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These may include prepayment, extension, call, and similar options. When determining the effective interest rate (EIR), an entity estimates the cash flows based on all the contractual terms of the financial instrument. Overwhelmed by constant stream of IFRS updates? Too many newsletters that you move to ‘read later’ folder, but later never comes? Reporting Period has you covered! All essential IFRS developments and Big 4 insights in one monthly newsletter curated by Marek Muc.

The cash flows from the acquired bond yield an EIR of 7.8%: All calculations provided in this example can be downloaded from an accompanying Excel file. In spreadsheet programs like MS Excel, this can be done using the XIRR function. Given the above information, Entity A can create a cash flow schedule and calculate the effective interest rate (EIR) as demonstrated below.

Coupon: 5%, equating to $50 (calculated on face value), paid annually on 31 December.

Transaction price (including coupon accrued to date): $900.

The relevant data for this scenario is provided below: Let’s illustrate this concept with a worked example presented below.Įntity A purchases a bond on a stock exchange for $900. This rate perfectly discounts projected future cash flows to the present carrying amount of a financial asset or liability. The amortised cost is determined using the effective interest rate (EIR).

credit losses (relevant only to financial assets).subsequent recognition of interest income or expense,.The components of amortised cost include: To determine which assets or liabilities specifically, refer to the page on classification. Amortised cost is the measurement method used for certain financial assets and liabilities.