Question Tag: EPS Significance

The objective of IAS 33 – Earnings Per Share is to improve the comparability of the performance of different entities in the same period and of the same entity in different accounting periods. This is done by prescribing the methods for determining the numbers of shares to be included in the calculation of earnings per share. The management of Soar Plc had sought your professional advice on the application of IAS 33.

a. You are required to advise the management of Soar Plc on the:
i. Significance of earnings per share. (5 marks)
ii. Shortcomings of earnings per share. (5 marks)

b. The directors of Soar Plc have decided to replace most of the existing plant and machinery which are now obsolete during the year ended September 30, 2015, to enhance earnings. The costs of removing existing plant and acquiring and installing new plant have been estimated at N750,000.

In order to improve liquidity, the directors decided to make a new issue of 800,000 ordinary shares at N2 per share fully paid on January 1, 2015, and a further N600,000 4% convertible loan notes on June 1, 2015. The terms of issue would provide for conversion into ordinary shares as stated below:

The ordinary shares issued would rank for dividend in the current year. The following relates to the company for the period ended September 30, 2015:

• Profit before interest and tax is N850,000.
• Effective rate of company tax on profit is 30% and the basic EPS for the year ended September 30, 2014, was 48 kobo.
• The company had issued as at September 30, 2014, the following:
  • 2,000,000 ordinary shares of 50 kobo each fully paid.
  • 400,000 12% irredeemable preference shares of N1 each fully paid.
  • 300,000 10% redeemable preference shares of N1 each fully paid.
  • N700,000 8% redeemable debenture (non-convertible).

Required:
Calculate for Soar Plc for the year ended September 30, 2015:
i. Basic earnings per share (5 marks).
ii. Fully diluted earnings per share (5 marks).