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Former Member

Details needed on Amortization Procedure

Hi,

I would like to know in what all business cases the Amortization procedure is used?

As per my understanding, this is used for instruments under "held-to-maturity" category. For example, if we purchase a bond at premium or discount then we use the amortization procedure to charge back the difference.

Please let me know if there are any other examples?

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2 Answers

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    Former Member
    Jan 05, 2015 at 02:46 AM

    Hi Krishan,

    Hope this information will help.

    SAP supports two Amortization Methods-

    Linear Amortization Cost (LAC) - Premium and Discount are distributed over the term on a linear basis.

    Scientific Amortization Cost (SAC) - System determine effective interest rate of cash flow to discount future payments up to amortization key date.  Following are the methods SAP supports in including interest.

         1. Do not Include Interest – Interest is not considered when determining the effective interest rate.

         2. Include Interest, Accrued Interest Adjustment (Sec.Only) – Interest is included in determining the effective interest rate and is used to discount future payments. Accrued interest is adjusted to avoid increase in the amortization acquisition value on interest dates.

         3. Effective Interest Method in Accordance with IAS39 – Interest is included but not interest adjustments.  Accruals and Deferrals are not required for this method.

    Net and Gross Procedure- Net Procedure – Book Value = Acquisition Value + Amortization Gross Procedure – Book Value = Acquisition Value + Premium /Discount  after amortization Book Value = Acquisition Value + Premium /Discount + Amortizatizations.

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    Former Member
    Jan 13, 2015 at 08:08 PM

    Well, typically you would amortize only premium/discount but business may also have the requirement to amortize things like fees (e.g. underwriting fees), costs etc. associated with the security.

    Manish

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