IAS 33 provides that basic earnings per share is calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the period.
The Numerator: Adjusting Profit or Loss
The Standard provides that the amount attributable to ordinary equity holders of the parent is adjusted for the after-tax amounts of preference dividends, differences arising on the settlement of preference shares, and other similar effects of preference shares classified as equity. It clarifies that the after-tax amount of preference dividends deducted from profit or loss includes the after-tax amount of any dividends on non-cumulative preference shares declared in respect of the period.
The Denominator: The Weighted Average Number of Shares
The Standard provides that the number of ordinary shares used for calculating basic earnings per share is the weighted average number of ordinary shares outstanding during the period, being the number of ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor.
Why a Weighted Average Rather Than a Fixed Number?
The Standard clarifies that using the weighted average number of ordinary shares outstanding during the period reflects the possibility that the amount of shareholders' capital varied during the period as a result of a larger or smaller number of shares being outstanding at any time, giving each share a weight proportional to the number of days it was outstanding relative to the total number of days in the period.
Illustrative Example (with Assumed Figures)
Suppose an entity's profit attributable to ordinary equity holders is 240,000 monetary units for the year, and the number of shares outstanding was 100,000 from the beginning of the year to 30 June, after which the entity issued an additional 20,000 shares on 1 July, bringing the total to 120,000 shares until year end. The weighted average = (100,000 × 6/12) + (120,000 × 6/12) = 50,000 + 60,000 = 110,000 shares. Basic earnings per share is then 240,000 ÷ 110,000 ≈ 2.18 monetary units per share. This is a purely illustrative example.
Why Isn't Basic Earnings Per Share Alone Enough?
Entities that have instruments convertible into ordinary shares, such as convertible bonds or share options, present an additional indicator known as diluted earnings per share alongside basic earnings per share, to reflect the potential effect of converting those instruments on the number of shares outstanding and, consequently, on each share's portion of earnings. Basic earnings per share therefore serves as the starting point on which the diluted earnings per share indicator is built, and calculating the numerator and denominator accurately — including the adjustments for preference dividends and the weighted average number of shares — remains indispensable for preparing both indicators correctly. In practice, any error in identifying the date shares were issued or bought back during the period, or in determining the correct amount of preference dividends to deduct, is reflected directly in the accuracy of the basic earnings per share figure shown in the financial statements, one of the financial indicators most closely followed by investors and analysts when assessing an entity's performance.
Legal References
- IAS 33 — Earnings per Share (2024 edition; applies until IFRS 18 becomes effective on 1 January 2027) — Paragraphs 10, 14, 19 and 20.
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