Assessment Task 2 — Written Assessment Part A
Due date: Wednesday of Week 7 (23:45 AEST) ASSESSMENT
Weighting: 20% 2A
Objectives
This assessment item relates to the following unit learning outcomes:
Interpret the technical requirements and conceptual aspects of selected accounting standards that
address advanced issues in financial reporting.
Exercise professional judgement to apply the requirements of relevant accounting standards and
conceptual accounting knowledge to solve advanced accounting problems.
Justify and communicate accounting advice and ideas in straightforward contexts to influence
specialists and non-specialists.
Reflect on performance feedback to identify and action learning opportunities and self-improvements.
Page | 2
Himalaya is a hiking equipment medium sized retailer which runs over 500 retail stores
throughout Australia with significant online exposure. Katherine Kay is a newly appointed
chief financial officer in Himalaya. She decided to recommend share options and exchange
traded share options to leverage the risk of volatile shares or earn the return from the share
market. Katherine have asked you as a financial accountant to prepare a memorandum to
the board of directors for Katherine’s signature. Considering the members of the board have
limited understanding of financial instruments such as exchange traded share options,
Katherine request you to draft the memorandum with the explanations of the exchange
traded share options. The below questions need to be addressed in the memorandum.
What is an option? Distinguish call options from put options.
What is an exchange traded share option? How does an exchange traded share option
work?
Are exchange traded share options financial instrument in accordance with AASB 9
Financial Instrument? What type of financial instruments are they according to AASB
9 (for example, primary, compound, hybrid, derivative)? Explain your answers.
For example, Himalaya has entered the contract of options on FashionCo Ltd on 1 July
2023. Explain the rights and obligations of Himalaya.
Then assuming on 1 September 2023, the company writes 100,000 exchange traded call
options in FashionCo at a premium of $2.50 per option. The options have a fair value to the
holder of $1.50 each on 31 January 2024. Explain whether it is beneficial for the company
to write the exchange traded call options. Use this example as the assumption in the
memorandum to present the accounting entries and its relevant explanations on
recognition and measurement.
Question 1 continued over the
page
Question 1 20 marks
Page | 3
Question 1 (continued)
Word Limit
Word limit is 700 words. You can exceed this limit by 10% (an extra 70 words) with no penalty. Note that the following are not included in the
word count:
The Memorandum title and heading block, and
The reference list.
Resources
The following are sources of information about share options for this assignment:
Chapter 11 or 12 of the new edition on prescribed textbook. This chapter contains information about the requirements of AASB 9
Financial instruments in relation to classification, recognition, and measurement.
An introductory finance textbook. This will provide you with some useful information. However, it will be at a more advanced level
than what is required here. It will not include discussion of the requirements of AASB 9 Financial Instruments.
Another accounting textbook. A good starting point is chapter 14 of Financial Accounting by Craig Deegan. The 9th edition (published in
2020) is available online through the CQU library.
Information from the internet via a search.
We will also discuss the assignment question during one (or more) of the weekly workshops.
In some cases you may come across interest rate swaps on investments. These types of swaps are different to the one in this question
as the interest is received from the investment rather than, as is the case here, being paid on a loan.
Page | 4
Criteria for ACCT19061 Advanced Financial Accounting Written Assessment Rubric
Content The writing should demonstrate competence in the subject and the ability to articulate knowledge and communicate effectively. This requires
consideration of the purpose of the writing task and the intended audience.
Relevance. Content is relevant when it contributes to fulfilling the purpose of the writing task. The relevance of content is also affected by the
intended audience (for example, their prior knowledge about a topic) and the scope of the writing task (for example, limitations such as word
length). The document should:
Include all relevant content: no relevant content should be omitted, and
Not include any irrelevant content.
Development refers to the ways the writing explores and illustrates the topic. It may include one or more of the following: research, synthesis,
analysis, critique, identification, explanation, Assessment, description, discussion, examination, justification, argument, and exploration.
Level of detail. The level of detail (depth)should be appropriate for the writing task.
Accuracy. The content should be accurate: complete and free from error. Errors result from mistakes (for example, misstating a definition, using
of out-of-date material, and incorrectly interpreting and/or applying an accounting requirement) or omissions (for example, omitting part of a
definition or part of an accounting requirement).
Writing style. This refers to word choice, word usage, sentence length/structure, and paragraph length/structure. The writing style should be
appropriate for the writing task. Some of the characteristics of the ‘business writing style’ are:
Writing that is concise, clear, precise, and direct,
The use of short sentences and paragraphs,
The appropriate use of abbreviations and jargon, and
The use of highlighting techniquesto help the reader access and understand the content. Highlighting techniquesinclude graphics(tables
and figures), white space, boldface text, italics, underlining, varied font sizes, and numbered and/or bulleted lists.
Page | 5
Tone is the use of words and writing style to convey the writer’s attitude towards or feelings about a topic. The tone adopted by a writer should
be appropriate for the writing task. For most business writing, the tone should be formal, objective, and impersonal.
Sources. The content should be adequately supported by appropriate (authoritative, relevant, and credible)sources. Typicalsources used include
references to textbooks, journal articles, and accounting standards.
Organisation The content should be well-organised which requires both of the following:
An organisational pattern that is clear, logical, and appropriate for the writing task. Organisational pattern refers to the systematic
arrangement (sequencing) of the writing.
Good use of structuring elements. The structuring elements are the parts of a writing task that form the basis for an overall pattern and
include: the introduction, use of sections, headings and sub-headings, transitions, and conclusion.
Writing conventions Writing conventions. The writing task should follow the writing conventions (the rules of syntax, grammar, spelling, and punctuation) of standard
written Australian English. Sources should be correctly cited using the APA referencing style.
Document design Standard of presentation. Presentation refers to the layout of the document: the way the writing looks on the page. The presentation should be
neat and tidy.
Format. The format of the writing task (which are specified in the assignment material) should be appropriate.
Page | 6
ACCT19061 Advanced Financial Accounting
Dear Board Members,
I am writing this memorandum to provide an overview of exchange traded share options and their potential use by Himalaya. Options are versatile financial instruments that can help companies manage risk and generate returns. Below is an explanation of key concepts related to options as well as a hypothetical example of how exchange traded options could benefit Himalaya.
What is an option? An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (the strike price) on or before a specified date (expiration date) (Hull, 2018). There are two main types of options:
Call options give the holder the right to buy the underlying asset, while put options give the holder the right to sell the underlying asset. For example, a call option on shares in FashionCo Ltd would give the holder the right to buy FashionCo shares, while a put option would give the holder the right to sell FashionCo shares (Hull, 2018).
Exchange traded share options are options contracts that are traded on a public exchange such as the Australian Securities Exchange (ASX). The underlying assets are typically shares of publicly listed companies. When an option is purchased or written on an exchange, both the buyer and seller are obligated to fulfill the terms of the contract (Fabozzi & Modigliani, 2009).
Exchange traded options fall under the category of derivatives according to accounting standard AASB 9 Financial Instruments since their value is derived from the price of the underlying asset (Deegan, 2020). Specifically, they are considered derivative financial assets or liabilities depending on whether the company purchases or writes the options (AASB 9, para. 4.2.1).
For example, if on July 1, 2023 Himalaya purchased call options on shares of FashionCo Ltd, it would obtain the right to buy FashionCo shares at a preset strike price. This contract would be considered a derivative financial asset on Himalaya’s balance sheet. Conversely, if Himalaya wrote (sold) put options on the FashionCo shares, it would take on the obligation to purchase the shares from the option holder and this contract would be a derivative financial liability.
In the hypothetical example, on September 1, 2023 Himalaya wrote (sold) 100,000 exchange traded call options on FashionCo shares at a premium of $2.50 per option. By writing these options, Himalaya received $250,000 (100,000 options x $2.50 premium each) in exchange for taking on the obligation to sell 100,000 FashionCo shares at the $3 strike price if the options are exercised. This obligation is recognized as a derivative financial liability.
On January 31, 2024 the options now have a fair value of $1.50 each to the holder based on current market conditions. Since the options are worth less than when originally written, Himalaya has benefited from writing the options as it has collected the $250,000 premium but faces less potential cost if the options are exercised. The reduction in fair value of the liability would be recognized as a gain. Therefore, in this example exchange traded options provided a beneficial way for Himalaya to earn income from the share market.
In summary, exchange traded options can be a useful risk management and income generating tool when used appropriately. I hope this overview provides helpful context for the Board to consider Katherine’s recommendation. Please let me know if any part of the explanation requires further clarification.
References:
Deegan, C. (2020). Financial accounting (9th ed.). McGraw-Hill Education.
Fabozzi, F. J., & Modigliani, F. (2009). Capital markets: Institutions and instruments (4th ed.). Prentice Hall.
Hull, J. C. (2018). Options, futures, and other derivatives (10th ed.). Pearson.
Australian Accounting Standards Board. (AASB 9) Financial instruments.
Regards,
[Your Name]
Financial Accountant
