an entity has a financial asset accounted for at amortised cost carried at 98 it tra 599072

Asset measured at amortised cost

An entity has a financial asset, accounted for at amortised cost, carried at 98. It transfers the asset to a third party in return for consideration of 95. The asset is subject to a call option whereby the entity can compel the transferee to sell the asset back to the entity for 102. The amortised cost of the asset on the option exercise date will be 100. The option is considered to be neither deeply in the money nor deeply out of the money. IAS 39 (IFRS 9) therefore requires the entity to continue to recognise the asset to the extent of its continuing involvement (Figure 50.1, Box 9 – see also 4.2.3 above).

The initial carrying amount of the associated liability is 95. This is then accreted to 100 (i.e. the amortised cost of the asset on exercise date – not the 102 exercise price) through profit or loss using the effective interest method. Because the transferred asset is measured at amortised cost, the associated liability must also be accounted for at amortised cost, and not at fair value through profit or loss (see 5.3.4 above). This will give rise to the accounting entries:

If the option is exercised, any difference between the carrying amount of the associated liability and the exercise price is recognised in profit or loss. This last requirement has the possibly counter-intuitive effect that the question of whether the entity records a profit or loss on exercise of the option is essentially a function of the difference between the liability (representing the amortised cost of the transferred asset) and the cash paid, not of whether it has in fact (i.e. in economic terms) made a gain or loss.

Thus, if the entity were to exercise its option at 102 it would apparently record the accounting entry

However, the entity would not have exercised the option unless the asset had been worth at least 102 (i.e. 2 more than its carrying amount), suggesting that the more appropriate treatment would be to add the 2 to the cost of the asset.

Likewise, if instead of the entity having a call option, the transferee had a put option at 98 which it exercised, the entity would apparently record the accounting entry:

However, the transferee would not have exercised its option unless the asset had been worth less than 98 (i.e. 2 less than its carrying amount). In this case, however, the IASB’s thinking may have been that the exercise of the transferee’s put option suggests an impairment of the asset which is required to be recognised in the financial statements (see Chapter 49 at 6). This would not necessarily be the case (e.g. where a fixed-interest asset has a fair value below cost because of movements in interest rates but is not intrinsically impaired).

If the option were to lapse unexercised, the entity would simply derecognise the transferred asset and the associated liability, i.e.