Document ID: chunk:federal_register_of_legislation:F2023C00406:body:0:p44
Version: federal_register_of_legislation:F2023C00406
Segment Type: other
Provision Reference: 
Character Range: 111910–114477

In this subsection, the forward purchase contract on the entity's own shares will be settled net in cash, ie there is no receipt or delivery of the entity's own shares upon settlement of the forward contract.
On 1 February 20X2, Entity A enters into a contract with Entity B to receive the fair value of 1,000 of Entity A's own outstanding ordinary shares as of 31 January 20X3 in exchange for a payment of CU104,000 in cash (ie CU104 per share) on 31 January 20X3. The contract will be settled net in cash. 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 forward contract on 1 February 20X2 is zero.
No entry is required because the fair value of the derivative is zero and no cash is paid or received.

31 December 20X2
 On 31 December 20X2, the market price per share has increased to CU110 and, as a result, the fair value of the forward contract has increased to CU6,300.

Dr  Forward asset  CU6,300
    Cr             Gain        CU6,300

To record the increase in the fair value of the forward contract.

31 January 20X3
 On 31 January 20X3, the market price per share has decreased to CU106. The fair value of the forward contract is CU2,000 ([CU106 × 1,000] – CU104,000).
On the same day, the contract is settled net in cash. Entity A has an obligation to deliver CU104,000 to Entity B and Entity B has an obligation to deliver CU106,000 (CU106 × 1,000) to Entity A, so Entity B pays the net amount of CU2,000 to Entity A.

Dr  Loss  CU4,300
    Cr    Forward asset     CU4,300

To record the decrease in the fair value of the forward contract (ie CU4,300 = CU6,300 – CU2,000).

Dr  Cash  CU2,000
    Cr    Forward asset     CU2,000

To record the settlement of the forward contract.

(b) Shares for shares ('net share settlement')
IE4 Assume the same facts as in (a) except that settlement will be made net in shares instead of net in cash. Entity A's journal entries are the same as those shown in (a) above, except for recording the settlement of the forward contract, as follows:

31 January 20X3
 The contract is settled net in shares. Entity A has an obligation to deliver CU104,000 (CU104 × 1,000) worth of its shares to Entity B and Entity B has an obligation to deliver 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