on a condition other than earnings or market price (e.g., opening of retail stores), assuming the present status remains unchanged until the end of the contingency period, shares are included according to the status at the end of the reporting period

Contingently Issuable Potential Ordinary Shares (Paragraph 57):

An entity determines whether the potential ordinary shares may be assumed to be issuable based on the conditions specified

If they should be reflected, their impact is determined by following provisions for options/warrants, convertible instruments, or contracts that may be settled in shares or cash, as appropriate

Exercise or conversion is not assumed unless exercise or conversion of similar outstanding potential ordinary shares that are not contingently issuable is assumed

Contracts That May Be Settled in Ordinary Shares or Cash (Paragraphs 58-61)

Issuer's Option (Paragraphs 58-59):

When an entity has issued a contract that may be settled in ordinary shares or cash at the entity's option, the entity shall presume that the contract will be settled in ordinary shares

The resulting potential ordinary shares shall be included in diluted EPS if the effect is dilutive

If the contract is presented as an asset or liability, or has both equity and liability components, the numerator shall be adjusted for any changes in profit or loss that would have resulted if the contract had been classified wholly as an equity instrument

Holder's Option (Paragraph 60):

For contracts that may be settled in ordinary shares or cash at the holder's option, the more dilutive of cash settlement and share settlement shall be used

Examples (Paragraph 61):

Debt instrument that, on maturity, gives the entity unrestricted right to settle principal in cash or its own ordinary shares

Written put option that gives the holder a choice of settling in ordinary shares or cash

Purchased Options (Paragraph 62)

Contracts such as purchased put options and purchased call options (options held by the entity on its own ordinary shares) are not included in the calculation of diluted EPS

Including them would be antidilutive

Put option would be exercised only if exercise price > market price

Call option would be exercised only if exercise price < market price

Written Put Options (Paragraph 63)

Contracts that require the entity to repurchase its own shares (written put options and forward purchase contracts) are reflected in diluted EPS if the effect is dilutive.

Calculation When "In the Money" (exercise or settlement price > average market price):

(a) Assume that at the beginning of the period sufficient ordinary shares will be issued (at average market price) to raise proceeds to satisfy the contract

(b) Assume that the proceeds from the issue are used to satisfy the contract (to buy back ordinary shares)

(c) The incremental ordinary shares (difference between number assumed issued and number received from satisfying the contract) shall be included in diluted EPS

RETROSPECTIVE ADJUSTMENTS (Paragraphs 64-65)

Required Adjustments (Paragraph 64):

If the number of ordinary or potential ordinary shares outstanding:

Increases as a result of a capitalisation, bonus issue, or share split; OR

Decreases as a result of a reverse share split

Then the calculation of basic and diluted EPS for all periods presented shall be adjusted retrospectively.

After Reporting Period but Before Authorisation (Paragraph 64):

If these changes occur after the reporting period but before the financial statements are authorised for issue

The per share calculations for those and any prior period financial statements presented shall be based on the new number of shares

The fact that per share calculations reflect such changes shall be disclosed

Errors and Accounting Policy Changes (Paragraph 64):

Basic and diluted EPS of all periods presented shall be adjusted for the effects of errors and adjustments resulting from changes in accounting policies accounted for retrospectively

No Restatement for Certain Items (Paragraph 65):

An entity does not restate diluted EPS of any prior period presented for:

Changes in the assumptions used in EPS calculations

The conversion of potential ordinary shares into ordinary shares

PRESENTATION (Paragraphs 66-69)

Required Presentation (Paragraph 66):

An entity shall present in the statement of comprehensive income:

Basic and diluted EPS for profit or loss from continuing operations attributable to ordinary equity holders of the parent entity

Basic and diluted EPS for profit or loss attributable to ordinary equity holders of the parent entity

For each class of ordinary shares that has a different right to share in profit for the period

With equal prominence for all periods presented

All Periods (Paragraph 67):

EPS is presented for every period for which a statement of comprehensive income is presented

If diluted EPS is reported for at least one period, it shall be reported for all periods presented, even if it equals basic EPS

If basic and diluted EPS are equal, dual presentation can be accomplished in one line

Separate Statement (Paragraph 67A):

If an entity presents items of profit or loss in a separate statement, it presents basic and diluted EPS in that separate statement

Discontinued Operations (Paragraphs 68-68A):

An entity that reports a discontinued operation shall disclose the basic and diluted amounts per share for the discontinued operation either in the statement of comprehensive income or in the notes

Negative EPS (Paragraph 69):

An entity shall present basic and diluted EPS even if the amounts are negative (i.e., a loss per share)

DISCLOSURE (Paragraphs 70-73)

Required Disclosures (Paragraph 70):

An entity shall disclose the following:

(a) Numerators:

The amounts used as the numerators in calculating basic and diluted EPS

A reconciliation of those amounts to profit or loss attributable to the parent entity for the period

The reconciliation shall include the individual effect of each class of instruments that affects EPS

(b) Denominators:

The weighted average number of ordinary shares used as the denominator in calculating basic and diluted EPS

A reconciliation of these denominators to each other

The reconciliation shall include the individual effect of each class of instruments that affects EPS

(c) Antidilutive Instruments:

Instruments (including contingently issuable shares) that could potentially dilute basic EPS in the future but were not included in the calculation of diluted EPS because they are antidilutive for the period(s) presented

(d) Subsequent Events:

A description of ordinary share transactions or potential ordinary share transactions, other than those accounted for in accordance with paragraph 64, that occur after the reporting period and that would have changed significantly the number of ordinary shares or potential ordinary shares outstanding at the end of the period if those transactions had occurred before the end of the reporting period

Examples of Subsequent Transactions (Paragraph 71):

Transaction Type
Issue of shares for cash
Issue of shares when proceeds are used to repay debt or preference shares outstanding at the end of the reporting period
Redemption of ordinary shares outstanding
Conversion or exercise of potential ordinary shares outstanding at the end of the reporting period into ordinary shares
Issue of options, warrants, or convertible instruments
Achievement of conditions that would result in the issue of contingently issuable shares

Note: EPS amounts are NOT adjusted for such transactions occurring after the reporting period because such transactions do not affect the amount of capital used to produce profit or loss for the period.

Terms and Conditions (Paragraph 72):

Disclosure of the terms and conditions of financial instruments and other contracts generating potential ordinary shares is encouraged, if not otherwise required

Additional Per Share Amounts (Paragraphs 73-73A):

If an entity discloses additional per share amounts using a reported component of the statement of comprehensive income other than one required by this Standard:

Such amounts shall be calculated using the weighted average number of ordinary shares determined in accordance with this Standard

Basic and diluted amounts per share shall be disclosed with equal prominence and presented in the notes

The entity shall indicate the basis on which the numerator(s) is (are) determined, including whether amounts per share are before tax or after tax

If a component not reported as a line item is used, a reconciliation shall be provided

APPLICATION GUIDANCE (Appendix A)

Profit or Loss Attributable to the Parent Entity (A1)

For EPS based on consolidated financial statements, profit or loss attributable to the parent entity refers to profit or loss of the consolidated entity after adjusting for non-controlling interests

Rights Issues (A2)

The issue of ordinary shares at the time of exercise or conversion of potential ordinary shares does not usually give rise to a bonus element

In a rights issue, the exercise price is often less than fair value, so it includes a bonus element

The number of ordinary shares to be used in calculating basic and diluted EPS for all periods before the rights issue is the number of ordinary shares outstanding before the issue, multiplied by:

Adjustment Factor = Fair value per share immediately before exercise of rights ÷ Theoretical ex-rights fair value per share

Theoretical ex-rights fair value per share = (Aggregate fair value of shares immediately before exercise + Proceeds from exercise) ÷ Number of shares outstanding after exercise

Control Number (A3)

Profit from continuing operations attributable to the parent entity is the control number

If potential ordinary shares are dilutive for continuing operations, they are included in the calculation of all other EPS amounts, even if antidilutive to those other amounts

Average Market Price of Ordinary Shares (A4-A5)

Calculated on the basis of the average market price during the period

A simple average of weekly or monthly prices is usually adequate

Closing market prices are usually adequate; when prices fluctuate widely, an average of high and low prices is more representative

The method used is applied consistently

Options, Warrants and Their Equivalents (A6-A9)

Options to Purchase Convertible Instruments (A6):

Assumed to be exercised to purchase the convertible instrument when average prices of both the convertible instrument and ordinary shares obtainable upon conversion exceed the exercise price

Exercise is not assumed unless conversion of similar outstanding convertible instruments is also assumed

Tendering Debt or Other Instruments (A7):

Options or warrants may permit or require tendering debt or other instruments in payment of exercise price

They have a dilutive effect if:

(a) Average market price of related ordinary shares exceeds exercise price; OR

(b) Selling price of instrument to be tendered is below that at which it may be tendered and the resulting discount establishes an effective exercise price below market price

If tendering cash is more advantageous and permitted, tendering cash is assumed

Interest (net of tax) on any debt assumed to be tendered is added back as an adjustment to the numerator

Preference Shares with Similar Provisions (A8):

Similar treatment is given to preference shares with similar provisions or other instruments with conversion options that permit the investor to pay cash for a more favourable conversion rate

Proceeds Applied to Redeem Debt (A9):

If terms require proceeds to be applied to redeem debt, options or warrants are assumed to be exercised and proceeds applied to purchase debt at average market price

Excess proceeds over amount used for assumed purchase of debt are considered (assumed to be used to buy back ordinary shares)

Interest (net of tax) on any debt assumed to be purchased is added back as an adjustment to the numerator

Written Put Options (A10)

Example: 120 written put options with exercise price of CU35, average market price CU28

Entity assumes it issued 150 shares at CU28 per share to satisfy put obligation of CU4,200

Difference between 150 shares issued and 120 shares received (30 incremental shares) is added to denominator

Instruments of Subsidiaries, Joint Ventures or Associates (A11-A12)

Inclusion in Diluted EPS (A11):

(a) Instruments issued by a subsidiary, joint venture, or associate that enable holders to obtain ordinary shares of that entity are included in calculating diluted EPS of that entity, then included in reporting entity's EPS based on reporting entity's holding

(b) Instruments of a subsidiary, joint venture, or associate that are convertible into the reporting entity's ordinary shares are considered among the reporting entity's potential ordinary shares

Instruments Convertible into Shares of Subsidiary/Joint Venture/Associate (A12):

Instruments are assumed to be converted

Numerator adjusted as necessary in accordance with paragraph 33

Numerator also adjusted for any change in profit or loss recorded by the reporting entity attributable to the increase in number of ordinary shares of the subsidiary/joint venture/associate

Denominator is not affected because number of reporting entity's ordinary shares outstanding would not change

Participating Equity Instruments and Two-Class Ordinary Shares (A13-A14)

Types of Instruments (A13):

(a) Instruments that participate in dividends with ordinary shares according to a predetermined formula, sometimes with an upper limit

(b) A class of ordinary shares with a different dividend rate from another class but without prior or senior rights

Calculation Approach (A14):

For instruments convertible into ordinary shares, conversion is assumed if dilutive

For instruments not convertible, profit or loss is allocated to different classes according to their dividend rights or other rights to participate in undistributed earnings

(a) Profit or loss attributable to ordinary equity holders is adjusted by dividends declared and contractual amount of dividends that must be paid

(b) Remaining profit or loss is allocated to ordinary shares and participating equity instruments as if all profit or loss had been distributed

(c) Total amount allocated to each class is divided by number of outstanding instruments

Partly Paid Shares (A15-A16)

Basic EPS (A15):

Treated as a fraction of an ordinary share to the extent they were entitled to participate in dividends during the period relative to a fully paid ordinary share

Diluted EPS (A16):

To the extent partly paid shares are not entitled to participate in dividends, they are treated as the equivalent of warrants or options

The unpaid balance is assumed to represent proceeds used to purchase ordinary shares

The number of shares included in diluted EPS is the difference between the number of shares subscribed and the number assumed to be purchased

KEY TAKEAWAYS SUMMARY

Topic	Key Points
Scope	Publicly traded entities or those filing with regulatory bodies; voluntary disclosure must follow HKAS 33
Basic EPS Formula	Profit attributable to ordinary equity holders ÷ Weighted average number of ordinary shares outstanding
Numerator Adjustments	Deduct after-tax preference dividends; adjust for settlement differences, induced conversions
Denominator	Weighted average; time-weight shares issued/bought back; adjust for bonus issues, share splits retrospectively
Diluted EPS	Adjust numerator for after-tax interest/dividends on dilutive potential shares; add incremental shares to denominator
Dilution Test	Use profit from continuing operations as control number; include only dilutive potential shares
Options/Warrants	Treasury stock method; dilutive when exercise price < average market price
Convertible Instruments	"If-converted" method; antidilutive when per-share adjustment > basic EPS
Contingently Issuable Shares	Include when conditions are met; based on status at period-end for diluted EPS
Contracts Settled in Shares/Cash	Presume share settlement at issuer's option; more dilutive at holder's option
Written Put Options	Assume shares issued at average market price to raise proceeds to satisfy contract
Retrospective Adjustments	For bonus issues, share splits, reverse splits; errors and accounting policy changes
Presentation	On face of statement of comprehensive income; equal prominence; all periods
Disclosure	Numerator and denominator reconciliations; antidilutive instruments; subsequent events

50 MULTIPLE CHOICE QUESTIONS

Q1. According to HKAS 33, what is the primary focus of the Standard?

A. The numerator of the earnings per share calculation

B. The denominator of the earnings per share calculation

C. Both numerator and denominator equally

D. The disclosure requirements only

Answer: B

Q2. Which of the following entities is required to apply HKAS 33?

A. A private company with no public trading

B. An entity whose ordinary shares are traded on a stock exchange

C. A sole proprietorship

D. A partnership

Answer: B

Q3. When an entity presents both consolidated and separate financial statements, where should EPS disclosures be presented?

A. Only in the separate financial statements

B. Only in the consolidated financial statements

C. In both sets of financial statements

D. Only in the notes to the financial statements

Answer: B

Q4. What is the definition of "dilution" according to HKAS 33?

A. An increase in earnings per share

B. A reduction in earnings per share or an increase in loss per share

C. A decrease in the number of shares outstanding

D. An increase in share price

Answer: B

Q5. Which of the following is NOT an example of a potential ordinary share?

A. Convertible bonds

B. Options and warrants

C. Trade payables

D. Shares issuable upon satisfaction of conditions in a business purchase agreement

Answer: C

Q6. For basic EPS calculation, how are dividends on cumulative preference shares treated?

A. Only declared dividends are deducted

B. The amount required for the period is deducted whether or not declared

C. No deduction is made

D. Only paid dividends are deducted

Answer: B

Q7. When are ordinary shares issued in exchange for cash included in the weighted average number of shares?

A. From the date of issue

B. From the beginning of the period

C. When cash is receivable

D. At the end of the period

Answer: C

Q8. How are ordinary shares issued as consideration in a business combination included in the weighted average number of shares?

A. From the beginning of the period

B. From the acquisition date

C. From the date of the business combination agreement

D. From the end of the period

Answer: B

Q9. When are contingently issuable shares included in basic EPS?

A. From the beginning of the period

B. From the date of the contingent share agreement

C. Only from the date when all necessary conditions are satisfied

D. From the end of the period

Answer: C

Q10. In a two-for-one bonus issue, how should the number of ordinary shares outstanding before the issue be adjusted?

A. Multiplied by two

B. Multiplied by three

C. Divided by two

D. No adjustment is needed

Answer: B

Q11. For diluted EPS, when are dilutive potential ordinary shares deemed to have been converted?

A. At the end of the period

B. At the beginning of the period or date of issue, if later

C. At the date of actual conversion

D. At the date of the financial statements

Answer: B

Q12. What is the "control number" used to determine whether potential ordinary shares are dilutive?

A. Profit or loss attributable to the parent entity

B. Profit or loss from continuing operations attributable to the parent entity

C. Total comprehensive income

D. Revenue

Answer: B

Q13. When are options and warrants dilutive?

A. When the exercise price exceeds the average market price

B. When the average market price exceeds the exercise price

C. When the exercise price equals the market price

D. Always dilutive

Answer: B

Q14. According to the treasury stock method, what is the difference between the number of ordinary shares issued and the number that would have been issued at average market price treated as?

A. A bonus issue

B. An issue of ordinary shares for no consideration

C. A share repurchase

D. A dividend distribution

Answer: B

Q15. Convertible preference shares are antidilutive when:

A. The dividend per ordinary share obtainable on conversion exceeds basic EPS

B. The dividend per ordinary share obtainable on conversion is less than basic EPS

C. The conversion price is below market price

D. They are always dilutive

Answer: A

Q16. For contracts that may be settled in ordinary shares or cash at the issuer's option, what presumption is made for diluted EPS?

A. The contract will be settled in cash

B. The contract will be settled in ordinary shares

C. The more dilutive method is used

D. The contract is ignored

Answer: B

Q17. For contracts that may be settled in ordinary shares or cash at the holder's option, what is used in calculating diluted EPS?

A. Cash settlement only

B. Share settlement only

C. The more dilutive of cash and share settlement

D. The less dilutive of cash and share settlement

Answer: C

Q18. Are purchased put options and purchased call options included in the calculation of diluted EPS?

A. Yes, always

B. No, because including them would be antidilutive

C. Yes, if they are in the money

D. Only purchased call options are included

Answer: B

Q19. For written put options that are "in the money," what is the first step in calculating the dilutive effect?

A. Assume shares are bought back at market price

B. Assume sufficient ordinary shares will be issued at average market price to raise proceeds to satisfy the contract

C. Assume the put options are exercised

D. Assume the contract is settled in cash

Answer: B

Q20. If the number of ordinary shares increases due to a bonus issue after the reporting period but before the financial statements are authorised for issue, what should be done?

A. No adjustment is needed

B. The per share calculations shall be based on the new number of shares

C. Only the current period should be adjusted

D. Only prior periods should be adjusted

Answer: B

Q21. Does an entity restate diluted EPS of prior periods for changes in assumptions used in EPS calculations?

A. Yes, always

B. No

C. Only if the change is material

D. Only for convertible instruments

Answer: B

Q22. How should basic and diluted EPS be presented in the statement of comprehensive income?

A. Basic EPS only

B. Diluted EPS only

C. With equal prominence for all periods presented

D. Only in the notes

Answer: C

Q23. If diluted EPS equals basic EPS for all periods presented, how should they be presented?

A. Only basic EPS is presented

B. Only diluted EPS is presented

C. Dual presentation can be accomplished in one line

D. They must be presented on separate lines

Answer: C

Q24. Must an entity present EPS even if the amounts are negative?

A. No

B. Yes

C. Only basic EPS

D. Only if the loss is from continuing operations

Answer: B

Q25. Which of the following must be disclosed according to HKAS 33?

A. The market price of shares

B. A reconciliation of the numerators used in calculating basic and diluted EPS

C. The dividend policy

D. The names of major shareholders

Answer: B

Q26. In a rights issue, how is the adjustment factor calculated?

A. Exercise price ÷ Market price

B. Fair value per share before exercise ÷ Theoretical ex-rights fair value per share

C. Number of shares after issue ÷ Number of shares before issue

D. Proceeds from exercise ÷ Market price

Answer: B

Q27. What is the theoretical ex-rights fair value per share?

A. Market price before exercise

B. (Aggregate fair value before exercise + Proceeds from exercise) ÷ Number of shares after exercise

C. Exercise price × Number of shares

D. Market price after exercise

Answer: B

Q28. For partly paid shares in basic EPS calculation, how are they treated?

A. As fully paid shares

B. As a fraction of an ordinary share to the extent they are entitled to participate in dividends

C. As potential ordinary shares

D. They are excluded

Answer: B

Q29. For partly paid shares not entitled to participate in dividends, how are they treated in diluted EPS?

A. As fully paid shares

B. As the equivalent of warrants or options

C. They are excluded

D. As convertible instruments

Answer: B

Q30. When an entity has more than one class of ordinary shares with different rights to share in profit, what must be presented?

A. Only total EPS

B. EPS for each class of ordinary shares

C. Only the class with the highest EPS

D. Only the class with the lowest EPS

Answer: B

Q31. What is the effect of antidilutive potential ordinary shares on diluted EPS?

A. They are included in the calculation

B. They are not included in the calculation

C. They increase diluted EPS

D. They decrease diluted EPS

Answer: B

Q32. In determining the order of including dilutive instruments, which are generally included first?

A. Convertible bonds

B. Convertible preference shares

C. Options and warrants

D. Contingently issuable shares

Answer: C

Q33. Why are options and warrants generally included first in the dilution sequence?

A. They have the highest earnings per incremental share

B. They do not affect the numerator of the calculation

C. They are always dilutive

D. They have the lowest exercise price

Answer: B

Q34. For employee share options with fixed terms, when are they treated as outstanding in diluted EPS calculation?

A. On the vesting date

B. On the grant date

C. On the exercise date

D. At the end of the period

Answer: B

Q35. Performance-based employee share options are treated as:

A. Options

B. Warrants

C. Contingently issuable shares

D. Convertible instruments

Answer: C

Q36. If the number of contingently issuable shares depends on future earnings and future market prices, when are they included in diluted EPS?

A. When either condition is met

B. When both conditions are met

C. When the earnings condition is met

D. When the market price condition is met

Answer: B

Q37. For contingently issuable shares where the condition is the opening of retail stores, how are they included in diluted EPS?

A. Based on projected store openings

B. According to the status at the end of the reporting period

C. They are never included

D. Based on the average of the period

Answer: B

Q38. What is the treatment of the excess of the fair value of consideration paid to preference shareholders over the carrying amount of preference shares?

A. Added to profit

B. Deducted in calculating profit attributable to ordinary equity holders

C. Recognised as an asset

D. Ignored

Answer: B

Q39. What is the treatment of any excess of the carrying amount of preference shares over the fair value of consideration paid to settle them?

A. Deducted in calculating profit attributable to ordinary equity holders

B. Added in calculating profit attributable to ordinary equity holders

C. Recognised as a gain

D. Ignored

Answer: B

Q40. For induced conversion of convertible preference shares, what is the excess of fair value of ordinary shares paid over fair value of ordinary shares issuable under original terms treated as?

A. A gain

B. A return to preference shareholders, deducted in calculating profit attributable to ordinary equity holders

C. An expense

D. A liability

Answer: B

Q41. When more than one basis of conversion exists for potential ordinary shares, which conversion rate is assumed?

A. The most advantageous from the entity's standpoint

B. The most advantageous from the holder's standpoint

C. The average of all rates

D. The rate specified in the financial statements

Answer: B

Q42. How are potential ordinary shares that are cancelled or allowed to lapse during the period treated in diluted EPS?

A. Included for the entire period

B. Included only for the portion of the period they were outstanding

C. Excluded entirely

D. Included from the beginning of the period

Answer: B

Q43. For options or warrants that permit tendering debt in payment of the exercise price, what is assumed if tendering cash is more advantageous and permitted?

A. Tendering debt

B. Tendering cash

C. The option is not exercised

D. The option is cancelled

Answer: B

Q44. What is the treatment of interest (net of tax) on any debt assumed to be tendered in option/warrant exercises?

A. Deducted from the numerator

B. Added back as an adjustment to the numerator

C. Ignored

D. Added to the denominator

Answer: B

Q45. For options or warrants where proceeds are required to be applied to redeem debt, what is assumed for the excess proceeds?

A. Used to pay dividends

B. Used to buy back ordinary shares

C. Held as cash

D. Used to issue new debt

Answer: B

Q46. In the calculation of diluted EPS for a subsidiary's instruments convertible into the parent's ordinary shares, what is the effect on the denominator?

A. Increased by the number of potential shares

B. Not affected

C. Decreased by the number of potential shares

D. Adjusted for the parent's holding

Answer: B

Q47. For participating equity instruments not convertible into ordinary shares, how is profit or loss allocated?

A. Equally to all classes

B. According to dividend rights or other rights to participate in undistributed earnings

C. Only to ordinary shares

D. Only to preference shares

Answer: B

Q48. What is the treatment of a share consolidation combined with a special dividend?

A. No adjustment is needed

B. The weighted average is adjusted for the reduction from the date the special dividend is recognised

C. Only the special dividend is adjusted

D. The consolidation is ignored

Answer: B

Q49. If an entity discloses additional per share amounts using a component not reported as a line item, what must be provided?

A. A note explaining the calculation

B. A reconciliation between the component used and a line item reported in the statement of comprehensive income

C. Approval from the auditor

D. A separate statement

Answer: B

Q50. According to HKAS 33, which of the following is NOT required to be disclosed?

A. The amounts used as numerators in calculating basic and diluted EPS

B. A reconciliation of numerators to profit or loss attributable to the parent entity

C. The names of directors

D. Instruments that could potentially dilute basic EPS in the future but were antidilutive

Answer: C