International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 708
31 December 2019
Call option liability
2,000
Gain on option (profit or loss)
2,000
To record movement in fair value of option from €(5,000) to €(3,000)
31 January 2020
Call option liability
1,000
Gain on option (profit or loss)
1,000
To record movement in fair value of option from €(3,000) to €(2,000)
Call option liability
2,000
Cash
2,000
To record net settlement of option by payment of €2,000 cash to B
B
Net share settlement
If the contract is entered into as net share-settled on 1 February 2019, then B can, on the exercise date
31 January 2020, require A to deliver to B as many of A’s own shares as have a fair value equal to any
excess of 1,000 of A’s own shares, as of 31 January 2020, over €102,000 (i.e. 1000 shares at the option
price of €102 per share). Since IAS 32 classifies such contracts as derivative financial liabilities (see 11
and 5.2.7 above), which are carried at fair value through profit or loss under IFRS 9, A records the
following accounting entries.
€
€
1 February 2019
Cash
5,000
Call option liability
5,000
Receipt of option premium (equal to fair value of option) from B
31 December 2019
Call option liability
2,000
Gain on option (profit or loss)
2,000
To record movement in fair value of option from €(5,000) to €(3,000)
31 January 2020
1,000
Call option liability
1,000
Gain on option (profit or loss)
To record movement in fair value of option from €(3,000) to €(2,000)
Call option liability
2,000
Equity
2,000
To record net settlement of option by issue of €2,000 worth of A’s shares to B
Financial instruments: Financial liabilities and equity 3581
C Gross
settlement
If the contract is entered into as gross-settled, on 1 February 2019, then B can, on the exercise date
31 January 2020, require A to deliver 1,000 of A’s shares in return for a payment by B of €102,000. IAS 32
classifies this derivative contract as an equity instrument (see 5.4 above); therefore no entries are recorded,
other than to record the cash flows arising under the contract:
€
€
1 February 2019
Cash
5,000
Equity
5,000
Receipt of option premium (equal to fair value of option) to B
31 January 2020
Cash
102,000
Equity
102,000
To record gross settlement of option by receipt of €102,000 cash from
B in exchange for 1,000 of A’s own shares.
If the option had lapsed unexercised, because the market price of A’s shares had fallen below €102 as at
31 January 2020, the €5,000 premium would remain in equity, even though it is, from an economic
perspective, clearly a gain rather than an amount received from an owner. This is because IFRS regards any
holder of an instrument classified as equity under IAS 32 as an ‘owner’.
D Settlement
options
If there are different settlement options (such as net in cash, net in shares or by an exchange of cash and shares),
the option is a financial liability. A accounts for the forward contract as a derivative (as in A and B above), with
the accounting entry made on settlement determined by the manner of settlement (i.e. equity or cash).
11.3 Put
options
11.3.1
Purchased put option
In a purchased put option, the entity makes a payment to a counterparty for the right,
but not the obligation, to require the counterparty to purchase a given number of the
entity’s own equity instruments from the entity for a fixed price at a future date. The
accounting for such a contract is illustrated in Example 43.21 below. [IAS 32.IE22-26].
Example 43.21: Purchased put option on own shares
The reporting entity (A), which has a functional currency of Euro and a year end of 31 December, purchases
a put option over its own shares from another party (B), for which the following are the major assumptions.
Contract date
1 February 2019
Exercise date (European terms – i.e. can be exercised only on maturity)
31 January 2020
Fixed exercise price to be paid on 31 January 2020
€98
Number of shares under contract 1,000
Market price per share on 1 February 2019
€100
Market price per share on 31 December 2019
€95
Market price per share on 31 January 2020
€95
Fair value of option to A on 1 February 2019
€5,000
Fair value of option to A on 31 December 2019
€4,000
Fair value of option to A on 31 January 2020
€3,000
3582 Chapter 43
The fair value of the option would be computed using an option pricing model and would be a function of
number of factors, principally the market value of the shares, the exercise price, and the time value of money.
A Net
cash
settlement
If the contract is entered into as net cash-settled on 1 February 2019, then A can, on the exercise date
31 January 2020, require B to make a cash payment to A for the excess, if any, of €98,000 (i.e. 1,000 shares at
the option price of €98 per share) over the fair value of 1,000 of A’s own shares, as of 31 January 2019. Because
IAS 32 classifies such contracts as derivative financial assets or financial liabilities (see 11 and 5.2.7 above),
which are carried at fair value through profit or loss under IFRS 9, A records the following accounting entries.
€
€
1 February 2019
Put option asset 5,000
Cash
5,000
Payment of option premium (equal to fair value of option) to B
31 December 2019
Loss on option (profit or loss)
1,000
Put option asset
1,000
To record movement in fair value of option from €5,000 to €4,000
31 January 2020
Loss on option (profit or loss)
1,000
Put option asset
1,000
To record movement in fair value of option from €4,000 to €3,000
Cash 3,000
Put option asset
3,000
To record net settlement of option by receipt of €3,000 cash from B
B
Net share settlement
If the contract is entered into as net share-settled on 1 February 2019, then A can, on the exercise date
31 January 2020, require B to deliver to A as many of A’s own shares as have a fair value equal to any excess of
€98,000 (i.e. 1,000 shares at the option price of €98 per share) over the fair value of 1,000 of A’s own shares, as of
31 January 2020. Because IAS 32 classifies such contracts as derivative financial assets (see 11 and 5.2.7 above),
which are carried at fair value through profit or
loss under IFRS 9, A records the following accounting entries.
€
€
1 February 2019
Put option asset 5,000
Cash
5,000
Payment of option premium (equal to fair value of option) to B
31 December 2019
Loss on option (profit or loss)
1,000
Put option asset
1,000
To record movement in fair value of option from €5,000 to €4,000
Financial instruments: Financial liabilities and equity 3583
€
€
31 January 2020
Loss on option (profit or loss)
1,000
Put option asset
1,000
To record movement in fair value of option from €4,000 to €3,000
Equity 3,000
Put option asset
3,000
To record net settlement of option by receipt of €3,000 worth of A’s
shares from B. This is shown as a deduction from equity in accordance
with IAS 32’s requirements for treasury shares (see 9 above).
C Gross
settlement
If the contract is entered into as gross-settled, on 1 February 2019, then A can, on the exercise date
31 January 2020, require B to take delivery 1,000 of A’s shares in return for a payment by B of €98,000.
IAS 32 classifies this derivative contract as an equity instrument (see 5.4 above); therefore no entries are
recorded, other than to record the cash flows arising under the contract:
€
€
1 February 2019
Equity 5,000
Cash
5,000
Payment of option premium (equal to fair value of option) to B
31 January 2020
Cash
98,000
Equity
98,000
To record gross settlement of option by delivery of 1,000 own shares to
B in exchange for €98,000.
If the option had lapsed unexercised, because the market price of A’s shares had risen above €98 as at
31 January 2020, the €5,000 premium would remain in equity, even though it is, from an economic
perspective, clearly a loss rather than an amount paid to repurchase A’s own shares. This is because IFRS
regards any holder of an instrument classified as equity under IAS 32 as an ‘owner’.
D Settlement
options
If there are different settlement options (such as net in cash, net in shares or by an exchange of cash and
shares), the option is a financial asset. A accounts for the forward contract as a derivative (as in A and B
above), with the accounting entry made on settlement determined by the manner of settlement (i.e. equity
or cash).
11.3.2
Written put option
In a written put option, the entity receives a payment from a counterparty for granting
to the counterparty the right, but not the obligation, to sell a given number of the entity’s
own equity instruments to the entity for a fixed price at a future date. The accounting
for such a contract is illustrated in Example 43.22 below. [IAS 32.IE27-31].
3584 Chapter 43
Example 43.22: Written put option on own shares
The reporting entity (A), which has a functional currency of Euros and a year end of 31 December, writes a
put option over its own shares with another party (B), for which the following are the major assumptions.
Contract date
1 February 2019
Exercise date (European terms – i.e. can be exercised only on maturity)
31 January 2020
Fixed exercise price to be paid on 31 January 2020
€98
Number of shares under contract 1,000
Market price per share on 1 February 2019
€100
Market price per share on 31 December 2019
€95
Market price per share on 31 January 2020
€95
Fair value of option to A on 1 February 2019
€(5,000)
Fair value of option to A on 31 December 2019
€(4,000)
Fair value of option to A on 31 January 2020
€(3,000)
The fair value of the option would be computed using an option pricing model and would be a function of a
number of factors, principally the market value of the shares, the exercise price, and the time value of money.
A Net
cash
settlement
If the contract is entered into as net cash-settled on 1 February 2019, then B can, on the exercise date
31 January 2020, require A to make a cash payment to B for the excess, if any, of €98,000 (i.e. 1,000 shares at the
option price of €98 per share) over the fair value of 1,000 of A’s own shares, as of 31 January 2020. Because IAS 32
classifies such contracts as derivative financial liabilities (see 11 and 5.2.7 above), which are carried at fair value
through profit or loss under IFRS 9, A records the following accounting entries.
€
€
1 February 2019
Cash 5,000
Put option liability
5,000
Receipt of option premium (equal to fair value of option) from B
31 December 2019
Put option liability
1,000
Gain on option (profit or loss)
1,000
To record movement in fair value of option from €(5,000) to €(4,000)
31 January 2020
Put option liability
1,000
Gain on option (profit or loss)
1,000
To record movement in fair value of option from €(4,000) to €(3,000)
Put option liability
3,000
Cash
3,000
To record net settlement of option by payment of €3,000 cash to B
B
Net share settlement
If the contract is entered into as net share-settled on 1 February 2019, then B can, on the exercise date
31 January 2020, require A to deliver to B as many of A’s own shares as have a fair value equal to any excess of
€98,000 (i.e. 1,000 shares at the option price of €98 per share) over the fair value of 1,000 of A’s own shares, as of
31 January 2020. Because IAS 32 classifies such contracts as derivative financial assets (see 11 and 5.2.7 above),
which are carried at fair value through profit or loss under IFRS 9, A records the following accounting entries.
Financial instruments: Financial liabilities and equity 3585
€
€
1 February 2019
Cash 5,000
Put option liability
5,000
Receipt of option premium (equal to fair value of option) from B
31 December 2019
Put option liability
1,000
Gain on option (profit or loss)
1,000
To record movement in fair value of option from €(5,000) to €(4,000)
31 January 2020
Put option liability
1,000
Gain on option (profit or loss)
1,000
To record movement in fair value of option from €(4,000) to €(3,000)
Put option liability
3,000
Equity
3,000
To record net settlement of option by issue of €3,000 worth of own shares to B
C Gross
settlement
If the contract is entered into as gross-settled on 1 February 2019, then B can,
on the exercise date 31 January 2020,
require A to take delivery of 1,000 of A’s own shares in return for a payment by A of €98,000. IAS 32 classifies