IFRS 9 effective interest method: Loan Fees and Entries

What does the IFRS 9 effective interest method measure?

The IFRS 9 effective interest method connects a loan's opening carrying amount, finance expense and contractual payments. It answers a practical question: if your company receives less cash than the amount it must repay, how should that financing cost appear over the borrowing period? The percentage printed on the agreement is only one input.

Start from the borrower's books. Cash interest follows the contract. Finance expense follows the effective rate applied to the opening amortised cost. The difference changes the liability. Once you keep those three amounts separate, a repayment schedule becomes much easier to explain and check.

This guide works through two fictional Saudi businesses, with every amount expressed in SAR. One repays its principal at maturity; the other repays principal annually. Both examples assume ordinary fixed-rate loans measured at amortised cost, annual year-end payments, no changes to expected contractual cash flows, and no qualifying asset requiring interest capitalisation. They are learning cases, not quotations from banks or descriptions of actual companies.

The [IFRS Foundation's IFRS 9 overview](https://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-financial-instruments/) explains recognition and initial measurement. A loan payable enters the accounts when the entity becomes party to the contractual provisions. Its initial measurement includes the relevant transaction-cost adjustment when it is outside fair value through profit or loss.

Keep a short cover sheet beside your calculation: borrower, agreement date, measurement basis, cash received, eligible fees, payment dates and final repayment. This creates a traceable starting point before you open a spreadsheet. Someone reviewing your schedule should be able to find each input in that cover sheet and then in the supporting document.

Which loan fees belong in the opening carrying amount?

For the ordinary liability considered here, begin with [fair value](/glossary#fair-value) and deduct eligible transaction costs. Our examples assume the loan's fair value before those costs equals the gross proceeds. A below-market arrangement needs a separate initial-measurement assessment; simply equating its face value with fair value could miss another component of the transaction.

The transaction-cost definition looks for incremental costs directly attributable to issuing the instrument. Internal administration costs do not qualify merely because someone allocated them to the loan. Integral origination fees also enter the effective-rate calculation. Check the substance of each charge and the service obtained. The relevant references are IFRS 9 Appendix A and paragraphs B5.4.1, B5.4.2(c) and B5.4.8, available in [XRB's equivalent standard text](https://standards.xrb.govt.nz/standards-navigator/nz-ifrs-9/).

For your working paper, list the supplier, purpose, amount and conclusion for each fee. A transaction-specific broker charge and an allocation of the finance team's existing salaries have different fact patterns. Keep supporting invoices and explain the conclusion in a sentence. An invoice label such as “administration” alone does not settle the accounting.

Timing also needs care. The [January 2026 final transaction-cost agenda decision](https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/2026/determining-and-accounting-for-transaction-costs-jan-2026.pdf) reports that costs incurred before signing are not automatically excluded from being incremental. Its findings also describe qualifying costs held as prepayments or other assets before the contractual arrangement. That does not mean every unsuccessful financing proposal creates an asset.

The later destination of interest is a separate question. Our examples charge finance expense to profit or loss. If the borrowing relates to a qualifying asset, review [borrowing costs under IAS 23](/learn/borrowing-costs-ias-23) after determining the financing cost. Preserve the distinction between measuring the liability and deciding whether qualifying borrowing costs enter an asset's cost.

How do you calculate the IFRS 9 effective interest method schedule?

Write the expected contractual cash flows in date order, including the principal repayment. For these fixed annual cases, find the rate that makes the present value of all future payments equal the opening carrying amount. Eligible fees have already reduced that starting amount, so do not subtract them again from a future payment.

Use this repeatable calculation for each full year:

• Finance expense: opening carrying amount multiplied by the annual effective rate.
• Closing carrying amount: opening carrying amount plus finance expense less total cash paid.
• Next year's opening balance: the previous year's closing balance.

These are applications of the effective-rate definition in [IFRS 9 Appendix A](https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2021/issued/part-a/ifrs-9-financial-instruments.pdf). That linked edition is historical; the current equivalent text linked above was also checked. Our assumed cash flows remain unchanged through maturity, so the examples do not address revisions, floating-rate resets or modifications.

A spreadsheet can solve the rate, but first check the payment pattern. For a bullet loan, the last payment includes the entire principal. For an instalment loan, the interest component may fall as contractual principal is repaid. Entering the same cash amount in every year without reading the agreement can produce a perfectly calculated answer to the wrong problem.

Keep full precision in the rate and intermediate calculations. Round only the displayed amounts to two decimals. A material balance left after the final payment is a reason to revisit the inputs, timing and rate. A very small display difference can arise from rounding; record any final cent adjustment transparently instead of forcing a large balancing figure into finance expense.

Before posting, perform a second check outside the annual schedule: total finance expense over the unchanged loan term should equal total contractual repayments less the initial carrying amount. This check uses different arithmetic and can reveal a missing fee or repayment.

Worked example 1: a Riyadh loan with principal due at maturity

Rimal Trading, a fictional Riyadh business, borrows SAR 1,000,000 on 1 January of Year 1. It pays qualifying issue costs of SAR 30,000 on the same date. The contract requires SAR 80,000 interest each 31 December and repayment of SAR 1,000,000 principal at the end of Year 3. The initial carrying amount is therefore SAR 970,000.

Solving for the annual rate using payments of SAR 80,000, SAR 80,000 and SAR 1,080,000 gives approximately 9.189161873%. The contract's 8% determines cash interest; the effective rate measures the financing cost on the carrying amount.

Record the initial gross receipt as a debit to cash and credit to the loan liability, both SAR 1,000,000. Record the qualifying fees as a debit to the loan liability and credit to cash, both SAR 30,000. Together, these entries leave the net carrying amount and net cash increase at SAR 970,000. A separate fee-adjustment subaccount can support the same net liability.

The following combined year-end [journal entry](/glossary#journal-entry) records the first year's finance expense and payment. If you need a refresher on the debit and credit structure, revisit [how to record journal entries](/learn/how-to-record-journal-entries).

The liability rises because the finance expense exceeds that year's payment. Total finance expense is SAR 270,000: three cash-interest payments of SAR 80,000 plus the SAR 30,000 fees. Independently, total repayments of SAR 1,240,000 less initial carrying amount of SAR 970,000 also produce SAR 270,000. Both checks explain where every part of the borrowing cost went.

Worked example 2: a Dammam loan with annual principal instalments

Sahil Distribution, a fictional Dammam business, borrows SAR 600,000 on 1 January of Year 1 and pays SAR 12,000 of qualifying issue costs immediately. It repays SAR 200,000 of contractual principal at each year-end. Cash interest is 6% of the contractual principal outstanding at the start of that year. All other assumptions remain as stated at the beginning of the guide.

Build the contractual payments before solving the effective rate. Year 1 interest is SAR 36,000 on SAR 600,000, making the payment SAR 236,000. Year 2 interest is SAR 24,000 on SAR 400,000, making the payment SAR 224,000. Year 3 interest is SAR 12,000 on SAR 200,000, making the final payment SAR 212,000.

The initial carrying amount is SAR 588,000. Discounting those three payments back to that amount gives an annual effective rate of approximately 7.120004676%.

After the first payment, contractual principal is SAR 400,000, while accounting carrying amount is SAR 393,865.63. The SAR 6,134.37 difference is the remaining unamortised fee adjustment. Keep both balances in the working paper so the lender's principal confirmation can be reconciled to the accounts.

This combined Year 1 entry balances at SAR 236,000. The liability reduction of SAR 194,134.37 combines principal repayment of SAR 200,000 with fee amortisation of SAR 5,865.63 in the opposite direction. Across all three years, expense totals SAR 84,000, equal to SAR 72,000 cash interest plus SAR 12,000 fees. Total cash repayments of SAR 672,000 less SAR 588,000 opening carrying amount give the same answer.

How do you reconcile the schedule to the accounts?

Reconcile the schedule to the [general ledger](/glossary#general-ledger) at each reporting date. Agree opening balances to the previous close, cash movements to the bank records, and finance expense to the posted entries. The remaining amount should match the net loan carrying amount, including any separate unamortised fee account.

For Rimal after Year 1, start with contractual principal of SAR 1,000,000 and deduct unamortised fees of SAR 20,865.13. The result is SAR 979,134.87, exactly the schedule's closing amount. For Sahil, the corresponding figures are SAR 400,000 less SAR 6,134.37, giving SAR 393,865.63. A principal confirmation alone cannot explain these differences.

Keep the presentation calculation beside the reconciliation. The carrying amount supports the statement of financial position; finance expense supports profit or loss under our assumptions. Current and non-current presentation requires a separate assessment of repayment terms and the applicable presentation requirements. A three-year schedule does not, by itself, justify labelling the whole liability non-current.

For a practical review file, save the agreement, fee analysis, dated cash-flow list, full-precision rate, schedule and posting references. Add a note confirming that the examples assume unchanged payments. A reviewer should be able to rebuild the closing balance without relying on a hidden spreadsheet cell or an unexplained plug.

The [ACCA financial-instruments technical article](https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/financial-instruments.html) provides a further explanation of the distinction between effective interest expense and contractual cash interest. Use that distinction as a review question: which column comes from the agreement, and which comes from the accounting measurement?

What common mistakes distort the effective interest calculation?

Several errors produce plausible-looking numbers. Review the cause of a difference before editing the final balance.

• Using face value for finance expense. In these examples, the effective rate applies to the opening carrying amount after the fee adjustment. The contractual rate has a different purpose.
• Counting fees twice. Once eligible fees reduce the opening liability and enter the effective-rate calculation, adding another annual expense for the same fees duplicates the cost.
• Keeping instalment-loan interest constant. Sahil's contract charges 6% on outstanding contractual principal, so its cash interest falls each year. Rimal's principal remains outstanding until maturity, giving a different pattern.
• Treating every loan-related payment alike. Document which charges qualify and assess other services separately. Payment on the drawdown date does not establish eligibility.
• Rounding the rate before completing the schedule. Retain calculation precision and reconcile the final cash payment. Investigate a material residual rather than clearing it without explanation.

Also respect the scope of the calculation. A floating-rate reset, early repayment, renegotiation or changed estimate calls for further analysis. You cannot automatically carry an unchanged fixed-rate example across those events.

The [IASB's amortised-cost measurement project](https://www.ifrs.org/projects/work-plan/amortised-cost-measurement/) was discussing tentative changes in September 2026, including aspects of modified instruments. At the research date, 30 September 2026, these proposals were not issued requirements. The worked examples here apply the existing unchanged-loan approach and do not anticipate proposed amendments.

When reviewing your own answer, write the error as a specific action: “I used contractual principal instead of carrying amount,” or “I omitted the final principal payment.” That gives you something concrete to correct in the next attempt.

How can you practise the method and check your own work?

Start with a blank schedule and reconstruct Rimal's three years using only the case facts. Before looking at the solution, predict the direction of the liability movement. Because yearly cash interest is below effective finance expense, the liability should rise before the final repayment. Then repeat Sahil's case and explain why its balance falls.

For a separate practice variation, remove Rimal's SAR 30,000 fees while leaving its contract unchanged. Opening carrying amount becomes SAR 1,000,000 and the effective rate becomes 8%. Finance expense is SAR 80,000 each year, and the liability stays at SAR 1,000,000 until principal repayment. This variation helps isolate what the fees changed without mixing in new repayment terms.

Use three checks when you finish: the final balance clears, every entry balances, and total finance expense equals total payments less the initial carrying amount. Then explain the first year's result in ordinary language, without reading the formula aloud. If you can identify the cash payment, accounting expense and balance movement separately, the calculation is becoming usable accounting knowledge.

Keep a short review note with the input you missed, the corrected reasoning and one fresh attempt. Change only one feature at a time, such as the fee or payment timing, so you can see its effect. Rebuild the cash-flow list whenever you change the contract assumptions.

Use [Accountery's accounting practice workspace](/for-students) to continue practising balanced entries, adjustments and reconciliations alongside your coursework. Choose the available exercises that support the skill you need, and keep this loan schedule as a worked reference. The next useful step is to record an entry, explain its effect on the liability and check it against the supporting calculation.