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  Interest Compensation

Purpose

Interest compensation is used to balance an account pool in a hierarchy, and is aimed at maximizing interest income and minimizing interest to be paid to the bank. It also enables you to manage accounts for the same account holder for different purposes.

Interest compensation adds up the debit and credit balances of more than one account, and calculates the interest for the total balance that has been compensated. Interest compensation is possible for the participating currencies in the EURO conversion, and in EURO itself. Interest can be compensated across bank areas, but a hierarchy over more than one level is not supported.

The system periodically compensates interest as part of account balancing.

Enter the settings and activate the required checks in the Implementation Guide (IMG). You can run interest compensation as part of the periodic account balancing as a mass run or as an individual balancing.

Note Note

Value dates in the past and backdated postings are allowed. Conditions that applied at the time of the value date are valid, meaning that if balanced periods are recalculated, the conditions of the hierarchy valid at that time are used. The account pool formation applies also. If an account was a member of an account pool at the time of the last period but is no longer participating, the conditions of the account pool apply.

An account can only belong to one account pool for a particular period, but this account can change to another pool in another period. If back postings and value dates in the past are for an earlier period in which the account belonged to another account pool, then the conditions of this account pool apply.

End of the note.

Prerequisites

Before you can run interest compensation you need to create an account pool with a root account. The root account must be created in the account pool and must be in the hierarchy, but it can refer to a reference account.

The root account is the leading account on which the interest conditions and limits are centrally defined for the account pool. The balancing date for interest compensation is also defined on the root account. If conditions are defined for the subordinate accounts, these are not included or are overridden by the conditions of the root account. The balancing date on each subaccount must be the same as that on the root account.

A change or assignment to an account pool is only possible during the period if the accounts were created after the hierarchy start date and have not yet received postings. You cannot assign an account to an account pool until account balancing has been completed.

Process Flow

  1. The balances of the subordinate accounts are fictitiously summarized, value date-exact, and used as a calculation basis.

  2. The interest for the accounts to be compensated is calculated on the basis of the total balance of the account pool, and compensated or posted to the root account. This means that only the balancing result is posted but no account balances are carried forward.

  3. All accounts in the hierarchy are balanced without compensation for information purposes.

A business partner has three accounts and wants the interest and charges compensated on one of these accounts. The accounts for compensation have the same debit and credit interest and the same limits. Interest is calculated for the compensated total balance.

Conditions:

Credit interest: 5%

Debit interest: 10%, overdraft limit = 1,000 USD

Result of interest compensation:

∑ Account balance (account 1, 2 and 3): 0 - 100 + 200 = 100 USD

Calculation of interest: 100 x 5%= 5 USD

Posting to root account: 5 USD credit interest

Result without interest compensation:

Account 1: 0 = 0 USD

Account 2: –100 x 10% = -10 USD debit interest

Account 3: +200 x 5% = + 10 USD credit interest

Advantage of interest compensation: 5 USD (account 1 / root account)

The advantage of charge compensation is illustrated in the following two examples. Set the Charge Compensation indicator to take advantage of this function.

Conditions of the root account

Conditions for the account

Account maintenance charge

10 USD

10 USD

Free items:

1500

500

Item charge:

0.50 USD/Item

0.50 USD/Item

Result/posting to root account with charge compensation:

Result/posting to root account with charge totaling:

Account maintenance charge:

10 + 10 + 10 = 30 USD

Item charge (compensated):

700 + 400 + 600 = 1700 -1500 = 200 items

0.50 USD x 200 = 100 USD

Account maintenance charge: 10 + 10 + 10 = 30 USD

Item charges:

700 - 500 = 200 x 0.50 USD

400-500 = 0

600 - 500 = 100 x 0.50 USD

100 +0 +50 = 150 USD

Result

The result is posted and can now be processed, for example, for capital yield tax (CYT).