I am working on the implementation of IFRS-9, which requires calculating Effective Interest Rate (EIR) for revenue recognition and discounting purposes. There is a debate if the EIR (mainly for loan portfolio) should be calculated based on simple method or compounding. For example, it would be (1+t/365*EIR) for simple, and (1+EIR)^t/365 with compounding.
Please advice which should be the approach and the logic behind it. If there is any specific material to read, please refer.
Thanks,
Serving the Quantitative Finance Community
Re: EIR calculation - simple or compound
I don't think it matters as long as you subsequently apply the EIR correctly in future periods to determine your revenue recognition. I suspect that accountants will understand better simple interest so would adopt that.