Under IFRS 9 ‘amortized cost of a financial asset or financial liability’ is the amount at which the financial asset or financial liability is measured at initial recognition, plus accrual of interest, minus repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance’ (we will ignore the loss allowance for the purposes of this FAQ).
‘Effective interest method’ is defined as ‘the method that is used in the calculation of the amortized cost of a financial asset or a financial liability and in the allocation and recognition of the interest revenue or interest expense in profit or loss over the relevant period’.
‘Effective interest rate’ is defined as ‘the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability’.
The effective interest method results in a constant rate of return on the instrument throughout the life of the instrument.
How do you calculate amortized cost of a financial instrument where periodic payments do not coincide with period end?