Effective rate of interest during the first-time adoption
How will the effective rate of interest be computed during the first-time adoption?
Effective interest rate is a key concept that runs through the entire gamut of Ind AS standards, more so for the financial instruments, as the interest element, be it revenue or expense is computed only based on the effective interest rate and not on the stated rate of interest. It may be impractical for an entity to find out the effective interest rate for a certain instrument due to lack of availability of all details relating to the contractual cash flows prior to the date of transition. If so, an entity is allowed to take the fair value as the new gross carrying amount or the new amortised cost of that financial liability at the date of transition to Ind AS. The effective interest should be computed based on the fair value of such instruments on the date of transition.