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NBFC Accounting

NBFC being a financial institution, needs to follow the standards set by Indian Accounting Standards. Hence for NBFC Accounting, the financial statements for Non-Banking Financial Company (NBFC), whose financial statements are drawn up, must comply with the Companies (Indian Accounting Standards) Rules, 2015.

Package Inclusions
  • Calculation of Financial Assets
  • Preparation of Financial Statements
  • Checking the Books of Accounts
  • Compare the Journal Entries
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NBFC Accounting Services

Non-Banking Financial Companies play an essential role in the credit delivery mechanisms for India's growth. It also reflects the imperatives of the evolution of a vibrant, competitive, and articulate financial system. The NBFCs have recorded market growth in recent years in India.

The Reserve Bank of India has regrouped the entire asset financing NBFCs, engaged in assets financing such as Industrial machinery and transport vehicles. Whereas, the other companies will be classified as loan and investment companies. However, the NBFCs can be explained as equipment leasing, loan companies, Hire purchase, and residuary Non-Banking Companies.

According to Section 45-I (f) of RBI Act, 1934 non-banking financial company means–

  • A financial institution that can be considered as a company.
  • A non-banking institution functioning as a company that has as its principal business of receiving deposits under any scheme/ arrangement/ in any other manner/lending.
  • Any other non-banking institution or class of institutions, as specified by the Bank with prior approval from the Central Government and also by publishing a notification in the Official Gazette.

NBFCs being a financial institution also need to follow the requirements set by Indian Accounting Standards. Hence, for NBFC Accounting, the financial statements for Non-Banking Financial Company (NBFC), which are drawn up, must comply with the Companies (Indian Accounting Standards) Rules, 2015.

The Ministry of Corporate Affairs through its notification dated 31st January 2020 has inserted sub-rule (1A) of Rule 12 of the Companies (Accounts) Rules, 2014 as:

  • Every Non-Banking Financial Company or NBFC that needs to comply with the Indian Accounting Standards (Ind AS) needs to file the financial statements with the Registrar along with Form AOC-4 NBFC (Ind AS) and also the consolidated financial statement if any with Form AOC-4 CFS NBFC (Ind AS).

Which NBFC Companies need to comply with Ind AS for NBFC Accounting?

The NBFC companies for the purpose of NBFC Accounting shall comply with the Indian Accounting periods beginning on or after April 1st, 2018, with the comparatives that end on 31st March 2018 or after that. NBFCs must fulfill following Ind AS criteria for NBFC Accounting:

  • Non-Banking Financial Companies are having a net worth of Five hundred crore rupees or more.
  • Holding, Subsidiary, Joint Venture, or Associate Companies of Companies has a net worth of five hundred crore rupees.

The NBFCs mentioned below needs to comply with the Indian Accounting Standards (Ind AS) for the NBFC accounting periods beginning on or after 1st April 2019 with the comparatives for the time period ending on 31st March 2019 or after that:

  • NBFCs with equity or debt securities listed in the process of listing any stock exchange in India or outside India having a net worth of less than five hundred crore rupees.
  • NBFCs function as unlisted companies with a net worth of two hundred and fifty crore rupees or more but less than five hundred crore rupees.

Applicability of Companies (Indian Accounting Standards) Rules, 2015 on NBFC Accounting

The applicability of companies in Ind AS rules, 2015 is divided into two phases:

  • Phase 1

S.No

Criteria

Accounting Periods

1.       

A.    NBFCs having a net worth of Rs.500 Crore or more.

For accounting periods beginning on or after the 1st April 2018, the comparative periods ended as on 31st March 2018

2.       

B.     Holding, subsidiary, joint venture or associate companies of companies covered under point A of phase 1.

For accounting periods beginning on or after the 1st April 2018 with the comparative periods ending as on 31st March 2018

  • Phase 2

S.No

 

Criteria

Accounting Periods

1.       

 

 

Equity or Debt listed NBFCs or in the process of listing and having net worth less than Rs. 500 crore.

 

For accounting periods beginning on or after the 1st April 2019 with the comparative periods ending as on 31st March 2019

2.       

Unlisted NBFCs with a net worth of Rs. 250 crore or more but less than Rs. 500 crore.

For accounting periods beginning on or after the 1st April 2019 with the comparative periods ending as on 31st March 2019

3.       

Holding, subsidiary, joint venture, or associate companies of companies covered under point A and point B of phase 2.

For accounting periods beginning on or after the 1st April 2019 with the comparative periods ending as on 31st March 2019

  • The NBFCs shall apply Ind AS only if it can satisfy the criteria mentioned above and shall not be allowed to adopt Ind AS voluntarily.
  • However, NBFCs can give Ind AS compliant financial statements to incorporate it into the Group's consolidated financial statements.
  • NBFCs not fulfilling the criteria mentioned above must follow Accounting Standards as specified in Annexure to the Companies (Accounting Standards) Rules, 2006.

What are the Principles for Calculating Net Worth for NBFC Accounting?

The NBFC Accounting for calculating net worth is:

  • The net worth shall be calculated in accordance with the latest audited standalone financial statements.

Explanation: The NBFCs in meeting the specified thresholds given in Phase 2 for the first time at the end of the accounting year shall apply to the Indian Accounting Standards (Ind AS) from the immediate next accounting year.

Some examples are given below to explain the above statement:

  • The NBFCs meeting the threshold for the first time on 31st March 2019 shall apply Ind AS for the financial year 2019-20 onwards.
  • The NBFCs that met the threshold limit for the first time on 31st March 2020 shall apply Ind AS for the financial year 2020-21 onwards and so on.

The term net worth shall have a meaning assigned to it in clause (57) of Section 2 of the Companies Act, 2013.

How are Financial Instruments Classified in NBFC Accounting?

  • Under the IGAAP, the concept of Financial Instruments is not explained for NBFC Accounting.
  • Ind AS 32 defines the Financial Instrument as any contract that increases one entity's financial asset and a financial liability or equity instrument of some other entity.
  • Ind AS 109 for NBFC Accounting classifies Financial Assets under the below-mentioned categories:
NBFC Accounting

The classification mentioned above is based on:

  • The business model of the organization for managing the financial assets: The business model assessment based on the contractual cash flow characteristics refers to how an entity manages its financial assets for generating cash flows.
  • The financial asset's contractual cash flow characteristics: The financial liabilities can also be classified either at the amortized cost or as a Fair Value by Profit and Loss.

Concept of Equity Instruments and Compound Financial Liability in NBFC Accounting

The concept of equity instruments and compound financial liability in NBFC Accounting are enumerated below:

  • According to Ind AS 32, equity instruments like any contract evidence a residual interest in an entity's assets after deduction of all its liabilities.
  • Compound Financial Liabilities means the instruments that satisfy the criteria of both the financial liability and the equity instruments.
  • An organization also separately recognizes the financial instrument's components that create a financial liability of the entity. It also grants an option to the holder of the instrument to convert it into an equity instrument for the company.
  • The non-derivative financial instrument's issuer shall evaluate the terms of the financial instrument for determining whether it contains both the liability and an equity component. The separated components shall be classified as financial liabilities and equity instruments based on the mechanism devised under Ind AS that is subject to the satisfaction of conditions laid down by Ind AS 109.

Derecognition of Financial Assets in NBFC Accounting

In NBFC Accounting, the derecognition of the financial assets are done in the following ways: 

  • As per the IGAAP, the assets were derecognized if it met the criteria of "True Sale" as prescribed in the RBI's guideline on the transfer of assets by way of Securitization and Direct Assignment of cash flows.
  • According to Ind AS, the assets will be derecognized if:

a) The contractual rights for the cash flow from the financial asset expiration.

b) The organization also transfers the financial asset just by transfer of contractual rights to receive the financial asset's cash flows with all the risks and rewards of ownership of the financial asset.

  • Derecognition criteria must be evaluated at Group, and so NBFCs will first assess if the Special Purpose Vehicle (SPV) to which the assets are transferred must be consolidated in NBFC or not.
  • To check whether the organization has transferred all the risks and rewards, a person needs to compute and compare the entity’s exposure to variability in the present value of the future cash flows before and after the transfer.
  • Whether the organization has maintained the control of the asset transferred, and that depends upon the transferee's ability to sell the asset.
  • On derecognition of the financial asset, the difference between the carrying amount and the consideration received shall be recognized in the profit or loss account.

How are Employee Benefit Plans specified in NBFC Accounting?

S.No

 

Treatment under IGAAP

Treatment under Ind AS

1.        

For the defined benefit plans, remeasurements such as Actuarial Gains and Losses on the Obligations and Plan Assets are recognized in Statement of Profit &Loss as Employee benefits expense.

In the case of Defined Benefit Plans, remeasurements such as Actuarial Gains and Losses on the obligations and plan Assets are recognized in Other Comprehensive Income, which will not be reclassified to Statement of P&L at a later stage.

How is Fair Valuation of Investments Treated in NBFC Accounting?

S.No

 

Treatment under IGAAP

Treatment under Ind AS

1.       

Under AS 13, Current investments must be carried at lower of cost and fair value. In contrast, the long term investments are carried at a lesser as per provision for diminution, other than of temporary nature, in the amount of such investments.

According to Ind AS 109, the value of all the investments that are classified at Fair value must be in accordance with Ind AS 113.

However, for the Investment in Subsidiary, it's Associate and Joint venture companies, an option is provided to value it at cost.

What is the Criteria of Expected Credit Loss in NBFC Accounting?

The expected credit loss in NBFC Accounting is explained below:

  • As per Ind AS 109 there are two types of credit loss:
  • An entity shall also measure the loss allowance for the specified financial instrument at an equal to 1-2 month expected credit losses.
  • Ind AS allows credit risk assessment on an individual or collective basis. This is done by considering all the reasonable and supportable information that is forward-looking.
  • An expected credit loss model; establishes a three-stage impairment model based on the significant increase in the credit risk of a financial asset since its initial recognition. Hence, the three stages determine the amount of impairment that must be recognized as Expected Credit Loss at each reporting date.
  • The model must be built as per historical data, but NBFCs also needs to consider the forward-looking information such as the Loan recovery patterns, time of recovery, probability of the default and the recovery expected from the collaterals.
  • The NBFCs are required to follow the ECL model as per Ind AS, whereas the loss in the loan is calculated based on the loan history loss experience and future expected credit loss depending on the credit quality assessment.
  • As per the present regime, the provisions of loss in loans are based on the Reserve Bank of India guidelines.

a) The first one is 12 months ECL.

b) Lifetime ECL.

  • Lifetime expected credit losses estimates the risk of a default occurring on the financial instrument during its expected lifetime
  • 12-month expected credit losses are a portion of the lifetime expected credit losses. It represents the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date.

Financial Guarantee Contracts in NBFC Accounting

  • According to Ind AS, financial guarantee contracts are a contract that needs the issuer to make specified payments to reimburse the holder for a loss it incurs. This is because a specified debtor fails to make payment when due in accordance with the original or the modified terms in a debt instrument.
  • Under the IGAAP, the issuer of Financial Guarantee must disclose the same in financial statements as a contingent liability against Ind AS 109. It requires the issuer of financial guarantee to recognize the associated responsibility in the books of account.

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Frequently Asked Questions

No, NBFCs, housing finance companies, and companies engaged in banking and insurance sectors are exempted from filing of the financial statements in XBRL.

Net worth that is calculated as per the definition given in the Companies Act, 2013 under Section 2(57) is- the aggregate value of the paid-up share capital and all reserves created out of the profits, securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

NBFCs with an asset size of Rs. 500 crore or more, as per the last audited balance sheet is considered as systematically necessary. The rationale behind such a classification is that the activities of this type of NBFCs have a bearing on the financial stability of the overall economy.

Yes, NBFCs can accept deposits. A non-banking institution which is a company having the principal business of receiving deposits under any scheme of the arrangement in one lump sum or in installments made by way of contributions or in any other manner is also an NBFC.

NBFCs typically borrow money from banks or sell commercial papers to mutual funds to raise money. They on-lend this money to small and medium enterprises, retail customers, and so on.

The last date of filing the said forms without any additional fees is 31st March of every year.

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