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How does TRM calculates amortised value of loan?

Former Member
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Hello colleagues,

I've faced with requirement that seems to be standard for IAS/GAAP but quite new for CIS countries:

Loans received are entered in the accounting statement in the amount of amortised cost with the application of the effective interest rate.

I need your help to find proper way to realise it for my client.

I expect that it should be done through TPM1 and i need to specify market data on effective % rate. 

I'm entering loan received with product category "Interest rate instrument":

Amount 1000 USD

Interest rate 2%

From 01.05.2012

To 01.05.2015

Interest and repayment at the end.

Cash flow is quite simple:

01.05.2012 1105 Borrowing / Increase         1 000,00

01.05.2015 1120 Final repayment                1 000,00-

01.05.2015 1200 Nominal interest                60,83-

I've also specified standard Position Management Procedure = 1001 Sec./Loan: MtM (P/L)/Amort. SAC Net Separate Position Costs.

My questions now are:

1) How do i specify effective interest rate? In my example i want to discount future cash flows with market rate 5%

2) Am i right about choice of PMP (1001) and Tcode for that (TPM1)?

Thanks in advance and best regards.

Vitaly

Accepted Solutions (1)

Accepted Solutions (1)

Former Member
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Hi Vitaly

If you have a bond which you have purchased today @ 95 % with a repayment price of 100 % and the repayment is in 5 years you can amortize each year one percent. If you want to do this then you have to generate a position managment procedure with a step amortize cost. In this case the system does not generate a valuation profit or loss but just an amortized cost entry. If this bond is in a foreign currency you also need a step for the FX valuation.

Theorethically it could also be that you have to value the amortized cost but also the profit and loss. In the example above the market price after one year could be 97 %. In this case you amortize 1 percent as described above and for the other 1 % you have to create a profit and loss entry. In this case in your position management procedure you have to create two steps. One for amortization and one for P/L. If there is also a foreign currency involved you have a three step procedure.

Step 1:     amortizing

Step 2:     security valuation

Step 3:     foreign currency valuation

In the case of the calculation of the amortizing you can decide (ask the business) to use a linear amortization or a sientific amortization.

Regards

Juerg Heiz

juerg.heiz@treascon.com

Former Member
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Hello Juerg,

thank you for your reply but i'm talking about slightly different case.

In my example we've received loan. So we have liability to pay 1000 USD on 01.05.2015.

But from accounting point of view we should represent present value of future outgoing cashflows.

According to current rates we calculate present value of our liability. Let say 800 USD on 31.05.2012 (just roughly).

And i want to realise calculation of NPV and revaluation of liability amount to its NPV.

I hope it's more clear now and you've got it

Former Member
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Hi,

For your case of writing up/down of your liability, you have to define a step for security price valuation in your position management procedure.  Further you have to run TPM60 which will calculate the NPV based on the defined evaluation types and the market rates and store it for the NPV type.  This NPV value will be used in your valuation in TPM1.

However, if you have premium or discount for your loan and this has to be amortized, then if you are managing your loan through money market, then you would have to specify the premium or discount while creating the transaction in FTR_CREATE.  However managing premium/discounts in money market  functionality is available only from EH3 onwards.  An amortization step in TPM1 would be enough to amortize the premium/discount over the period of the loan.

Regards,

Ravi

Answers (0)