The effective interest rate discounts expected cash flows to the initial carrying amount, including transaction costs and fees. Spreading loan fees over the loan term instead of expensing them upfront is a result of this method.
Source: TFRS 9
Related terms
Amortised costThe amount at which a financial asset or liability is measured at initial recognition, minus principal repayments, plus cumulative amortisation calculated using the effective interest method.Financial instruments (TFRS 9)The standard governing the classification, measurement and impairment of financial assets and liabilities, and hedge accounting.Borrowing costs (TMS 23)The standard requiring interest and other borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period to get ready for use or sale) to be included in its cost.Accounting estimatesThe determination by management judgement of amounts that cannot be measured precisely, such as provisions, useful lives, expected credit losses and fair values.Accounting policiesThe specific principles, bases, conventions, rules and practices an entity applies in preparing its financial statements.Accrual basis of accountingThe principle of recording transactions as income, expenses, assets and liabilities in the period in which they occur, rather than when cash is received or paid.
Last updated: November 8, 2026 · This definition is for general information only.