Eagle Accounting has the ability to lock in and apply an amortization methodology, and offers four different amortization methodologies: Default, Prospective, Retrospective, and the PAC NPV.
- Default. The legacy amortization methodology utilized in Eagle Accounting prior to the 2017 release. The Default amortization methodology is prospective by nature with the ability to offer ad hoc retrospective amortization true ups. Prospective in nature means that when an amortization yield is calculated and applied, the amortization is calculated from the start of the current coupon period up to the current earn thru date. In the event that a retrospective amortization calculation is executed, that retrospective amortization yield is held constant for the current coupon period. The next following coupon period, Eagle Accounting will calculate a new prospective yield based upon projected cash flows and amortize cost as of the start of the coupon period. If you select this option, you must also specify the Prospective Amortization Yield Recalculation Frequency, which tells the Amortization Process when and under what conditions to recalculate amortization yields.
- Prospective. The Prospective amortization methodology is very similar to the Default amortization methodology, where amortization yields and changes in amortization are calculated and applied prospective from the start of the coupon period. The difference is that the prospective amortization methodology does not allow any retrospective amortization calculations. If you select this option, you must specify the Prospective Amortization Yield Recalculation Frequency.
- Retrospective. The retrospective amortization methodology calculates the initial amortization yield at time of purchase, locks that yield in, and does not recalculate and apply a new amortization yield until a retrospective amortization calculation is executed. It then holds that yield constant until another retrospective amortization yield is recalculated. If you select this option, you must specify an Automatically Apply Retrospective Amortization field value. You can manually invoke Eagle Accounting's retrospective amortization calculation or can schedule it to execute based upon certain conditions or frequency.
- PAC NPV. In the Default and Prospective amortization methodology for yield-based amortization methods, Eagle Accounting amortization process determines the amortization for the current coupon period by calculating and apply the amortization yield to the start of the coupon period's book cost and applying the appropriate amortization method in order to determine the amount of total income that is contributed by amortization as opposed to stated income. The income is then allocated across the days in the period. If you select this option, the Automatically Apply Retrospective Amortization field becomes visible and required.
The PAC method takes a different approach where a yield is used to discount future cash flows to derive a net present value (NPV) calculation. This NPV is then used as the end of period book cost for comparison against the beginning of period book cost. The PAC method locks in and utilizes the initial cash flows to discount future cash flows to derive an amortization yield.
- For discount lots, when the end of period net present value of the lot is greater than the beginning of period book cost (adjusted for interim principal cash flows (factor payments and amortized cost of sales), the difference is recorded as deferred market discount. If the end of period adjusted NPV is less than the beginning of period book cost, no deferred market amortization discount is accrued.
- For premium lots, when the end of period net present value of the lot is less than the beginning of period book cost (adjusted for interim principal cash flows (factor payments and amortized cost of sales), the difference is recorded as premium amortization. If the end of period adjusted NPV is greater than the beginning of period book cost, no premium amortization discount is accrued.
You can select an amortization methodology in the Amortization & Accretion Rules panels.
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