CALL OPTION ACCOUNTING – IFRS SME
Writing or Selling a Call Option is
when one gives the buyer of the call option the right to buy shares from “you”
at a particular price by a certain date. In other words, the seller (also known as
the writer) of the call option can be forced to sell his or her shares at the
strike price. A strike price is the set price at which the shares in a call
option contract can be bought or sold when it is exercised. An call option
contract is an agreement between a buyer and seller of shares that gives the
purchaser of the option the right to buy or sell a particular asset at a later
date at an agreed-upon price.
It is important to note that a call
option contract is not separated into the selling or writing of the call option and
the delivery of the shares. The call option and the delivery of the shares are
one contract. Th writer of the call option upon receipt of the money paid by the
buyer of the call option has a liability to deliver the shares to the buyer if
and when the buyer exercises the right to buy.
IFRS for SME [2.20] - An essential
characteristic of a liability is that the entity has a present obligation to
act or perform in a particular way. This “act” has two typical features that
are mutually exclusive when it has regard to a call option contract, the
initial receipt of cash and the delivery of shares.
The call option has no validity in
isolation it is inextricably to the result of the call option: either it lapses
or the buyer exercises his or her rights.
The question arises as to whether
the money received by the writer of a call option can recognise the money as
income. The money paid by the buyer of the call option is non-refundable. In other words, the buyer will forfeit the initial fee if he or she does not
exercise his or her right to buy the shares. If the buyer exercises his or her
right, then the money paid for the call option will be set off against the
strike price.
The initial cash received by the
writer of the call option does not have the characteristics of revenue or any
other income. The initial cash takes the legal form of income received by the
writer of the call option in anticipation or advance of the event which is
whether the buyer of the call option exercises his or her rights in terms of
the call option contract.
IFRS for SME [23.8] - An entity
applies the recognition criteria to two or more transactions together when they
are linked in such a way that the commercial effect cannot be understood
without reference to the series of transactions as a whole. This statement by
IFRS for SME applies to a call option contract, where the call option has no
function or the need to exist without the writer's obligation to deliver the
shares if and when or never. This can only happen when the buyer makes his or
her decision, whether to exercise his or her rights or not.
IFRS for SME [23.11] - An assessment
of when an entity has transferred the significant risks and rewards of
ownership to the buyer requires an examination of the circumstances of the
transaction. In most cases, the transfer of the risks and rewards of ownership
coincides with the transfer of the legal title or the passing of possession to
the buyer. Examples of situations in which the entity may retain the
significant risks and rewards of ownership are: when the buyer has the right to
rescind the purchase for a reason specified in the sales contract.
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