Off Balance Sheet Accounting for Collaterals

User Guide

2005-08-17 Information in this document is subject to change without notice.

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Introduction to Off Balance Sheet Accounting for Collaterals
The Collateral attached to any credit facility minimises the risk to the maximum extent. But the booking of this
mitigation process is an off balance sheet process. To achieve this, the Temenos Transact system allows
the booking of collateral accounting entries and reports it in the system.

The GL accounting for Collaterals is raised based on the Limit exposures that are being covered by the
collaterals linked through the Right of the Customer. The accounting is raised for collateral amount that is
allocated, utilised and unutilised for the corresponding Limit exposure.

Configuring Off Balance Sheet Accounting for Collaterals

The following setup is done to record accounting entries for Collateral:

 Accounting Treatment and Booking Frequency

 Configuring Balance Types

 Collateral Code for GL Posting

Accounting Treatment and Booking Frequency

The Collateral GL Accounting booking frequency and GL Treatment are configured in

the LIMIT.PARAMETER application. Configuring the fields are pre-requisites for Collateral GL Accounting.

The GL treatment for collateral provides in two options:

 In Out – The system fully reverses the previously created positions and performs new bookings for
the full amount.

 Adjustment – The system compares the current position with the previously booked and posts the
adjustment for the difference.

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The posting of the accounting entry is performed by an automatically run online background service on a
periodic basis. This service runs according to the Coll Booking Frequency set in LIMIT.PARAMETER. The
LI.CO.ACCOUNTING service is run to perform calculations and postings of collateral utilisation by underlying
limits and assets underneath those Limits.

This service is run on-line on a periodic basis and calculates Allocated, Unutilised and Utilised portions of the
collateral value allocated to the limit. Calculated balances are posted against the Consolidation key created for
the record in LIMIT where LIMIT Utilisation balances are currently booked (EB.CONTRACT.BALANCES).
Configuring Balance types

The AC.BALANCE.TYPE application in Temenos Transact allows banks to configure balances that are used

by the system. These balances are created as part of the system configuration to allow booking and reporting
of collateral balances.

These balances are configured with Reporting Type as Contingent.

Collateral Code for GL Posting

Off balance sheet postings are expected not for all types of collaterals. The bank needs accounting to only be
raised for certain types of 'external' collaterals such as property, insurance, personal guarantee and securities
portfolio received as collateral. Internal cash collaterals such as cash on account at the bank and term
deposits at the bank do not require off balance sheet accounting.

The COLLATERAL.CODE application defines the following Balance Types to be used when posting collateral
balances to a GL.

 Allocated portion

 Utilised portion

 Unutilised portion

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Working with Off Balance Sheet Accounting for Collaterals
The method for booking of the collateral entries, that is, In Out or Adjustment, and the booking frequency, is
selected from LIMIT.PARAMETER. The balance type (AC.BALANCE.TYPE) created for the booking and
reporting of collateral balances are attached to the COLLATERAL.CODE of a specific collateral. The following
collateral balances are considered when posting the collateral balances to GL.

 Allocated portion of the Execution Value

 Utilised portion

 Unutilised portion

The collateral values are allocated to the limit exposures using the standard Temenos Transact collateral
allocation mechanism and the allocation details are stored in the LIMIT.COL.ALLOC.WORK table. Balances
related to collateral allocation and utilisation are booked against the same limit consolidation keys, to which
the limit utilisation is booked.

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Page 5 of 11 Off Balance Sheet Accounting for Collaterals
The collateral allocation details are recorded in the LIMIT.COL.ALLOC.WORK table, as shown below.

The calculated amount for the allocated, utilised and unutilised portion is posted against the Consol key of the
respective LIMIT . This amount is updated in the corresponding Limit key
in EB.CONTRACT.BALANCES (ECB).

The EB.CONTRACT.BALANCES (ECB) for the Limit is updated post COB. The Allocated, Utilised and
unutilised collateral amount is updated in ECB for the LIMIT after the service LI.CO.ACCOUNTING.SERVICE
is run.

The screenshot of ECB shown below contains the details prior to running the service,
LI.CO.ACCOUNTING.SERVICE.

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After running the service, the allocated, utilised and unutilised collateral amount is updated
in EB.CONTRACT.BALANCES as shown in the screenshot below.

The following list of accounting entries are generated for Collateral Accounting based on allocation to the Limit
in RE.CONSOL.SPEC.ENTRY.

The GL accounting treatment is the IN OUT method and the following Transaction Code is used in the
accounting entries raised for collaterals

 CAL (Collateral Allocated)

 CUT (Collateral Utilised)

 CUN (Collateral Unutilised)

 If the booking method is Adjustment, the following is the entry in ECB:

o Revolving Limit is USD 100,000

o Collateral Amount is USD 150,000

o Loan Disbursed is USD 100,000

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   Allocated (in USD) Utilised (in USD) Unutilised (in USD)

After the LI.CO.ACCOUNTING service is run

Collateral 100,000 100,000  

After partial repayment of 60,000

Collateral 100,000 100,000  

Collateral 100,000 40,000 60,000

For the repaid amount, new entries are raised in the RE.CONSOl.SPEC.ENTRY table. The existing LIMIT
entries are untouched.

 If the user repays the loan amount for a revolving limit, the utilised and the unutilised amounts in the
ECB change post repayment. The unutilised amount is increased by the repayment amount. For
example:

o Revolving Limit is USD 100,000

o Collateral Amount is USD 150,000

o Loan Disbursed is USD 100,000

  Allocated (in USD) Utilised (in USD) Unutilised (in USD)

After the LI.CO.ACCOUNTING service is run

Collateral 100,000 100,000  

After partial repayment of 60,000

Collateral 100,000 40,000 60,000

After the repayment of USD 60,000, the unutilised amount is increased by 60,000. Original Spec entries are
reversed and new Spec entries are raised for new amounts after the repayment of the same limit amount. The
following accounting entries are generated:

  Allocated(in USD) Utilised(in USD) Unutilised(in USD)

After the LI.CO.ACCOUNTING service is run

Collateral 100,000 Cr 100,000 Dr  

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 After partial repayment of 60,000

Collateral 100,000 Dr 100,000 Cr  

Collateral 100,000 Cr 40,000 Dr 60,000 Dr

 If the user repays the loan in the case of a non- revolving limit, the utilised amount is reflected. For
example:

o Revolving Limit is USD 100,000

o Collateral Amount is USD 150,000

o Loan Disbursed is USD 100,000

  Allocated (in USD) Utilised (in USD) Unutilised (in USD)

After the LI.CO.ACCOUNTING service is run

Collateral 100,000 100,000  

After partial repayment of 60,000

Collateral 100,000 40,000  

After the repayment of USD 60,000, the utilised amount is decreased by 60,000.

The following accounting entries are generated:

  Allocated(in USD) Utilised(in USD) Unutilised(in USD)

After the LI.CO.ACCOUNTING service is run

Collateral 100,000 Cr 100,000 Dr  

After partial repayment of 60,000

Collateral 100,000 Dr 100,000 Cr  

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 Collateral 40,000 Cr 40,000 Dr  

USD 60,000 is Unallocated.

 If more than one collateral is attached to a single limit, the ECB is updated with all the collaterals that
are linked.

EXAMPLE: Limit A is linked to two Collateral Rights with the same Collateral Code. Two different collaterals
are attached to the two Collateral Rights given. In ECB, the allocated, utilised and unutilised balances are
updated based on the Collateral Right Id. Both the Collateral Right Ids are given in ECB with the allocated,
utilised and unutilsed amount.

Limit A Collateral Right 1 Collateral 1

Collateral Right 2 Collateral 2

The Allocation of Collateral takes place on priority basis as mentioned in CO.ALLOCATION.PARAMETER.

The following screen shot shows an ECB for limit and the two Collateral Rights attached to a single limit with
the allocated, utilised and unutilised balance.

In the above case, the collateral code is the same for both the Collateral Rights. If the collateral codes are
different for multiple Collateral Rights, the ECB is updated in the same manner.

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  In the case of multiple limits attached to a single collateral, separate ECBs are generated for the given
limits. The collateral is allocated to these multiple limits based on the priority given in
the CO.ALLOCATION.PARAMETER and COLLATERAL.RIGHT applications.

 The ECB is also affected when the value of either the limit or collateral or both is increased or
decreased.

Limit is increased

Limit USD 10,000

Collateral Amount USD 15,000

Loan Disbursed USD 8,000

Limit is increased to 12,000

Collateral 12,000 8,000 4,000

Collateral is decreased

Limit USD 10,000

Collateral Amount USD 15,000

Loan Disbursed USD 8,000

  Allocated (in USD) Utilised (in USD) Unutilised (in USD)

Collateral 10,000 8,000 2,000

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