The effective interest rate plays a significant role in the measurement of financial assets and financial liabilities under IAS 32, as it represents the time value of money and the credit risk inherent in the instrument. The effective interest rate is used to determine the carrying amount of the instrument and the interest income or expense recognized in each reporting period.

The effective interest rate is the rate that exactly discounts the expected future cash flows of the instrument over its expected life, taking into account any fees, transaction costs, and other premiums or discounts. The expected cash flows of the instrument include all contractual cash flows, such as interest payments, principal repayments, and any other fees or penalties, as well as any expected credit losses.

Using the effective interest rate, financial assets and financial liabilities are initially recognized at fair value, which may include any premiums or discounts. Subsequently, the carrying amount of the instrument is adjusted to reflect the interest income or expense recognized in each reporting period. Any transaction costs directly attributable to the acquisition or issue of the instrument are also included in the initial measurement of the carrying amount.

Here's an example to illustrate the significance of the effective interest rate in the measurement of financial assets and financial liabilities:

Suppose a company acquires 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 company acquires the bond for $950, which includes $50 of transaction costs.