Whenever an Exchange transaction is invoked, Eagle Accounting automatically trues up earnings to the day before ex-date. A backdated buy automatically initiates an Exchange corporate action. In addition, Eagle Accounting accrues earnings from the trade date of the open buy, to ex-date minus one.
You can set up the corporate action announcement's Treatment of Interest Indicator to determine how Eagle Accounting treats the period to date accrued interest for exchange offers or conversions when processing the corporate action. As part of normal STAR accrual processing, coupons typically post on coupon date. For exchange offers, you can elect to have coupons post on ex-date of the exchange offer rather than on coupon day. The system can generate a coupon on ex-date for income accrued to ex-date minus 1 or it can generate a coupon on ex-date for income accrued to pay date minus 1.
Manage Interest Treatment When You Post Coupons on Coupon Date
The Treatment of Interest Indicator, an option you can define in the Create Exchange Offers panel when you create a corporate action announcement for an exchange offer or conversion, determines how Eagle Accounting treats the period to date accrued interest for exchange offers or conversions when processing the corporate action. As part of normal Eagle Accounting accrual processing, coupons typically post on coupon date. You can select the following options for the Treatment of Interest Indicator field where coupons post on coupon date:
- Transfer. Transfers the interest receivable to the resulting debt security and continues to accrue interest. This is not a valid option when processing an exchange from a Fixed Income security to Equity. This option triggers a date-specific retro recalculation of yield and amortization from the beginning of the coupon period. For "like" securities where the attributes such as Coupon and Maturity Date are the same, this results in the same yield on the From and To side of the exchange. For securities with different attributes, you see an amortization delta true up on ex date.
- Allocate. Allocates interest receivable to the cost of the new security.
- Reverse. Reverses interest accrued in the current coupon period.
For an example of how the system uses the Transfer, Allocate, and Reverse settings, see Mandatory Exchange Offer Corporate Action Example and Voluntary Exchange Offer Corporate Action Example.
Manage Interest Treatment When You Post Coupons on Ex Date
You can select the following options for the Treatment of Interest Indicator in the Create Exchange Offer panel to have coupons for exchange offers post on ex-date of the exchange offer rather than on coupon day. This helps the system better handle accrued interest for exchange offers. Otherwise, because of how the dates align, the issuer cannot move interest from the original security to the newly exchanged security, so they must pay interest to make the holders of the security whole.
- Receive Income Accrued to Ex Date. Generates a coupon on ex-date for income accrued to ex-date minus 1.
- Receive Income Accrued to Pay Date. Generates a coupon on ex-date for income accrued to pay date minus 1.
After you select one of these two options, you create the exchange offer and process the exchange offer through global processing or a scheduled process. After the system processes the exchange offer, it creates a coupon entitlement for each close lot on the ex-date of the exchange offer. That is, any lot that is entitled to the coupon has a traded cash record created for the coupon (for any income received up to that point) that is paid to the current holder of the bond.
If you select the Receive Income Accrued to Ex Date option, the full receivable posts on ex-date for all income accrued to ex-date -1. Therefore it is not necessary to post to the unearned interest offset account.
If you select the Receive Income Accrued to Pay Date option, the system records the full receivable on the ledger on ex-date to a new contra asset offset for the unearned interest. This occurs because Eagle Accounting is recording the full receivable on ex-date for income that still has not been earned. It posts this to the contra offset account called unearned interest. Because the first day of the ex-date period is accrued on ex-date, the following day’s (ex-date + 1 day) ex-date amount is the amount of remaining unearned income on ex-date. Each subsequent day, the ex-unearned interest account decreases by each day's income accrual until the income is fully accrued to pay-date -1, at which point the unearned interest account is zero, as all the income for coupon was received.
For an example of how the system uses these Treatment of Interest Indicator settings, see Exchange Offer Coupon on Ex Date Examples
Calculate Payments Based on a Payment Override Factor
The Payment Override Factor option becomes available when you set the Treatment of Interest Indicator field to a value of either Receive Income Accrued to Ex Date or set it to Receive Income Accrued to Pay Date. This field allows you to override the calculation of the interest receivable/payable that the system otherwise creates on the From security.
If the exchange corporate action has the Treatment of Interest Indicator set to Receive Income Accrued to Ex Date or to Receive Income Accrued to Pay Date and you provide a value for the Payment Override Factor field, the earnings process calculates a payment based on payment override factor value multiplied by the applicable par/current face for the current factor divided by 100.
Any true up of earning values based difference between the Accrual Payment Factor and the Eagle calculated PTD earnings numbers is reflected in the Eagle Income on either ex date or pay date-1 of the corporate action, depending on the election.
The exception to the Receive Income Accrued to Pay Date scenario occurs if the buy/open settle date is equal to the “pay date” of the exchange offer. Then the payment override adjustment occurs on the pay date rather than on the pay date minus 1.
For an example of how the system uses the Payment Override Factor field value, see Exchange Offer Coupon on Ex Date Examples
0 Comments