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:
- Section 7.1, "Discount Accrual Fees"
- Section 7.2, "Computation of Net Discount Accrual Amount for a Processing Day"
7.1 Discount Accrual Fees
This chapter contains the following sections:
- Section 7.1.1, "Processing Discount Accrual Fees"
- Section 7.1.2, "Defining a Discount Accrual Fee Class"
- Section 7.1.3, "Associating Discount Accrual Components to Products"
7.1.1 Processing Discount Accrual Fees
The following steps are involved in processing discount accrual fees:
- Defining discount accrual fee classes
- 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:
- Par
- Par/Discount
- Par/Premium
- Par/Discount/Premium
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:
- Whether discount accruals should be stopped or reversed
- The transfer GLs for discount accrual
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:
- All discount accrual accounting roles are made available for transfer.
- The balances transferred are:
- Premium TBA to Premium Accrued
- Discount TBA to Discount Accrued
- Setting of the ‘Stop Accrual’ flag stops the discount accrual also. This indicates that the YACR event will not be pass any accounting entries.
- Setting of ‘Reverse Accrual’ flag reverses the following
balances:
- Premium Accrued
- Discount Accrued
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:
- Section 7.2.1, "Computing Net Discount Accrual Amount"
- Section 7.2.2, "IRR calculation and IRR Re-calculation"
7.2.1 Computing Net Discount Accrual Amount
The following details are stored in the system during discount accrual:
- Outstanding bill amount
- Outstanding arrears interest accrued
- Discounted interest to be accrued
- Premium to be accrued
- Discount to be accrued
- Interest adjustment accrued already
- Premium accrued till date
- Discount accrued till date
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:
- All future cash flows are discounted to the processing day using
the IRR effective as of the processing day, and the net present value
(NPV) of the contract as of the processing day is obtained. The NPV is
calculated based on the acquisition type as follows:
- If the acquisition type is ‘Discount’, NPV is given by: NPV = outstanding bill amount + outstanding arrears interest accrued + outstanding acquired interest – (discounted interest to be accrued – discounted interest accrued) – (discount to be accrued - discount accrued).
- If the acquisition type is ‘Premium’, the NPV is given by: NPV = outstanding bill amount + outstanding arrears interest accrued + outstanding acquired interest - (discounted interest to be accrued – discounted interest accrued) + (discount to be accrued - discount accrued).
- If the acquisition type is ‘Par’, the NPV is given by: NPV = outstanding bill amount + outstanding arrears interest accrued + outstanding acquired interest – (discounted interest to be accrued – discounted interest accrued) + (interest adjustment accrued already + interest adjustment accrued).
- Outstanding arrears accrued interest is only for arrears (bearing) type contracts. The discounted interest is only for discounted type contracts.
- The till date discount accrual amount is computed using the following
expression:
- Where,
- TDAn represents the Till Date Discount Accrual for nth Accrual Date
- NPVn , the Net Present Value of the contract as of nth Accrual Date
- Pn, the Outstanding Principal of the contract as of nth Accrual Date
- DTAs, the Discount to be accrued as of current IRR Effective Date
- AIn, the Current Period Accrued Interest as of nth Accrual Date, and
- DAs, the Discount Accrued as of current IRR Effective Date
- The difference between the ‘Till date discount accrual’
amount as of the previous processing day and the ‘Till date discount
accrual’ amount as of the current processing day is the ‘Net
Discount accrual’ amount that is realized as income as of the processing
day. The expression used would be
Where,- NDAn represents the Accrual for nth Accrual Date,
- TDAn, the Till Date Discount Accrual for nth Accrual Date and
- TDAn-1, the Till Date Discount Accrual for n-1th Accrual Date.
7.2.2 IRR calculation and IRR Re-calculation
IRR calculation does not happen in the below mentioned cases:
- Collection
- Payment
- Acceptance
- Initial stage of a contract
- Advance by loan is marked for the contract
- Contract closure
IRR recalculation happens during the following events with new effective date:
- Value dated amendment of a contract maturity date
- Floating interest rate revision
- Partial prepayment to a principal amount for a contract
- New charge on a contract, payable by customer
- Amendment of the Interest to Date
- Amendment of the interest rate
- Partial prepayment to an interest amount
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:
- A partial prepayment to a principal amount
- New charge on a contract, payable by your Customer
Additionally, IRR recalculation happens during the below mentioned events if charges are applicable on them:
- REFA – Refusal of Bill/draft acceptance
- REFP – Refusal of bill/ draft payment
- TAFT – Acceptance of payment fate transfer
- TACP – Bill/draft acceptance tracer
- TPAY – Principal payment follow-up tracer
- TPFT – Principal payment fate tracer
- AFAT – Advice of acceptance fate
- PFAT – Advice of payment fate
- PRNA – Protest of non-acceptance of draft
- PRNP – Protest of non payment of principal
- BACP – Acceptance of bill
Note
IRR recalculation is undone during reversal of a partial prepayment.
IRR recalculation is not done during the following events:
- When a payment is overdue
- For a regular payment
- For a full prepayment
- Amendment of a bill amount
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