AASB 9 Financial Instruments: Share Options at Foxton Ltd Analysis

This report provides an explanation of share options under AASB 9 Financial Instruments, specifically in the context of Foxton Ltd. It covers the features of options, the rights and obligations of parties involved in option trades, and the circumstances under which parties make profit or loss. The report also differentiates between settlement through delivery and net cash settlement, classifies options under AASB 9, and outlines the measurement requirements for options. The author reflects on the challenges faced while analyzing the recognition and measurement criteria under AASB 9, highlighting their strengths in understanding option trading and areas for improvement in knowledge of Australian accounting standards. The report concludes with a discussion of the time spent researching relevant materials and the knowledge gained for future assignments. Desklib provides similar solved assignments and past papers for students.

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

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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

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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.

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 The profit of the option holder at the time the amount of the asset moves in a direction is
not equivalent to the loss when the value of the asset moves in another direction
(Bondarenko, 2014).
Parties to an option trade and their rights and obligations:
Options are of two types, which include put option and call option and they could be
bought for speculating on the stock direction or stock indices or sold for generating income. For
any option trade, there is involvement of two parties, which include the buyer and the seller. The
buyer of call option possesses the right to purchase the shares covered in the contract at the strike
price; however, it is not obligatory. The put buyers possess the right of selling shares at the strike
price in the contract; however, it is not their obligation (Brigham et al., 2016). On the other hand,
the option sellers are obliged to transact their trade side; in case, a purchaser decides of executing
a call option for purchasing the underlying security or executing a put option for sale.
Time to exercise the option and circumstances under which the parties make profit or loss
under option trade:
For a call option, when the strike price is lower compared to the stock price, the option
taker could exercise the call. In this manner, the stock could be purchased at a lower price and it
could be sold to the market immediately at higher price. On the other hand, for a put option, if
the strike price is more than the stock price, the option taker could exercise the same. This is
because the stock could be sold at a greater price and then it could be purchased back
immediately at lower price (Kidwell et al., 2016).
Difference between settlement through delivery and net cash settlement:
Under net cash settlement method, the contract sellers are not involved in delivering the
underlying assets; however, they transfer the net cash position. For instance, if it is assumed that

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the purchaser of a rice futures contract wants to settle the contract in cash, the difference needs to
be incurred between the futures price and the spot price (Madura, 2014). Under the settlement
through delivery agreement, there is occurrence of actual delivery of asset, which is to be
provided on the particular delivery date rather than net cash settlement. This settlement mainly
occurs with commodities; however, it could take place with financial instruments as well. The
clearing brokers or agents conduct the settlement through delivery system (Valdez & Molyneux,
2015).
Classification of options under AASB 9 Financial Instruments and recognition criteria for
options:
According to “Paragraph 2.1 of AASB 9”, an organisation is allowed to designate an
option in the form of a financial asset, which would otherwise qualify for amortised cost
accounting gauged at fair value via profit or loss (Aasb.gov.au, 2019). In case of initial
recognition, an organisation might undertake irrecoverable action for representing changes in fair
value of options in the statement of other comprehensive income and the selection is made based
on instruments. Moreover, the amount included in the statement need not be transferred
subsequently to the income statement.
Measurement requirements for options in AASB 9 Financial Instruments:
According to AASB 9, the options need to be measured at fair value constituting of
transaction costs for those options not gauged at fair value through profit or loss. Subsequent to
initial recognition, options have been designated in the form of a heeding instrument or hedged
item (Pilbeam, 2018). Hence, they would be subject to measurement under hedge accounting
requirements mentioned in AASB 139.

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Conclusion:
The above discussion has provided clear overview of the various requirements for options
along with the types of option trading. In addition, it has provided a brief insight of the different
measurements and recognition criteria associated with options.
Question 2:
For answering the above question, I think the most challenging factor that I have faced is
to analyse the recognition and measurement criteria under AASB 9. This is because it requires
thorough understanding of the said standard and thus, I faced some issues in understanding the
criteria in the initial stage.
However, since I have sound knowledge of option trading from the general perspective, I
have provided accurate overview of the parties related to option trading and distinction between
net cash settlement and settlement through delivery. I think I have performed the best in these
areas, since I have effective knowledge of options and their features.
As mentioned above, I think I could have performed better with the recognition and
measurement criteria associated with options. This is because I did not possess detailed
knowledge of the Australian accounting standards and in this case, it is AASB 9. Therefore, with
the passage of time, I could improve my knowledge on these standards, which would assist me in
providing better answers to questions in future.
Finally, for conducting the assessment, I have to spend too much time in researching
relevant materials for the same. However, I have managed to gather sufficient amount of
knowledge that would definitely play a pivotal role in my future assignments.

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References:
Aasb.gov.au. (2019). Retrieved 19 April 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-10.pdf
Bai, J., Philippon, T., & Savov, A. (2016). Have financial markets become more
informative?. Journal of Financial Economics, 122(3), 625-654.
Bondarenko, O. (2014). Why are put options so expensive?. The Quarterly Journal of
Finance, 4(03), 1450015.
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Kidwell, D. S., Blackwell, D. W., Sias, R. W., & Whidbee, D. A. (2016). Financial institutions,
markets, and money. John Wiley & Sons.
Madura, J. (2014). Financial markets and institutions. Nelson Education.
Pilbeam, K. (2018). Finance & financial markets. Macmillan International Higher Education.
Valdez, S., & Molyneux, P. (2015). An introduction to global financial markets. Macmillan
International Higher Education.