Amortization involves gains and losses, from interest-bearing financial assets or payables, being distributed over the term of the transaction.
We distinguish between the following amortization methods:
Amortization can be executed at the following times:
For key date valuations. This amortization is triggered manually.
For each business transaction that affects a position. These amortizations are generated by the system. In the case of a partial outflow (partial sale) the total position prior to the outflow is amortized before the position values (including amortization already generated) are cleared proportionately. This ensures that the amortized acquisition value displays the current value at the time of each position change.
For more information about the setting options for amortization, choose
Treasury and Risk Management
→
Transaction Manager
→
General Settings
→
Accounting
→
Settings for Position Management
→
Key Date Valuation
→
Define Amortization Procedure.
The system supports amortization for the following product categories:
Area |
Product Categories |
---|---|
Loans |
300 Mortgage 310 Borrower’s note loan 20 Policy loan 30 General loan |
Securities |
040 Bond 041 Bond with redemption schedule 042 Bond with installment repayment 060 Warrant bond 070 Convertible bond |
Money Market |
510 Fixed-term deposit 530 Commercial paper 540 Cash flow transaction 550 Interest rate instrument |
The net present value can be calculated for the key date using the following methods:
Linear Amortized Cost (LAC)
Scientific Amortized Cost (SAC)
The LAC or SAC value is determined in position currency. The net present value calculated in position currency is compared with the amortized acquisition value in position currency. The difference 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
.
You can make the following field settings for the net or gross procedure in Customizing for
Treasury and Risk Management
, by choosing
Transaction Manager
→
General Settings
→
Accounting
→
Settings for Position Management
→
Key Date Valuation
→
Define Amortization Procedure
In the case of the
net procedure
the position is posted with its acquisition value (book value = acquisition value) and is amortized over the remaining term (book value = acquisition value + amortization).
In the case of the
gross procedure
, the premium/discount for the position is posted as accrued/deferred assets/liabilities (book value = acquisition value + premium/discount). During amortization, the premium/discount is written back over the remaining term affecting net income (book value = acquisition value + premium/discount [] + amortizations[]).
Net; Separate Balance Sheet Accounts for Amortization:
Negative and positive amortizations for a position caused by changes to the position, transfer postings, or key date valuations are posted to offsetting accounts in Financial Accounting. After posting the amortizations, the balance of both accounts is automatically compared for this position. If both accounts show a balance for this position, the account with the lower balance is cleared via the account with the higher balance by an adjustment flow.
Gross; Premium/Discount Not Included in Book Value:
A special
gross procedure
case. The premium/discount is posted and written back over the remaining term affecting net income but the book value does not contain the premium/discount (book value = acquisition value + amortizations). This ensures that the amount of the foreign currency write up/down is the same for one position in different valuation areas.
Gross; Separate Accounts for Accruals/Deferrals:
In the gross procedure, postings are made to the accruals/deferrals account. This depends on whether a premium or discount exists. If you choose this procedure, the system uses adjustment flows to make sure that at any time, only one of the two accrual/deferral accounts displays a balance other than zero. So the accrued/deferred assets can show balances on the debit side and the accrued/deferred liabilities can only show balances on the credit side.
See also: