In view of the fact that entities became accustomed to posting interest on the basis of the nominal interest rate, the EIR contains more components that can be treated differently in traditional accounting practice:
...
- For a financial instrument with premiums/discounts/charges/transaction costs, the sum of the three components “nominal interest income”, “smoothing effect” and "amortisation" represents the theoretical effective interest as defined in IFRS 9.
- Considering the same sample deal of the regular EIR the smoothing EIR is calculated in addition to the regular EIR. Ignoring the initial discount with a value of 3000, the following equation needs to be considered in order to derive the smoothing EIR:
- The solution to the equation results in an approximated value for EIR = 6.137883%.
...