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Financial Reporting · Classification and Measurement of Financial Assets and Financial Liabilities

Subsequent Measurement of Financial Liabilities under Ind AS 109

Updated 5 October 2026 · Fact-checked

Under Ind AS 109, most financial liabilities are measured at amortised cost using the effective interest rate: opening balance plus interest at EIR minus cash paid. Liabilities held for trading or designated at FVTPL are carried at fair value; for designated ones, the own credit risk part of the change goes to OCI, the rest to profit or loss.

Understand Subsequent Measurement of Financial Liabilities

After you recognise a financial liability at fair value (adjusted for transaction costs where it is not at FVTPL), you must decide how to carry it at each reporting date. Ind AS 109 gives a default and a list of exceptions.

The default is amortised cost using the effective interest method. The effective interest rate (EIR) is the rate that exactly discounts all estimated future cash payments over the expected life of the liability to its initial carrying amount. Each period, finance cost = opening carrying amount × EIR. This is not the same as the cash coupon. The difference between finance cost and cash paid is added to (or deducted from) the carrying amount. When the net initial carrying amount is below the redemption amount (because of a discount or transaction costs), the EIR is higher than the coupon rate and the carrying amount accretes up to the redemption amount. For a premium, the reverse occurs.

The main exceptions are:

  • Liabilities at fair value through profit or loss (held for trading, or designated on initial recognition).
  • Liabilities arising when a transfer of a financial asset does not qualify for derecognition.
  • Financial guarantee contracts and commitments to provide a loan at a below-market interest rate. These are measured at the higher of the loss allowance (ECL) and the amount initially recognised less the cumulative income recognised under the principles of Ind AS 115.
  • Contingent consideration of an acquirer in a business combination, which is measured at FVTPL.

Check which bucket the liability falls into first.

For FVTPL liabilities, the whole fair value change goes to profit or loss if the liability is held for trading. If the liability is designated at FVTPL, split the fair value change. The part due to changes in the entity's own credit risk is presented in OCI. The remainder goes to profit or loss. The exception: if presenting the own-credit part in OCI would create or enlarge an accounting mismatch in profit or loss, the entire change goes to profit or loss. The OCI requirement does not apply to loan commitments and financial guarantee contracts designated at FVTPL.

Amounts shown in OCI for own credit risk are never recycled to profit or loss, even when the liability is settled. You may move the cumulative amount within equity (for example, to retained earnings). Note the direction: when your own credit worsens, the fair value of your liability falls, so you show a gain in OCI. When your credit improves, you show a loss.

Key rules to remember

Amortised cost roll-forward (liability)
Closing carrying amount = Opening carrying amount + Interest at EIR − Cash paid (interest and principal)
Interest (finance cost) = Opening carrying amount × EIR. Closing balance in the final year equals the amount repaid, if cash flows are as expected.
Effective interest rate
Net initial carrying amount = Σ [Cash flow ÷ (1 + EIR)^t]
Net initial carrying amount is fair value less directly attributable transaction costs. Find EIR by trial or interpolation, or use the rate given.
Revision of estimated cash flows
New carrying amount = PV of revised remaining cash flows at the original EIR; difference goes to profit or loss
Applies to fixed-rate instruments. Floating-rate instruments are re-estimated, which changes the EIR.
Designated FVTPL liability: split of change
Total fair value change = Change due to own credit risk (OCI) + Remaining change (P&L)
If it would create or enlarge an accounting mismatch in P&L, show the entire change in P&L.
Held-for-trading liability
Entire fair value change → profit or loss
No OCI split for own credit risk.
OCI own-credit amount on settlement
Not reclassified to profit or loss; transfer within equity is allowed
Do not show it again in P&L at derecognition.

How to solve Subsequent Measurement of Financial Liabilities questions

Use this sequence for any question on measuring a financial liability after initial recognition.

  1. 1Identify the liability and check whether it falls under an exception: held for trading, designated at FVTPL, financial guarantee, below-market loan commitment, contingent consideration, or failed derecognition transfer.
  2. 2If no exception applies, use amortised cost. Find the initial carrying amount: fair value less directly attributable transaction costs.
  3. 3Get the EIR from the question. If it is not given, compute it so that the PV of all cash flows equals the initial carrying amount.
  4. 4Build a table: opening balance, finance cost at EIR, cash paid, closing balance. Round consistently and make the last closing balance equal the redemption amount.
  5. 5If it is an FVTPL liability, state whether it is held for trading or designated. Held for trading: all change in P&L.
  6. 6For a designated FVTPL liability, split the fair value change into own credit risk and other. Check for an accounting mismatch before choosing OCI.
  7. 7Post the entries: finance cost or fair value loss to P&L, own-credit gain or loss to OCI, and the liability at its new carrying amount.
  8. 8Conclude in one line stating the carrying amount at the reporting date and where each amount is presented.

Quickest way: Amortised cost table and FVTPL split in two passes

When to use it: Use when time is short in a numerical on EIR or on FVTPL with own credit risk.

  1. For amortised cost, write one row per year: Opening, ×EIR, less cash, Closing. Check that the last closing equals the redemption amount. If it does not, there is a calculation error.
  2. Compare the net initial carrying amount with the redemption amount. If it is lower (discount or costs), the EIR is higher than the coupon rate, finance cost exceeds the cash coupon in the early years, and the carrying amount rises toward the maturity amount. For a premium, the reverse occurs.
  3. For FVTPL, write the total change first. Then write the own-credit figure. The other change is the balancing figure.
  4. Own credit worsens means liability value falls, so OCI gain. Own credit improves means OCI loss.
  5. Scan the question for the words held for trading, designated, or mismatch. They decide whether OCI is used at all.

Common mistakes in Subsequent Measurement of Financial Liabilities

  • Charging the coupon as the finance cost instead of interest at EIR

    Students book the cash interest because it is visible, and ignore the discount or transaction costs.

    Fix: Finance cost is always opening carrying amount × EIR. The difference from cash paid is added to the liability (or deducted, for a premium).

  • Treating transaction costs as an immediate expense for an amortised cost liability

    It feels natural to expense costs of raising a loan.

    Fix: For liabilities not at FVTPL, deduct directly attributable costs from the initial carrying amount and spread them through the EIR. Only for FVTPL liabilities are costs expensed.

  • Showing the entire fair value change of a designated FVTPL liability in OCI

    Students remember that OCI is used for own credit but forget that only that portion goes there.

    Fix: Split the change. Only the part from own credit risk goes to OCI; the rest goes to P&L.

  • Applying the OCI rule to held-for-trading liabilities or to loan commitments and financial guarantee contracts

    The rule is remembered as applying to all FVTPL liabilities.

    Fix: The OCI treatment applies to liabilities designated at FVTPL, not held for trading, and not to loan commitments and financial guarantee contracts.

  • Getting the sign wrong for own credit risk

    Students think worse credit means a loss.

    Fix: Worse own credit lowers the liability's fair value, so you show a gain in OCI. Better own credit gives a loss in OCI.

  • Recycling the OCI amount to profit or loss on settlement

    Students carry over the recycling logic from FVOCI debt assets.

    Fix: For own credit, no recycling. State that the cumulative amount may be transferred within equity only.

Worked examples

Example 1

Case: On 1 April 2026, Kiran Ltd issues 3-year debentures of face value ₹10,00,000 with a coupon of 5% payable annually in arrears, redeemable at par. After transaction costs, the net initial carrying amount is ₹9,22,687. The EIR is 8%. The debentures are not held for trading and are not designated at FVTPL. Show the carrying amount and finance cost for each year.

Show the solution
  1. No FVTPL exception applies, so the debentures are at amortised cost using the EIR.
  2. Cash coupon each year = 5% × ₹10,00,000 = ₹50,000.
  3. Year 1 (2026-27): Finance cost = ₹9,22,687 × 8% = ₹73,815. Closing = 9,22,687 + 73,815 − 50,000 = ₹9,46,502.
  4. Year 2 (2027-28): Finance cost = ₹9,46,502 × 8% = ₹75,720. Closing = 9,46,502 + 75,720 − 50,000 = ₹9,72,222.
  5. Year 3 (2028-29): Finance cost = ₹9,72,222 × 8% = ₹77,778. Opening 9,72,222 + finance cost 77,778 = ₹10,50,000 before payment.
  6. Cash paid in Year 3 = coupon ₹50,000 + principal ₹10,00,000 = ₹10,50,000. Closing carrying amount = 10,50,000 − 10,50,000 = nil.
  7. Check: the Year 3 closing carrying amount before payment is ₹10,50,000 (principal ₹10,00,000 plus coupon ₹50,000). This equals the cash paid of ₹10,50,000, so the carrying amount is nil and the table reconciles.

Answer: Finance cost: ₹73,815 (Year 1), ₹75,720 (Year 2), ₹77,778 (Year 3). Carrying amounts at year end: ₹9,46,502 (Year 1), ₹9,72,222 (Year 2) and nil (Year 3, after paying ₹10,50,000 as coupon and principal). Finance cost is recognised in profit or loss.

Example 2

Case: Meera Ltd issued a zero-coupon bond and, on initial recognition, designated it at FVTPL. There is no accounting mismatch in profit or loss. Fair value on 1 April 2026 was ₹50,00,000 and on 31 March 2027 was ₹52,00,000. A valuer reports that a fall in market interest rates increased the fair value by ₹5,00,000, while a deterioration in Meera Ltd's own credit risk decreased it by ₹3,00,000. Show the accounting for 2026-27.

Show the solution
  1. The liability is designated at FVTPL, so it is measured at fair value and the change is split.
  2. Total change = 52,00,000 − 50,00,000 = ₹2,00,000 increase in the liability, which is a net loss.
  3. Own credit risk portion: the fair value fell by ₹3,00,000. The liability is lower, so there is a gain of ₹3,00,000 presented in OCI.
  4. Remaining change: increase of ₹5,00,000 due to market rates, which is a loss presented in profit or loss.
  5. Check: loss 5,00,000 − gain 3,00,000 = net increase of ₹2,00,000, which matches the total change.
  6. Entries: Dr Profit or loss ₹5,00,000 and Cr Financial liability ₹5,00,000. Dr Financial liability ₹3,00,000 and Cr OCI ₹3,00,000. Liability at 31 March 2027 = ₹52,00,000.
  7. The OCI gain of ₹3,00,000 is not recycled to profit or loss later, even on settlement. If an accounting mismatch had existed, the whole ₹2,00,000 net loss would have been shown in profit or loss.

Answer: Profit or loss shows a loss of ₹5,00,000. OCI shows a gain of ₹3,00,000. The liability is carried at ₹52,00,000 at 31 March 2027.

Exam tips

  • Start every answer by naming the measurement category (amortised cost, held for trading, or designated FVTPL). It shows the examiner your logic and earns marks even if the numbers slip.
  • In EIR problems, always show the four-column table and check that the last closing balance equals the redemption amount.
  • For own credit risk questions, state three points: designated at FVTPL, mismatch test, and no recycling from OCI. Case MCQs often test one of these.
  • Read the case for words like held for trading, designated, and accounting mismatch. They change the presentation completely.
  • Show the journal entries with the OCI and P&L split clearly labelled, and conclude with the carrying amount at the reporting date.

Practice questions from Classification and Measurement of Financial Assets and Financial Liabilities

Subsequent Measurement of Financial Liabilities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Subsequent Measurement of Financial Liabilities: frequently asked questions

How are financial liabilities measured after initial recognition under Ind AS 109?

Most are measured at amortised cost using the effective interest method. The exceptions are FVTPL liabilities, financial guarantee contracts, below-market loan commitments, contingent consideration in a business combination, and liabilities from failed derecognition transfers. Each exception has its own rule.

Where do own credit risk changes go for a liability at FVTPL?

For a liability designated at FVTPL, the change in fair value due to own credit risk is presented in OCI, and the rest goes to profit or loss. If this would create or enlarge an accounting mismatch in profit or loss, the whole change goes to profit or loss. Held-for-trading liabilities have no OCI split.

Is the own credit amount in OCI recycled to profit or loss when the liability is repaid?

No. Amounts presented in OCI for own credit risk are not subsequently transferred to profit or loss. You may transfer the cumulative gain or loss within equity.

Why is finance cost different from the coupon paid?

Finance cost is opening carrying amount × EIR, which spreads any discount, premium and transaction costs over the life. The coupon is only the contractual cash. The difference changes the carrying amount each year.