Asset measured at fair value subject to collar put and call options
An entity has a financial asset, accounted for at fair value, carried at €100. On 1 January 2013 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 €120; and
- a put option whereby the transferee can compel the entity to reacquire the asset for €80.
The options are 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 time value of the put and call are €1 and €5 respectively. At the date of transfer, the call option is out of the money, so that the associated liability is calculated as the sum of the fair value of the asset and the fair value of the put option less the time value of the call option, i.e. (€100+€1) – €5 = €96. The net of this and the fair value of the asset (€100) is €4 which is the net fair value of the two options (call €5 less put €1). Assuming that the transaction is undertaken at arm’s length, the transferee would pay €96 for the asset and the entity would record the accounting entry:
|
€ |
€ |
|
|
Cash |
96 |
|
|
Liability |
96 |
A Transferred asset increases in value
Suppose that, at 31 December 2013, the fair value of the asset is €140, and the time value of the put and call are €0.5 and €2 respectively. The call option is now in the money, so that IAS 39 (IFRS 9) requires the entity to recognise a liability equal to the sum of the call exercise price and fair value of the put option less the time value of the call option, i.e. (€120 + €0.5) – €2 = €118.5. The net of this and the carrying value of the asset (€140) is €21.5 which is the net fair value of the two options (call €22 [time value €2 plus intrinsic value €20] less put €0.5 = €21.5). This gives the accounting entry:
|
€ |
€ |
|
|
31 December 2013 |
||
|
Asset (€140 – €100) |
40.0 |
|
|
Gain (profit or loss) |
17.5 |
|
|
Liability (€118.5 – €96) |
22.5 |
The gain represents the increase in fair value of the call option of €17 (€5 at outset and €22 at 31 December 2013) plus the €0.5 decrease (a gain from the transferor’s perspective) in the fair value of the put option (€1 at outset and €0.5 at 31 December 2013).
If the entity were able to, and did, exercise its call option, it would record the entry:
|
€ |
€ |
|
|
Exercise of call option |
||
|
Liability |
118.5 |
|
|
Loss (profit or loss) |
1.5 |
|
|
Cash |
120.0 |
The overall gain of €16 on the transaction (€1.5 loss above and €17.5 profit recorded in 2013) represents the increase in fair value of the asset of €40 (€100 at outset, €140 at 31 December 2013) less the net €24 paid to the transferee (€120 paid on exercise of call less €96 received on initial transfer).
B Transferred asset decreases in value
Suppose instead that, at 31 December 2013, the fair value of the asset is €78, and the time value of the put and call are €0.5 and €2 respectively. The call option is now out of the money, so that IAS 39 (IFRS 9) requires the entity to recognise a liability equal to the sum of the fair value of the asset and the fair value of the put option (i.e. €2.5 – time value €0.5 plus intrinsic value €2 [€80 exercise price versus €78 fair value of asset]) less the time value of the call option, i.e. (€78 + €2.5) – €2 = €78.5.
The net of this and the carrying value of the asset (€78) is €(–0.5) which is the net fair value of the two options (call €2 less put €2.5 = €(–0.5)). This gives the accounting entry:
|
€ |
€ |
|
|
31 December 2013 |
||
|
Liability (€78.5 – €96) |
17.5 |
|
|
Loss (profit or loss) |
4.5 |
|
|
Asset (€78 – €100) |
22.0 |
The loss represents the decrease in the fair value of the call option of €3 (€5 at outset and €2 at 31 December 2013) plus the €1.5 increase (a decrease from the transferor’s perspective) in the fair value of the put option (€1 at outset and €2.5 at 31 December 2013).
If the transferee were able to, and did, exercise its put option, the entity would record the entry:
|
€ |
€ |
|
|
Exercise of put option |
||
|
Liability |
78.5 |
|
|
Loss (profit or loss) |
1.5 |
|
|
Cash |
80.0 |
The overall loss of €6 on the transaction (€1.5 loss above and €4.5 loss recorded in 2013) represents the decrease in fair value of the asset of €22 (€100 at outset, €78 at 31 December 2013) offset by the net €16 received from the transferee (€96 received on initial transfer less €80 paid on exercise of put).