August 04, 2016
All India Financial Institutions
(Exim Bank, NABARD, NHB and SIDBI)
Madam / Dear Sir,
Implementation of Indian Accounting Standards (Ind AS)
The Ministry of Corporate Affairs (MCA), Government of India has notified the Companies (Indian Accounting Standards) Rules, 2015 on February 16, 2015. A reference is also invited to the Press Release dated January 18, 2016 issued by the MCA outlining the roadmap for implementation of International Financial Reporting Standards (IFRS) converged Indian Accounting Standards for banks, non-banking financial companies, select All India Term Lending and Refinancing Institutions and insurance entities.
2. In this connection, it is advised that select All-India Term Lending and Refinancing Institutions(AIFIs) (Exim Bank, NABARD, NHB and SIDBI), shall follow the Indian Accounting Standards as notified under the Companies (Indian Accounting Standards) Rules, 2015, subject to any guideline or direction issued by the Reserve Bank in this regard, in the following manner:
(i) AIFIs shall comply with the Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning from April 1, 2018 onwards, with comparatives for the periods ending March 31, 2018 or thereafter. Ind AS shall be applicable to both standalone financial statements and consolidated financial statements. “Comparatives” shall mean comparative figures for the preceding accounting period.
(ii) AIFIs shall apply Ind AS only as per the above timelines and shall not be permitted to adopt Ind AS earlier.
3. AIFIs are advised to take note of the Press Release dated January 18, 2016 issued by the MCA which states that All India Term-lending Refinancing Institutions (i.e. EXIM Bank, NABARD, NHB and SIDBI) would be required to prepare Ind AS based financial statements for accounting periods beginning from April 1, 2018 onwards, with comparatives for the periods ending March 31, 2018 and thereafter.
4. Ind AS implementation is likely to significantly impact the financial reporting systems and processes and, as such, these changes need to be planned, managed, tested and executed in advance of the implementation date. Each AIFI is advised to set up a Steering Committee headed by an official of the rank of an Executive Director (or equivalent) comprising members from cross-functional areas of the AIFI to immediately initiate the implementation process. The name and details of the designated official and the team may be forwarded by email to us. The Audit Committee of the Board shall oversee the progress of the Ind AS implementation process and report to the Board at quarterly intervals. The critical issues which need to be addressed in the Ind AS implementation plan include the following:
a) Ind AS Technical Requirements: Diagnostic analysis of differences between the current accounting framework and Ind AS, significant accounting policy decisions impacting financials, drafting accounting policies, preparation of disclosures, documentation, preparation of proforma Ind AS financial statements, timing the changeover to Ind AS, and dry-run of accounting systems and end-to-end reporting process before the actual conversion.
b) Systems and processes: Evaluate system changes - assessment of processes requiring changes, issues having significant impact on information systems (including IT systems), and develop/strengthen data capture system, where required.
c) Business Impact: Profit planning and budgeting, taxation, capital planning, and impact on capital adequacy.
d) People - Evaluation of resources: Adequate and fully dedicated internal staff for implementation, comprehensive training strategy and program.
e) Project management: Managing the entire process-holistic approach to planning and execution by ensuring that all linkages are established between accounting, systems, people and business, besides effective communication strategies to stakeholders.
5. AIFIs shall assess the impact of the Ind AS implementation on their financial position including the adequacy of capital, taking into account the Basel III capital requirements, as and when these are made applicable to the AIFIs, and submit quarterly progress reports to their Boards. AIFIs also need to be in preparedness to submit proforma Ind AS financial statements as per the formats given in Annex I to IV, and the associated guidance given in Annex V, to the Reserve Bank from the half-year ended September 30, 2016, onwards. The guidelines for preparation of the proforma Ind AS financial statement are given in the Appendix. The proforma statements for the half year ended September 30, 2016 shall be submitted latest by November 30, 2016. Considering that the financial year of NHB is from July to June, it may prepare proforma Ind AS financial statements for the half-year ended December 31, 2016 which shall be submitted latest by February 28, 2017.
6. The Reserve Bank shall also take steps to facilitate the implementation process by holding periodic meetings with AIFIs. The Reserve Bank shall issue necessary instructions/guidance/clarifications on relevant aspects as and when required.
7. AIFIs shall disclose in their Annual Report, the strategy for Ind AS implementation, including the progress made in this regard. These disclosures shall be made from the financial year 2016-17 until full implementation.
8. The Boards of the AIFIs shall have the ultimate responsibility in determining the Ind AS direction and strategy and in overseeing the development and execution of the Ind AS implementation plan.
9. The directions contained herein are issued under Section 45L of the Reserve Bank of India Act, 1934 and AIFIs shall ensure strict compliance of the same.
Chief General Manager
Implementation of Indian Accounting Standards (Ind AS)
AIFIs, with exception of NHB, shall submit Proforma Ind AS Financial Statements, for the half year ended September 30, 2016 latest by November 30, 2016 to the Chief General Manager in Charge, Department of Banking Regulation, Central Office, Reserve Bank of India, Mumbai. NHB shall submit Proforma Ind AS Financial statements for the half year ended December 31, 2016 latest by February 28, 2017. AIFIs shall be guided by the Ind ASs notified by the Ministry of Corporate Affairs, Government of India under the Companies (Indian Accounting Standards) Rules, 2015 and Companies (Indian Accounting Standards) (Amendment) Rules, 2016, as amended from time to time, in this regard. [reference G.S.R.111(E) dated February 16, 2015 and G.S.R.365(E) dated March 30, 2016]. AIFIs shall also refer to the Report of the Working Group on “Implementation of Ind AS by Banks in India” placed on the RBI website on October 20, 2015.
2. The Proforma Ind AS Financial Statements shall include the following:-
(b) Profit and Loss Account (Annex III).
(c) Notes (Annex IV).
(For NHB the proforma Ind AS Financial statements shall be as on December 31, 2016 instead of September 30, 2016 and July 01, 2016 instead of April 01, 2016)
3. The formats as per the Annexes are solely for the preparation and submission of proforma Ind AS financial statements to the Reserve Bank. The formats for the Ind AS financial statements for the accounting periods beginning April 1, 2018 shall be notified separately. It is also clarified that AIFIs shall continue to be guided by the extant instructions issued vide their respective concerned gazette notifications and General Regulations with respect to the preparation and presentation of financial statements for the financial years 2016-17 and 2017-18.
4. AIFIs may refer to Annex V for the broad application guidance on the major line items/sub-line items in the financial statements. AIFIs may email to the Reserve Bank for specific clarifications/issues, in this regard.
5. To begin with, AIFIs which are not in a position to submit both standalone and consolidated proforma Ind AS financial statements for the half year ended September 30, 2016 are permitted to submit only standalone financial statements. However, AIFIs shall submit both proforma Ind AS standalone and consolidated financial statements in the subsequent periods.
6. AIFIs shall disclose significant accounting policies including, inter alia, the following:
(i) financial assets and financial liabilities, including use of fair value option in designating financial assets or financial liabilities at Fair Value Through Profit or Loss (FVTPL) upon initial recognition.
(ii) impairment of financial assets, with the following details:
• Methodology for computation of expected credit losses (ECL).
• Level of segmentation in the portfolio used.
• Criteria used for determination of movement from Stage 1 (12 month ECL) to Stage 2 and Stage 3 (lifetime ECL).
• The method used to compute lifetime ECL.
• The manner in which the forward looking information has been incorporated in the ECL estimates- the information provided should include both discussion of the judgment required and how it is applied in determining the allowance.
• The treatment for non-fund based facilities.
• The methodology for computation of ECL for revolving credit facilities.
• The areas where the AIFIs intends to refine work on in this ECL estimate and the work plan / timeline to achieve it.
• The impact of movement from the current approach to the ECL approach- reconciliation of the stock of provisions under the current reporting requirements with the opening Ind AS 109 allowance. A comparison of the impairment allowance under ECL for the half-year ended September 30, 2016 with the corresponding provisions under the extant Prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) norms shall also be disclosed.
AIFIs may note that Ind AS 109 is not specific in terms of the approach to be followed when measuring expected credit losses. The Reserve Bank expects AIFIs to adopt sound expected credit loss methodologies commensurate with the size, complexity, and risk profile specific to individual AIFIs. AIFIs may also note that the Reserve Bank shall finalise the policy on expected credit loss provisioning, taking into account the impairment requirements under Ind AS 109, after due deliberations, and considering various factors including, inter alia, the inputs as above. AIFIs are therefore advised to maintain flexibility while designing the systems and processes in this regard.
(iii) derivatives and hedge accounting.
(iv) derecognition of financial assets and financial liabilities.
(v) employee benefits.
(vi) offsetting financial instruments.
(vii) income taxes.
(viii) Significant areas of estimation uncertainty, critical judgements and assumptions in applying accounting policies.
(ix) Approach on exemptions under Ind AS 101 First Time Adoption of Indian Accounting Standards.
7. For the purpose of preparation of proforma Ind AS financial statements for the half year ending September 30, 2016, the notional date of transition to Ind ASs shall be the beginning of business as on April 01, 2016 (or equivalently close of business as on March 31, 2016/June 30, 2016 for NHB). This however, does not change the date of transition for the purpose of preparation of Ind AS financial statements for the accounting periods beginning April 1, 2018, which shall be as per the provisions of Ind AS 101 First Time Adoption of Indian Accounting Standards.
8. The Proforma Ind ASs Financial Statements shall also include:
(i) (a) reconciliation of equity reported in accordance with the existing financial reporting requirements as at April 01, 2016 to its equity in accordance with Ind ASs as on the same date.
(b) reconciliation of equity reported in accordance with the existing financial reporting requirements as at September 30, 2016 to its equity in accordance with Ind ASs as on the same date.
(ii) reconciliation of the total comprehensive income in accordance with Ind AS for the half year ended September 30, 2016 with the profit or loss under the existing financial reporting requirements.
9. The reconciliations required by paragraph 8 above shall be given in sufficient detail to understand the material adjustments to the Balance Sheet and Statement of Profit and Loss, thereby explaining how the transition from the existing financial reporting to Ind ASs affected the reported Balance Sheet and financial performance. The detail shall be such as to enable the Reserve Bank to understand the significant adjustments to equity that will impact regulatory capital. The Reserve Bank does not require the proforma Ind AS financial statements to be audited and understands that this information, while being a fair estimate of the impact to opening equity, is subject to change.
10. Please note that the submission of proforma Ind AS financial statements to the Reserve Bank shall not be construed as validation, in any form, of the financial statements, by the Reserve Bank.