standard as amended was operating reasonably effectively. In fact the Accounting Standards Board (ASB) has stated that a review of earnings per share would not normally have been given priority at this stage of the Board’s programme. However, in June 1997 FRED 16 Earnings per share, was issued which proposed amendments to SSAP 3 and subsequently in October 1998 FRS 14 Earnings per share was published.
Required
(a) (i) Describe the main changes to SSAP 3 which have occurred as a result of FRS 14 and the main reasons for those changes.
(ii) Explain why there is a need to disclose diluted earnings per share in financial statements.
- The following financial statement extracts for the year ending 31 May 1999 relate to Mayes, a public limited company.
|
£000 |
£000 |
|
|
Operating profit |
||
|
Continuing operations 26700 |
26700 |
|
|
Discontinued operations |
(1120) |
|
|
Continuing operations |
25580 |
|
|
Profit on disposal of tangible fixed assets 2500 |
2500 |
|
|
Discontinued operations |
||
|
(Loss) on sale of operations |
(5080) |
|
|
23000 |
||
|
Interest payable |
(2100) |
|
|
Profit on ordinary activities before taxation |
20900 |
|
|
Tax on profit on ordinary activities |
(7500) |
|
|
Profit on ordinary activities after tax |
13400 |
|
|
Minority interest – equity |
(540) |
|
|
Profit attributable to members of parent company |
12860 |
|
|
Dividends: |
||
|
Preference dividend on non equity shares |
210 |
|
|
Ordinary dividend on equity shares |
300 |
|
|
(510) |
||
|
Other appropriations – non equity shares (note iii) |
(80) |
|
|
Retained profit for year |
12270 |
|
|
Capital as at 31 May 1999. |
£000 |
|
|
Allotted, called up and fully paid ordinary shares of £1 each |
12500 |
|
|
7% convertible cumulative redeemable preference shares of £1 |
3000 |
|
|
15500 |
Additional Information
(i) On 1 January 1999, 3.6 million ordinary shares were issued at £2.50 in consideration of the acquisition of June Ltd for £9 million. These shares do not rank for dividend in the current period. Additionally the company purchased and cancelled £24 million of its own £1 ordinary shares on 1 April 1999. On 1 July 1999, the company made a bonus issue of 1 for 5 ordinary shares before the financial statements were issued for the year ended 31 May 1999.
(ii) The company has a share option scheme under which certain directors can subscribe for the company’s shares. The following details relate to the scheme.
Options outstanding 31 May 1998:
(i) 1.2 million ordinary shares at £2 each
(ii) 2 million ordinary shares at £3 each both sets of options are exercisable before 31 May 2000.
Options granted during year 31 May 1999
(i) One million ordinary shares at £4 each exercisable before 31 May 2002, granted 1 June 1998.
During the year to 31 May 1999, the options relating to the 1.2 million ordinary shares (at a price of £2) were exercised on 1 March 1999.
The average fair value of one ordinary share during the year was £5.
(iii) The 7% convertible cumulative redeemable preference shares are convertible at the option of the shareholder or the company on 1 July 2000, 2001, 2002 on the basis of two ordinary shares for every three preference shares. The preference share dividends are not in arrears. The shares are redeemable at the option of the shareholder on 1 July 2000, 2001, 2002 at £1.50 per share. The ‘other appropriations – non equity shares’ item charged against the profits relates to the amortisation of the redemption premium and issue costs on the preference shares.
(iv) Mayes issued £6 million of 6% convertible bonds on 1 June 1998 to finance the acquisition of Space Ltd. Each bond is convertible into 2 ordinary shares of £1. Assume a corporation tax rate of 35%.
(v) The interest payable relates entirely to continuing operations and the taxation charge relating to discontinued operations is assessed at £100 000 despite the accounting losses. The loss on discontinued operations relating to the minority interest is £600 000.
Requirement
Calculate the basic and diluted earnings per share for the year ended 31 May 1999 for Mayes plc utilising FRS 14 Earnings per share.
(Candidates should show a calculation of whether potential ordinary shares are dilutive or anti dilutive.)