When can financial liabilities be measured at amortized cost versus fair value?

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AcadiFi · Accepted Answer

Under IFRS 9, the default classification for financial liabilities is amortized cost using the effective interest method. This applies to most corporate debt, trade payables, bank borrowings, and long-term notes, including Stradwell's 10-year senior bond.

FVTPL is required for liabilities that are held for trading (acquired principally for near-term resale, including short sale liabilities and derivatives in a net liability position) or those with embedded derivatives that cannot be reliably separated. FVTPL is also available by election through the fair value option when the three eligibility criteria are met.

The effective interest method allocates interest expense across the life of the instrument by computing the IRR at initial recognition that equates initial proceeds to future contractual cash flows. For Stradwell's bond issued at $97 with 5% coupon and $100 par maturing in 10 years, the EIR exceeds the 5% coupon because of the discount, and each period's interest expense equals EIR times amortized carrying amount, with the bond's carrying value accreting to par by maturity.

If Stradwell modifies the bond before maturity, the modification gain/loss is recognized immediately if terms are substantially different (10% cash flow test under IFRS 9), otherwise the carrying amount is adjusted with a gain/loss for the change in NPV using the original EIR.

Amortized cost provides stable reporting for hold-to-collect-type liabilities; FVTPL introduces volatility but reflects current economic value for traded or hedged positions.

When can financial liabilities be measured at amortized cost versus fair value?

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