What is Amortized Cost?
Amortised cost is a measurement category under IFRS 9 in which a financial asset or liability is measured using the effective interest method, with the carrying amount adjusted for principal repayments, impairment, and the amortisation of premiums or discounts.
How It Works
- Determine the initial carrying amount — fair value plus directly attributable transaction costs.
- Compute the effective interest rate from expected cash flows.
- Each period, accrue interest using the effective rate.
- Adjust the carrying amount for cash receipts, repayments, and impairment.
- Test the asset for ECL at each reporting date.
Saudi Context
Amortised cost is the dominant measurement basis for retail and corporate murabaha and qard receivables across Saudi banks and finance companies. ZATCA accepts the resulting interest profile for tax purposes when calculated consistently under SOCPA-adopted IFRS 9.
Example
A receivable with face value SAR 100,000 booked at SAR 95,000 with an effective rate of 7% produces year-1 interest of SAR 6,650. The carrying amount rises to SAR 101,650 before any repayments.