Cash Flow Engine

Under the IFRS the complete schedule of payments (as well as non-cash settlements) is the basis for the valuation of the financial instruments measured at amortised cost (IAS 39.9). Furthermore it is the basis for the specific impairment which is calculated using expected future cash flows (IAS 39.63). For financial instruments that require measurement at Fair Value but do not have a reliable market price, the discounted cash flow analysis is applied over the appropriately generated cash flow schedules. The expected future cash flows of the financial instruments are used for many of the disclosures required by IFRS 7, including quantitative disclosures on the risk and significance of the financial instruments and the maturity analysis. Finally, the cash flows in the current reporting period are the basis for the generation of the Cash Flow statement under IAS 7 (direct method).

Determination of payments

Financial instruments in iFRS-VBox are defined by their respective raw contractual information, which states the payment of principal, interest and fees or charges using descriptive business rules (e.g. "On 15th of every month the debtor pays interest of 5.6 % p. a."). Using these business rules from the contract converted via dictionaries into attributes understandable for system, the iFRS-VBox Cash Flow Engine will roll out the complete cash flow schedule starting from the instruments origination date until maturity. It will calculate single payments and non-cash settlements like:

  • Limit (increase, decrease, expiration)
  • Principal (balance, disbursement, repayment)
  • Interest (interest, discount, premium)
  • Fee and charges
Cash flow engine

Calculation parameters and special features

To meet the requirements resulting from modern financial engineering, the iFRS-VBox Cash Flow Engine understands the following parameters:

  • Day count convention (e. g. 30/360, act/360, act/365, act/act etc.).
  • Business day convention (e. g. previous/following business day).
  • Payment convention (e. g. in advance/in arrears).
  • Adjustment (e. g. adjust to ultimo, adjust value date).
  • Holiday calendars.
  • Compound interest.
  • Revolving/term instruments.
  • Furthermore iFRS-VBox supports instruments which need special treatment under the IFRS, like:

  • Annuity payments (consisting of principal and interest).
  • Interest rate fixing in-between interest payments.
  • Flat interest agreements.
  • Below market rate agreements.
  • Yield enhancing and management fees.
  • Revolving facilities.

Business events

During the financial instrument's lifetime, various business events can have an influence on the future cash flows and therefore the recalculation of the cash flow schedule by system is required. Major business events supported by the iFRS-VBox Cash Flow Engine include:

  • Interest rate adjustment
  • Late payment
  • Early repayment
  • Specific impairment

Forecast and modeling

iFRS-VBox supports also advanced modelling approaches to forecast accurately the future cash flows, like:

  • Estimation of prepayment / early termination behaviour.
  • Forecasting of interest rates beyond the current agreement period.
  • Estimation of future credit losses, PD/LGD.
  • Estimation of Incurred-But-Not-Reported loss rates.
  • Complex interest rate fixing rules.
  • “Position Building” i.e. aggregation of security positions at average price.