7. Defining Discount Accrual Fee Classes

In Oracle FLEXCUBE, you can define the different types of charges or fees that apply on a product as ‘classes’. A charge class is a specific type of charge component (E.g. ‘Charges for amending the terms of a loan’).

When defining a product, you merely have to attach the required classes. In this manner, a contract processed under a particular product acquires the classes (components) associated with the product.

A discount accrual fee class can be made applicable for loans and bills processed in Oracle FLEXCUBE. To apply a discount accrual fee, you should first define attributes for each of the components.

This chapter contains the following sections:

7.1 Discount Accrual Fees

This chapter contains the following sections:

7.1.1 Processing Discount Accrual Fees

The following steps are involved in processing discount accrual fees:

  1. Defining discount accrual fee classes
  2. Associating discount accrual fee classes with a product

7.1.2 Defining a Discount Accrual Fee Class

A discount accrual fee class specifies the accrual parameters for interest, charges and fees. You can define the attributes of a discount accrual fee class in the ‘Discount Accrual Class Maintenance’ screen. You can invoke this screen by typing ‘DADACRCL’ in the field at the top right corner of the Application tool bar and clicking on the adjoining arrow button.

Before defining the attributes of a discount accrual fee class, you should specify the following:

Class Code

Specify a unique identifier for the class.

Description

Enter a brief description for the class. A description would help you easily identify the class.

Module

Specify the module to which the class is associated.

Module Description

A brief description of the module is displayed here.

7.1.2.1 Specifying Accrual Preferences

When building a discount accrual fee class, you define the following attributes:

Discount Accrual Required

Specify whether Discount accrual should be performed for the class.

Accrual Frequency

Specify the frequency at which discount accrual should be performed. This can be either Daily or Monthly. For monthly accruals, the discount accrual will be done on the last day of the month.

Acquisition Type

The Acquisition Type determines whether the initial cash flows for a C contract can be more (Premium) or less (Discount) or equal (Par) to the bill amount.

The ‘Acquisition Type’ is determined by the cash flows of interest, charges and fees for which 'Consider as Discount' option is checked.

The drop down list comprises of the following values:

If the incoming cash flows of all the above components are greater than outgoing cash flows considering Incoming flow as Positive (In case of bills), the acquisition type is considered as Discount.

If the incoming cash flows of all the above components are less than outgoing cash flows considering Incoming flow as Positive (In case of bills), the acquisition type is considered as Premium.

If the incoming cash flows of all the above components are equal to outgoing cash flows considering Incoming flow as Positive (In case of bills), the acquisition type is considered as Par.

Note

The acquisition type of a contract can change from premium to par/discount or otherwise depending on the charges getting liquidated during the life cycle of the contract.

Handling of Foreclosure

Specify how foreclosures with respect to the contracts using the class must be handled. You can opt for the completion of pending accruals, or refund. In case the ‘Acquisition Type’ is ‘Par’, there are no refunds. Only the pending accruals are completed.

7.1.2.2 Specifying Day Count Method Details

You can specify the day count methods for each currency using the class. You can define the day count methods for both the Numerator and the Denominator.

7.1.3 Associating Discount Accrual Components to Products

After building discount accrual fee classes you can associate the class with loans or bills products. Click ‘Discount Accrual’ button in the Product Definition screen. The ‘Discount Accrual Preference Association’ screen is invoked.

To associate discount accrual fee class with a product, click ‘Default From Class’ button in the Discount Accrual Preference Association screen. Select the appropriate discount accrual fee class from the list of classes.

The attributes defined for the discount accrual fee class defaults to the product. You have the option to modify the attributes defined for the class, to suit the requirement of the product you are creating. Alternatively, you can choose to define the discount accrual details for the product.

The system derives the acquisition type based on the following criteria:

Product Type Inflow/Outflow Acquisition Type
Asset Inflow>Outflow Discount
Asset Inflow<Outflow Premium
Asset Inflow=Outflow Par

An asset here is a BC contract and Inflow/Outflow could pertain to the charges and discounted interest associated with a contract. Now, if the acquisition type derived by the system for a contract and the acquisition type of the discount accrual class linked at the product are different, system does not allow saving of a contract.

7.1.3.1 Events and Accounting Entries for Discount Accrual

While defining the accounting entries for the Loans and Bills modules you must identify the events and accounting entries that are required for discount accrual fee accounting. One of these is the YTM based Discount Accrual (YACR) event.

It is meant to indicate the periodic discount accruals for the contract. The Accounting Roles that should be associated with the event YACR are:

Accounting Role Acquisition Type Product Type Description
EIMDISCRIA Discount Asset Effective Interest Based Discount To Be Accrued
EIMDISCINC Discount Asset Effective Interest Based Discount Accrued Till Date
EIMPREMPIA Premium Asset EIM Premium paid in advance
EIMPREMEXP Premium Asset EIM Premium Expense
EIMINTADJREC Par Asset EIM Interest Adjustment Receiva­ble
EIMINTADJINC Par Asset EIM Interest Adjustment Income

The Amount Tags for the YACR event:

Amount Tag Description
EIMDISC_ACCR Net Discount Accrual amount for the processing day
EIMDISC_ADJ Discount accrual refund amount
EIMPREM_ACCR Net premium accrual amount for processing day
EIMINTAD­J_ACCR Interest adjustment amount
EIMPREM_ADJ Premium accrual refund amount

The following entries should be maintained for the YACR event for assets (BC contracts):

Accounting Role Amount Tag Dr/Cr Indicator
EIMDISCRIA EIMDISC_ACCR Debit
EIMDISCINC EIMDISC_ACCR Credit
EIMDISCRIA EIMDISC_ADJ Debit
CUSTOMER EIMDISC_ADJ Credit
CUSTOMER EIMPREM_ADJ Debit
EIMPREMPIA EIMPREM_ADJ Credit
EIMINTADJREC EIMINTAD­J_ACCR Debit
EIMINTADJINC EIMINTAD­J_ACCR Credit
EIMPREMEXP EIMPREM_ACCR Debit
EIMPREMPIA EIMPREM_ACCR Credit

The account head mapped to the accounting role EIMDISCRIA and account heads mapped to the subsystem specific RIA (Received in Advance) accounting roles should be maintained as the same account.

For discount accrual, you must also maintain the following accounting set-up for the Charge Liquidation event. The charge liquidation event is the event in the life of a bill contract at which the charge is going to be levied; you would have specified this while building a charge class or while attaching a charge class to the product. This is in addition to the normal accounting set-up that you would define for the LIQD event:

Accounting Role Description
component_RIA* Charge amount Received in Advance

* The component will be replaced by the appropriate Charge Rule.

Amount Tag Description
component_DISC* Charge Amount to be discounted
component_PIA Charge amount paid in advance

* The component will be replaced by the appropriate Charge Rule. The following entries should be maintained for the charge liquidation event.

Accounting Role Amount Tag Dr/Cr
<Charge rule>_RIA <Charge rule>_DISC Credit
CUSTOMER <Charge rule>_DISC Debit
<Charge rule>_INC <Charge rule>_LIQD Credit
CUSTOMER <Charge rule>_LIQD Debit
<Charge rule>_PIA <Charge rule>_PREM Debit
CUSTOMER <Charge rule>_PREM Credit

Along with the normal accounting entry setup for the LIQD event, you must also maintain the following accounting entries:

Accounting Role Amount Tag Dr/Cr Indicator
EIMDISCRIA EIMDISC_ADJ Debit
CUSTOMER EIMDISC_ADJ Credit

7.1.3.2 Specifying Status Change Details for Discount Accrual

You need to define the manner in which discount accrual is processed in the event of status changes. You must maintain the following details as part of status maintenance for bills:

You can specify the following roles as part of the transfer GLs:

Accounting Role Description
EIMDISCRIA Effective Interest Based Discount To Be Accrued
EIMDISCINC Effective Interest Based Discount Accrued Till Date
EIMPREMPIA EIM Premium Paid In Advance
EIMPREMEXP EIM Premium Expense
EIMINTADJREC EIM Interest Adjustment Receivable
EIMINTADJINC EIM Interest Adjustment Income

To recall, at the BC product level, you maintain preferences pertaining to status change processing through the ‘Bills – User Defined Status Maintenance’ screen (which you invoke by clicking ‘Status’ button in the ‘Bills and Collections – Product Definition’ screen). During the contract status change processing, the following are supported by the system based on the preferences maintained:

For more information, refer to the section ‘Aging Analysis for a Product’ in the chapter titled ‘Product Definition’ in the Products User Manual.

7.1.3.3 Processing for Discount Accrual Fees

The System provides a batch process for discount accrual. You can trigger the batch process through the ‘Setting up Mandatory Programs’ screen. The YACR event is initiated, and the net discount accrual amount for the day is computed.

7.2 Computation of Net Discount Accrual Amount for a Processing Day

This chapter contains the following section:

7.2.1 Computing Net Discount Accrual Amount

The following details are stored in the system during discount accrual:

Catch-Up of discount accrual is done during a BC contract rollover also. The net discount accrual amount for a processing day is computed as follows:

 

7.2.2 IRR calculation and IRR Re-calculation

IRR calculation does not happen in the below mentioned cases:

IRR recalculation happens during the following events with new effective date:

Note

The above events pertain to bearing/arrears type of BC contracts.

For discounted/true discounted type of BC contracts where the interest is collected in advance, IRR recalculation is done with a new effective date during the following events:

Additionally, IRR recalculation happens during the below mentioned events if charges are applicable on them:

Note

IRR recalculation is undone during reversal of a partial prepayment.

IRR recalculation is not done during the following events:

Note

Amendment of a bill amount is supported for collection bills and this does not form part of funding operations of the bank. It is also assumed that there will be no interest components on the collection bills.

Discount Accrual Processing

Let us consider a Loan contract with following parameters

Loan Amount USD 1,000,000
Value Date 01-Jan-2003
Maturity Date 01-Jan-2004
Interest Rate 12%
Commission Rate 6%
Commission Value Date 01-Jan-2003
Interest Repayment Frequency Monthly (Month Ends)
Principal Repayment Frequency Bullet
Interest Basis Actual/365
Discount Accrual Day count Numerator Method Actual
Discount Accrual Day count Denominator method 365
Interest Payment Method Bearing
IRR 20.30%

The projected cash flow for the contract would be:

Due Date Component Amount (USD)
01-Jan-2003 Principal -1,000,000
01-Jan-2003 Commission 60,000
01-Feb-2003 Interest 10,191.78
01-Mar-2003 Interest 9,205.48
01-Apr-2003 Interest 10,191.78
01-May-2003 Interest 9,863.01
01-Jun-2003 Interest 10,191.78
01-Jul-2003 Interest 9,863.01
01-Aug-2003 Interest 10,191.78
01-Sep-2003 Interest 10,191.78
01-Oct-2003 Interest 9,863.01
01-Nov-2003 Interest 10,191.78
01-Dec-2003 Interest 9,863.01
01-Jan-2004 Interest 10,191.78
01-Jan-2004 Principal 1,000,000

If the Discount Accrual Processing Date is 15-Feb-2003, the processing for discount accrual is as follows:

Step 1

NPV of the contract is computed as of 15-Feb-2003 by discounting the future cash flows as shown below:

Due Date Amount (di-d1)/D 1+IRR (1+IRR)^( (di-d1)/D) Discount CF
01-Mar-2003 9205.48 0.038 1.203 1.0071 9140.46
01-Apr-2003 10191.78 0.123 1.203 1.023 9962.22
01-May-2003 9863.01 0.205 1.203 1.0387 9495.54
01-Jun-2003 10191.78 0.29 1.203 1.0551 9659.27
01-Jul-2003 9863.01 0.373 1.203 1.0713 9206.78
01-Aug-2003 10191.78 0.458 1.203 1.0882 9365.53
01-Sep-2003 10191.78 0.542 1.203 1.1054 9219.70
01-Oct-2003 9863.01 0.625 1.203 1.1224 8787.80
01-Nov-2003 10191.78 0.71 1.203 1.1401 8939.02
01-Dec-2003 9863.01 0.792 1.203 1.5755 8520.56
01-Jan-2004 1010191.78 0.877 1.203 1.1759 859105.75
          951402.94

The NPV of the Contract as of 15-Feb-2003 = USD 951,402.94

Step 2

IRR Start date = 01-Jan-2003

Outstanding Principal as of 12-Feb-2003 = USD 1,000,000

Discount to be accrued as of 01-Jan-2003 = USD 60,000

Accrued Interest as of 15-Feb-2003 = USD 4602.74

Discount Accrued as of 01-Jan-2003 = USD 0.00

Previous process till date = 14-Feb-2003

Till Date Accrual as of 14-Feb-2003 (TDAn-1) = USD 6647.43

TDAn = 951402.94 – (1000000-60000)-4602.74+0

TDAn = 6800.2

Net Discount Accrual = TDAn – TDAn-1

Net Discount Accrual = 6800.20 – 6647.43

Net Discount Accrual = 152.77

Net Discount Accrual amount for 15-Feb-2003 processing = USD 152.77