When securities are purchased at a discount, it is expected this discount would be accreted (earned) over time.
Some keywords to take note of when working with discount accretion for a security deal are;
Units traded:- Quantity
Consideration:- Settlement value
Discount:- Unit traded – Consideration
Let’s take for example 500,000 worth of a TBILL purchased @ $89.
Here, the Unit traded is 500,000.
The Consideration is ($89/100) X 500,000 = $445,000
This means the 500,000 units of TBILL will be purchased for 445,000 and the discount (55,000) would be earned over the life of the security as Discount Accretion.
On Finacle Treasury, considering that securities would most often be processed at a holding level, discount accretion would also be handled at the holding level. In this case, the system would not process accretions per deal, rather, it would process it per group of deals (also known as portfolio professionally, and known as holding in FT ).
For security holdings, the units of related deals are summed up to make a value known as Holding’s NET QUANTITY, the Settlement Values are summed up to make a value known as Holding’s NET VALUE, the difference of these two values (NET QUANTITY – NET VALUE ) is known as the unearned discount.
So, for holding processing, instead of working with the keywords noted above for deal level processing above, we would work with the Holding level figures.
Therefore, NET QUANTITY – NET VALUE =UNNEARNED DISCOUNT
The Unearned discount has to be earned over time through the life of the security instrument.
There are multiple methods this can be split to be earned over time. The method to be used would be strictly on the regulatory policies applicable to the bank’s region.
The most widely used method is the Straight Line method where the unearned discount is shared evenly over the tenor of the security. Based on this, the Discount is earned.
To earn this, the system basically debits the Discount Account and credits the Discount Accretion Account.