Document ID: chunk:federal_register_of_legislation:F2023C00406:body:0:p48
Version: federal_register_of_legislation:F2023C00406
Segment Type: other
Provision Reference: 
Character Range: 121619–124453

number of its own shares in exchange for paying a fixed amount of cash or another financial asset. Entity A recognises a derivative asset or liability, as illustrated in (a) and (b) above. The accounting entry to be made on settlement depends on how the contract is actually settled.

Example 3: Purchased call option on shares
IE12 This example illustrates the journal entries for a purchased call option right 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 the entity's own 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          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')
IE13 On 1 February 20X2, Entity A enters into a contract with Entity B that gives Entity B the obligation to deliver, and Entity A the right to receive 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 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 CU102 exceeds the market price per share of CU100 and it would therefore not be economic for Entity A to exercise the option. In other words, the call option is out of the money.

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

To recognise the purchased call option.

31 December 20X2
 On 31 December 20X2, the market price per share has increased to CU104. The fair value of the call option has decreased to CU3,000, of which CU2,000 is intrinsic