Settlement options

Learning objectives

• Explain why a derivative that gives one party a choice over how it is settled is a financial asset or a financial liability, unless all of the settlement alternatives would result in equity.L2
• Determine the classification of a derivative on own equity instruments that includes a net cash settlement option.L3

Normative references

• IAS 32 §26When one of the parties has a choice over how a derivative is settled (for example, net in cash or by exchanging shares for cash), the derivative is a financial asset or a financial liability unless all of the settlement alternatives would result in it being an equity instrument.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• Opale SA enters into a derivative on its own shares with a bank. At maturity, the bank chooses either to receive 5,000 Opale shares against a payment of 100,000 euros, or a net cash settlement of the difference between the value of the shares and 100,000 euros (case facts). How is this derivative classified?L2
• A colleague drafts conclusions on the classification of derivatives on own equity instruments with a settlement option. Which of these conclusions is wrong?L3