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PQR Ltd. issues a call option to ABC Ltd. that allows ABC to buy PQR's equity at ₹100 per share, with NET settlement (no physical delivery of shares). At balance-sheet date the market price is ₹110, so PQR would owe ABC ₹10/share if settled. Under Ind AS 32, the ₹10 net settlement obligation is:
AAn equity instrument because the underlying is PQR's own shares
BOutside Ind AS 32 because net settlement is non-physical
CA derivative measured at amortised cost
DA financial liability — the settlement is potentially unfavourable to PQR
Answer & Solution
Correct answer: D. A financial liability — the settlement is potentially unfavourable to PQR
Ind AS 32.11 — a contractual obligation to exchange financial assets/liabilities under conditions that are POTENTIALLY UNFAVOURABLE to the entity is a financial liability. Even though the underlying is PQR's own equity, the net cash settlement is unfavourable when market > strike — the ₹10 obligation is a financial liability.
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