Amortized Cost

What is amortized cost?

Amortized cost represents the amortized value of an item on the balance sheet. It usually equals the acquisition cost of a financial or fixed asset. However, this value only applies when a company acquires the item initially. Later, companies must also deduct some amounts from that value to reach the amortized cost. It may include principal repayments and discounts or premiums on that item. Similarly, it also accounts for impairment losses and exchange differences.

Amortized Cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.

Amortised cost is a cost-based measure. The carrying value of a financial asset recorded in the statement of financial position at any given point in time does not provide information about the fair value of the future cash flows.

The amortised cost of a financial asset or financial liability is:

The amount at which it was measured at initial recognition – the “initial amount” – usually cost.

LESS any repayments of principal.

LESS any reduction for impairment or uncollectability.

ADD or LESS the cumulative amortisation of the difference between the initial amount and the final maturity amount.