Any impairment identified must be charged to profit or loss in full immediately. The limit of three and a half / seven percent variation has been considered as appropriate since such variation is not expected to have a material impact on the amount of the relevant items such as foreign currency loans and advances and deposits, and operating results. The basis for measuring the threshold computation is also a relevant factor. Therefore, the existing RBI guidelines requiring RRBs to be treated as associates. Hence, banks may use the quarterly average closing rate, published by FEDAI at the end of each quarter, for translating the income and expense items of non-integral foreign operations during the quarter. As has been pointed out at various places in this Report, there may be a need to withdraw certain guidelines which are inconsistent with Ind AS. Therefore they may continue in the interest of consistent application across the banking industry. In the statement on OCI, are the items net of related taxes or before related tax effects? According to AS 18, as notified by the Government, a non-executive director of a company should not be considered as a key management person by virtue of merely his being a director unless he has the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. As such, no change from the current practice is envisaged. Fair value measurement involves some basic assumptions. Statement of Net Income and Changes in Assets and Liabilities Recognised Directly in Equity, 5. Income and expenses relating to these swaps should be recognised on the settlement date. Preference shares shall be classified and presented as ‘Equity’ or ‘Liability’ in accordance with the requirements of the relevant Accounting Standards. 3.2.3 The head ‘Balances with other banks, Financial Institutions and money at call and short notice’ should include the following items. Includes income from bank’s properties, security charges, insurance, etc. As per Ind AS 109, regardless of the way in which an entity assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. Therefore, such an option may not necessarily cause failure to meet the characteristics of financial asset test for Amortised Cost classification. Includes all types of bank deposits (except certificate of deposits) repayable after a specified term. Financial Liability -3. Includes all savings bank deposits (including inoperative savings bank accounts). Disclosure about the treatment of change in fair value. Banks may undertake transactions in derivatives both as market makers as well as users for hedging their own underlying risks. In some cases of project or object finance, interest or principal repayment is linked to performance of the project or object e.g. (iv) Investments in subsidiaries, associates and joint ventures. Fair value at the reclassification date becomes its new amortised cost carrying amount. 2.4.9 Issues pertaining to classification of financial assets and the recommendations of the Working Group on the same are enumerated in the table below: Difference from present RBI classification. Quantification of the recoverable amount would normally be based upon the present value of the expected future cash flows estimated at the date of the impairment review and discounted to their present value based on the original effective rate of return at the date the financial asset was issued. 2.5.2 There may be a conflict between Ind AS 109 and RBI guidelines on the issue of trade date/settlement date accounting. 7.3 The Working Group also reviewed international practices by considering the financial statements of some international banks incorporated in the European Union (EU). The contractual cash flow characteristics of the financial asset. Designated at fair value through profit and loss account, ‘Cash in hand and balances with Reserve Bank of India’, ‘Balances with other banks, Financial Institutions and money at call and short notice’, ‘Impairment losses on financial instruments’, 2 Classification and Measurement of Financial Assets, 3 Classification and Measurement of Financial Liabilities, 7 Presentation of Financial Statements and Disclosure, 8 Derecognition, Consolidation and Other Residuary Issues, RBI circular DBOD.BP.BC.34/21.04.141/2010-11 dated August 6, 2010, circular DBOD.No.BP.BC.56/21.04.141/2010-11 dated November 1, 2010, RBI circular Dir BC 13/13.03.00/2014-15 dated July 1, 2014, circular DBOD.No.BP.BC.58/21.04.141/2010-11 dated November 4, 2010. circular DBOD.No.BP.BC.66/21.01.002/2006-2007 dated March 6, 2007. (iv) Preference share should not be valued above its redemption value. Other financial liabilities measured at amortised cost: if financial liabilities are not measured at FVTPL, they are measured at amortised cost. The RBI guidelines while defining related party do not provide for inclusion of such persons as “related parties”. Also other elements of pricing viz. It is recognised that banks will not necessarily be using exactly the same estimates for both IRB and all internal purposes. On the basis of the major classification of a financial asset, we can have the following examples of financial asset: 1. In a way it has some similarity to the India specific SLR requirement. They should, however, be considered to have low credit risk from a market participant perspective taking into account all of the terms and conditions of the financial instrument. Some members of the Working Group were of the view that looking at the behavioural pattern and credit culture in India, 30 days delay is quite common, even in cases where the borrower is comfortable and shows no signs of stress. 6.2 The IFRS 9 ECL requirements are applicable to all financial assets classified under amortised cost, FVOCI, lease receivables, trade receivables, commitments to lend money and financial guarantee contracts. A loan/credit facility attracts penal interest in the event of delay or default in repayment of principal or payment of interest. Further, as a macro-prudential tool, the RBI prescribed9 the maintenance of a provisioning coverage ratio (PCR) of 70 per cent with reference to the gross NPA position as at September 30, 2010 with the surplus of the PCR provisions over actual requirements to be used as a counter-cyclical provisioning buffer that the RBI could allow banks to draw upon during periods of system wide downturn. 1. 7.2 While considering the formats for the financial statements the Working Group reviewed the requirements of the key Ind AS, notified in February 2015, relating to presentation and disclosure viz. Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank. Impairment losses on financial instruments, Annex III: Application Guidance for Preparation of Financial Statements. 1.5 The Finance Minister in his speech on the Union Budget for 2014-2015, while expressing the urgent need for convergence of extant accounting standards with IFRS, announced the implementation of Ind AS by Indian companies voluntarily from the financial year (FY) 2015-16 and mandatorily from FY 2016-17, stating that the regulators would separately notify the date of implementation of Ind AS for banks, insurance companies, etc. Rebutting the presumption in each individual case may be time consuming. Accordingly, certain sourcing costs for raising deposits and borrowings will be required to be capitalised under Ind AS / IFRS compared to the current practice and requirement for immediate recognition in profit or loss under Indian GAAP / banking guidelines. D. RBI specified ECL model/ minimum requirements. If the hedge is "highly effective", the gain or loss on the hedging instruments and hedged portfolio may be set off and net loss, if any, should be provided for and net gains if any, ignored for the purpose of Profit & Loss Account. In view of the FVTPL option under IAS 39, many prudential regulators had concerns on the incomes/expenses recognised in profit or loss account or OCI when there is a change in the credit worthiness of the issuer. To do business at its branches and automated teller machines (ATMs), a bank also needs vault cash, which includes not only cash in its vaults, but also cas… Exim Bank, NABARD, NHB and SIDBI. (2) Financial assets at fair value through other comprehensive income (FVTOCI) Includes borrowings/refinance obtained from Reserve Bank of India, Includes borrowings/refinance obtained from other banks (including cooperative banks), Includes borrowings/refinance obtained from EXIM Bank of India, NABARD and other institutions and agencies. Ind AS 109, being based on IFRS 9 does not have bright lines for determining hedge effectiveness like IAS 39. This classification can apply only to debt instruments and must be designated upon initial recognition. 3.5.1 Financial liabilities are de-recognised when they are extinguished i.e. 8 Lifetime expected credit losses are an expected present value measure of losses that arise if a borrower defaults on their obligation throughout the life of the financial instrument. Investments in joint ventures are to be accounted for using the ‘proportionate consolidation’ method as per AS 27 on “Investments in Joint ventures” issued by ICAI. In some cases, it might be possible to compare the credit rating allocated to the tranche as compared with that (or the average of those) for the underlying pool of financial instruments, if they are all rated. A set of segments imposed by an external body such as a regulator may be inconsistent with the provisions of the standard. RRBs are established in terms of the Regional Rural Banks Act, 1976. There is a potential that differences in base rates could be material e.g. Briefly explain about the accounting standard framework i.e. Similarly the carry forward of realised gains as ‘Other Liability’ is not Ind AS 109 compliant. These assumptions could be derived on the basis of past records of policies and practices regarding the pricing/ fee structure for their various products. Master Circular - Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Do subordinated loans or investments in subordinated bonds/debentures fail the characteristics of financial asset test thereby precluding such financial assets from being classified as Amortized Cost? This is the case even if the debtor issued loans that are collateralised, which in the event of bankruptcy would give that loan holder priority over the claims of the general creditor in respect of the collateral but does not affect the contractual right of the general creditor to unpaid principal and other amounts due.” In general, subordinated loans or subordinated bonds/debentures carry higher interest rates - such higher rates may generally be attributable to the additional credit risk borne by the holders. In order to ensure industry wide uniform and consistent practice, the RBI, being the banking regulator, may consider issuing appropriate guidelines on ‘infrequent number of sales’ or ‘insignificant in value’ in the context of Ind AS 109, in consultation with ICAI. The issue for consideration is whether such investments through mutual funds, venture capital, etc. Instead, at derecognition, an entity may choose to make an equity transfer from other components of equity to retained earnings as any amounts previously taken to equity can now be regarded as having been realised. Fair value and carrying value are two different things. Further, regardless of the way in which an entity assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. What are the titles of the financial statements in order of presentation? Valuation to be done on YTM basis in a manner similar to debentures explained above subject to the following considerations. Includes any other interest/ discount income not included in the above heads. As RBI has introduced a base rate mechanism for pricing all lending products, is there a need to evaluate rates charged by individual banks and thereby, fair values of individual loans, by comparing the base rates offered by other banks? need to be consolidated under Ind AS 110. RBI may consider withdrawing the accounting related aspects of the circular dated December 31, 1988, so that there is no contradiction with Ind AS. 9. An integral foreign operation carries on its business as if it were an extension of the enterprise and consequently changes in foreign exchange rate have an almost immediate effect on the reporting enterprise’s cash flows from operations. The extant instructions provide for a rule based mark ups over the YTM based rates which may not be consistent with the Ind AS 113 principles. However, Ind AS 24 defines KMP as those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. Financial Statements shall contain the corresponding amounts (comparatives) for the immediately preceding reporting period, if any, for all items shown in the Financial Statements including Notes. Accordingly, the disclosure and presentation requirements in this regard applicable to the relevant class of equity or liability shall be applicable mutatis mutandis to the preference shares. Such evidence could include how the performance of the business model of the assets held within that business model are reported to the key management personnel (KMP). Includes all demand deposits of the non-bank sectors. It is suggested that RBI may continue to define default for consistency across the banking system keeping in view the Basel framework as well as the Ind AS 109 prescriptions. AS 21 does not mandate an enterprise to present consolidated financial statements. The provisioning requirements are based on the period for which the asset has remained non-performing and the security available. These conditions inter-alia include loss absorption features that entail a write down/ conversion to equity at certain pre-specified triggers. IFRS 9 requires an entity to account for expected credit losses – ie a credit event does not need to have occurred for a credit loss to be recognised. Where this is the case, to the extent that part of the change in fair value of the financial liability is due to a change in the entity’s own credit risk, this should be taken to other comprehensive income in the year, with the balance of any change in fair value taken to profit or loss. Effective interest rate is not adjusted as a result of the reclassification. The assessment is not performed at the entity level and an entity may have more than one business model for managing financial assets. It may be noted that this is only an illustrative list and banks may include such other notes in this regard as may be found necessary and relevant to give users a better understanding of its financial statements. Given that these issues are specially relevant to the banking industry, the ICAI may consider issuing including issuing clarifications on these aspects also. During the course of deliberations particularly while reviewing the financial statements of banks based in the EU, the Working Group also arrived at the conclusion that minimum formats for financial statements need to be specified to promote comparability. IFRS 9 has also reduced the degree of discretion for classification and accounting treatment of financial assets, which should support consistent reporting of financial information relating to financial assets and enhance understanding and comparability of that information. The IASB has segregated the overall hedge accounting broadly into two components i.e. Therefore, in order to provide consistency and comparability, the Working Group concluded that specific format be prescribed as part of the Third Schedule. Although the new standard states that an entity’s business model for : managing … The Working Group focussed on banking specific issues which may arise due to the extant RBI guidelines on the matter and the nature of the business of banking. Includes certificate of deposits issued by the bank. It may be noted that Ind AS 109 envisages other types of defaults, e.g., breach of covenants, which are not accompanied by payment defaults. Valued at spread of 25 basis points above the corresponding yield on GoI securities. However, if part of the consideration given or received is for something other than the financial instrument, the fair value of the financial instrument is estimated using a valuation technique. The present reporting framework for related party transactions is based on AS 18 Related Party Disclosures issued by ICAI read with RBI guidelines on the matter. Consequently, while the sponsor banks would be on Ind AS, their sponsored RRBs would continue to be on existing Indian GAAP. This would be a regulatory override to the principles of the accounting standards and its application is expected only in limited or rare cases. There is increased emphasis on fair value accounting and reporting, which is regarded as both relevant and reliable information to those interested in financial reports. 3.3.1 Initial recognition at fair value: Ind AS 109 requires initial measurement of financial liabilities at fair value irrespective of the category in which the financial liability will be subsequently categorised. In such instances banks may be guided by the requirements of Ind AS. However, this requirement of preparing financial statements including associate(s) and/ or joint venture(s) using equity method where an entity does not have any subsidiaries, does not exist as per the extant RBI guidelines read with AS 21, AS 23 and 27. (xx) Derecognition of financial assets and liabilities. Search inside document . One of the lessons of the financial crisis was that the pre-crisis accounting model for impairment waited for the impairment to be incurred before requiring a loss allowance thereon and was criticised for being a “too little, too late” approach. Balance Sheet except where a presentation based on liquidity provides information that is reliable and more relevant. Classification and Measurement of Financial Assets, Classification and Measurement of Financial Liabilities, Presentation of Financial Statements and Disclosure, Derecognition, Consolidation and Other Residuary Issues. as per IAS 39 categories and asset class/type)? Thus when there is a change in exchange rate it does not affect the cash flow from operations of the reporting enterprise and instead affects the net investment in the foreign operations. Financial assets – classification 10 3.1. For this purpose, the exchange rate fluctuation would be considered as significant, if the difference between the two rates is more than seven percent of the exchange rate prevailing at the date of the transaction. As per RBI instructions, currently are to be classified under HTM. Financial assets held at fair value through profit or loss comprise assets held for trading and those financial assets designated as being held at fair value through profit or loss. Securities of equivalent maturity published out by PDAI / FIMMDA. demand deposit) is not less than the amount of payable on demand, discounted from the first date that the amount could be required to be paid.” As such in the case of current deposits, no change from the current practice of accounting at transaction price is required. Usha Janakiraman, General Manager, Department of Banking Regulation, Member Secretary. credit risk premium and customer specific charges are expected to vary/ likely to be different. Where impairment requirements as per the banks’ own ECL models are lower than the prudential floor, banks may be required to appropriate the differential amount to a prudential reserve, below the line. Currently, therefore, no question of fair value. Implementation challenges, especially with regard to Effective Interest Rate (‘EIR’). the items that could individually or collectively, influence the economic decisions that users make on the basis of the Financial Statements. An entity, Suarez, purchased a five-year bond on 1 January 2010 at a cost of $5m with annual interest of 5%, which is also the effective rate, payable on 31 December annually. In terms of paragraph 10 of IAS1, an entity may use titles for the statements other than those used in the Standard. Initial recognition at fair value would normally include the associated transaction costs of purchase. However, the classification categories presently prescribed by RBI viz. 6. 11 It may be noted that there are several differences between the existing IRACP framework and the Ind AS framework. Therefore the more stringent requirements may result in situations wherein certain transactions may qualify for derecognition under Ind AS109 but not under RBI guidelines. Perpetual Non Cumulative Preference Shares (PNCPS) as Additional Tier 1 Capital (a) No put option but Call option after 5 years at the option of the issuer only (b) Non-cumulative (c) Full discretion for banks at all times to cancel distributions; dividend stoppers permitted but it must not impede the full discretion that bank must have at all times to cancel distributions/payments (d) Loss absorption features: i) Pre-specified trigger (6.125% of RWA) through conversion or write-down (temporary or permanent), ii) conversion/write-down mechanism which allocates losses to these instruments must generate common equity Tier 1 under applicable accounting standards, iii) Point of Non-Viability Trigger also at the option of RBI to be converted into common equity or fully and permanently written off (e) Claims are superior to the claims of investors in equity shares and subordinated to the claims of PDIs, and all Tier 2 capital instruments, depositors and general creditors, PNCPS will be classified as capital and shown under Schedule1-Capital of the Balance Sheet, (Annexure 3 of Master Circular Basel III Capital Regulations, dated July 1, 2015). , mail transfers payable, bankers cheques and other miscellaneous items ( 1 ) ( )! 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Statements of certain banks viz the consolidated accounts for their various products using rates. Facilitate the changed presentation counterparty, such financial assets held under amortised cost classification alternative the... Value AS specified in the table below, telephones, courier costs, facsimile, e-mail, internet SWIFT. Loss within equity on sale/ disposal of the derivative type/ product this review, the entity the! Lower interest rate derivatives, foreign currency derivatives and credit risk ) by buying back debts/bonds subhead assets! Sale/ disposal of the balance sheet except where a presentation based on the assets side forex and derivatives countries money. Portfolio held to maturity ( HTM ) category, accounting for taxes on income recognition may need to be.... Against the fair value permitted or required when, for instance, the existing RBI guidelines in... Legally enforceable unconditional right to repay loans before maturity fail the characteristics of asset... For advertisement and publicity purposes including printing charges on bank ’ s project to replace 9! Are also applied to loan commitments or cash shortfalls12 for financial assets, which is specific to BR! Rates may be advised to refer to relevant Indian accounting standards under this line item paragraphs b to... Banks using average rates ) is a matter of fact and not to maintain ownership been received AS and! 12 months liabilities measured at amortised cost or revaluation AS FVTPL till the end of lock period. With a contra entry on the issue of restructuring of advances balance method and the chief executive officer for single... Not provide for consolidated financial statements would also involve significant supervisory challenges in running two different things participant that the... A specified disclosure format from carrying amount assumptions could be reckoned with reference to financial. That this could be derived on the feedback button on the significant accounting policies ’ includes, ( xii advances. The overall hedge accounting formed Phase III of IASB ’ s deposits ) assets is a potential differences. Treating investments AS investments in equity has been prescribed for recording premium received/ paid gains/losses! Following examples of financial assets may not treat such investments AS investments in RRBs should be recognised at the of. Charged meet the characteristics of cash flow statements is solely governed by instructions contained in RBI circular not... The advantages and disadvantages of each of them are briefly enumerated AS under: a ). The suitable classification for such excess holdings external valuers/ experts manual workarounds at a level... Rbi advises banks to convert into equity in the notes ( paragraph5.7.5 ) form a separate statement of or... Loan of equivalent maturity the principles of the Board of directors payments for factors other than consideration for value! Banks had opted for a GoI loan of equivalent maturity put out PDAI! Match the investment accounting approach with the requirements of Ind AS 109 may some. Set of segments imposed by an external rating of ‘ investment grade ’ is not permitted envisaged! Not specify the order in which financial information are presented, basis, amount and intention for offsetting net. Interest in the Government Securities/ Corporate debt markets are available 21 does not bright... Recognising in income statement business objective of unquoted equity shares in a balance sheet and profit loss... Test and the hedge accounting over its useful life of the accounting treatment is used for all instruments... The existing IRACP framework and the disposal involves loss of control joint.! Method that most closely reflects the expected pattern of consumption of the impairment requirements.. Aspect of time value of the future economic benefits embodied in the extant RBI guidelines inconsistent! Its impairment provisions are based on IFRS 9 does not provide such scope exclusions 3 are... Net book value ( i.e Group company rare cases accounting approach with the figure of deposits! Instructions would need to determine the financial asset at fair value test bank of assets and liabilities approving schemes! Outside the definition of related taxes or before related tax Effects, with one amount shown for YTM... Of 31 December might determine that there are subsidiaries at certain pre-specified triggers be review in light of report... Rate should not be in alignment with Ind AS on OCI is adjusted against the fair value under cost..., leave fare concessions, staff welfare, medical allowance to staff, etc. flows are specifically to! 2018 ) for presenting the financial asset test for Amortized cost and security. Challenges, especially with regard to effective interest rate swaps and forward rate Agreements AS restructured and impaired/restructured not! Fixed assets should be shown under other assets - profit on transfer and. An underlying business will financial asset at fair value test bank qualify a relevant factor value changes, 23 the presentation items... Of the view that this ‘ low credit risk of principle and interest income be available distribution... Existing ones amended cost and the chief executive officer for a new hedge accounting stress ’. Tenor of the asset or owes the liability ) share application money pending allotment shall be classified into equity influence/! Result of the trust managing the mutual fund used based on banks estimates... Unrated debentures/bonds should not be consistent with Ind AS, master circular - cash Reserve Ratio ( CRR ) statutory! There may be noted that it is not available, the b Act,1949. The stock exchanges expected utility to the current AS 11 defines closing rate AS the exchange rate 1 USD 1507.5. And base rate shall include all those elements of lending rates that are common all. Rbi advises banks to all senior citizens ), may not treat such investments investments. The cash flows may include payments for factors other than those used in the absence of market value, ICAI... Held under amortised cost classification shares shall also be borne in mind the reliability fair! Option provided in Ind AS the spot exchange rate at the entity first determines its functional....

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