Advanced Analysis and Reporting to Stakeholders
Reporting
Advanced Analysis and Reporting to Stakeholders
Syllabus tag: KASNEB CPA | Advanced Level | CA32 Advanced Financial Reporting and Analysis | Topic 9 Advanced Analysis and Reporting to Stakeholders
Lesson objectives
By the end of this topic, you will be able to:
- Compute basic and diluted earnings per share
- Test whether a potential ordinary share is dilutive
- Analyse group accounts and state the limitations
- Identify segment reporting requirements
- Describe integrated and sustainability reporting
Why this matters
CA23 computed ratios from a single company. Group accounts add complications the ratios do not show, and EPS — the most quoted figure in any set of accounts — has enough rules of its own to be examined every sitting.
Basic earnings per share
EPS = Earnings attributable to ordinary shareholders / Weighted average number of ordinary shares
Earnings are profit after tax and after non-controlling interest and preference dividends — what belongs to ordinary shareholders alone.
A company with profit after tax of KES 96,000,000 and preference dividends of 6,000,000:
Earnings = KES 90,000,000
The weighted average share count
Three rules, and the distinction between them is the examinable point:
| Issue type | Treatment |
|---|---|
| Full price issue | Weighted from the date of issue — resources arrived then |
| Bonus issue | Applied to all periods retrospectively, including comparatives |
| Rights issue | Split: a bonus element applied retrospectively, the rest weighted |
Why bonus issues are retrospective. No resources entered the company, so earnings capacity did not change. Weighting from the issue date would make EPS fall for a reason that has nothing to do with performance, and would make the comparative meaningless.
Worked example. 40,000,000 shares in issue; a 1-for-4 bonus issue during the year; 10,000,000 shares issued at full price three months before the year end.
| Shares | |
|---|---|
| Opening, adjusted for the bonus (40m × 1.25) | 50,000,000 |
| Full price issue weighted (10m × 3/12) | 2,500,000 |
| Weighted average | 52,500,000 |
Basic EPS = 90,000,000 / 52,500,000 = KES 1.71
Diluted earnings per share
Diluted EPS shows what EPS would be if all dilutive potential ordinary shares converted. It is a warning about the future, not a report of the past.
Convertible bonds of KES 40,000,000 at 9%, convertible into 8,000,000 shares, tax 30%:
| Post-tax interest saved (40m × 9% × 70%) | KES 2,520,000 |
| Adjusted earnings (90m + 2.52m) | KES 92,520,000 |
| Adjusted shares (52.5m + 8m) | 60,500,000 |
| Diluted EPS | KES 1.53 |
The dilution test. A potential ordinary share is dilutive only if it reduces EPS. Compute the incremental EPS of the conversion:
2,520,000 / 8,000,000 = KES 0.315
That is below the basic EPS of 1.71, so conversion dilutes and is included. An instrument whose incremental EPS exceeds basic EPS is anti-dilutive and is excluded — including it would raise diluted EPS above basic, which defeats the purpose of the figure.
:::checkpoint A company has two convertible instruments, with incremental EPS of 0.40 and 2.10, against a basic EPS of 1.71. State which is included in diluted EPS and explain the reason. :::
Analysing group accounts
Consolidated statements combine entities with different margins, risks and currencies, which limits what the ratios reveal:
- Group ratios are averages that may describe no member of the group
- Non-controlling interests mean the group does not own all the assets generating its profit — return on capital employed on a consolidated basis overstates the parent shareholders' position
- Goodwill inflates capital employed without generating cash directly, depressing ROCE
- Fair value adjustments on acquisition raise depreciation, so a recently acquisitive group reports lower margins than an organically grown one doing identical business
- Intra-group eliminations mean group revenue is not the sum of the parts
The practical response is to read the segment note before the ratios, since that is where the composition becomes visible.
Segment reporting
IFRS 8 requires disclosure on the basis management actually uses — the management approach. Reportable segments are those regularly reviewed by the chief operating decision maker and meeting the quantitative thresholds.
The advantage is that users see the business as management sees it. The weakness follows from the same fact: segments are not comparable between companies, because each defines them differently, and management can restructure its internal reporting to obscure a weak division.
Integrated and sustainability reporting
Integrated reporting connects financial performance to the resources the business depends on — financial, manufactured, intellectual, human, social and natural capital — and explains value creation over time.
Sustainability reporting is moving from voluntary to required. The ISSB now issues standards on sustainability and climate disclosure, bringing this information within the same framework as financial reporting.
Why an accountant should care. These disclosures are increasingly assured, increasingly compared, and increasingly relied on by lenders and investors. Information that carries consequences requires the same rigour as the financial statements — and the same question applies: is it complete, neutral and free from error, or is it presented to flatter?
:::checkpoint A group reports a declining ROCE while each subsidiary reports improving returns. Give two explanations arising from consolidation itself rather than from performance. :::