Terms/conditions to charge penal interest for defaulting or delinquent borrowers, is generally an additional consideration for the credit risk, and is, therefore not expected to fail the characteristics of financial asset test for qualifying for Amortised Cost classification. The Working Group is of the opinion that the SLR are prescribed to maintain the solvency and stability of the individual banks and the system as a whole. The circular also does not cover situations where options are purchased for hedging purposes, in which case the entries specified may not be applicable. Further, IAS 21/Ind AS 21 provides guidance on selection of the functional currency which may be supplemented by the ICAI in its educational material at a later stage if required. However, it was noted that if the FVTPL category is not permitted or its scope is curtailed, it could pose a number of operational issues for issuers of structured notes (mainly NBFCs in India) as they would be forced to account for instruments differently from how they price and risk manage their businesses. However, keeping in view the opinion of some bankers that it would be in the interest of the banks for RBI to continue to specify segments, it is also recommended that RBI may, if it chooses to withdraw the instructions, like to clarify that the main segments generally observed for banks in India are Treasury’, ’Corporate/ Wholesale Banking’, ‘Retail Banking’ and ‘Other Banking Business’ as specified currently. The amount of dividends proposed to be distributed to equity and preference shareholders for the period and the related amount per share shall be disclosed separately. Further, the following norms are applicable. 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. Please visit our global website instead. Directed lending (Priority sector lending (PSL)) mandates banks to lend at specified rates for certain products/ sectors– in such circumstances, are those loans considered off-market and require fair valuation using a valuation technique? Units to be valued at least once a year based on audited results. Based on the above differentiation between the nature of integral and non-integral operations there is a difference in accounting treatment. Cumulative gain or loss in the OCI is adjusted against the fair value of the financial asset at reclassification date. RBI categories of HTM, HFT and AFS as well as the accounting thereof are not consistent with the classification and accounting requirements of Ind AS 109. The expected future cash flows now expected by Suarez from the bond issuer are as follows: Required: Calculate the extent of impairment of the financial asset to be included in the financial statements of Suarez for the year ending 31 December 2011. Implementation challenges, especially with regard to Effective Interest Rate (‘EIR’). (i) it is classified as FVTPL, and One problem that may arise in relation to financial assets measured at fair value is whether a reliable fair value can be determined at the reporting date. Paragraphs B4.1.10, B4.1.11 & B4.1.12 (Ind AS 109) provide guidance on when put/call/variable cash-flow and other contractual provisions and terms may still result in cash-flows that are principal and interest on principal – thus not precluding Amortised Cost classification. If the hedge is not found to be "highly effective" no set off will be allowed and the underlying securities will be marked to market as per the norms applicable to their respective investment category. RBI may consider withdrawing its instructions specifying the segments and disclosure formats and banks may follow the requirements of Ind AS 108 for segment reporting. 1 per company. 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. In March 2012, the RBI released a ‘Discussion Paper on Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India’ which provided a broad framework to compute expected loss provisioning based on the industry average for some select asset classes. net of the fee it receives. Where a price of an identical asset/ liability is not observable, an entity may use another valuation technique that maximizes the use of observable inputs and minimizes the use of unobservable inputs. which though in the nature of reimbursement of expenses incurred may be included under this head. Banks need to work on historical data of DPD status and subsequent recoveries/slippages to rebut the 30-day presumption and arrive at the alternate threshold period. If an entity originates a loan that bears an off-market interest rate (e.g. The daily allowance, hotel charges, conveyance charges, etc. Fair value is measured at reclassification date. Similarly, after an asset becomes an NPA under IRACP norms, no income is recognized whereas under Ind AS, income would be recognized on the EIR basis for credit impaired assets, albeit after the gross amortised cost carrying amount is reduced by the impairment allowance. Prevailing industry practices may also be borne in mind in this regard. Financial assets or financial liabilities designated at FVTPL107 9.1.3. Under Ind AS, there is no distinction between integral foreign operations and non-integral foreign operations. However, in terms of IAS 16 and its Indian equivalent Ind AS 16 on Property Plant and Equipment, the depreciable amount of asset shall be allocated on a systemic basis over its useful life. However, if an enterprise, due to any statutory or regulatory requirement, needs to present consolidated financial statements, it is required to comply with the requirements of AS 21. The use of an independent agency specifying the valuation would provide guidance to market participants as well as facilitate consistent application across the banking industry. Where the securities are unquoted, an appropriate valuation technique would be required to determine fair value. There is no recycling of amounts from OCI to profit and loss (for example, on sale of an equity investment), nor are there any impairment requirements. Treatment of transaction costs incurred with raising liabilities. 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. While giving the option to use either trade date or settlement date accounting, Ind AS 109 requires that an entity shall apply the same method consistently for all purchases and sales of financial assets that are classified in the same way in accordance with this Ind AS. The subhead ‘Others’ would include reclassification from OCI. Carrying cost, i.e. Assets on lease are to be shown separately. book value less provisioning held). Ind AS 109 has corrected the anomaly of recognising in income statement gains/losses due to own credit risk. In fact an entity that was previously classified as integral foreign operation will have the same functional currency as the reporting entity. The ICAI may issue clarification in the context of Ind AS 12. Further, IAS 1 does not specify the order in which the various statements should be presented, 2. These instructions are based on the current AS 22: Accounting for taxes on income issued by the ICAI. The functional currency is the currency of the primary economic environment in which the entity operates. Where the option to convert is only given in exceptional situations, for instance, where there is a continuing payment default, it may still satisfy the cash flow characteristics test. Initial recognition at fair value is normally cost incurred and this will exclude transactions costs, which are charged to profit or loss as incurred. Represents employee benefits as per Indian Accounting Standards. These assumptions could be derived on the basis of past records of policies and practices regarding the pricing/ fee structure for their various products. 8.3.2 The present RBI guidelines require all related entities of the bank to be consolidated with the parent on the lines prescribed in the various Accounting Standards issued by the ICAI viz. Includes interest paid on all types of deposits including deposits from banks and other institutions. 7.3 The Working Group also reviewed international practices by considering the financial statements of some international banks incorporated in the European Union (EU). In view of the above, it may not be necessary to evaluate rates charged by other banks by comparing base rates offered by other banks for the purpose of arriving at the fair value of individual loans in the normal course. IFRS 13 was originally … Balances in current account and deposit accounts should be shown separately. “Internal ratings and default and loss estimates must play an essential role in the credit approval, risk management, internal capital allocations, and corporate governance functions of banks using the IRB approach. Finance cost recognised at the effective interest rate. 2.5.1 As per Ind AS 109, an entity may recognise a financial asset in its Balance Sheet only when it becomes a party to the contractual provisions of the instrument. Loans and advances given at concessional rates to staff are not based on market terms and therefore the transaction price cannot be indicative of the fair value, since it includes an element of employee benefits. The nature of the restriction and amount placed in deposits where there are restrictions on withdrawal should be disclosed. 2.4.2 Ind AS 109 allows subsequent measurement at amortised cost for debt instruments only if they satisfy both of the following conditions. Thus, eligible transaction costs may be included at initial recognition of financial asset held in amortised cost/ FVOCI category, rather than being expensed. For instance, redeemable preference shares shall be classified and presented under ‘Subordinated Liabilities’ and the disclosure requirements in this regard applicable to such borrowings shall be applicable mutatis mutandis to redeemable preference shares. Splitting a financial instrument into two categories. Result in differentiating the degree of credit risk in different credit exposures of a bank. Accordingly, the Working Group has suggested the formats as below: Balance Sheet13, including statement of changes in equity (Annex I, Form A, to be prescribed under the Third Schedule to the BR Act), Profit and Loss Account (Annex I, Form B, to be prescribed under the Third Schedule to the BR Act), Notes (Annex II, to be prescribed by way of RBI circulars), Guidance for preparation of financial statements (Annex III, to be prescribed by way of RBI circulars), Balance Sheet (including SOCE) and Profit and Loss Account, 7.6.2 Detailed and prescriptive formats for the Third Schedule may not be compatible with an Ind AS scenario where there is emphasis on a principle-based approach as opposed to a rules based approach. Based on this review, the issues identified by the Working Group and its recommendations thereon are given in the table below. Further, Ind AS 21 provides guidance on selection of the functional currency which may be supplemented by the ICAI in its educational material at a later stage if required. It is presumed that an expected credit loss model would require substantially higher provisioning than an incurred credit loss model currently followed. Can the securities acquired/ held in excess of SLR requirements, which is specific to the Indian context, qualify for Amortized Cost category? The total of these two items should match with the figure of total debt securities. One of the key determinants for classification into Amortised Cost or FVOCI category is the business model test as brought out in section 2.4 of this report. 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. 1.7 The Working Group adopted a consultative approach and outreach meetings were held with bankers to understand their issues and apprehensions with regard to Ind AS, especially in the context of current accounting practices. All legal expenses and reimbursement of expenses incurred in connection with legal services are to be included here. In light of the issuance of Ind AS 109, accounting instructions may be withdrawn, RBI Master Circular on Risk Management and Inter-Bank Dealings, Prudential Norms for Off-balance Sheet Exposures of Banks, The RBI instructions that deal with classification and income recognition may need to be reviewed in light of impairment requirements of Ind AS 109, Revised Format of the Balance Sheet and Profit & Loss Account. Covanta 203160 01-24-18 Amnesty, SALN. 6.6 While the Working Group was of the view that Alternative C was the preferred approach, RBI may take a final view on the matter. 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. The IFRS 9 ECL requirements, which have been incorporated without any significant change in Ind AS 109, also represents a paradigm shift from current practice in the Indian banking industry which follows income recognition, asset classification and provisioning (IRACP) norms prescribed by the Reserve Bank. 5.7 The head ‘Other Income’ should include the following items, 5.8 Banks should reflect recognised impairment losses (net of recoveries) as per the requirements of Indian Accounting Standards under the respective sub heads of Note 23 ‘Impairment losses on financial instruments’, 5.9 The head ‘Employee Benefits’ could include the following, 5.10 The head ‘Other Expenses’ could include the following. Interest accrued in respect of assets held at amortised cost should not be included under this subhead and instead included as a part of the amortised cost itself. This would depend upon the circumstances of the case. 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). Ind AS 108 requires operating segments to be identified inter-alia on the basis of operating results being reviewed by the entity’s chief operating decision maker implying that the segments are to be decided by a bank on the basis of its internal MIS in the context of resource allocation decisions. 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. Under the functional currency approach the entity first determines its functional currency and then translates all foreign currency items into the functional currency. However, financial instruments are not required to be externally rated to be considered to have low credit risk. 2.4.1 After, initial recognition, as per Ind AS 109, financial assets may be classified as subsequently measured at (a) amortised cost, (b) fair value through profit and loss (FVTPL) or (c) fair value through other comprehensive income (FVOCI). 3.2.6 The head ‘Advances’ should include the following items. Paragraph 47 of Ind AS 113 states that “the fair value of a financial liability with a demand feature (e.g. At the date of initial application, an entity shall use reasonable and supportable information that is available without undue cost or effort to determine the credit risk at the date that a financial instrument was initially recognised. Given that these issues are specially relevant to the banking industry, the ICAI may consider issuing including issuing clarifications on these aspects also. 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. 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. IFRS 13 applies to IFRSs that require or permit fair value measurements or disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about fair value measurement. 3. Given that even the IRB approaches under the Basel framework use only 12 month probabilities of default (PD) and not lifetime PDs, estimating lifetime expected credit losses may be challenging. Includes all savings bank deposits (including inoperative savings bank accounts). Statement of Changes in Equity (SOCE). 3.4.1 Ind AS 109 provides for two measurement categories for financial liabilities, viz. (viii) Derivative financial instruments and hedge accounting, Policy for considering derivatives as trading or for hedging purpose, Basis of valuation and accounting for fair value hedge, cash flow hedge, net investment hedge, Basis of valuation and accounting for derivatives not considered for hedging, (ix) Financial assets/liabilities measured at amortised cost, Components of assets and liabilities measured at amortised cost, Policy for impairment and reversal of impairments, (x) Investments (including restructured investments). Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Annex V: List of RBI instructions that need review. Estimation of 12 month expected credit losses. These are briefly summarised along with the Working Group’s recommendations in the table below. Advances to Central and State Governments and other Government undertakings including Government Companies and corporations which are, according to the statutes, to be treated as public sector companies are to be included in the category ‘Public Sector’. Does this meet the characteristics of cash flow test as explained in paragraph 2.4.2(b) above. The review helped develop a better understanding of financial statements presented under IFRS as well as allowed comparisons of alternative presentations options provided under IAS1 and IFRS 7. credit risk premium and customer specific charges are expected to vary/ likely to be different. There have been no significant changes to accounting for financial liabilities. In terms of paragraph 10A of IAS 1, An entity may present a single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections. Valuation of 6 percent Capital Indexed Bonds, 2002, Issued by Government of India, Valuation of 6% Government of India Capital Indexed Bonds, 2002 by Banks -Change in Wholesale Price Index (WPI) Base Year. In terms of Ind AS 109, credit risk is considered to be low if the risk of default is low, borrower has strong capacity to meet its contractual cash obligations in near term and adverse changes in economic and business conditions in the longer term may but will not necessarily reduce borrower’s ability to fulfil its obligations. Therefore, the existing RBI guidelines requiring RRBs to be treated as associates. Based on the above, in cases where an entity does not have a subsidiary but investments in associates and/ or joint ventures it is required to prepare financial statements where the associate and/ or joint venture are accounted for using the equity method. Answer: The future cash flows now expected are discounted to present value based on the original effective rate associated with the financial asset of 5% as follows: Therefore, impairment amounting to the change in carrying value of ($5.0m – $4.329m) $0.671m will be recognised as an impairment charge in the year to 31 December 2011. b) Investment in Preference shares as part of project finance, Valued at par for a period of two years after commencement of production or five years after subscription whichever is earlier, Unquoted Mutual Funds and units of Venture Capital Funds(VCF), Securitisation Companies, etc, a) Unquoted Mutual Fund Units with repurchase price. It should be noted that credit related considerations (need for provisions on guarantee exposures etc.) If NAV is not available than valued at cost till the end of lock in period. However, the classification categories presently prescribed by RBI viz. 2 Non-recourse debt, in this context, refers to where the loan is completely secured by collateral. Carrying cost (i.e. Appendix A to Ind AS 109 defines transaction cost as incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability (see paragraph B5.4.8). Given that these issues are especially relevant to the banking industry, the ICAI may also consider issuing clarifications on these aspects. Subsequently, unless the financial guarantee contract is part of FVTPL category or arising out of transfer of financial assets that does not meet derecognition criteria, it should be measured at higher of the amount of loss allowance determined as per Ind AS 109 and the amount initially recognised less cumulative amount of income recognised in accordance with Ind AS 115. Under Ind AS, banks liabilities under acceptances, endorsements of customer bills will have to be recorded as liabilities on the balance sheet with a corresponding receivable shown as assets. Considering the criticality of the topic and the largely principle based requirements in Ind AS 109 with regard to the classification and measurement of financial assets as well as the significant impact of the provisions of the standard on the financial statement position and performance of an entity, an ‘outreach’ approach was adopted to gain feedback from bankers in relevant departments (credit, product development, structured finance, treasury etc.) The accounting treatment automatically incorporates an impairment review, with any change in fair value taken to other comprehensive income in the year. 4.1 Hedge Accounting formed Phase III of IASB’s project to replace IFRS 9 in its entirety. 8.1 In the course of deliberations with bankers and a review of extant RBI instructions, the Working Group identified areas where the extant instructions may not be consistent with Ind AS and may need to be reviewed or withdrawn. 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