Valuation
Use
You use the valuation function to value the positions in the parallel valuation areas for a given key date.
The following products are valued:
Prerequisites
Before you can use the valuation function, you must make the necessary settings in Customizing. In Customizing you define the principles and rules for valuing the individual positions.
IMG activity |
Settings |
You first define the various valuation procedures. In the IMG, choose Transaction Manager ® General Settings ® Settings for Position Management ® Key Date Valuation. | |
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See also: Valuation of Capitalized Costs |
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See also: Valuation of Capitalized Costs
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The different procedures are then grouped in position management procedures in the IMG activity Transaction Manager ® General Settings ® Accounting ® Parallel Valuation Areas ® Settings for Position Management ® Define Position Management Procedure. | |
Next, you define the rules according to which a position management procedure is assigned to a position. This is defined under Transaction Manager ® General Settings ® Accounting ® Parallel Valuation Areas ® Settings for Position Management ® Assign Position Management Procedure. | |
You define and assign the update types needed for key date valuation in the IMG activities under Transaction Manager ® General Settings ® Accounting ® Parallel Valuation Areas ® Key Date Valuation. | |
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In this activity you define all the update types you require for valuation. |
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You assign all the update types required for valuation to the usage 9002 Key Date Valuation. This assignment is necessary in order to ensure that the update types are available as possible entries in the following IMG activity Assign Update Types for Valuation. |
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For each position management procedure, you define the update types to be generated when you perform a key date valuation.
Depending on the steps you have defined for the position management procedure, you may not need to fill out all of the tabs. Example: If amortization has not been defined for the position management procedure, you do not need to assign update types on the Amortization tab. |
You make the account determination settings for the update types used for valuation by choosing Transaction Manager ® General Settings ® Accounting ® Parallel Valuation Areas ® Link to Other Accounting Components ® Define Account Determination. | |
Before you can actually perform the key date valuation, you also need to fulfill other prerequisites, such as updating the price and NPV tables, and so on. See also: Execute Key Date Valuation
Features
You can perform a valuation at the end of the year or during the course of the year. If you run the valuation during the year, you can opt to have it reset afterwards.
If you perform a valuation and then have it reset, the system automatically resets the postings in the same run as the valuation itself. The key date for the reset postings is one day after the valuation key date.
When it values a position, the system follows the steps defined in the position management procedure for that position.
The following valuation steps are available:
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.
Flows are generated for the write-up or write-down amount. The system selects an update type based on the gross/net indicator. If the +/- sign differs from the sign for the total of all the earlier flows, and you have opted to clear gains and losses in Customizing, the system generates a clearing flow. If the result of the valuation is that the position has to be written down, for example, and write-up flows already exist, the system would generate one flow to clear the write-ups, and one flow for the remaining write-down amount. The same applies if a write-up offsets former write-downs.
This valuation step can generate reset flows.
Amortization is supported for the following product categories:
The amortization function according to LAC and SAC is not released for loans with annuity or instalment repayments, or for securities with annuity or instalment repayments.
See also:
The one-step valuation procedure uses the total amount in local currency as the basis for generating write-ups and write-downs, creating and reversing provisions, and disclosing unrealized gains/losses. The system compares the book value of the position in valuation currency with the market value or NPV and then calculates the new book value according to the rules defined for the position management procedure. The book value in position currency is determined at the same time. The gain or loss for the paper is determined by first calculating the write-up or write-down amount in position currency and then translating it into the valuation currency using the book exchange rate. The write-up or write-down amount for the foreign exchange component is the difference between this value and the new book value in valuation currency. See also: One-Step Valuation Sequence
For more information on valuing capitalized costs, see
Valuation of Capitalized Costs.One-step valuation is supported for the following product categories:
Flows are generated for the write-up or write-down amounts. One flow is generated for the gain or loss relating to the paper, and one for the foreign exchange gain or loss. The update type depends on the +/- sign of the individual amounts and on the +/- sign of the sum of both write-up or write-down amounts in valuation currency. This valuation step can generate reset flows.
This step determines the gains and losses resulting from changes in the price of the paper. The book value of the position (without costs) is compared to the market value or NPV in position currency. The write-up or write-down amount is first calculated in position currency and then translated into the valuation currency using the book exchange rate.
Market values and NPVs
For securities, the system reads the prices from the security price table and determines the market values on the basis of the nominal amounts and security units.
For loans, money market transactions, forex transactions and derivatives (except for forward bonds) the fair value is a present value that has either been calculated in market risk management or entered manually in the NPV table. If the prices or present values are not available in the required currency, they are translated using the most recent market exchange rates available in the system.
In the case of forward bonds, the market value for a bond purchase is set to "bond market value – spot open + margin accruals", while the market value for a bond sale is "spot open – bond market value + margin accruals".
Book exchange rate
If one of the two book values is 0, or the book values have opposing +/- signs, the book exchange rate is set to 1. For forward bonds, the book exchange rate is set to the opening bond spot price for the contract.
For more information on valuing capitalized costs, see Valuation of Capitalized Costs.
Flows are generated for the write-up or write-down amounts. If the +/- sign differs from the sign for the total of all the earlier flows, and you have opted to clear gains and losses in Customizing, the system generates a clearing flow. If the result of the valuation is that the position has to be written down, for example, and write-up flows already exist, the system would generate one flow to clear the write-ups, and one flow for the remaining write-down amount. The same applies if a write-up offsets former write-downs. This valuation step can generate reset flows.
Valuation of the paper is supported for the following product categories:
This step determines the gains and losses resulting from changes to the exchange rate. The system compares the book exchange rate of the position with the market exchange rate and calculates the new book exchange rate according to the rules defined for the position management procedure.
This new book exchange rate is then used to translate the position book value (into position currency). The difference to the book value in valuation currency is the write-up or write-down amount. This valuation step can only supply a write-up or write-down amount in valuation currency.
Acquisition exchange rate
If one of the two acquisition values is 0, the acquisition exchange rate is set to 1. For forward bonds, the acquisition exchange rate is set to the opening bond spot price for the contract.
Book exchange rate
If one of the two book values is 0, or the book values have opposing +/- signs, the book exchange rate is set to 1. For forward bonds, the book exchange rate is set to the opening bond spot price for the contract.
Costs
The costs are dealt with proportionately. The new book exchange rate is used to translate the book value of the costs in position currency to the new book value in valuation currency. The difference between the new and old book values for the costs is the write-up/write-down amount in valuation currency.
Flows are generated for the write-up or write-down amounts. If the +/- sign differs from the sign for the total of all the earlier flows, and you have opted to clear gains and losses in Customizing, the system generates a clearing flow. If the result of the valuation is that the position has to be written down, for example, and write-up flows already exist, the system would generate one flow to clear the write-ups, and one flow for the remaining write-down amount. The same applies if a write-up offsets former write-downs. The amount in position currency for these flows is always 0. This valuation step can generate reset flows.
You define the order in which these two steps are processed in the position management procedure.
Index valuation is only available for index-linked bonds.
The procedure for index valuation is predefined in the system. You cannot define specific procedures in Customizing.
The system compares the book index value for the position with the market index value. It does this by multiplying the "clean" book value for the position in position currency with the market index. The "clean" position has been adjusted to remove the effects of index-linked price components. The difference between this value and the book value of the position in position currency is the write-up or write-down amount. This is then translated to the valuation currency using the book exchange rate. You cannot vary the procedure for this step by applying different rules.
Flows are generated for the write-up or write-down amounts. This valuation step can generate reset flows. Clearing flows, on the other, cannot be generated. The system assumes that there are no offsetting effects for an index.
Exchange rates
When you conclude a forward exchange transaction, you enter the transaction spot rate for the purchase currency/sale currency and the transaction swap for the purchase currency/sale currency. In addition, the system determines the market spot rate for the purchase currency/local currency and the market swap rate for the purchase currency/local currency on the contract date. The transaction spot rate in sale currency/local currency and the transaction swap for the sale currency/local currency are calculated on the basis of the exchange rates for the purchase currency/local currency and the sale currency/purchase currency.
Amounts
As a result of the transaction amounts you enter (in purchase and sale currency) and the rates calculated by the system, there are three amounts (in purchase currency, sale currency and local currency), which represent the forward rates for the transaction. Likewise, there are three amounts for the transaction spot rates. The system adjusts the transaction amount that is the following currency in the currency pair "purchase currency/sale currency".
Example
Transaction data |
Purchase 100 USD ~ Sale 12,000 JPY ~ Spot USD/JPY = 110 | ||||||
Read by the system |
Local currency EUR ~ Forward rate USD/EUR 1.00 ~ Spot rate USD/EUR = 1,1 ~ Following currency for pair USD / JPY is JPY | ||||||
Forward rates, amounts | |||||||
1 USD = 1 EUR |
120 USD = 1 EUR |
=> 1 EUR = 120 JPY |
100 USD |
12,000 JPY |
100 EUR | ||
Spot rates, amounts | |||||||
1.1 USD = 1 EUR |
110 USD = 1 EUR |
=> 1 EUR = 100 JPY |
100 USD |
11,000 JPY |
110 EUR | ||
Valuation currency
If the valuation currency is the purchase currency, sale currency or local currency, the rates for forward exchange transactions are valued using the above rates and amounts. If this is not the case, the system determines the transaction spot rate and transaction swap for the purchase currency/valuation currency for each valuation key date and calculates the amounts according to the above rules.
Rate valuation for forward exchange transactions considers the change in the spot or forward exchange rate on the key date when compared with the spot or forward exchange rate for the transaction. There are three valuation types:
The system uses the spot and forward rates on the forex market to calculate the cross-rate between the purchase currency/valuation currency and the sale currency/valuation currency on the valuation key date. These rates are determined on the basis of spot and swap exchange rate types for purchase currency/valuation currency and sale currency/valuation currency respectively. In each of the three cases the rates can be determined in the usual way ("normal") or using cross-rates ("cross"). If you use cross-rates, the gain or loss associated with the purchase currency and the gain or loss associated with the sale currency are disclosed separately. If you choose "normal", the gains and losses are not split in this way.
Normal
The forward rate for the transaction is compared to the result of the following calculation:
Transaction amount in purchase currency * Market rate on the valuation key date for purchase currency/valuation currency – Transaction amount in sale currency * Market rate on the valuation key date for sale currency/valuation currency.
Both transaction amounts (in purchase and sale currency) are translated using with the market spot or forward rates for purchase currency/valuation currency and sale currency/valuation currency in order to determine the difference.
If you use the transaction spot rate as a basis for the comparison, the system adjusts the amount in the following currency from the transaction to account for the transaction swap "purchase currency/sale currency" and then translates the adjusted amount.
Cross
The transaction is treated as if there were two transactions: "purchase currency – valuation currency" and "valuation currency – sale currency". The calculation for the purchase currency is described below. The same algorithm is used in the calculation for the sale currency.
If the comparison is based on the transaction forward rate, the transaction amount in purchase currency is calculated using the market spot or forward rate and compared with the amount in valuation currency. This is calculated by translating the transaction amount in purchase currency using the transaction forward rate "purchase currency/valuation currency".
If the comparison is based on the transaction spot rate, and the purchase currency is the following currency in the currency pair "purchase currency/sale currency", the system adjusts the transaction amount in purchase currency to account for the transaction spot rate "purchase currency/sale currency" and then translates the adjusted amount. The amount in valuation currency is calculated by translating the adjusted transaction amount in purchase currency using the transaction spot rate "purchase currency/valuation currency".
The difference, which is calculated in valuation currency, is translated into the position currency using the market exchange rate. [For forward exchange transactions, the system always assumes that the position currency is the same as the valuation currency. The only exception is when the valuation currency is changed during the transaction term, which is a special case.]
You apply rules to these amounts in order to calculate the write-up and write-down amounts. The following rules are defined:
Flows are generated for the write-up or write-down amounts. If the +/- sign differs from earlier valuations, the system generates clearing flows. If the result of the valuation is that the position has to be written down, for example, and write-up flows already exist, the system would generate one flow to clear the write-ups, and one flow for the remaining write-down amount. The same applies if a write-up offsets former write-downs. The write-up and write-down amounts are only disclosed in valuation currency.
The swap/margin accrual function divides the swap amount or margin pro rata temporis over the term of the forward (forward exchange transaction or forward bond) using the following principle:
Result of swap/margin accrual/deferral = Swap amount/margin
Key date of current valuation – date of last valuation / payment date – contract date + 2 days
You cannot vary the procedure for this step by applying different rules. In the case of forward exchange transactions, the system first calculates the accrual/deferral amount in valuation currency and then converts it to position currency using the current market exchange rate. For forward exchange transactions, the system always assumes that the position currency is the same as the valuation currency. The only exception is when the valuation currency is changed during the transaction term, which is a special case. In the case of forward bonds, the system first calculates the accrual/deferral amount in position currency, and then converts it to the valuation currency using the current book exchange rate.
Swaps and margins
Book exchange rate
If one of the two book values is 0, or the book values have opposing +/- signs, the book exchange rate for a forward bond is set to the opening bond spot rate for the contract.
Flows are generated for the write-up or write-down amount. If the +/- sign differs from the sign for the total of all the earlier flows, the system generates a clearing flow. If the result of the valuation is that the position has to be written down, for example, and write-up flows already exist, the system would generate one flow to clear the write-ups, and one flow for the remaining write-down amount. The same applies if a write-up offsets former write-downs.
This valuation step can generate reset flows.
The swap valuation function considers the difference between the market swap from the valuation key date to the close date and the "book swap". The book swap is the remaining swap after swap accruals and valuations.
The swap amount from the valuation key date to the close date is calculated in the following currency, and then translated to the valuation currency using the spot exchange rate for the valuation key date. This amount is compared to the "book swap", and the difference amount disclosed as a gain or loss. The gain or loss is then translated into the position currency using the current exchange rate. For forward exchange transactions, the system always assumes that the position currency is the same as the valuation currency. The only exception is when the valuation currency is changed during the transaction term, which is a special case.
You cannot vary the procedure for this step by applying different rules.
Flows are generated for the write-up or write-down amount. If the +/- sign differs from the earlier flows, the system generates a clearing flow. If the result of the valuation is that the position has to be written down, for example, and write-up flows already exist, the system would generate one flow to clear the write-ups, and one flow for the remaining write-down amount. The same applies if a write-up offsets former write-downs.
The write-up and write-down amounts are only disclosed in valuation currency.
You would not apply all of these steps to each of the different transactions. As a consequence, only certain steps are available as possible entries when you define the position management procedures. The steps you can choose from depend on the position management categories:
Activities
See also: