Last update 25/08/2019
Transaction costs are of importance in IFRS because they are or are not included in the carrying value at initial recognition. The differences are as follows:
- Assets at amortised costs are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.
- Assets at fair value are initially recorded at fair value excluding transaction costs and are subsequently carried at fair value through profit or loss or at fair value through other comprehensive income. Although transaction costs are taken into account when identifying the most advantageous market (in fair value measurement), the fair value is calculated before adjustment for transaction costs because these costs are characteristics of the transaction and not the asset or liability. However, if location is a factor, then the market price is adjusted for the costs incurred to transport the asset to that market. Market participants must be independent of each other and knowledgeable, and able and willing to enter into transactions.
- Financial liabilities and equity instruments such as bank borrowings and redeemable preference shares are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable/discount receivable on redemption, as well as any interest or coupon payable while the liability is outstanding.
Transport costs – An asset may have to be transported from its current location to the principal (or most advantageous) market. As the location of an asset or a liability is a characteristic of the asset or liability, it will have a different fair value because of linked transport costs. For example, if an entity located in a capital city is considering buying a vehicle, then a vehicle located in a country town has a different fair value compared to one located in the capital city because of the transport costs linked with the vehicle in the country town. In contrast, transaction costs such as registration costs are not a characteristic of the asset. A price in the principal (or most advantageous) market is then adjusted for the transport costs.
Definitions:
IFRS 9:
Transaction costs – Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
IFRS 13:
Transaction costs -The costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following criteria:
- They result directly from and are essential to that transaction.
- They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made (similar to costs to sell, as defined in IFRS 5).
Transport costs – The costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market.
Transaction costs
Transaction costs
Transaction costs Transaction costs Transaction costs Transaction costs