Share Issues and EPS Adjustments Quiz

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Questions and Answers

What condition must be met for contingently issuable ordinary shares to be included in the calculation of diluted earnings per share?

Both earnings to date and current market price at the end of the reporting period must be met (correct)

Market price must be higher than the average market price during the period

Only future earnings conditions need to be satisfied

The average market price must be used regardless of the reporting period

How does the calculation of diluted earnings per share respond to changes in market price after the reporting period?

Diluted earnings per share calculation is adjusted to reflect future market prices

The average market price during the reporting period is always used

Changes in future earnings have no impact on diluted earnings per share

It does not factor future changes until the end of the contingency period (correct)

When contingently issuable ordinary shares depend on a condition other than earnings or market price, what is assumed during the calculation?

The condition is irrelevant to the calculation

Earnings must be forecasted for accuracy

The present status of the condition remains unchanged (correct)

The condition status changes frequently

What is the effect on diluted earnings per share when the market price exceeds the exercise price of the options at the end of the reporting period?

It increases the number of ordinary shares included in the calculation Signup and view all the answers

In diluted earnings per share calculations, what happens if contingently issuable ordinary shares are based on an average market price extending beyond the reporting period?

The average market price over the extended time is utilized Signup and view all the answers

What role do future earnings play in determining the number of ordinary shares for the diluted earnings per share calculation?

They conditionally influence the number of shares alongside current market prices Signup and view all the answers

In the context of dilutive securities, under what circumstances might the basic earnings per share not include certain ordinary shares?

Until all necessary conditions related to issuance are satisfied Signup and view all the answers

What is the significance of the contingency period in the context of diluted earnings per share?

It marks the time during which conditions must be evaluated Signup and view all the answers

How is the weighted average number of ordinary shares calculated after a two-for-one bonus issue?

It is the original number of shares multiplied by three. Signup and view all the answers

What characterizes a consolidation of ordinary shares?

Reduces the number of shares without affecting resources. Signup and view all the answers

Which of the following is a feature of a capitalisation or bonus issue?

Ordinary shares are issued for no additional consideration. Signup and view all the answers

What effect does a reverse share split typically have?

It decreases the number of shares outstanding. Signup and view all the answers

When adjusting for a share consolidation with a special dividend, what must be taken into account?

The reduction in the number of shares from the date the special dividend is recognized. Signup and view all the answers

Which statement about contingently issuable shares is correct?

They may increase the number of shares outstanding if certain conditions are met. Signup and view all the answers

What generally happens to resources in the case of a share consolidation with a share repurchase?

Resources decrease alongside the reduction in shares outstanding. Signup and view all the answers

How does a rights issue with a bonus element differ from a standard bonus issue?

It requires existing shareholders to buy an additional proportion of shares. Signup and view all the answers

What adjustment is made to earnings per share calculations when ordinary shares increase due to a capitalization or bonus issue?

The adjustment is made retrospectively for all periods presented. Signup and view all the answers

Which of the following is NOT considered when calculating the potential dilutive effect on earnings per share?

The total number of shares issued in the last fiscal year. Signup and view all the answers

What is assumed when determining the proceeds from new ordinary shares issued to satisfy a contract?

Sufficient shares will be issued at the average market price during the period. Signup and view all the answers

How are contingently issuable shares treated for diluted earnings per share calculations?

They are included only if they are expected to be issued. Signup and view all the answers

In the case of a reverse share split, how should the number of shares be adjusted for earnings per share calculations?

The calculations for all periods presented shall be adjusted retrospectively. Signup and view all the answers

What is the effect on diluted earnings per share if the exercise price is below the average market price?

There is no impact on diluted earnings per share. Signup and view all the answers

When shares are subject to a capitalisation issue, the impact on earnings per share calculations occurs at which time?

Retrospectively for all periods presented. Signup and view all the answers

What happens to the incremental ordinary shares in the calculation of diluted earnings per share?

They are included in the total ordinary shares calculation for diluted earnings per share. Signup and view all the answers

Study Notes

Diluted earnings per share (EPS) is calculated based on the number of ordinary shares that could be issued if the market price is considered at the end of the reporting period.
If contingent conditions rely on average market prices over a span extending beyond the reporting period, the average price to date is utilized.
Basic EPS excludes contingently issuable shares until conditions are fully satisfied, postponing inclusion until the contingency period ends.

Conditions for Including Contingently Issuable Shares

The number of contingently issuable shares may hinge on future earnings and stock prices. Both earnings and market price conditions must be satisfied for inclusion in diluted EPS.
If contingently issuable shares stem from factors outside of earnings or market price, like opening new retail stores, current conditions at reporting period's end govern inclusion in diluted EPS.

Types of Issued Shares

Share-related events such as capitalisation/bond issues, bonus elements in rights issues, share splits, and reverse share splits significantly affect the number of ordinary shares.
A capitalisation or bonus issue entails issuing shares to current shareholders at no extra cost, increasing the number of outstanding shares without additional resources.

Ordinary shares outstanding before a capitalisation or split are adjusted based on the proportional change resulting from the event as if it occurred at the start of the earliest presented period.
Examples include a two-for-one bonus issue, increasing the overall share count proportionately.

Impact of Consolidation of Shares

Consolidation reduces the number of outstanding shares without affecting total resources. If it coincides with share repurchase, resources may reduce accordingly, particularly if combined with special dividends.
Weighted average shares outstanding is adjusted during the period a consolidation occurs.

Calculating Potential Dilution Effects

For contracts considered ‘in the money’ during the period, the potential dilutive effect on EPS is determined by assuming the issue of additional ordinary shares to fulfill contracts based on average market price.
Proceeds from issued shares are assumed to buy back ordinary shares, and incremental shares (the difference) are factored into diluted EPS calculation.

Changes in the number of ordinary or potential ordinary shares due to capitalisations, bonus issues, or splits must lead to retrospective adjustments in EPS calculations across all presented periods.
Adjustments are also necessary when changes occur after the reporting period but before financial statements are authorized, ensuring all per share calculations reflect updated figures.

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Description

Test your knowledge on share issues, including capitalisation, rights issues, and share splits. Understand how these events impact earnings per share calculations and the concept of diluted earnings per share. This quiz will help reinforce key financial principles related to share adjustments.