8.2.1.1 Asset Sale

This assumption is a specific case of cash flow movement category where cash flows posted in the original maturity bucket of an asset are moved to a prior bucket due to a sale. This assumption allows you to specify a sale of unencumbered marketable, fixed, or other assets to advance the cash inflows. Sale can be specified on each individual asset or as a combination of dimensions. This assumption allows you to specify a partial sale of assets by specifying the sale amount. The assumption reverses all original cash flows that occur between the sale bucket and maturity bucket and posts the market value less haircut in the sale bucket.

See Defining a New Business Assumption, for information on the steps involved in specifying this assumption.

The steps involved in applying the asset sale assumption to cash flows are:

1. The new inflows are calculated due to sale based on the current market or fair value (in case of marketable and fixed assets) or current outstanding balance (in case of other assets such as loans) and haircut.
2. For instance, if the face value of a bond is 100, market value is 120 and sale is specified as 50%, then new inflows are 60 (i.e. 120*50%). Similarly if the outstanding balance of a loan is 10000 and sale is specified at 75% with a haircut of 5%, the new inflow is 7125 [10000*75 % *(1 – 5 %)].
3. The original time bucket(s) are identified in which the asset(s) matures and the original cash inflows, both principal and interest, in each time bucket.
4. The original cash inflows to be reversed are calculated. This is proportionate to the sale amount and is calculated based on the original value.
5. In the example of the bond it will be 50 (i.e. 100*50%). In the example of the loan, it will be 75% of the original principal and interest payments.
6. The cash inflows are assigned due to sale to the sale bucket and reverse the proportionate original cash flow in the respective original buckets.
7. The number of units held is updated post sale in case of marketable assets and the outstanding balance in case of other assets. For all further computations, the revised asset balance is used.

   If a sale is specified as an amount or in terms of units, it is converted into a percentage of the market value or outstanding balance for the purpose of reversing the original cash flows. For instance, a bank has 10 bonds whose total market value is $1200 and original value is $1000.

   1. When sale is specified as $900 pre-haircut value, the percentage sold is 75% (i.e. 900/1200). The original cash flow to be reversed is $750 (1000*75%).
   2. When sale is specified as 5 units, the percentage sold is 50% (i.e. 5/10). The original cash flow to be reversed is $500 (1000*50%).

      Note:

      • Assets can only be sold in buckets that are prior to the original bucket. That is, their maturity bucket.
      • If an asset is currently encumbered but its encumbrance period is less than its maturity, it can be sold in the time bucket occurring between the last day of encumbrance and its maturity.
      • Other assets include unencumbered loans and other non-marketable assets.
      • A sale of assets removes all future cash flows, both principal and interest and results in a new inflow at the sale bucket.
      • Haircut is applied to the sale value only that is, market value in case of marketable and fixed assets and outstanding balance in case of other assets. Original cash flow reversal will not include haircut.
      • If sale is specified as an amount, it is considered as the pre-haircut amount.
      • When converting the sale amount to a percentage, the pre-haircut amount is to be considered.

   An illustration of the asset sale business assumption is provided below. This example is based on the equal cash flow assignment methodology. The original value of the asset in the 1-5 year bucket is 48000 and > 5 year bucket is 32000. The current market value is 1245 per unit and the number units held is 100.

   Table 7-2 Cash Flow Movement - Asset Sale

   Business Assumption Definition					Cash Flow Assignment
   Product Type	Rating	Sale Amount / Percentage	Haircut	Time Bucket	Contractual Cash Flow	Time Bucket	Revised Cash Flow
   Bond	BBB	40%	10%	8-15 Days	10000	Overnight	24940 [= 10000 + {(1245*100*40%*90%)/3}]
   					5000	1-7 Days	19940 [= 5000 + {(1245*100*40%*90%)/3}]
   					8000	8-15 Days	22940 [= 8000 + {(1245*100*40%*90%)/3}]
   					119870	1-5 Years	100670 [=119870 – (48000*40%)]
   					200907	> 5 Years	188107 [=200907 – (32000*40%)]