Netting Accrued Interest (Reset Procedure)

Use

Instead of posting the accrued interest relating to a bond purchase directly to the profit and loss account, the system initially posts the interest to a compensation account. The balance of this compensation account is then cleared to the profit and loss account when the next interest payment is made or when the bond is sold.

The compensation account balance is taken into account as part of accrual/deferral according to the reset procedure and for transfer postings.

Prerequisites

You need to make the following settings in Customizing to use this function:

  1. You need to have selected Netting Accrued Interest under Derived Business Transactions for Interest in the relevant position management procedure by choosing Start of the navigation path Transaction Manager Next navigation step General Settings Next navigation step Accounting Next navigation step Settings for Position Management Next navigation step Define Position Management Procedure. End of the navigation path

  2. Assign the position management procedure to the positions by choosing Start of the navigation path Transaction Manager Next navigation step General Settings Next navigation step Accounting Next navigation step Settings for Position Management Next navigation step Assign Position Management Procedure. End of the navigation path

  3. Make the following assignments (possibly just for the accounting code or valuation area ) by choosing Start of the navigation path Transaction Manager Next navigation step General Settings Next navigation step Accounting Next navigation step Settings for Position Management Next navigation step Effects of the Update Types on the Position Components: End of the navigation path

    1. Assign the update type for accrued interest received (for example, SE8701) to position change category 1021 Post Accrued Interest Received.

    2. Assign the update type for accrued interest paid (for example, SE8702) to position change category 1022 Post Accrued Interest Paid.

    3. Assign an update type for nominal interest to position change category No Position Change .

  4. Make your settings for the accrual/deferral of positions by choosing Start of the navigation path Transaction Manager Next navigation step General Settings Next navigation step Accounting Next navigation step Accrual/Deferral. End of the navigation path Choose the Reset Procedure for the positions and set the Netting indicator.

  5. You to specify update types to clear the accrued interest. We recommend that you describe the update types as follows:

    • DBT_H001 Clear accrued interest paid

    • DBT_H003 Clear accrued interest received

  6. You need to assign update types to clear the accrued interest paid. You do this on the Interest tab page for the appropriate position management procedure by choosing Start of the navigation path Transaction Manager Next navigation step General Settings Next navigation step Accounting Next navigation step Derived Business Transactions Next navigation step Update Types Next navigation step Assign Update Types for Derived Business Transactions. End of the navigation path

    Since the accrued interest position component can also be affected by a transfer posting, you need to define the required update types and assign them to the tab pages Transfer Postings (fields 65-68) and Position Outflows (fields 49 and 50).

  7. To make the relevant settings for all the update types relevant for posting, choose Start of the navigation path Transaction Manager Next navigation step General Settings Next navigation step Accounting Next navigation step Link to Other Accounting Components Next navigation step Indicate Update Types as Relevant for Posting End of the navigation path and Define Account Determination.

Features

  • Accrued interest is managed in the accrued interest Position Component . This component is not included in the book value.

  • When a bond is purchased, the accrued interest is posted to the debit side of the compensation account. The posting can also be made to the credit side (for example, if interest is paid at the start of the period). It is therefore not necessary to have two different compensation accounts.

  • The component is cleared when the first interest payment is made after the purchase.

  • When the bond is sold, the accrued interest is cleared to the profit and loss account using the "average" method. With this method, the proportion of the nominal amount sold corresponds to the proportion of the balance for the accrued interest component that has to be cleared to the profit and loss account.

  • When the amount of interest accrual is calculated, the system takes into account the amount in the Accrued Interest position component.

  • In the case of transfer postings (such as securities account transfers or account assignment reference transfers), the corresponding portion of the balance in the accrued interest component is transferred.

    Caution Caution

    The functions described in this document are not available for accrued interest from parallel coupons (coupons with overlapping interest periods).

    End of the caution.

Example

You purchase a bond in June. The accrued interest is USD 60. This results in the following postings:

  • Position to bank x USD

  • Compensation to bank 60 USD

The positions are accrued/deferred in July:

Nominal interest of USD 120 is due in December meaning revenue of USD 70 pro rata minus accrued interest of USD 60 USD posts the following amount to profit and loss:

  • Receivables from interest revenues to profit and loss 10 USD