Partly paid ordinary shares

Consider the entitlement to dividends during the period

↓

↓

Include in basic EPS the fraction entitled to dividends

Include as equivalent of options in diluted EPS the fraction not entitled to dividends

Potential impact on basic EPS

Potential impact on diluted EPS

To the extent that a partly paid ordinary share is entitled to participate in dividends during the period relative to a fully paid ordinary share, it is treated as a fraction of an ordinary share in the denominator. [IAS 33.A15]

To the extent that a partly paid ordinary share is not entitled to participate in dividends during the period, it is treated as the equivalent of an option or warrant (see Options, warrants and their equivalents). [IAS 33.A16]

No adjustment is necessary in the numerator because the payment of the remaining balance has no consequential effect in income or expense.

The potential adjustment to the denominator is determined by applying the treasury share method to the fraction of partly paid ordinary shares that is not entitled to participate in dividends. The unpaid balance is assumed to be the proceeds used to hypothetically purchase ordinary shares at the average market price for the period (or the period for which the partly paid ordinary shares are outstanding if this is shorter). The potential adjustment to the denominator is the number of incremental shares that are assumed to be issued and is the difference between:

• the number of shares subscribed; and
• the number of ordinary shares assumed to be purchased at the average market price with the unpaid balance. [IAS 33.A16]

Case – Partly paid ordinary shares with participating rights

The following basic facts relate to Company P.

• Net profit for Year 1 is 4,600,000.
• The number of ordinary shares outstanding on 1 January Year 1 is 3,000,000.

The following facts are also relevant for Year 1.

• On 1 April, P issues 1,000,000 ordinary shares. Each of these shares has a subscription price of 10, payable in accordance with the following schedule:
  • 80% of the issue price: on issue; and
  • balance: required to be paid when it is called for by P.

Accordingly, P receives 8 per share on that date.

• In accordance with the applicable laws and P’s constitutional documents, holders of P’s partly paid ordinary shares are entitled to participate in dividends at the percentage the shares are paid up, as compared with fully paid ordinary shares.
• The average market price of P’s ordinary shares between 1 April and 31 December is 12.

The EPS computations for Year 1 are as follows.

Basic EPS

Diluted EPS

1. Determine the numerator

No adjustment is necessary. The numerator is 4,600,000.

1. Identify POSs

The partly paid ordinary shares are POSs from 1 April Year 1, because they are treated as the equivalent of warrants or options to the extent that they are not entitled to dividends relative to fully paid ordinary shares.

2. Determine the denominator

Partly paid ordinary shares are treated as fractions of ordinary shares to the extent of their dividend rights. Accordingly, each of the 1,000,000 partly paid ordinary shares is treated as 80% of an ordinary share when determining the denominator. Accordingly, P calculates the denominator as follows.

The denominator is therefore 3,600,000.

2. For each POS, calculate EPIS

Potential adjustment to the numerator for EPIS: No adjustment is required.

Potential adjustment to the denominator for EPIS: The adjustment is determined using the treasury share method, as follows.

The bonus element is weighted for the period the ordinary shares are not fully paid.

3. Determine basic EPS

Basic EPS = 4,600,000 / 3,600,000 = 1.28.

3. Rank the POSs

This step does not apply, because there is only one class of POSs.

4. Determine basic EPS from continuing operations

Basic EPS is 1.28 (see Step 3 of basic EPS computation on the right side).

5. Identify dilutive POSs and determine diluted EPS

The partly paid ordinary shares are dilutive because no adjustment to the numerator for EPIS is required and the unpaid balance per share is lower than the average market price of an ordinary share during the period.

Accordingly, P includes the impact of the partly paid ordinary shares in diluted EPS.

Diluted EPS = 1.27