IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 24 / Financial In struments: Presentation (l A S 32)

• An issued (written) call option or warrant tha t gives the holder the right to purcha se a fixed number of equity instruments of the entity (e.g., 1,000 sha res) f o r a fixed price (e.g., $100) . If the proceeds from issuing the call opt ion is $9 ,000, the entity makes this journal entry: Dr Cash 9,000 Cr Equity 9,000 • A purchased call option that gives the entity the right to repurchase a fixed number of its own issued equity inst ruments (e.g., 1,000 shares) fo r a fixed price (e.g., $ 100). If the price f or purchas ing the call op tion is $9,000, the entity makes this j ournal ent ry: Dr Equity 9,000 Cr Cash 9,000 • A forward contract to sell a fixed number of equity instruments (e.g.. 1,000 shares) of the en– tity to another entity fo r a fixed exercise price at a f uture dat e (e.g., $ 100). If the forwa rd is entered into at a zero fa ir value, no j ournal entry is required until se ttleme nt of the transac– tion. 3.3.4 If, however, there is any variability in the amount of cash or own equity instruments that will be received or delivered under such a contract (e.g., based on the share price, the price of gold , or some other variable ), the contract is a financial asset or financial liability, as appl icable. Example Examples of instruments that are cla ssifi ed as fin an cial liabilities are • A contract that requires the ent ity to deliver as man y of the entity's own equity instruments as are equal in value to $100,000 on a future date • A contract that requ ires the ent ity to deliv er as man y of the entity 's own equity instruments as are equal in value to the valu e of 100 ounces of go ld on a futu re dat e • A contract that requires the entity to deliver a fi xed number of the ent ity 's own equity instru– ment s in return fo r an amo unt of cash calculated to equal the value of 100 ounc es of go ld on a f uture date 3.3.5 If a financial instrument requires the issuer to repurch ase its own issued equity instruments for cash or other financial assets, there is a financial liability for the present value of the repurchase price (redemption amount). The liabil ity is recognized by reclassifying the amount of the liability from equity. Subsequently, the liabil ity is accounted for under lAS 39. If it is classified as a finan– cial liabilit y measured at amortized cos t, the difference between the repurchase price and the pres– ent value of the repurchase price is amortized to profit or loss as an adjustment to interest expense using the effective interest rate method. Example On January I , 20X7, Ent ity A ente rs into a forwa rd cont ract that requires the entity to repurchase 1,000 sha res fo r $60,000 on December 31, 20X7. No conside ration is paid or received at inception of the contract. The market interest rate is 10%, such that the present value of the payment is $54,545 [= 60,0001(1 + IO%)}. Theref ore, the entity makes this j ournal entry on init ial recogn ition to recog nize its liability fo r the repurchase pri ce: 54,545 On Decemb er 3 1, 20X7, Entity A makes this entry to recogni ze the amortizati on in accordance with the effective interest method: Dr Interest expense 6.565 Cr Liability 6.565 Finally, on December 3 1, 20X7, Entity A settles the forward contract and ma kes thi s journal entry: Dr Liability 60,000 Cr Cash 60,000 3.3.6 If a derivativ e financial instrument gives one party a choice over how it is settled, it is a financial asset or financia l liability unless all of the settlement alternatives would result in it being an equit y instrument. Example One example of a contract that would be classified as a financial liability because it provides for a choice ofsettlement is a written call option on own equity that the entity can decide to settle eithe r &~~ ~~ Cr Liability