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Ind AS 33 – Earnings per Share (EPS) Interview Q&A

InterviewQ&A

A. Core Concepts & Objectives

Q1: What is the objective of Ind AS 33, and why is EPS important in financial reporting?

What the interviewer tests: The interviewer is testing your understanding of earnings per share (EPS) and its relevance in financial reporting.

Key elements:
  • Earnings per share
  • Investor decision-making
  • Financial performance indicator

The objective of Ind AS 33 is to prescribe the principles for the determination and presentation of earnings per share (EPS). EPS is crucial as it provides a measure of the company's profitability on a per-share basis, aiding investors in making informed decisions and comparing financial performance across different companies.

Q2: Define basic earnings per share and explain the components of its numerator and denominator.

What the interviewer tests: The interviewer is checking your knowledge of fundamental financial metrics and their implications.

Key elements:
  • Definition of EPS
  • Numerator components
  • Denominator components

Basic earnings per share (EPS) is calculated as net income minus preferred dividends, divided by the weighted average shares outstanding. The numerator reflects the company's profitability available to common shareholders, while the denominator indicates the number of shares that are entitled to earnings, providing a per-share profitability measure.

Q3: How is diluted earnings per share computed, and why is it reported in addition to basic EPS?

What the interviewer tests: The interviewer is assessing your understanding of EPS calculations and the significance of dilution.

Key elements:
  • Calculation of diluted EPS
  • Impact of convertible securities
  • Importance of reporting diluted EPS

Diluted EPS is computed by adjusting the basic EPS for the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted into common stock. This includes factors like convertible bonds and stock options. Reporting diluted EPS provides a more conservative view of earnings, reflecting the impact of all potential shares that could dilute earnings.

Q4: On which financial statements must basic and diluted EPS be presented?

What the interviewer tests: The interviewer is evaluating your knowledge of financial reporting requirements regarding earnings per share.

Key elements:
  • Income statement
  • Basic EPS
  • Diluted EPS

Basic and diluted EPS must be presented on the face of the income statement for each class of ordinary shares. Additionally, they should be disclosed in the notes to the financial statements as required by accounting standards.

B. Basic EPS – Calculation Nuances

Q5: How are preference dividends treated in the calculation of basic EPS?

What the interviewer tests: The interviewer is assessing your understanding of earnings per share calculations and the treatment of different types of dividends.

Key elements:
  • Understanding of EPS
  • Treatment of preference dividends
  • Impact on shareholder equity

Preference dividends are deducted from net income to arrive at the earnings available to common shareholders when calculating basic EPS. This ensures that the earnings per share reflect only the profit attributable to common shareholders.

Q6: How is the weighted average number of ordinary shares determined?

What the interviewer tests: The interviewer is testing your knowledge of share calculations and corporate finance metrics.

Key elements:
  • Time-weighting
  • Stock splits or dividends
  • Basic vs. diluted shares

The weighted average number of ordinary shares is determined by taking the total shares outstanding during the period, adjusted for any stock splits or dividends, and time-weighting them based on how long they were outstanding. This can be calculated for basic shares and may also consider potential dilution from convertible securities.

Q7: When are new shares issued during the period included in the weighted average calculation?

What the interviewer tests: The interviewer is testing your knowledge of share issuance and its effect on earnings per share calculations.

Key elements:
  • Weighted average shares concept
  • Timing of share issuance
  • Impact on EPS

New shares issued during the period are included in the weighted average calculation from the date of issuance to the end of the reporting period. This ensures that the calculation reflects the total shares outstanding during the relevant time frame, impacting the earnings per share (EPS) accurately.

Q8: How are bonus issues, rights issues, and share splits treated in EPS calculations?

What the interviewer tests: The interviewer is assessing your understanding of earnings per share (EPS) and how adjustments are made for different corporate actions.

Key elements:
  • Understanding of EPS adjustments
  • Impact of corporate actions
  • Calculation methods

Bonus issues, rights issues, and share splits are adjustments that affect the number of shares outstanding. EPS is recalculated by adjusting the weighted average number of shares to reflect these changes, ensuring comparability across periods.

Q9: When are retrospective adjustments required for EPS due to changes like bonus issues?

What the interviewer tests: The interviewer is checking your grasp of accounting standards and their implications on financial reporting.

Key elements:
  • Understanding of EPS
  • Accounting standards compliance
  • Impact of bonus issues

Retrospective adjustments for Earnings Per Share (EPS) are required when there are changes such as stock splits or bonus issues, as these adjustments ensure comparability of financial statements across periods, aligning with the accounting standards like ASC 260.

C. Diluted EPS – Potential Ordinary Shares

Q10: What is a dilutive potential ordinary share?

What the interviewer tests: The interviewer is evaluating your understanding of share dilution and its implications for earnings per share.

Key elements:
  • Convertible securities
  • Options and warrants
  • Impact on earnings per share

A dilutive potential ordinary share refers to a financial instrument, such as convertible securities, stock options, or warrants, that can be converted into ordinary shares. When exercised, these instruments increase the total number of shares outstanding, potentially lowering earnings per share and diluting existing shareholders' equity.

Q11: How are the numerator and denominator adjusted when calculating diluted EPS?

What the interviewer tests: The interviewer is checking your knowledge of earnings per share calculations and the effects of dilution.

Key elements:
  • Understanding of diluted EPS
  • Adjustment for convertible securities
  • Impact of stock options

In calculating diluted EPS, the numerator is adjusted by adding back the interest expense on convertible debt, net of tax, and any dividends on convertible preferred stock. The denominator is adjusted by including the weighted average number of additional shares that would be issued from convertible securities, stock options, and any other dilutive instruments. This ensures that the diluted EPS reflects the potential dilution from these securities.

Q12: Under what conditions are convertible instruments included in diluted EPS calculations?

What the interviewer tests: The interviewer is testing your knowledge of earnings per share calculations and the treatment of convertible securities.

Key elements:
  • Convertible instruments are included when dilutive
  • Impact on net income and shares outstanding
  • Compliance with accounting standards

Convertible instruments are included in diluted EPS calculations when they are deemed dilutive, meaning their conversion would decrease EPS. This is assessed by comparing the effect on net income and the increase in shares outstanding, ensuring compliance with accounting standards for accurate financial reporting.

Q13: What does it mean for potential shares to be antidilutive, and how are they treated?

What the interviewer tests: The interviewer is assessing your understanding of share dilution and the implications for earnings per share.

Key elements:
  • Definition of antidilutive shares
  • Impact on earnings per share
  • Accounting treatment

Antidilutive shares are potential shares that, if converted to common stock, would increase earnings per share (EPS). They are typically excluded from the calculation of diluted EPS because their conversion would not dilute existing shareholders' equity.

Q14: How are options and warrants treated in diluted EPS using the treasury share method?

What the interviewer tests: The interviewer is evaluating your knowledge of financial reporting and EPS calculations.

Key elements:
  • Understanding of diluted EPS
  • Knowledge of treasury share method
  • Application of accounting standards

Under the treasury share method, options and warrants are assumed to be exercised at the average market price during the period. The proceeds from the exercise are used to repurchase shares at this average price, which results in an adjusted number of shares outstanding for calculating diluted EPS.

D. Presentation & Disclosures

Q15: How should EPS be presented when the entity reports discontinued operations?

What the interviewer tests: The interviewer is assessing your understanding of EPS reporting standards and how to handle discontinued operations.

Key elements:
  • Understand EPS calculation
  • Know reporting standards
  • Differentiate between continuing and discontinued operations

Earnings per share (EPS) should be presented separately for continuing and discontinued operations, typically showing both basic and diluted EPS. This allows users to assess the performance of continuing operations without the impact of discontinued segments.

Q17: What reconciliations are required to be disclosed for EPS?

What the interviewer tests: The interviewer is assessing your knowledge of earnings per share (EPS) calculations and related disclosures.

Key elements:
  • Understanding of EPS calculations
  • Knowledge of reconciliation requirements
  • Awareness of financial reporting standards

Reconciliations for EPS typically include adjustments for preferred dividends, stock splits, and potential dilutive securities, ensuring clarity on the numerator and denominator used in the EPS calculation.

Q18: How should potential dilutive instruments that are not included due to being antidilutive be disclosed?

What the interviewer tests: The interviewer is testing your knowledge of financial reporting standards regarding the disclosure of dilutive securities.

Key elements:
  • Disclosure requirements
  • Antidilutive instruments
  • Impact on EPS calculations

Potential dilutive instruments that are antidilutive should be disclosed in the notes to the financial statements, clearly stating their nature and the reason for exclusion from the diluted earnings per share (EPS) calculation. This transparency helps users understand the potential impact these instruments could have on future EPS if circumstances change.

Q19: What events occurring after the reporting period must be disclosed if they affect EPS?

What the interviewer tests: The interviewer is assessing your knowledge of financial reporting standards and your ability to identify significant events that impact earnings per share.

Key elements:
  • Adjusting events
  • Non-adjusting events
  • Disclosure requirements

Events that must be disclosed include adjusting events that provide additional evidence about conditions existing at the reporting date, such as settlements of litigation, and non-adjusting events that are significant enough to affect the decisions of users, like major acquisitions or changes in management.

E. Complex Scenarios & Practical Edge Cases

Q20: How do you calculate EPS in a loss-making scenario?

What the interviewer tests: The interviewer is assessing your understanding of Earnings Per Share (EPS) calculations under challenging conditions.

Key elements:
  • Understand EPS formula
  • Adjust for losses
  • Impact on shareholder value

In a loss-making scenario, EPS is calculated by dividing the net loss by the weighted average number of shares outstanding. It's important to note that negative EPS reflects the company's struggles, which can impact investor perception and shareholder value.

Q21: How is EPS computed separately for continuing and discontinued operations?

What the interviewer tests: The interviewer is checking your knowledge of earnings per share calculations and their implications for financial reporting.

Key elements:
  • Separate calculations for EPS
  • Continuing operations earnings
  • Discontinued operations earnings

EPS is computed by dividing the net income attributable to common shareholders by the weighted average number of shares outstanding. For continuing operations, only the earnings from ongoing business activities are considered, while for discontinued operations, the earnings or losses from segments that have been sold or are held for sale are reported separately, allowing investors to assess ongoing performance more clearly.

Q22: How do contingent share issues affect the calculation of EPS?

What the interviewer tests: The interviewer is testing your understanding of earnings per share (EPS) and how it can be impacted by share dilution.

Key elements:
  • Understanding of EPS calculation
  • Impact of dilution
  • Knowledge of contingent shares

Contingent share issues can affect the calculation of EPS by potentially diluting the earnings available to common shareholders. When calculating diluted EPS, we include the effect of these contingent shares, which can lower the EPS figure if they are converted into common shares, reflecting a more conservative estimate of a company's profitability.

Q23: How is EPS affected when partly paid shares are involved?

What the interviewer tests: The interviewer is testing your knowledge of earnings per share calculations and how different types of shares can influence financial metrics.

Key elements:
  • Understanding of EPS calculation
  • Impact of share types on earnings
  • Knowledge of share capital structure

When partly paid shares are involved, EPS is typically calculated based on the shares that are fully paid. However, the weighted average number of shares outstanding may need to be adjusted to reflect the portion of the share capital that is paid. This ensures that the EPS calculation accurately reflects the earnings attributable to shareholders who have fully invested.

Q24: What adjustments are needed in EPS when exchange differences are debited to reserves?

What the interviewer tests: The interviewer is assessing your knowledge of earnings per share (EPS) calculations and the impact of currency fluctuations.

Key elements:
  • Impact of exchange differences on reserves
  • Adjustment process for EPS
  • Understanding of financial reporting standards

When exchange differences are debited to reserves, the adjustments to EPS involve excluding these non-operational impacts to present a clearer picture of profitability. Specifically, the EPS calculation should focus on net income attributable to shareholders, adjusted for any effects that do not arise from core operations, ensuring compliance with applicable financial reporting standards.

Q25: What disclosures or safeguards would ensure transparency in complex EPS situations?

What the interviewer tests: The interviewer is assessing your knowledge of earnings per share (EPS) reporting and the importance of transparency.

Key elements:
  • Clear calculation methodology
  • Detailed notes in financial statements
  • Disclosure of assumptions and estimates

To ensure transparency in complex EPS situations, companies should disclose the calculation methodology clearly, provide detailed notes in the financial statements, and explain any significant assumptions or estimates that affect the EPS figures. This helps stakeholders understand the underlying factors influencing reported earnings.

Ind AS 33 – Earnings per Share (EPS) Interview Q&A Interview Q&A — Interview Q&A · CandiMentor