Accrual Accounting Requirements

Scope of Type 2 Accrual accounting

We would support the following support for Accrual Accounting (Will refer to the same as Type 2 Accrual Accounting)

  • Accrue interest, fees and penalties as soon as they become due (on the due date of the repayment)
  • Add the ability to accrue interest at any point in time (it might not be possible to do so in the first cut of accrual accounting since we do not have support for true “declining balance”, it might be beneficial to think of these two items together)

Existing functionality (Type 1 Accrual accounting)

We currently have (limited, not tested or updated since the first time we wrote the functionality back in June last year) support for Upfront Accrual (let’s call it Type 1 to avoid confusion).

  • Accrue the entire interest upfront (as soon as the loan is disbursed)
  • Accrue a fee as soon as it is applied

Ensuring that Type 1 works correctly should be fairly trivial (as most of the code is in place). However the focus of this documentation is adding support for Type 2 Accrual Accounting.

Modifications to COA Snippet

 

New accounts for capturing Receivables would be required

 

Account Type

Placeholder (Suggested Account Name)

Comments

Assets

Cash

 

Loan Portfolio

 

Transfers in Suspense

 

Receivables Interest

Newly added for recognizing interest

Receivables Fees

Newly added for recognizing fees

Receivables Penalties

Newly added for recognizing penalties

 

Income

 

Interest on loans

 

Income from fees

 

Income from Penalties

 

Expenses

Losses Written Off

 

Liability

Loan Over-payments

 

New Posting rules

 

The base posting rules would be as follows

Event

Account to Debit

Account to Credit

Disbursal

Loan Portfolio (A)

Cash (A)

Interest Applied

Receivables Interest (A)

Interest on loans (I)

Fee Applied

Receivables fee (A)

Income from fees (I)

Penalty Applied

Receivables penalties (A)

Income from Penalties (A)

Principal repayment

Cash (A)

Loan Portfolio (A)

Interest repayment

Cash (A)

Receivables Interest (A)

Principal Write off

Losses Written Off (E)

Loan Portfolio (A)

Fees payment

Cash (A)

Receivables fee (A)

Penalty payment

Cash (A)

Receivables penalties (A)

Interest write off

Losses Written Off (E)

Receivables Interest (A)

Fee write off

Losses Written Off (E)

Receivables fee (A)

Penalty write off

Losses Written Off (E)

Receivables penalties (A)

Examples

 

Basic Scenario

 

Consider This Example on a Loan with a Monthly Payment Schedule.

 

 

 

Event

Sequence No

Transaction Date

(dd/mm/yyyy)

Effective Date (for accounting)Comment

Debit

Credit

Disbursal

 

1

7-10-20137-10-2013 

Loan Portfolio (A)

Cash (A)

Automated System Accrual Event

2

7-11-2013

 

7-11-2013

A Repayment is Accrued/Recognized on the day it becomes due (both Interest and Fees/Penalties associated with the Repayment shall now be accrued).

The system event shall only kick in when it finds a repayment which is due for that particular day. In this scenario, it would only recognize the first repayment for this loan which is due on the 7th of November 2013.

The Accrual event does not kick in if

  • The interest, fees and penalty for the installment has already been paid ( We are now unlinking accruals and repayments)
  • The interest/fees and Penalty for the installment has been waived
  • The loan is not in an active state (pending transfer etc) ?



 

 

Receivable Interest (A)

Income from interest (I)

Receivable Fees (A)

Income from fees (I)

Receivable Penalties (A)

Income from penalties (I)

1st Installments repayment

3

7-11-2013



7-11-2013



Pays Principal, interest, fees and Penalties associated with this repayment 

Cash (A)

Receivable Interest (A)

Receivable Fees (A)

Receivable Penalties (A)
Loan Portfolio (A)
Prepayment for remaining Installments48-11-20138-11-2013

None of remaining Repayments are due yet, so the Interest/Fees/Penalties associated with them have not yet been recognized.

However, we use the same posting rules for repayments (and let accruals happen independently as per schedule)

Cash (A)Receivable Interest (A)

Receivable Fees (A)

Receivable Penalties (A)
Loan Portfolio (A)
Delete Previous Prepayment (with sequence Number 4)59-11-20138-11-2013

In case of deletion of a transaction, all accounting entries made for that transaction needs to be reversed.

For deleting (or even editing) an existing transaction, accounting books for that day should not be closed

Receivable Interest (A)Cash (A)
Receivable Fees (A)
Receivable Penalties (A)
Loan Portfolio (A)
Automated System Accrual Event67-12-20137-12-2013Identical to event 2 but recognizes the receivables for the second repayment which has become due today  
Out of turn repayment (as of 6-11-2013)77-12-20136-11-2013

One of the USP's of MifosX which Organizations have found very convenient had been its Flexibility like the ability to make a repayment as on any date provided, edit any repayment at any point in time, undo a disbursal etc ( of course we can also disable such behavior by closing accounting as on a particular day).

Handling out of turn payments becomes easy with the approach for "delinking" accruals and repayments.

So an "Out of turn" repayment here would do the following

1) Not affect any accruals

2) Cause the platform to inspect all repayments made after the effective date of this out of turn repayment. If this repayment causes the allocation (allotment of the paid amount in a repayment towards principal, interest and fees) of any of the following repayments to change, the repayments are automatically reversed at the portfolio side ( accounting reversals are also made for the reversed transactions). New repayments having the same repayment date and amount (but different allocation) are then created for the reversed repayments. The new repayments are also accounted appropriately

 Receivable Interest (A)
Receivable Fees (A)
Receivable Penalties (A)
Loan Portfolio (A)
Write Off the rest off the Loan


8


8-12-2013


8-12-2013


Unlike Cash based accounting which is affected only by Principal Write-off. Accrual Based accounts should respond to the following

  • Principal Write-off
  • Interest Write-off/Waiver (However, accounting entries are to be made only for that portion of the interest that has been recognized before the waiver)
  • Fee write off (However, accounting entries are to be made only for those fees which have been recognized)

We should not allow a write-off before the last payment. Also, after the writeoff, we stop accruing interest/fees and Penalties

 







Losses Written Off (E)
Receivables Interest (A)
Receivable Fees (A)
Receivable Penalties (A)
Loan Portfolio (A)
Undo Disbursal8 ( in a Parallel Universe)8-12-20138-12-2013

Undoing the disbursal does the following

1) Reverses all payments for this loan (and creates subsequent accounting reversals)

2) Reverses all accruals which have happened on this loan (and creates subsequent accounting reversals)