The Financial Reporting Council (FRC) has published a thematic review of earnings per share (EPS). All companies with listed ordinary shares need to report EPS by IAS 33 Earnings per share in both interim and annual reports (including companies reporting under the UK GAAP standard FRS 102). While EPS is a well-understood metric widely used by companies and investors, some aspects of its calculation are not straightforward. The findings from the FRC's Corporate Reporting Review (CRR) team's routine monitoring of company reporting show that some of the main principles of IAS 33 are not always well understood or applied correctly.
The FRC’s review identifies how companies can improve their disclosure of EPS:
- Companies should consider providing further information to explain the basis for the weighted average number of shares used in the EPS calculation if it is significantly different from information disclosed about issued ordinary shares and potential ordinary shares (for example, share options).
- Judgements that have a material effect on EPS should be disclosed by paragraph 122 of IAS 1 (or paragraph 8.6 of FRS 102).
- Disclosures provided for non-GAAP 'adjusted EPS' should meet the ESMA Guidelines on Alternative Performance Measures (APMs) requirements and explain the methodology applied in the adjusted calculation, including the basis used for tax on adjusting items.
The review highlights the more common errors in EPS calculations and reminds companies of specific key requirements. Including the definitions of dilutive and anti-dilutive, the treatment of share reorganisations that include a bonus element, adjustments required for equity preference shares, and the methodology for calculating EPS when a reverse acquisition has occurred. To encourage improvement in the general quality of the application of IAS 33 by companies, the review includes a summary of the main requirements of the standard; examples to explain some more complex aspects of calculating EPS; and observations on the importance of EPS for investors.