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All calculations are performed at the lot level (For example, no market discount from one lot shall be applied to another when calculating the amount of amortization to recognize). The election for Accelerated Market Discount
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applies only to Identified Lot (IDLOT) cost accounting.
You set up Accelerated Market
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Use Accelerated Market Discount
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discount at the amortization rule level by setting the Amortization at Disposition and Paydown Costing Allocation field value, as follows. For information about creating and editing amortization & accretion rules, see Manage Amortization & Accretion Rules
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.
To use the election
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, in the Create Amortization & Accretion Rules panel select the following field options:
Amortization at Disposition (tag 3902)
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to Yes
Paydown Costing Allocation (tag 16008)
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to Accelerated Market Discount Recognized
When setting up a rule to follow Accelerated Market Discount and PAC method (For example, set the Yield Type field to Net Present Value, and set the Adjustment Type field to PAC), you must set up individual accretion instances for Amortization/Accretion Election (tag 3933) for
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Recognition of Income
Accelerated Market Discount recognizes deferred market discount and cost adjustments on principal repayments for securities purchased at a discount. When the system processes any of these repayments, the Accelerated Market Discount method first reduces amortization. Then, once fully reduced to zero, cost is reduced to zero. Once cost is reduced to zero by principal repayments, the remaining proceeds are recognized as a gain or loss.
Example 1 – Remaining Deferred Exceeds Paydown Proceeds
As principal payments occur, the entire principal payment is applied to income when the amount of deferred market discount on the tax lot is greater than or equal to the amount of the principal payment (Example 1).
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Units
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Current Original Cost
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Market Discount
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Cash Proceeds (at par)
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85,000
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75,000
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1,000
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500
Proceeds are less than remaining deferred amortization (i.e. 1,000) so the entire proceeds will be recorded as amortization income and book cost will remain unchanged.
The remaining deferred amortization will be reduced by the recorded amortization.
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Units – Post
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Current Original Cost – Post
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Def Market Discount - Post
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84,500
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75,000
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500
Ledger Postings
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Debit
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Credit
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Investment Receivable
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500
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Amortization Income
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500
Example 2 – Paydown Proceeds Exceeds Remaining Deferred
When the principal payment is greater than the remaining amount of deferred market discount, record the remaining amount as a reduction of current original cost (Example 2).
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Units
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Current Original Cost
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Def Market Discount
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Cash Proceeds (at par)
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85,000
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75,000
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1,000
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1,500
Proceeds are greater than remaining deferred amortization so the entire deferred amount will be recorded as amortization income and book cost will be reduced by the remainder.
The remaining deferred amortization will be reduced by the recorded amortization and will end at 0.
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Units – Post
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Current Original Cost – Post
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Def Market Discount - Post
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83,500
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74,500
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0
Ledger Postings
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Debit
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Credit
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Investment Receivable
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1,500
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Amortization Income
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1000
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Cost
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500
Example 3 – Paydown Proceeds Exceeds Remaining Deferred and Cost
If the principal payment is greater than the remaining cost and deferred market discount, record the remaining amount as a capital gain (Example 3).
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Units
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Current Original Cost
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Def Market Discount
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Cash Proceeds (at par)
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15,000
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5,000
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500
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10,000
Proceeds are greater than remaining deferred amortization and the remaining book cost so the entire deferred amount will be recorded as amortization income and book cost will be reduced to zero and the remainder will be recorded as a capital gain.
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Units – Post
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Current Original Cost – Post
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Def Market Discount - Post
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5,000
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0
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0
Ledger Postings
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Debit
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Credit
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Investment Receivable
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10,000
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Amortization Income
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500
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Cost
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5,000
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Cap Gain
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4,500
Recognition of Paydown Loss/Recovery
For ABS paydowns that have proceeds and principal loss factors in the same coupon cycle the principal loss factors are applied first, followed by the paydown cash received.
Apply loss factor quantity as a straight par reduction to the extent that there is sufficient unamortized discount to absorb the quantity without reducing any deferred market discount or original cost.
Unamortized discount = Par – Original Cost – Deferred Amortization
If the loss quantity is greater than the unamortized discount then apply the remaining quantity to the accumulated deferred market discount. This amount is stored on the open lot (Prior Deferred Amort Reduction Local/Base).
If the loss quantity is greater than the total unamortized discount and accumulated deferred market discount the lot will be at par before applying the remaining par quantity. Apply the remaining quantity to cost and Short Term Loss. This amount is stored on the open lot (Prior Cost Reduction Local/Base).
Once the principal loss factor has been applied and reduced the appropriate quantity (and deferred market discount and cost when applicable), the cash portion of the paydown should be applied to the position in the manner described in the prior section.
Unamortized Market Discount (Mkt Dis) is not a stored value in Eagle but is displayed as a balance in the example below for illustrative purposes.
Example 4 - Loss factor is less than the amount of unamortized discount (excluding deferred amortization)
Apply full unit reduction as a decrease in quantity and do not impact the remaining amount of deferred market discount.
No ledger entries are required for the principal loss component as there is no impact on cost.
Pre Paydown Totals
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Units
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Cost
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Def Market Discount
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Mkt Dis
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1,000,000
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950,000
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10,000
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40,000
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Paydown Units
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Cash Proceeds
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Loss Factor
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10,000
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8,000
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2,000
The loss factor of 2,000 is processed as a quantity reduction with no impact on deferred market discount or cost as there is sufficient unamortized discount (i.e. 40,000) to absorb the full loss factor.
Totals after applying loss factor
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Units
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Cost
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Def Market Discount
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Mkt Dis
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998,000
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950,000
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10,000
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38,000
Next apply the proceeds quantity of 8,000 as recognition of deferred market discount. There is no remaining proceeds so no impact on cost or realized gain.
Ledger Postings
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Debit
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Credit
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Amortization Income
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8,000
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Investment Receivable
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8,000
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Post Paydown Totals
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Units
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Cost
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Def Market Discount
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Mkt Dis
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990,000
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950,000
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2,000
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38,000
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Prior Cost Reduction
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Prior Def Mkt Discount Reduction
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0
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0
Example 5 – Loss factor is greater than the amount of unamortized discount but less than the total of unamortized discount and deferred market discount
Apply loss factor as a reduction of quantity and reduce deferred market discount for the amount of loss factor that is greater than the unamortized discount.
Pre Paydown Totals
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Units
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Cost
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Def Market Discount
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Mkt Dis
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1,000,000
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980,000
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15,000
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5,000
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Paydown Units
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Cash Proceeds
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Loss Factor
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25,000
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8,000
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17,000
As there is sufficient unamortized discount and deferred market discount to absorb the loss factor there is no impact on cost and no ledger entries for the loss factor amounts. The amount of deferred market discount is reduced but because the amount has not been posted to income there is no adjustment from an accounting perspective other than to reduce the amount of deferred available for realization as the proceeds portion of the paydown is processed.
The loss factor is applied reducing the unamortized discount by 5,000 to zero and then reduces the deferred market discount by the remaining 12,000 leaving 3,000 available as deferred market discount.
Totals after processing loss factor
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Units
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Cost
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Def Market Discount
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Mkt Dis
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983,000
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980,000
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3,000
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0
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Prior Cost Reduction
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Prior Def Mkt Discount Reduction
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0
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12,000
The paydown with proceeds (8,000) is then applied to the remaining deferred market discount 3,000 and then cost.
Ledger Postings
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Debit
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Credit
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Amortization Income
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3,000
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Investment Receivable
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8,000
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Cost
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5,000
Totals after applying loss factor and proceeds
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Units
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Cost
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Def Market Discount
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Mkt Dis
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975,000
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975,000
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0
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0
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Prior Cost Reduction
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Prior Def Mkt Discount Reduction
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0
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12,000
Example 6 –Loss factor is greater than the total unamortized discount and deferred market discount
Apply loss factor as a reduction of quantity and reduce deferred market discount to zero. The remaining loss factor results in a realized capital loss.
Pre Paydown Totals
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Units
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Cost
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Def Market Discount
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Mkt Dis
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1,000,000
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980,000
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15,000
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5,000
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Paydown Units
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Cash Proceeds
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Loss Factor
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33,000
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8,000
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25,000
The loss factor of 25,000 reduces the market discount by 5,000 to zero, reduces the deferred market discount by 15,000 to zero and reduces cost and creates a realized loss for the remaining 5,000.
Ledger Postings
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Debit
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Credit
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Loss
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5,000
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Cost
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5,000
Totals after processing loss factor but prior to applying proceeds
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Units
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Cost
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Def Market Discount
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Mkt Dis
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975,000
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975,000
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0
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0
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Prior Cost Reduction
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Prior Def Mkt Discount Reduction
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5,000
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15,000
As the lot is now at par the proceeds amount of 8,000 will be reduce cost and produce no recognition of income.
Ledger Postings
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Debit
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Credit
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Investment Receivable
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8,000
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Cost
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8,000
Totals after applying loss factor and proceeds
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Units
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Cost
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Def Market Discount
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Mkt Dis
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967,000
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967,000
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0
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0
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Prior Cost Reduction
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Prior Def Mkt Discount Reduction
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5,000
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15,000
Loss Recovery - Continuation of example 6
Recovery factor reverses prior losses, then increases the deferred market discount by the remaining recovery amount.
Pre Paydown Totals
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Units
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Cost
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Def Market Discount
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Mkt Dis
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967,000
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967,000
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0
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0
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Prior Cost Reduction
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Prior Def Mkt Discount Reduction
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5,000
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15,000
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Net Paydown Units
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Cash Proceeds
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Recovery Factor
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15,000
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25,000
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10,000
There is a 25,000 principal paydown and a 10,000 non cash increase in quantity for the recovery factor which equates to a 15,000 net decrease in quantity. The loss recovery quantity will increase the total quantity by 10,000 prior to processing the cash based paydown of 25,000.
Loss factor is processed first which increases the quantity by 10,000 and reverses the total prior loss of 5,000 and then increases the deferred market discount by the remaining 5,000 of the recovery amount reducing the amount of deferred market discount available for future recoveries to 10,000.
If there are no remaining losses to reverse or prior reductions of deferred market discount to reverse recoveries should produce an increase to par which re-establishes an unamortized discount.
Ledger Postings
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Debit
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Credit
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Loss
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5,000
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Cost
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5,000
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Totals after processing recovery factor but prior to applying proceeds
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Units
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Cost
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Def Market Discount
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Mkt Dis
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977,000
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972,000
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5,000
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0
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Prior Cost Reduction
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Prior Def Mkt Discount Reduction
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0
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10,000
Next process the proceeds payment of 25,000 which now will record the 5,000 deferred market discount which was just restored from the loss recovery and then reduce the remaining 20,000 at par.
Ledger Postings
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Debit
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Credit
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Investment Receivable
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25,000
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Cost
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20,000
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Amortization Income
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5,000
Totals after applying recovery factor and proceeds
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Units
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Cost
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Def Market Discount
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Mkt Dis
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952,000
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952,000
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0
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0
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Prior Cost Reduction
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Prior Def Mkt Discount Reduction
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0
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(MD) and Market Premium (MP).