The Financial Reporting Council (FRC) published Thursday its thematic review, Earnings Per Share (IAS 33). The review summarises the main requirements of the IAS 33, Earnings Per Share, standard, explains the complex aspects of earnings-per-share (EPS) calculations, and discusses the importance of EPS disclosure for investors.
The FRC found that "some of the main principles of IAS 33 are not always well understood or applied correctly", following routine reviews of company reporting by its Corporate Reporting Review team.
All listed companies, reporting under IFRS or UK GAAP, are required to report EPS in accordance with IAS 33 in both interim and annual financial statements.
The review offers three ways for companies to improve the quality of disclosures:
Provide further information. Companies should explain the basis for the weighted number of shares used to calculate EPS if significantly different from information disclosed about issued ordinary shares and potential ordinary shares.
Disclose judgements. Companies are required to disclose judgements that have a material effect on EPS — in accordance with paragraph 122 of IAS 1, Presentation of Financial Statements (or paragraph 8.6 of FRS 102).
Meet guideline requirements. Disclosures provided for non-GAAP "adjusted EPS" should meet the requirements of the ESMA Guidelines on Alternative Performance Measures (APMs) and explain the methodology applied in the adjusted calculation, including the basis used for tax on adjusting items.
Key reminders from the FRC:
- 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.
- When 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, Business Combinations, for calculating the weighted average number of shares for the period of the reverse acquisition and for comparative periods.
The FRC encourages companies to consider the findings within the review when preparing EPS calculations and disclosures.
— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.