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Contracts that may be settled in entity’s own equity instruments on net basis

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Contracts that may be settled in entity’s own equity instruments on net basis

  • This topic has 3 replies, 2 voices, and was last updated 1 month ago by Stephen Widberg.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • June 26, 2022 at 12:35 pm #659335
    ahmadimam120
    • Topics: 18
    • Replies: 13
    • ☆

    I wasn’t able to understand the Contracts that may be settled in entity’s own equity instruments on net basis when I was going through an example which says, ‘that an an entity entered into a contract to buy a car after 2 months and the consideration will be paid in form of 10000 shares after 2 months’
    After 2 months the fair value of the car was 7,000,000 and the value of 10000 shares was 7,300,000.
    It was then written If the entity was to give 10000 shares valuing at 7300000 as a consideration for the purchase of car to the supplier then there will be a loss of 300,000 which I was able to understand.
    It was then written (the point which I was not able to understand) “the entity will issue its own shares valuing 300,000 to settle the transaction on net basis to cancel the deal of purchase as it is not beneficial for it”
    Kindly explain the reason behind why the entity will issue its own shares of value 300000 to settle the transaction on the net basis and secondly what is the meaning of, “the contract will be settled in own equity instruments on net basis and there will be no physical delivery of goods and services”

    June 26, 2022 at 2:00 pm #659340
    Stephen Widberg
    Moderator
    • Topics: 10
    • Replies: 2548
    • ☆☆☆☆☆

    Net basis = no one gets a car or a lot of (10000) shares.

    But the loser will pay the winner the difference in price – 300 – normally in cash but it sounds as if they are settling in shares (300k worth)

    So it sounds like a derivative.

    Whether or not they changed their mind about the car 🙂 , I cannot tell from the scenario.

    June 26, 2022 at 2:36 pm #659343
    ahmadimam120
    • Topics: 18
    • Replies: 13
    • ☆

    Thank you Sir, but I am not being able to understand why the party In a loss position delivers shares to the party in gain position. Kindly explain the reason behind this treatment. I am not able to understand the purpose and the reason of this particular treatment.

    June 27, 2022 at 5:36 pm #659443
    Stephen Widberg
    Moderator
    • Topics: 10
    • Replies: 2548
    • ☆☆☆☆☆

    PRETEND THEY ARE HAVING A BET / GAMBLING

    IF THE PRICE OF THE CAR GOES UP MORE THAN THE SHARE PRICE – I GIVE YOU SOMETHING

    IF THE PRICE OF THE SHARES GOES UP MORE THAN THE PRICE OF THE SHARES – YOU GIVE ME SOMETHING

    HENCE A ‘CONTRACT FOR DIFFERENCE’ – WHICH MEANS A DERIVATIVE

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