£
£
Liability
100
Loss 2
Cash 102
However, the entity would not have exercised the option unless the asset had been worth at least £102 (i.e.
£2 more than its carrying amount), suggesting that the more appropriate treatment would be to add the £2 to
the cost of the asset.
Likewise, if instead of the entity having a call option, the transferee had a put option at £98 which it exercised,
the entity would apparently record the accounting entry:
£
£
Liability
100
Profit 2
Cash 98
However, the transferee would not have exercised its option unless the asset had been worth less than £98
(i.e. £2 less than its carrying amount). In this case, however, the IASB’s thinking may have been that the
exercise of the transferee’s put option suggests an impairment of the asset which is required to be
recognised in the financial statements (see Chapter 46 at 5). This would not necessarily be the case (e.g.
where a fixed-interest asset has a fair value below cost because of movements in interest rates but is not
intrinsically impaired).
Financial
instruments:
Derecognition
3937
If the option were to lapse unexercised, the entity would simply derecognise the transferred asset and the
associated liability, i.e.:
£
£
Liability
100
Asset 100
5.4.3
Transfers of assets measured at fair value
IFRS 9 discusses the application of continuing involvement accounting to transferred
assets measured at fair value in terms of transferred assets subject to:
• a transferor’s call option (see 5.4.3.A below);
• a transferee’s put option (see 5.4.3.B below); and
• a ‘collar’ – i.e. a transferor’s call option combined with a transferee’s put option
(see 5.4.3.C below).
The way in which the rules are articulated in IFRS 9 is somewhat confusing, but in
general the effect is that the transferred asset is recognised at:
• in the case of an asset subject to a transferor call option, its fair value (on the basis
that the call option gives the transferor access to any increase in the fair value of
the asset); and
• in the case of an asset subject to a transferee put option, the lower of fair value and
the option exercise price (on the basis that the put option denies the transferor
access to any increase in the fair value of the asset above the option price).
This methodology summarised below is applied both on the date on which the option
is written and subsequently.
5.4.3.A Transferor’s
call
option
If a transferor’s call option prevents derecognition (see 3.8.3 and 4 above) of a
transferred asset measured at fair value, the asset continues to be measured at its fair
value. The associated liability is measured:
• if the option is in or at the money, at the option exercise price less the time value
of the option; or
• if the option is out of the money, at the fair value of the transferred asset less the
time value of the option.
The adjustment to the measurement of the associated liability ensures that the net
carrying amount of the asset and the associated liability is the fair value of the call option
right, as illustrated by Example 48.12 below. [IFRS 9.B3.2.13(c)].
Example 48.12: Asset measured at fair value subject to transferor’s call option
An entity has a financial asset, accounted for at fair value through profit or loss, carried at €80. It transfers
the asset to a third party, subject to a call option whereby the entity can compel the transferee to sell the asset
back to the entity for €95. At the date of transfer, the call option has a time value of €5.
The option is considered to be neither deeply in the money nor deeply out of the money. IFRS 9 therefore requires
the entity to continue to recognise the asset to the extent of its continuing involvement (Figure 48.1, Box 9 – see
also 4.2.3 above), and to continue recording it at fair value. At the date of transfer, the call option is out of the money.
IFRS 9 therefore requires the liability to be measured at the fair value of the transferred asset less the time value of
3938 Chapter 48
the option, i.e. €80 – €5 = €75. This has the result that the net of the carrying value of the asset (€80) and the carrying value of the liability (€75) equals the time value of the option (€5), resulting in the following accounting entry:
€
€
Date of transfer
Cash 75
Liability
75
A
Transferred asset increases in value
Suppose that one year later the fair value of the asset is €100 and the time value of the option is now €3. The
option is now in the money, so that the liability is measured at the option exercise price less the time value of
the option, i.e. €95 – €3 = €92. This has the result that the net of the carrying value of the asset (€100) and
the carrying value of the liability (€92) equals the fair value of the option (€8, representing €3 time value and
€5 intrinsic value). The liability could have been more straightforwardly calculated as the fair value of the
asset (€100) less the fair value of the option (€8) = €92. This gives rise to the following accounting entries:
€
€
During year 1
Asset (€100 – €80)
20
Liability (€92 – €75)
17
Gain (profit or loss)
3
The €3 gain recorded in profit or loss effectively represents the increase in the fair value of the option from €5 to
€8 over the period. If the entity were able to exercise the option at this point, and did so, it would record the entry:
€
€
Liability
92
Loss (profit or loss)
3
Cash 95
The particular transaction results in no overall gain or loss being reflected in profit or loss (i.e. €3 gain during
the year less €3 loss on exercise of option). This represents the net of the €20 gain in the fair value of the
asset (€100 at the end of period less €80 at the start) and the net cash outflow of €20 (€75 in on initial transfer,
€95 out on exercise of option).
B
Asset decreases in value
Suppose instead that during the first year the fair value of the asset fell to €65 and the time value of the option
at the end of the year was only €1. The liability would be measured at the fair value of the transferred asset
less the time value of the option, i.e. €65 – €1 = €64. This would generate the accounting entries:
€
€
During year 1
Liability (€64 – €75)
11
Loss (profit or loss)
4
Asset (€65 – €80)
15
Again the overall loss shown in profit or loss represents the movement in the fair value of the option over the
period from €5 to €1. Suppose that one year later there was no change in the fair value of the asset, and the option
&nbs
p; expired unexercised. The entity would then record the accounting entry:
€
€
At end of year 2
Liability
64
Loss (profit or loss)
1
Asset (statement of financial position)
65
This results in an overall loss for the transaction as a whole of €5 (€4 in year 1 and €1 in year 2), which
represents the difference between the carrying value of the asset at the date of original transfer (€80) and the
proceeds received (€75).
Financial
instruments:
Derecognition
3939
The amount of any consideration received is in principle not relevant to the
measurement of the liability. If, for example, the entity originally received consideration
of €72, it would still record a liability of €75 and a ‘day one’ loss of €3. If it received
consideration of €80, it would still record a liability of €75 and a ‘day one’ profit of €5.
The IASB no doubt presumed that such transactions are likely to be undertaken only by
sophisticated market participants such that the consideration received will always be
equivalent to the fair value of the asset less the fair value of the option. However, there
may well be instances where this is not the case, such as in transactions between
members of the same group or other related parties.
5.4.3.B Transferee’s
put
option
If a transferee’s put option prevents derecognition (see 3.8.3 and 4 above) of a
transferred asset measured at fair value, IFRS 9 requires the asset to be measured at the
lower of fair value and the option exercise price. The basis for this treatment is that the
entity has no right to increases in the fair value of the transferred asset above the
exercise price of the option. The associated liability is measured at the option exercise
price plus the time value of the option. This ensures that the net carrying amount of the
asset and the associated liability is the fair value of the put option obligation, as
illustrated by Example 48.13 below. [IFRS 9.B3.2.13(d)].
Example 48.13: Asset measured at fair value subject to transferee’s put option
An entity has a financial asset, accounted for at fair value. On 1 January 2019 it transfers the asset, then
carried at €98, to a third party, subject to a put option whereby the transferee can compel the entity to
reacquire the asset for €100. The option is considered to be neither deeply in the money nor deeply out of
the money. IFRS 9 therefore requires the entity to continue to recognise the asset to the extent of its
continuing involvement (Figure 48.1, Box 9 – see also 4.2.3 above), and to continue recording it at the
lower of (a) fair value and (b) €100 (the exercise price of the option). Assuming that the transferee pays
€106 for the asset, representing €98 fair value of the asset plus €8 time value of the option, the entity would
record the accounting entry:
€
€
1 January 2018
Cash 106
Liability
106
A
Transferred asset increases in value
Suppose that at 31 December 2019, the option has a time value of €5 and the fair value of the asset is €120.
IFRS 9 requires the carrying value of the asset to be restricted to €100 (the exercise price of the option). The
liability is measured at the exercise price plus the time value of the option,17 i.e. €100 + €5 = €105. This has
the result that the net of the carrying value of the asset (€100) and the carrying value of the liability (€105)
equals the fair value of the option to the transferor (–€5).
This gives the accounting entry:
€
€
31 December 2019
Asset (€100 – €98)
2
Liability (€105 – €106)
1
Gain (profit or loss)
3
The gain of €3 effectively represents the decrease in the time value of the option (a gain from the transferor’s
perspective) from €8 to €5.
3940 Chapter 48
If the option were then to lapse unexercised, with no further change in the fair value of the asset, the entity
would record the accounting entry:
€
€
On lapse of option
Liability
105
Asset 100
Gain (profit or loss)
5
The total gain on the transaction of €8 (€3 in Year 1 and €5 on lapse) represents the option premium of €8
(i.e. the difference between the total consideration of €106 and the carrying value of the asset of €98) received
at the outset.
B
Transferred asset decreases in value
Suppose instead that at 31 December 2019, the option has a time value of €5 but the fair value of the asset is
€90. IFRS 9 requires the carrying value of the asset to be measured at its fair value of €90. The liability is
measured at the exercise price plus the time value of the option (i.e. to the transferee), i.e. €100 + €5 = €105.
This gives the accounting entry:
€
€
31 December 2019
Liability (€105 – €106)
1
Loss (profit or loss)
7
Asset (€90 – €98)
8
This has the result that the net of the carrying value of the asset (€90) and the liability (€105), i.e. €(–15)
represents the fair value of the option to the transferor (i.e. intrinsic value €(–10) [€100 exercise price versus
€90 value of asset] + time value €(–5)). The €7 loss represents the increase in the fair value of the option (a
loss to the transferor) from €8 at the outset to €15 at 31 December 2019.
If the transferee were able to, and did, exercise its option at that point, the entity would record the accounting entry:
€
€
On exercise of option
Liability
105
Cash 100
Gain (profit or loss)
5
The overall €2 loss (i.e. €5 gain above and €7 loss during Year 1) represents the net cash of €8 received from
the transferee (€108 in at inception less €100 out on exercise) less the €10 fall in fair value of the transferred
asset (€100 at inception less €90 at exercise).
5.4.3.C
‘Collar’ put and call options
Assets may be transferred in a way designed to ensure that the transferee is shielded
from excessive losses on the transferred asset but has to pass significant gains on the
asset back to the transferor. Such an arrangement is known as a ‘collar’, on the basis that
it allocates a range of potential value movements in the asset to the transferee, with
movements outside that range accruing to the transferor. A simple example would be
the transfer of an asset subject to a purchased call option (allowing the transferor to
reacquire the asset if it increases in value beyond a certain level) and a written put
option (allowing the transferee to compel the transferor to reacquire the asset if it falls
in value beyond a certain level).
Financial
instruments:
Derecognition
3941
If a col
lar, in the form of a purchased call and written put option, prevents derecognition
(see 3.8.3 and 4 above) of a transferred asset measured at fair value, IFRS 9 requires the
entity to continue to measure the asset at fair value. The associated liability is measured at:
• if the call option is in or at the money, the sum of the call exercise price and the
fair value of the put option less the time value of the call option; or
• if the call option is out of the money, the sum of the fair value of the asset and the
fair value of the put option less the time value of the call option.
The adjustment to the associated liability ensures that the net carrying amount of the
asset and the associated liability is the fair value of the options held and written by the
entity, as illustrated by Example 48.14 below. [IFRS 9.B3.2.13(e)].
Example 48.14: Asset measured at fair value subject to collar put and call options
An entity has a financial asset, accounted for at fair value, carried at €100. On 1 January 2019 it transfers the
asset to a third party, subject to:
• a call option whereby the entity can compel the transferee to sell the asset back to the entity for €120;
and
• a put option whereby the transferee can compel the entity to reacquire the asset for €80.
The options are considered to be neither deeply in the money nor deeply out of the money. IFRS 9 therefore
requires the entity to continue to recognise the asset to the extent of its continuing involvement (Figure 48.1,
Box 9 – see also 4.2.3 above), and to continue recording it at fair value.
At the date of transfer, the time value of the put and call are €1 and €5 respectively. At the date of transfer,
the call option is out of the money, so that the associated liability is calculated as the sum of the fair value of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 779
