Know Your Rights!!

I have been receiving a number of queries on calculation of effective interest rate for floating (variable) rate financial assets or financial liabilities – which are to be subsequently measured at amortised cost. Let’s first start with the definition of ‘Effective Interest Method’. Indian Accounting Standard (Ind AS) 109, Financial Instruments in Appendix A states that ‘the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability. When calculating the effective interest rate, an entity shall estimate the expected cash flows by considering all the contractual terms of the financial instrument (for example, prepayment, extension, call and similar options) but shall not consider the expected credit losses (ECL). The calculation includes all fees and points paid or received between parties to the c...