As leading auditors to SME-listed businesses on AIM and AQSE, we regularly advise on the calculation of Earnings Per Share (EPS) and Diluted Earnings Per Share (DEPS) under IFRS. These disclosures are mandatory for any company with shares traded in a public market, including AIM and AQSE, though companies with only listed debt are not required to report EPS (voluntary disclosure is permitted).
In this article, Joseph Brewer, a partner in our listed audit team, highlights five common issues related to Earnings Per Share and Diluted Earnings Per Share disclosures.
- Identifying the correct figure for ‘Earnings’
The aim of EPS reporting is to provide a performance metric that is comparable across companies. The correct figure for earnings is the profit for the year, as reported in the profit or loss statement, before considering other comprehensive income and excluding profits attributable to non-controlling interests. In more complex scenarios, adjustments to the profit figure might be necessary.
- DEPS reporting when a loss is reported
Small cap companies, such as exploration or biotech firms, often report losses, especially in pre-revenue phases or during the early stages of building a sales pipeline. When a loss is reported, common instruments like share options generally do not have a dilutive impact, as dilution occurs only when it would increase the loss per share—something unlikely in typical share option schemes.
- Understanding the impacts of dilutive instruments
DEPS reflects the potential impact of dilutive instruments, such as employee share options or warrants held by brokers and investors. The calculation is complex and goes beyond simply adding the number of share options to the weighted average number of shares. It may be that the only dilutive element of a particular share option is the difference between the average share price in the year and the exercise price. Sometimes, even with share options in issue, no dilution occurs if the options are exercisable at a price below the average share price for the year. This area requires careful attention to avoid errors.
- Discontinued operations
When a company reports discontinued operations in its profit or loss statement, it must separately report EPS and DEPS for continuing and discontinued operations, either on the face of the profit and loss account or in the notes.
- Calculating the weighted average number of shares
While the calculation of the weighted average number of shares is generally well performed, certain situations can introduce complexity. For example, if share options are fully vested and ‘in the money,’ it may be appropriate to include those options in the weighted average number of shares. Special attention is needed in more complex cases, such as when a share consolidation has occurred during the year.
What next?
EPS and DEPS calculations often occur late in the financial reporting process, which can lead to errors. Identifying key issues early in the reporting cycle can prevent complications. Gravita’s listed audit team has unparalleled experience in advising small cap listed companies on financial reporting obligations, including EPS and DEPS calculations in both simple and complex scenarios.
Find out how Gravita can assist by contacting Joseph Brewer, an audit partner in our London office.
