Financial-instrument measurement based on initial amount, effective interest, principal cash flows, fees, and applicable credit-loss adjustments.
Amortized cost is a measurement basis for qualifying financial assets and many financial liabilities. It starts with the amount recognized initially and updates that amount for principal receipts or payments, effective-interest accrual, premiums, discounts, transaction costs, and, for financial assets, applicable loss allowances.
Amortized cost is not the depreciated cost of machinery or the unamortized cost of an intangible asset. In financial reporting, the term primarily concerns contractual financial instruments such as loans, receivables, deposits, and bonds.
Under IFRS 9, a financial asset is measured at amortized cost when both conditions are met:
If the business model is achieved by both collecting and selling, fair value through other comprehensive income may apply to a qualifying debt instrument. Other financial assets generally fall into fair value through profit or loss, subject to IFRS 9’s detailed requirements and elections.
Classification cannot be chosen solely to avoid fair-value volatility. It follows how the portfolio is managed and what the contract requires.
For a financial asset, a simplified period-end relationship is:
The gross carrying amount of a financial asset is the amortized cost before adjusting for the loss allowance. That distinction matters when analyzing interest revenue and credit-impaired assets.
For a financial liability, the loss-allowance deduction does not apply. The amount is updated for repayments and the effective-interest allocation of transaction costs, premiums, and discounts.
The effective interest rate is the rate that discounts estimated future contractual cash payments or receipts through the expected life of the instrument to the relevant initial carrying amount. It incorporates contractual interest and qualifying fees, transaction costs, premiums, and discounts.
The cash coupon and effective-interest amount can differ:
Straight-line allocation may approximate effective interest only in limited circumstances when the difference is immaterial and the applicable framework permits the result.
Assume an investor buys a two-year zero-coupon bond for $92,000. It pays no annual coupon and will repay $100,000 at maturity. Ignoring credit losses, the effective annual yield is approximately 4.2572%.
| Year | Opening carrying amount | Effective interest | Cash received | Closing carrying amount |
|---|---|---|---|---|
| 1 | $92,000.00 | $3,916.62 | $0 | $95,916.62 |
| 2 | $95,916.62 | $4,083.38 | $100,000.00 | $0 after repayment |
The first-year entry increases the asset’s gross carrying amount:
The $8,000 difference between purchase price and maturity amount becomes interest revenue over the two-year life through the effective-interest method. It is not depreciation and does not represent a market-price revaluation.
If the required loss allowance at the end of year 1 is $1,200, simplified net amortized cost would be $94,716.62, while gross carrying amount remains $95,916.62.
| Concept | Applies primarily to | Main purpose |
|---|---|---|
| Amortized cost | Financial assets and liabilities | Allocate financing economics using effective interest |
| Amortization | Finite-life intangible assets or loan repayment schedules, depending on context | Allocate intangible cost or describe principal repayment |
| Depreciation | Tangible depreciable assets | Allocate depreciable amount over useful life |
| Historical cost | Broad asset and liability measurement family | Use transaction-derived information, updated as required |
| Fair value | Items required or permitted to use current market-participant measurement | Reflect a current exit price at measurement date |
Amortized cost does not attempt to show what the instrument could be sold for today. Interest-rate and credit-spread changes can make fair value materially higher or lower than amortized cost.
For a financial asset measured at amortized cost:
For a financial liability, effective-interest expense can exceed or fall below the cash coupon when the instrument was issued at a discount or premium or includes transaction costs.
Contractual prepayment can shorten the expected cash-flow period and affect effective-interest calculations. A modification requires analysis of whether the original instrument is derecognized and, if not, how the carrying amount and modification gain or loss are determined.
Credit deterioration does not simply change contractual principal. IFRS 9 uses an expected-credit-loss model, with different interest-revenue mechanics for credit-impaired financial assets. Analysts should examine gross carrying amount, loss allowance, stage migration, write-offs, and cash collections separately.
This page is educational and is not accounting, audit, tax, legal, credit, or investment advice.