Chasing Myths: Common Misapplications of IFRS and Their Implications Myth #3: ACCRUED INTEREST

Surprisingly, it remains relatively common for some entities to recognize accrued but unpaid or unreceived interest for a given period under accruals of expenses or income, presented in items such as other receivables or other payables.

This practice is inconsistent with the subsequent measurement basis of #amortized cost applied to financial assets and to financial liabilities and is not applicable to other subsequent measurement bases, rendering it incorrect.

According to the definition of amortized cost, interest determined using the effective interest method is added to the carrying amount of the related financial asset or financial liability. For reference, see the journal entries presented in the Agenda Decision "Curing of a Credit-Impaired Financial Asset."

Thus, when the subsequent measurement basis is amortized cost, accrued interest on, for example, a loan obtained—payable only in the subsequent period(s)—must be recognized as an adjustment to the carrying amount of the corresponding financial liability (to reflect its amortized cost). Similarly, accrued interest on an investment (e.g., a term deposit) receivable only in the subsequent period(s) must be recognized as an adjustment to the carrying amount of the corresponding financial asset.

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