How to Calculate Amortised Cost: Inputs, Formula, and Worked Examples

To calculate amortised cost for a debt instrument, start with what you paid at acquisition (including transaction fees), then each period multiply that carrying amount by the effective interest rate to get interest income, add that interest to the carrying amount, and subtract the cash you actually received. The closing figure becomes next period’s opening balance, and the carrying amount converges on face value by maturity. That is the whole method in one paragraph; the rest is knowing which numbers to plug in and how to handle the wrinkles.

The Four Inputs You Need Before You Start

Pull these from the bond indenture or loan agreement before opening a spreadsheet:

Initial carrying amount. The fair value at acquisition plus transaction costs directly tied to the purchase (legal fees, registration charges, origination fees). For financial assets not measured at fair value through profit or loss, these costs are added to the opening balance rather than expensed on day one.¹
Maturity (face) value. What the issuer will repay at the end.
Contractual cash flows. The scheduled coupons or interest payments plus any principal repayments along the way.
Effective interest rate (EIR). The rate that discounts all expected future cash flows back to the initial carrying amount. It is not the stated coupon rate; it folds in any discount or premium you paid and any transaction costs bundled into the opening balance.

Origination fees on commercial loans commonly run 2% to 3% of the loan amount, and because those fees change the net amount you actually invest, they change the EIR even when the coupon rate is unchanged. Getting the EIR wrong at inception means every subsequent interest entry is off, so this is the number to double-check before posting anything.

The Two-Step Calculation Each Period

IFRS 9 defines amortised cost as the amount at initial recognition, minus principal repayments, plus or minus the cumulative amortisation of any difference between the initial amount and the maturity amount, and (for financial assets) adjusted for any loss allowance.² The precise definition is dense; the mechanical calculation reduces to two steps.

Step 1. Multiply the opening carrying amount by the EIR. That is your interest income for the period.

Step 2. Add the interest income to the opening carrying amount, then subtract the cash you actually received (coupon, principal, or both). The result is the closing carrying amount, which opens the next period.

If you paid less than face value, interest income each period exceeds the cash coupon, and the carrying amount drifts upward toward face value. If you paid more than face value, the coupon exceeds calculated interest income, and the carrying amount drifts downward. Either way, the two figures meet at maturity.

Worked Example: Bond Bought at a Discount

You buy a three-year corporate bond with a $100,000 face value and a 4% annual coupon for $94,654. Because you paid below face value, the EIR works out to 6%.

Year 1.

Opening carrying amount: $94,654
Interest income at 6%: $5,679
Cash received (4% coupon): $4,000
Closing carrying amount: $96,333

The $1,679 gap between interest income and cash received increases the carrying amount. That gap is the portion of the discount amortised this period.

Year 2.

Opening carrying amount: $96,333
Interest income at 6%: $5,780
Cash received: $4,000
Closing carrying amount: $98,113

Year 3.

Opening carrying amount: $98,113
Interest income at 6%: $5,887
Cash received: $104,000 (final coupon plus face value)
Closing carrying amount: $0

Interest income grows each year because the balance it is calculated on keeps rising. Over the three years, you recognise $17,346 of interest income, which is the $12,000 in coupons plus the $5,346 discount. The effective interest method spreads that discount across the instrument’s life instead of dropping it all at purchase or maturity. The final period’s interest is typically adjusted by a few dollars so rounding does not leave a residual balance.

Worked Example: Bond Bought at a Premium

The mechanics reverse when you pay more than face value. Buy the same $100,000 bond for $105,000 and the EIR falls below the 4% coupon. Each period the cash coupon exceeds recognised interest income, and the carrying amount drops toward $100,000 by maturity. IFRS 9 requires premiums and discounts to be amortised over the instrument’s expected life using the effective interest method, with a shorter period used only when the premium relates to a variable that reprices before maturity.²

What Changes With Floating-Rate Debt

When the interest rate resets periodically against a benchmark like SOFR, the coupon cash flows change each period. You still accrue interest at the rate in effect, but any upfront discount, premium, or origination fee requires a choice: fix the amortisation schedule at inception using the initial reference rate, or update the effective rate each time the benchmark resets. Whichever you pick, apply it consistently for the life of the instrument. What you cannot do is freeze the EIR for the interest calculation itself while the actual payments float.

Adjusting for Expected Credit Losses

Amortised cost is not a promise the borrower will pay. Both IFRS and US GAAP require a loss allowance that directly reduces the carrying amount on the balance sheet.

Under IFRS 9, assets sit in one of three stages depending on how credit risk has moved since initial recognition. Stage 1 (no significant increase in credit risk) carries a 12-month expected loss allowance. Stage 2 (significant increase, presumed once payments are more than 30 days past due, though the presumption is rebuttable) carries a lifetime expected loss allowance. Stage 3 (credit-impaired) also carries a lifetime allowance, but interest income is now calculated on the net carrying amount after deducting the allowance rather than on the gross figure. If credit quality recovers, an asset can move back to Stage 1.¹

Under US GAAP, ASC 326’s Current Expected Credit Losses (CECL) model requires you to estimate lifetime expected losses from the moment the asset is recorded, using historical experience, current conditions, and reasonable forecasts. FASB does not prescribe a specific estimation method; approaches range from simple loss-rate models to discounted cash flow analyses.³ CECL applies to all entities, with effective dates now passed for both SEC filers and smaller reporting companies.⁴

The practical effect on the calculation is the same under either framework: the loss allowance is subtracted from the amortised cost figure on the balance sheet, and changes in the allowance run through profit or loss.

When the Loan Terms Change

Borrowers renegotiate. The first question is whether a modification creates a new loan or continues the old one. Under US GAAP, that evaluation follows the refinancing guidance in ASC 310-20. When the modification is a continuation, you adjust the effective interest rate going forward rather than derecognising the old asset and booking a new one.⁵

The former troubled-debt-restructuring rules were eliminated for entities that adopted ASC 326. Because CECL already captures the credit loss effect of most modifications through the loss allowance, a separate adjustment at the modification date is generally unnecessary. The exception is principal forgiveness: when the lender writes off part of the principal, the amortised cost basis is reduced by the forgiven amount and the loss allowance is adjusted by the same figure.⁵

Closing the Balance at Maturity or Sale

The asset comes off the balance sheet when the right to cash flows expires, the borrower makes the final payment, or the asset is transferred under conditions that qualify for derecognition.² At maturity, if everything ran on schedule, the closing carrying amount equals the final cash received and the balance zeros out, as in the discount example above.

Sell the instrument early and the difference between sale price and current carrying amount is booked as a gain or loss in profit or loss. That is the one moment market prices touch the income statement for an amortised cost asset. Prepayment penalties collected from a borrower who pays off a loan early are generally recorded as part of interest income rather than a separate gain, since they compensate for interest that would otherwise have been earned over the remaining term.

For financial liabilities, derecognition happens when the obligation is discharged, cancelled, or expires, and any difference between the carrying amount and the consideration paid to extinguish the liability also flows through profit or loss. Once the balance is zero, keep the supporting amortisation schedule on file for the auditors.

1
IFRS Foundation. IFRS 9 Financial Instruments
2
IFRS Foundation. IFRS 9 Financial Instruments
3
Financial Accounting Standards Board. FASB Staff Q&A Topic 326, No. 1
4
Federal Deposit Insurance Corporation. Current Expected Credit Losses (CECL)
5
Financial Accounting Standards Board. Accounting Standards Update 2022-02 – Troubled Debt Restructurings and Vintage Disclosures