Question

Which financial investments are valued at amortized cost? Explain the rationale.

Answer 1

Bonds & other Debt securities are recorded at amortized cost. In other words, we can say that securities which are classified as held to maturity are recorded at amortized acquisition cost in the financial statements. It is also referred by IFRS 9. Amortized cost is the carrying value of security i.e. the difference between the cost and repayments made. To calculate the amortized acquisition value, securities are amortized like a bond. All the fluctuation in the price of security is ignored while accounting for held to maturity security. Held to maturity are basically reported as non current Assets except when they have maturity date of one year or less.

Through Amortization the cost of securities are incrementally adjusted throughout their life. Interest income Earned appears on the Income Statement but change in market value does not effect securities' carrying value in Financial Statements. The main Reason for using Amortized cost method is that it not only recognizes reported interest as the primary “earnings” of the entity but also places emphasis on the timing of the realization of changes in value by the organization rather than simply on the amount of the changes in value.