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7.9 Effective interest rate—changes in expectations
Publication date: 31 Mar 2023
us IFRS & US GAAP guide
Differences in how changes in expectations (associated with financial assets carried at amortized cost) are treated can affect asset values and the timing of income recognition.
US GAAP | IFRS |
Different models apply to the way revised estimates are treated depending on the nature of the asset. Changes may be reflected prospectively or retrospectively. However, none of the prescribed US GAAP models is the equivalent of the IFRS cumulative-catch-up-based approach.
| If an entity revises its estimates of payments or receipts, the entity adjusts the carrying amount of the financial asset (or group of financial assets) to reflect revised estimated cash flows.
Revisions of the expected life or the estimated future cash flows may occur, for example, in connection with debt instruments that contain a put or call option that does not cause the asset to fail the SPPI test described in SD 7.3.
The carrying amount is recalculated by computing the present value of estimated future cash flows at the financial asset’s original effective interest rate. The adjustment is recognized as income or expense in the income statement (i.e., by the cumulative-catch-up approach).
Generally, floating rate instruments issued at par are not subject to the cumulative-catch-up approach; rather, the effective interest rate is revised as market rates change.
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