Is transaction cost included in amortized cost?

Amortized Cost and Transaction Costs

Amortized cost is a method of accounting for financial assets and liabilities where the initial fair value is gradually recognized over the life of the instrument. This approach ensures that the carrying amount of the asset or liability accurately reflects its economic value.

According to IFRS 9 (International Financial Reporting Standard 9), transaction costs incurred when acquiring or issuing a financial asset or liability are included in its amortized cost at initial recognition. Transaction costs are expenses associated with the transaction, such as brokerage fees, legal fees, and regulatory fees.

Components of Amortized Cost

At the time of initial recognition, the amortized cost of a financial asset or liability comprises the following components:

• Fair value: The market value of the instrument at the time of acquisition or issuance
• Plus or minus transaction costs: Any expenses incurred in facilitating the transaction

For example, if a company purchases a bond for $100,000 and incurs $1,000 in brokerage fees, the amortized cost of the bond would be $101,000.

Accounting Treatment

Transaction costs included in amortized cost are amortized over the life of the financial asset or liability. This means that they are recognized as an expense in the income statement over the period that the instrument is held.

Amortizing transaction costs ensures that the carrying amount of the asset or liability gradually approaches its maturity value. This provides a more accurate representation of the instrument’s economic value over time.

Conclusion

IFRS 9 requires that transaction costs incurred in acquiring or issuing financial assets or liabilities be included in their amortized cost at initial recognition. This ensures that the carrying amount of the instrument reflects its fair value and provides a more accurate representation of its economic value over the life of the instrument.