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Function documentation Fair Value Calculation 

Use

You use this function to calculate the fair value of an asset. A fair value calculation results in a write-up or a write-down.

Integration

The fair value calculation is triggered during a key date valuation or by Structure linkderived business transactions.

Features

A fair value calculation can be part of calculation procedures for key date valuations or for updating secondary business transactions. Fair Value is calculated in the service functions (see Structure linkProvide Fair Value for more information). The Structure linkPrice Calculator can also be used here. In the templates for calculation procedures that are predefined by SAP, the fair value calculation always follows amortization.

As of Release 3.1, you can specify whether the valuation rule in the fair value server is to use or the FI spread (retail spread) in the calculation procedure or not.

Digression to Market Interest Rates/Financial Instrument Rates:

The fair value is usually determined by discounting cash flows at market interest rates. With SAP, the yield curve/instrument market data that is essential to determining the value of book value components in balance position management is determined as follows (only the most important steps are listed):

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  1.  The accounting system is assigned to a global valuation environment.

  2.  The legal entity/accounting system is assigned to a market data area.

  3.  You can define a derivation strategy for the valuation rule and determination of the market data set in Customizing for the fair value server.

Choose the IMG activity Create Global Valuation Environments under Bank Analyzer ® Processes and Methods ® General Calculation and Valuation Methods ® Present Value Calculation ® Fair Value Server ® Configuration.

  4.  A valuation rule is found by means of the characteristics of the financial position and the derivation strategy valuation rule.

In the Implementation Guide (IMG), choose Bank Analyzer ® Processes and Methods ® General Calculation and Valuation Methods ® Cash Flow Refinement ® Derivations ® Determination of the Valuation Rule ® Edit Rule Entries.

You enter the modules required (but not the derivation strategy) on the following selection screen. You can find them in the Create Derivation Strategy IMG activity at the same level.

  5.  Using the valuation rule and existing characteristics (including the market data area), the system finds a market data set in Customizing with the help of the derivation strategy used to determine the market data set:

In the Implementation Guide (IMG), choose Bank Analyzer ® Processes and Methods ® General Calculation and Valuation Methods ® Cash Flow Refinement ® Derivations ® Determination of Market Data Sets and Spread Curve Types ® Edit Rule Entries.

  6.  The assigned rate types for the market data set found are available in:

IMG activity: Financial Services ® Foundation ® Market Data ® Create Market Data Set.

  7.  You can edit the market data by entering the market data area and the rate type. From the SAP Easy Access Menu, choose Financial Services ® Foundation ® Market Data.

Calculating without a financial instrument-dependent spread (FI spread, retail spread)

If you calculate without an FI spread, the cash flows are discounted based on the yield curve interest only. You can decide when you want to determine the fair value.

Fair Value Valuation of OLR Loans for the Notes

IAS32 requires you to calculate a fair value for loans for the notes. IAS39 is based on valuations. Fair value valuations are usually not defined for OLR loans, which means no FI spread is determined within the SAP IAS solution. Therefore, when you determine the fair value of loans for the notes (where required), you can only determine the fair value by discounting the cash flows at market interest rates (that is, without an FI spread). If you want to calculate the loans with an FI spread (for example, an internal bank spread), you could define a yield curve in the SDL that corresponds to the market interest rate curve + x base points. By using valuation rule determination in risk basis, you can find this yield curve, and determine a fair value in accordance with it (that is, instead of basing this calculation purely on the market interest rate curve). The same applies to the designation of OLR loans. The fair value that is calculated as the basis for the HAC and HFV when the designations are made would be based on this yield curve.

Calculating with a financial instrument-dependent spread (FI spread, retail spread)

If you want to calculate the fair value method (instrument valuation) using a Structure linkfinancial instrument spread then you must carry out the instrument valuation calculation step for every position change (including purchase/sale/repayment). If you do not do this, the system does not use the financial instrument spread in the calculation.

Although they are managed in Accounting, there are some products that are valuated using amortized cost, and not the fair value. To nevertheless report a fair value (fair value 32) in the notes of a financial statement, you can determine an FI spread at the start of a product's term. In the case of a security valuation, this is done using a zero posting.

Note

You must use the calculation step type security valuation in the calculation procedure to do this. This calculation step has been assigned with the calculation method 0V22. This calculation method is used to determine an FI spread (for the first time), and makes sure that the security valuation is set to zero in the first calculation. If a subsequent valuation is required, the system does not generate a document for the security valuation for the existing FI spread.

Table 1 shows how similar the FI spread calculation is to the amortization calculation:

Similarities

Amortized cost

Fair Value with FI Spread

Determining the effective interest rate/spreads

The effective interest rate is calculated by discounting all future cash flows to a target value (usually the acquisition value or the old amortized cost).

 

First, an interest rate is calculated by discounting all future cash flows to a target value (valid fair value). (For the initial purchase, this interest rate is equal to the effective interest rate.) The market interest rate is subtracted from this interest rate. The resulting value is the FI spread.

Change in stock

If an additional purchase/sale occurs, the original position is amortized. Then the acquisition value of the business transaction is “added” to this amortized cost value. In the next valuation, these accumulated continued acquisition costs are used to calculate the new effective interest rate or amortized cost.

If an additional purchase/sale occurs, the original position is valuated. Then the acquisition value of the business transaction is “added” to this original position fair value, which results in a new fair value. In the next valuation, the current FI spread or fair value is determined based on this new fair value (target value).

The only difference between AC and FV calculations is the target value achieved by the discount. For an AC calculation, it is the last amortized cost. For the FV calculation, it is the last fair value. Over time, amortized costs diverge as the market interest rates change.

Constancy

If no position change occurs, the effective interest rate remains constant

If no position change occurs, the FI spread remains constant

SDL condition change

The effective interest rate can change based on condition changes to a financial instrument. Until the new version becomes valid, SAP continues to perform calculations with the effective interest rate of the old version. When the new version becomes effective, the amortized cost value determined in the first version is available as a target value. This value is used to determine the new effective interest rate with which all future cash flows need to be discounted.

The FI spread can change based on condition changes to a financial instrument. Until the new version becomes valid, SAP continues to perform calculations with the FI spread of the old version. When the new version becomes effective, the fair value determined in the first version is available as a target value. This value is used to determine the new FI spread with which all future cash flows need to be discounted.

Activities

To define a global valuation environment, choose the IMG activity Create Global Valuation Environments under Bank Analyzer ® Processes and Methods ® General Calculation and Valuation Methods ® Present Value Calculation ® Fair Value Server ® Configuration.

Subledger Scenario

You can assign a global valuation environment to an accounting system in the IMG by choosing Bank Analyzer ® Processes and Methods ® Accounting for Financial Products ® After Generation ® Basic Settings ® Assign Global Valuation Environment to Accounting System.

  In the calculation procedures for key date valuations and updating secondary business transactions, you can define calculation steps that call up the Fair Value calculation method. Calculation steps for the calculating the fair value must be of the Instrument Valuation category and be assigned to the Fair Value calculation method.

In the Implementation Guide (IMG), choose Bank Analyzer ® Processes and Methods ® Accounting for Financial Products ® After Generation ® Financial Position Processes ® Processing of Internal Business Transactions ® Basic Settings ®Calculation Methods ® Edit Calculation Steps.

Merge Scenario (Balance Analyzer)

  You can assign a global valuation environment to an accounting system in the IMG by choosing Bank Analyzer ® Analytics® Accounting: Merge Scenario ® Balance Analyzer ® After Generation ® Basic Settings ® Assign Global Valuation Environment to Accounting System (Merge Scenario).

  In the calculation procedures for key date valuations and updating secondary business transactions, you can define calculation steps that call up the Fair Value calculation method. Calculation steps for the calculating the fair value must be of the Instrument Valuation category and be assigned to the Fair Value calculation method.

  In Customizing, choose Bank Analyzer ® Analytics ®Accounting: Merge Scenario® Balance Analyzer ® After Generation ® Accounting ®Processing for Business Transactions ®Processing of Internal Business Transactions ® Basic Settings ® Calculation Procedure ® Edit Calculation Steps.