Document ID: chunk:federal_register_of_legislation:F2023C00406:body:0:p55
Version: federal_register_of_legislation:F2023C00406
Segment Type: other
Provision Reference: 
Character Range: 138884–141693

No entry is made on 31 December because no cash is paid or received and a contract to deliver 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 Entity A.

31 January 20X3
 Entity A exercises the put option and the contract is settled gross. Entity B has an obligation to deliver CU98,000 in cash to Entity A in exchange for 1,000 shares.
Dr  Cash  CU98,000
    Cr    Equity       CU98,000

To record the settlement of the option contract.

(d) Settlement options
IE26 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 put 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 issuing a fixed number of its own shares in exchange for receiving 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 6: Written put option on shares
IE27 This example illustrates the journal entries for a written put option 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          CU95
Market price per share on 31 January 20X3           CU95

Fixed exercise price to be paid on 31 January 20X3  CU98
Present value of exercise price on 1 February 20X2  CU95
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            CU4,000
Fair value of option on 31 January 20X3             CU3,000

(a) Cash for cash ('net cash settlement')
IE28 Assume the same facts as in Example 5(a) above, except that Entity A has written a put option on its own shares instead of having purchased a put option on its own shares. 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 outstanding ordinary shares as of 31 January 20X3 in