Understand the Expense Absorption Process

The Set Rate Distribution process automatically calls the EXPENSE_ABSORPTION event. That is, when you use the Post Set Rate Distributions panel to submit postings for the daily set distribution rate calculation, the system additionally processes expense absorption as part of its overall processing under certain conditions. 

The system runs the expense absorption process only when attempting to trigger the set rate procedure on the end date of a non-distribution period. You can set up non-distribution periods through the Distribution Schedule panels. On this day, the system calculates a Class Expense Absorption per Day for that non-distribution period, stores it, and then proportionally absorbs it over the next user defined calendar days (In most cases it is a single day – the first distribution day of the following year).

The following steps describe how the expense absorption process works:

Step 1. Set Rate Distribution

If you initiate the Set Rate Distribution procedure on the end date of a non-distribution period, the system runs the expense absorption process. The process then figures out each calendar date in between and including the start and end dates of the non-distribution period. In the following example when you trigger set rate distribution on 12/31, the system resolves the dates that follow:

Sample Last Days of Fiscal Year End:

Non-distribution period begin date = 12/25

Non-distribution period end date = 12/31

Calendar dates needed:

12/25, 12/26, 12/27, 12/28, 12/29, 12/30, 12/31

The system also returns the distribution shares for each share class for each date. If the date is a non-business day, the procedure returns the most recent prior business day’s share value.

Step 2. Average Shares

The system uses each day’s distribution shares for each class to calculate the class level average shares. Once it retrieves each day’s shares for each class, the procedure sums up the class level totals and divides them by the number of non-distribution days.

Total Class Level Shares /# of non-distribution days = Average Shares

The following table shows an example of consecutive non-distribution days.

Step 3. Absorption Period

The system calculates the number of calendar days between/including the absorption begin date and end date to get the number of days in the absorption period. (You establish the absorption period’s begin and end date within the non-distribution schedule setup.)

(Absorption Begin Date – Absorption End Date) + 1 = # of absorption days.

Step 4. Class Level Expenses

The system retrieves the class level expense deltas from the expense logs. It excludes the Total Fund expenses from the calculation of the expense differential. Moreover, it includes all class level expenses as well as any class level reimbursements or expense reclassifications.

Step 5. Class Specific Expense Per Share

Once the system calculates a Total Class Level Expense Delta for each class in Step 5, the procedure then calculates the Class Specific Expense Per Share by taking the Total Class Level Expense Delta (Step 5) and dividing by the Distribution Shares (Step 4) for each share class.

Total Class Level Expense Delta / Distribution Shares = Class Specific Expense Per Share

Step 6. Class Specific Expense Differentials

The system determines the Class Specific Expense Differentials for all non-base classes by taking the base class specific expense per share minus each share class’s specific expense per share (Step 6).

Base Class Specific Expense per Share – Non-base Class Specific Expense per Share = Class Specific Expense Differential

Step 7. Class Expense Absorption per Day

Lastly, the procedure needs to divide the class specific expense differential by the number of days between and including absorption begin and end dates.

For each share class:

Class Specific Expense Differential / # of absorption days = Class Expense Absorption per Day