Ideas for the Mambu Banking Engine

When changing a branch assignment, recognise accrued interest income in the branch where it was earned

What: when a client is reassigned from Branch 1 to Branch 2, recognise the interest accrued (earned) during the time the loan was in Branch 1 in that branch, instead of recognising it fully (i.e. “moving”) in Branch 2 (the current behaviour).

Taking as an example a loan account assigned to Branch 1 with:
- interest accrued as of “today" = 40,
- daily accrual = 5,
- the total interest expected for the current installment = 50 (2 days before the due date)

As of “today", 40 accrued interest income has been accrued in Branch 1 for this loan account:
Dr Interest Receivable 40 Branch 1
Cr Interest Income 40 Branch 1

At next EOD (daily accrual posting)
Dr Interest Receivable 45 Branch 2
Cr Interest Income 45 Branch 2

When Interest is Applied on the due date:
Dr Interest Receivable 50 Branch 2
Cr Interest Income 50 Branch 2

=> As a result, on repayment due date:

Interest Income 0 in Branch 1
Interest Income 50 in Branch 2

However, 40 of that income was earned in Branch 1 and therefore should be recognised in Branch 1 from the accounting perspective.

A solution would require to adjust the Interest Income so that Branch 1 keeps the income up to the transfer (branch change), and Branch 2 only recognises income earned after the transfer.

To achieve this, we could book the following Journal Entry

Dr Interest Income 40 Branch 2
Cr Interest Income 40 Branch 1

NOTE: to correctly balance end of day accrued interest, this Journal Entry should be future-dated to midnight on next day after the branch change (e.g. if Branch Change is done on date T, the Interest Income Adjustment should be booked as of T+1, 00:00)

Why: According to the accounting standards, income needs to be recognised as it’s earned, taking into consideration assignment to a particular entity (e.g. branch). Otherwise, income figures will be distorted in the Profit and Loss statement for each entity, i.e. understated in one branch and overstated in another.

Looking at the above example, if the 50 interest income is fully recognised in Branch 2 after loan branch assignment is changed (current behaviour), interest income figures in Branch 1 will be understated by 40 and in Branch 2 overstated by 40.

  • Dorota Nosal
  • Feb 26 2018
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