Show TOC

 Amortization

Use

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:

  1. LAC (Linear Amortized Cost): The premium or discount (the difference between the payment and the repayment amounts) is distributed over the term on a linear basis.
  2. SAC (Scientific Amortized Cost): This method is also knows as the effective interest method. The amortized acquisition value of a position is determined as follows: The system uses the effective interest rate of a cash flow to discount future payments up to the amortization key date. The following variations on this method are supported:
    1. Do not include interest: Interest payments are not taken into account when determining the effective interest rate or when discounting future payments. The premium or discount is then distributed exponentially over the term.
    2. Include interest, accrued interest adjustment (for securities only): The interest payments are included in the effective interest rate calculation and are also taken into account when discounting future payments. To avoid increases in the amortized acquisition value on interest dates, accrued interest is adjusted on a linear basis. If you choose this option, you also need to make interest accruals/deferrals for amortization.
    3. Effective interest method in accordance with IAS 39: Interest payments are included as in section b. but there is no accrued interest adjustment. Additional interest accruals and deferrals are therefore not required.

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 ManagementTransaction ManagerGeneral SettingsAccounting  Settings for Position ManagementKey Date Valuation  Define Amortization Procedure.

Integration

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

Features

Determining the Amortized Acquisition Value

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 .

Net/Gross Procedure

You can make the following field settings for the net or gross procedure in Customizing for Treasury and Risk Management , by choosing Transaction ManagerGeneral Settings  AccountingSettings for Position ManagementKey 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:

Amortization with Issue Spread / Negotiation Spread

Amortization According to LAC and SAC