3. Commission Calculation

The process of defining parameters that determine the method of commission calculation and collection for a contract is spread over the following four screens:

For details regarding the definition of commission rules and their application on a contract, refer the chapter on processing commissions in this Commissions User Manual.

This chapter explains the manner in which the various commission parameters affect its calculation. As commissions are applied most frequently on Letter of Credit (LC) contracts, the following discussion and examples will assume that we are dealing with a LC contract. However, the methods are applicable to other types of contracts as well.

The methods of commission calculation and commission collection are discussed in the following sections.

This chapter contains the following sections:

3.1 Calculation Parameters for Rate Type Commission

This section contains the following topics:

3.1.1 The Meaning of Rounding Period

Commission can be defined as a flat amount or it can be expressed in terms of a rate.

A commission rule defines the basic attributes of a commission. The procedure for defining commission rules is described under Processing Commissions. The following commission calculation parameters, are defined for a commission rule:

These rules are then linked to a product. For instance, you process an LC contract under a product, all the parameters defined for the rule linked to the product, will be applicable to the LC. Some of these parameters can be changed, when an LC is processed. The calculation of commission will be based on the changed parameters, for such an LC.

The commission rate for an LC is always quoted in multiples of a month. The calculation of commission is also done for a whole period, which should necessarily be an entire month. Fractional periods in the tenor of an LC are thus rounded up based on a rounding period you specify, for a rule.

The tenor of the LC and the rounding period together decide the Good Until Date (GUD). This is the date until which the commission on an LC will be applied.

Note

As a corollary, for an LC, additional commission will be applied when the Expiry Date is extended, only if the new Expiry Date is beyond the original Good Until Date. This is be­cause the commission was originally calculated till the Good Until Date.

3.1.2 Applying the Rounding Period

The Good Until Date of an LC is calculated on the assumption, that commission on an LC is applied for whole months. These months start from the date of issue and finish one day before, the starting date of the following period.

At times, the expiry of the LC does not fall exactly on the start date minus one day of a future period. In such a case the LC validity needs to be rounded up, so that the Good Until Date of the LC falls on the start date minus one day of a future period.

Rate Period

The rate period you define is used to determine the period for which the effective commission rate is applicable. Instead of expressing the commission rate on a per annum basis, it is expressed on a rate period basis.

0.5% for 3 months = 2% per annum.

Good Until Date

The date that the commission will be Good until is calculated as given below:

DT + (PR * RP) - 1 day

Where,

Term

 

Description

DT

-

Start date (or Amendment date)

PR

-

Number of periods rounded

RP

-

Rate period

3.1.3 Commission Calculation for an LC

Commissions are calculated using the following formula:

Where,

Term

Description

R

Commission rate to be charged per Rate period

A

Commission basis amount

N

Number of periods (rounded) to be collected

Note

In the examples that follow, the minimum and maximum amounts for a commission rule have been ignored.

3.2 Commission Collection

This section contains the following topics:

3.2.1 Periodic Commissions

The term collection refers to the debiting of commission, either from a receivable account or a customer account. Under this head we shall discuss the following:

These attributes for a commission are specified for a product (through the Product Preferences screen).

Commission collection can thus be classified as:

Periodic commissions are collected in portions, over a period of time. Commission in this case is calculated on the basis of a set of parameters defined. The LC amount on which the commission rate is applied, will always be the LC Outstanding Amount, at the beginning of the period.When commission is collected on a periodic basis, it will be collected automatically based on the rate period specified. It will be collected at the beginning or end of each collection period, depending on whether it has to be collected in arrears or in advance.The commission for the last period is collected on the Expiry Date of the LC. This commission will be calculated till the Good Until Date of the LC.

Note

On saving a Letters of Credit contract, the system displays an override message as “Col­lection period cannot be NEGATIVE for <Component>”, if the collection period of commis­sion is less than one month and also is less than the rate period:

The system displays this override message even if the component is waived at the contract level.

3.2.2 Non Periodic Commissions

If the entire commission is collected as one amount, it is said to be non-periodic. In this case, a single commission amount is calculated at the time you enter an LC, using a set of parameters defined for the LC. This type of commission can also be collected either in advance or in arrears.

3.2.3 Commission Collected in Advance

For advance collection of a non-periodic commission, the commission is collected when the LC contract is entered in the system (it could be the issue of an import LC or the advise or any other variation of an export LC). For periodic commission, the collection is done at the booking of an LC and at the start of every subsequent period.

3.2.4 Commission Collected in Arrears

For arrears collection of non-periodic commission, the commission is collected on the Expiry Date of the LC. For periodic commission, the collection is done at the end of each period.

3.2.5 Commission for LC Amendment

An amendment to certain details of an LC has an impact on the method of commission calculation and collection. The following amendments result in an amendment commission, being applied:

a. An increase in the LC amount

If you amend a non-periodic LC, to increase the LC amount, the system maintains two separate commission records. Each of these records will be processed separately.

You can specify a new commission Rule (commission base parameters) for the amended amount or continue with the rule defined for the initial LC. The system uses the amendment date as the start date of the new LC. Based on the start date and the rate period specified for the amended amount, a new good until date is computed.

If a flat amount was specified for the initial LC, then only a flat amount can be entered again. If the commission has been entered as non-periodic initially, then only non-periodic type commission can be entered. The re-entering of non-periodic commission details will only change the commission details (base) for any future commission calculations. This is possible only if the LC amount is increased or the expiry date is changed to a date later than the existing Good until date till which commission has been calculated.

The same commission calculation formula as described above is used to determine the Amendment Commission and to establish the LC validity.

If the LC amount is decreased either through an amendment or because of an availment, there will be no additional commission charged nor will there be a refund of commissions, already collected.

b. If the LC Expiry Date is Changed

If you amend an LC to affect an extension in the expiry date that is earlier than the Good Until Date, the system will not have to calculate any additional commission. The existing commission calculations already cover that period.

c. Expiry Date Extended to a Date After Good Until Date

You can amend an LC to process an extension in its expiry date. If the new date falls after the Good Until Date defined for the calculation of the initial LC, then a new calculation amount is computed for the applicable commission rule, for the new rate period.

This may require more than one Rate period to be covered depending on the length of the extension. The system determines the amount it should calculate as the additional commission.

Specifying Include To Date

Select this option to include the expiry date also for calculation of commission otherwise it is not included for commission calculation.

Validations

LC commission calculation logic when rounding period is zero (Days basis) is as follows:

Total commission amount = (LC Amount * Commission Rate * Tenor in days)/ (Total days/100)

Where Tenor in days = (Expiry date – Start date) +1

The above logic would be changed as follows

If include to date is ‘yes’ then the above logic holds good.

If include to date is ‘No’ then,

Total commission amount = (LC Amount * Commission Rate * Tenor in days)/ (Total days/100)

Where Tenor in days = (Expiry date – Start date)

The accrual processing function would also be changed to exclude accrual on commission end date if include to date is set to ‘No’.

3.2.6 Non-Periodic in Advance

If the commission due to an LC is to be collected in advance, then the commission is collected at the time of opening the LC.

3.2.7 Non-Periodic in Arrears

If the commission due on an LC is to be collected in arrears, the commission will be collected on the expiry date of the LC

3.3 Periodic Commission Calculation

This section contains the following topics:

3.3.1 Commission Calculation on Opening an LC

The Commissions to be collected for effecting an LC are calculated at the beginning of each collection period, for the period up to the next collection date.

The next collection date is derived as follows:

Last collection date + collection frequency (in months).

For LCs whose commissions be calculated on a periodic basis, the collection frequency is picked up based on the preferences specified in the Product Preferences screen.

The commission is calculated on the current available amount. The formula used to calculate the commission earned for each period is:

Where,

Term

Description

R

Commission rate

A

Liability amount, as at the time of calculating commission and at the start of each collection period

F

Collection frequency

P

Rate period

3.3.2 Commission Calculation on Amending an LC

Periodic commission with increase in LC amount

If you increase the LC amount, periodic commission is calculated based on the same rules as described previously. The periodic rule used for the earlier LC is applied to the increased LC amount unless a new rule is specified at the time of increasing the LC amount. The collection frequency, however cannot be changed while processing an increase in the LC amount.

In case of an amendment,

Where,

Term

 

Description

R

=

Commission rate.

I

=

Increase in liability amount.

F

=

Collection frequency.

P

=

Rate period.

The system treats the amended amount as a new LC. A new good until date is computed. The new calculations are based on the amended amount and the commission amount is calculated based on the rule defined for the amendment.

3.4 Commission Stop Date and Commission Calculation

The minimum and maximum limits that can be collected as commission for an LC are defined in the Rule Maintenance screen. This amount cannot be exceeded regardless of the calculation result. The minimum and maximum amounts can be expressed in the local currency or in the currency of the LC, to which it is applied.

For periodic commissions, you can specify the frequency in which the commission should be collected. Future calculations (and collections) can be stopped when necessary. You do so by specifying a stop date (in the Contract ICCF screen). From then on no further commission should be collected.

Effect of stop date on current calculation

If the commission is collected in advance, the current commission will not be affected. However no commissions will be computed or calculated for the periods that fall, after the stop date.

If the commission is to be collected in the future (Arrears) an apportioned amount will be collected. This amount is calculated by taking the number of days from when the commission was calculated to 1 day before the stop date (as a proportion of the total amount of commission over the total number of days).

Assume that commission is on an accrual basis and in arrears. If a stop date is input, the commission is collected upto one day before the stop date and the necessary entries will be passed.

For non-periodic LCs, the total number of days is computed as the number of days from commission calculation date to 1 day before the expiry date.

For periodic LCs, it is computed as the number of days, from commission calculation date to end of Rate period or 1 day before the expiry date (for last Rate period).

Effect of stop date on future calculation

If you specify a stop date, all future commission calculations and collections will be stopped from that date.