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In order to promote high quality and consistent implementation, as well as facilitate comparison and better supervision, the Reserve Bank of India has framed regulatory guidance for Indian Accounting Standards (Ind AS)-implementing non-banking finance companies (NBFCs) and Asset Reconstruction Companies (ARCs) for preparation of their financial statements from FY20 onwards.
Need for consistency
The RBI said its guidelines focus on the need to ensure consistency in the application of the accounting standards in specific areas, including asset classification and provisioning, and provide clarifications on regulatory capital in the light of Ind AS implementation.
In view of the criticality of the nature of the business model in determining the classification of financial assets and restrictions on subsequent reclassification, the RBI advised NBFCs/ARCs to put in place board-approved policies that clearly articulate and document their business models and portfolios. NBFCs/ARCs have to also articulate the objectives for managing each portfolio.
NBFCs/ARCs need to frame their policy for sales out of amortised cost business model portfolios and disclose the same in their notes to financial statements.
The Reserve Bank said it expects the board of directors to approve sound methodologies for the computation of Expected Credit Losses (ECL) that address policies, procedures and controls for assessing and measuring credit risk on all lending exposures, commensurate with the size, complexity and risk profile specific to the NBFC/ARC.
Ind AS 109 does not explicitly define default, but requires entities to define default in a manner consistent with that used for internal credit risk management. Hence, the RBI recommended that the definition of default adopted for accounting purposes should guided by the definition used for regulatory purposes.
The Audit Committee of the Board (ACB) should approve the classification of accounts that are past due beyond 90 days but not treated as impaired, with the rationale for the same clearly documented. Further, the number of such accounts and the total amount outstanding and the overdue amounts should be disclosed in the notes to the financial statements.
Where impairment allowance under Ind AS 109 is lower than the provisioning required under income recognition, asset classification and provisioning (IRACP) norms (including standard asset provisioning), NBFCs/ARCs should appropriate the difference from their net profit or loss after tax to a separate ‘impairment reserve’.
The balance in the ‘impairment reserve’ will not be reckoned for regulatory capital. Further, no withdrawals will be permitted from this reserve without prior permission from the Department of Supervision, RBI.
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