IAS 33

The bonus fraction is applied to give effect to the idea that those free shares have been in issue all year, even though they were only issued part way through the year

With no additional funds being received by the entity, the number of shares in issue as at the end of the year is represented by the number in issue at the start + the free ones

We re-state the previous year’s disclosed eps to make the exercise of comparison more valid. Again, because there were no funds involved, the number of shares in issue last year needs to be increased by the number of the free shares … but instead of actually increasing the denominator from last year’s eps calculation, it’s simpler just to multiply last year’s disclosed eps by the reciprocal of the bonus fraction

Try it with some made up figures!

Say last year’s weighted average number of shares was 2,000,000 and earnings last year were $500,000

This year there was a bonus issue of 1 for 4 so the bonus fraction is 5/4 and the reciprocal is 4/5

Last year’s eps as disclosed was $500,000 / 2,000,000 = 25 cents

This year with the bonus those shares now number 2,500,000 and last year’s eps, with 2,500,000 shares now as the denominator, becomes $500,000/2,500,000 = 20 cents

Instead, we simply multiply last year’s disclosed eps figure by the reciprocal of the bonus fraction (4/5)

So 25 cents x 4/5 = ????

OK?