company xyz owns an office building it enters into a put option with an investor whi 598051

Determining whether a put option on an office building is within the scope of IAS 39 (IFRS 9)

Company XYZ owns an office building. It enters into a put option with an investor, which expires in five years and permits it to put the building to the investor for 150 million. The current value of the building is 175 million. The option, if exercised, may be settled through physical delivery or net cash, at XYZ”s option.

XYZ”s accounting depends on its intention and past practice for settlement. Although the contract meets the definition of a derivative, XYZ does not account for it as a derivative if it intends to settle the contract by delivering the building in the event of exercise and there is no past practice of settling net.

The investor, however, cannot conclude that the option was entered into to meet its expected purchase, sale, or usage requirements – the contract may be settled net and is a written option. Regardless of past practices, its intention does not affect whether settlement is by delivery or in cash. Accordingly, the investor accounts for the contract as a derivative. As noted in Chapter 44 at 2 and in Chapter 46 at 2, this will involve remeasuring the derivative to its fair value each reporting period with any associated gains and losses recognised in profit or loss.

However, if the contract were a forward contract rather than an option, it required physical delivery and the investor had no past practice of settling net (either in cash or by way of taking delivery and subsequently selling within a short period), the contract would not be accounted for as a derivative. [IAS 39.A.2].