The Board discussed proposals on earnings per share calculations. These proposals replace previous decisions made by the Board relating to proposed changes to the treasury stock method. One of the main focuses of the new proposals is convergence with the Financial Accounting Standards Board (FASB).
Fair value method
Currently, IAS 33 Earnings per Share calculates the dilutive effect of options and warrants using the treasury stock method. This method assumes that the proceeds from conversion are used to repurchase shares at the average market price.
Options and warrants classified as liabilities in accordance with IAS 32 Financial Instruments: Presentation, are measured at fair value and changes in fair value are recognised in profit and loss. The Board proposes to exclude from diluted earnings per share calculations, options and warrants classified as liabilities. The Board noted that fair value adjustments recognised in the profit and loss better reflect the dilution of earnings relevant to these instruments during the period.
IAS 33 calculates the dilutive effect of convertible instruments using the if-converted method. This method assumes that the instruments are converted at the beginning of the period and reflects the dilution of shares accordingly. Consistently with the proposal to exclude options and warrants classified as liabilities, the Board proposes to exclude from diluted earnings per share calculations, convertible instruments classified wholly (ie both the host and the conversion option) as liabilities and measured at fair value through profit and loss.
The Board also discussed several issues that could be addressed while making the proposed amendments for the fair value method. Of these issues, the Board proposed the following:
- Guidance issued by the FASB on participating securities (Issue 2 of EITF Issue 03-6 and proposed FSP on EITF Issue 03-6-a) would not be incorporated into IAS 33.
- Guidance issued by the FASB on the two-class method (Issues 3 to 6 and 8 of EITF Issue 03-6) and the potential guidance on the application of the two-class method to master limited partnerships would not be incorporated into IAS 33.
- Guidance issued by the FASB on contingently convertible instruments (EITF Issue 04-8) would not be incorporated into IAS 33.
- Paragraph A14 of application guidance in IAS 33 would be amended to state that the conversion of participating securities would be calculated using the two-class method.
- Application guidance and examples issued by the FASB on the two-class method (proposed FASB staff position on FAS 128-a) would be incorporated into IAS 33.
- IAS 33 should be amended to require the two-class method for computing basic earnings per share for mandatorily convertible instruments with a stated participation right. Mandatorily convertible instruments without a stated participation right should be excluded from the calculation of basis earnings per share.
- IAS 33 should be amended to include options and warrants with a nominal exercise price in the computation of basic earnings per share if (a) the instruments are currently exercisable or convertible into ordinary shares for little or no cost to the holder or (b) the option or warrant currently participates in earnings with ordinary shareholders.