Amortization According to LAC and SAC (SAP Library - Functions in the Parallel Valuation Areas)

Amortization According to LAC and SAC

Use

The amortization function determines the new book value for a position by calculating the net present value on the key date. You can calculate the net present value for the key date according to the Linear Amortized Costs (LAC) method or the Scientific Amortized Costs (SAC) method. The system compares the calculated net present value with the current amortized acquisition value and generates the corresponding interest capitalization flow for the difference. The LAC and SAC values are determined and compared in position currency. The difference to the amortized acquisition value is the write-up or write-down amount in position currency. This is then translated to the valuation currency using the book exchange rate.

The net present value can be calculated using two methods:

Linear Amortized Cost (LAC)

The LAC calculation assumes that the positions have a constant annual amortization rate.

Scientific Amortized Cost (SAC)

The SAC method assumes an exponential amortization rate for the change in value of the positions. It calculates the net present value of the position for the key date by discounting the flows that arise from this position after the key date.

If amortization has been defined for the position management procedure for a position, the positions are amortized in the following cases:

When you value the position

When there are position inflows ( derived business transactions)

When there are position outflows ( derived business transactions)

Whenever there is any other type of operative business transaction that changes the amortized acquisition value (= purchase value + capitalized costs + amortizations).( derived business transactions)

Prerequisites

See also:

Valuation

Features

Linear Amortized Cost (LAC)

The LAC amortization method values an item at 100% assuming a constant annual amortization of the book price.

This graphic is explained in the accompanying text

whereby:

Da = Duration in days between the last amortization and the current one

Db = Duration in days between the last amortization and final repayment

Scientific Amortized Cost (SAC)

The SAC calculations are performed in the position currency. The results of the calculations (that is, the individual amortizations) are translated into the local currency or valuation currency using the acquisition exchange rate.

The interest calculation method for the SAC calculation is taken from the master data for the class or for the loan.

The AIBD/ISMA method is used as the effective interest method.

The SAC value is calculated on the basis of the previous SAC calculation.

The amortization calculation is always performed for the total position.

Key date amortization: The position calculation includes all the business transactions on this date. After key date amortization, you cannot make any changes to the position for this key date.

You can only perform the amortization once for each key date using the valuation function.

You perform the amortization for each operative business transaction that changes the amortized acquisition value (= purchase value + capitalized costs + amortizations). In other words, each time there is a quantity change (position inflow or position outflow), the amortization is carried out for the total position. This also applies for inflows relating to existing positions, partial outflows, or capitalized costs entered retrospectively.

Calculation

The calculation is based on the cash flow for the position to be valued. The relevant cash flow is determined as follows:

The system determines the key date of the last amortization or the key date of the last quantity change (the latter case only applies if the position was zero before the inflow, otherwise an amortization would already exist). => T*
The amortized acquisition value A* and the nominal value N* are calculated for the date T*. These values are used to generate a hypothetical purchase or disbursement.
Based on the hypothetical purchase, the system determines the future repayments according to the conditions. Interest is not included in the cash flow. Non-condition-based flows, such as charges or revenues entered manually, are not included in the cash flow and are not considered in the effective interest calculation. The relevant cash flow therefore only contains the initial purchase/disbursement and a series of repayments.

The system now calculates the effective interest rate for this cash flow according to the AIBD/ISMA effective interest method using the relevant interest calculation method.

It then determines the net present value on the key date for all flows with value dates after the key date, using the effective interest rate calculated and the relevant interest calculation method.

This graphic is explained in the accompanying text

whereby:

a	= Repayment flows as from date T*
e	= Effective interest rate calculated

It is not necessary to adjust the accrued interest, since the interest is not included in the SAC calculation.