Document ID: chunk:federal_register_of_legislation:F2023C00406:body:0:p51
Version: federal_register_of_legislation:F2023C00406
Segment Type: other
Provision Reference: 
Character Range: 129203–131921

option on 1 February 20X2             CU5,000
Fair value of option on 31 December 20X2            CU3,000
Fair value of option on 31 January 20X3             CU2,000

(a) Cash for cash ('net cash settlement')
IE18 Assume the same facts as in Example 3(a) above except that Entity A has written a call option on its own shares instead of having purchased a call option on them. Accordingly, on 1 February 20X2 Entity A enters into a contract with Entity B that gives Entity B the right to receive and Entity A the obligation to pay the fair value of 1,000 of Entity A's own ordinary shares as of 31 January 20X3 in exchange for CU102,000 in cash (ie CU102 per share) on 31 January 20X3, if Entity B exercises that right. The contract will be settled net in cash. If Entity  B does not exercise its right, no payment will be made. Entity A records the following journal entries.

1 February 20X2
Dr  Cash  CU5,000
    Cr    Call option obligation     CU5,000

To recognise the written call option.

31 December 20X2
Dr  Call option obligation  CU2,000
    Cr                      Gain        CU2,000

To record the decrease in the fair value of the call option.

31 January 20X3
Dr  Call option obligation  CU1,000
    Cr                      Gain        CU1,000

To record the decrease in the fair value of the option.
On the same day, Entity B exercises the call option and the contract is settled net in cash. Entity A has an obligation to deliver CU104,000 (CU104 × 1,000) to Entity B in exchange for CU102,000 (CU102 × 1,000) from Entity B, so Entity A pays a net amount of CU2,000.

Dr  Call option obligation  CU2,000
    Cr                      Cash        CU2,000

To record the settlement of the option contract.

(b) Shares for shares ('net share settlement')
IE19 Assume the same facts as in (a) except that settlement will be made net in shares instead of net in cash. Entity A's journal entries are the same as those shown in (a), except for recording the settlement of the option contract, as follows:

31 December 20X3
 Entity B exercises the call option and the contract is settled net in shares. Entity A has an obligation to deliver CU104,000 (CU104 × 1,000) worth of Entity A's shares to Entity B in exchange for CU102,000 (CU102 × 1,000) worth of Entity A's shares. Thus, Entity A delivers the net amount of CU2,000 worth of shares to Entity B, ie 19.2 shares (CU2,000/CU104).

Dr  Call option obligation  CU2,000
    Cr                      Equity      CU2,000

To record the settlement of the option contract. The settlement is accounted for as an equity transaction.

(c) Cash for shares ('gross physical settlement')
IE20 Assume the same facts as in (a) except that settlement will be made