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Why are Transaction Costs added to Fair Value in case of Financial Assets & deducted in case of Financial Liabilities? Why is this treatment different?
Transaction cost are not always added to Fin Assets.
If the intention is to trade then FVPL so cost is directly expensed to SPL and not added to Fin Assets.However if intent is to hold then the cost needs to be spread over the life of asset, hence its treated as attributable to asset and added to the Asset Value.
Transaction costs are deducted from Financial liability.
By deducting transaction costs, the carrying amount of the liability is adjusted to reflect the net amount that the entity is obligated to pay to the creditor.
The proceeds from issuance is viewed to be received after the deduction.
I understand how it is to be treated, my question is WHY is it done that we add in case of FAs and deduct in case of FLs?
What Parag said is in FLs, Transaction Cost is deducted to calculate the net amount to be paid to the creditor. If I issue a bond worth $100 @ 5% (implicit rate is also the same) redeemable at par in 1 year and transaction cost is $10, why would the net liability turn out to be $90? I need to pay the bond holder $105 at the year end. Why would the bond not be recorded at $100?
If you pay transaction costs you Cr Cash. So conceptually we either DR P&L or DR Liability
Standard writers decided on liability.
For reasons you can refer to Part C of:
But don’t start batting on about them in the exam!
In my simple mind I’ve accepted that you start with a net borrowing of 90 because 90 is the money you have available to spend after you have paid your transaction cost.
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