6.1.1.3 Collateral Depreciation Methods
This topic describes the information on Collateral Depreciation Methods.
Following methods are considered for collateral depreciation. Method of depreciation refers to how the cost should be treated as expiring over the life of assets.
- Straight line method
- Written down value method (reducing balance method)
- Sum of years digit method
Straight line method
If the useful life of assets is 10 years, depreciation is calculated at 10% every year on the original cost. However, rate of depreciation specified is considered for straight line method. Revaluation rate for frequency specified is arrived considering the depreciation rate per year signified.
Table 6-1 Illustration of Straight-Line Method
| Assumptions | |
|---|---|
| Collateral Type/ Asset | Machinery |
| Useful life of the Asset | 5 Years |
| Depreciation Percentage | 20% |
| Revaluation Frequency | Yearly |
Table 6-2 Illustration of Straight-Line Method
| Years | Original Cost of Asset | Depreciation Amount | Collateral value at the end of each year |
|---|---|---|---|
| 1 | $10,000.00 | $2000.00 | $8000.00 |
| 2 | $10,000.00 | $2000.00 | $6000.00 |
| 3 | $10,000.00 | $2000.00 | $4000.00 |
| 4 | $10,000.00 | $2000.00 | $2000.00 |
| 5 | $10,000.00 | $2000.00 | $0.00 |
Written down value method
In this scenario, depreciation value reduces over the period as depreciation is calculated on the written down value of the collateral in second and subsequent years, as compared to the original cost in the first year.
Table 6-3 Illustration of Written Down Value Method
| Assumptions | |
|---|---|
| Collateral Type/ Asset | Machinery |
| Useful life of the Asset | 5 Years |
| Depreciation Percentage | 20% |
| Revaluation Frequency | Yearly |
Table 6-4 Illustration of Written Down Value Method
| Years | Original Cost of Asset | Collateral Value at the Beginning of Each year (Depreciated Value) | Depreciation Amount | Collateral value at the end of each year |
|---|---|---|---|---|
| 1 | $10,000.00 | $10,000.00 | $2000.00 | $8000.00 |
| 2 | $10,000.00 | $8,000.00 | $1600.00 | $6400.00 |
| 3 | $10,000.00 | $6,400.00 | $1280.00 | $5120.00 |
| 4 | $10,000.00 | $5,120.00 | $1024.00 | $4096.00 |
| 5 | $10,000.00 | $4096.00 | $819.00 | $3277.00 |
Sum of years digit method
The sum of the year's digits (SYD) method is an accelerated depreciation method where an asset's value is depreciated faster in its early years than in later years.
Table 6-5 Illustration of Sum of Years Digit Method
| Assumptions | |
|---|---|
| Collateral Type/ Asset | Machinery |
| Useful life of the Asset | 5 Years |
| Cost of Asset | $10,000.00 |
| Sum of Years of Digit | 5+4+3+2+1=15 |
Table 6-6 Illustration of Sum of Years Digit Method
| Years | Original Cost of Asset | Computation of Depreciation Percentage | Depreciation Amount | Collateral value at the end of each year |
|---|---|---|---|---|
| 1 | $10,000.00 | 5/15 = 33% | $3300.00 | $6700.00 |
| 2 | $10,000.00 | 4/15 = 27% | $2700.00 | $4000.00 |
| 3 | $10,000.00 | 3/15 - 20% | $2000.00 | $2000.00 |
| 4 | $10,000.00 | 2/15 = 13% | $1300.00 | $700.00 |
| 5 | $10,000.00 | 1/15 = 7% | $700.00 | $0.00 |
| - | - | Total 100% | $10,000.00 | - |
External
Securities type of collateral will follow ‘External’ method of revaluation. Collaterals which are created with security code gets collateral value based on latest price signified for the particular security in Security Code Maintenance (price fetched externally).
Securities type of collateral which derives its value from security maintenance Security Code Maintenance and accordingly collateral value is calculated.
Whenever price changes for a particular security, latest price is signified in security maintenance for the price code with effective date and collateral marked for external revaluation is picked up and updated with latest price on the next revaluation date and arrive at the modified value the collateral. On the next revaluation date, the system picks up the closest price change (latest price change) when multiple price changes are existing for a particular security to re-valuate the collateral.
Based on price changes, the collateral value may appreciate or depreciate during revaluation and accordingly collateral value gets updated.
Last revaluation date is updated as the date of automatic revaluation and next revaluation date is updated considering the last revaluation date + frequency + holiday processing setting.
History of revaluation is updated and same is available for inquiry at View Collateral Revaluation History Screen.
Custom
This method can be used for customizing the revaluation process of the collateral.
Holiday setting – Ignore holidays
If the next revaluation date falls on a holiday and holiday settings at collateral level is ignore holidays, the system consider Application Parameter Settings defined at the Config service level (‘S’ or ‘N’) and accordingly revaluation is done. In case of consecutive holidays covering multiple frequencies revaluation considers the number of frequencies and arrive at collateral value accordingly.
With Holiday Processing setting
In respect collateral with holiday processing settings like move forward/move backward and with consecutive holidays covering multiple frequencies, revaluation considers the number of frequencies and arrive at collateral value accordingly.
In case calendar is not available for either branch or currency on next revaluation date and the holiday processing setting has to consider the holiday for branch and/or currency, next revaluation date is considered as a working date and updated accordingly.
Revaluation of a Suspended Collateral
When a collateral is suspended, such collaterals are not candidates for automatic revaluation even though next revaluation date is equal to business date. Suspended collaterals cannot be manually revaluated.
However, when suspension is revoked, the system revaluates such collaterals up to date and update the latest collateral value.
Exception logging
When collateral value reduces, revaluation of the collateral stops when the same goes to negative.
When the collateral which is a candidate for automatic revaluation and the modified value on account of revaluation is negative, revaluation process skips such collaterals and exception is logged in ‘OBELCM_PP_TMS_COLLAT_EXCEPTION’ table.
On account of collateral revaluation when the collateral value decreases resulting in available balance going to negative at collateral level or at linked pool level or at linked facility level, exceptions are logged in corresponding entity exception table.
Parent topic: Collateral Revaluation