The use of earnings per share disclosures in annual financial statements by managers of South African equity unit trust portfolios as a performance indicator.
The earnings per share ratio is often quoted in financial publications as an indictor of how well a company has performed financially. However, there is much controversy over the usefulness of earnings per share information, especially in respect of its potential for manipulation by the preparers of financial information. Recent changes to South African accounting standards through the International Harmonisation Project resulted in a revision of the Statement of Generally Accepted Accounting Practice 104: Earnings per Share (AC104). Significant changes to the method of calculation and disclosure of both basic and diluted earnings per share were implemented. Unit trusts have gained popularity in South Africa over the past decade. Members of the public prefer to invest on the Johannesburg .Stock Exchange through intermediaries such as unit trusts rather than undertake investment decisions personally. Unit trust portfolio managers are in an important and a responsible position: they wield significant power on the stock exchange with their daily dealings in shares but they also carry the responsibility of making sound investment decisions. Research has tended to focus more on earnings than earnings per share. A review of literature and prior research revealed several controversial issues: the usefulness of earnings in making investment decisions, the susceptibility of both earnings and earnings per share to manipulation, the predictive value of earnings, the use of earnings in the valuation of securities and the use of earnings and earnings per share in performance measurement. The research problem was thus developed as follows: are the earnings per share disclosures of South African listed companies sufficient to meet the needs of equity unit trust portfolio managers in South Africa as a performance indicator, and if not, what additional information do they require? In addressing the research problem, the following four objectives were formulated: (i) to determine what changes have been made to earnings per share calculation and disclosure by the issue of the new ACI04, (ii) to determine what characteristics South African equity unit trust portfolio managers regard as indicative of a good financial performance indicator, (iii) to determine what impact the changes made to the earnings per share calculation and disclosure by the new AC104 has had on the use of earnings per share information by South African unit trust portfolio managers as a performance indicator, and (iv) to determine the extent of use of other similar performance indicators, such as headline earnings per share and cash flows per share, as compared to earnings per share. In order to meet these objectives, it was necessary to conduct a survey of South African equity unit trust portfolio managers. The descriptive survey method was identified as being appropriate and a mailed survey was undertaken. The main conclusions to this research were that: (i) the characteristics of a useful performance indicator are related to reliability, consistency, comparability, adequate disclosure and ease of computation and understanding, (ii) equity unit trust portfolio managers regard the changes to the calculation and disclosure of basic earnings per share to be improvements to the standard but their use of basic earnings per share as a performance indicator has remained unchanged, (iii) equity unit trust portfolio managers regard the changes to the calculation and disclosure of diluted earnings per share to be improvements to the standard and their use of diluted earnings per share as a performance indicator has, as a result, increased, (iv) headline earnings per share and diluted earnings per share are considered to be better performance indicators and are used more frequently as performance indicators than basic earnings per share. Thus the research project achieved its objectives. In addition, interesting findings in respect of other issues were identified. Further areas for research were also identified.