Dividend and Interest Accrual

Payment date calendar
Payment date calendar

Many trading firms, especially ones that are not self-clearing, use prime brokerages to maintain accounting books and records on the trading firm’s behalf. Accrual accounting is used: items are recognized when they are earned and expenses recognized when they are incurred.

Because accrued-based accounting is used, in some cases accruals are set up in the the General Ledger to record income or expenses that have been earned but not received.  The two most common are dividends and coupon interest, and what follows is a typical scenario followed by a prime broker to handle these two items. First, a few important dates are defined:

  • Record date: whoever owns the securities on the close of the record date is entitled to the dividend
  • Ex-dividend date: first trading date following the record date; dividends are not due to security holders as of this date. Also known as the ex-date.
  • Trade date: date on which a trade occurs
  • Settle date: date on which a trade is settled – on that date, cash and securities are exchanged.
  • Pay date: date on which a dividend or coupon are paid. For interest, also known as the coupon date.

Dividends

Dividends are booked using the ex-dividend date as the trade date and pay date as the settle date. The broker’s Dividend Accrual Report shows the trading firm’s dividends posted for common stock in which the dividend transactions are past the ex-date (i.e., trade date) but have not yet reached the pay date (i.e., settle date). This is usually no more than a 3-day gap domestically. Accountants create accrual entries for the General Ledger during month-end closing cycle based upon the Dividend Accrual Report.

Coupon Interest

Coupon interest is booked on the coupon date (trade date = settle date = coupon date). Accrued interest is not booked in the firm’s transaction database except upon the purchase or sale of an interest-bearing instrument. Interest accrued between the time of a bond purchase and the next coupon date is not recognized in the transaction database until realized on the coupon date (or upon closing of the bond position), but must be accrued monthly in the General Ledger. Therefore, the accountants run an Interest Accrual Report at month-end that shows the accrued interest earned within the month. They create accrual entries for the General Ledger during month-end closing cycle based upon the Interest Accrual Report.

Because the cash from the coupon payment is paid on the coupon date, the coupon’s effect on the trading firm’s cash balances on that date are available for use by cash managers.

Firms usually also receive a Consolidated Accrual Report that reports all accruals for the month, not just dividend and interest.  These include income and expense entries reflected in the company’s receivables and payables.

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Copyright 2011 Eric Bank, Freelance Writer

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