CHAPTER 8

Accounting for Equity Call Options

LEARNING OBJECTIVES

After studying this chapter you should have a grasp of the following:

  • Accounting standards for derivative instruments and hedging activities.
  • Trade life cycle of exchange-traded options (ETOs) for long call.
  • Journal entries to be recorded during the different phases of the trade life cycle.
  • FX revaluation and FX translation process for these trades.
  • Illustration of long call, non-hedging trades.
  • Preparation of journal entries and general ledger accounts.
  • Preparation of income statement and balance sheet after the call option trades are made.
  • Illustration of long call, non-hedging trades in foreign currency.
  • Trade life cycle of exchange-traded options when writing call options.
  • Journal entries to be recorded during the different phases of the trade life cycle.
  • Illustration of written call options in functional currency.
  • Preparation of journal entries and general ledger accounts.
  • Preparation of income statement and balance sheet after writing the call options.

ACCOUNTING STANDARDS—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The accounting treatment of call options prima facie will depend upon the intention with which the call options are purchased, either for hedging or for speculation (non-hedging). If the position is taken as a hedge against some other position, the relevant accounting standards will be applicable and certain conditions must be fulfilled.

Relevant Accounting Standards

U.S. GAAP IFRS

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