Put option

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Jonny
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Put option

Post by Jonny »

Hi

An entity X has entered a Business combination acquiring the 70% of a Group Y. The NCI has a put option to sell the 30% shares.

Which discount rate I must use to calculate the NPV of the put? Risk free or kd? Why?

Does the Entity X have to post the put option in his separate Financial statement?

Thanks
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Marek Muc
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Re: Put option

Post by Marek Muc »

wow, that's a complex issue! how do you plan to account for this option?
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JRSB
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Re: Put option

Post by JRSB »

and out of interest what was the commercial reason? Why not sell 100% in this case?
Student of IFRS.
Jonny
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Re: Put option

Post by Jonny »

We plan to book the put option using the risk free. The amount is due. Non other risk must be considered. Is it correct?

The company does not buy 100% because wants to understand the performance of the Group acquired and the expected synergy.
pub_acco
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Re: Put option

Post by pub_acco »

Should be kd or incremental borrowing rate because the put is just one of financial liabilities of X, maybe?

I'm interested too in how you would account for the put, in concrete debits and credits.
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Marek Muc
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Re: Put option

Post by Marek Muc »

NCI may not want to sell in the future, so a call option for acquirer would better match your needs it seems.
So you plan to recognise the put option as a liability in the amount representing the exercise price? and where does the debit go? give us your debits and credits :)
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Marek Muc
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Re: Put option

Post by Marek Muc »

PS If you've got access to EY International GAAP (their manual) - they cover this matter in Chapter 7 para 6
Jonny
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Re: Put option

Post by Jonny »

Thank you, Marek. Yes, I have access.
The auditor (big four) is in the opinion to use risk free for the put. They say it is just a matter of time.
Where can I find a table with the discount rate to use for each item?
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Marek Muc
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Re: Put option

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Marek Muc
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Re: Put option

Post by Marek Muc »

what is the measurement basis? fair value?
Jonny
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Re: Put option

Post by Jonny »

Marek Muc wrote: 18 Jan 2021, 15:52 what is the measurement basis? fair value?
yes
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Marek Muc
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Re: Put option

Post by Marek Muc »

so I would go for cost of debt rather than risk-free, fair value should take credit risk of the borrower into account
Jonny
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Re: Put option

Post by Jonny »

Makes sense! Thank you Marek!
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