Contractual cash flows & effective interest rate

When contractual cash flows are modified to change in the terms of contract, does the effective interest rate change?

When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the de-recognition of that financial asset an entity shall recalculate the gross carrying amount of the financial asset and shall recognise a modification gain or loss in profit or loss. The gross carrying amount of the financial asset is recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets) or, when applicable, the revised effective interest rate calculated after a fair value hedge. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset.

When the contractual cash flows are modified due to revision in estimates, does the effective interest rate change?

If an entity revises its estimates of payments or receipts (excluding modification due to renegotiation) and changes in estimates of expected credit losses), it should adjust the gross carrying amount of the financial asset or amortised cost of a financial liability (or group of financial instruments) to reflect actual and revised estimated contractual cash flows. The entity recalculates the gross carrying amount of the financial asset or amortised cost of the financial liability as the present value of the estimated future contractual cash flows that are discounted at the financial instrument’s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets) or, when applicable, the revised effective interest rate calculated after a fair value hedge. The adjustment is recognised in profit or loss as income or expense.

Transaction not representing the fair value

Transaction not representing the fair value A financial asset or financial liability should be measured at fair value on initial recognition. What if the transaction does not represent the fair value of the financial asset or financial liability? If at initial recognition the transaction value is different from the fair value, then …
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Treatment of transaction costs

Treatment of transaction costs How are the transaction costs treated? Transaction costs incurred while acquiring a financial asset or incurring a financial liability is treated differently depending upon the classification of such financial asset or financial liability. Transaction costs include fees and commission paid to agents (including employees acting as selling agents), advisers, …
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What is the concept of effective interest method?

What is the concept of effective interest method? Explain the concept of effective interest method? Effective interest method is a new concept that is introduced through the Ind AS standards. Effective interest rate is relevant not merely for financial instruments, but as a concept running through the entire gamut of the Accounting …
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Derecognition of a financial asset

Derecognition of a financial asset When should a financial asset be derecognised? An entity shall derecognise financial assets when and only when the contractual rights to the cash flows from the financial assets expire or it transfers the financial asset which eventually qualifies for derecognition as per the standard. An entity transfers a …
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Consequence of not de-recognising an asset after the sale

Consequence of not de-recognising an asset after the sale What is the consequence of not de-recognising an asset even after the sale of such asset? When an entity continues to recognise an asset to the extent of its continuing involvement, the entity also recognises an associated liability. The transferred asset and the …
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