Valuation at Amortized Cost

The Effective Interest Rate (EIR) Method is at the hearth of IFRS and is completely and highly accurately implemented in iFRS-VBox.

The EIR method is a method of calculating the interest income or expense of a financial asset or liability measured at Amortized Costs over the relevant period. The EIR is the rate that exactly discounts estimated future cash payments through the expected life of the financial instrument. The Amortized Cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the EIR Method of any difference between the initial amount and the maturity amount, and minus any reduction for impairment or uncollectibility.

Effective interest rate and amortization

Key challenges solved in iFRS-VBox

The EIR Calculation requires the cash flow schedule of the financial instrument as an input. In iFRS-VBox, basis for the calculation of the EIR is the schedule which is either imported from the core banking system or determined automatically by iFRS-VBox based on the business rules of the instrument's contract. EIR, Interest income/expense and Amortized Costs are calculated using the appropriate non-linear formulas.

To meet the requirements resulting from IFRS, iFRS-VBox calculates separately the relevant parts of the interest income / expense like:

  • Interest accrual (in the appropriate day count convention).
  • Amortization of premiums or discounts (e. g. bond positions).
  • Amortization of fees, charges, transaction costs (separately per fee type).
  • Amortization of upfront or period fees (e. g. yield enhancing fees).

Furthermore iFRS-VBox automatically adjusts the measurement in cases which need special treatment under the IFRS, like:

  • Below market rate loans – treatment of the difference between fair value and cost at initial recognition and subsequently.
  • Flat interest agreements.
  • Discount loans / discount facilities.
  • Developer subsidies on mortgage loans.
  • Promotions and Incentives.
  • Loans with Interest-free and/or Payment-free periods.
  • Bonus payments on saving accounts.

Business Events

During the financial instrument's lifetime, various business events can have an influence on the cash flows and therefore a recalibration of the measurement (e.g. recalculation of the EIR respectively re-estimation of the amortized cost using the original EIR) might be needed. iFRS-VBox supports the IFRS-compliant treatment in all major business events like:

  • Interest rate adjustment.
  • Late payment / Overdue.
  • Early repayment.
  • Specific impairment.
  • Re-estimation of the fees, charges or transaction cost amounts.