Question 3b

IAS® 33 – Earnings per Share – sets out requirements for the calculation and presentation of earnings per share in financial statements of listed entities. The requirements include the disclosure of basic earnings per share and, where an entity has potential ordinary shares in issue, the additional disclosure of diluted earnings per share in certain circumstances.

Kappa is a listed entity with a number of subsidiaries. Extracts from the consolidated statement of profit or loss and other comprehensive income of Kappa for the year ended 30 September 2018 appear below:

Attributable to Kappa Non-controlling interest Total
$’000 $’000 $’000
Profit for the year 39,000 3,000 42,000
Other comprehensive income 5,000 Nil 5,000
––––––– –––––– –––––––
Total comprehensive income 44,000 3,000 47,000
––––––– –––––– –––––––

The long-term finance of Kappa comprises:

(i) 200 million ordinary shares in issue at the start of the year. On 1 January 2018, Kappa issued 50 million new ordinary shares at full market value.

(ii) 80 million irredeemable preference shares. These shares were in issue for the whole of the year ended 30 September 2018. The dividend on these preference shares is discretionary.

(iii) $180 million 6% convertible loan stock issued on 1 October 2016 and repayable on 30 September 2021 at par. Interest is payable annually in arrears. As an alternative to repayment at par, the lenders on maturity can elect to exchange their loan stock for 100 million ordinary shares in Kappa. On 1 October 2016, the prevailing market interest rate for five-year loan stock which had no right of conversion was 8%. Using an annual discount rate of 8%, the present value of $1 payable in five years is $0·68 and the cumulative present value of $1 payable at the end of years one to five is $3·99.

In the year ended 30 September 2018, Kappa declared an ordinary dividend of 10 cents per share and a dividend of 5 cents per share on the irredeemable preference shares.

The annual rate of income tax applicable to Kappa and its subsidiaries is 20%.

All transactions have been correctly accounted for in the financial statements of Kappa for the year ended 30 September 2018.

Required:
(b) Explain how the diluted earnings per share is calculated and when it needs to be disclosed. (3 marks)