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Chapter 11

2.2 Amortised cost

The accounting treatment of financial liabilities measured at amortised cost is as
follows:

They are initially recognised at fair value (normally the proceeds received) less any
transaction costs (such as legal or broker fees).

They are subsequently measured at amortised cost:

 Interest is charged to profit or loss using the effective rate and is added on to
the carrying amount of the liability

 Any cash payments during the year are deducted from the carrying amount of
the liability.

The effective rate of interest spreads all of the costs of the liability (such as
transaction fees, issue discounts, annual interest payments and redemption
premiums) to profit or loss over the term of the instrument.

Example 1

The following table is useful for working out the carrying amount of a liability
that is measured at amortised cost:

Opening 2 3 Closing
Reporting period Interest Cash
amount amount
Year ended 1
31 December 20X1 X X (X) X
1
In the first year of the liability, the initial value will be its fair value less
transaction costs.

2 Interest is charged using the effective rate of interest.

3 Cash interest payments are based on the nominal (par) value of the liability
and the coupon rate of interest.

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