In this guide, we explain the fundamentals of EPS and share the exact EPS implications for various types. Warrants, options and equivalents are all financial tools that allows to have a right purchase ordinary shares.
This chapter is generally about options. Options are written calls that allow holders to have options but rather no responsibility to purchase ordinary shares of an entity using cash or provide goods and services. The transaction falls under IFRS 2 if the option is traded for goods and services. Share-based Payment. Other options are covered under the IAS 32 Financial Instruments category: Presentation.
These options might also require the settlement of ordinary shares. The cash option does NOT give the holder access for ordinary shares. It is not considered to be a POS and is therefore not included in the diluted EPS. This chapter focuses specifically on the EPS implications for options. Some instruments may require additional consideration.
Options and forwards written put. These options are those that require an entity buy its ordinary shares. These instruments are covered by the IAS 32 Financial Instruments: presentation. Forwards and written puts do not generally affect diluted EPS but are not considered outstanding in basic EPS.
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Understanding the accounting of these instruments is crucial as it determines if their assumed transformation would have an impact on profit or losses. If they are in-the-money (i.e., written puts or forwards), they will be dilutive.
The exercise or settlement price is higher than the average price for ordinary shares. These instruments may be considered liabilities under IAS 32. In this case, the numerator adjustment could vary. This could impact the instrument’s elusiveness.
Entities prefer to have purchased puts and calls over their ordinary shares. Purchased puts and calls are not included in the basic and diluted EPS. You may have other options embedded in financial instruments than the one that you currently use.
Other performance conditions may apply to options than those for service. See also Contingently issuable shares of ordinary shares. Options to buy convertible instruments – Options and warrants for convertible instrument purchase – e.g. Option to buy convertible preference shares might also be considered POS. These options cannot be classified under IAS 32 and can be accounted as IFRS 9 Financial Instruments. These options cannot be used to buy the convertible tools in EPS (diluted) if they possess the following:
The exercise price of the option is greater than the average price of ordinary shares which can be converted.
Also, it is assumed that any other outstanding convertible instruments will be converted. IAS 33 does not provide any guidance on how to calculate the impact of these instruments on diluted earnings per share.
There are many options. The Treasury share method is generally accepted as a way to determine the impact of these instruments on diluted EPS. This assumes that options can be used to convert shares directly. The numerator would adjust to account for any post-tax consequential income and expense changes.
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Additional considerations can be found in EPS Impact on Share-Based Payments.
Implications of EPS
Options do not have an effect on diluted earnings per share. If options are fully exercised or vested, we believe they should be included in the basic earnings per share. Understanding the accounting of these options is crucial as it will determine if they have a consequential effect or not on profit and/or loss.
Options that are in-the-money are dilutive. The exercise price is the total fair value of any future goods or services provided to the entity. It is lower than the average market share. Options that are accounted for under IFRS 2 or IAS 32 may have their numerator adjustment differ. This could impact the status of options as dilutive.
Optional denominator adjustment-The treasury share method
The IAS33 Earnings per Share denominator for diluted EPS assumes that all dilutive or POS shares have been converted into ordinary shares by the end of the period or later than the date of issue.
These are included in the denominator, but only for the duration they remain unissued. IAS 33, also known by the “treasury share method”, specifies a method that adds the denominator to the average weighted number of ordinary shares that would be issued from the assumed transformation.
The treasury share method is different from the one used to ’embedded into’ other financial instruments such as e.g. convertible debt . This is despite IAS 33 and 39 requiring split accounting for options embedded in another instrument. These standards treat embedded options as well as stand-alone options the same.
Treasury shares assumes that the proceeds from an option exercise are used to buy shares at the average price over the time period. The bonus element refers to the difference between the price and number of ordinary shares that were issued at the exercise price, and those that were purchased at an average market rate.
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Theshani is a Senior auditor and has experience of 4+ years in providing audit assurance and advisory services to a wide range of industry clients. She continues to stay on top of ever-changing industry dynamics by continuously learning and developing expertise.