The use of earnings per share disclosures in annual financial statements by managers of South African equity unit trust portfolios as a performance indicator.

Abstract

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.