Asset measured at fair value subject to transferee’s put option
An entity has a financial asset, accounted for at fair value. On 1 January 2013 it transfers the asset, then carried at €98, to a third party, subject to a put option whereby the transferee can compel the entity to reacquire the asset for €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), and to continue recording it at the lower of (a) fair value and (b) €100 (the exercise price of the option). Assuming that the transferee pays €106 for the asset, representing €98 fair value of the asset plus €8 time value of the option, the entity would record the accounting entry:
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€ |
€ |
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1 January 2013 |
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Cash |
106 |
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Liability |
106 |
A Transferred asset increases in value
Suppose that at 31 December 2013, the option has a time value of €5 and the fair value of the asset is €120. IAS 39 (IFRS 9) requires the carrying value of the asset to be restricted to €100 (the exercise price of the option). The liability is measured at the exercise price plus the time value of the option,19 i.e. €100 + €5 = €105. This has the result that the net of the carrying value of the asset (€100) and the carrying value of the liability (€105) equals the fair value of the option to the transferor (–€5).
This gives the accounting entry:
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€ |
€ |
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31 December 2013 |
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Asset (€100 – €98) |
2 |
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Liability (€105 – €106) |
1 |
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Gain (profit or loss) |
3 |
The gain of €3 effectively represents the decrease in the time value of the option (a gain from the transferor’s perspective) from €8 to €5.
If the option were then to lapse unexercised, with no further change in the fair value of the asset, the entity would record the accounting entry:
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€ |
€ |
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On lapse of option |
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Liability |
105 |
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Asset |
100 |
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Gain (profit or loss) |
5 |
The total gain on the transaction of €8 (€3 in Year 1 and €5 on lapse) represents the option premium of €8 (i.e. the difference between the total consideration of €106 and the carrying value of the asset of €98) received at the outset.
B Transferred asset decreases in value
Suppose instead that at 31 December 2013, the option has a time value of €5 but the fair value of the asset is €90. IAS 39 (IFRS 9) requires the carrying value of the asset to be measured at its fair value of €90. The liability is measured at the exercise price plus the time value of the option (i.e. to the transferee), i.e. €100 + €5 = €105.
This gives the accounting entry:
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€ |
€ |
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31 December 2013 |
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Liability (€105 – €106) |
1 |
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Loss (profit or loss) |
7 |
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Asset (€90 – €98) |
8 |
This has the result that the net of the carrying value of the asset (€90) and the liability (€105), i.e. €(–15) represents the fair value of the option to the transferor (i.e. intrinsic value €(–10) [€100 exercise price versus €90 value of asset] + time value €(–5)). The €7 loss represents the increase in the fair value of the option (a loss to the transferor) from €8 at the outset to €15 at 31 December 2013.
If the transferee were able to, and did, exercise its option at that point, the entity would record the accounting entry:
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€ |
€ |
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On exercise of option |
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Liability |
105 |
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Cash |
100 |
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Gain (profit or loss) |
5 |
The overall €2 loss (i.e. €5 gain above and €7 loss during Year 1) represents the net cash of €8 received from the transferee (€108 in at inception less €100 out on exercise) less the €10 fall in fair value of the transferred asset (€100 at inception less €90 at exercise).