Amortized Costs (Financial Assets) - Explained
What is Amortized Cost?
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What is an Amortized Cost?
Amortized cost is that accumulated portion of the recorded cost of a fixed asset that has been charged as an expense (through either depreciation or amortization).
Financial assets must be reported on a balance sheet at their amortized value - which is equal to their acquisition cost minus their principal repayments and any discounts or premiums minus any impairment losses and exchange differences.
How Does Amortized Cost Compare to Market Value?
Amortized cost does not necessarily have any relationship between the adjusted cost of an asset and its market value. Market value could potentially be much higher or lower than the original cost of an asset net of its amortized cost.
When are Amortized Costs Allowed Under IFRS?
Amortized Cost approach is an approach to asset amortization allowed by the IFRS 9. Other amortization methods include fair value, fair value through comprehensive income (also known as FVOCI), and fair value through profit and loss (also known as FVTPL).
What is the Amortized Costs Approach Used?
Amortized cost applies to debts that meet the following criteria:
- A contractual cash flow of financial assets which are on repayment plans of principals and interests that occur on scheduled dates.
- A business model of companies that own assets to collect their contractual cash flows instead of selling.
Application of Amortized Costs to Bonds
Some Financial assets, such as a bond, are costs amortized, by the interest rate method. This method carries a cash flow stream defined by their coupon rate.
Over the bond's term period, the interest rate can differ as the market differs. If the market rate goes up and is higher than the noted rate, the bond price in the market is lower than its overall maturity value. The only example in which the market price and the bond's price would be the same is when the interest rate in the market and the face value rate are the same, but this is a rare occasion that this occurs.
There are a few requirements any discount or premiums arise when a financial assets carry amortized costs using an interest rate method. Under these methods the interest rates is calculated by adding in the market rate to the bonds carry rate.
The difference between the income interest should be recognized as the interest income being paid. This can be used to write off any discounts and premiums so there is a zero balance at the end of the bonds term period.
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