QUESTION 23 Illustration 13: Written put option over non-controlling interests Parent P holds a 70% controlling interest in Subsidiary S. The remaining 30% is held by Entity Z. On 1 January 2018, P writes an option to Z which grants Z the right to sell its shares to Parent P on 31 December 2019 for $ 1,000. Parent P receives a payment of $ 100 for the option. The applicable discount rate for the put liability is determined to be 12%. State by which amount the financial instrument will be recognized and under which category

Solution

On 1 January 2018, the present value of the (estimated) exercise price is $ 797 ($ 1,000 discounted over 2 years at 12%).

Accordingly, P will recognize a financial liability of $ 797 and the difference between cash received i.e. $ 1000 and the financial liability of $ 797 will be debited to equity.

Therefore, the financial instrument will be recognized at a fair value of $797, with the initial recognition being a debit to put option liability and a credit to equity for $203. The put option liability will be measured at fair value through profit or loss at each reporting period, with any changes in fair value being recognized in the income statement.

Since the put option liability represents a contractual obligation for Parent P to purchase non-controlling interests in Subsidiary S, it will be classified as a financial liability.






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