Filip Slavchev

N01294144
Professor Witt
December 9, 2019

Bond Amortization Methods per IFRS and ASPE

After initial recognition, all financial liabilities, except those, FVPL, are measured and

reported at amortized cost, which is the amount initially recognized for the debt adjusted by

subsequent amortization of said premium or discount: “After initial recognition, an entity shall

measure all financial liabilities at amortized cost using the effective interest method, except for:

(a)   financial liabilities at fair value through profit or loss. Such liabilities, including

derivatives that are liabilities, shall be measured at fair value except for a derivative liability that is

linked to and must be settled by delivery of an equity instrument that does not have a quoted

price in an active market for an identical instrument (ie a Level 1 input) whose fair value cannot

otherwise be reliably measured, which shall be measured at cost.

(b) financial liabilities that arise when a transfer of a financial asset does not qualify for

derecognition or when the continuing involvement approach applies. Paragraphs 29 and 31

apply to the measurement of such financial liabilities.

(c)  financial guarantee contracts as defined in paragraph 9. After initial recognition, an

issuer of such a contract shall (unless paragraph 47(a) or (b) applies) measure it at the higher of:

(i)   the amount determined in accordance with IAS 37; and (ii) the amount initially recognized

(see paragraph 43) less, when appropriate, the cumulative amount of income recognized in

accordance with the principles of IFRS 15”.

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 Required under IFRS 9, per IAS 39.47, the effective interest method must be used to

determine amortized cost. Application of this method requires the effective interest rate, which is

the yield of the debt on the date of issuance (IFRS 9 defines the effective interest rate as the rate

that exactly discounts estimated future cash payments or receipts through the expected life of the

instrument). As confirmed by the handbook, the application of the effective interest method does

not differ. As mentioned in both the textbook and the handbook, the steps are identical:

• At maturity, the amortized cost of the bond (the carrying value or net book value)

equals the maturity (face) value of the bond

• The original discount or premium is charged to interest expense over the life of the

bond. Amortizing bond discounts increases interest expense relative to the coupon payment;

premiums decrease interest expense.

• For bonds sold at a discount, the interest expense per period increase in each period.

This is because the amortized cost of the bond increases each period and interest expense is a

function of the bond’s value. On the other hand, for bond sold at a premium, the interest

expense decreases each period.

While there is no doubt that IFRS unambiguously requires that amortized cost be

determined using the effective interest method, Canadian Standards permit otherwise. After the

AcSB’s issuance of ASPE, effective for fiscal periods beginning on or after January 1, 2011.

These standards include section 3856—Financial Instruments, which does not specify the

method for determining amortized cost, so this standard implicitly permits straight-line

amortization of premiums and discounts (based on prior practice permitted by section 3855—

that allowed companies—both private and public to use either method). In conclusion, the

effective interest method is required under IFRS per IAS 39.47, but ASPE do not specify that this

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method must be used and therefore the straight-line method is also an option. The straight-line

method is valued for its simplicity and might be used by companies whose financial statements

are not constrained by GAAP.

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