Effective interest method
The method of calculating and allocating interest on a financial liability using a constant periodic interest rate.
Definition
The effective interest method applies a fixed interest rate to the opening carrying amount of the liability each period to calculate the period's interest charge. This means the interest charge is higher in earlier periods (when the liability is larger) and reduces over time. It is the required method for unwinding the lease liability discount under IFRS 16 and amended FRS 102.
Why it matters
The effective interest method means the total P&L charge (depreciation plus interest) is not constant — interest is front-loaded. This differs from the old straight-line operating lease cost.
In AuditLease
AuditLease uses the effective interest method in all lease liability amortisation calculations.
Related terms
Put this into practice with AuditLease
AuditLease handles IFRS 16 and FRS 102 lease calculations, statutory note generation, journal entries, and audit evidence — so your team spends less time on spreadsheets and more time on judgements.
This definition is for general information only and is not accounting or legal advice. Definitions are based on IFRS 16, FRS 102, and associated guidance published by the IFRS Foundation and the Financial Reporting Council. Users should refer to the applicable accounting standards and their professional advisers for judgement-specific matters.