IAS 33 — Calculating EPS with non-cumulative preference dividends
At its November 2011 meeting, the Committee considered a request for clarification on the period in which a dividend on non-cumulative preference shares should result in an adjustment to the earnings per share (EPS) calculation. The preference shares in questions have the following characteristics: (1) they are classified as equity, (2) there is no contractual requirement to declare a preference dividend in any given period, (3) when a dividend is proposed on the ordinary shares, a preference dividend must be declared in the same period with a contractually fixed ratio and (4) the preference dividends are non-cumulative.
At its November meeting, the Committee noted that for the fact pattern given, it is not relevant whether the dividends declared on the preference shares have been recognised in the financial statements for the for purposes of calculating EPS. Paragraph A14 of IAS 33 Earnings per Share would require the preference dividends to be taken into account in the calculation of EPS on the notional basis that all of the net profit or loss for the period was distributed to each class of equity instrument. However, the Committee noted that there may be other fact patterns that would require an entity to apply the guidance in paragraph 14(a) of IAS 33, and that the application of this guidance may result in diversity. Therefore, at this meeting, the staff provided analysis of: its outreach to determine if any current fact patterns exist where the guidance in paragraph 14(a) applies and its assessment of any need to clarify the wording in IAS 33.
Feedback of National Standard Setters to determine the relevance of paragraph 14(a) of IAS 33 matters revealed that the issue was not widespread; however, diversity in practice was noted. Therefore, the staff considered expanding the scope of the issue by analysing the phrases 'in respect of the period' and 'declared' within paragraph 14(a) of IAS 33 for preference dividends in the circumstances where paragraph A14 of IAS 33 is not applicable.
Committee members expressed strong opinions on the meaning of the phrases 'in respect of the period' and 'declared' within paragraph 14(a). Unfortunately, these opinions differed amongst Committee members. Many Committee members believed that paragraph 14(a) should be read literally. These members noted that declaration is an attribute model, whereby EPS should be adjusted in the period in which the related profits sourcing the dividend were generated (i.e., if dividends were sourced from (i.e., declared in respect of) 2010 earnings, 2010's EPS should reflect those dividends). This was seen as providing more useful information to users as to profitability in the period. However, other Committee members believed that EPS should be adjusted in the period in which the dividends are recognised in the financial statements. These Committee members noted practical difficulties in applying a literal read of the wording, including the following: (1) while certain jurisdictions have legal requirements regarding the allocation of a dividend to a particular period of profits or retained income, other jurisdictions do not. Trying to determine the period that the profits were earned on which the related dividend is declared may be impracticable. For example, a company may have earned profits for the past three years without the declaration of a preference dividend, and at the end of year three, the company declares a preference dividend. It was not clear to these Committee members to which year preferred dividends should be allocated in determining EPS; (2) would a company be required to restate all previous periods if it declared a dividend out of retained income after experiencing multiple period of losses? Further, they noted that it did not make sense that the preference dividends would be recognised as a distribution in one accounting period but that their impact to the EPS measure might predate the preference dividend recognition in the financial statements.
Many Committee members expressed concern that any agenda decision or movement on this issue may result in a significant change in practice. They acknowledged that certain diversity in practice may exist today, but noted that this diversity may be more akin to jurisdictional-specific legal requirements (e.g., the requirement to declare a dividend in respect of a specific period) as opposed to confusion in accounting application. Further, they noted the issue does not appear to be widespread in practice based on the staff's outreach so as to give rise to a need to address immediately. They also noted that the scope of any project would be limited to instruments where there is no participation feature (i.e., where paragraph A14 of IAS 33 does not apply), which was not considered a widespread issue. Therefore, the Committee tentatively decided to perform no further work on this issue at the current time.