Here is full example of an EPS Calculation. This narrative builds on the basic principles introduced in the narrative EPS, and sets out the specific basic and diluted EPS calculation rules as per IAS 33 Earnings per share.
Company P earns a consolidated net profit of 4,600,000 during the year ended 31 December Year 1 and 5,600,000 during the year ended 31 December Year 2. The total number of ordinary shares outstanding on 1 January Year 1 is 3,000,000.
Various POSs are issued before 1 January Year 1 and during the years ended 31 December Year 1 and Year 2. During this period, the outstanding number of ordinary shares also changes.
The statement of changes in equity below summarises only the actual movements in the outstanding number of ordinary shares, followed by detailed information about such movements and POSs outstanding during the periods.
Details of the instruments and ordinary share transactions during Year 1 and Year 2
1. Convertible preference shares
At 1 January Year 1, P has 500,000 outstanding convertible preference shares. Dividends on these shares are discretionary and non-cumulative. Each preference share is convertible into two ordinary shares at the holder’s option.
The preference shares are classified as equity in P’s financial statements.
On 15 October Year 1, a dividend of 1.20 per preference share is declared. The dividend is paid in cash on 15 December Year 1. Preference dividends are not tax-deductible.
Accounting Policies to First IFRS FS – An entity must use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements. Those accounting policies must comply with each IFRSs effective at the end of its first IFRS reporting period, unless there is a mandatory exception to retrospective application or an optional exemption from the requirements of IFRSs.
Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognised for non-controlling interests and any fair value of the Group’s previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed.
If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognised in profit or loss as a gain on bargain purchase.
Business combinations are accounted for using the acquisition method. Cost of an acquisition is measured at the fair value of the assets given and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities assumed in a business combination (including contingent liabilities) are measured initially at their fair values at the acquisition date. There are no non-controlling interest in the Group’s subsidiaries.
The Dorolco acquisition – On xx October 202x Dorco Loan PLC acquired 100% of the Dorolco operations, by acquiring 100% of all voting shares in the legal entities now part of this Group.
Assets acquired and liabilities assumed – Because the holding companies established in structuring the Dorolco acquisition have been incorporated on behalf of this transaction, the opening balance sheet as at xx October 202x shown in the Consolidated Financial Statements as comparatives to the balance sheet as at 31 December 202x is the balance sheet at incorporation date. Shares issued were paid on acquisition date, except for the share option plan shares issued at closing date (1,000,000 shares issued, of which as at 31 December 202x 155,000 were not yet granted and paid up).
Mergers and acquisitions (business combinations) can have a fundamental impact on the acquirer’s operations, resources and strategies. For most entities such transactions are infrequent, and each is unique. IFRS 3 ‘Business Combinations’ contains the requirements for accounting for mergers, which are challenging in practice.
This narrative provides a high-level overview of IFRS 3 and explains the key steps in accounting for business combinations in accordance with this Standard. It also highlights some practical application issues dealing with:
how to avoid unintended accounting consequences when bringing two businesses together, and
deal terms and what effect they can have on accounting for business combinations.
Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.
Example accounting policies guidance
Whether to disclose an accounting policy
1. In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users where those policies are selected from alternatives allowed in IFRS. [IAS 1.119]
2. Some IFRSs specifically require disclosure of particular accounting policies, including choices made by management between different policies they allow. For example, IAS 16 Property, Plant and Equipment requires disclosure of the measurement bases used for classes of property, plant and equipment and IFRS 3 Business Combinations requires disclosure of the measurement basis used for non-controlling interest acquired during the period.
3. In this guidance, policies are disclosed that are specific to the entity and relevant for an understanding of individual line items in the financial statements, together with the notes for those line items. Other, more general policies are disclosed in the note 25 in the example below. Where permitted by local requirements, entities could consider moving these non-entity-specific policies into an Appendix.
Change in accounting policy – new and revised accounting standards
4. Where an entity has changed any of its accounting policies, either as a result of a new or revised accounting standard or voluntarily, it must explain the change in its notes. Additional disclosures are required where a policy is changed retrospectively, see note 26 for further information. [IAS 8.28]
5. New or revised accounting standards and interpretations only need to be disclosed if they resulted in a change in accounting policy which had an impact in the current year or could impact on future periods. There is no need to disclose pronouncements that did not have any impact on the entity’s accounting policies and amounts recognised in the financial statements. [IAS 8.28]
6. For the purpose of this edition, it is assumed that RePort Co. PLC did not have to make any changes to its accounting policies, as it is not affected by the interest rate benchmark reforms, and the other amendments summarised in Appendix D are only clarifications that did not require any changes. However, this assumption will not necessarily apply to all entities. Where there has been a change in policy, this will need to be explained, see note 26 for further information.
Private operating companies seeking a ‘fast track’ stock exchange listing sometimes arrange to be acquired by a smaller listed company (sometimes described as a ‘shell’ company or Special Purpose Acquisition Company or SPAC that is also a ‘shell’ company, especially incorporated (and listed) to serve a reverse acquisition/SPAC Merger). This usually involves the listed company issuing its shares to the private company shareholders in exchange for their shares.
The listed company becomes the ‘legal parent’ of the operating company, which in turn becomes the ‘legal subsidiary’.
A transaction in which a company with substantial operations (‘operating company’) arranges to be acquired by a listed shell company should be analysed to determine if it is a business combination within the scope of IFRS 3.
US GAAP comparison
The registering of securities that are issued by a special-purpose acquisition company (SPAC) — A Form S-1 may be used for the initial registration and sale of shares of a SPAC, a newly formed company that will use the proceeds from the IPO to acquire a private operating company (which generally has not been identified at the time of the IPO). To complete the acquisition of a private operating company, the SPAC may file a proxy or registration statement. Within four days of the closing of the acquisition of the private operating company, the SPAC must file a “super Form 8-K” that includes all of the information required in a Form 10 registration statement of the private operating company.
Is the transaction a business combination?
Answering this question involves determining:
which company is the ‘accounting acquirer’ under IFRS 3, ie the company that obtains effective control over the other
whether or not the acquired company (ie the ‘accounting acquiree’ under IFRS 3) is a business.
In these transactions, the pre-combination shareholders of the operating company typically obtain a majority (controlling) interest, with the pre-combination shareholders of the listed shell company retaining a minority (non-controlling) interest (i.e. a SPAC Merger). This usually indicates that the operating company is the accounting acquirer.
If the listed company is the accounting acquiree, the next step is to determine whether it is a ‘business’ as defined in IFRS 3. In general, the listed company is not a business if its activities are limited to managing cash balances and filing obligations. Further analysis will be needed if the listed company undertakes other activities and holds other assets and liabilities. Determining whether the listed company is a business in these more complex situations typically requires judgement.
IFRS 3 refers to a ‘business combination’ rather than more commonly used phrases such as takeover, acquisition or merger because the objective is to encompass all the transactions in which an acquirer obtains control over an acquiree no matter how the transaction is structured. A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses.
An entity’s purchase of a controlling interest in another unrelated operating entity will usually be a business combination (see Simple case – Straightforward business combinationbelow). However, a business combination (M and A) may be structured, and an entity may obtain control of that structure, in a variety of ways.
Examples of business combinations structurings
Examples of ways an entity may obtain control
A business becomes the subsidiary of an acquirer
The entity transfers cash, cash equivalents or other assets(including net assets that constitute a business)
Net assets of one or more businesses are legally merged with an acquirer
The entity incurs liabilities
One combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners
The entity issues shares
The entity transfers more than one type of consideration, or
Two or more entities transfer their net assets, or the owners of those entities transfer their equity interests to a newly created entity, which in exchange issues shares, or
The entity does not transfer consideration and obtains control for example by contract alone Some examples of this:
‘dual listed companies’ or ‘stapled entity structures’
acquiree repurchases a sufficient number of its own shares for an existing shareholder to obtain control
a condition in the shareholder agreement that prevents the majority shareholder exercising control of the entity has expired, or
a call option over a controlling interest that becomes exercisable.
A group of former owners of one of the combining entities obtains control of the combined entity, i.e. former owners, as a group, retain control of the entity they previously owned.
Therefore, identifying a business combination transaction requires the determination of whether:
what is acquired constitutes a ‘business’ as defined in IFRS3, and
Better Communication in Financial Reporting is an IFRS.org initiative to focus financial reporting on users. There is a general view that financial reports have become too complex and difficult to read and that financial reporting tends to focus more on compliance than communication. See also narrative reporting as a discussion on alternative ways of reporting.
At the same time, users’ tolerance for sifting through information to find what they need continues to decline.
This has implications for the reputation of companies who fail to keep pace. A global study confirmed this trend, with the majority of analysts stating that the quality of reporting directly influenced their opinion of the quality of management.
To demonstrate what companies could do to make their financial report more relevant, there are several suggestions to ‘streamline’ the financial statements to reflect some of the best practices that have been emerging globally over the past few years. In particular:
Information is organized to clearly tell the story of financial performance and make critical information more prominent and easier to find.
Additional information is included where it is important for an understanding of the performance of the company. For example, we have included a summary of significant transactions and events as the first note to the financial statements even though this is not a required disclosure.
Improving disclosure effectiveness
Terms such as ’disclosure overload’ and ‘cutting the clutter’, and more precisely ‘disclosure effectiveness’, describe a problem in financial reporting that has become a priority issue for the International Accounting Standards Board (IASB or Board), local standard setters, and regulatory bodies. The growth and complexity of financial statement disclosure is also drawing significant attention from financial statement preparers, and more importantly, the users of financial statements.