Page 50 - Ebook Financial Accounting 3

3.2 Measurement of the issuance of financial

A financial instrument will be a financial liability, as opposed to being an equity

instrument, where it contains an obligation to repay. Financial liabilities are then classified and
accounted for as either fair value through profit or loss (FVTPL) or at amortised cost.

a) Amortized cost

➢ Financial liabilities that are classified as amortised cost are initially measured at fair

value minus any transaction costs.
➢ Accounting for a financial liability at amortised cost means that the liability's effective

rate of interest is charged as a finance cost to the statement of profit or loss (not the
interest paid in cash) and changes in market rates of interest are ignored – i.e the

liability is not revalued at the reporting date.
➢ In simple terms this means that each year the liability will increase with the finance

cost charged to the statement of profit or loss and decrease by the cash repaid.

b) Fair value through profit and loss (FVTPL)

➢ Financial liabilities that are classified as FVTPL are initially measured at fair value

and any transaction costs are immediately written off to the statement of profit or loss.
➢ By accounting for a financial liability at FVTPL, the financial liability is also

increased by a finance cost and reduced by cash repaid but is then revalued at each
reporting date with any gains and losses immediately recognised in the statement of

profit or loss.
➢ The measurement of the new fair value at the year-end will be its market value or, if

not known, the present value of the future cash flows, using the current market interest

rates. The interest rate used subsequently to calculate the finance cost will be this new
current rate until the next revaluation.

Transaction cost

➢ Transaction costs include fees and commissions paid to brokers and dealers, agents,
advisers, levies imposed by regulatory agencies and exchanges, and transfer taxes and

duties, among others.

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