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Accounting of Investments by NBFC

Vaibhav Rathi
30 Mar, 2024 30 Mar, 2024
Accounting of Investments by NBFC

Non-Banking Financial Companies (NBFCs) are obligated to record and report their investments in accordance with particular accounting rules and norms. The Reserve Bank of India and other regulatory bodies have set forth accounting standards and regulations for NBFCs to ensure accurate and transparent reporting of their investment operations in their financial statements. Let us discuss the accounting of investments by NBFCs and its regulation from RBI.

Accounting of Investments by NBFC

Documenting, valuing, reporting, and disclosing the various types of financial instruments owned by the NBFC as part of its investment portfolio is the accounting of investments by Non-Banking Financial Companies. To appropriately depict the financial position, performance, and risks associated with these investments in the NBFC’s financial statements, the accounting of the investment process entails adhering to specified accounting standards and principles. 

Accounting of Investment – Accounting Standard 13 deals with accounting for investments in financial statements created by a company and specifies numerous disclosure standards. Accounting for Investments is frequently utilised.

Classification of Investments

Investments in securities can be classified into two categories:

Current Investments – Current investments are, by definition, easily realisable and are meant to be held for some time shorter than a year after the date of the investment.

Long-Term Investments – Although they might be freely tradable, long-term investments differ from current ones.

Accounting of investments and its RBI Guidelines

According to Regulation 10 of the NBFC-Non-Systematically Important Non-Deposit taking (Reserve Bank) Directions, 2016, the NBFCs are regulated to do accounting for investments in the following manner:

Board’s Decision

  • The Board of Directors of each applicable NBFC shall establish and carry out an investment policy for the Company; 
  • The Board of the firm shall provide the criteria for classifying investments into current and long-term investments in the investment policy; 
  • At the time of each investment, the investment in securities shall be classified into current and long-term investments; And
  • In the case of inter-class transfer, the following rules apply:
  1. Such transfers shall not be made on an ad-hoc basis. 
  2. Such transfers, if warranted, shall only be made at the beginning of each half-year, on April 1 or October 1, with the Board’s approval.
  3. Investments shall be transferred by scrip from current to long-term or vice versa at book value or market value, whichever is lower.
  4. Each scrip’s depreciation must be fully compensated, and any appreciation should be ignored.
  5. At the time of such an inter-class transfer, even regarding the scrips of the same category, the depreciation in one scrip may not be offset against the appreciation in another.
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Quoted Current Investments

For valuation, quoted current investments must be divided into the following categories:

  • (a) Preference shares,
  •  (b) Equity shares,
  •  (c) Debentures and bonds, 
  • (d) Government securities, including treasury bills,
  • (e) Mutual fund units, and
  • (f) Others. 

Current investments in each category must be evaluated at the cost or market value, whichever is lower. The investments in each category will be considered scrip-by-scrip for this purpose, with the cost and market value for all assets in each category being combined. The net depreciation must be accounted for or charged to the profit and loss account if the category’s total market value is less than its whole cost. The net appreciation shall not be considered if the category’s total market value exceeds its cost. Investment depreciation in one category cannot be offset by appreciation in a different area.

  • Unquoted Equity Shares – The breakup value or cost, whichever is smaller, shall be applied to unquoted equity shares that are current investments. However, if necessary, applicable NBFCs may replace the breakup value of the shares with fair value. Shares shall only be valued at one Rupee in cases where the investee company’s balance sheet will not be available for two years. 
  • Unquoted preference shares – Unquoted preference shares that are current investments must be valued at face value or cost, whichever is lower. 
  • Unquoted Government Securities or government-guaranteed bonds – Government-guaranteed bonds or investments in unquoted government securities must be valued at carrying cost. 
  • Mutual Funds – Current investments that are unquoted in mutual fund units are valued at the net asset value that the mutual fund has disclosed for each specific plan.
  • The carrying cost value of commercial papers must be used. 
  • Long-term Investment and unquoted debentures – The accounting standard published by ICAI must be used when determining the value of a long-term investment. To recognise income and classify assets, unquoted debentures should be classified as term loans or other types of credit facilities on the basis of their tenure.
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Importance of Accounting of Investments by NBFCs

Accounting of investments by NBFCs is essential for several reasons:

  • Accurate Report: Correct accounting of investment ensures that the financial statements of the NBFC accurately reflect its financial status and performance. This is crucial for transparency and for giving interested parties, such as creditors, regulators, and investors, accurate information.
  • Compliance: The Reserve Bank of India and the Ministry of Corporate Affairs have set regulatory requirements and accounting standards that NBFCs must follow. By ensuring compliance with these rules, proper accounting reduces the possibility of penalties or other regulatory measures.
  • Risk Management: The level of risk associated with investments varies. NBFCs can evaluate the performance of their investment portfolio using proper accounting of investment strategies to identify possible threats and respond quickly to mitigate them.
  • Effective Decision-Making: Management gains insights into the performance of many investment categories through accurate investment accounting. This makes it possible to allocate resources wisely and make informed decisions on acquiring or disposing of investment assets and the overall investment plan.
  • Evaluation of Investment Plans: NBFCs can assess the efficacy of their investment plans over time because of the accurate accounting of investments. They can use it to determine whether their investment choices are in line with their financial aims and business goals.

It makes it easier to make well-informed decisions, increases stakeholder confidence, and ensures that pertinent accounting rules and laws are followed.

Conclusion

In conclusion, accounting of investments is not just a legal necessity for NBFCs. It is also a tactical instrument that accurately explains their financial situation, investment performance, and risk management. For regulatory compliance, transparency, investor confidence, and efficient decision-making, NBFC accounting of investments must be accurate. It helps the stakeholders to assess the NBFC’s financial stability and investment performance.

  1. Can NBFCs invest money?

    NBFCs are similar to banks in that they lend money and make investments, but there are a few differences from banks.

  2. How are the assets of NBFC classified?

    Standard assets, Sub-standard assets, Doubtful Assets, and Loss Assets are the four categories. Each of these assets must be provisioned at the rates the RBI specifies.
    Additionally, NBFCs must declare in their financial statements any provisions made in accordance with RBI requirements.

  3. What does “accounting of investment” mean?

    Accounting with an emphasis on tracking and analysing investment activity is known as investment accounting or accounting of investment. Investment accountants frequently work for financial organisations like banks or credit unions, but they can also be independent contractors or employees of advising firms.

  4. What makes investment crucial? 

    Investing is a successful way to use your money and potentially grow your wealth. The value of your money can grow and outpace inflation if you make wise investment decisions. The power of compounding and the balance between risk and return are the main reasons why investments have high growth potential.

  5. What is an NBFC, and what do they do?

    Although they lack a banking licence, they are financial institutions that offer financial services to clients. 

  6. What is the other name for NBFC? 

    Nonbank Financial Companies (NBFCs), commonly referred to as Nonbank Financial Institutions (NBFIs), are organisations that offer services comparable to those of a bank but lack a licence to conduct banking.

  7. Can NBFC make share market investments?

    An NBFC may purchase shares, stocks, bonds, debentures, and other securities from the federal government, municipal governments, or other issuers of marketable securities. It might work in the hire-purchase, leasing, insurance, or chit-fund industries.

  8. Can NBFCs make deposits?

    Public deposits may be accepted by and renewed by NBFCs for a minimum of 12 months and a maximum of 60 months. 

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