At initial recognition, financial liabilities are measured at fair value.

The subsequent treatment of a financial liability is that they can be measured at

either:

 amortised cost

 fair value through profit or loss.

Under IAS 32, financial liabilities are initially recognized at fair value, which is the amount at which the liability could be exchanged in an arm's length transaction between knowledgeable, willing parties. Any transaction costs directly attributable to the issuance of the financial liability are included in the initial measurement of the liability and are not recognized separately.

After initial recognition, financial liabilities are measured at amortized cost, which is the amount at which the liability was initially recognized, minus any principal repayments, plus or minus any adjustments for amortization of any difference between the initial amount and the maturity amount, and any interest expense or income accrued.

Here's an example of how financial liabilities are recognized initially and subsequently:

Suppose a company issues a bond with a face value of $1,000 and a maturity of 5 years. The bond has an annual interest rate of 6% and pays interest annually. The bond is issued at par, so the initial measurement of the bond liability is also $1,000.

At the end of the first year, the company would recognize interest expense of $60 (6% of $1,000), which is included in the measurement of the bond liability. If the company repays $100 of the principal at the end of the first year, the bond liability would be adjusted to $900 ($1,000 - $100).

At the end of the second year, the company would again recognize interest expense of $60, which is included in the measurement of the bond liability. If the company repays another $100 of the principal at the end of the second year, the bond liability would be adjusted to $800 ($900 - $100).

This process continues until the maturity date of the bond, at which point the bond liability would be reduced to zero.

The recognition and subsequent measurement of financial liabilities is important for accounting purposes, as it affects the presentation and disclosure of the liabilities in the financial statements, as well as the amount of interest expense or income recognized in each reporting period.

The bond liability is initially recognized at fair value, which in this case is $1,000. Subsequently, the bond liability is measured at amortized cost, which is initially $1,000, and is adjusted each year to reflect the interest expense recognized and any principal repayments made. At the end of the fifth year, the bond liability is reduced to zero, which means the liability has been fully discharged.