NHB
(ND)/DRS/REPO/POL/1170/2003
April 4, 2003
To
HFCs registered with NHB
Dear Sir,
Guidelines
for uniform accounting for Repo / Reverse repo transactions
In order to ensure uniform accounting treatment in respect of
repo transactions and to impart an element of transparency, it
has been decided to lay down uniform accounting principles for
repo/reverse repo transactions undertaken by all housing finance
companies [HFCs].
2. The uniform accounting principles will be applicable from the financial year
2003-04. On implementation, market participants may undertake repos from any
category of investments.
3. The legal character of repo under the current law, viz. as outright purchase
and outright sale transactions will be kept intact by ensuring that the securities
sold under repo (the entity selling referred to as "seller") are excluded from
the Investment Account of the seller of securities and the securities bought
under reverse repo (the entity buying referred to as "buyer") are included in
the Investment Account of the buyer of securities.
4. At present repo transactions are permitted in Central Government securities
including Treasury Bills and dated State Government securities. The first leg
of the repo should be contracted at prevailing market rates. Further, the accrued
interest received / paid in a repo / reverse repo transaction and the clean price
(i.e. total cash consideration less accrued interest) should be accounted for
separately and distinctly.
5. The other accounting principles to be followed while accounting for repos
/ reverse repos will be as under:
(i) Coupon
In case the interest payment date of the security offered under repo falls within
the repo period, the coupons received by the buyer of the security should be
passed on to the seller on the date of receipt as the cash consideration payable
by the seller in the second leg does not include any intervening cash flows.
While the buyer will book the coupon during the period of the repo, the seller
will not accrue the coupon during the period of the repo. In the case of discounted
instruments like Treasury Bills, since there is no coupon, the seller will continue
to accrue the discount at the original discount rate during the period of the
repo. The buyer will not therefore accrue the discount during the period of the
repo.
(ii) Repo Interest Income / Expenditure
After the second leg of the repo / reverse repo transaction is over,
(a) the difference in the clean price of the security between the first leg and
the second leg should be reckoned as Repo Interest Income / Expenditure in the
books of the buyer / seller respectively ;
(b) the difference between the accrued interest paid between the two legs of
the transaction should be shown as Repo Interest Income/ Expenditure account,
as the case may be; and
(c) the balance outstanding in the Repo interest Income / Expenditure account
should be transferred to the Profit and Loss account as an income or an expenditure
.
As regards repo / reverse repo transactions outstanding on the balance sheet
date, only the accrued income / expenditure till the balance sheet date should
be taken to the Profit and Loss account. Any repo income / expenditure for the
subsequent period in respect of the outstanding transactions should be reckoned
for the next accounting period.
(iii) Marking to Market
The buyer will mark to market the securities acquired under reverse repo transactions
as per the
investment
classification of the security. The valuation for securities acquired
under reverse repo transactions may be in accordance with the valuation norms
followed by them in respect of securities of similar nature.
In respect of the repo transactions outstanding as on the balance sheet date
(a) the buyer will mark to market the securities on the balance sheet date and
will account for the same as laid down in the extant valuation norms prescribed
in the Housing Finance Companies (NHB) Directions, 2001.
(b) the seller will provide for the price difference in the Profit & Loss
account and show this difference under "Other Assets" in the balance sheet if
the sale price of the security offered under repo is lower than the book value.
(c) the seller will ignore the price difference for the purpose of Profit & Loss
account but show the difference under "Other Liabilities" in the balance sheet
if the sale price of the security offered under repo is higher than the book
value; and
(d) similarly the accrued interest paid / received in the repo / reverse repo
transactions outstanding on balance sheet dates should be shown as "Other
Assets" or "Other Liabilities" in the balance sheet.
(iv) Book value on re-purchase
The seller shall debit the repo account with the original book value (as existing
in the books on the date of the first leg) on buying back the securities in the
second leg.
(v) Disclosure
The following disclosures should be made by banks in the "Notes on Accounts'
to the Balance Sheet.
(Rs.
in lakhs)
| |
Minimum
outstanding during the year
|
Maximum
outstanding during the year
|
Daily
Average outstanding during the year
|
As
on March 31
|
| Securities
sold under repos |
|
|
|
|
| Securities
purchased under reverse repos |
|
|
|
|
(vi) Accounting methodology
The accounting methodology to be followed along with illustrations is given in
the Annexes I and II. While market participants, having different accounting
systems, may use accounting heads different from those used in the illustration,
there should not be any deviation from the accounting principles enunciated above.
Further, to obviate disputes arising out of repo transactions, the participants
may consider entering into bilateral Master Repo Agreement as per the documentation
finalized by FIMMDA [Fixed Income Money Markets and Derivatives Association of
India].
Yours faithfully,
Sd/-
(A. K. Sohani)
Executive Director
Encl: As above
Annex-I
Recommended
Accounting Methodology for Uniform Accounting of Repo /
Reverse
Repo transactions
a. The following accounts may be opened , viz. i) Repo Account, ii) Repo Price
Adjustment Account, iii) Repo Interest Adjustment Account, iv) Repo Interest
Expenditure Account, v) Repo Interest Income Account, vi) Reverse Repo Account,
vii) Reverse Repo Price Adjustment Account, and viii) Reverse Repo Interest Adjustment
Account.
b. The securities sold/ purchased under repo should be accounted for as an outright
sale / purchase.
c. The securities should enter and exit the books at the same book value. For
operational ease the weighted average cost method whereby the investment is carried
in the books at their weighted average cost may be adopted.
Repo
d. In a repo transaction, the securities should be sold in the first
leg at market related prices and re-purchased in the second leg at the derived
price. The sale and repurchase should be accounted in the Repo Account.
e. The balances in the Repo Account should be netted from the bank's Investment
Account for balance sheet purposes.
f. The difference between the market price and the book value in the first leg
of the repo should be booked in Repo Price Adjustment Account. Similarly the
difference between the derived price and the book value in the second leg of
the repo should be booked in the Repo Price Adjustment Account.
Reverse repo
g. In a reverse repo transaction, the securities should be purchased
in the first leg at prevailing market prices and sold in the second leg at the
derived price. The purchase and sale should be accounted for in the Reverse Repo
Account.
h. The balances in the Reverse Repo Account should be part of the Investment
Account for balance sheet purposes and can be reckoned for SLR purposes if the
securities acquired under reverse repo transactions are approved securities.
i. The security purchased in a reverse repo will enter the books at the market
price (excluding broken period interest). The difference between the derived
price and the book value in the second leg of the reverse repo should be booked
in the Reverse Repo Price Adjustment Account.
Other aspects relating to Repo / Reverse Repo
j. In case the interest payment date of the security
offered under repo falls within the repo period, the coupons received
by the buyer of the security should be passed on to the seller
on the date of receipt as the cash consideration payable by the
seller in the second leg does not include any intervening cash
flows.
k. The difference between the amounts booked in the first and second legs in
the Repo / Reverse Repo Price Adjustment Account should be transferred to the
Repo Interest Expenditure Account or Repo Interest Income Account, as the case
may be.
l. The broken period interest accrued in the first and second legs will be booked
in Repo Interest Adjustment Account or Reverse Repo Interest Adjustment Account,
as the case may be. Consequently the difference between the amounts booked in
this account in the first and second legs should be transferred to the Repo Interest
Expenditure Account or Repo Interest Income Account, as the case may be.
m. At the end of the accounting period the ,
for
outstanding repos , the balances in the Repo / Reverse Repo Price
Adjustment Account and Repo / Reverse repo Interest Adjustment account should
be reflected either under item VI - 'Others' under Schedule 11 - 'Other Assets'
or under
item IV 'Others (including Provisions)' under Schedule 5 - 'Other Liabilities
and Provisions' in the Balance Sheet , as the case may be .
n. Since the debit balances in the Repo Price Adjustment Account
at the end of the accounting period represent losses not provided
for in respect of securities
offered in outstanding repo transactions, it will be necessary to make a provision
therefor in the Profit & Loss Account.
o. To reflect the accrual of interest in respect of the outstanding repo/ reverse
repo transactions at the end of the accounting period, appropriate entries should
be passed in the Profit and Loss account to reflect Repo Interest Income / Expenditure
in the books of the buyer / seller respectively and the same should be debited
/ credited as an income / expenditure accrued but not due. Such entries passed
should be reversed on the first working day of the next accounting period.
p. In respect of repos in interest bearing (coupon) instruments, the buyer would
accrue interest during the period of repo. In respect of repos in discount instruments
like Treasury Bills, the seller would accrue discount during the period of repo
based on the original yield at the time of acquisition.
q. At the end of the accounting period the debit balances (excluding balances
for repos which are still outstanding) in the Repo Interest Adjustment Account
and Reverse Repo Interest Adjustment Account should be transferred to the Repo
Interest Expenditure Account and the credit balances (excluding balances for
repos which are still outstanding) in the Repo Interest Adjustment Account and
Reverse Repo Interest Adjustment Account should be transferred to the Repo Interest
Income Account.
r. Similarly, at the end of accounting period, the debit balances (excluding
balances for repos which are still outstanding) in the Repo / Reverse Repo Price
Adjustment Account should be transferred to the Repo Interest Expenditure Account
and the credit balances (excluding balances for repos which are still outstanding)
in the Repo / Reverse Repo Price Adjustment Account should be transferred to
the Repo Interest Income Account.
s. Illustrative examples are given in Annex II
Annex-II
Illustrative
examples for uniform accounting of Repo /
Reverse repo transactions
A. Repo/ Reverse Repo of Coupon bearing security
1. Details of Repo in a coupon bearing security :
|
Security
offered under Repo
|
11.43%
2015
|
|
|
Coupon
payment dates
|
7
August and 7 February
|
|
|
Market
Price of the security offered under Repo (i.e. price of the security
in the first leg)
|
Rs.113.00
|
(1)
|
|
Date
of the Repo
|
19
January, 2003
|
|
|
Repo
interest rate
|
7.75%
|
|
|
Tenor
of the repo
|
3
days
|
|
|
Broken
period interest for the first leg*
|
11.43%x162/360x100=5.1435
|
(2)
|
|
Cash
consideration for the first leg
|
(1)
+ (2) = 118.1435
|
(3)
|
|
Repo
interest**
|
118.1435x3/365x7.75%=0.0753
|
(4)
|
|
Broken
period interest for the second leg
|
11.43%
x 165/360x100=5.2388
|
(5)
|
|
Price
for the second leg
|
(3)+(4)-(5)
= 118.1435 + 0.0753 - 5.2388 = 112.98
|
(6)
|
|
Cash
consideration for the second leg
|
(5)+(6)
= 112.98 + 5.2388 = 118.2188
|
(7)
|
* Computation of days based on 30/360 day count convention
** Computation of days based on Actual/365 day count convention applicable to
money market instruments
2. Accounting for seller of the security
We assume that the security was held by the seller at the book value (BV) of
Rs.120.0000
First
leg Accounting
| |
Debit |
Credit |
| Cash
Repo Account |
118.1435 |
120.0000
(Book value) |
| Repo
Price Adjustment account |
7.0000
(Difference between BV & repo price) |
|
| Repo
Interest Adjustment account |
|
5.1435 |
Second Leg Accounting
| |
Debit |
Credit |
| Repo
Account Repo Price Adjustment account |
120.0000 |
7.02
(the difference between the BV and 2nd leg price) |
| Repo
Interest Adjustment account Cash account |
5.2388 |
118.2188 |
The balances in respect of the Repo Price Adjustment Account and Repo Interest
Adjustment Account at the end of the second leg of repo transaction are transferred
to Repo Interest Expenditure Account. In order to analyse the balances in these
accounts, the ledger entries are shown below :
Repo Price Adjustment account
| Debit |
Credit |
| Difference
in price for the 1st leg |
7.00 |
Difference
in price for the 2nd leg |
7.02 |
| Balance
carried forward to Repo Interest Expenditure account |
0.02 |
|
|
| Total |
7.02 |
Total |
7.02 |
Repo
Interest Adjustment account
| Debit |
Credit |
| Broken
period interest for the 2nd leg |
5.2388 |
Broken
period interest for the 1st leg |
5.1435 |
| |
|
Balance
carried forward to Repo Interest Expenditure account |
0.0953 |
| Total |
5.2388 |
Total |
5.2388 |
Repo Interest Expenditure account
| Debit |
Credit |
| Balance
from Repo Interest Adjustment account |
0.0953 |
Balance
from Repo Price Adjustment account |
0.0200 |
| |
|
Balance
carried forward to P & L a/c. |
0.0753 |
| Total |
0.0953 |
Total |
0.0953 |
3. Accounting for buyer of the security
When the security is bought, it will bring its book value with it. Hence market
value is the book value of the security.
First
leg Accounting:
| |
Debit |
Credit |
| Reverse
Repo Account |
113.0000 |
|
| Reverse
Repo Interest Adjustment account |
5.1435 |
|
| Cash
account |
|
118.1435 |
Second Leg Accounting
| |
Debit |
Credit |
| Cash
account |
118.2188 |
|
| Reverse
Repo Price Adjustment account (Difference between the 1st and 2nd
leg prices) |
0.0200 |
|
| Reverse
Repo account |
|
113.0000 |
| Reverse
Repo Interest Adjustment account |
|
5.2388 |
The balances in respect of the Reverse Repo Interest Adjustment Account and Reverse
Repo Price adjustment account at the end of the second leg of reverse repo in
these accounts are transferred to Repo Interest Income Account. In order to analyse
the balances in these two accounts, the ledger entries are shown below:
Reverse
Repo Price Adjustment Account
| Debit |
Credit |
| Difference
in price of 1st & 2nd leg |
0.0200 |
Balance
to Repo Interest Income a/c. |
0.0200 |
| Total |
0.0200 |
Total |
0.0200 |
Reverse Repo Interest Adjustment Account
| Debit |
Credit |
| Broken
period interest for the 1st leg |
5.1435 |
Broken
period interest for the 2nd leg |
5.2388 |
| Balance
carried forward to Repo Interest Income Account |
0.0953 |
|
|
| Total |
5.2388 |
Total |
5.2388 |
Reverse Repo Interest Income Account
| Debit |
Credit |
| Difference
between the 1st & 2nd leg prices |
0.0200 |
Balance
from Reverse Repo Interest Adjustment account |
0.0953 |
| Balance
carried forward to P & L account |
0.0753 |
|
|
| Total |
0.0953 |
Total |
0.0953 |
4. Additional accounting entries to be passed on a Repo / Reverse Repo transaction
on a coupon bearing security, when the accounting period is ending on an intervening
day.
| Transaction
Leg à |
1st
leg |
End
of accounting period |
2nd
leg |
| Dates à |
19
Jan 03 |
21
Jan 03* |
22
Jan 03 |
The difference in the clean price of the security between the first leg and the
second leg should be apportioned upto the Balance Sheet date and should be shown
as Repo Interest Income / Expenditure in the books of the seller / buyer respectively
and should be debited / credited as an income / expenditure accrued but not due.
The balances under Income / expenditure accrued but not due should be taken to
the balance sheet
The coupon accrued by the buyer should also be credited to the Repo Interest
Income account..
No
entries need to be passed on " Repo / Reverse Repo price adjustment account
and Repo / Reverse repo interest adjustment account" . The illustrative
accounting entries are shown below:
a)
Entries in
Seller's books on January 21, 2003
| Account
Head |
Debit |
Credit |
|
Repo
Interest Income account [ Balances under the account to be transferred
to P & L]
|
|
0.0133
( Notional credit balance 0.0133 in the Repo Price Adjustment Account
by way of apportionment of price difference for two days i.e. upto
the balance sheet day)
|
| Repo
interest Income accrued but not due |
0.0133 |
|
*21 January, 2003
is assumed to be the balance sheet date
b)
Entries in
Seller's books on January 21, 2003
| Account
Head |
Debit |
Credit |
| Repo
interest income |
0.0133 |
|
| P & L
a/c |
|
0.0133 |
c)
Entries in
Buyer's Books on January 21, 2003
| Account
Head |
Debit |
Credit |
|
Repo
interest income accrued but not due
|
0.0502 |
|
|
Repo
Interest Income account [Balances under the account to be transferred
to P & L]
|
|
0.0502
(Interest accrued for 3 days of Rs. 0.0635* - Apportionment of the
difference in the clean price of Rs. 0.0133)
|
*For the sake of
simplicity the interest accrual has been considered for 2 days.
d)
Entries in
Buyer's Books on January 21, 2003
| Account
Head |
Debit |
Credit |
| Repo
interest income account |
0.0502 |
|
| P& L
a/c |
|
0.0502 |
The difference between the repo interest accrued by the seller and the buyer
is on account of the accrued interest forgone by the seller on the security offered
for repo.
B. Repo/ Reverse Repo of Treasury Bill
1. Details of Repo on a Treasury Bill
| Security
offered under Repo |
GOI
91 day Treasury Bill maturing on 28 February, 2003 |
|
| Price
of the security offered under Repo |
Rs.96.0000 |
(1) |
| Date
of the Repo |
19
January, 2003 |
|
| Repo
interest rate |
7.75% |
|
| Tenor
of the repo |
3
days |
|
| Total
cash consideration for the first leg |
96.0000 |
(2) |
| Repo
interest |
0.0612 |
(3) |
| Price
for the second leg |
(2)+(3)
= 96.0000 + 0.0612 = 96.0612 |
|
| Cash
consideration for the 2nd leg |
96.0612 |
|
2. Accounting for seller of the security
We assume that the security was held by the seller at the book value (BV) of
Rs.95.0000
First leg Accounting:
| |
Debit |
Credit |
| Cash
Repo Account |
96.0000 |
95.0000
(Book value) |
| Repo
Price adjustment account |
|
1.0000
(Difference between BV & repo price ) |
Second Leg Accounting
| Repo
Account |
95.0000 |
|
| Repo
Price adjustment account |
1.0612
(the difference between the BV and 2nd leg price) |
|
| Cash
account |
|
96.0612 |
The balances in respect of the Repo Price Adjustment Account at the end of the
second leg of repo transaction are transferred to Repo Interest Expenditure Account.
In order to analyse the balances in this account, the ledger entries are shown:
Repo Price
Adjustment account
| Debit |
Credit |
| Difference
in price for the 2nd leg |
1.0612
|
Difference
in price for the 1st leg |
1.0000
|
| |
|
Balance
carried forward to Repo Interest Expenditure account |
0.0612
|
| Total |
1.0612
|
Total |
1.0612
|
Repo Interest Expenditure Account
| Debit |
Credit |
| Balance
from Repo Price Adjustment account |
0.0612 |
Balance
carried forward to P & L a/c. |
0.0612 |
| Total |
0.0612 |
Total |
0.0612 |
The Seller will continue to accrue the discount at the original discount rate
during the period of the repo.
3.
Accounting
for buyer of the security
When the security is bought, it will bring its book value with it. Hence market
value is the book value of the security.
First
leg Accounting:
| |
Debit |
Credit |
| Reverse
Repo Account |
96.0000 |
|
| Cash
account |
|
96.0000 |
Second Leg Accounting
| |
Debit |
Credit |
| Cash
account |
96.0612 |
|
| Repo
Interest Income account (Difference between the 1st and 2nd leg
prices) |
|
0.0612 |
| Reverse
Repo account |
|
96.0000 |
The Buyer will not accrue for the discount during the period of the repo.
4. Additional accounting entries to be passed on a Repo / Reverse Repo transaction
on a Treasury Bill, when the accounting period is ending on an intervening day.
| Transaction
Leg à |
1st leg |
B/S
date |
2nd leg |
| Date à |
19
Jan.03 |
21
Jan.03* |
22
Jan.03 |
*21
January, 2003 is assumed to be the balance sheet date
a.
Entries in
Seller's books on January 21, 2003
| Account
Head |
Debit |
Credit |
|
Repo
Interest Expenditure account (after apportionment of repo interest
for two days) [ Balances under the account to be transferred to P & L]
|
0.0408 |
|
| Repo
interest expenditure accrued but not due |
|
0.0408 |
b.
Entries in
Seller's books on January 21, 2003
| Account
Head |
Debit |
Credit |
| Repo
interest expenditure account |
|
0.0408 |
| P & L
a/c |
0.0408 |
|
c.
Entries in
Buyer's Books on January 21, 2003
| Account
Head |
Debit |
Credit |
| Repo
interest income accrued but not due |
0.0408 |
|
|
Repo
Interest Income account [ Balances under the account to be transferred
to P & L]
|
|
0.0408 |
d.
Entries in
Buyer's Books on January 21, 2003
| Account
Head |
Debit |
Credit |
| Repo
interest income account |
0.0408 |
|
| P & L
a/c |
|
0.0408 |