Lesson 13 of 20 · 7 min
Why a backward-effective revision is possible
A term can be revised with effect from a date already past, producing a charge for a period you thought was settled.
Most people assume a change to a loan takes effect when they are told about it. On a variable-rate demand facility, that assumption is not reliable, and the reasons are mundane rather than sinister.
How a revision comes to have effect from a past date:
- The index is published with a lag, so the rate for a past period is only knowable afterwards.
- A tier or relationship discount is determined from period-end balances, so the correct spread for the period is computed after the period.
- An error is discovered and corrected, and the correction properly applies to the period in which it arose.
- A collateral reclassification is determined to have applied from an earlier date, changing the collateral value used in past tests.
The result appears as a prior-period adjustment, which is the subject of the next lesson. Mechanically the account is recomputed as though the corrected term had applied all along, and the difference between what was charged and what should have been charged is added or credited.
The consequence worth internalising is that a closed statement is not final. A period you reconciled, agreed and filed can be reopened by a figure determined later. This is a genuine limit on what verification can achieve: checking a statement confirms it is internally consistent with the terms as then stated, not that the charge will not change.
The practical response is not suspicion but record-keeping. Keeping the rate, balance and collateral figures you verified for each period is what lets you identify an adjustment as an adjustment, rather than absorbing it as a slightly odd interest line.
Key terms
- Backward-effective revision
- A change to a term taking effect from a date already past, producing a recomputation of a settled period.
- Publication lag
- The delay between a period and the availability of the index value for it. A common and legitimate source of retroactive adjustment.
- Reopening
- Recomputing a closed period under a revised term. It is why a reconciled statement is not necessarily final.
Worked example
A period reopened three months later
A period originally charged $1,869.47 at an effective 7.003% on a flat $310,000 balance, Act/360, 31 days.
- Originally charged
- $1,869.47
- Spread later determined to be 25 bps higher for the period
- Effective rate 7.253%
- Recomputed charge
- $1,936.22
- Difference
- $66.75
- How it appears
- A line on a later statement
- Period the line refers to
- One already reconciled and filed
$310,000 × 0.07253 ÷ 360 × 31.
Sixty-seven dollars is small. The structural fact — that a settled period can be recomputed — is not, and it is only visible if you kept the original figures.
Check yourself
You reconciled a statement three months ago and agreed the interest charge. Can that charge still change?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.