NBFC

Guidelines for Ind AS Implementation by NBFC’s, ARC’s issued by RBI

The Reserve Bank of India rolled out regulatory guidelines for implementing Indian Accounting Standards (Ind AS) by Non-Banking Financial Companies (NBFCs) and Asset Reconstruction Companies (ARCs) whilst preparing their financial results. In this article we shall take a look at the guidelines for Ind AS implementation.

Objective of Guidelines for Ind AS Implementation

The guidelines by RBI for Ind AS implementation by NBFC’s, ARC’s were issued to achieve the following objectives:

• To promote a high quality of Indian Accounting Standards(Ind AS).
• Consistent implementation of Indian Accounting Standards.
• To facilitate comparison and better supervision for preparing their financial results.

What is Ind AS?

Ind AS stands for Indian Accounting Standards. It came into existence to meet the requirements of (IFRS) International Financial Reporting Standards. It helps in ensuring that Indian companies are globally accessible. These are documents and policies that provide standards for the recognition, measurement, treatment, presentation, and disclosures of transactions in Ind AS financial statements. It contains guidelines and frameworks for keeping books of accounts for an organisation based in India.

The prime objective is to ensure uniformity in financial statements so as to make them easily accessible and transparent to be understood by all users. Accounting Standards are issued in India by the Institute of Chartered Accountants of India (ICAI).

Applicability of Ind AS for NBFCs (Non-Banking Financial Companies)

The table given below shows the phase-wise applicability of Ind AS implementation by NBFCs:

From 2018-19 onwards	1.NBFC having net worth of Rs. 500 crore or more;   2.Holding, subsidiary, joint ventures or associate companies of companies covered under point 1 above
From 2019-20 onwards	1.NBFC whose equity or debt securities are listed or are in the process of listing any stock exchange in India or outside India and having net worth less than 500 crore;  2. NBFC that are unlisted companies having net worth of Rs.250 crore or more but are less than Rs.500 crore; 3. Holding, joint venture, subsidiary or associate companies of companies covered under point (1) and (2) above.

What Does the Guidelines Issued By RBI State with regard to Ind AS Implementation by NBFCs?  

The guidelines issued by the RBI^[1] for Ind AS implementation byNBFCs state the following things:-

1. The Guidelines directs the Non-banking financial companies and the asset reconstruction companies to put in place board-approved policies.
2. The board approved policies must clearly articulate and document their business models and portfolios.
3. The guidelines further state that the NBFC’s and the ARC’s need to devise their policies for sales out of amortised cost business model portfolios and mention that in their notes to financial statements.
4. The guidelines stated that the NBFC’s and ARC’s must educate their customers about the importance of making the payments on time.
5. The guidelines mentioned that the audit committee must approve the classification of accounts that are outstanding for more than 90 days but not being treated as impaired with the rationale is clearly documented.
6. If there are outstanding amounts and overdue amounts, then it must be disclosed in the notes to the financial statements.
7. The NBFC’s and the ARC’s are required to hold impairment allowances as needed by the Ind AS.
8. The NBFC’s and ARC’s must maintain the asset classification and must compute provisions as per extant prudential norms on IRACP (Income Recognition, Asset classification and Provisioning) including the borrower/beneficiary wise classification, provisioning for standard, restructured assets and NPA ageing.

Applicability of Ind AS to all companies

The Ministry of Corporate Affairs, in 2015, notified the companies that stipulated the adoption and applicability of Ind AS step by step beginning from the accounting period 2016-17. The MCA has issued three amendment rules since that period. Since the Indian companies have comparatively wider reach now than earlier, it was felt necessary to converge reporting standards with international standards; this led to the institution of Ind AS.

Implementation of Indian Accounting Standards

The RBI in a detailed order said that from the financial year 2019-20 NBFC’s and ARC’s are required to comply with Ind AS implementation. The responsibility of preparing a fair presentation of the financial statements of NBFC and ARC rests with the Board of Directors of the respective companies. Detailed analysis, application of judgement and detailed documentation would be required to support the judgments. In the specific areas like asset classification and provisioning, consistency in the application can be ensured through the aforementioned guidelines.

Computation of Regulatory Capital and Regulatory Ratios

In determining owned funds, net owned funds and regulatory capital, NBFCs and ARCs shall be guided by:

i) Any net unrealised gains arising out of fair valuation of financial instruments, including gains arising on the transition to Ind AS, should not be included in owned funds but all such net losses must be taken into consideration. To determine the net unrealised gains for reduction from owned funds, the NBFCs must categorise financial assets measured at fair value into two categories:

• Investments in shares of other NBFCs, in shares, debentures, bonds, etc. in Group companies that are required to be reduced while determining Tier I Capital as defined in paragraph 2(xxxii) of the Non-Banking Financial Company-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016;
• Others

While netting may be done within the above-mentioned categories, net gains from one category must not be offset against losses in another category.

ii) Any unrealised gains or losses recognised in equity due to; (a) own credit risk, (b) cash flow hedge reserve will be derecognised while determining owned funds.

iii) Since unrealised gains on category -(a) have been excluded in the computation of owned fund, NBFCs will reduce the lower of acquisition cost/fair value of investments or advances in subsidiaries or other group companies and other NBFCs while determining Tier I capital as mentioned in paragraph 2(xxxii) of the aforementioned Master Directions. Net unrealised gains on Category -(b) (i.e. ‘Others’) to the extent that they have been excluded in regulatory capital, shall also be reduced from the risk-weighted asset.

iv) ARC’s shall apply the guidelines mentioned in subparagraph I to iii above mutatis-mutandis whilst determining net owned funds.

v) Where NBFCs or ARCs use fair value as a deemed cost on the date of transition with respect to Property, Plant and Equipment (PPE) in terms of Ind AS 101, and the distinction between the deemed cost and the current-carrying cost is settled directly in retained earnings; any fair value gains on such transition shall be reckoned as Tier II capital for NBFCs or net owned funds for ARCs at a discount of 55%.

vi) 12 month expected credit loss (ECL) allowances for financial instruments, i.e. where the credit risk hasn’t increased significantly since initial recognition, shall be included under general provisions and loss reserves in Tier II capital within limits mentioned by extant regulations. Lifetime ECL won’t be reckoned for regulatory capital (numerator) but it shall be reduced from the risk-weighted assets.

vii) Securitised assets which are not qualifying for de-recognition under Ind AS due to credit enhancement is given by the originating NBFC on such assets shall be risk-weighted at zero%. Although, the NBFC shall reduce 50% of the amount of credit enhancement given from Tier I capital and the balance from Tier II capital.

• Regulatory ratios, disclosures and limits shall be based on Ind AS figures and impaired assets and restructured assets shall be considered as non-performing assets (NPA) for calculation of NPA ratios.

Conclusion

The RBI in a detailed order said that from the financial year 2019-20 NBFC’s and ARC’s are required to comply with Ind AS implementation. It is expected to facilitate comparison and better supervision for preparing their financial results.

Read our article: Indian Accounting Standard (IND AS) 12 – Accounting on Income Taxes