(c) Shares for cash ('gross physical settlement')
IE10. 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 the entity's own shares. Similarly to (a) and (b) above, the price per share that Entity A will pay in one year is fixed at CU104. Accordingly, Entity A has a right to receive CU104,000 in cash (CU104 × 1,000) and an obligation to deliver 1,000 of its own shares in one year. Entity A records the following journal entries.

(b) Shares for shares ('net share settlement')
IE9. 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 shown in (a), except:
31 January 2003
The contract is settled net in shares. Entity A has a right to receive CU104,000 (CU104 × 1,000) worth of its shares and an obligation to deliver CU106,000 (CU106 × 1,000) worth of its shares to Entity A. Thus, Entity A delivers a net amount of CU2,000 (CU106,000 - CU104,000) worth of its shares to Entity B, ie 18.9 shares (CU2,000 / CU106).
Dr    Forward liability    CU2,000    
Cr    Equity         CU2,000
To record the settlement of the forward contract. The issue of the entity's own shares is treated as an equity transaction.

To record the increase in the fair value of the forward contract (ie CU4,300 = CU6,300 - CU2,000).
The contract is settled net in cash. Entity B has an obligation to deliver CU104,000 to Entity A, and Entity A has an obligation to deliver CU106,000 (CU106 × 1,000) to Entity B. Thus, Entity A pays the net amount of CU2,000 to Entity B.
Dr    Forward liability    CU2,000    
Cr    Cash         CU2,000
To record the settlement of the forward contract.

IE8. On 1 February 2002, Entity A enters into a contract with Entity B to pay the fair value of 1,000 of Entity A's own outstanding ordinary shares as of 31 January 2003 in exchange for CU104,000 in cash (ie CU104 per share) on 31 January 2003. The contract will be settled net in cash. Entity A records the following journal entries.
1 February 2002
No entry is required because the fair value of the derivative is zero and no cash is paid or received.
31 December 2002
Dr    Loss    CU6,300    
Cr    Forward liability         CU6,300
To record the decrease in the fair value of the forward contract.
31 January 2003
Dr    Forward liability    CU4,300    
Cr    Gain         CU4,300

IE7. This example illustrates the journal entries for forward sale contracts on an entity's own shares that will be settled (a) net in cash, (b) net in shares or (c) by receiving cash in exchange for shares. It also discusses the effect of settlement options (see (d) below). To simplify the illustration, it is assumed that no dividends are paid on the underlying shares (ie the 'carry return' is zero) so that the present value of the forward price equals the spot price when the fair value of the forward contract is zero. The fair value of the forward has been computed as the difference between the market share price and the present value of the fixed forward price.
Assumptions:
Contract date    1 February 2002
Maturity date    31 January 2003
Market price per share on 1 February 2002    CU100
Market price per share on 31 December 2002    CU110
Market price per share on 31 January 2003    CU106
Fixed forward price to be received on 31 January 2003    CU104
Present value of forward price on 1 February 2002    CU100
Number of shares under forward contract    1,000
Fair value of forward on 1 February 2002    CU0
Fair value of forward on 31 December 2002    CU(6,300)
Fair value of forward on 31 January 2003    CU(2,000)
(a) Cash for cash ('net cash settlement')

31 January 2003          
Dr    Interest expense    CU340    
Cr    Liability         CU340
To accrue interest in accordance with the effective interest method on the liability for the share redemption amount.
Entity A delivers CU104,000 in cash to Entity B and Entity B delivers 1,000 of Entity A's shares to Entity A.
Dr    Liability    CU104,000    
Cr    Cash         CU104,000
To record the settlement of the obligation to redeem Entity A's own shares for cash.
(d) Settlement options
IE6. 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 forward repurchase contract is a financial asset or 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 forward contract as a derivative.
Example 2: Forward to sell shares

1 February 2002          
Dr    Equity    CU100,000    
Cr    Liability         CU100,000
To record the obligation to deliver CU104,000 in one year at its present value of CU100,000 discounted using an appropriate interest rate (see IAS 39, paragraph AG64).
 
31 December 2002          
Dr    Interest expense    CU3,660    
Cr    Liability         CU3,660
To accrue interest in accordance with the effective interest method on the liability for the share redemption amount.
 

31 January 2003
The contract is settled net in shares. Entity A has an obligation to deliver CU104,000 (CU104 × 1,000) worth of its shares to Entity B and Entity B has an obligation to deliver CU106,000 (CU106 × 1,000) worth of shares to Entity A. Thus, Entity B delivers a net amount of CU2,000 (CU106,000 - CU104,000) worth of shares to Entity A, ie 18.9 shares (CU2,000 / CU106).
Dr    Equity    CU2,000    
Cr    Forward asset         CU2,000
To record the settlement of the forward contract.
(c) Cash for shares ('gross physical settlement')
IE5. 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 Entity A's shares. Similarly to (a) and (b) above, the price per share that Entity A will pay in one year is fixed at CU104. Accordingly, Entity A has an obligation to pay CU104,000 in cash to Entity B (CU104 × 1,000) and Entity B has an obligation to deliver 1,000 of Entity A's outstanding shares to Entity A in one year. Entity A records the following journal entries.

31 January 2003
On 31 January 2003, the market price per share has decreased to CU106. The fair value of the forward contract is CU2,000 ([CU106 × 1,000] - CU104,000).
On the same day, the contract is settled net in cash. Entity A has an obligation to deliver CU104,000 to Entity B and Entity B has an obligation to deliver CU106,000 (CU106 × 1,000) to Entity A, so Entity B pays the net amount of CU2,000 to Entity A.
Dr    Loss    CU4,300    
Cr    Forward asset         CU4,300
To record the decrease in the fair value of the forward contract (ie CU4,300 = CU6,300 - CU2,000).
Dr    Cash    CU2,000    
Cr    Forward asset         CU2,000
To record the settlement of the forward contract.
(b) Shares for shares ('net share settlement')
IE4. 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 shown in (a) above, except for recording the settlement of the forward contract, as follows:

1 February 2002
The price per share when the contract is agreed on 1 February 2002 is CU100. The initial fair value of the forward contract on 1 February 2002 is zero.
No entry is required because the fair value of the derivative is zero and no cash is paid or received.
31 December 2002
On 31 December 2002, the market price per share has increased to CU110 and, as a result, the fair value of the forward contract has increased to CU6,300.
Dr    Forward asset    CU6,300    
Cr    Gain         CU6,300
To record the increase in the fair value of the forward contract.