Transaction costs (or costs of the transaction) 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 costs of the transaction are taken into account when identifying the most advantageous market (in fair value measurement), the fair value is calculated before adjustment for costs of the transaction 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 costs of the transaction 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.
- Investment property (IAS 40 21): The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure. Directly attributable expenditure includes, for example, professional fees for legal services, property transfer taxes and other transaction costs.
IFRS 9: Directly attributable transaction costs are added to or deducted from the carrying value of those financial instruments that are not measured subsequently at fair value. Directly attributable costs of the transaction – incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. (costs of the transaction include expenditures such as legal fees, reimbursement of the lender’s administrative costs and appraisal costs associated with a loan. costs of the transaction do not include financing fees, debt premiums or discounts.
Directly attributable transaction costs relating to financial instruments acquired and recognised at amortised costs are included in the calculation of amortised cost using the effective interest method and consequently are recognised in profit or loss over the life of the instrument.
Transaction costs expected to be incurred on transfer or disposal of a financial instrument are not included in the initial or subsequent measurement of the financial instruments.
When a financial asset is originated or acquired or a financial liability is issued or assumed in a related party transaction, the transaction should be measured in accordance with IAS 24, Related Party Transactions, i.e. at arm’s length from the point of view of market participants (parties whose sole relationship with the entity is in the capacity of management, are deemed to be unrelated third parties for financial instrument purposes).
costs of the transaction do not include debt premiums or discounts, financing costs or internal administrative costs. If there is a difference between the consideration paid or received and the fair value of the instrument, the difference should be recognized in net income unless it qualifies as some other type of asset or liability.
costs of the transaction related to the acquisition of an equity instrument (neither held for trading nor contingent consideration recorded by an acquirer in a business combination) designated at fair value through other comprehensive income (as per IFRS 9 5.7.5) are added to the carrying value of the equity instrument.
Costs of issuing and reacquiring equity instruments
Costs of issuing or reacquiring equity instruments (other than in a business combination) are accounted for as a deduction from equity, net of any related income tax benefit.
An entity typically incurs various costs in issuing or acquiring its own equity instruments. Those costs might include registration and other regulatory fees, amounts paid to legal, accounting and other professional advisers, printing costs and stamp duties. The transaction costs of an equity transaction are accounted for as a deduction from equity (net of any related income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. The costs of an equity transaction that is abandoned are recognized as an expense.
costs of the transaction that relate to the issue of a compound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. costs of the transaction that relate jointly to more than one transaction (for example, costs of a concurrent offering of some shares and a stock exchange listing of other shares) are allocated to those transactions using a basis of allocation that is rational and consistent with similar transactions.
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:
IFRS 13 25 – The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for costs of the transaction. Transaction costs shall be accounted for in accordance with other IFRSs. Transaction costs are not a characteristic of an asset or a liability; rather, they are specific to a transaction and will differ depending on how an entity enters into a transaction for the asset or liability.
IFRS 13 26 – Transaction costs do not include transport costs. If location is a characteristic of the asset (as might be the case, for example, for a commodity), the price in the principal (or most advantageous) market shall be adjusted for the costs, if any, that would be incurred to transport the asset from its current location to that market.
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.
Transaction costs are different from transport costs, which are the costs that would be incurred to transport the asset from its current location to its principal (or most advantageous) market. Unlike transaction costs, which arise from a transaction and do not change the characteristics of the asset or liability, transport costs arise from an event (transport) that does change a characteristic of an asset (its location).
IFRS 13 states that if location is a characteristic of an asset, the price in the principal (or most advantageous) market should be adjusted for the costs that would be incurred to transport the asset from its current location to that market. That is consistent with the fair value measurement guidance already in IFRSs. For example, IAS 41 required an entity to deduct transport costs when measuring the fair value of a biological asset or agricultural produce.