Key Points
- A financial asset qualifies for amortised cost only if the entity holds it to collect contractual cash flows and those cash flows are solely payments of principal and interest.
- Most financial liabilities default to amortised cost unless they are held for trading or designated at FVTPL.
- The effective interest rate is locked at initial recognition and does not change for floating-rate adjustments to the contractual rate.
- Failing the SPPI test forces fair value measurement, which changes both the balance sheet and where gains and losses appear in the income statement.
What is Amortised Cost?
IFRS 9 Appendix A gives the formula: take the amount at initial recognition, subtract principal repayments, add or subtract the cumulative amortisation of the difference between the initial amount and the maturity amount, and (for assets) subtract any loss allowance. The effective interest method does the mechanical work. It spreads transaction costs, premiums, and discounts over the instrument's life so that each period recognises a constant rate of return on the carrying amount.
For financial assets, reaching amortised cost measurement requires passing two gates. IFRS 9.4.1.2(a) tests the business model: the entity must hold the asset to collect contractual cash flows, not to sell it. IFRS 9.4.1.2(b) tests the cash flow characteristics: the contractual terms must give rise on specified dates to cash flows that are solely payments of principal and interest (the SPPI test). Fail either gate and the asset goes to fair value.
Financial liabilities face a simpler path. IFRS 9.4.2.1 directs most liabilities to amortised cost by default. Only liabilities held for trading and those the entity designates at FVTPL under IFRS 9.4.2.2 escape this default.
Worked example: Schönberg Logistik GmbH
Client: German logistics company, FY2024, revenue €67M, HGB and IFRS dual reporter.
Step 1 — Identify the instrument
Schönberg holds a €5M corporate loan to a long-standing customer, originated in January 2024, five-year term, fixed interest at 3.8% paid annually, no embedded derivatives, no conversion features.
Step 2 — Apply the business model test
Schönberg's treasury policy requires holding originated loans to maturity. No loans were sold in the prior three years. The CFO's board report confirms the hold-to-collect intent.
Step 3 — Apply the SPPI test
The loan pays fixed interest on a fixed principal balance with no leverage features, no equity kickers, no non-recourse clauses linked to specific assets, and no performance-contingent coupon adjustments. Contractual cash flows represent solely payments of principal and interest on the principal amount outstanding.
Step 4 — Calculate amortised cost at Year 1
The loan was originated at par (€5M), so there is no premium or discount to amortise. Transaction costs of €12K were incurred. Initial carrying amount: €5,012K. Effective interest rate (recalculated to spread the €12K over five years): approximately 3.85%. Year 1 interest income: €193K (€5,012K × 3.85%). Cash received: €190K (€5M × 3.8%). The €3K difference accretes to the carrying amount.
Conclusion: The loan qualifies for amortised cost measurement because it passes both the business model test and the SPPI test. The carrying amount at 31 December 2024 is €5,015K, and the effective interest rate of 3.85% is locked for the instrument's life.
Why it matters in practice
The AFM's 2021 report on IFRS 9 implementation found that firms documented the SPPI test conclusion without documenting the analysis. Files stated the instrument "passes SPPI" but did not record which contractual features were evaluated or which application guidance paragraphs were considered. IFRS 9.B4.1.7–B4.1.26 contains over 20 paragraphs of specific guidance. A bare conclusion is not a documented assessment.
Teams frequently ignore the business model test for originated loans, treating hold-to-collect as obvious. IFRS 9.B4.1.2A requires the entity to assess the business model at a level that reflects how groups of financial assets are managed together. If the entity has a pattern of selling similar loans before maturity, the hold-to-collect classification fails even if the specific loan in question has never been sold.
Amortised cost vs fair value through profit or loss
Amortised cost keeps the instrument at its calculated carrying amount. Period-to-period changes in market value do not hit the income statement. FVTPL remeasures the instrument to fair value at every reporting date, with gains and losses recognised immediately in profit or loss.
On an engagement, the difference matters most for income volatility. A €5M loan at amortised cost produces predictable interest income each period. The same loan at FVTPL would produce interest income plus or minus fair value movements driven by credit spreads and market rates. For entities with bank covenants tied to reported earnings, the measurement basis can determine whether a covenant is met or breached.