Issuance Ordinary Share with a put option written
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QP Deloitte :: QP :: QP Q&A Section :: MA
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Issuance Ordinary Share with a put option written
When a firm issues certain amt of OS, attached with a put option exercisable a few years later.
E.g. 100m share with $1 par issed at $1.5, simutaneously write a put option to buy back at $1.2, 3 years later, the FV of such option is $10m.
(I draft this with a little modification of Q.18.18c)
My question is how to account for that and please provide the entry.
Here is my thought,
Certainly the 100m share is equity instrument.
But for the put option, I dun know if we can treat it as FL or EI.
E.g. 100m share with $1 par issed at $1.5, simutaneously write a put option to buy back at $1.2, 3 years later, the FV of such option is $10m.
(I draft this with a little modification of Q.18.18c)
My question is how to account for that and please provide the entry.
Here is my thought,
Certainly the 100m share is equity instrument.
But for the put option, I dun know if we can treat it as FL or EI.
Lam Fai- Posts : 26
Join date : 2008-12-05
Age : 38
Location : Kwun Tong
Re: Issuance Ordinary Share with a put option written
As the written put option is a deriative, I guess it should be recognized as financial liabilities at FVTPL (i.e. as a liability of $10m...)??
I am not sure abt it...
I am not sure abt it...
kipeggy- Posts : 15
Join date : 2008-12-05
Age : 38
Location : Lok Fu
Re: Issuance Ordinary Share with a put option written
I wonder if it can be an EI, which is an exception set out in the CLP and Billy's note (pg 68).
Since I think that all 5 specific conditions are met.
Moreover, if it is either a FL or an EI, what will be the entries =_=?
Dr. Cash 150m
Cr. SC 100m
Cr. SP 50m
then how to a/c for the put option
Cr. SC 100m
Cr. SP 40m
Cr. CR- Put Option (or, FL) 10m ????
or,
Cr. SC 90m
Cr. SP 50m
Cr. CR- Put Option (or, FL) 10m ????
Since I think that all 5 specific conditions are met.
Moreover, if it is either a FL or an EI, what will be the entries =_=?
Dr. Cash 150m
Cr. SC 100m
Cr. SP 50m
then how to a/c for the put option
Cr. SC 100m
Cr. SP 40m
Cr. CR- Put Option (or, FL) 10m ????
or,
Cr. SC 90m
Cr. SP 50m
Cr. CR- Put Option (or, FL) 10m ????
Lam Fai- Posts : 26
Join date : 2008-12-05
Age : 38
Location : Kwun Tong
Re: Issuance Ordinary Share with a put option written
It should be a FL because there is a contractual obligation to purchase its own equity instrument (CLP 12.10.4).
The criteria set in in 12.10.5 or billy's note is that if the obligation is just to deliver a pro rata share of its net assets only liquidation, etc. I dun think the criteria are met in this case.
When the shares are issued, the entry should be
Dr Cash 150m
Cr Equity 150m
If the entity will buy its shares with cash, then:
when the option is reclassified
Dr Equity PV of 120m
Cr FL PV of 120m
If the option will be settled cast for cash, then:
Dr SP(?) FV of the option
Cr FL FV of the option
For example, if the counterparty will exercise the option, we'll have to pay 120m. If the market price of the shares at the exercise date is $1, we'll receive 100m. The net FL at the exercise date will be $20m then.
The criteria set in in 12.10.5 or billy's note is that if the obligation is just to deliver a pro rata share of its net assets only liquidation, etc. I dun think the criteria are met in this case.
When the shares are issued, the entry should be
Dr Cash 150m
Cr Equity 150m
If the entity will buy its shares with cash, then:
when the option is reclassified
Dr Equity PV of 120m
Cr FL PV of 120m
If the option will be settled cast for cash, then:
Dr SP(?) FV of the option
Cr FL FV of the option
For example, if the counterparty will exercise the option, we'll have to pay 120m. If the market price of the shares at the exercise date is $1, we'll receive 100m. The net FL at the exercise date will be $20m then.
Kay- Admin
- Posts : 34
Join date : 2008-12-05
Age : 39
Location : Shatin
Re: Issuance Ordinary Share with a put option written
After the discussion with Kason, let me simply wrap up some key pts.
- In the e.g., a co. issuing shr with writing a put option to the counterparty for them to sell back.
- The Puttable FI under AS32.16A,B is the reverse, a co. issuing shr who retains the right to buy back its own shr.
i.e. For the former, the co. is the writer, whilst the latter, the co. is the buyer.
Thus, kson and peggy are correct ^^
- In the e.g., a co. issuing shr with writing a put option to the counterparty for them to sell back.
- The Puttable FI under AS32.16A,B is the reverse, a co. issuing shr who retains the right to buy back its own shr.
i.e. For the former, the co. is the writer, whilst the latter, the co. is the buyer.
Thus, kson and peggy are correct ^^
Lam Fai- Posts : 26
Join date : 2008-12-05
Age : 38
Location : Kwun Tong
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