Share-Based Payments and Earnings per Share
What you must know
For equity-settled share-based payments, measure the goods or services at the fair value of the equity instruments granted at grant date and recognise over the vesting period, with a corresponding increase in equity. For cash-settled awards, measure the liability at fair value at each reporting date and remeasure until settlement. Understand vesting conditions (service and performance conditions) and non-vesting conditions; market conditions are reflected in fair value at grant date. For EPS, compute basic EPS as profit or loss attributable to ordinary shareholders divided by the weighted average number of ordinary shares. Compute diluted EPS by adjusting profit and the share count for dilutive potential ordinary shares, applying the if-converted method and the treasury share method for options. Adjust prior-period EPS for bonus issues and rights issues.
Traps candidates fall into
- Remeasuring an equity-settled award at each reporting date; only cash-settled awards are remeasured.
- Ignoring the effect of non-market vesting conditions when estimating the number of awards expected to vest.
- Using year-end shares instead of the weighted average for basic EPS.
- Forgetting to adjust the denominator for the bonus element of a rights issue.
- Including antidilutive instruments in diluted EPS.
- Failing to adjust profit for the after-tax effect of interest on convertible debt.
Rule of thumb
Equity-settled: fix fair value at grant date and spread it. Cash-settled: remeasure each period. For EPS, weight shares by time and test each potential share for dilution before including it.
Worked example
Profit attributable to ordinary shareholders is 500,000. Shares: 400,000 outstanding all year plus 100,000 issued on 1 October. Weighted average = 400,000 + (100,000 × 3/12) = 425,000. Basic EPS = 500,000 / 425,000 ≈ 1.18 per share.