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IAS 33 Earnings Per Share is an accounting standard that shows how much profit a company makes for each share held by its shareholders. It is a key number that investors use to judge how profitable a company is.
IAS 33 requires the presentation of two types of earnings per share (EPS) on the last line of the income statement, that is, Basic EPS and Diluted EPS.
Basic EPS: Calculates the profit earned by each outstanding ordinary share of the company.
*Earnings of a company refers to the profit for the year (after tax has been deducted).
*Outstanding ordinary shares of a company refers to the total number of shares of a company that are currently owned by investors/shareholders.
Here is a simple example for calculating Basic EPS
Imagine at the year end December 31, 2024, a company has 10 million ordinary shares outstanding and made a profit for the year of $240 million. Basic EPS is $24 per share, calculated as
Diluted EPS: When a company has financial instruments like stock options (the option holder has the right to buy the company's shares) or convertible bonds (the bondholder has the right to turn the bonds into shares of the company), the company will have to adjust how they calculate their EPS to show the impact of those instruments that can be converted into the company's shares, even though they are not yet converted. This is because the adjustment shows the company's investors what would happen to their earnings if all these potential extra shares were actually issued/converted to shares.
In simple terms, it means that the more the shares, the less the earnings that each shareholder gets. Basic EPS does not consider potential shares that may be converted, while Diluted EPS considers potential shares.
Here is a simple example for calculating Diluted EPS
Imagine if the same company in the calculation above has convertible bonds that could potentially convert into 1 million shares, the calculation for diluted EPS might change.
The formula would now consider 11 million shares (10 million outstanding shares + 1 million potential shares) in the denominator.
Also, remember that interest will no longer have to be paid on the bonds since it is now converted to shares, as such assuming $2 million interest (after tax) would have been paid on the bonds if they were not converted to shares, the $2 million interest would be added back to the earnings in the numerator because the interest expense that normally causes earnings to be lower has now been removed.
As such, the numerator will be $242 million ($240 million + $2 million).
The Diluted EPS is $22 per share (meaning it has been diluted from the Basic EPS of $24 per share).
The below resources (PDF and eLearns) provide comprehensive coverage of IAS 33, including its key requirements and practical guidance. Whether you are new to IAS 33 or need a refresher, these resources will be helpful.
IAS 33 Earnings Per ShareSource: IASB
Access the IAS 33 Standard here
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