Principles of Investment Accounting. Dennis V. Yacobozzi, President & CEO United American Capital Corporation (UACC) Investing Public Funds Since 1991

Transcription

1 Principles of Investment Accounting Presented By: Dennis V. Yacobozzi, President & CEO United American Capital Corporation (UACC) Investing Public Funds Since Topics to Cover Separation of Accounting Duties The Concept of Asset Conversion Understanding Investment Reports Cash Basis Accounting Accounting Treatment of Example Securities Reconciliation Process Principles of Investing Accounting United American Capital Corp. 2 1

2 Investment Accounting System for Public Entities A comprehensive investment accounting system ensures full disclosure and accountability. Investment reports are public records. Promotes clean audits. Accurately describes all investment holdings and investment income. Principles of Investing Accounting United American Capital Corp. 3 Separation of Accounting Duties/ Checks and Balances Investing Authority Maintains official investment records Balances with custodian and Investment Manager Registered Investment Advisor Executes investment transactions with Broker/Dealers Ensures proper settlement at Custodian Bank Prepares monthly/quarterly investment reports Brokers/Dealers Sends trade confirmations to Public Entity and Investment Manager Affirm transaction with custodian Deliver/receive bonds vs. payment (DVP) Custodian Bank Pays for purchases/delivers sold bonds on settlement date DVP Issues monthly custody statements Principles of Investing Accounting United American Capital Corp. 4 2

3 The Concept of Asset Conversion An investment transaction is a conversion process. CASH INVESTMENT INVESTMENT CASH Cash and investments are both assets of your public entity. Adjustments are made between cash and investments when bond purchases, sales, maturities, and calls take place. Principles of Investing Accounting United American Capital Corp. 5 The Concept of Asset Conversion Cash account and Investment account A bond purchased for $1 million reduces cash and increases investments on the settlement date by that amount. The total assets of the public entity remains the same. The total asset value of the public entity increases when the investment pays interest (or when capital gains are realized). Cash Increases Income is credited. Principles of Investing Accounting United American Capital Corp. 6 3

4 Investment Report Components An Inventory of all securities including: CUSIP, Par Value, Market Value, Book Value, Settlement Date, Maturity Date, Coupon, Yield to Maturity A record of all investment activity for the period: Purchases, Sales, Calls, Maturities A record of all income received during the period: Interest Received, Realized Capital Gains Investment Income = Proceeds Cost Principles of Investing Accounting United American Capital Corp. 7 The Portfolio Inventory Categorize investments by issuer and type Issuers include: US Treasuries Government Agencies Fannie Mae (FNMA), Freddie Mac (FHLMC), Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB) Corporations Municipalities Banks (CDs) Types include: Callable bonds (fixed rate and step ups), Non callable bonds (or bullets), Discounted Securities (Bills, Discount Notes, CP) Principles of Investing Accounting United American Capital Corp. 8 4

5 Components of the Inventory CUSIP: Letter and number combinations assigned to identify publicly traded securities. Each number is unique to the issue. Par Value: The value of a bond at maturity; its future value. Market Value: The estimated liquidation value of each security as of a specific date; may be greater (or less) than your purchase cost due to changing interest rates. Principles of Investing Accounting United American Capital Corp. 9 Components of the Inventory Book Value (Cost): The amount disbursed to purchase a security, including any accrued interest due to the seller on the settlement date. The buyer will receive the entire coupon payment at the next interest payment date. Book Value = Principal + Accrued Interest (Principal Cost= Par Value * Purchase Price) After the next interest payment is received, the accrued interest is amortized from the book value and the book value will equal the principal cost. Principles of Investing Accounting United American Capital Corp. 10 5

6 Components of the Inventory Settlement Date: The date in which the securities are delivered versus payment. The statute requires "delivery vs. payment" (DVP) and the use of a qualified safekeeping agent. Maturity Date: The future date in which the par amount is paid to the investor. The par value will be paid at maturity, regardless of original purchase cost. Principles of Investing Accounting United American Capital Corp. 11 Components of the Inventory Coupon (or Rate): The annual percentage amount paid to an investor, based upon the par value of the bond; the rate may be fixed or variable. Yield to Maturity: Therateofreturnanticipated on a bond if it is held to maturity. If a bond was purchased at a discount, YTM > the coupon. If a bond was purchased at a premium, YTM < the coupon. If a bond was purchased at par (100), YTM = coupon. Principles of Investing Accounting United American Capital Corp. 12 6

7 Public Entities Cash Basis Accounting Cash Basis Purchase cost remains level to the maturity or sale date. Purchase cost is reduced by the amount of purchased accrued interest at the next interest payment date. Premiums are not amortized; discounts are not accreted (Exception: Premiums may be amortized over the life of the security through the application of realized income). Income is reported when received (realized). Realized income is shown as proceeds minus cost. Principles of Investing Accounting United American Capital Corp. 13 Accrual Basis Accounting Accrual Basis Purchase cost is adjusted daily ( adjusted book value ) Discounts accrete daily over the life of the security Premiums are amortized daily over the life of the security Interest accrues daily Capital gains/losses are based upon adjusted book value Principles of Investing Accounting United American Capital Corp. 14 7

8 CUSIP Issuer Par Value Stated Rate Maturity Date Purchase Date DTM YTM Market Value Accrued Interest At Purchase Current Principal Book Value Commercial Paper Discount 2254EBFN6 CSFBNY 110, /22/2018 9/29/ , , , QJE2 JPMSCC 100, /14/ /21/ , , , CP Discount Totals 210, , , , Federal Agency Coupon (NC) 3130A5FD6 FHLB 100, /27/2018 5/27/ , , , EETE0 FFCB 150, /12/2018 3/13/ , Received 149, , LM3 FHLB 100, /11/2018 8/7/ , Received 99, , G46P8 FHLMC 100, /11/2019 6/29/ , Received 99, , G0R39 FNMA 100, /24/ /22/ , Received 98, , G0VY6 FNMA 100, /27/2020 3/9/ , Received 99, , G9QB6 FHLMC 120, /25/2020 5/25/2016 1, , , , EHKK8 FFCB 135, /24/2021 6/14/2017 1, , Received 134, , G0N82 FNMA 100, /17/2021 8/19/2016 1, , , , G0Q89 FNMA 135, /7/ /15/2016 1, , Received 133, , Fed. Agency (NC) Totals 1,140, ,125, ,134, ,134, Federal Agency Coupon (Callable) 3136G4GD9 FNMA 100, /28/ /31/ , , , G3VG7 FNMA 50, /29/ /29/2017 1, , , , G4AT0 FNMA 100, /30/ /22/2017 1, , , , G4GF4 FNMA 100, /28/ /31/2016 1, , , , Fed. Agency (C) Totals 2,005, ,977, , , Treasury Securities Coupon P87 USTN 110, /28/2021 3/13/2017 1, , Received 106, , S76 USTN 105, /31/2021 7/27/2017 1, , Received 102, , T34 USTN 100, /30/2021 8/3/2017 1, , Received 97, , Treas. Securities Totals 315, , , , , Investment Totals 2,015, ,978, ,995, ,995, Principles of Investing Accounting United American Capital Corp. 15 Accounting for a Discounted Purchase A FNMA with an original issue date of 9/30/16 and maturing on 9/30/21 with a coupon rate of 1.625%, purchased in the secondary market on settlement date 12/22/17, at a price of (to yield 2.283%), will affect the total cash account as follows: 97, $100,000 Par Value minus a discount of $2, Accrued interest paid at purchase = Initial Purchase Cost = 98, Reduction in total cash offset by an increase in total investments Principles of Investing Accounting United American Capital Corp. 16 8

9 Amortizing Accrued Interest At the following interest payment date (03/30/2018), cash and investments are affected as follows: Gross interest payment received minus accrued interest paid at purchase = net interest income (the pay in amount): $ Interest received (credited by the custodian bank) Accrued interest paid at settlement date (2/21/2017) $ Net interest income (Increase in cash offset by a decrease in investment cost) Principles of Investing Accounting United American Capital Corp. 17 Recognizing Income on Discount All subsequent interest payments (after the amortization has taken place) are paid in totally, as an increase in the cash account. First pay in of $ subsequent pay ins of $812.50totaling $5, Plus realized gain at maturity of $2, Equals total realized income of $8, Principles of Investing Accounting United American Capital Corp. 18 9

10 Yields on Callable Bonds When a callable bond is purchased at a discount: if the bond is called prior to maturity, the investor will realize a yield greater than the yield to maturity. When a callable bond is purchased at a premium: if the bond is called prior to maturity, the investor will realize a yield less than the yield to maturity. Principles of Investing Accounting United American Capital Corp. 19 Yield to Call Schedule YTC schedule on FNMA /30/21 purchased at on 12/22/17 03/30/ % 06/30/ % 09/30/ % 12/30/ % 03/30/ % 06/30/ % 09/30/ % 12/30/ % 03/30/ % 06/30/ % 09/30/ % 12/30/ % 03/30/ % 06/30/ % 09/30/ % Principles of Investing Accounting United American Capital Corp

11 Summary of Reconciliation Process The public entity s internal record keeping is subject to audit by the State Auditor. Components of the Reconciliation Process: Internal Records (the official books) Custodian bank safekeeping of investment assets, purchase cost, income, trade activity Investment advisor (if used) inventory of assets and individual purchase cost, income, list of transactions Additional records broker/dealer trade confirms Principles of Investing Accounting United American Capital Corp. 21 Common Reconciliation Errors Using market value rather than book value (cost) Failing to account for purchased accrued interest Not recognizing a discount at maturity Not amortizing a premium paid Not maintaining supporting documentation Not recognizing income when received Principles of Investing Accounting United American Capital Corp