• Register
Search Questions / Answers

Welcome to AccountantAnswer Forum, where you can ask questions and receive answers. Although you need not be a member to ask questions or provide answers, we invite you to register an account and be a member of our community for mutual help. You can register with your email or with facebook login in few seconds

Get AccountantAnswer App


As per IFRS 9 (IAS 39) some financial assets are required to be measured at amortized cost using effective interest method. Can anyone tell me what this in fact is & how it is calculated?
in IFRS 9 - Financial Instruments by Level 2 Member (3.4k points)
retagged by
Hello. And Bye.
hello everyone thanks for approve

1 Answer

+1 vote

Before moving into effective interest method (also called "present value amortization"), it is good to know what "effective interest rate" means.

Effective interest rate is the interest rate that can be applied on the carrying amount of a financial asset to create a constant yield up to the maturity date.

For example, let's assume a bond which costs $100,000 now with a maturity value $121,000 in two years time. the effective interest rate of this bond's yeild would be 10%. This would be found as follows:
$100,000 x (1 + 0.1) = $110,000
$110,000 x (1 + 0.1) = $121,000

This means, if you use a discount rate of 10%, the NPV of a cash flow of $121,000 due in 2 years' time is equal to the initial cost of $100,000.

However, in some complicated cases an exact algebraic solution is not easy to find, and various approximation methods can be applied. Practically, most people use MS Excel IRR funtion (internal rate of return) to calculate the effective interest rate (you can find many example calculations on the internet)

Then, the carrying amount of the bond x effective interest rate = amortization

by Level 1 Member (1.5k points)
edited by