- 30 Marks
FR – L2 – Q63 – Earnings Per Share
Question
(a) (i) The issued share capital of Accra Trust, a publicly listed company on the Accra Stock Exchange, at 31st March 20X7 was GH¢10 million. Its shares are denominated at 25 pesewas each. Accra Trust’s earnings attributable to its ordinary shareholders for the year ended 31st March 20X7 were also GH¢10 million, giving an earnings per share of 25 pesewas.
Year ended 31st March 20X8
On 1st July 20X7 Accra Trust issued eight million ordinary shares at full market price. On 1st January 20X8 a bonus issue of one new ordinary share for every four ordinary shares held was made. Earnings attributable to ordinary shareholders for the year ended 31st March 20X8 were GH¢13.8 million.
Year ended 31st March 20X9
On 1st October 20X8 Accra Trust made a rights issue of shares of two new ordinary shares at a price of GH¢1.00 each for every five ordinary shares held. The offer was fully subscribed. The market price of Accra Trust’s ordinary shares immediately prior to the offer was GH¢2.40 each. Earnings attributable to shareholders for the year ended 31st March 20X9 were GH¢19.5 million.
Required:
Calculate Accra Trust’s earnings per share for the years ended 31st March 20X8 and 20X9 including comparative figures.
(a) (ii) On 1st April 20X9 Accra Trust issued GH¢20 million 8% convertible loan stock at par. The terms of the conversion (on 1st April 20Y2) are that for every GH¢100 of loan stock, 50 ordinary shares will be issued at the option of loan stockholders. Alternatively, the loan stock will be redeemed at par for cash. Also, on 1st April 20X9 the directors of Accra Trust were awarded share options on 12 million ordinary shares exercisable from 1st April 20Y2 at GH¢1.50 per share. The average market value of Accra Trust’s ordinary shares for the year ended 31st March 20X9 was GH¢2.50 each. The income tax rate is 25%. Earnings attributable to ordinary shareholders for the year ended 31st March 20X9 were GH¢25,200,000. The share options have been correctly recorded in the statement of profit or loss.
Required:
Calculate Accra Trust’s basic and diluted earnings per share for the year ended 31st March 20X9 (comparative figures are not required).
You may assume that both the convertible loan and the directors’ options are dilutive.
(b) Nsawam Ltd issued 3,000 convertible bonds at par. The bonds are redeemable in 4 years’ time at their par value of GH¢100 per bond. The bonds pay interest annually in arrears at an interest rate (based on nominal value) of 5%. Each bond can be converted at the maturity date into 5 GH¢1.00 shares. The prevailing market interest rate for four-year bonds that have no right of conversion is 8%.
The present value at 8% of GH¢1 receivable at end of:
Year 1 0.926
Year 2 0.857
Year 3 0.794
Year 4 0.735
Required:
Show the initial accounting treatment of the bond in accordance with International Financial Reporting Standards (IFRS Accounting Standards).
(c) You are the finance director of ABC Company. ABC is preparing its financial statements for the year ended 31st December 20X9. The following item has been brought to your attention:
ABC acquired the entire share capital of XYZ Ltd during the year. The acquisition was achieved through a share exchange. The terms of the exchange were based on the relative values of the two companies obtained by capitalizing the companies’ estimated cash flows. When the fair value of XYZ’s Ltd identifiable net assets was deducted from the value of the company as a whole, its goodwill was calculated at GH₵2.5 million. A similar exercise valued the goodwill of ABC at GH₵4 million. The directors wish to incorporate both goodwill values in the companies’ consolidated financial statements.
Required:
Describe how ABC should treat the item in its financial statements for the year ended 31st December 20X9 commenting on the directors’ views, where appropriate.
(d) As a newly qualified accountant with The Institute of Chartered Accountants (Ghana) (ICAG), you are asked to make a short presentation to the rest of the staff in the accounting and finance department of your employer who are themselves yet to join ICAG as students about the standard setting process adopted by the International Accounting Standards Board.
Required:
Discuss the standard setting process as adopted by the IASB to these junior staff.
(e) The functional currency according to IAS 21 The Effects of Changes in Foreign Exchange Rates is the currency of the primary economic environment where the entity operates.
Required:
Identify THREE factors in accordance with IAS 21 that an entity will consider in determining its functional currency.
Answer
(ai). Calculate Accra Capital’s earnings per share for the years ended 31st March 20X8 and 20X9 including comparative figures. (7 marks)
Answer:
Accra Capital – EPS year ended 31 March 20X8:
The issue on 1 July 20X7 at full market value needs to be weighted:
| | 40m × 3/12 = | 10m |
| New shares | 8m | |
| | 48m × 9/12 = | 36m |
| Total | | 46m |
Without the bonus issue this would give an EPS of 30p (13.8m / 46m × 100).
The bonus issue of one for four would result in 12 million new shares giving a total number of ordinary shares of 60 million. The dilutive effect of the bonus issue would reduce the EPS to 24p (30p × 48m / 60m).
The comparative EPS (for 20X7) would be restated at 20p (25p × 48m / 60m).
EPS year ended 31 March 20X9:
The rights issue of two for five on 1 October 20X8 is half way through the year. The theoretical ex-rights value can be calculated as:
Holder of 100 shares worth GH₵2.40 = GH₵240
Subscribes for 40 shares at GH₵1 each = GH₵40
Now holds 140 worth (in theory) = GH₵280 i.e. GH₵2 each
Weighting:
| 60m × 6/12 × 2.40 / 2.00 = | 36m |
| Rights issue (2 for 5) | 24m |
| New total | 84m × 6/12 = | 42m |
| Weighted average | | 78m |
EPS is therefore 25p (GH₵19.5m / 78m × 100).
The comparative (for 20X8) would be restated at 20p (24p × 2.00 / 2.40).
(ii). The basic EPS for the year ended 31 December 20X9 is 30p (GH₵25.2m / 84m × 100).
Dilution
Convertible loan stock
On conversion loan interest of GH₵1.2 million after tax would be saved (GH₵20 million × 8% × (100% – 25%)) and a further 10 million shares would be issued (GH₵20m / GH₵100 × 50).
Directors’ options
Options for 12 million shares at GH₵1.50 each would yield proceeds of GH₵18 million. At the average market price of GH₵2.50 per share this would purchase 7.2 million shares (GH₵18m / GH₵2.50). Therefore the “bonus” element of the options is 4.8 million shares (12m – 7.2m).
Using the above figure the diluted EPS for the year ended 31 December 20X9 is 26.7p ((GH₵25.2m + GH₵1.2m) / (84m + 10m + 4.8m)).
(b). Non-current liabilities
Financial liability component of convertible bond (W1) 270,180
Equity
Equity component of convertible bond (300,000 – (W1) 270,180) 29,820
WORKING
Fair value of equivalent non-convertible debt
Present value of principal payable at end of 4 years
(3,000 × GH₵100 = GH₵300,000 × 0.735) = 220,500
Present value of interest annuity payable annually in arrears for 4 years
| Year 1 (5% × 300,000) = 15,000 × 0.926 | 13,890 |
| Year 2 15,000 × 0.857 | 12,855 |
| Year 3 15,000 × 0.794 | 11,910 |
| Year 4 15,000 × 0.735 | 11,025 |
| Total | 49,680 |
Total fair value of liability component: 220,500 + 49,680 = 270,180
(c). Whilst it is acceptable to value the goodwill of GH₵2.5 million of XYZ (the subsidiary) on the basis described in the question and include it in the consolidated statement of financial position, the same treatment cannot be afforded to ABC’s own goodwill. The calculation may indeed give a realistic value of GH₵4 million for ABC goodwill, and there may be no difference in nature between the goodwill of the two companies, but it must be realized that the goodwill of ABC is internal goodwill and IFRS Accounting Standards prohibit such goodwill appearing in the financial statements. The main basis of this conclusion is one of reliable measurement. The value of acquired (purchased) goodwill can be evidenced by the method described in the question (there are also other acceptable methods), but this method of valuation is not acceptable as a basis for recognizing internal goodwill.
(d). The following summarizes the key steps in the standard setting process:
Issues paper
IASB staff prepare an issues paper including studying the approach of national standards setters.
Discussion
The SAC is consulted about the advisability of adding the topic to the IASB’s agenda.
Document
A Discussion Document may be published for public comment.
Exposure Draft
An Exposure Draft is published for public comment.
International Financial Reporting Standard
After considering all comments received, an IFRS is approved by at least 8 votes (of 14) of the IASB. The final standard includes both a basis for conclusions and any dissenting opinions.
(e). (i) The currency that mainly influences sales prices for goods and services
(ii) The currency of the country whose competitive forces and regulations mainly determine the sales price of goods and services
(iii) The currency that mainly influences labour, material and other costs of providing goods and services
- Tags: Financial Reporting, Foreign Currency, Functional Currency, IAS 21
- Level: Level 2
- Uploader: Samuel Duah