BR Workbook 7: Accounting Standards - Disclosures

IAS 33

Earnings Per Share (EPS)

What does EPS indicate?

How much profit each ordinary share has earned

What does IAS 33 require?

PLCs report basic and fully diluted EPS on the face of the SPL

What is EPS always expressed as?

Pence

basic earnings per share formula

net income after taxes and preference dividends/weighted average number of shares in issue

Equity Instruments

Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction.

Financial Instrument

Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity

Ordinary Shares

shares of a company other than preference shares.

Preference Shares

Shares in a company that give the owner the right to receive a fixed dividend before any are paid to owners of ordinary shares

Potential ordinary share

A financial instrument or other contract that may entitle its holder to ordinary shares.

Warrants/Options

Financial instruments that give the holder the right to purchase ordinary shares

3 steps for calculating basic EPS

1. Calculate basic earnings figure

2. Calculate basic weighted average number of shares

3. Calculate EPS

What can WANS be affected by?

- issue of shares at full market price

- bonus issue of shares

- issue of shares at less than full market price

Bonus issue of shares

Shares issued for no consideration, so same level of profits are shared by a higher no. of shareholders with no cash input by company.

How should an issue of shares at less than market price be treated

As if it comprises both a

- share issue at full market price

- an issue if bonus shares

What does basic EPS not take into account?

The impact of dilutive potential ordinary shares.

What are dilutive potential ordinary shares?

Ordinary shares that might be issued in the future but do not involve the organisation receiving funds by a corresponding amount.

What is the effect of issuing dilutive potential ordinary shares on EPS?

Reduces EPS, so shareholders must be warned.

What does IAS 33 require in terms of EPS?

That both basic and diluted (if applicable) EPS must be disclosed.

What is the formula for Diluted Earnings Per Share?

Diluted earnings ÷ Diluted weighted average number of shares in issue

What are deferred ordinary shares?

Ordinary shares entitled to a dividend only after a certain date or only if profits rise above a certain amount.

What are convertible preference shares?

Preference shares that can be converted into ordinary shares at the option of the holder.

What are convertible debentures / loan stock?

Debt instruments that can be converted into ordinary shares at the option of the holder.

What are share options and warrants?

They give the holder the right to purchase a fixed number of ordinary shares at a predetermined price.

What are contingently issuable shares

Shares issued after certain conditions have been fulfilled.

Step 1 of calculating diluted earnings per share

Calculate the basic earnings figure

Step 2 of calculating diluted earnings per share

Calculate the weighted average number of shares

Step 3 of calculating diluted earnings per share

Calculate the basic EPS

Step 4 of calculating diluted earnings per share

Recalculate the earnings figure taking into account future events that will potentially decrease earnings

Step 5 of calculating diluted earnings per share

Recalculate weighted average number of shares taking into account future events that will increase shares without any earning potential

Step 6 of calculating diluted earnings per share

Calculate the diluted EPS

What disclosures does IAS 33 require for EPS?

- Show basic & diluted EPS (with comparatives) on the face of the P&L/OCI.

- Note must explain: earnings used, WANS, and reconciliation between basic & diluted EPS (if applicable).

- Disclose post-year-end share transactions that would have significantly changed EPS.

- Provide reconciliation of earnings figures to the P&L/OCI.

- If alternative EPS figures are given, disclose their basis and reconcile to P&L/OCI; WANS must follow IAS 33.

IFRS 8

Operating Segments

What does IFRS 8 require?

More detailed analysis of P&L/OCI and SOFP figures for each operating segment.

What is the purpose of IFRS 8 segment reporting?

To show the performance and importance of different goods/services and geographical areas.

What is an operating segment?

A component of an entity with separate financial information that is regularly reviewed by the chief operating decision maker.

Do operating segments include components that sell mainly to other segments?

Yes - internal-selling components can also be operating segments.

When must an operating segment be reported under IFRS 8?

If it has more than 10% of total revenue, profit/loss, or total assets.

Can management include segments below the 10% threshold?

Yes, if the information would be useful to users.

What proportion of revenue must disclosed segments cover?

At least 75% of the entity's revenue.

What key items must be disclosed for each operating segment under IFRS 8?

- Revenue (internal & external),

- profit/loss,

- assets & liabilities (if reported to chief decision maker),

- additions to non-current assets,

-depreciation/amortisation,

- interest received/paid,

- tax.

What must be disclosed about allocations?

How central costs and shared assets/liabilities are allocated to each segment.

What is required regarding major customers?

If one customer provides more than 10% of external revenue, disclose this and the total revenue from that customer (identity not required).

What geographical information must be disclosed?

Revenue earned and non-current assets held by country.

What descriptive information must be provided?

How segments were determined, the products/services in each segment, and any differences between segment reporting measures and the financial statements.

What reconciliation is required?

Segment totals must be reconciled to the figures in the P&L/OCI and SOFP.

IAS 24

Related Party Disclosures

Related party

a person or entity that is related to the entity that is preparing its financial statements

When is a person (or close family member) related to a reporting entity?

When they:

- control or jointly control,

- have significant influence,

- are key management personnel of the entity or its parent.

When is an entity related to a reporting entity?

entity?

When it's:

- in the same group,

- is an associate or joint venture,

- is linked through common third-party JV/associate relationships,

- is a post-employment benefit plan,

- or is controlled/ influenced by a related person.

Related party transaction

A transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

Control

Ability of an investor to affect it's returns from an investee through its power over the investee

Significant influence

The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.

Joint control

The contractually agreed sharing of control over an economic activity.

Key management personnel

those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director of that entity

Close members of the family of an individual

Family members who are expected to influence or be influenced by that individual in their dealings with the entity.

examples of related party transactions that must be disclosed

- purchases or sales of goods

- purchases or sales of assets

- rendering or receiving of services

- leases

- transfers of research and development

- transfers under license agreements

- provision of finance

- provision of guarantees and collateral

What disclosures are required for parent-subsidiary relationships?

Disclose the name of the parent and, if different, the ultimate controlling party, even if no transactions occurred. If neither publishes consolidated accounts, disclose the next most senior parent that does.

What must be disclosed about key management personnel?

Total compensation, split into: short-term benefits, post-employment benefits, other long-term benefits, termination benefits, and share-based payments.