Holder Ltd purchases an options contract from Issuer Ltd that gives Holder Ltd the right to acquire 100 000 options
Holder Ltd purchases an options contract from Issuer Ltd that gives Holder Ltd the right to acquire 100 000 options in Torquay Ltd for a price (exercise price) of $10.00 per share. When the contract was exchanged the price of Torquay Ltd shares was $9.00 each. The option entitles Holder Ltd to exercise the options and buy the shares any time within the next six months. If the options are not exercised within the six-month period, then the options will expire.
Determine whether a financial liability or financial asset exists from the perspectives of Holder Ltd and Issuer Ltd. Further, if the price of shares in Torquay Ltd falls to $5.00, with the result that it is improbable that Holder Ltd will ever exercise the options, will this change the classification of the options as either financial assets or financial liabilities?
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