Amortization According to LAC and SAC (SAP Library

Amortization According to LAC and SAC

Use

The key date value of your bond positions is calculated using amortization.

You can use the following 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.

The positions are amortized:

As part of valuation
When position outflows occur

There are two exceptions to this rule in the operative valuation area:

If the position management procedures LAC valuation (to-the-day) or LAC valuation (to-the-year) have been assigned to the position, then amortization takes place only when the amortization function is performed during valuation.
If the position management procedure SAC net incremental has been assigned to the position, then amortization takes place when the amortization function is performed, when either position inflows or outflows occur, or in the event of other operative business transactions that change the units/nominals, the purchase value, or the capitalized costs of a position.

The amortization 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.

Prerequisites

Linear Amortized Cost (LAC)

In the Customizing area for securities, you must assign a position management procedure to the positions that calls for amortization according to LAC. You do this under Assign Position Management Procedure.

You can use the following LAC position management procedures:

LAC net

LAC gross

LAC valuation (to-the-day) [only when the amortization function is carried out as part of the valuation]

LAC valuation (to-the-year) [only when the amortization function is carried out as part of the valuation]

You can only use LAC amortization methods for securities that meet the following requirements:

The security must be either a bond, a warrant bond or a convertible bond (product categories 040, 060 or 070).
A final repayment is made for the security.

Scientific Amortized Cost (SAC)

In the Customizing area for securities, you must assign a position management procedure to the positions that calls for amortization according to SAC . You do this under Assign Position Management Procedure.

You can use the following SAC position maintenance procedures:

SAC net

SAC gross

SAC valuation (to-the-day)

SAC net incremental

You can only use SAC amortization methods for securities that meet the following requirements:

The security must be either a bond, a warrant bond or a convertible bond (product categories 040, 060 or 070).
A final repayment is made for the security.

Note

Position management procedures for LAC and SAC are both available using gross and net methods. These two methods differ in the way they deal with premiums and discounts. Exception: SAC net incremental - there is no gross procedure for this

The net position management procedures do not manage premiums or discounts.

The gross position management procedures do manage premiums and discounts. Among other things, they can be used to depict borrower's note loans in the securities module.

See also:

The documentation on position management procedures in the Implementation Guide under Assign Position Management Procedure.

To execute the Amortization function, you first have to perform Period-end Closing for all relevant classes.

Features

Linear Amortized Cost (LAC)

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

Calculation to the day according to LAC (LAC net/LAC gross)

(applies to position management procedures LAC net, LAC gross, LAC valuation (to the day))

This graphic is explained in the accompanying text

whereby:

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

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

Calculation to the day according to LAC (LAC valuation (to-the-day))

(applies to position management procedures LAC net, LAC gross, LAC valuation (to the day))

This graphic is explained in the accompanying text

whereby:

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

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

Calculation to the year according to LAC (LAC valuation (to-the-year))

(applies to position management procedure LAC valuation (to the year))

This graphic is explained in the accompanying text

whereby:

Remaining term

= the amount of time (in years) between the valuation key date and the final due date.

Note You cannot write-down an item more than once in one year when you use the LAC method. If you have performed a LAC valuation for an item more than once in one year, you must reverse the write-up and write-down amounts.

Note If the old book price is over 100%, the system checks to see if there is a drawing date or a notice date. If such a date exists, it is chosen as the final due date.

Scientific Amortized Cost (SAC)

The calculation is based on the cash flow for the position to be valued. The system extracts the flows that are relevant for the calculation from this cash flow. To do this, it eliminates all flows whose position value date is after the valuation key date. (This prevents transaction activities that take place after the key date from changing the SAC value on the key date).

The cash flow is generated again on the basis of the flows calculated.

By making the relevant effective interest rate settings for the flow type when you choose Define Flow Types in Customizing for Securities, the system only extracts the relevant flows.

The system now calculates the effective interest rate for this cash flow according to the AIBD/ISMA effective interest method using the interest calculation method 360E/360.

It then determines the net present value on the key date for all flows with value dates after the key date. It uses the effective interest rate calculated above and the interest calculation method 360E/360 to do this.

This graphic is explained in the accompanying text

whereby:

a	= flows relevant for effective interest rate from time t1
e	= Effective interest rate calculated

The system now calculates the interest earned for the period between the key date and the end of the interest period (accrued interest amount).

This graphic is explained in the accompanying text

The SAC value is the difference between the net present value and the accrued interest amount. The SAC rate is the ratio of the SAC value and the nominal value of the position.

This graphic is explained in the accompanying text

For interest paid in advance: This graphic is explained in the accompanying text

Scientific Amortized Cost (SAC) [SAC net incremental]

If the position management procedure SAC net incremental has been assigned to a position, then amortization takes place according to SAC as follows:

The interest calculation method for the SAC calculation is taken from the master data for the class.
The effective interest method used is that defined in the master data of the class.
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 units/nominals, the purchase value, or the capitalized costs of a position. 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.
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 and a series of repayments.

The system now calculates the effective interest rate for this cash flow according to the effective interest method from the class master data 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. It uses the effective interest rate calculated above and the appropriate 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.

See also:

Amortization

Activities

To carry out amortization according to LAC and SAC, choose Securities ® Accounting ® Operative Valuation Area ® Key Date Valuation® Execute Amortization.