Example 8: Entities with some equity
IE33. The following example illustrates an income statement and balance sheet format that may be used by entities whose share capital is not equity as defined in IAS 32 because the entity has an obligation to repay the share capital on demand. Other formats are possible.


Income statement for the year ended 31 December 20x1
          20x1    20x0
          CU    CU
Revenue         472    498
Expenses (classified by nature or function)    (367)    (396)
Profit from operating activities    105    102
Finance costs other finance costs    (4)    (4)
     distributions to members    (50)    (50)
Change in net assets attributable to members    51    48
Balance sheet at 31 December 20x1
          20x1              20x0
     CU    CU         CU    CU
ASSETS                        
Non-current assets (classified in accordance with IAS1)    908              830    
Total non-current assets         908              830
Current assets (classified in accordance with IAS1)    383              350    
Total current assets         383              350
Total assets         1,291              1,180
LIABILITIES                        
Current liabilities (classified in accordance with IAS1)    372              338    
Share capital repayable on demand    202              161    
Total current liabilities         (574)              (499)
Total assets less current liabilities         717              681
Non-current liabilities (classified in accordance with IAS1)    187              196    
          187              196
RESERVES [2]                        
Reserves eg revaluation reserve, retained earnings etc    530              485    
          530              485
          717              681
MEMORANDUM NOTE Total Members' Interests
Share capital repayable on demand         202              161
Reserves         530              485
          732              646
                          

(d) Settlement options
IE31. The existence of settlement options (such as net in cash, net in shares or by an exchange of cash and shares) has the result that the written put option is a financial liability. If one of the settlement alternatives is to exchange cash for shares ((c) above), Entity A recognises a liability for the obligation to deliver cash, as illustrated in (c) above. Otherwise, Entity A accounts for the put option as a derivative liability.
Entities such as Mutual Funds and Co-operatives whose Share Capital is not Equity as Defined in IAS 32
Example 7: Entities with no equity
IE32. The following example illustrates an income statement and balance sheet format that may be used by entities such as mutual funds that do not have equity as defined in IAS 32. Other formats are possible.
Income statement for the year ended 31 December 20x1
     20x1    20x0
     CU    CU
Revenue    2,956    1,718
Expenses (classified by nature or function)    (644)    (614)
Profit from operating activities    2,312    1,104
Finance costs other finance costs    (47)    (47)
distributions to unitholders    (50)    (50)
Change in net assets attributable to unitholders    2,215    1,007
Balance sheet at 31 December 20x1
          20x1         20x0
     CU    CU    CU    CU
ASSETS                    
Non-current assets (classified in accordance with IAS1)    91,374         78,484    
Total non-current assets         91,374         78,484
Current assets (classified in accordance with IAS1)    1,422         1,769    
Total current assets         1,422         1,769
Total assets         92,796         80,253
LIABILITIES                    
Current liabilities (classified in accordance with IAS1)    647         66    
Total current liabilities         (647)         (66)
Non-current liabilities excluding net assets attributable to unitholders (classified in accordance with IAS1)    280         136    
          (280)         (136)
Net assets attributable to unitholders         91,869         80,051

(c) Cash for shares ('gross physical settlement')
IE30. Assume the same facts as in (a) except that settlement will be made by delivering a fixed amount of cash and receiving a fixed number of shares, if Entity B exercises the option. Similarly to (a) and (b) above, the exercise price per share is fixed at CU98. Accordingly, Entity A has an obligation to pay CU98,000 in cash to Entity B (CU98 × 1,000) in exchange for 1,000 of Entity A's outstanding shares, if Entity B exercises its option. Entity A records the following journal entries.
1 February 2002
Dr    Cash    CU5,000    
Cr    Equity         CU5,000
To recognise the option premium received of CU5,000 in equity.
Dr    Equity    CU95,000    
Cr    Liability         CU95,000
To recognise the present value of the obligation to deliver CU98,000 in one year, ie CU95,000, as a liability.
31 December 2002
Dr    Interest expense    CU2,750    
Cr    Liability         CU2,750
To accrue interest in accordance with the effective interest method on the liability for the share redemption amount.
31 January 2003
Dr    Interest expense    CU250    
Cr    Liability         CU250
To accrue interest in accordance with the effective interest method on the liability for the share redemption amount.
On the same day, Entity B exercises the put option and the contract is settled gross. Entity A has an obligation to deliver CU98,000 in cash to Entity B in exchange for CU95,000 worth of shares (CU95 × 1,000).
Dr    Liability    CU98,000    
Cr    Cash         CU98,000
To record the settlement of the option contract.

(b) Shares for shares ('net share settlement')
IE29. Assume the same facts as in (a) except that settlement will be made net in shares instead of net in cash. Entity A's journal entries are the same as those in (a), except for the following:
31 January 2003
Entity B exercises the put option and the contract is settled net in shares. In effect, Entity A has an obligation to deliver CU98,000 worth of shares to Entity B, and Entity B has an obligation to deliver CU95,000 worth of Entity A's shares (CU95 × 1,000) to Entity A. Thus, Entity A delivers the net amount of CU3,000 worth of Entity A's shares to Entity B, ie 31.6 shares (3,000 / 95).
Dr    Put option liability    CU3,000    
Cr    Equity         CU3,000
To record the settlement of the option contract. The issue of Entity A's own shares is accounted for as an equity transaction.

(a) Cash for cash ('net cash settlement')
IE28. Assume the same facts as in Example 5(a) above, except that Entity A has written a put option on its own shares instead of having purchased a put option on its own shares. Accordingly, on 1 February 2002, Entity A enters into a contract with Entity B that gives Entity B the right to receive and Entity A the obligation to pay the fair value of 1,000 of Entity A's outstanding ordinary shares as of 31 January 2003 in exchange for CU98,000 in cash (ie CU98 per share) on 31 January 2003, if Entity B exercises that right. The contract will be settled net in cash. If Entity B does not exercise its right, no payment will be made. Entity A records the following journal entries.
1 February 2002
Dr    Cash    CU5,000    
Cr    Put option liability         CU5,000
To recognise the written put option.
31 December 2002
Dr    Put option liability    CU1,000    
Cr    Gain         CU1,000
To record the decrease in the fair value of the put option.
31 January 2003
Dr    Put option liability    CU1,000    
Cr    Gain         CU1,000
To record the decrease in the fair value of the put option.
On the same day, Entity B exercises the put option and the contract is settled net in cash. Entity A has an obligation to deliver CU98,000 to Entity B, and Entity B has an obligation to deliver CU95,000 (CU95 × 1,000) to Entity A. Thus, Entity A pays the net amount of CU3,000 to Entity B.
Dr    Put option liability    CU3,000    
Cr    Cash         CU3,000
To record the settlement of the option contract.

(d) Settlement options
IE26. The existence of settlement options (such as net in cash, net in shares or by an exchange of cash and shares) has the result that the put option is a financial asset. It does not meet the definition of an equity instrument because it can be settled otherwise than by Entity A issuing a fixed number of its own shares in exchange for receiving a fixed amount of cash or another financial asset. Entity A recognises a derivative asset, as illustrated in (a) and (b) above. The accounting entry to be made on settlement depends on how the contract is actually settled.
Example 6: Written put option on shares
IE27. This example illustrates the journal entries for a written put option on the entity's own shares that will be settled (a) net in cash, (b) net in shares or (c) by delivering cash in exchange for shares. It also discusses the effect of settlement options (see (d) below).
Assumptions:      
Contract date    1 February 2002
Exercise date    31 January 2003
(European terms, ie it can be exercised only at maturity)
Exercise right holder    Counterparty (Entity B)
Market price per share on 1 February 2002    CU100
Market price per share on 31 December 2002    CU95
Market price per share on 31 January 2003    CU95
Fixed exercise price to be paid on 31 January 2003    CU98
Present value of exercise price on 1 February 2002    CU95
Number of shares under option contract    1,000
Fair value of option on 1 February 2002    CU5,000
Fair value of option on 31 December 2002    CU4,000
Fair value of option on 31 January 2003    CU3,000

(c) Cash for shares ('gross physical settlement')
IE25. Assume the same facts as in (a) except that settlement will be made by receiving a fixed amount of cash and delivering a fixed number of Entity A's shares, if Entity A exercises the option. Similarly to (a) and (b) above, the exercise price per share is fixed at CU98. Accordingly, Entity B has an obligation to pay CU98,000 in cash to Entity A (CU98 × 1,000) in exchange for 1,000 of Entity A's outstanding shares, if Entity A exercises its option. Entity A records the following journal entries.
1 February 2002
Dr    Equity    CU5,000    
Cr    Cash         CU5,000
To record the cash received in exchange for the right to deliver Entity A's own shares in one year for a fixed price. The premium paid is recognised directly in equity. Upon exercise, it results in the issue of a fixed number of shares in exchange for a fixed price.
31 December 2002
No entry is made on 31 December because no cash is paid or received and a contract to deliver a fixed number of Entity A's own shares in exchange for a fixed amount of cash meets the definition of an equity instrument of Entity A.
Entity A exercises the put option and the contract is settled gross. Entity B has an obligation to deliver CU98,000 in cash to Entity A in exchange for 1,000 shares.
Dr    Cash    CU98,000    
Cr    Equity         CU98,000
To record the settlement of the option contract.
31 January 2003

(b) Shares for shares ('net share settlement')
IE24. Assume the same facts as in (a) except that settlement will be made net in shares instead of net in cash. Entity A's journal entries are the same as shown in (a), except:
31 January 2003
Entity A exercises the put option and the contract is settled net in shares. In effect, Entity B has an obligation to deliver CU98,000 worth of Entity A's shares to Entity A, and Entity A has an obligation to deliver CU95,000 worth of Entity A's shares (CU95 × 1,000) to Entity B, so Entity B delivers the net amount of CU3,000 worth of shares to Entity A, ie 31.6 shares (CU3,000 / CU95).
Dr    Equity    CU3,000    
Cr    Put option asset         CU3,000
To record the settlement of the option contract.

(a) Cash for cash ('net cash settlement')
IE23. On 1 February 2002, Entity A enters into a contract with Entity B that gives Entity A the right to sell, and Entity B the obligation to buy the fair value of 1,000 of Entity A's own outstanding ordinary shares as of 31 January 2003 at a strike price of CU98,000 (ie CU98 per share) on 31 January 2003, if Entity A exercises that right. The contract will be settled net in cash. If Entity A does not exercise its right, no payment will be made. Entity A records the following journal entries.
1 February 2002
The price per share when the contract is agreed on 1 February 2002 is CU100. The initial fair value of the option contract on 1 February 2002 is CU5,000, which Entity A pays to Entity B in cash on that date. On that date, the option has no intrinsic value, only time value, because the exercise price of CU98 is less than the market price per share of CU100. Therefore it would not be economic for Entity A to exercise the option. In other words, the put option is out of the money.
Dr    Put option asset    CU5,000    
Cr    Cash         CU5,000
To recognise the purchased put option.
On 31 December 2002 the market price per share has decreased to CU95. The fair value of the put option has decreased to CU4,000, of which CU3,000 is intrinsic value ([CU98 - CU95] × 1,000) and CU1,000 is the remaining time value.
Dr    Loss    CU1,000    
Cr    Put option asset         CU1,000
To record the decrease in the fair value of the put option.
31 January 2003
On 31 January 2003 the market price per share is still CU95. The fair value of the put option has decreased to CU3,000, which is all intrinsic value ([CU98 - CU95] × 1,000) because no time value remains.
Dr    Loss    CU1,000    
Cr    Put option asset         CU1,000
To record the decrease in the fair value of the option.
On the same day, Entity A exercises the put option and the contract is settled net in cash. Entity B has an obligation to deliver CU98,000 to Entity A and Entity A has an obligation to deliver CU95,000 (CU95 × 1,000) to Entity B, so Entity B pays the net amount of CU3,000 to Entity A.
Dr    Cash    CU3,000    
Cr    Put option asset         CU3,000
To record the settlement of the option contract.
31 December 2002

(d) Settlement options
IE21. The existence of settlement options (such as net in cash, net in shares or by an exchange of cash and shares) has the result that the call option is a financial liability. It does not meet the definition of an equity instrument because it can be settled otherwise than by Entity A issuing a fixed number of its own shares in exchange for receiving a fixed amount of cash or another financial asset. Entity A recognises a derivative liability, as illustrated in (a) and (b) above. The accounting entry to be made on settlement depends on how the contract is actually settled.
Example 5: Purchased put option on shares
IE22. This example illustrates the journal entries for a purchased put option on the entity's own shares that will be settled (a) net in cash, (b) net in shares or (c) by delivering cash in exchange for shares. It also discusses the effect of settlement options (see (d) below).
Assumptions:      
Contract date    1 February 2002
Exercise date    31 January 2003
(European terms, ie it can be exercised only at maturity)
Exercise right holder    Reporting entity (Entity A)
Market price per share on 1 February 2002    CU100
Market price per share on 31 December 2002    CU95
Market price per share on 31 January 2003    CU95
Fixed exercise price to be received on 31 January 2003    CU98
Number of shares under option contract    1,000
Fair value of option on 1 February 2002    CU5,000
Fair value of option on 31 December 2002    CU4,000
Fair value of option on 31 January 2003    CU3,000