On September 8, 2022 the Financial Reporting Council (FRC) published the results of a Thematic Review it has conducted into the reporting of earnings per share (EPS) in companies’ financial statements. The report highlights some of the more common errors and, using case studies and examples, it aims to explain the issues involved and show how companies can improve the reliability of their EPS by complying with the detailed requirements of IAS 33, and providing more helpful disclosures.
International Accounting Standard (IAS) 33 ‘Earnings per Share’ sets out the calculation, presentation and disclosure requirements for EPS under International Financial Reporting Standards (IFRSs). All listed companies, reporting under IFRSs or UK GAAP, are required to report EPS in accordance with IAS 33 in both their annual and interim financial statements, and to include comparatives for all periods presented. Reviews undertaken by the FRC’s Corporate Reporting Review (CRR) team show that some of the main principles of IAS 33 are not always well understood, or applied correctly, even in relatively straightforward circumstances. On several occasions, queries raised by CRR on a company’s annual report have resulted in a restatement of the company’s reported EPS in the following year.
The FRC’s findings highlight a number of areas where there is scope for companies to improve their reporting of EPS:
- The weighted average number of ordinary shares outstanding is key to the calculation of EPS, but IAS 33 does not require specific disclosures to explain how the number has been determined. Sometimes it is not clear from a company’s disclosures how the weighted average number of shares relates to the number of shares in issue and potential ordinary shares. As a result, companies should provide further information to explain the basis for the weighted average number of shares, if it is significantly different from information disclosed about issued ordinary shares and potential ordinary shares.
- A company may have made judgements about the substance of a share reorganisation or other arrangement that affects how it is treated in the EPS calculation. It is rarely possible to tell from disclosures when this has been the case. The FRC expect judgements that have a material effect on EPS to be disclosed in accordance with paragraph 122 of IAS 1 ‘Presentation of Financial Statements’ (or paragraph 8.6 of FRS 102 for companies reporting under that standard).
- Certain requirements of IAS 33 appear to have been overlooked or not well understood by companies and these points can be addressed by more transparent disclosures, and a greater awareness of what IAS 33 requires. The FRC expect the disclosures provided for adjusted EPS to meet the requirements of the ESMA Guidelines on APMs and to explain the methodology applied in the calculation, including the basis used for tax on adjusting items.
The FRC remind companies that:
- The IAS 33 definition of whether potential ordinary shares are dilutive or antidilutive is based on 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.
(FRC, Thematic Review – Earnings per Share (IAS 33), 08.09.2022)