Document ID: chunk:federal_register_of_legislation:F2023C00406:body:0:p45
Version: federal_register_of_legislation:F2023C00406
Segment Type: other
Provision Reference: 
Character Range: 114226–116982

CU106,000 (CU106 × 1,000) worth of shares to Entity A. Thus, Entity B delivers a net amount of CU2,000 (CU106,000 – CU104,000) worth of shares to Entity A, ie 18.9 shares (CU2,000/CU106).

Dr  Equity  CU2,000
    Cr      Forward asset     CU2,000

To record the settlement of the forward contract.

(c) Cash for shares ('gross physical settlement')
IE5 Assume the same facts as in (a) except that settlement will be made by delivering a fixed amount of cash and receiving a fixed number of Entity A's shares. Similarly to (a) and (b) above, the price per share that Entity A will pay in one year is fixed at CU104. Accordingly, Entity A has an obligation to pay CU104,000 in cash to Entity B (CU104 × 1,000) and Entity B has an obligation to deliver 1,000 of Entity A's outstanding shares to Entity A in one year. Entity A records the following journal entries.

1 February 20X2

Dr  Equity  CU100,000
    Cr      Liability     CU100,000

To record the obligation to deliver CU104,000 in one year at its present value of CU100,000 discounted using an appropriate interest rate (see AASB 9, paragraph B5.1.1).

31 December 20X2
Dr  Interest expense  CU3,660
    Cr                Liability     CU3,660

To accrue interest in accordance with the effective interest method on the liability for the share redemption amount.

31 January 20X3
Dr  Interest expense  CU340
    Cr                Liability     CU340

To accrue interest in accordance with the effective interest method on the liability for the share redemption amount.
Entity A delivers CU104,000 in cash to Entity B and Entity B delivers 1,000 of Entity A's shares to Entity A.
Dr  Liability  CU104,000
    Cr         Cash          CU104,000

To record the settlement of the obligation to redeem Entity A's own shares for cash.

(d) Settlement options
IE6 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 forward repurchase contract is a financial asset or a financial liability. If one of the settlement alternatives is to exchange cash for shares ((c) above), Entity A recognises a liability for the obligation to deliver cash, as illustrated in (c) above. Otherwise, Entity A accounts for the forward contract as a derivative.

Example 2: Forward to sell shares
IE7 This example illustrates the journal entries for forward sale contracts on an entity's own shares that will be settled (a) net in cash, (b) net in shares or (c) by receiving cash in exchange for shares. It also discusses the effect of settlement options (see (d) below). To simplify the illustration, it is assumed that no dividends are paid on the underlying shares (ie the 'carry return' is zero) so that the present value of the forward