Query in IAS 18 interpretation

Discussion in 'IFRS' started by Gimi, Mar 8, 2014.

  1. Gimi

    Gimi Member

    IAS 18 talks about revenue and it states, for Interest it should be recognised as follows. Interest on time proportion basis that takes into account the effective yield. Can some one please explain what does this mean? 1. Recognistion of interest on time proportion? 2. What is effective yield here?
  2. Mayur Sheth

    Mayur Sheth New Member

    Kindly refer IAS 39. The definition of effective interest method is reproduced below:

    The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) but shall not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (see IAS 18 Revenue), transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to estimate reliably the cash flows or the expected life of a financial instrument (or group of financial instruments), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments).

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