Financial Liabilities at Amortized Cost are accounted for i.e. the liability’s Effective Rate of Interest is CHARGED as a finance cost to the Profit or Loss (not the interest paid in cash) and changes in Market Rate of interest are IGNORED – i.e. the liability is not revalued at the reporting date.
Financial Liabilities at Amortized Cost – Accounting As Per IFRS 9
At INITIAL recognition, Financial Liability is classified and measured at amortized cost UNLESS either:
- The financial liability is held for trading and is therefore required to be measured at FVPL (e.g. derivatives not designated in a hedging relationship); OR
- The entity elects to measure the financial liability at FVPL (using the fair value option).
[Reclassification of Financial Liability after initial recognition is NOT allowed.]
|Examples of financial liabilities that are likely to be classified and accounted for at amortized cost INCLUDE:|
|(a) Trade payables|
|(b) Loan payables with standard interest rates (such as a benchmark rate plus a margin) OR the host contract arising from a loan agreement that contains separable embedded derivatives|
|(c) Bank borrowings|
The accounting requirements for Financial Liabilities at Amortized Cost are:
- It is initially measured at fair value less transaction costs;
- It is subsequently measured at amortized cost;
- Interest expense is recognized in P&L using the effective interest rate (IRR); AND
- Foreign exchange gains and losses on the amortized cost are recognized in P&L.
The Bottom Line
Financial Liabilities at Amortized Cost as per IFRS 9 are INITIALLY measured at Fair Value less 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)