Background documentationHA Rule 300: Amortization / Hedge Adjustment P&L

 

The HA rule 300 Amortization / Hedge Adjustment P&L is used in the hedging scenario 160 FVH: Bond (Liability) Hedged with Interest Rate Swap - Final Maturities Similar.

Prerequisites

In Customizing for the Transaction Manager under Start of the navigation path General Settings Next navigation step Accounting End of the navigation path, you need to make the required settings for the valuation in the following Customizing activities:

  • In the Customizing activity Define Position Management Procedure, you need to include the following valuation steps in the position management procedure for these positions:

    1. Amortization

    2. One-step valuation or security valuation

  • In the Customizing activities Define One-Step Price Valuation Procedure and Define Security Valuation Procedure, set the Execute Solely in the Case of Hedge Accounting checkbox.

  • In the Customizing activity Assign Update Types for Valuation, assign the update types to be used for the flows of the valuation (such as for the write-ups and write-downs).

  • In Customizing activity Assign Alternative Update Types for Position Outflows, enter the alternative update types for posting the hedge adjustment (condition: P-HA: Hedge Adjustment). In this way, the hedge adjustment is posted to a separate (P&L) account.

Features

Valuation Before the Start of a Hedging Relationship

  • Hedged item:

    Amortizations are assigned to the position component 1007 (= Amortization). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation". Before the start and after the end of the hedging relationship, no security valuation occurs for the hedged item.

  • Hedging Instrument:

    Write-ups and write-downs in the security are written to the position component 1002 (= Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

Valuation at the Start of the Hedging Relationship (Designation)

With a designation, the system transfers the hedged subpositions or the subpositions to be hedged from the free-standing subpositions. Before these transfer postings are made, the free-standing subpositions are valuated as part of a derived business transaction: Hedged item: Amortizations are assigned to the position component 1007 (= Amortization). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation". No security valuation is performed for the hedged item. Hedging Instrument: Write-ups and write-downs in the security are written to the position component 1002 (= Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

Valuations During the Hedging Relationship

Valuations during hedging relationships are performed as key date valuations (transaction TPM1) or as part of derived business transactions. With a key date valuation, a check is run as to whether the hedging relationship is effective both retrospectively and prospectively. The result of the valuation can only be posted if effectiveness is given. In the case of ineffectiveness, the hedging relationship has to be dedesignated manually. Valuations as part of derived business transactions also affect business transactions in the future (for example, with a designation, valuation is performed at the time of the dedesignation). For this reason, the existence of a valid effectiveness test is not a prerequisite for creating the derived business transaction. Consequently, valuation as part of a derived business transaction can also be performed for an ineffective hedging relationship. However, at the time when you fix the derived business transaction, the hedging relationship must be effective. In the case of ineffectiveness, the hedging relationship has to be dedesignated manually (see Dedesignation of an Ineffective Hedging Relationship).

  • Hedged Item Valuation

    • In the case of effectiveness

      Amortizations are assigned to the position component 1007 (= Amortization). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation". The write-ups and write-downs in the security result from the difference between the fair value at the time of the designation (this value has to be entered manually during designation) and the market value on the valuation key date. A detailed log for the valuation log shows how the write-up/write-down is calculated.

      Write-ups and write-downs in the security are written to position component 1301 (= Hedge Adjustment) as well as to position component 1300 (For internal calculation: To be classified). The update type is determined using the settings made in the Customizing activity "Assign Update Types for Valuation" and can be overwritten with a different update type using the Customizing activity "Alternative Update Types for Position Outflows" (condition: P-Hedge Accounting: Hedge Adjustment). In this way, the hedge adjustment can be posted in a separate account.

    • In the case of ineffectiveness

      Amortizations are assigned to the position component 1007 (= Amortization). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation". The write-ups and write-downs in the security result from the difference between the fair value at the time of the designation (this value has to be entered in the market data container during designation) and the market value on the valuation key date. A detailed log for the valuation log shows how the write-up/write-down is calculated. Write-ups and write-downs are written to the position component 1002 (= Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

  • Hedging Instrument Valuation

    • In the case of effectiveness

      Write-ups and write-downs in the security are written to position component 1002 (= Security Valuation) as well as to position component 1300 (For internal calculation: To be classified). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

    • In the case of ineffectiveness

      Write-ups and write-downs in the security are written to the position component 1002 (= Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

    A classification (transaction TPM101) can be used to split the valuation results determined into effective and ineffective portions. For this, the position component 1300 (= For internal calculation: To be classified) of the hedged item and of the hedging instrument is transferred to the position components 1302 (Effective) and 1303 (Ineffective). Once the classification has been performed, the position component 1300 (For internal calculation: To be classified) acquires the value zero.

Valuation at the End of the Hedging Relationship

During a dedesignation, transfer postings are made from the hedged subpositions or to the subpositions to be hedged to the free-standing subpositions. Before these transfer postings are made, the hedged subpositions or the subpositions to be hedged are valuated as part of derived business transactions. Valuation at the end of the hedging relationship uses the same procedure as valuation during the hedging relationship. A classification is also performed as part of a derived business transaction.

Manual Dedesignation of an Ineffective Hedging Relationship

With a manual dedesignation, an additional retrospective effectiveness test is included in the test plan. This test needs to be executed manually. If the test is effective, the valuation performed as part of the dedesignation is performed in the "Effective" mode. If the test is ineffective, the valuation performed as part of the dedesignation is performed in the "Ineffective" mode.

Graphical Display