Accounting for a call option

In the example, a company received a significant option fee of $8m after issuing a call option over the shares of a subsidiary (“X”). The key question: should the company recognise the option fee as income in the income statement (P&L)? or should it be held on the balance sheet under IFRS?

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Extract of the Conclusion:

The deposit received of $8m is non-refundable and was paid by Buyer to grant them the right to purchase X from Seller, but not the obligation. Therefore, it is not consideration in relation to the sale of any asset, goods or services, and hence does not meet the recognition criteria for income under IAS 18 Revenue or IFRS 3 Business Combinations.

As discussed below, the call option was found to be a financial liability to be measured at cost. It is not possible, therefore, to recognise the $8m on a straight line basis over the life of the exercise period.

The call option is treated as deferred income until 30 xx 20xx as the risks and rewards of ownership of X will not be transferred until Buyer exercises the option or it lapses. It is therefore classified as a non-derivative financial liability(A1) that met the recognition criteria during the financial year ended 30 xx 20xx(A2).

Accordingly, the call option was initially measured at fair value less transaction costs(A3), and is subsequently measured at amortised cost(A4).

At the point of recognition, and at 30 Juxx 20xx, the fair value and amortised cost were both deemed to be $8m less costs of £1m, giving a net balance recorded in the 30 xx 20xx financial statements of $6m.