Earnings per share help please

Barry

I find this subject quite hard to follow and not sure of something in the Steve Collings book IFRS for dummies. On page 317 the example starts with after tax profit and then adds on the reduction in loan interest then deducts tax relief and adds/deducts various other components relating to the convertible loan to arrive at an adjusted after tax profit for purposes of the diluted EPS figure. My question is why does the example do this? I can't follow the logic.

Thank you in advance.

Steve Collings

Barry wrote: »

I find this subject quite hard to follow and not sure of something in the Steve Collings book IFRS for dummies. On page 317 the example starts with after tax profit and then adds on the reduction in loan interest then deducts tax relief and adds/deducts various other components relating to the convertible loan to arrive at an adjusted after tax profit for purposes of the diluted EPS figure. My question is why does the example do this? I can't follow the logic.

Thank you in advance.

Hi,

The reason is that it is a "convertible" loan - i.e. that the loan note holder has the option to convert the capital element into shares at the redemption date if they so wish. Hence the existing shareholders need to know two types of EPS - the basic EPS and the diluted EPS. If the loan did not exist then there would be no interest payments, hence no tax relief on the loan and higher profits which would then give rise to a higher bonus (in my scenario the directors bonuses are based on pre tax profit). That is why the earnings figure is adjusted to take account of the "potential" issues that will arise if the loan note holders take shares as opposed to cash.

I hope that helps

Steve

Barry

Thank you very much Steve. That has helped me understand it better.

I was at my revision course today and my tutor mentioned your book as recommended reading. She was very complementary about it as well.