call/put option to non controlling interests

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Leo
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Joined: 05 Apr 2020, 22:31

call/put option to non controlling interests

Post by Leo »

Hi guys, I'd like your opinion on the put and call option written by parent company to the holder of non controlling interest.

Put option :

I found an example here in page 22 :
https://www.grantthornton.global/global ... report.pdf

Parent P holds a 70% controlling interest in Subsidiary S. The remaining 30% is held by Entity Z. On 1.1.X1 P writes an option to Z which grants Z the right to sell its shares to Parent P on 31.12.X2 for CU 1,000. Parent P receives a payment of CU 100 for the option. The applicable discount rate for the put liability is determined to be 6%.

The accounting entry proposed is the following :
dr : cash 100 LCU
dr : equity 790 LCU (Gross amount according to IAS32)
cr : financial liability 890 LCU (present value of redemption amount according to IAS32)

For this I understand.

Call option :

Most of the literature I found is related to put option, but there is only one document I found related to written call option by parent company to holder of non controlling interest.

Take the example above : Parent P holds a 70% controlling interest in Subsidiary S. The remaining 30@ Is held by Entity Z. On 1.1.X1, P writes an call to Z which grants Z to buy its shares to parent P on 31.12.X2 for CU 1000. Parent P receives a payment of CU 100 for the option. The applicable discount rate for the put liability is determined to be 6%.

The only case I found is here :
https://www.mah.uk.com/wp-content/uploa ... option.pdf

The authors suggest the following :
Dr cash : 100 CU
Cr Financial liability : 90 CU
CR Amortised costs ???: 10 CU

And Financial liability is subsequently held at amortised cost

I'm really not sure of it, and most of all, why when it comes to call option I can't book a financial assets of 790 CU corresponding to "the present value of redemption amount according to IAS32" ??? does this only applies to financial liability ?

What do you think ?
Leo
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Joined: 05 Apr 2020, 22:31

Re: call/put option to non controlling interests

Post by Leo »

Any thoughts ?
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Marek Muc
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Re: call/put option to non controlling interests

Post by Marek Muc »

currently it's too hot in Warsaw to think about options on non-controlling interests ;)
Leo
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Joined: 05 Apr 2020, 22:31

Re: call/put option to non controlling interests

Post by Leo »

I'd love to contribute if there is a fundraising to buy you a climatiser. I've noticed there are a few adverts in between your articles. Nice!!!

By the way thank you very much for running this platform !
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Marek Muc
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Re: call/put option to non controlling interests

Post by Marek Muc »

I appreciate that but with air conditioning I wouldn't have any excuse to get lazy during summer ;)
pub_acco
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Re: call/put option to non controlling interests

Post by pub_acco »

The first put deals P's equity (i.e. non-controlling interest) whereas the second call effectively deals P's assets and liabilities (i.e. control over S). Not really sure though if that's the reason for the different treatments.
Leo
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Joined: 05 Apr 2020, 22:31

Re: call/put option to non controlling interests

Post by Leo »

Thanks ! yes, you are right !

The first put deals with Z's shares in S (30%). It grants to Z the right to sell its 30% shares in S. So, at term, if Z exercise the option, P will have to buy at fixed price (cash out for P).

The call, deals with P's shares in S (70%), it grants to Z the right to buy 70% of P's share in S. At term, if Z exercise the option, P will have to sell at fixed price (cash in for P).

So for the put, there is plenty of docs on Google.

But for the call, I've only found this, and I'd like to know if you guys agree with :

https://www.mah.uk.com/wp-content/uploa ... option.pdf

Which, translated into accounting scheme, is something like this at initial recognition ?

Dr cash : 100 CU
Cr Financial liability : 90 CU
CR Amortised costs ???: 10 CU

And amortised over time after ?
pub_acco
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Re: call/put option to non controlling interests

Post by pub_acco »

I'm not aware of all the super complex debates over NCI put, but my understanding is IAS 32.23 is a key, which specifically requires to record a liability at the redemption amount relating to some options over own equity instruments. That's perhaps why the gross liability is recognized in the first case.

The second call does not seem to involve P's equity as long as Z can buy the entire interest in S (though it would be unclear if Z could buy only 10% interest and no loss of control could occur). If the call related to normal assets and liabilities, it would be accounted for as an FVTPL instrument on a net basis. I have no idea why the second call is accounted for as an amortized cost liability.
Leo
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Joined: 05 Apr 2020, 22:31

Re: call/put option to non controlling interests

Post by Leo »

Understand, that's clear.

thanks pub_acco
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