When a company acquires financial assets, they must declare them on their balance sheet. The initial value of these items comes from the cost of obtaining them.
Companies must later incorporate them at a different amount, though. Accounting standards govern what these amounts should be. This procedure often falls within the amortized cost method.
When a company acquires financial assets, they must declare them on their balance sheet. The initial value of these items comes from the cost of obtaining them.
Companies must later incorporate them at a different amount, though. Accounting standards govern what these amounts should be. This procedure often falls within the amortized cost method.
AMORTIZED COST
The value of a financial asset or fixed asset on the balance sheet is referred to as amortized cost. It is a method used in accounting to estimate the value of these items. However, depending on the asset it impacts, the amortized cost definition could vary.
Regardless, amortized cost indicates the amortized value of an item on the balance sheet.
On the balance sheet, the amortized cost typically equals the acquisition cost of a financial or fixed asset.
This value, however, is only relevant at the time of initial acquisition by a company. In order to get at the amortized cost, businesses must later deduct a certain amount from that value.
It might also cover discounts or premiums on that item as well as principal repayments. In a similar manner, it also takes exchange differences and impairment losses into account.
Example: How to calculate Amortization Cost of a Bond?
ABC Corporation issues a bond with a face value of $1,000 and a 10-year maturity. Assume that the bond cost $1,150 when it was sold at a premium.
Let’s calculate the bond’s value after four years of amortization.
Amortized amount per year = Premium amount/Bond Term
Amortized amount per year = (1,150 – 1,000)/10 = $15
Total amortized premium for 4 years = $15 * 4 = $60
Unamortized Premium = $150 – $60 = $90
Bond Carrying Value = Face Value + Unamortized Premium
Carrying value of the bond = $1,000 + 90 = $ 1,090
WHAT IS THE AMORTIZED COST OF A FIXED ASSET?
The amortized cost concept also applies to fixed assets. It mostly affects intangible assets, but it can also affect other resources.
The amortized cost of a fixed asset is the accumulated portion of its cost that has been expensed through depreciation or amortization. It also describes complete depletion of natural resources.
WHAT IS THE AMORTIZED COST OF SECURITIES?
The amortized cost of securities differs from that of fixed assets. In this case, it shows the cost of the security after deduction of the purchase’s premiums and discounts.
It takes into account the difference between the security’s purchase price and face value. The amortized cost will change depending on the difference if these values are different.
When the security’s face value is greater than the purchase price, a purchase discount occurs. The effective interest rate will rise in this scenario.
Therefore, the difference will be covered by the amortized cost. When the face value is less than the purchase price, a purchase premium exists. The effective interest rate will be lower in this scenario.