Cima F2 Exam Question No 65

Question No 65:

The total number of shares issued on the exercise of the option or warrant is split into two

• The number of shares that would have been issued if the cash received had been used to buy shares at fair value (using the average price of the shares during the period);
• The remainder, which are treated like a bonus issue (i.e. as having been issued for no consideration).

The number of shares issued for no consideration is added to the weighted average number of shares when calculating the DEPS.

Cima F2 Exam Question No 64

Question No 64:

Options and warrants to subscribe for shares?
An option or warrant gives the holder the right to buy shares at some time in the future at a predetermined price.The cash received by the entity when the option is exercised will be less than the market price of the shares, as the option will only be exercised if the exercise price is lower than the market price.
The increase in resources does not match the increase there would be in resources if the issue of shares were at market value. The options will therefore have a dilutive effect on EPS.

Cima F2 Exam Question No 63

Question No 63:

What is Convertible debt?

The principles of convertible bonds and convertible preference shares are similar and will be dealt with together. If the convertible bonds/preference shares had been converted:

• The interest/dividend would be saved therefore earnings would be higher
• The number of shares would increase.

Note: Interest on bonds is tax deductible however preference dividends do not attract tax relief. Therefore, the interest adjustment should only be reflected net of tax in the case of bonds.
Note: If there is an option to convert the debt into a variable number of ordinary shares depending on when conversion takes place, the maximum possible number of additional shares is used in the calculation.

Cima F2 Exam Question No 62

Question No 62:

What is Importance of DEPS?
IAS 33 therefore requires an entity to disclose the DEPS, as well as the basic EPS, calculated using current earnings but assuming that the worst possible future dilution has already happened. Existing shareholders can look at the DEPS to see the effect on current profitability of commitments already entered into to issue ordinary shares in the future.