Advanced Financial Accounting: Explanation of Share Options

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Question 1:.......................................................................................................................................2
Introduction:................................................................................................................................2
Option and features of options:....................................................................................................2
Parties to an option trade and their rights and obligations:.........................................................3
Time to exercise the option and circumstances under which the parties make profit or loss
under option trade:.......................................................................................................................3
Difference between settlement through delivery and net cash settlement:..................................3
Classification of options under AASB 9 Financial Instruments and recognition criteria for
options:........................................................................................................................................4
Measurement requirements for options in AASB 9 Financial Instruments:................................4
Conclusion:..................................................................................................................................5
Question 2:.......................................................................................................................................5
References:......................................................................................................................................6

2ADVANCED FINANCIAL ACCOUNTING
Question 1:
Memorandum
Date: 19 April 2019
To: The Board of Directors of Foxton Limited
From: L. May, Chief Accountant
Subject: Explanation of share options
Introduction:
The memorandum is designed with the intent to describe the requirements of AASB 9
Financial Instruments with respect to accounting for options.
Option and features of options:
An option could be defined as a derivative contract, which provides its owner the right to
purchase or sell securities at a decided price within a particular timeframe. Thus, for option, an
individual pays for the right to make the desired transaction; however, the person is not obliged
to conduct the same (Bai, Philippon & Savov, 2016). The option contracts possess the following
features:
 Due to the high standardisation of option contracts, trading could be conducted only in
organised exchanges.
 The option holder needs to incur a certain amount, which is premium, in order to hold the
right to exercise the option.
 At the time of writing the contract, there is no exchange of commodity or share or money.