This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Solutions to Gripping IFRS : Graded Questions Earnings per share Kolitz & Sowden-Service, 2008 Chapter 8: Page 1 Solution 8.1 a) The following situations will result in comparatives for earnings per share to be restated: A capitalisation issue or a share split (i.e. a not for value issue) A change in accounting policy or a correction of an error With a capitalisation issue or a share split no new cash resources are available to the company. The number of shares increases resulting in a decrease in the EPS. Therefore, the comparative EPS must be restated to ensure that comparability is not lost. This adjustment applies not only to the prior period but to the figures of all previous periods that are presented as comparatives as well. A change in accounting policy or a correction of an error gives rise to a prior year adjustment in terms of IAS 8. With a prior year adjustment it is necessary to restate the previous years comparatives and the retained earnings at the beginning of the year. If the adjustment has an impact on the earnings used for the earnings per share calculation, it will therefore be necessary to restate the earnings per share figure for the previous year. b) IAS 33 requires earnings per share to be based on basic earnings, which is defined as the profit or loss for the period attributable to ordinary shareholders after deducting preference dividends. In terms of IAS 8, profit for the period should include all items of income and expense recognised in a period. The profit on sale of investments should be included in profit for the period and therefore should be included in basic earnings as well. c) Dividends per share depends on the dividend payout policy of a company, and not necessarily on the size of its profits. It is not possible to judge a companys performance on its dividends declared. In new or expanding companies, for example, it would be irresponsible to adopt too high a dividend payout ratio. A low dividend per share in such cases would not necessarily reflect poor performance - management may just be retaining the profits in order to re-invest in the business. Earnings per share, on the other hand, is based on profit earned by the business regardless of whether such funds are being paid out to the owners or are being re-invested to increase the value of the business. Profit after tax on its own does not tell shareholders the extent of the return on their investment. For example if two companies both reflect profit after taxation for the year of C100 000 but company A has 1 000 shares and company B has 2 000 shares, it cannot be said that a shareholder with one share in each of the companies has earned the same amount on each investment, even though the profits earned by each company are the same. The one share held in company A has yielded a C100 return whereas the one share in company B has only yielded a C50 return once the profits have been shared out amongst the owners. It is therefore more meaningful to look at earnings per share than at total earnings. Solutions to Gripping IFRS : Graded...
View Full Document