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Definition
The effective interest rate (EIR) is the internal rate that discounts a loan’s expected cash flows to its initial carrying value. It is used under FRS 102 and IFRS to recognise interest and arrangement fees smoothly over the life of the debt.
In plain terms
Rather than expensing a big upfront fee in month one, EIR accounting drips it across the term, giving a truer cost per period.
Why it matters for your company
It changes how debt cost hits your profit and loss. Your accountant applies it, but knowing it exists explains why the interest charge in your accounts differs from cash interest paid.
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