Golden Ltd acquired some call options in shares of DOB Ltd. The options were written by Silver Ltd, which provided Golden Ltd with the right to acquire shares in DOB Ltd at a certain price in three years’ time. How should DOB Ltd recognise the call options?Group of answer choicesDOB Ltd needs to recognise financial liabilities.DOB Ltd needs to recognise equity instruments.DOB Ltd needs to recognise financial assets.DOB Ltd does not need to recognise anything.
Question
Golden Ltd acquired some call options in shares of DOB Ltd. The options were written by Silver Ltd, which provided Golden Ltd with the right to acquire shares in DOB Ltd at a certain price in three years’ time. How should DOB Ltd recognise the call options?Group of answer choicesDOB Ltd needs to recognise financial liabilities.DOB Ltd needs to recognise equity instruments.DOB Ltd needs to recognise financial assets.DOB Ltd does not need to recognise anything.
Solution
DOB Ltd does not need to recognise anything.
Here's why:
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The call options were acquired by Golden Ltd and written by Silver Ltd. This means that Golden Ltd has the right to buy shares of DOB Ltd at a certain price, and Silver Ltd has the obligation to sell those shares if Golden Ltd decides to exercise the options.
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DOB Ltd, the company whose shares are subject to the call options, is not a party to this contract. It does not have any rights or obligations arising from these call options.
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Therefore, DOB Ltd does not need to recognise anything in its financial statements related to these call options. The recognition of financial instruments is required only when the entity has a right or an obligation arising from a past event (the definition of an asset or a liability according to the Conceptual Framework for Financial Reporting).
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In this case, the past event is the writing of the call options by Silver Ltd and their acquisition by Golden Ltd. Since DOB Ltd was not involved in this event, it does not have any related rights or obligations to recognise.
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