Reporting Accrued Interest Income

Reporting Accrued Interest Income

Some organizations receive information on their bank statements that reports accrued, unpaid, income. This can be thought of as a receivable. It is the balance of accrued income that is usually reported. The total market balance on the statement includes this accrued balance.

This balance of accrued income can increase or decrease from statement to statement, as more interest income is earned (but payment is deferred), or as income is paid out. There are various ways to account for this receivable income, depending on your reporting needs, and the requirements of your auditors. 

Don’t Track the Accrued Income Balance

If you ignore accrued income, then you are operating on the cash basis as far as interest income is concerned, and Funds will not be fairly credited with their portion of the income. If you ignore the accrued income amount on your investment statements, the accrued interest balance will be a reconciling item against the statement, which usually includes the accrued income in the Ending Market Balance. New Funds in the Pool will also receive a portion of the realized interest, even though it was actually earned before they joined the Pool.

NOTE: You should not generally allow your Pool balances to differ from the total of the applicable investment statement market balances.

The preferred method is to treat accrued income just like paid interest income, without keeping a separate balance of accrued income at the Fund level. In order to allocate the accrued interest as it is received, you can enter it on an allocable line on the Reconciliation tab and keep it in its own General Ledger account or include it on the Interest Income line and then post it to General Ledger as part of interest income (even though it has not yet been received). When the interest is paid out, there will be a negative change to the accrued income balance shown on the investment statement and a corresponding increase in the interest income amount on the statement. If you are recording the accrued interest on a separate line on the Reconciliation tab, this negative change would be reflected on that line and the accrued interest income actually received would be part of the interest income balance reported.

Using this approach, the net interest income for previously accrued interest income will be zero. This means that a new Fund to the Pool will not receive the income. It also means that a Fund that is no longer in the Pool when the interest is received will have properly received income when it was earned in a previous Cycle.

NOTE: Neither of these methods track the Accrued Income Balance. 

Track the Accrued Income Balance at the Organization Level

Most organizations only need to report the accrued investment interest income balance at the organization level – usually once or twice a year in a consolidated report. They set up a single organizational level Accrued Income Balance (asset) account to hold this value in General Ledger. The values are copied from bank statement(s) and entered into the General Ledger Journal to make the balance available for financials.

NOTE: These entries must be offset by entries to a Contra account so the amount is not included twice on Consolidated Financial Statements. 

Allocate Accrued Income Outside of FACTS

Some organizations report the accrued income balance at the Fund level. FACTS is not designed to handle accrued income directly, so these organizations use a work-around outside of FACTS, which results in a Fund level accumulated interest balance.

NOTE: Using this method, the Accrued Income Balance for a specific Fund can never be negative (unless the Fund has a negative position in the Pool). This is because the net Accrued Income Balance can never be negative, and the entire amount is re-allocated each month. This effect may be desirable for some organizations, because they do not have to explain a negative Accrued Income Balance for a new Fund. However, it may also be a reflection of the inequity of the method:

• This method does not reflect the fact that the accrued interest was earned prior to the current Cycle, and that new Funds should possibly not participate in the income as it is paid. In fact, the accrued income balance (receivable) for a specific Fund will not tie out with the accrued interest revenue, because accrued interest receivable earned in one Cycle is reallocated to other Funds in a later Cycle.
• Since the Accrued Interest Balance is not part of the Pool while it is processed (Pool = Pooled Asset account + optional Adjustment to Market account), allocations do not reflect these assets, although they are actually part of the market value of the Pool.

To do this, use the Allocation and Entries utility in General Ledger to allocate the Accrued Income balance, ignoring it in FACTS. The prior month’s ending accrued income balance is reversed out each month and re-allocated based on the new Fund balances. Changes to the balance are also allocated based on the new Fund balances.

1. In the General Ledger module, create a General Ledger Asset Account (for example, Accrued Income Balance), and an Accrued Income Change (revenue) account for each Fund.
2. In FACTS, enter account reconciliation information exclusive of accrued income activity. This should leave an unreconciled difference between FACTS and the bank statement.
3. Post FACTS through to General Ledger accounts.
4. Do the following via the Allocation and Entries utility to create three sets of entries applied to the last day of each reconciliation period:

NOTE: Refer to Running Allocation and Entries for more information.

• Reverse out the accrued income balance in each Fund from the prior month. Base the Allocation and Entries on the Accrued Income Balance receivable account. Enter the total Accrued Income Balance as the amount. Debit the Pooled Asset account, and credit the Accrued Income Balance.
• Redistribute total accrued income balance from the prior month. Base the Allocation and Entries on any allocation from the current Cycle (for example, Interest Income). Enter the total Accrued Income Balance from the prior month as the amount. Debit the Accrued Income Balance (receivable) account and credit the Pooled Asset account.
• Allocate the change to the accrued income balance. Base the Allocation and Entries on any allocation from the current Cycle (e.g. Interest Income). Enter the net change to the accrued interest income balance as the amount. Assuming the change is positive, debit the Accrued Income Balance account and credit the Accrued Income Change (revenue) account.

NOTE: The Accrued Income Balance for a specific Fund can never be negative (unless the Fund has a negative position in the Pool). This is because the net Accrued Income Balance can never be negative, and the entire amount is re-allocated each month. This effect may be desirable for some organizations, because they do not have to explain a negative Accrued Income Balance for a new Fund. However, it may also be a reflection of the inequity of the method:

• This method does not reflect the fact that the accrued interest was earned prior to the current Cycle, and that new Funds should possibly not participate in the income as it is paid. In fact, the accrued income balance (receivable) for a specific Fund will not tie out with the accrued interest revenue, because accrued interest receivable earned in one Cycle is reallocated to other Funds in a later Cycle.
• Since the Accrued Interest Balance is not part of the Pool while it is processed (Pool = Pooled Asset account + optional Adjustment to Market account), allocations do not reflect these assets, although they are actually part of the market value of the Pool.

Allow FACTS to Allocate the Accrued Income Changes

This method allows you to keep the accrued income balance at the Fund level and give the income to the Funds that were in the Pool when it was earned (not just paid).

It provides the ability to have accrued revenue and receivable balances maintained at the Fund level in the General Ledger and will maintain a Receivable Balance at the Fund level.

This method is similar to the way Unrealized Gains are handled in FACTS. A Fund’s allocation from the Unrealized Gain / Loss field on the Reconciliation tab maps to the Fund’s Unrealized Gain / Loss revenue account in General Ledger, and (optionally) is offset by an entry to the Adjustment to Market asset account, in lieu of the Assets in Pool account.

You can accomplish a similar posting for Accrued Income Changes. Set up a General Ledger Asset account (for example, Accrued Income Balance) and an Accrued Income Change (revenue) account for each Fund. Each month perform the following steps in FACTS:

1. In General Ledger, use Cash Call or Allocation and Entries to move the accrued income balance in each Fund from the prior month into the Pooled Asset account. Assuming the balances are positive, you would debit the Pooled Asset account, and credit the Accrued Income Balance account.
2. Post the General Ledger Journal entries to the first day of the Cycle.

NOTE: Refer to Moving All Cash from a Holding Account to an Investment Account and Running Allocation and Entries in the General Ledger module for more information.

NOTE: You may have to run Cash Call twice if there are any credit accrued income balances. It is generally easier to use Allocation and Entries.

3. Enter the change in the accrued income balance twice into the Reconciliation tab. Assuming the balance has increased, enter it as a positive amount into a field mapped to accrued interest revenue (which will be credited, with an offsetting debit to the Pooled Asset Account), and then enter it as a negative amount into a field mapped to Accrued Interest Balance (which will be debited, with a credit to the Asset Account). The net effect of these postings will be a debit to the Accrued Interest Balance and a credit to the Accrued Interest Revenue. This is the only way to effectively create a debit and credit entry pair via FACTS for accounts other than the Pooled Asset Account

NOTE: Reverse the signs of the entries if the change is negative (if the accrued income balance has decreased). In this case, regular Interest Income will be credited for the amount of the realized interest, and assets in Pool will be debited.

4. Post FACTS, and then post the General Ledger Journal entries as usual.
5. In General Ledger, use the Entries from Journal History utility to move the accrued income balance from the prior month back into the Accrued Income Balance account. Debit the Accrued Income Balance (receivable) account and credit the Pooled Asset account. Use the last day of the Cycle as the Apply Date.

NOTE: Before the next Cycle you will need to change the date on the Transactions to the first day of the next Cycle.

NOTE: Refer to Creating Journal Entries from Journal History in the General Ledger module for more information about the Entries from Journal History utility.

An interesting result of this method is that the Accrued Income Balance could be negative for a specific Fund. If a Fund was new to the Pool, and the Accrued Income Balance diminished during the Fund’s first Cycle in the Pool, the Fund would receive a debit to the Accrued Interest Income Revenue, and a balancing credit to Actual Interest Income Revenue. On the asset side, it would receive a debit increase to the Pooled Asset account but would also get a negative (credit) to the Accrued Income Balance for the same amount. Its actual assets in the Pool would be the net of these two accounts, and that is how it could be reported.

The negative Accrued Income Balance would reflect interest income that was earned before the Fund joined the Pool but was not yet received. As more income is accrued, the negative accrued balance will disappear, and the Fund will begin to earn subsequent realized interest income.