ifrs alternative 1 a

8/12/2019 IFRS Alternative 1 A

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Notional amount 1,000,000.00Spread 3.00%

Expected spread 1.42%

Original forward periods 1 2 3 4 5Remaining periods 1

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 4.18%Forward rates (BM) 4.18%

Reflecting contractual interest Spot rates (contractual) 7.18%Forward rates (contractual) 7.18%

Reflecting expected interest Spot rates (BM+expected spread) 5.60%Forward rates (BM+expected spread) 5.60%

Contractual cash flowsCash flows:Variable interest 71,816.16Principal 1,000,000.00

Present value:Variable interest 67,004.17 67,004.17Principal 932,995.83 932,995.83

1,000,000.00Expected cash flowsCredit loss (%) 50.00%Expected cash flows (% received) 50.00%Cash flows:

Variable interest 35,908.08Principal 500,000.00

PV (using initial expected spread)Variable interest 34,003.43 34,003.43Principal 473,478.80 473,478.80

507,482.220.00

AccountingExpected EIR (%) 5.60%

Interest revenue 28,425.86CF differential (i CF vs i accrual) -7,482.22Carrying amount 1,000,000.00 528,949.46 470,316.18 485,334.05 507,482.22 500,000.00 0.00Yield (%) 5.60%

Simple scenario assuming the fowardrates from t3 have become actual ratesin t4 [ie 'moving along the forward

In the simple scenario in which the thefoward rates from t3 have become actualrates in t4 the carrying amount unwinds tothe expected principal CF at maturity if

there is no (further) change in expected

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office FRN t4



Notional amount 1,000,000.00Spread 3.00%Expected spread 1.42%

Original forward periods 1 2 3 4 5Remaining periods 1 2

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 4.74% 4.46%Forward rates (BM) 4.74% 4.18%

Reflecting contractual interest Spot rates (contractual) 7.74% 7.46%Forward rates (contractual) 7.74% 7.18%

Reflecting expected interest Spot rates (BM+expected spread) 6.16% 5.88%Forward rates (BM+expected spread) 6.16% 5.60%

Contractual cash flowsCash flows:Variable interest 77,381.55 71,816.16Principal 1,000,000.00

Present value:Variable interest 71,823.72 62,191.69 134,015.40Principal 865,984.60 865,984.60

1,000,000.00Expected cash flowsCredit loss (%) 90.00% 50.00%Expected cash flows (% received) 10.00% 50.00%Cash flows:Variable interest 7,738.15 35,908.08Principal 500,000.00

PV (using initial expected spread)Variable interest 7,289.29 32,030.99 39,320.28Principal 446,013.76 446,013.76

485,334.05

0.00AccountingVariable expected EIR (%) 6.16% 5.60%Interest revenue 29,886.33 28,425.86CF differential (i CF vs i accrual) 22,148.18 -7,482.22Carrying amount 1,000,000.00 528,949.46 470,316.18 485,334.05 507,482.22 500,000.00 0.00Catch-up adjustment 0.00Carrying amount before re-estimate 485,334.05Yield (%) 6.16% 5.60%

For comparison: BM forward rate + initial expected spread 5.27% 4.72%

The benchmark interest curveschanged from t2 to t3. This meansthat the carrying amount will nolonger (automatically) unwind to theexpected principal CF at maturity.

The expected spread is reset in t3 in order torecalibrate the PV to the carrying amount.

New spot curve derivedusing the revised expectedspread (after reset of theexpected EIR).

No catch-up adjustment ascalibration is effected by adjustingthe initial expected spread (ieresetting the expected EIR).

Adjusting the initial expectedspread ensures the PV equalsthe carrying amount.

Adjusting the initial expectedspread also ensures correctunwinding.

Interest accrues at a higher rate thanthe BM forward rate + initial expectedspread despite higher than expectedcredit losses because the initial spread





Original forward periods 1 2 3 4 5Remaining periods 1 2

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 4.74% 4.46%Forward rates (BM) 4.74% 4.18%

Reflecting contractual interest Spot rates (contractual) 7.74% 7.46%Forward rates (contractual) 7.74% 7.18%

Reflecting expected interest Spot rates (BM+expected spread) 5.10% 4.82%Forward rates (BM+expected spread) 5.10% 4.55%

Contractual cash flowsCash flows:Variable interest 77,381.55 71,816.16Principal 1,000,000.00

Present value:Variable interest 71,823.72 62,191.69 134,015.40Principal 865,984.60 865,984.60

1,000,000.00Expected cash flowsCredit loss (%) 90.00% 50.00%Expected cash flows (% received) 10.00% 50.00%Cash flows:

Variable interest 7,738.15 35,908.08Principal 500,000.00

PV (using initial expected spread)Variable interest 7,362.54 32,679.76 40,042.31Principal 455,047.53 455,047.53

495,089.84-9,755.79

AccountingExpected EIR (%) 5.10% 4.55%

Interest revenue 24,760.03 22,832.62CF differential (i CF vs i accrual) 17,021.88 -13,075.45Carrying amount 1,000,000.00 528,949.46 470,316.18 485,334.05 502,355.93 489,280.47 -10,719.53Yield (%) 5.10% 4.55%


Difference arising afterchange in forward curve.


\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office FRN t3 (pre reset)




Original forward periods 1 2 3 4 5Remaining periods 1 2 3

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 7.14% 7.22% 7.30%Forward rates (BM) 7.14% 7.30% 7.47%

Reflecting contractual interest Spot rates (contractual) 10.14% 10.22% 10.30%Forward rates (contractual) 10.14% 10.30% 10.47%

Reflecting expected interest Spot rates (BM+expected spread) 7.51% 7.58% 7.67%Forward rates (BM+expected spread) 7.51% 7.66% 7.83%

Contractual cash flowsCash flows:Variable interest 101,428.57 102,992.70 104,710.50Principal 1,000,000.00

Present value:Variable interest 92,088.20 84,776.89 78,021.22 254,886.31Principal 745,113.69 745,113.69

1,000,000.00Expected cash flowsCredit loss (%) 80.00% 90.00% 50.00%Expected cash flows (% received) 20.00% 10.00% 50.00%Cash flows:Variable interest 20,285.71 10,299.27 52,355.25Principal 500,000.00

PV (using initial expected spread)Variable interest 18,869.32 8,898.30 41,947.17 69,714.78Principal 400,601.40 400,601.40

470,316.180.00

AccountingVariable expected EIR (%) 7.51% 7.66% 7.83%Interest revenue 35,303.58 37,190.00 40,130.47CF differential (i CF vs i accrual) 15,017.87 26,890.73 -12,224.78Carrying amount 1,000,000.00 528,949.46 470,316.18 485,334.05 512,224.78 500,000.00 0.00Catch-up adjustment 0.00Carrying amount before re-estimate 470,316.18Yield (%) 7.51% 7.66% 7.83%

For comparison: BM forward rate + initial expected spread 7.68% 7.84% 8.01%


The expected spread is reset in t2 in order torecalibrate the PV to the carrying amount.

New spot curve derivedusing the revised expectedspread (after reset of theexpected EIR).

No catch-up adjustment as

calibration is effected by adjustingthe initial expected spread (ieresetting the expected EIR).

Adjusting the initial expectedspread also ensures correctunwinding.

Adjusting the initial expectedspread ensures the PV equalsthe carrying amount.

Interest accrues at a lower rate than the BM

forward rate + initial expected spread becausethe initial spread has been reset (the spreadcan even become negative when using this





Original forward periods 1 2 3 4 5Remaining periods 1 2 3

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 7.14% 7.22% 7.30%Forward rates (BM) 7.14% 7.30% 7.47%

Reflecting contractual interest Spot rates (contractual) 10.14% 10.22% 10.30%Forward rates (contractual) 10.14% 10.30% 10.47%

Reflecting expected interest Spot rates (BM+expected spread) 7.68% 7.76% 7.84%Forward rates (BM+expected spread) 7.68% 7.84% 8.01%

Contractual cash flowsCash flows:Variable interest 101,428.57 102,992.70 104,710.50

Principal 1,000,000.00

Present value:Variable interest 92,088.20 84,776.89 78,021.22 254,886.31Principal 745,113.69 745,113.69

1,000,000.00Expected cash flowsCredit loss (%) 80.00% 90.00% 50.00%Expected cash flows (% received) 20.00% 10.00% 50.00%Cash flows:

Variable interest 20,285.71 10,299.27 52,355.25Principal 500,000.00

PV (using initial expected spread)Present value: 18,839.13 8,869.87 41,746.47 69,455.47Variable interest 398,684.67 398,684.67

468,140.142,176.04

AccountingExpected EIR (%) 7.68% 7.84% 8.01%Interest revenue 36,113.78 38,089.55 41,149.76CF differential (i CF vs i accrual) 15,828.06 27,790.28 -11,205.49Carrying amount 1,000,000.00 528,949.46 470,316.18 486,144.24 513,934.52 502,729.03 2,729.03Yield (%) 7.68% 7.84% 8.01%

Difference arising afterchange in forward



\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office FRN t2 (pre reset)





Original forward periods 1 2 3 4 5Remaining periods 1 2 3 4

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 6.68% 6.74% 6.80% 6.86%Forward rates (BM) 6.68% 6.79% 6.92% 7.05%

Reflecting contractual interest Spot rates (contractual) 9.68% 9.74% 9.80% 9.86%Forward rates (contractual) 9.68% 9.79% 9.92% 10.05%

Reflecting expected interest Spot rates (BM+expected spread) 7.22% 7.27% 7.33% 7.40%Forward rates (BM+expected spread) 7.22% 7.33% 7.45% 7.59%

Contractual cash flowsCash flows:Variable interest 96,802.13 97,943.73 99,185.17 100,538.47Principal 1,000,000.00

Present value:Variable interest 88,258.52 81,333.28 74,932.03 69,015.68 313,539.52Principal 686,460.48 686,460.48

1,000,000.00Expected cash flowsCredit loss (%) 0.00% 80.00% 90.00% 50.00%Expected cash flows (% received) 100.00% 20.00% 10.00% 50.00%Cash flows:

Variable interest 96,802.13 19,588.75 9,918.52 50,269.23Principal 500,000.00

PV (using initial expected spread)Variable interest 90,287.04 17,022.58 8,021.25 37,785.67 153,116.54Principal 375,832.92 375,832.92

528,949.46446,408.13

AccountingExpected EIR (%) 7.22% 7.33% 7.45% 7.59%Interest revenue 38,168.85 34,474.80 36,168.32 38,817.20CF differential (i CF vs i accrual) -58,633.28 14,886.05 26,249.80 -11,452.04Carrying amount 1,000,000.00 528,949.46 470,316.18 485,202.24 511,452.04 500,000.00 0.00Impairment loss -446,408.13Carrying amount before re-estimate 975,357.60Yield (%) 7.22% 7.33% 7.45% 7.59%

Impairment loss is calculated usingthe initial expected spread and thecurrent forward curve.

Revised loss estimate in t1.

Carrying amount afterimpairment loss (write-down)

Initial expected

spread determined in


\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office FRN t1 revised ECF




Original forward periods 1 2 3 4 5Remaining periods 1 2 3 4

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 6.68% 6.74% 6.80% 6.86%Forward rates (BM) 6.68% 6.79% 6.92% 7.05%

Reflecting contractual interest Spot rates (contractual) 9.68% 9.74% 9.80% 9.86%Forward rates (contractual) 9.68% 9.79% 9.92% 10.05%

Reflecting expected interest Spot rates (BM+expected spread) 7.22% 7.27% 7.33% 7.40%Forward rates (BM+expected spread) 7.22% 7.33% 7.45% 7.59%

Contractual cash flowsCash flows:

Variable interest 96,802.13 97,943.73 99,185.17 100,538.47Principal 1,000,000.00

Present value:Variable interest 88,258.52 81,333.28 74,932.03 69,015.68 313,539.52Principal 686,460.48 686,460.48

1,000,000.00Expected cash flowsCredit loss (%) 0.00% 40.00% 40.00% 5.00%Expected cash flows (% received) 100.00% 60.00% 60.00% 95.00%Cash flows:Variable interest 96,802.13 58,766.24 59,511.10 95,511.54Principal 950,000.00

PV (using initial expected spread)Variable interest 90,287.04 51,067.75 48,127.48 71,792.76 261,275.04Principal 714,082.55 714,082.55

975,357.600.00

AccountingExpected EIR (%) 7.22% 7.33% 7.45% 7.59%Interest revenue 70,381.54 69,558.34 71,540.87 73,752.67CF differential (i CF vs i accrual) -26,420.59 10,792.10 12,029.76 -21,758.87Carrying amount 1,000,000.00 975,357.60 948,937.00 959,729.11 971,758.87 950,000.00 0.00Yield (%) 7.22% 7.33% 7.45% 7.59%

Initial expected spread

determined in t0.


In the simple scenario in which the thefoward rates from t0 have become actualrates in t1 the carrying amount unwinds tothe expected principal CF at maturity ifthere is no change in expected credit losses.



Notional amt 1,000,000.00 Spread adjustment -2.46%Spread 3.00% Expected spread 0.54%

Original forward periods 1 2 3 4 5Remaining periods 1 2 3 4 5

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 5.00% 5.84% 6.16% 6.35% 6.49%Forward rates (BM) 5.00% 6.68% 6.79% 6.92% 7.05%

Reflecting contractual interest Spot rates (contractual) 8.00% 8.84% 9.16% 9.35% 9.49%Forward rates (contractual) 8.00% 9.68% 9.79% 9.92% 10.05%

Reflecting expected interest Spot rates (BM+expected spread) 5.54% 6.37% 6.69% 6.88% 7.02%Forward rates (BM+expected spread) 5.54% 7.22% 7.33% 7.45% 7.59%

Contractual cash flowsCash flows:Variable interest 80,000.00 96,802.13 97,943.73 99,185.17 100,538.47Principal 1,000,000.00

Present value:Variable interest 74,074.07 81,720.85 75,308.59 69,381.51 63,903.41 364,388.44Principal 635,611.56 635,611.56

1,000,000.00Expected cash flowsCredit loss (%) 0.00% 0.00% 40.00% 40.00% 5.00%Expected cash flows (% received) 100.00% 100.00% 60.00% 60.00% 95.00%Cash flows:Variable interest 80,000.00 96,802.13 58,766.24 59,511.10 95,511.54Principal 950,000.00

PV (using initial expected spread)Variable interest 75,797.52 85,537.34 48,377.38 45,588.36 67,999.68 323,300.28Principal 676,354.87 676,354.87

999,655.15344.85

AccountingExpected EIR (%) 5.54% 7.22% 7.34% 7.46% 7.60%Interest revenue 55,443.57 70,471.61 69,652.85 71,643.57 73,864.58CF differential (i CF vs i accrual) -24,556.43 -26,330.53 10,886.61 12,132.47 -21,646.96Carrying amount 1,000,000.00 975,443.57 949,113.05 959,999.65 972,132.12 950,485.16 485.16Yield (%) 5.54% 7.22% 7.34% 7.46% 7.60%

IRRContractual -1,000,000.00 80,000.00 96,802.13 97,943.73 99,185.17 1,100,538.47 9.41%

Expected -1,000,000.00 80,000.00 96,802.13 58,766.24 59,511.10 1,045,511.54 6.95%Spread adjustment -2.46%

Based on contractual EIR vsexpected EIR (ie loss adjusted)[see lines 50-53].

Approximation of expectedspread (derived as contractualspread less spread adjustment).

Difference due toapproximation.

Difference due toapproximation.

An alternative way of determining the

This tab illustrates a possible approximationthat would not involve the calculation offorward and spot curves specifically for theexpected spread (ie the grey shaded cellswould be obsolete).



Notional amt 1,000,000.00Spread 3.00%Expected spread 0.54%

Original forward periods 1 2 3 4 5Remaining periods 1 2 3 4 5

Spot (zero) and forward ratesReflecting benchmark interest Spot rates (BM) 5.00% 5.84% 6.16% 6.35% 6.49%Forward rates (BM) 5.00% 6.68% 6.79% 6.92% 7.05%

Reflecting contractual interest Spot rates (contractual) 8.00% 8.84% 9.16% 9.35% 9.49%Forward rates (contractual) 8.00% 9.68% 9.79% 9.92% 10.05%

Reflecting expected interest Spot rates (BM+expected spread) 5.54% 6.37% 6.69% 6.88% 7.02%Forward rates (BM+expected spread) 5.54% 7.22% 7.33% 7.45% 7.59%

Contractual cash flowsCash flows:Variable interest 80,000.00 96,802.13 97,943.73 99,185.17 100,538.47

Principal 1,000,000.00

Present value:Variable interest 74,074.07 81,720.85 75,308.59 69,381.51 63,903.41 364,388.44Principal 635,611.56 635,611.56

1,000,000.00Expected cash flowsCredit loss (%) 0.00% 0.00% 40.00% 40.00% 5.00%Expected cash flows (% received) 100.00% 100.00% 60.00% 60.00% 95.00%Cash flows:Variable interest 80,000.00 96,802.13 58,766.24 59,511.10 95,511.54Principal 950,000.00

PV (using initial expected spread)Variable interest 75,803.69 85,551.14 48,389.05 45,603.01 68,026.96 323,373.85Principal 676,626.15 676,626.15

1,000,000.00

AccountingExpected EIR (%) 5.54% 7.22% 7.33% 7.45% 7.59%Interest revenue 55,357.60 70,381.54 69,558.34 71,540.87 73,752.67

CF differential (i CF vs i accrual) -24,642.40 -26,420.59 10,792.10 12,029.76 -21,758.87Carrying amount 1,000,000.00 975,357.60 948,937.00 959,729.11 971,758.87 950,000.00Yield (%) 5.54% 7.22% 7.33% 7.45% 7.59%

Determined by iteration (setting theinitial PV of the expected CFs equalto the initial carrying amount).

Carrying amount unwindsto the expected CF onmaturity.

Calibrated to 1m usingiteration for theexpected spread.

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office FRN t0

ifrs alternative 1 a

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