Financial Assets at Amortized Cost REFLECT the amount at which the asset or liability was measured upon initial recognition, MINUS principal repayments, plus or minus the cumulative amortization of any premium or discount, and MINUS any write-down for impairment.
Financial Assets at Amortized Cost – Accounting As Per IFRS 9
A ‘Debt Instrument’ that MEETS the following criteria must be measured at amortized cost UNLESS the asset is designated at FVPL under the Fair Value Option:
- Hold to Collect’ Business Model Test: The asset is held within a business model WHOSE objective is to hold the financial asset in order to collect contractual cash flows; AND
- ‘SPPI’ Contractual Cash-flow Characteristic Test: The contractual terms of the Financial Asset give rise to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding on a specified date.
|Examples of debt instruments that are likely to be classified and accounted for at amortized cost INCLUDE:|
|(a) Trade receivables;|
|(b) Loan receivables with ‘basic’ features;|
|(c) Investments in government bonds that are not held for trading; AND|
|(d) Investments in term deposits at standard interest rates.|
The accounting requirements for Financial Assets at Amortized Cost are:
- It is initially measured at fair value PLUS transaction costs;
- It is subsequently measured at amortized cost;
- Interest income is recognized in P&L using the effective interest rate (IRR);
- Foreign exchange gains and losses on the amortized cost are recognized in P&L; AND
- Credit impairment losses/reversals are recognized in P&L using credit impairment methodology.
The Bottom Line
Financial Assets at Amortized Cost as per IFRS 9 are INITIALLY measured at Fair Value plus transaction costs and SUBSEQUENTLY measured at Amortized Cost. The objective of IFRS 9 is to ESTABLISH principles for the financial reporting of financial assets and liabilities that will present relevant and valuable information to users of financial statements.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)