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Eg 5, Diluted EPS – chap 21

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Eg 5, Diluted EPS – chap 21

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by MikeLittle.
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  • August 22, 2016 at 8:34 pm #334601
    aamir2111
    Participant
    • Topics: 123
    • Replies: 85
    • ☆☆☆

    I have doubt in Eg. 5 of chap 21, EPS. I have copied the question below for you:

    Edgars had in issue throughout the year ended 31 December, 2009 3,370,000 $1 equity shares, and earnings for the year, after tax at 25%,
    were $10,000,000. Of this amount, $900,000 was from discontinued operations. An average mid-market price for the year for Edgars’ shares
    was $4.
    In addition, Edgars had the following outstanding financial instruments:
    • 520,000 options, exercise price $3.00, exercise date 31 December 2011
    • 2,000,000 options exercise price $5.00 exercise date 31 December 2013
    • $20,000,000 10.673% convertible bonds. Conversion terms are for each $1,000 bond the holder can acquire 18 equity shares on 31
    December 2012 or 30 equity shares on 31 December 2014.
    Calculate Edgar’s basic and diluted eps for the year ended 31 December, 2009.
    Convertible preference shares are a further possible diluting financial instrument.

    My question, In the solution, why did we delete the earnings from discontinued operation from total earnings while doing the working to find the diluting instrument, but did not deduct it while calculating Basic and diluted EPS?

    August 22, 2016 at 8:38 pm #334603
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23327
    • ☆☆☆☆☆

    ‘My question, In the solution, why did we delete the earnings from discontinued operation from total earnings while doing the working to find the diluting instrument, but did not deduct it while calculating Basic and diluted EPS?’

    The easy answer is to say “Because that’s what we do”!

    In the workings for dilutions, there’s no point in including the results from discontinued operations because they’re not going to be there in the future.

    They’re not even going to be there next year!

    So that’s why they’re ignored

    But a diluted eps is to be disclosed THIS year and those discontinued operation results DID contribute to this year …

    … so we include them

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