An option contract is a contract which gives one party to the contract the right, but not
the obligation, to buy from, or sell to, the other party to the contract the asset that is the
subject of the contract for a given price (often, but not always, a price that is fixed) at a
future date (or during a longer period ending on a future date). An option giving the right
to buy an asset is referred to as a ‘call’ option and one giving the right to sell as a ‘put’
option. An option is referred to as a ‘bought’ or ‘purchased’ option from the perspective
of the party with the right to buy or sell (the ‘holder’) and as a ‘written’ option from the
perspective of the party with the potential obligation to buy or sell. An option is referred
to as ‘in the money’ when it would be in the holder’s interest to exercise it and as ‘out
of the money’ when it would not be in the holder’s interest to exercise it.
Under IFRS 9 an option is:
• ‘deeply in the money’ when it is so far in the money that it is highly unlikely to go
out of the money before expiry; [IFRS 9.B3.2.5(d)] and
• ‘deeply out of the money’ when it is so far out of the money that it is highly unlikely
to become in the money before expiry. [IFRS 9.B3.2.4(c)].
IFRS 9 does not elaborate on what it means by ‘highly unlikely’ in this context, although
the Implementation Guidance to IAS 39 clarified that ‘highly probable’ (in the context
of a ‘highly probable forecast transaction’ subject to a hedge) indicates a much greater
likelihood of happening than the term ‘more likely than not’. [IAS 39.F.3.7].
Financial
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Option contracts that are within the scope of IFRS 9 (see Chapter 42 at 2) are recognised
as assets or liabilities when the holder or writer becomes a party to the contract.
[IFRS 9.B3.1.2(d)].
4.2.1
Deeply in the money put and call options
If a transferred financial asset can be called back by the transferor, and the call option
is deeply in the money, the transfer does not qualify for derecognition because the
transferor has retained substantially all the risks and rewards of ownership (Figure 48.1,
Box 7, Yes).
Similarly, if the financial asset can be put back by the transferee, and the put option is
deeply in the money, the transfer does not qualify for derecognition because the
transferor has retained substantially all the risks and rewards of ownership,
[IFRS 9.B3.2.16(f)], (Figure 48.1, Box 7, Yes).
The accounting treatment for such transactions would be similar to that for ‘repos’ as
set out in Example 48.9 at 5.2 below.
If a transferred asset continues to be recognised because of a transferor’s call option or
transferee’s put option, but the option subsequently lapses unexercised, the asset and
any associated liability would then be derecognised.
4.2.2
Deeply out of the money put and call options
A financial asset that is transferred subject only to a transferee’s deeply out of the money
put option, or a transferor’s deeply out of the money call option, is derecognised. This
is because the transferor has transferred substantially all the risks and rewards of
ownership, [IFRS 9.B3.2.16(g)], (Figure 48.1, Box 6, Yes).
4.2.3
Options that are neither deeply out of the money nor deeply in the
money
Where a financial asset is transferred subject to an option (whether a transferor’s call
option or a transferee’s put option) that is neither deeply in the money nor deeply out
of the money, the result is that the entity neither transfers nor retains substantially all
the risks and rewards associated with the asset, [IFRS 9.B3.2.16], (Figure 48.1, Box 7, No). It
is therefore necessary to determine whether or not the transferor has retained control
of the asset under the criteria summarised in 3.9 above.
If a transferred asset continues to be recognised because of a transferor’s call option or
transferee’s put option, but the option subsequently lapses unexercised, the asset and
any associated liability would then be derecognised.
4.2.3.A
Assets readily obtainable in the market
If the transferor has a call option over a transferred financial asset that is readily
obtainable in the market, IFRS 9 considers that control of the asset has passed to the
transferee (Figure 48.1, Box 8, No – see 3.9 above). [IFRS 9.B3.2.16(h)]. This would
presumably also be the conclusion where the transferee has a put option over a
transferred financial asset that is readily obtainable in the market, although IFRS 9 does
not specifically address this.
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4.2.3.B
Assets not readily obtainable in the market
If the transferor has a call option over a transferred financial asset that is not readily
obtainable in the market, IFRS 9 considers that control of the asset remains with the
transferor (Figure 48.1, Box 8, Yes – see 3.9 above). Accordingly, derecognition is
precluded to the extent of the amount of the asset that is subject to the call option.
[IFRS 9.B3.2.16(h)].
If the transferee has a put option over a transferred financial asset that is not readily
obtainable in the market, IFRS 9 requires the transferee’s likely economic behaviour to
be assessed – in effect to determine whether the option gives the transferee the
practical ability to sell the transferred asset (see 3.9.1 above).
If the put option is sufficiently valuable to prevent the transferee from selling the asset,
the transferor is considered to retain control of the asset and should account for the
asset to the extent of its continuing involvement, [IFRS 9.B3.2.16(h)], (Figure 48.1, Box 9).
The accounting treatment required is discussed at 5.3 below.
If the put option is not sufficiently valuable to prevent the transferee from selling the
asset, the transferor is considered to have ceded control of the asset, and should
derecognise it, [IFRS 9.B3.2.16(i)], (Figure 48.1, Box 8, No).
The requirements above beg two questions. First the question of whether or not a put
option is sufficiently valuable to prevent the transferee from selling the asset is not a
matter of objective fact, but rather a function of the transferee’s appetite for risk, its need
for liquidity and so forth. It is not clear how the transferor can readily assess these factors.
Second, IFRS 9 is not explicit as to the accounting consequences (if any) of an option
that was considered at the time of the original transfer to be deeply out of the money
subsequently becoming neither deeply in the money nor deeply out of the money, or
even deeply in the money, (or any other of the possible permutations). This is discussed
further at 4.2.9 below.
4.2.4
Option to put or call at fair value
A transfer of a financial asset subject only to a put or call option with an exercise price
equal to the fair value of the financial asset at the time of repurchase results in
derecognition because of the transfer of substantially all the risks and rewards of
ownership, [IFRS 9.B3.2.16(j)], (Figure 48.1, Box 6, Yes).
4.2.5
Net cash-settled opti
ons
Where a transfer of a financial asset is subject to a put or call option that will be settled
net in cash, IFRS 9 requires the entity to evaluate the transfer so as to determine whether
it has retained or transferred substantially all the risks and rewards of ownership.
[IFRS 9.B3.2.16(k)]. IFRS 9 comments that ‘if the entity has not retained substantially all the
risks and rewards of ownership of the transferred asset, it determines whether it has
retained control of the transferred asset’ – a repetition of the basic principles of the
standard adding no clarification specific to this type of transaction.
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4.2.6
Removal of accounts provision
A ‘removal of accounts provision’ is an unconditional repurchase (i.e. call) option that
gives an entity the right to reclaim transferred assets subject to some restrictions. Provided
that such an option results in the entity neither retaining nor transferring substantially all
the risks and rewards of ownership, IFRS 9 allows derecognition, except to the extent of
the amount subject to repurchase (assuming that the transferee cannot sell the assets).
For example, if an entity transfers loan receivables with a carrying amount of €100,000 for
proceeds of €100,000, subject only to the right to call back any individual loan(s) up to a
maximum of €10,000, €90,000 of the loans would qualify for derecognition. [IFRS 9.B3.2.16(l)].
4.2.7
Clean-up call options
A ‘clean-up call’ option is an option held by an entity that services transferred assets (and may
be the transferor of those assets) to purchase remaining transferred assets when the cost of
servicing the assets exceeds the entity’s participation in their benefits. If such a clean-up call
results in the entity neither retaining nor transferring substantially all the risks and rewards of
ownership, and the transferee cannot sell the assets, IFRS 9 precludes derecognition only to
the extent of the amount of assets subject to the call option. [IFRS 9.B3.2.16(m)].
4.2.8
Same (or nearly the same) price put and call options
IFRS 9 does not specifically address the transfer of an asset subject to both a transferee’s
option to put, and a transferor’s option to call, the asset at a fixed price rather than at
fair value (as discussed in 4.2.4 above). Assuming that:
• both options can be exercised simultaneously; and
• both the transferor and transferee behave rationally,
it will clearly be in the interest of either the transferor or the transferee to exercise its
option, so that the asset will be reacquired by the transferor. This indicates that the
transferor has retained substantially all the risks and rewards of ownership.
However, if the two options were exercisable on different dates or at different prices
the effects of each option would need to be considered carefully.
4.2.9
Changes in probability of exercise of options after initial transfer of asset
As noted at 4.2.3.B above, IFRS 9 is not explicit as to the accounting consequences (if
any) of an option that was considered at the time of the original transfer to be deeply
out of the money subsequently becoming neither deeply in the money nor deeply out
of the money, or even deeply in the money, (or any other of the possible permutations).
This is explored further in Examples 48.2 to 48.4 below.
Example 48.2: Financial asset transferred subject only to deeply out of the
money call option
On 1 January 2016 an entity transferred a financial asset to a counterparty, subject only to a call option to
repurchase the asset at any time up to 31 December 2019. At 1 January 2016 the option was considered deeply
out of the money and the asset was accordingly derecognised (see 4.2.2 above).
At 31 December 2019 market conditions have changed considerably and the option is now deeply in the
money. What is the accounting consequence of this change?
3920 Chapter 48
There are no accounting consequences since, as noted at 3.8 above, IFRS 9
paragraph B3.2.6 specifies that an asset previously derecognised because substantially
all the risks and rewards associated with the asset have been transferred (as would be
the analysis for an asset transferred subject only to a deeply out of the money call –
see 4.2.2 above) is not re-recognised in a future period unless it is reacquired. Instead
the increase in the fair value of the option would be captured in the financial statements
as a gain under the normal requirement of IFRS 9 to account for derivatives at fair value
with changes in value reflected in profit or loss (see Chapter 42).
However, if the market changes were not demonstrably beyond any reasonable expectation
as at 1 January 2016, there might be an argument (given the definition of a deeply out of the
money option as an option that is ‘highly unlikely’ to become in the money before expiry –
see 4.2 above) that the fact that the option is now not merely in the money, but deeply in the
money, indicates that the original assessment that that option was deeply out of the money
was in fact an accounting error requiring correction under IAS 8 (see Chapter 3 at 4.6).
Example 48.3: Financial asset transferred subject only to deeply in the money
call option
On 1 January 2016 an entity transferred a financial asset to a counterparty, subject only to a call option to
repurchase the asset at any time up to 31 December 2019. At 1 January 2016 the option was considered deeply
in the money and the asset was accordingly not derecognised (see 4.2.1 above).
At 31 December 2019 market conditions have changed considerably and the option is now deeply out of the
money. What is the accounting consequence of this change?
This is the mirror image of the fact pattern in Example 48.2. However, whereas IFRS 9
makes it clear that an asset previously derecognised is not re-recognised, there is no
comparable provision that an asset that previously did not qualify for derecognition on
the origination of a particular transaction may not later be derecognised as a result of a
subsequent change in the assessed likely impact of the transaction. Because the standard
does not explain the consequences, it is not clear when the asset is derecognised or
whether there is any basis for derecognising the asset before the expiry of the option.
Assuming the asset in Example 48.3 above ìs not derecognised, the fall in the value of
the option indicates an impairment of the asset which is likely to be required to be
reflected in the financial statements under the normal requirements of IFRS 9 (see
Chapter 46 at 5). This would in turn appear to require a corresponding adjustment to
the liability recognised for the sale proceeds, so as to avoid recognising a net loss in the
income statement that has not actually been suffered.
Example 48.4: Financial asset transferred subject to call option neither deeply in
the money nor deeply out of the money
On 1 January 2016 an entity transferred a financial asset (an equity share) to a counterparty, subject only to a call
option to repurchase the asset at any time up to 31 December 2019. At 1 January 2016 the option was considered
to be neither deeply in the money
nor deeply out of the money. However, the asset was readily marketable and
freely transferable by the transferor and was accordingly derecognised because the entity, while neither
transferring nor retaining substantially all the risks and rewards of the asset, no longer controls it (see 4.2.3 above).
At 31 December 2019 the financial asset that was the subject of the transfer ceases to be listed and is therefore
not readily marketable. Had this been the case at the time of the original transfer, the entity would have been
regarded as retaining control of the asset, which would not have been derecognised (see 4.2.3.B above). What
is the accounting consequence of this change?
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Again, matters are not entirely clear. The rule in paragraph B3.2.6 of IFRS 9 that a
previously derecognised asset should not be re-recognised (other than on reacquisition
of the asset) applies, as drafted, only where derecognition results from a transfer of
substantially all the risks and rewards associated with the asset. In this case,
derecognition has resulted from a loss of control over, not a transfer of substantially all
the risks and rewards associated with, the asset. There is therefore some ambiguity as
to whether B3.2.6 is to be read:
• generally as prohibiting any re-recognition of a derecognised asset; or
• specifically as referring only to circumstances where derecognition results from
transfer of substantially all the risks and rewards (i.e. it applies only to ‘Box 6, Yes’
transactions, and not to ‘Box 8, No’ transactions).
Again, however, we take the view that the original decision to derecognise the asset
should not be revisited, unless (in exceptional circumstances) the original assessment
was an accounting error within the scope of IAS 8. The fact that the asset was
transferred on terms that the transferee could freely dispose of it means that the
transferor did indeed lose control.
4.3
Subordinated retained interests and credit guarantees
Where a financial asset is transferred, an entity may provide the transferee with credit
enhancement by subordinating some or all of its interest retained in the transferred
asset. Alternatively, an entity may provide the transferee with credit enhancement in
the form of a credit guarantee that could be unlimited or limited to a specified amount.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 775
