IFRS and the Issue of Put Option

Friday, June 1, 2012 Print Email

The international financial reporting standards (IFRS) and international accounting standard board (IASB) have proclaimed for public explanation. They have suggested the direction for the accounting in the case of a put option, which is addressed by the parent company by considering the shares and equity of the subsidiary which is under the control of shareholders which have a minimum ownership stake.

A put option is such a contract through which the holder who has signed the option the authority to sell away the mentioned asset to anyone who has composed the option. The option contains both the required price and the time. Other features of put options include; if the position is obtained by being a barrier against the other position, here comes the point when hedge accounting rules and standards can be applied. Along with that, certain conditions also ask for fulfillment. In the case, put option is bought on analytical trade then value paid for the purchase (premium) is considered and labeled as an expense, and on the other hand the money received on the sale of the put option is considered as the revenue.

If the parent company is bound in any case to make the purchase of the shares of its collateral company for cash or in exchange of any other financial asset, it is the duty of the parent entity to know about the financial condition and liability by having the idea about consolidated financial data so that the current value of the option can be matched and paid.

Therefore, interpretation committee was questioned about how to consequently measure the specified financial liability and standing? It is practically not possible because diversity exists on large scope. With the answer to this query, the interpretation committee replied, the changes which are taking place while measuring the financial liability needs to be dealt and identified at the time of calculating the profit and loss. All this process should be in accordance with the rules and steps suggested by IAS 39. The amended version of the IAS 39 was introduced by the European Union in 2005.

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