Whilst EPS is a well understood metric which is widely used by companies and investors, there are some aspects of its calculation that are complex and not straightforward to apply.  The FRC’s Corporate Reporting Review (CRR) Team has identified, through its routine reviews, a number of companies that have failed to fully understand or correctly apply the requirements, leading in some cases to restatements in their annual reports and accounts.

In light of these findings, the FRC’s thematic, through the use of case studies and examples, seeks to identify ways in which companies can meet the requirements of IAS 33 and provide better disclosure.  The thematic identifies a number of areas where the FRC expects improvements to be made:

• Weighted average number of ordinary shares – although IAS 33 does not require specific disclosures to explain how this number has been determined, due to the importance of this denominator to the EPS calculation, companies should consider providing further information to explain the basis for the weighted average number of ordinary shares used in the calculation of EPS if it is significantly different from information disclosed about issued ordinary shares and potential ordinary shares (for example share options);
• Judgements made - where judgements have been made that have a material effect on EPS (for example about the substance of a share reorganisation or other arrangement that affects how it is treated in the EPS calculation), disclosures should be made in accordance with IAS 1.122.
• Non-GAAP ‘adjusted EPS’ - where adjusted EPS is provided, companies should ensure that the disclosures meet the requirements of the European Securities and Market Authority’s (ESMA’s) Guidelines on Alternative Performance Measures and also explain the methodology applied in calculating adjusted EPS, including the basis used for tax on adjusting items.

As well as areas for improvement, the thematic highlights the basic requirements of IAS 33, flags common pitfalls in applying the standard and reminds companies of a number of the key requirements including:

• the definitions of dilutive and antidilutive;
• the treatment of share reorganisations that include a bonus element;
• adjustments required for equity preference shares; and
• the methodology for calculating EPS when a reverse acquisition has taken place.

The FRC encourages companies to consider the findings when preparing their forthcoming EPS calculations and disclosures.

A press release and the full report are available on the FRC website.