Document ID: chunk:federal_register_of_legislation:F2023C00406:body:0:p53
Version: federal_register_of_legislation:F2023C00406
Segment Type: other
Provision Reference: 
Character Range: 134035–136793

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                               Reporting entity (Entity A)

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
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')
IE23 On 1 February 20X2, Entity A enters into a contract with Entity B that gives Entity A the right to sell, and Entity B the obligation to buy the fair value of 1,000 of Entity A's own outstanding ordinary shares as of 31 January 20X3 at a strike price of CU98,000 (ie CU98 per share) on 31 January 20X3, if Entity A exercises that right. The contract will be settled net in cash. If Entity A does not exercise its right, no payment will be made. Entity A records the following journal entries.

1 February 20X2
 The price per share when the contract is agreed on 1 February 20X2 is CU100. The initial fair value of the option contract on 1 February 20X2 is CU5,000, which Entity A pays to Entity B in cash on that date. On that date, the option has no intrinsic value, only time value, because the exercise price of CU98 is less than the market price per share of CU100. Therefore it would not be economic for Entity A to exercise the option. In other words, the put option is out of the money.

Dr  Put option asset  CU5,000
    Cr                Cash        CU5,000

To recognise the purchased put option.

31 December 20X2
 On 31 December 20X2 the market price per share has decreased to CU95. The fair value of the put option has decreased to CU4,000, of which CU3,000 is intrinsic value ([CU98 – CU95] × 1,000) and CU1,000 is the remaining time value.

Dr  Loss  CU1,000
    Cr    Put option asset     CU1,000

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

31 January 20X3
 On 31 January 20X3 the market price per share is still CU95. The fair value of the put option has decreased to CU3,000, which is all intrinsic value ([CU98 – CU95] × 1,000) because no time value remains.

Dr  Loss  CU1,000
    Cr    Put option asset     CU1,000

To record the