The costs that are incurred by an entity in selling an asset or transferring a liability in the principal market (or in the absence of it, in the most advantageous market). These costs shall be directly related or attributable to the disposal of the respective asset or the transfer of the respective liability. These costs must directly arise from the respective transaction, and must also constitute an essential element in such a transaction.
Transaction costs are incurred in the process of a carrying out a transaction and are typically allocated or amortized depending on the type of assets/ liabilities involved, the nature of payments (fixed, determinable), and the contractual term. For example, in accordance with accounting best practices, transactions costs incurred in relation to financial instruments that are measured subsequent to initial recognition at amortized cost will be amortized through profit or loss (P&L) over the lifespan of the instrument. In other words, these costs will be embedded in the calculation of the effective interest rate.
For financial assets classified as available for sale (AFS), when the effective interest method is applied, transaction costs will be made part of the carrying amount of the financial instrument/ asset, upon initial recognition. Thereafter, over the term of the instrument, the transaction costs will also be amortized through profit or loss under the effective interest method. If the AFS asset has no fixed or determinable payment pattern or has an indefinite life such as an equity investment (in which case the effective interest rate is not used), transaction costs are recognized in profit or loss only in two cases: on recognition of an impairment loss or derecognition of the investment.
For financial instruments classified as at fair value through profit and loss (FVTPL), transaction costs are recognized in profit or loss on initial recognition.
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