A bonus issue of shares (also known as a scrip issue or a capitalisation issue) is an issue of new shares to existing shareholders, in proportion to their existing shareholding, for no cost or consideration. The company receives absolutely no money for it, they’re given away free of charge.
Why does a company issue bonus shares?
Well, sometimes if a share price is getting too large, people can’t afford to buy the shares, so a company will increase the amount of shares in issue to make them more affordable again.
A bonus issue of shares is different to a rights issue or a standard issue of new shares. The company receives no extra money for these shares, so they do nothing to generate additional revenue or profits.
If additional shares are issued for no money, the comparative figures might be misleading.
How is a bonus issue of shares is different to a rights issue or a standard issue of new shares?
Imagine if you doubled the amount of shares in issue this year, and didn’t adjust the comparison figures, so last years earnings per share figure was calculated using half the shares.
This would cause your EPS figure to halve overnight, leading investors and creditors into a wild and frenzied panic as they think your company is going down the tubes.
To stop this from happening, and to ensure the EPS figure is comparable with last years, IAS 33 requires the weighted average number of shares should be calculated as if the bonus shares had always been in issue.
So we adjust the proportionate number of shares outstanding as if the bonus issue had occurred at the beginning of the earliest period presented. So to do this, we:
- the current period’s shares are adjusted as if the bonus shares were issued on the first day of the year
- the comparative EPS for the previous year (or years) is restated on the same basis.
Now if we know that bonus issues and share splits are treated retrospectively.
EPS adjustment for bonus issues
How does this affect us in the exam? If we offer shareholders a 2 for 1 split, we pretend the split happened at the start of the year, and also adjust our previous figures, pretending they were split since the start of time. No matter what time of the year it took place.