| 11.15 | The amortised cost of a financial asset or financial liability at each reporting date is the net of the following amounts: [AMD 307] |
| (a) | the amount at which the financial asset or financial liability is measured at initial recognition; |
| (b) | minus any repayments of the principal; |
| (c) | plus or minus the cumulative amortisation using the effective interest method of any difference between the amount at initial recognition and the maturity amount; [AMD 308] |
| (d) | minus, in the case of a financial asset, any reduction (directly or through the use of an allowance account) for impairment or uncollectability. |
| Financial assets and financial liabilities that have no stated interest rate (and do not constitute a financing transaction) and are classified as payable or receivable within one year are initially measured at an undiscounted amount in accordance with paragraph 11.14(a). Therefore, (c) above does not apply to them. |
| 11.16 | The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or a group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the carrying amount of the financial asset or financial liability. The effective interest rate is determined on the basis of the carrying amount of the financial asset or liability at initial recognition. Under the effective interest method: [AMD 309] |
| (a) | the amortised cost of a financial asset (liability) is the present value of future cash receipts (payments) discounted at the effective interest rate; and |
| (b) | in the absence of capital repayments, the interest expense (income) in a period equals the carrying amount of the financial liability (asset) at the beginning of a period multiplied by the effective interest rate for the period. [AMD 310] |
| 11.17 | When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument (eg prepayment, call and similar options) and known credit losses that have been incurred, but it shall not consider possible future credit losses not yet incurred. For variable rate financial assets and variable rate financial liabilities the current market rate of interest or index of general price inflation may be used when estimating the contractual cash flows. [AMD 311] |
| 11.18 | When calculating the effective interest rate, an entity shall amortise any related fees, finance charges paid or received (such as 'points'), transaction costs and other premiums or discounts over the expected life of the instrument, except as follows. The entity shall use a shorter period if that is the period to which the fees, finance charges paid or received, transaction costs, premiums or discounts relate. This will be the case when the variable to which the fees, finance charges paid or received, transaction costs, premiums or discounts relate is repriced to market rates before the expected maturity of the instrument. In such a case, the appropriate amortisation period is the period to the next such repricing date. |
| 11.19 | For variable rate financial assets and variable rate financial liabilities, periodic re-estimation of cash flows to reflect changes in market rates of interest or an index of general price inflation alters the effective interest rate. If a variable rate financial asset or variable rate financial liability is recognised initially at an amount equal to the principal receivable or payable at maturity, re-estimating the future interest payments normally has no significant effect on the carrying amount of the asset or liability. [AMD 312] |
| 11.20 | If an entity revises its estimates of payments or receipts, the entity shall adjust the carrying amount of the financial asset or financial liability (or group of financial instruments) to reflect actual and revised estimated cash flows. The entity shall recalculate the carrying amount by computing the present value of estimated future cash flows at the financial instrument's original effective interest rate. The entity shall recognise the adjustment as income or expense in profit or loss at the date of the revision. |
Example of determining amortised cost for a five-year loan using the effective interest method On 1 January 20X0, an entity acquires a bond for Currency Units (CU)900, incurring transaction costs of CU50. Interest of CU40 is receivable annually, in arrears, over the next five years (31 December 20X0 to 31 December 20X4). The bond has a mandatory redemption of CU1100 on 31 December 20X4. |
||||
Year |
Carrying amount at beginning of period |
Interest income at 6.9583%* |
Cash inflow |
Carrying amount at end of period |
|
CU |
CU |
CU |
CU |
20X0 |
950.00 |
66.11 |
(40.00) |
976.11 |
20X1 |
976.11 |
67.92 |
(40.00) |
1,004.03 |
20X2 |
1,004.03 |
69.86 |
(40.00) |
1,033.89 |
20X3 |
1,033.89 |
71.94 |
(40.00) |
1,065.83 |
20X4 |
1,065.83 |
74.16 |
(40.00) |
1,100.00 |
|
|
|
(1,100.00) |
0 |
| AMD 307 Amendment Paragraph 11.15 amended by Amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications (issued December 2017) Effective date 01/01/2019 Previous text 11.15 he amortised cost of a financial asset or financial liability at each reporting date is the net of the following amounts: |
| AMD 308 Amendment Paragraph 11.15(c) amended by Amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications (issued December 2017) Effective date 01/01/2019 Previous text (c) plus or minus the cumulative amortisation using the effective interest method of any difference between the amount at initial recognition and the maturity amount; |
| AMD 309 Amendment Paragraph 11.16 amended by Amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications (issued December 2017) Effective date 01/01/2019 Previous text 11.16 The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or a group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the carrying amount of the financial asset or financial liability. The effective interest rate is determined on the basis of the carrying amount of the financial asset or liability at initial recognition. Under the effective interest method: |
| AMD 310 Amendment Paragraph 11.16(b) amended by Amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications (issued December 2017) Effective date 01/01/2019 Previous text (b) the interest expense (income) in a period equals the carrying amount of the financial liability (asset) at the beginning of a period multiplied by the effective interest rate for the period. |
| AMD 311 Amendment Paragraph 11.17 amended by Amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications (issued December 2017) Effective date 01/01/2019 Previous text 11.17 When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument (eg prepayment, call and similar options) and known credit losses that have been incurred, but it shall not consider possible future credit losses not yet incurred. |
| AMD 312 Amendment Paragraph 11.19 amended by Amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications (issued December 2017) Effective date 01/01/2019 Previous text 11.19 For variable rate financial assets and variable rate financial liabilities, periodic re-estimation of cash flows to reflect changes in market rates of interest alters the effective interest rate. If a variable rate financial asset or variable rate financial liability is recognised initially at an amount equal to the principal receivable or payable at maturity, re-estimating the future interest payments normally has no significant effect on the carrying amount of the asset or liability. |
| * The effective interest rate of 6.9583 per cent is the rate that discounts the expected cash flows on the bond to the initial carrying amount: 40/(1.069583)1 + 40/(1.069583)2 + 40/(1.069583)3 + 40/(1.069583)4 + 1,140/(1.069583)5 = 950 |
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