IAS 33 — Tax consequences of dividends on participating equity instruments

Date recorded:

Basic earnings per share and participating equity instruments - Agenda Paper 4


This new issue addresses the determination of basic EPS when an entity has issued has two classes of equity instruments—ordinary shares and participating equity instruments. Dividend payments on the participating instruments are discretionary and under local tax laws, entitle the entity to a tax deduction. The entity recognises this tax benefit in equity.

Paragraph A14 of IAS 33 requires an entity to allocate profit or loss (after adjusting for cumulative dividends and/or dividends declared in the period) to ordinary shares and participating equity instruments to the extent that each instrument shares in earnings as if all of the profit or loss for the period had been distributed.

The submitter asks whether, in making this allocation, the entity adjusts profit attributable to ordinary shareholders (ie the numerator in the basic EPS calculation) to reflect the tax benefit.

Staff analysis

The staff believed that, in applying IAS 33, the entity adjusts profit or loss attributable to ordinary shareholders to reflect the tax benefit when calculating basic EPS. This is because:

  • (a) paragraph A14(b) of IAS 33 requires an entity to assume that all of the profit or loss for the period had been distributed—this hypothetical distribution of profits to the participating equity holders would generate a tax benefit that would effectively result in additional amounts available for distribution to the ordinary shareholders; and
  • (b) paragraph A14 requires an entity to consider ‘other rights to participate in undistributed earnings’ when allocating profit or loss. The tax benefit accruing to the ordinary shareholders represents such a right to participate in undistributed earning.
  • (c) the objective of basic earnings per share information is to provide a measure of the interests of each ordinary share of a parent entity in the performance of the entity over the reporting period. The tax benefit is an interest of the ordinary shares that arises from the hypothetical distribution of profit to the participating equity holders. Accordingly, adjusting the profit attributable to ordinary shareholders to include the tax benefit is consistent with this objective.

The staff considered the Board’s recently published proposed amendments to IAS 12 as part of the Exposure Draft on Annual Improvements to IFRS Standards 2015-2017 Cycle and noted that finalisation of the proposed amendments to IAS 12 might result in the entity recognising the tax benefit associated with distributions to participating equity holders in profit or loss. Accordingly, the staff believed that the application of the proposed amendments to IAS 12 would not change how an entity calculates basic EPS in the fact pattern described in the submission.

Staff recommendation

The Staff recommended that the Committee not add this issue to its agenda. Instead, the Staff recommended publishing an agenda decision that includes educative guidance outlining how an entity applies the relevant principles and requirements in IAS 33 to the fact pattern in the submission.


Discussion of original AP 4 on Tuesday 14 March 2017

The IC agreed with the publication of an agenda decision; however, they suggested that it be shortened to focus on the relevant principles in IAS 33, and that the example and other guidance be moved to separate educational materials. The Staff agreed to bring back a revised agenda decision and what form the educational materials should take for discussion at a future meeting.

Most of the IC members agreed with the Staff’s technical analysis. One member disagreed with it on the grounds that the dividend had not actually been paid and therefore the tax benefit has not actually arisen. Another IC member asked the Staff to think of and address other possible consequences of a hypothetical declaration of all the profits of a company, e.g. would there be any employee compensation issues and other regulatory issues that would affect the amount of ultimate profits that is distributable? Furthermore, that IC member asked the Staff to assess how earnings (for EPS purposes) would be calculated beyond year one to make sure there is no double counting in subsequent years. Another IC member thought that the tax benefit should also be allocated to the participating shareholders on an iterative basis rather than being allocated in its entirety to the ordinary shareholders.

Discussion of addendum to AP 4 on Wednesday 15 March 2017

Based on the comments received from the IC (see above), the Staff presented a redrafted tentative agenda decision for discussion. There was no new technical debate – all the comments related to drafting. All IC members agreed with the revised draft subject to a few minor edits.

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