IFRS 9 Amortised Cost: A Practical Loan Example
A company borrows £500,000 for four years at a 5% annual coupon and pays £15,000 in arrangement fees. The coupon says 5%. The accounting says something else.
1. Initial measurement
A financial liability at amortised cost is recognised at fair value less directly attributable transaction costs. The fees are not an expense on day one.
2. The effective interest rate
The effective rate is the rate that discounts all future cash flows (four coupons of £25,000 and £500,000 at maturity) back to the £485,000 received.
3. The amortised cost schedule
Interest expense each year is the opening balance times the effective rate. The cash coupon stays at £25,000. The difference unwinds the fees into the liability, until it reaches £500,000 at maturity.
| Year | Opening | Interest 5.86% | Coupon | Closing |
|---|---|---|---|---|
| 1 | 485,000 | 28,436 | 25,000 | 488,436 |
| 2 | 488,436 | 28,637 | 25,000 | 492,073 |
| 3 | 492,073 | 28,851 | 25,000 | 495,924 |
| 4 | 495,924 | 29,076 | 25,000 | 500,000 |
4. The check
Total interest expense over the four years equals the coupons plus the fees: £100,000 + £15,000 = £115,000. If your schedule doesn’t reconcile to that, the rate or the timing is wrong.
Common mistakes
- Using the coupon as the effective rate.
- Expensing transaction costs immediately.
- Keeping the liability at the nominal amount throughout.