Document ID: chunk:federal_register_of_legislation:F2023C00406:body:0:p50
Version: federal_register_of_legislation:F2023C00406
Segment Type: other
Provision Reference: 
Character Range: 126585–129458

has a right to receive 1,000 of Entity A's own outstanding shares in exchange for CU102,000 (CU102 × 1,000) in cash, if Entity A exercises its option. Entity A records the following journal entries.

1 February 20X2
Dr  Equity  CU5,000
    Cr      Cash        CU5,000

To record the cash paid in exchange for the right to receive Entity A's own shares in one year for a fixed price. The premium paid is recognised in equity.

31 December 20X2
 No entry is made on 31 December because no cash is paid or received and a contract that gives a right to receive a fixed number of Entity A's own shares in exchange for a fixed amount of cash meets the definition of an equity instrument of the entity.

31 January 20X3
 Entity A exercises the call option and the contract is settled gross. Entity B has an obligation to deliver 1,000 of Entity A's shares in exchange for CU102,000 in cash.

Dr  Equity  CU102,000
    Cr      Cash          CU102,000

To record the settlement of the option contract.

(d) Settlement options
IE16 The existence of settlement options (such as net in cash, net in shares or by an exchange of cash and shares) has the result that the call option is a financial asset. It does not meet the definition of an equity instrument because it can be settled otherwise than by Entity A repurchasing a fixed number of its own shares in exchange for paying a fixed amount of cash or another financial asset. Entity A recognises a derivative asset, as illustrated in (a) and (b) above. The accounting entry to be made on settlement depends on how the contract is actually settled.

Example 4: Written call option on shares
IE17 This example illustrates the journal entries for a written call option obligation on the entity's own shares that will be settled (a) net in cash, (b) net in shares or (c) by delivering cash in exchange for shares. It also discusses the effect of settlement options (see (d) below).

Assumptions:
Contract date                                       1 February 20X2
Exercise date                                       31 January 20X3
                                                    (European terms, ie it can be exercised only at maturity)
Exercise right holder                               Counterparty
                                                    (Entity B)
Market price per share on 1 February 20X2           CU100
Market price per share on 31 December 20X2          CU104
Market price per share on 31 January 20X3           CU104

Fixed exercise price to be paid on 31 January 20X3  CU102
Number of shares under option contract              1,000

Fair value of 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)