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Chapter 10

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.

2.2 Effective interest rate

Issue costs Discount on
issue

Effective interest rate %

Premium on
Interest paid redemption

110