Amortized Cost

Amortized Cost

Use

This function determines the new book value for a securities position by calculating the net present value on the key date. It compares the net present value calculated with the current book value in the system and generates the corresponding interest capitalization flow for the difference. You can use this function for securities positions that are managed according to the SAC method and for discounted bonds.

Prerequisites
Customizing

Settings for using the amortized cost function for securities positions which are managed according to the SAC method:

· In Customizing for Basic Functions, choose Define Valuation Classes and assign to the positions a valuation class for which you entered 02 (Position management according to scientific amortized cost) in the PosM.AC field. Since you cannot use the amortized cost method for all securities accounts, you have to choose valuation category 21 in the valuation class.

· In Customizing for Securities, choose Assign Flow Types to Flow Category to assign two flow types for the interest capitalization (debit and credit) to the flow category EAZB. The flow types 8995 and 8998 are delivered for this purpose with the standard Customizing.

Settings for using the amortized cost function for discounted bonds:

In the class data for bonds, enter 01 in the Discounted field (discounted on exponential basis) in the condition header.

In Customizing for Securities, choose Define Accrual/Deferral to define the flow types for generating interest capitalization flows for the flow types that are position inflows. The system generates these interest capitalization flows when you execute the Amortized cost function for discounted bonds and when you sell them.

Other

To execute the Amortized cost function, you first have to perform Period-end closing for all the relevant classes.

Features
The amortized cost function for positions managed according to the SAC method:

When you perform accruals/deferrals according to the amortized cost method, the system calculates the net present value of the securities position on the key date. If the acquisition or book value is under par, the system creates an interest capitalization record, which results in a write-up to the calculated net present value. If the acquisition or book value is above par, there is a corresponding write-down.

The net present value is calculated by discounting the cash flow with a constant internal interest rate ("effective interest rate"). The internal interest rate is calculated according to the AIBD using a Newton iteration and is based on the cash flow of the securities account position. The system reads the interest calculation method from the class data of the bond.

Amortized Cost for Disounted Bonds

The function calculates the net present value of the bond on the key date and generates the corresponding interest capitalization flows, which increase the book value of the position.

The system uses the acquisition value as the basis for calculating the interest capitalization. It also assumes a repayment price of 100%.

The interest capitalization amount is calculated as follows:

Whereby:

Nominal amount	= repayment amount
Interest rate	= effective interest rate p.a.
Remaining term	= remaining term in years =
Book value	= old book value before amortized cost function is executed

The system calculates all the position value dates ‘inclusively’.

Example: When you purchase a bond on 01/08 and sell it on 01/12, the interest capitalization amount is calculated for 5 days.

Selection Criteria

1. You can use the following criteria to restrict the evaluation area to be included in the accrual/deferral run:

a. Company code

b. Product type

c. Security number

d. Securities account

e. Account assignment reference

f. Position currency

2. The Accruals/deferrals key date determines when the amounts are posted per value date. The system defaults to the current date (today’s date), but you can overwrite it.

3. The Posting date can vary from the key date of the accrual/deferral.

4. The Posting period is an optional entry.

5. In the Forex rate calc. type field, you choose the rate types you want to use for exchange rate translation. You create the rate calculation indicator in Customizing for Basic Functions by choosing Define Calculation Indicator.

6. If you set the Simulation indicator, the accrual/deferral run is first performed as a simulation.

Output

Posting log

The posting log is displayed if you have executed the accrual/deferral run as an ‘update run’, in other words, you not have set the Simulation indicator.

The posting log tells you which postings have been performed. You can see the document number, the security ID numbers involved, the G/L accounts and the amounts posted for each posting activity.

Amortized cost list

The list contains the following columns:

Security number
Securities account
Net present value (NPV)
Percent
Amount
Debit/credit indicator (D/C)

You can use the flow type, the account assignment reference, currencies and the company code in local currency to display subtotals.

See also:

Zero bonds

Define Valuation Classes in Customizing for Basic Functions.