Amortised Cost

From Open Risk Manual

Definition

Amortized Cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.

Amortised cost is a cost-based measure. The carrying value of a financial asset recorded in the statement of financial position at any given point in time does not provide information about the fair value of the future cash flows.

Usage in IFRS 9

Besides a measurement (value), amortized cost is also one of the three classification and measurements options for financial assets under IFRS 9, the others being fair value through other comprehensive income and fair value through profit and loss.

IFRS 9 Classification Criteria

A financial asset shall be measured at amortised cost if both of the following conditions are met[1]:

  • The financial asset is held within a Business Model whose objective is to hold financial assets in order to collect contractual cash flows
  • The contractual terms of the financial asset give rise on specified dates to cash flows that are Solely Payments of Principal and Interest on the principal amount outstanding.

Amortised Cost Calculation

Amortised cost of a financial instrument is calculated using the Effective Interest Method. This method is essentially a spreading mechanism that allocates interest revenue or interest expense over a relevant period, and in doing so, amortises or acretes the carrying amount recorded on initial recognition to the ultimate contractual cash flows.

References

  1. IFRS Standard 9, Financial Instruments

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