Amortization Using the Deferral Item for the Purchase Value (Discounts/Premiums)

Use

Based on the issue value of a security, a yield curve can be determined from the time of issue to the time of repayment.If a security is purchased during the term, its price is usually above or below this theoretical yield curve.

If you use the Position Component Deferral Item for the Purchase Value, it displays the difference between the actual security purchase value and the value of the security according to the theoretical yield curve. During amortization, the deferral item for the purchase value is deducted pro rata over the remaining term using the straight line method .

The deferral item is not included in the book value nor taken into account when price/rate gains are calculated.

The deferral item for the purchase value is included in the purchase value, which means that standard amortization is based on the modified acquisition value. The deferral item for the purchase value is also deferred on a linear basis for amortization purposes.

Deferral Item, Purchase Value

This position component may be positive (deferred income) or negative (deferred expenses).

For the derived business transactions for the position inflows and outflows, and the key date valuation, the system generates corresponding flows.

Note Note

The deferral item for the purchase value is deferred with the key date valuation function and not with the accrual/deferral function.

End of the note.

The function can be used in both the gross and net procedures.

Prerequisites

  • The Deferral Item for the Purchase Value function is used for the position management categories Securities/Loans/Money Market Without Index-Linked Bonds (BFT1) and Index-Linked Bonds (BFT2) .

  • Under Other Components, in the amortization procedure you need to select Deferral Item for the Purchase Value .

    You make these settings in Customizing for Treasury and Risk Management by choosing Start of the navigation path Transaction Manager Next navigation step Accounting Next navigation step Settings for Position Management Next navigation step Key Date Valuation Next navigation step Define Amortization Procedure End of the navigation path .

  • You need to define, assign, and set up the required update types in the following IMG activities: Define Update Types and Assign Usages, Assign Update Types for Derived Business Transactions, and Assign Update Types for Valuation.

Examples

For zero bonds, it is required by law that the purchase value in the financial statement for tax purposes corresponds to the value of the issue yield curve as opposed to the purchase price paid. Zero bonds must therefore be amortized in accordance with the issue yield curve.

The difference in purchase price is managed as an accrued/deferred item and cleared equally over the term to the profit and loss account. The deferrals are cleared on an incremental basis for each position change and key date valuation.

The deferral item is not included in the book value nor taken into account when calculating price/rate gains.

Example 1

  • The purchase price of a zero bond amounting to 100,000 UNI (nominal amount) at a rate of 60% is 60,000. The current market value on the issue yield curve according to SAC amortization is 70,000.

  • The book value is 60,000.

  • The deferral item for the purchase value (deferred income) is displayed for the difference in amount of 10,000 on the issue yield curve. This amount is then cleared over the term on a linear basis.

  • If the security is sold at a price of 60,000 directly after it has been purchased, there is a price loss of 10,000. The posting-relevant translation of the deferral item and the offsetting posting ( deferred income ) clear the balance on the profit and loss account.

Example 2