Amortization According to LAC and SAC

During amortization, the system determines the new amortized acquisition value of a position. If you have determined amortization for a position management procedure, the system executes amortization in the following cases:

When valuating the position
Derived business transactions:
- For position inflows and outflows
- For all other business transactions that change the amortized acquisition value (purchase value + capitalized costs + amortizations) or the nominal value.

On each amortization date, the system always executes amortization for the total position.

Note:

For a partial outflow, the system first takes into account the total position for amortization, in other words, the position before the partial outflow occurred. The proportional book value of the partial position is then cleared.

You can calculate the amortized acquisition value according to the Linear Amortized Cost (LAC) procedure or the Scientific Amortized Cost (SAC) procedure.

Features

LAC Procedure

This procedure uses a linear amortization process. Planned profit is distributed equally over the term. This calculation method assumes that the value of the positions is based on a constant annual amortization rate.

This graphic is explained in the accompanying text.

BP_new = new book rate

BP_old = old book rate

D_a = Duration in days between the last and the current amortization

D_a = Duration in days between the last amortization and the final maturity date

SAC Procedure

This calculation procedure is based on an exponential amortization rate. The system first calculates an effective interest rate and then uses this to discount future flows up to the amortization key date.

To calculate the effective interest rate and amortization, the system does not consider the entire cash flow of the position but instead uses the amortized acquisition value on the last amortization date to generate a new cash flow internally. This new cash flow is then used to calculate amortization. Besides an inflow at the last time of amortization, the internal cash flow only covers condition-based planned flows (therefore no sales, unscheduled repayments or changes in capital).

The system determines the difference from the newly calculated and previous amortized acquisition values and uses this amount to generate a write-up or write-down. The system uses the position currency to determine the values mentioned above. The write-up or write-down amount is then translated at the book exchange rate into the valuation currency.

The following setting options are available for the SAC procedure:

Do not include interest
See also: SAC Procedure Without Interest
Include interest, with accrued interest adjustment (securities)
See also: SAC Including Interest and Accrued Interest Adjustment
Cash flow method in accordance with IAS39 (Include interest, without accrued interest adjustment)
See also: SAC Procedure Including Interest (Cash flow method in accordance with IAS39)

For more information, see Customizing for the Transaction Manager under Start of the navigation path General Settings Next navigation step Accounting Settings for Position Management Key Date Valuation Define Amortization Procedure End of the navigation path .

See also: