(i) it is classified as FVTPL, and For sales to RCs/SCs between February 26, 2014 and March 31, 2016, banks have been permitted to spread the shortfall between the sale value and the NBV, over a period of two years, subject to necessary disclosures in the notes to account in the annual financial statements. Description: Data are converted by Economena using the exchange rate 1 USD = 1507.5 LBP. 4.1 Hedge Accounting formed Phase III of IASB’s project to replace IFRS 9 in its entirety. Under trade date accounting for purchases, the entity recognises an asset to be received and the liability for the payment on the trade date itself. Disclose the date when the financial statements were authorised for issue and who gave the authorisation. In order to address this issue, as a part of its project to replace IAS 39, the IASB developed a forward looking “expected credit loss” (ECL) framework for recognising impairment on financial assets. Difference from carrying amount should be recognized in OCI. RBI is empowered to regulate the interest rate derivatives, foreign currency derivatives and credit derivatives5. 5.2 In deliberating its recommendation with respect to Fair Value Measurement, the Working Group was guided by the following objectives: Valuation in accordance with the accounting standards and international best practices with departures only in exceptional cases, Transparency in the application of the valuation methodology and the inputs to the valuation process, Valuation to be determined on an independent and objective basis, Consistency in valuation of identical or similar instruments and. However, Ind AS 28 on Investments in Associates and Joint Ventures does not provide for ‘proportionate consolidation’ and instead requires that entity should use the ‘equity method’ for consolidation where it has joint control. Includes cost of all employee share based payments including options granted by the holding company or any other group company. For valuation purposes, the respective boards should lay down an appropriate policy to reflect the fair value of the outstanding contracts. Whether a third party imposes the requirement to sell the financial assets, or that activity is at the entity’s discretion, is not relevant to the analysis. 3.2.2 The head ‘Balances with other central banks’ should include balances with other central banks in (a) Current Accounts and (b) Other Accounts. This process will require concurrent changes to the formats prescribed under the Third Schedule to the BR Act, which will have to be notified by the GoI and may not provide the flexibility and adaptability to changing requirements and regulatory prescriptions. At the reporting date of 31 December 2010 interest has been received as expected and the market rate of interest is now 6%. Share application money pending allotment shall be classified into equity or liability in accordance with relevant Indian Accounting Standards. In such cases, it is suggested by the Working Group that banks and their auditors exercise caution to ensure that any change in risk is suitably factored in failing which an assessment of the fair value of the new financial asset being recognised may need to be made. Any gains realized from closing out / settlement of futures contracts cannot be taken to Profit & Loss account but carried forward as ‘Other Liability’ and utilized for meeting depreciation provisions on the investment portfolio. In terms of paragraph 99 of IAS 1, An entity shall present an analysis of expenses recognised in profit or loss using a classification based on either their nature or their function within the entity, whichever provides information that is reliable and more relevant. The accounting prescriptions contained in the RBI circular are not consistent with Ind AS 109. As per the Application Guidance to Ind AS 109, to determine whether a financial instrument has low credit risk, an entity may use its internal credit risk ratings or other methodologies that are consistent with a globally understood definition of low credit risk and that consider the risks and the type of financial instruments that are being assessed. Debt instruments will be classified to be measured and accounted for at FVTPL unless they have been correctly designated to be measured at amortised cost (see later). Even if the bank assigns a ‘low credit risk’ rating ( its best rating ) to an exposure, it is still expected to assess whether credit risk has increased significantly and continue to assess those exposures for changes in credit risk and recognise changes in 12 month ECL through provisions. In light of the above, computation of fair value using valuation technique is not required in such cases. Is it possible that a single financial instrument may have some portion classified as amortized cost and the remaining FVOCI or FVTPL category? As per Ind AS 109, if at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall continue to measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses. In November 2013, the IASB added to IFRS 9 a new hedge accounting model in respect of component (a) above. ALCO. 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). Circumstances in which reclassification is permitted. 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. Thus the accounting framework specified in the extant RBI guidelines is inconsistent with the derecognition requirements of Ind AS 109. The consolidated financial statements are in addition to the bank’s separate financial statements prepared as per the formats prescribed under Section 29 of Banking Regulation Act, 1949. Any subsequent withdrawals from such a prudential reserve would require prior RBI approval. AS 22, being based on the pre-1996 IAS 12 uses an income statement liability method whereas the current IAS 12 uses balance sheet liability method. 5.7.1 In certain cases involving highly illiquid or complex/ structured instruments, the Working Group recommends valuation by independent external valuers/ experts. Includes all savings bank deposits (including inoperative savings bank accounts). Income earned by way of dividend. Valued at spread of 25 basis points above the corresponding yield on GoI securities. The paper documents the current application of fair value accounting in the industry, showing what proportions of recognized assets and liabilities of bank holding companies are at or close to fair … (b) Given that accounting offsetting may not be available, RBI may need to review and recalibrate prudential limits for inter-bank liabilities (IBL) issued vide circular DBOD.No.BP.BC.66/21.01.002/2006-2007 dated March 6, 2007. The issue for consideration was whether there is a need to revisit and estimate the fair value for initial measurement of a term deposit by comparing with market rates. Derecognition, Consolidation and Other Residuary Issues. Corporate Information; Accounting Policies; Significant Accounting Estimates and Judgments; Group Information; Material Partly - Owned Subsidiaries ; Segmental Information; Interest and Similar Income; Interest and Similar Expense; Net Fee and Commission Income; Net Gain from Financial Instruments … In other cases, it is suggested that the valuation may be carried out or certified by an independent external valuer taking into account Ind AS requirements. 5.7 Illiquid/ Complex/ Structured instruments. SCBs and AIFIs should strive to restore their hedge effectiveness at the earliest. The sections shall be presented together, with the profit or loss section presented first followed directly by the other comprehensive income section. The total of these two items should match with the figure of total borrowings. The issue for consideration is which type of instruments can be considered to have ‘low credit risk‘, keeping in view the requirements of the standard. In such cases, if it is assessed that a loan will in part be sold or sub-participated (which may be evident from the bank’s internal policy documents e.g. 5.1 As the Indian banking sector moves towards reporting under converged International Financial Reporting Standards, one of the key issues facing the industry would be the application of fair value measurement, in view of the very nature of banking business and the preponderance of financial instruments on a bank’s balance sheet. The Working Group focussed on banking specific issues which may arise due to the extant RBI guidelines on the matter and the nature of the business of banking. The threshold, if prescribed, would have to factor in a specified time period. Other information; 59. The IRB approach, further sub-divided into the foundation IRB and advanced IRB, is based on measures of unexpected losses (UL) and expected losses (EL). Briefly the extant instructions entail an indexation with reference to the Wholesale Price Index (WPI) at the time of measurement and the WPI at the time of issuance adjusted to arrive at the carrying cost. To be valued on the basis of the prices/YTM rates put out by PDAI / FIMMDA at periodical intervals. However, contractual interest income and expense on financial instruments held at or designated at fair value through profit or loss may be recognised under interest income and expense respectively. In 2007, this Task Force published a comprehensive Concept Paper that recommended a convergence strategy rather than full fledged adoption, taking into consideration legal, regulatory and conceptual differences as well as existing business practices in India. 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’. RBI may need to consider withdrawing the current guidelines on classification of operations as integral or non-integral since it is not relevant in the context of Ind AS 21. 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. 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. The Working Group on Presentation of Financial Statements and Disclosure has specified formats for standalone financial statements. Where the securities are unquoted, an appropriate valuation technique would be required to determine fair value. subsidiaries are consolidated on a line-by-line basis (AS 21), associates are consolidated by the equity method (AS 23) and joint ventures are consolidated by the proportionate consolidation method (AS 27). Paragraph 8 of Ind AS 21 defines ‘closing rate’ as the spot exchange rate at the end of the reporting period. As a rule of thumb, an arms’ length transaction between unrelated parties can be assumed to be at fair value (unless there is evidence to the contrary or the transaction is part of a larger set of transactions and some additional value / consideration is sought to be paid / received through the deposit rate). There is a potential that differences in base rates could be material e.g. However, dividend in the nature of interest should be classified under Interest Income as per the requirements of Indian Accounting Standards. The application guidance (paragraph B 4.1.3) to Ind AS 109 states that ‘although the objective of an entity’s business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those instruments until maturity’. However, Ind AS 109 provides that on derecognition of a financial asset the difference between the carrying amount measured at the date of derecognition and the consideration received shall be recognised in the profit or loss account. It appears from a reading of Ind AS 110 that the exemption available for investment entities is only available to the investment entity itself on account of paragraph 33 which states that “A parent of an investment entity shall consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity. 7. An entity is required to translate its results and financial position from its functional currency into a presentation currency using the specified method in the standard for translating a foreign operation for inclusion in the reporting entity’s financial statements. Where compliance with the requirements of the Act, guidelines issued by the Reserve Bank of India from time to time or Indian Accounting Standards require any change in treatment or disclosure including addition, amendment, substitution or deletion in the head/subhead or any changes inter se, in the Financial Statements, the same shall be made and the requirements of the Third Schedule shall stand modified accordingly, subject to clause (2) above. RBI may consider amending the definition of related party and key management personnel in its guidelines to incorporate the definition of related party within Ind AS 24. to the extent that these items are not set off against relative tax provisions. Rates would differ based on deposit size, bank's liquidity needs etc. 2.6.2 The fair value of a financial asset at initial recognition is normally the transaction price (i.e. Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site. Act, 1934. 6.2 The IFRS 9 ECL requirements are applicable to all financial assets classified under amortised cost, FVOCI, lease receivables, trade receivables, commitments to lend money and financial guarantee contracts. 8.3.4 A key difference between AS 21 and Ind AS 110 relates to the definition of control. Debenture liability (SFP) 50,00. For the designation to be effective, the financial asset must pass two tests as follows: One example of a financial asset that would fail this test is a convertible bond. 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.) 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. As per Ind AS 110, an investor controls an investee when the investor (a) has power over the investee, (b) is exposed, or has rights, to variable returns from its involvement with the investee and (c) has the ability to affect those returns through its power over the investee. Further, regardless of the way in which an entity assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. These conditions inter-alia include loss absorption features that entail a write down/ conversion to equity at certain pre-specified triggers. Financial Liability -3. The requirements include: A currently legally enforceable unconditional right to settle an asset and liability on a net basis. Secondly, resorting to carve-out from IFRSs may not be advisable as it may adversely affect the primary objective of availing maximum benefit of embracing global best frameworks/practices. Finance cost recognised at the effective interest rate. Fair value is measured at reclassification date. This is especially true in the case of Revolving credit facilities such as cash credit, credit cards or bank overdrafts, can have a life of many years, with balances being drawn and repaid (partly or fully) at short intervals. For example, the fair value of a long term loan or receivable that carries no interest can be estimated as the present value of all future cash receipts discounted using the prevailing market rate(s) of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. 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. Includes interest on balances with central banks (if any), banks, call loans, money market placements, liquidity adjustment facility, etc. The treatment specified in the RBI guidelines is asymmetric requiring immediate recognition of losses and deferred recognition of gains. Includes all demand deposits of the non-bank sectors. Any previously recognised gains, losses or interest cannot be restated. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. This paper studies the application of fair value accounting in bank holding companies in the United States with the purpose of evaluating the effects of expanding fair value accounting in the banking industry. External costs such as road shows, publicity, advertising etc. Includes staff salaries/wages, allowances, bonus. In some cases, Ind AS110, Ind AS 27 or Ind AS 28 require or permit an entity to account for an interest in a subsidiary, associate or joint venture in accordance with some or all of the requirements of Ind AS 109. The amount disclosed in Note 18 would be the gross amount of the financial guarantee as reduced by the amount recognised in the balance sheet for the same. 6.1 Given the business of banking, ensuring that the recoverable value of impaired financial assets is properly reflected and such financial assets are adequately provided for is of critical importance. In line with the Application Guidance to Ind AS 109, a bank may measure the fair value of such a loan as the present value of all future cash receipts discounted using the prevailing market rate(s) of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. Illustration 1 – classification and measurement of financial assets Extant guidelines requiring instruments to be valued at cost are not consistent with Ind AS 113 and may need to be modified to be in line with valuation on fair value basis as required under Ind AS 113. Because expected credit losses consider the amount and timing of payments, a credit loss (ie cash shortfall) arises even if the entity expects to be paid in full but later than when contractually due. 8 Lifetime expected credit losses are an expected present value measure of losses that arise if a borrower defaults on their obligation throughout the life of the financial instrument. It is also not the credit losses on assets that are forecast to actually default in the next 12 months. Classification and Measurement of Financial Assets, Classification and Measurement of Financial Liabilities, Presentation of Financial Statements and Disclosure, Derecognition, Consolidation and Other Residuary Issues. demand deposit) is not less than the amount of payable on demand, discounted from the first date that the amount could be required to be paid.” As such in the case of current deposits, no change from the current practice of accounting at transaction price is required. Areas where there is likely to be an impact of fair valuation would be the specific incentive based pricing offered to employees and ex-employees for term deposits (as these are specific to certain individuals for certain banks). RBI guidelines also provide that if different entities in a group are governed by different accounting norms laid down by the concerned regulator for different businesses then, where banking is the dominant activity, accounting norms applicable to a bank should be used for consolidation purposes in respect of like transactions and other events in similar circumstances. But, the regulatory prescriptions do not explicitly specify the ‘proportion say 10%, 20%, 50%,etc’ of the portfolio to be periodically monetized. Presentation of Financial Statements and Disclosure. Provident fund, pension, gratuity and other superannuation and post-employment benefits. While Ind AS 109 appears to envisage sale of assets held under the Amortised Cost category before maturity, the application guidance states that such sales may be consistent with a business model whose objective is to hold financial assets in order to collect contractual cash flows if those sales are infrequent (even if significant in value) or insignificant in value both individually and in aggregate (even if frequent). Fair value is measured at reclassification date. The presentation of items broadly follows a descending order of liquidity. Quoted prices from active markets that entity has access to. (ii) Instruments with Write Off Feature. 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. Such changes are expected to be infrequent. It may be noted that Ind AS 109 does not mandate the use of a framework akin to the Basel IRB framework and entities have the discretion to build their own models for estimation of expected credit losses consistent with the largely principle based requirements of the standard. If, however, a convertible bond is converted into shares, the shares represent a new financial asset to be recognised by the entity. a) Debentures/ bonds rated by rating agencies but not quoted, b) Debentures/ bonds not rated by rating agencies, d) Investment in preference shares as part of rehabilitation package, YTM rate should not be lower than 1.5% above the coupon rate/YTM for GOI loan of equivalent maturity, e) Special securities directly issued by the Government of India (GoI) to the beneficiary entities. Whether investment portfolio held to comply with LCR qualifies the business model test for classification under Amortized Cost Category? 6. In terms of extant RBI guidelines investments in RRBs should be treated as investments in associates for the purpose of consolidated supervision. Banks may be permitted the discretion to formulate more stringent standards. Ind AS 109 states that when defining default for the purposes of determining the risk of a default occurring, an entity shall apply a default definition that is consistent with the definition used for internal credit risk management purposes for the relevant financial instrument and consider qualitative indicators (for example, financial covenants) when appropriate. Balance Sheet except where a presentation based on liquidity provides information that is reliable and more relevant. d. All of these answer choices are IFRS requirements. 2.5.3 Recommendation: RBI circular referred to above which mandates settlement date accounting for SLR securities may have to be reviewed keeping in view the scope and coverage of the principles of Ind AS 109. RBI has also prescribed the accounting treatment for both types of participations as under, In the case of the issuing bank, the aggregate amount of participation would be reduced from the aggregate advances outstanding. (refer definition of derivative in Appendix A of Ind AS 109). Generally, banks at times offer preferential interest rates to certain customers (high value corporate deposits, senior citizens). In rare instances of illiquid listed shares for which prices are not available on an ongoing basis, recourse to an external valuation may need to be taken. In terms of paragraph 4.1.3 of Ind AS 109, interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. Investments in SLR securities would by themselves thus not preclude the instruments from being categorised under amortised cost category if the business model and the contractual cash flow characteristics test are otherwise met. 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. Costs that would typically qualify for deferral as part of EIR would be those such as merchant banker fees, lawyers’ fees, auditors’ fees, rating agency fees etc. The RBI could consider prescribing indicative thresholds for sales that are more than insignificant in value. Such estimate should be a best estimate of the expenditure required to settle the present obligation at balance sheet. Financial Statements shall disclose all ‘material’ items i.e. However, in the case of purchased or originated credit-impaired financial assets, an entity shall only recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance. Certain aspects of these extant instructions, explained below, may not be in alignment with Ind AS 109. After three years unquoted shares / bonds / units transferred to AFS and valued as below: Units – Valuation will be done at NAV shown by the VCF in its financial statements. Carrying cost (i.e. Further, the following norms are applicable. This would be a regulatory override to the principles of the accounting standards. However, objective criteria that can be applied across the banking sector are not specified. 2.8.2 The issue that arises is whether banks need to rework amortised cost using Ind AS 9 which will involve going back to the original date of booking the transaction. This could result in the exercise of judgment or discretion, which could undermine the reliability or relevance of any amounts accounted for as a fair value. HTM, AFS and HFT, that exist currently. The granular details are to be given as per Note 6 on ‘Investments’. Guidance for preparation of financial statements. As has been pointed out at various places in this Report, there may be a need to withdraw certain guidelines which are inconsistent with Ind AS. In the case of investments in subsidiaries/JVs/ associate as defined in the accounting standards as well as for Regional Rural Banks (RRBs) the RBI may consider prescribing that these may only be accounted for at cost thereby limiting the option provided by Ind AS 27. In contrast, under Ind AS 109 all financial derivatives would necessarily be measured at fair value irrespective of the derivative type/ product. Is the presentation of financial assets and financial liabilities in the Balance Sheet as per asset class or does it follow a mixed approach (i.e. Though the current financial statements of aforementioned entities are prepared under an IAS 39 environment which will be eventually be replaced by IFRS 9, it was observed that many of presentation and disclosures practices will be useful even under an IFRS 9 scenario. fees/commission charged, transaction costs incurred, expected life of the products and so on. This requirement is to ensure that there is a degree of consistency in application of such valuation methodology and principles. In profit and loss account suggested by the Central Government to adapt the format!, 4 conservative than the coupon rate/YTM for a single financial instrument that may be based! Paid by the provisions of Ind AS 8 also provides a similar scenario, at! 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