RSM South Africa

Headline earnings per share - Part 2

Part 2 - How to calculate HEPS

Before I start going through all the technical literature, here are some transactions that should either be included or excluded from your HEPS calculation. Give them some thought, along with the information in Part 1 of the HEPS discussion, and I will give you the correct treatment of these items in terms of the HEPS calculation at the end of the article.

  1. Revaluation of property, plant and equipment

  2. Depreciation

  3. Impairment of goodwill

  4. Equity accounted profit or loss for associates

  5. Profit or loss on disposal of property, plant and equipment

So to recap, what is HEPS? Circular 3/2012 defines headline earnings as:

“an additional earnings number that is permitted by IAS 33. The starting point is earnings as determined by IAS 33, excluding “separately identifiable re-measurements” (as defined), net of related tax (both current and deferred) and related non-controlling interest, other than re-measurements specifically included in headline earnings “including re-measurements” (as defined).

A re-measurement is an amount recognised in profit or loss relating to any change (whether realised or unrealised) in the carrying amount of an asset or liability that arose after initial recognition of such asset or liability.

Circular 3/2012 includes a detailed table of items that should be either included or excluded from the HEPS calculation. This can be found under paragraph 21 (Section C) of the circular and should be referred to whenever a HEPS calculation is performed.

Included re-measurements are the re-measurements identified in the table in paragraph 21 (Section C) of this circular and are to be included in headline earnings because:

  1. They have been determined as normally relating to the operating/trading activities of the entity;

  2. They relate to the usage of a non-current asset, which is an operating/trading activity of the entity;

  3. They relate to current assets or current liabilities, and thus relate to the operating/trading activities of the entity;

  4. They are foreign exchange movements on monetary assets and liabilities and thus relate to the operating/trading activities of the entity;

  5. They are financial instrument adjustments arising from the application of ISA 39; or

  6. They are reclassified items relating to IAS 39 cash-flow hedges because these amounts are matched with those relating to the hedge item.

There are a few exceptions included in the above points. Please refer to the detailed circular if you have any of the above transactions.

In summary, to calculate HEPS:

  1. Start with basic earnings as calculated in terms of IAS 33;

  2. Add or deduct re-measurements as discussed above;

  3. This equals headline earning;

  4. Divide by weighted average number of shares in issue;

  5. This equals HEPS.

From all the information above, were you able to assess whether the 5 items mentioned in the start of the article should be included or excluded for the HEPS calculation?

The correct treatment is as follows:

  1. Revaluation of property, plant and equipment – Excluded

  2. Depreciation – Included

  3. Impairment of goodwill – Excluded

  4. Equity accounted profit or loss for associates – Interesting scenario, you will need to assess what is included in the profit or loss of the associate to determine what should be included or excluded from the HEPS calculation

  5. Profit or loss on disposal of property, plant and equipment – Excluded

An updated circular is expected during the course of 2013 which will be updated to address the new IFRS statements that are effective this year. Be on the look out for it if you are involved in calculating HEPS.

 

Michael Steenkamp

Audit Partner