Preference shares in EPS Calculations
Preference shares may in accordance with IAS 32 Financial Instruments: Presentation be classified as a whole or by their component parts into a financial liability and/or an equity instrument, depending on their terms. They may be convertible into ordinary shares.
This narrative builds on the basic principles introduced in EPS or earnings per share, and sets out the specific basic and diluted EPS implications of the following types of instrument(s).
An entity needs to consider whether equity-classified preference shares are a class of ordinary shares. If the entity has more than one class of ordinary shares, then it is required to present EPS for each class. Ordinary shares of the same ‘class’ are those shares that have the same right to receive dividends or otherwise share in the profit for the period. Additional considerations for classes of ordinary shares are set out below in classes of ordinary shares. [IAS 33.5–6]
EPS implications
Generally, how preference shares are dealt with in EPS depends on their accounting classification as liabilities or equity instruments, and whether they are convertible into ordinary shares.
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Potential impact on basic EPS
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Potential impact on diluted EPS
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The numerator might or might not be affected and the denominator is not affected.
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The numerator and the denominator might or might not be affected.
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Preference shares that are wholly classified as liabilities under IAS 32 are not ordinary shares. The returns to the holders of these shares – e.g. post-tax amounts of preference dividends – have generally been recognised in profit or loss and therefore no further adjustment to the numerator is necessary. [IAS 33.13]
For preference shares that are wholly or partly classified as equity instruments under IAS 32, the numerator is adjusted for any returns to the holders of these shares, which include the post-tax amounts of preference dividends and any differences arising on settlement. For additional considerations and examples of adjustments for equity-classified preference shares in basic EPS. [IAS 33.12]
In addition, separate disclosure of EPS amounts is required for equity-classified preference shares that form a separate class of ordinary shares. [IAS 33.66]
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Preference shares that are convertible into ordinary shares, other than those that are mandatorily convertible, are POSs (see Convertible instruments).
For equity-classified convertible preference shares, the potential adjustment:
- to the numerator includes the returns to the holders of these shares adjusted in the calculation of basic EPS (see left); and
- to the denominator is based on the additional ordinary shares resulting from the assumed conversion.
Conversion is assumed to have occurred at the beginning of the period (or, if later, the date of issuance of the convertible preference shares).
For liability-classified convertible preference shares, the potential adjustment:
- to the numerator includes the post-tax amount of any dividends and other consequential changes in income or expense that would result from the assumed conversion; and
- to the denominator is based on the additional ordinary shares resulting from the assumed conversion.
Conversion is assumed to have occurred at the beginning of the period (or, if later, the date of issuance of the convertible preference shares). For an example of adjustments for convertible instruments containing a liability component, see contracts settled in shares or cash.
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Dilutive or anti-dilutive?
Generally, a convertible preference share is anti-dilutive whenever the amount of the dividend on such shares declared in or accumulated for the current period and any other required adjustment to the numerator per ordinary share obtainable on conversion exceeds basic EPS from continuing operations. [IAS 33.50]
Classes of ordinary shares
If an entity has more classes of ordinary shares, then EPS is disclosed for each class of ordinary shares that has a different right to share in the profit for the period. Therefore, for an entity that applies IAS 33, it is important to identify which of the instruments in issue are ordinary shares and to determine if there is more than one class of ordinary shares. (IAS 33.66)
IAS 33 defines an ‘ordinary share’ as ‘an equity instrument that is subordinate to all other classes of equity instruments’. It also explains that ordinary shares participate in profit for the period only after other types of shares such as preference shares have participated, and that ordinary shares of the same class are those shares that have the same right to receive dividends or otherwise share in the profit for the period. (IAS 33.5–6)
If an entity has shares with different rights, then it considers whether all of the shares are in fact ordinary shares. Consider the following contrasting examples.
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Case – Two classes of ordinary shares
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Company X has two classes of shares, A and B. The holders of class B shares are entitled to dividends equal to 50% of any dividends declared on the class A shares, but the shares are otherwise identical to class A shares. Both classes are subordinate to all other classes of equity instruments with respect to participation in profit.
In this case, X concludes that both class A and class B shares are ordinary shares despite the difference in entitlement to dividends. Disclosure of separate EPS amounts is therefore required for both class A and class B ordinary shares.
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In general, an entity is not required to present separate EPS information for participating preference shares that are not considered to be a separate class of ordinary shares.
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Case – Participating preference shares that are not ordinary shares
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Company C has two classes of shares, X and Y. Shareholders of class X are entitled to a fixed dividend per share and have the right to participate in any additional dividends declared. The class Y shareholders participate equally with class X shareholders with respect to the additional dividends only.
In this example, C concludes that class X shares are not considered to be ordinary, because the fixed entitlement creates a preference over the class Y shares, and the class Y shareholders are subordinate to the class X shareholders. This is even if both classes participate equally in the residual assets of C on dissolution.
The class Y shares are the only class of ordinary shares, and therefore the only class of shares for which disclosure of EPS information is required. However, the participating rights of each class of these shares should be considered in determining earnings attributable to ordinary shareholders.
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In general, puttable instruments that qualify for equity classification instead of financial liability classification under IAS 32 Financial Instruments: Presentation are not ordinary shares for the purposes of IAS 33. We believe that it is not appropriate to apply by analogy the limited scope exemption under IAS 32 for EPS calculation purposes. (IAS 32.16A–16F)
The EPS presentation is not required for, or as a result of the existence of, such instruments. However, when determining the earnings that are attributable to the ordinary shareholders, the terms of these instruments should be evaluated to determine if they are participating instruments.
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Preference shares in EPS Calculations
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