Queries
hiii Can any one tell me about treasury accounting ???..What are the contents and how can we entered in our books of accounts...?? Warm Regards Mukesh

22nd November 2008 From India , Chennai

Dear fnd,

Treasury bill accounting generally deals with the adjustement of repos and reverse repos

Here is a following note on the procedural aspect of the Treasury Bill Accounting

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


(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

Here is the annexure as mentioned above with the classical example in practical term- By Wils24:)

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 ŕ 1st leg End of accounting period 2nd leg Dates ŕ 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 ŕ 1st leg B/S date 2nd leg Date ŕ 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
26th January 2009 From India , New Delhi
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