April 3rd, 2010
Praveen Bajaj 8 Comments »
To understand Overnight Index Swap (OIS) in depth we need to know some basics related to it.
What is Swap?
A swap basically means exchange. So any financial product suffixed or prefixed by words swap would indicate the exchange of something. This something might be future cash flows, interest rates (fixed or floating), currencies or a combination of the above.
What is an Interest rate swap?
An interest rate swap involved the exchange of interest rates. It can be fixed to floating rate swap, floating rate to another floating swap or a fixed to fixed rate swap. It can involved swapping rates in different currencies as well. Quonto Swap and Currency Swap
Overnight Index swap
OIS is a contract involving swapping a Read more »
March 25th, 2010
Shalini Tibe No Comments »
Effective Interest Rate
Effective Interest Rate (EIR) is a new concept to the existing Indian GAAP.
TheEffective Interest Rate (EIR) method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period.
TheEffective Interest Rate (EIR)use in the allocation process is the rate that exactly discounts estimated future cash flows (receipts or payments) to the net carrying amount of the financial instrument through the expected life of this instrument.
EIR calculation is not the same as for Yield to Maturity (YTM). YTM is nothing but the Internal Rate of Return (IRR) of the bond. But Effective Interest Rate (EIR) may also include some non-interest components such as loan origination charges, processing fees as part of the effective rate.
Under IFRS income from Loans and receivables has to be recognized through application of effective interest rate.
An illustration given below gives better clarity for calculation of Effective Interest Rate (EIR).
|Nominal value (payable in 5 years’ time)
|Loan origination fee (inflow)
|Transaction costs (directly related to loan origination, outflow)
|Net transaction costs (40-90)
|Fair value (net of transaction costs and fees) (1250+50)
Calculation of INTERNAL RATE OF RETURN based on above data:
|Year 1 (1250*4.7%)
|Year 2 (1250*4.7%)
|Year 3 (1250*4.7%)
|Year 4 (1250*4.7%)
|Year 5 1250 + (1250*4.7%)
Thus IRR will work out to 3.83%
Thus companies has to maintain Coupon rate as well as EIR which will practically for each transaction will be a major task and will add significantly load on IT systems.
Author: CA Shalini Tibe, IFRS Consultant
March 23rd, 2010
Praveen Bajaj 6 Comments »
Before getting into the details, let us first understand -
What is Repo Rate?
Definition of Repo Rate: Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which commercial banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
What is Reverse Repo Rate?
Definition of Reverse Repo Rate: It is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.
In order to tame inflation, anchoring inflationary expectations and considering the signs of strong economic revival RBI on March 19 , 2010 announced Monetary Policy Measures with immediate effects:
- to raise the repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.75 % to 5 %
- to raise the reverse repo rate under the LAF by 25 basis points from 3.25% to 3.5%
This is the second action since January when RBI announced a 75-basis point rise in the cash reserve ratio (CRR) to 5.75 per cent. But, unlike CRR, which is used to manage liquidity in the system, an increase in the repo and reserve repo rates is aimed at signaling an increase in interest rates.
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March 23rd, 2010
Shalini Tibe 5 Comments »
IFRS is a novel way of looking at accounting. IFRS is a “principle-based” standards rather than “rule-based” standard which are currently followed.
Under IFRS there is need to apply professional judgment consistent with intent and spirit of standards.
Various countries have adapted to IFRS in different ways, often embedding local cultures and that is why there are no standard rules; only broad principles which define the outer boundary of accounting.
IFRS fixed assets rules questions valuation on historical cost basis, questions application of uniform rates of depreciation on all components of a fixed asset as also the amortization of intangible assets such as goodwill or patents.
In IFRS off-balance sheet transactions had been made as part of accounts; it brings a whole new meaning to the reported numbers.
It defines control of entities not through percentage of holdings but by the decision-making power inherent in the parent company.
Top management has, thus, to work out new targets of earnings depending on the direction of impact caused by the new accounting principles and recognising the IFRS GAAP differences.
Earnings will no more be a steady figure that can be easily targeted depending as it is not just on sales and expenses but also changes in asset values and the ability to measure those correctly.
To be adequately prepared for IFRS, senior management has to also shape up by analyzing which management models and strategies will work best for their organizations facing a huge level of turbulence and thus should prepare an IFRS roadmap.
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March 19th, 2010
Shalini Tibe No Comments »
Key Practical Challenges for implementation of IFRS in India for Banking Industry
No stable Platform: There are many changes / amendment taking place for most of the standards from International Accounting Standard Board there has been no stable platform ready for banks.
Training: All Stakeholders has to be conversant and shall be able to understand and interpret Financials prepared as per IFRS. Training to personnel in an organization is a most crucial.
Judgment: Banks in India are subject to regulatory guidelines provided by regulator i.e. RBI where as under IFRS in most of the areas management judgment is required in framing accounting policy and procedures.
Fair Value: There is extensive use of fair value under IFRS and for assessment of fair value there is need for specialization which is seldom.
Data Capture: There has been modification in reporting system under IFRS and also there has been changes in recognition criteria and an extensive disclosure requirement will require new data and also extraction of historical data for retrospective application will be difficult.
Consolidation of Accounts: IFRS requires data requirement from subsidiary, joint ventures and associates for consolidation purpose at every reporting date. Also policies and procedures have to be consistent throughout the group.
Author : CA Shalini Tibe