Recognition of call/put options if not exercised

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Anushree.gupta
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Joined: 11 Nov 2021, 11:20

Recognition of call/put options if not exercised

Post by Anushree.gupta »

Hi all

Happy NY!

Can anyone help with at what point is an option recognised in the financial statements? I'm assuming the option premium gets recorded as an expense right away when it is paid but when does an option get recognised? If it is never exercised, does it never exist on the financial statements? Journal entries will be helpful too.

Thanks in advance.
DJP
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Re: Recognition of call/put options if not exercised

Post by DJP »

Hello,

Assuming that you are buying an option, and that hedge accounting is not applied, you should recognise the premium paid as a financial asset at FVPL on the balance sheet on the trade date. Your first entry should then consist of:
DR: Financial asset at FVPL - Option (BS)
CR: Cash (BS)

Going forward, your option will be measured at FV, and any FV changes should be recognised in the income statement:
DR/CR: Financial asset at FVPL - Option (BS)
CR/DR: Gain or loss on the option (IS)

If the option ends out of the money, its final fair value will be nil, meaning that you will no longer have an asset on the balance sheet and the initial premium will have been fully recognised in the income statement by then.

If the option ends in the money, and is non-deliverable, on the exercise date you will derecognise the option value and recognise cash:
DR: Cash (or underlying asset)
CR: Financial asset at FVPL - Option (BS)

But if the option is deliverable, you will recognise the underlying asset at its fair value and derecognise the option's financial asset:
DR: Underlying asset (BS)
CR: Financial asset at FVPL (BS) - Option (BS)
CR: Cash - price agreed to pay for the underlying asset (BS)

Hope this helps.
Anushree.gupta
Posts: 8
Joined: 11 Nov 2021, 11:20

Re: Recognition of call/put options if not exercised

Post by Anushree.gupta »

Many Thanks this was very clearly laid out and very helpful! I'm assuming if hedge accounting is applied then the only difference to these journals will be around the recording of the intrinsic value of the option in OCI (assuming that only the intrinsic value is designated in the hedging relationship)?

Thanks
DJP
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Re: Recognition of call/put options if not exercised

Post by DJP »

Yes, but also changes in time value are to be recorded in OCI and taken to P&L either linearly or when the hedged item affects P&L -- this is the so-called "cost of hedging" approach which was introduced by IFRS 9
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Marek Muc
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Re: Recognition of call/put options if not exercised

Post by Marek Muc »

wow, short and to the point, thank you DJP!
Anushree.gupta
Posts: 8
Joined: 11 Nov 2021, 11:20

Re: Recognition of call/put options if not exercised

Post by Anushree.gupta »

Understood, thank you! :)
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