7. Defining Discount Accrual Fee Classes

The chapter contains the following sections:

7.1 Introduction

In Oracle Lending, 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 (For example, ‘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 Lending. To apply a discount accrual fee, you should first define attributes for each of the components.

Steps involved in 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

7.2 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 Preference Class Maintenance’ screen.

You can invoke the ‘Discount Accrual Maintenance’ screen by typing ‘OLDACRCL’ in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button.

 

Before defining the attributes of a discount accrual fee class, you should assign the class a unique identifier, called the Class Code and briefly describe the class. A description would help you easily identify the class.

When building a discount accrual fee class, you define certain attributes such as:

7.2.1 Associating Discount Accrual Components to Products

After building discount accrual fee classes you can associate the class with loans or bills products. Click the ’Discount Accrual’ 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’ 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.

Note

7.3 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

Description

Acquisition Type

Product Type

EIMDISCRIA

Effective Interest Based Discount To Be Accrued

Discount

Asset

EIMDISCINC

Effective Interest Based Discount Accrued Till Date

Discount

Asset

EIMPREMPIA

XX?

Premium

Asset

EIMPREMEXP

 

Premium

Asset

EIMINTAD­JREC

 

Par

Asset

EIMINTADJINC

 

Par

Asset

EIMDISCPIA

 

Discount

Liability

EIMDISCEXP

 

Discount

Liability

EIMPREMRIA

 

Premium

Liability

EIMPREMINC

 

Premium

Liability

EIMINTAD­JPAY

 

Par

Liability

EIMINTADJ­EXP

 

Par

Liability

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

The following entries should be maintained for the YACR event:

Accounting Role

Amount Tag

Dr/Cr Indicator

EIMDISCRIA

EIMDISC_ACCR

Debit

EIMDISCINC

EIMDISC_ACCR

Credit

Note

The account head mapped to the accounting role ‘EIBDISCOUNT_RIA’ 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 (LIQD/INIT/VAMI/ROLL/CAMD) event. This is in addition to the normal accounting set-up that you would define for the charge liquidation event.

Accounting Role

Description

component_RIA*

Charge amount Received in Advance

Charge comp_RIA

Charge amount Received in Advance

<Charge Comp>PIA

Charge amount Paid in Advance

<Fee Comp>RIA

Fee Amount Received in Advance

* The component is replaced by the appropriate Charge Rule.

Amount Tag

Description

component_DISC*

Charge Amount to be discounted

<Charge comp>_DISC(Existing Tag)

Charge Discount Amount

<Charge Comp>_PREM

Charge Premium Amount

<Fee Comp>_DISC

Fee Discount Amount

* The component is replaced by the appropriate Charge Rule.

You should maintain the following for the normal accounting entry setup for LIQD event:

Amount Tag

Description

EIMDISC_ADJ - (Existing Tag)

Discount Accrual Refund Amount

EIMPREM_ACCR

Net Premium Accrual amount for the processing day

EIMINTADJ_ACCR

Interest Adjustment Amount

EIMPREM_ADJ

Premium Accrual Refund Amount

You should maintain the following accounting roles for setting up accounting entries for the YACR event:

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

EIMDISCRIA

EIMDISC_ADJ

Debit

CUSTOMER

EIMDISC_ADJ

Credit

CUSTOMER

EIMPREM_ADJ

Debit

EIMPREMPIA

EIMPREM_ADJ

Credit

EIMPREMRIA

EIMPREM_ADJ

Debit

CUSTOMER

EIMPREM_ADJ

Credit

CUSTOMER

EIMDISC_ADJ

Debit

EIMDISCPIA

EIMDISC_ADJ

Credit

The following entries should be maintained for the 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

CUSTOMER

<Charge rule>_DISC

Debit

<Charge rule>_RIA

<Charge rule>_DISC

Credit

CUSTOMER

<Charge rule>_PREM

Credit

<Charge rule>_PIA

<Charge rule>_PREM

Debit

CUSTOMER

<Charge rule>_PREM

Debit

<Charge rule>_RIA

<Charge rule>_PREM

Credit

CUSTOMER

<Charge rule>_DISC

Credit

<Charge rule>_PIA

<Charge rule>_DISC

Debit

You should maintain the following accounting entries for the YACR event:

Accounting Role

Amount Tag

Dr/Cr

EIMDISCRIA

EIMDISC_ACCR

Debit

EIMDISCINC

EIMDISC_ACCR

Credit

EIMPREMEXP

EIMPREM_ACCR

Debit

EIMPREMPIA

EIMPREM_ACCR

Credit

EIMINTADJREC

EIMINTADJ_ACCR

Debit

EIMINTADJINC

EIMINTADJ_ACCR

Credit

EIMPREMRIA

EIMPREM_ACCR

Debit

EIMPREMINC

EIMPREM_ACCR

Credit

EIMDISCEXP

EIMDISC_ACCR

Debit

EIMDISCPIA

EIMDISC_ACCR

Credit

EIMINTADJEXP

EIMINTADJ_ACCR

Debit

EIMINTADJPAY

EIMINTADJ_ACCR

Credit

7.4 Specifying Status Change Details for Discount Accru­al

Discount accruals in respect of a loan or a bill could result in status changes. You must maintain the following details as part of status maintenance for loans and bills, for discount accruals:

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

Note

The accounting roles for discount accrual are available to indicate the transfer GL as part of status change.

7.4.1 Processing for Contract Status Change

The impact of status change of contracts on Transfer of Balances, Stop Accruals and Reverse Accruals is as follows:

Transfer of Balances

The following balances are transferred to new GL:

Stop of Accruals

YACR does not pass any entries.

Reverse of Accruals

The following balances are reversed:

7.5 Processing for Internal Rate of Return Calculation

This section contains the following topics:

The Acquisition Type specified at the Discount Accrual Preference Class Maintenance is recognized during IRR calculation and stored in the IRR tables. During contract save, the acquisition type is derived using the following logic:

Product

Inflow/Outflow

Acquisition Type

Asset*

Inflow>Outflow

Discount

Asset

Inflow<Outflow

Premium

Asset

Inflow=Outflow

Par

Liability*

Inflow>Outflow

Premium

Liability

Inflow<Outflow

Discount

Liability

Inflow=Outflow

Par

The following information is stored for every IRR Effective Date when the IRR calculation/recalculation happens and also during the Discount Accrual Batch:

7.5.1 Recalculation of IRR with new effective date

In case of Bearing contracts, IRR recalculation is done using a new effective date, during the following events:

Contract Amendment without Schedule Re-definition:

 

Rollover:

 

In case of Discounted contracts, IRR recalculation is done using a new effective date, during the following events:

Contract Amendment without Schedule Re-definition:

 

Note

7.5.2 Computation of Net Present Value based on Acquisition Type

The NPV calculation is different for different acquisition types.

If the acquisition type is Discount:

NPV = O/S Principal

+O/S Bearing Interest Accrued*

+O/S Acquired Interest

+ (Expense Fee TBA –Expense Fee Accrued)

- (Income Fee TBA –Income Fee Accrued)

- (Discounted Interest TBA – Discounted Interest Accrued)*

- (Discount TBA – Discount Accrued)

If Acquisition type is Premium:

NPV = O/S Principal

+O/S Bearing Interest Accrued*

+O/S Acquired Interest

+ (Expense Fee TBA –Expense Fee Accrued)

- (Income Fee TBA –Income Fee Accrued)

- (Discounted Interest TBA – Discounted Interest Accrued)*

+ (Premium TBA – Premium Accrued)

If Acquisition type is Par

NPV = O/S Principal

+O/S Bearing Interest Accrued*

+O/S Acquired Interest

+ (Expense Fee TBA –Expense Fee Accrued)

- (Income Fee TBA –Income Fee Accrued)

- (Discounted Interest TBA – Discounted Interest Accrued)*

+ (Interest Adjustment Accrued Already + Interest Adjustment Accrued)

Note

7.5.3 Computation of Net Discount Accrual Amount for a Processing Day

The net discount accrual amount for a processing day is computed as follows:

Where,

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,

7.5.4 Discount Accrual Processing - an Example

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-03

9205.48

0.038

1.203

1.0071

9140.46

01-Apr-03

10191.78

0.123

1.203

1.023

9962.22

01-May-03

9863.01

0.205

1.203

1.0387

9495.54

01-Jun-03

10191.78

0.29

1.203

1.0551

9659.27

01-Jul-03

9863.01

0.373

1.203

1.0713

9206.78

01-Aug-03

10191.78

0.458

1.203

1.0882

9365.53

01-Sep-03

10191.78

0.542

1.203

1.1054

9219.70

01-Oct-03

9863.01

0.625

1.203

1.1224

8787.80

01-Nov-03

10191.78

0.71

1.203

1.1401

8939.02

01-Dec-03

9863.01

0.792

1.203

1.5755

8520.56

01-Jan-04

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