an entity has a financial asset accounted for at fair value through profit or loss c 599073

Asset measured at fair value subject to transferor’s call option

An entity has a financial asset, accounted for at fair value through profit or loss, carried at €80. It transfers the asset to a third party, subject to a call option whereby the entity can compel the transferee to sell the asset back to the entity for €95. At the date of transfer, the call option has a time value of €5.

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), and to continue recording it at fair value. At the date of transfer, the call option is out of the money. IAS 39 (IFRS 9) therefore requires the liability to be measured at the fair value of the transferred asset less the time value of the option, i.e. €80 – €5 = €75. This has the result that the net of the carrying value of the asset (€80) and the carrying value of the liability (€75) equals the time value of the option (€5), i.e.

A Transferred asset increases in value

Suppose that one year later the fair value of the asset is €100 and the time value of the option is now €3. The option is now in the money, so that the liability is measured at the option exercise price less the time value of the option, i.e. €95 – €3 = €92. This has the result that the net of the carrying value of the asset (€100) and the carrying value of the liability (€92) equals the fair value of the option (€8, representing €3 time value and €5 intrinsic value). The liability could have been more straightforwardly calculated as the fair value of the asset (€100) less the fair value of the option (€8) = €92. This gives rise to the following accounting entries:

The €3 gain recorded in profit or loss effectively represents the increase in the fair value of the option from €5 to €8 over the period. If the entity were able to exercise the option at this point, and did so, it would record the entry:

The particular transaction results in no overall gain or loss being reflected in profit or loss (i.e. €3 gain during the year less €3 loss on exercise of option). This represents the net of the €20 gain in the fair value of the asset (€100 at the end of period less €80 at the start) and the net cash outflow of €20 (€75 in on initial transfer, €95 out on exercise of option).

B Asset decreases in value

Suppose instead that during the first year the fair value of the asset fell to €65 and the time value of the option at the end of the year was only €1. The liability would be measured at the fair value of the transferred asset less the time value of the option, i.e. €65 – €1 = €64. This would generate the accounting entries:

Again the overall loss shown in profit or loss represents the movement in the fair value of the option over the period from €5 to €1. Suppose that one year later there was no change in the fair value of the asset, and the option expired unexercised. The entity would then record the accounting entry:

This results in an overall loss for the transaction as a whole of €5 (€4 in year 1 and €1 in year 2), which represents the difference between the carrying value of the asset at the date of original transfer (€80) and the proceeds received (€75).