Ind AS Implementation CommitteeThe Institute of Chartered Accountants of India,

New Delhi, India

Key issues in Implementation of Ind AS for NBFC

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§ Background

§ Questions answered by Ind AS Facilitation Group (ITFG)

§ Adjustments under Ind AS [specific for NBFC] compared to IGAAP

§ Other common principles of Ind AS (applicable to NBFC and other Ind AS entities)

§ Other key points

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Coverage

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Scope of NBFC

• As per the Companies Ind AS Rules, “Non-Banking Financial Company” means a Non-Banking Financial Company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 and includes:

– Housing Finance Companies, – Merchant Banking companies, – Micro Finance Companies, – Mutual Benefit Companies, – Venture Capital Fund Companies, – Stock Broker or Sub-Broker Companies, – Nidhi Companies, – Chit Companies, – Securitisation and Reconstruction Companies, Mortgage Guarantee Companies, Pension Fund Companies, Asset

Management Companies and Core Investment Companies.’.– Accordingly, such NBFC’s and any other such class of NBFC’s, while preparing its first and subsequent Ind AS Financial

Statements, would apply Division III to Ind AS Schedule III to the Act.

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Applicability of Ind AS for NBFC

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1. Applicability of Ind AS for NBFC – Phase 1[from 1st April 2018 with comparative period for the previous year]

An NBFC whose -• Net worth is INR 500 crore and more, and• The holding, subsidiary, joint venture or associate companies of the above, other than those companies already

covered under the road map for companies issued by MCA (corporate road map) in February 2015.

2. Applicability of Ind AS for NBFC – Phase 2[from 1st April 2019 with comparative period for the previous year]

An NBFC whose -• Equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India

and having net worth of less than INR 500 crore.• Equity and/or debt securities are unlisted, having net worth of INR 250 crores or more but less than INR 500 crore.• Holding, subsidiary, joint venture or associate companies of the above class of companies, other than those already

covered by the road map for companies issued by MCA (corporate road map) in February 2015.

NBFCs with a net worth below INR 250 crores and not covered in Phase I or II will continue to comply with the existing accounting standards.

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Applicability of Ind AS for NBFC-Bulletin 15

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(ITFG Clarification Bulletin 15, Issue 5)(Date of finalisation: April 04, 2018)

Issue 18: The Company is a registered stock-broker recognised by theSEBI. The net worth of the Company as on 31st March 2015 is INR 500 crores. As per the Ind AS Rules, it falls under the definition of NBFC roadmap and accordingly, is required to apply Ind AS from 1st April 2018 onwards.

In the month of July 2016, the company applied for terminating its membership to the exchange. It was awaiting clearance from SEBI as of June 2017. It received clearance from the Board in the month of August 2017 accepting their termination. The company also have debt listed securities.

Whether the company should have prepared Ind AS financial statements as a Phase 1 non-NBFC corporate entity as of 31 March 2017 given it has applied for termination of membership with the exchange in the month of July 2016?

Applicability of Ind AS for NBFC-Bulletin 13

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ITFG Clarification Bulletin 13, Issue 4)(Date of finalisation: January 16, 2018)

Issue 2: A Company ABC Ltd. performs role of NBFC and has appliedfor the registration as NBFC which is awaited from the Reserve Bank ofIndia (RBI).

Whether roadmap for the applicability of Ind AS as applicable to NBFCsalso applies to the Company ABC Ltd., which performs role of NBFChowever, it is not registered with the RBI?

Applicability of Ind AS for NBFC-Bulletin 6

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(ITFG Clarification Bulletin 6, Issue 3)(Date of finalisation: November 19, 2016)

Issue 5: Company X is falling under Phase II of MCA roadmap forcompanies and hence Ind AS are applicable to it from the financial year2017-18. Company X is a subsidiary of Company Y.

Company Y is an unlisted NBFC company having net worth of ` 285 crores. What will be the date of applicability of Ind AS for company X and company Y?

If Ind AS applicability date for parent NBFC is different from the applicabilitydate of corporate subsidiary, then, how will the consolidated financialstatements of parent NBFC be prepared?

Applicability of Ind AS for NBFC-Bulletin 3

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ITFG Clarification Bulletin 3, Issue 2)(Date of finalisation: June 22, 2016)

Issue 11: Company A is a Core Investment Company (CIC) having networth of more than 500 crore as on March 31, 2014. During the year2014-15, the Reserve Bank of India (RBI) had exempted Company Afrom certain regulations/directions governing CIC in India.

Whether Company A (exempted CIC) will be regarded as Non-BankingFinancial Company (NBFC) for the purpose of applicability of Ind AS?

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Application of ECL method

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1. Application of Expected credit loss method for provision on Loss on Loan

Under IGAAP - Provision for impairment of loansto customer was made as per the guidelinesspecified by RBI / NHB

Under Ind AS, - Impairment loss is recognised onloans, based on the ECL model as required by IndAS 109.

Rebuttal of Days Past Due (DPD) criteria

Whether Stage 1 needs to be below 30 daysWhether Stage 2 needs to be 30-90 days

Use of conservative approach by retaining theprovision for NPA/ standard asset made underIGAAP in addition to ECL under Ind AS 109

Application of ECL method-contd

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2. Application of Expected credit loss method for provision on Loss on Loan

Under IGAAP, NPA provision along with Standardasset provision has been disclosed under AS-29Provisions, Contingent Liabilities and ContingentAssets (i.e. separate line item for provision)

Under Ind AS, the ECL provision is shown as aseparate line item under Loans.

Whether the disclosure of ECL on stage 1 assetshould be disclosed as additional informationunder RBI circular of provision under standardasset (0.4%)

Application of ECL method-cont

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3. Application of Expected credit loss method for loan loss provision

Under IGAAP, NBFC was not required to createprovision for ECL against undrawn commitments.

Under Ind AS, impairment allowance on undrawncommitment has been determined based onExpected Credit Loss Model (ECL) and shownunder Provisions..

Whether the provision on undrawn commitmenthas to be disclosed separately or can be includedunder ECL provision (combined loss provision).

Application of ECL method-cont

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4. Application of Expected credit loss method for loan loss provision

ECL provision Time for back testing.

Recognition of interest income

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Interest income on loans

In accordance with prudential norms issued byRBI, interest income on Non performing asset wasaccounted on receipt basis.

Under Ind AS 109, interest income is generally recognized on effective interest rate on the gross carrying amount of financial assets depending on the stage in which the loan is. In the case where the loan or an asset is considered impaired, the interest income will be accounted for at the net amount, i.e., gross carrying amount less provisions made

Recognition of interest income & expense using EIR method

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Financial assets and financial liabilities are recognised via amortisation through application of EIR method

Under IGAAP, transaction fees charged tocustomers was fully recognised upfront in thebooks.

Under Ind AS, such fee (other than where theinstrument is measured at Fair value withchange in FV being recognised in P/L) isincluded in the initial recognition amount offinancial asset and recognised as interestincome using effective interest method. Allcontractual terms such as pre-payment,extension, call & other options to beconsidered)

Under IGAAP, the NBFC accounted for refundablesecurity deposits liability taken from customers atcarrying amount.

Under Ind AS, these deposits are accounted atamortised cost determined using the appropriatemarket rate.

Loans- disclosure of Fair value

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Disclosure of Fair value of loans

IGAAP did not require disclosure of fair value ofloans and only historical value subject toimpairment provision were reflected

Under Ind AS 107, fair value of loans are requiredto be disclosed. Determination of fair value posesseveral challenges including whether FV to be atportfolio level or individual level. Similarly themacro economic aspects, limited credit ratedcustomers etc poses another challenge.

Direct assignment of Loan portfolio.

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Interest recognition for direct assignment of Loan portfolio

In absence of specific guidance under IGAAP, theNBFC based on RBI guidelines derecognized theloan portfolio assigned to assignees and interestincome was recognised as and when it wasaccrued on the life of loan portfolio assigned (netof minimum retention ratio)

Under Ind AS, excess interest spread would berecognized upfront i.e., at the time of derecognition (true sale criteria met- partial or totalde recognition depending on transfer ofrisk/reward )

Changes in matters related to securitised assets

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Recognition/De-recognition of assets given as security, income from securitisation transactions and PTCs

NBFC having certain securitised assets underIGAAP, used to derecognise those assets in thebooks, upon satisfaction of the "true sale"criteria laid down by the RBI.

However, as per Ind AS, the NBFC has nottransferred substantially all the risks and rewardsof the corresponding securitised asset, hence theasset is re-recognised on a basis that it reflectsthe rights and obligations that the NBFC hasretained. (related liabilities are recognised under“borrowings”, other than debt securities & related“interest income” and “expense” is recognised).

Deferred tax liability on Special Reserves

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Deferred tax liability on special reserves created in consonance with Income Tax Act

Under IGAAP and as per Expert AdvisoryOpinion coupled with directions from regulators(NHB), DTL was created on reserves created tocomply with section 36(1)(viii) of the Income TaxAct

Ind AS requires companies to recognise deferredtax assets or liabilities using a balance sheetapproach, i.e. comparing the Ind AS carryingvalue of the asset or liability to its tax base.

Whether supporting the intent of non-withdrawal or utilisation in future (for examplethrough a board resolution), whether that wouldconstitute sufficient evidence to classify such adifference as a permanent difference.

Definition of group- RBI circular

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Disclosure of

Prudential norms circulariii) “companies in the group” means anarrangement involving two or more entitiesrelated to each other through any of thefollowing relationships: Subsidiary – parent(defined in terms of AS 21), Joint venture(defined in terms of AS 27), Associate (definedin terms of AS 23), Promoter-promotee (asprovided in the SEBI (Acquisition of Shares andTakeover) Regulations, 1997) for listedcompanies, a related party (defined in terms ofAS 18), Common brand name, and investmentin equity shares of 20% and above.”

Challenge of adopting definition under Ind AS-additional disclosure as required by NBFC SINDDirections 2016 (borrower wise break up-subsidiaries/ companies in same group/ otherrelated parties

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Common and Relevant terms under Ind AS

Financial instruments

CODM -Segment

Balance sheet

approach for DT

[special reserve]

FV of ESOP

Life time ECL

ROU - Lease

Restate opening

balances for prior period

items

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SEBI relaxations and exemptions in the year of transition

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q SEBI notification dated 5th July 2016 for relaxations and exemptions in the year of transitionI. In the first quarter of transition, previous quarter and year figures not required to be disclosed

II. Comparative quarter figures does not require limited review or audit i.e. published figures are as permanagement.

Audit Report

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• Audit report – Note should be added to specify that comparative figures are restated as per Ind AS

• Auditors’ of listed entities have given KAM for:I. Change in financial reporting framework – First time adoption of Ind ASII. Impairment loss allowance

Ind AS vs Regulatory GAAP

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q NBFC will have to give separate disclosure as per the requirement of RBI hence adjustments are required in Ind AS financial statement to align it with the Regulatory GAAP

I. Schedule III Division III applicable for NBFCs preparing their financial statements under Ind AS and IndAS 109 on financial instruments requires impairment provisions made to be reduced from the relatedfinancial assets for presentation purposes. In the preparation of the financial information as perRegulatory GAAP, the related NPA and Standard Asset provisions made have been presented underprovisions

Division III – Format of financial statement for NBFC

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a. MCA has amended Schedule III to the Companies Act, 2013 and inserted Division III [format ofFinancial Statements for a NBFC preparing Financial Statements in compliance with the CompaniesInd AS Rules]

b. In case of Balance sheet:a. Option of presenting assets and liabilities in the order of liquidity [Ind AS 1]b. Disclosure of NBFC’s objective, policies, process for managing capitalc. Separate disclosure of trade receivable which have significant increase in credit risk & credit

impairedd. Disclosure of commitment (undrawn commitment)

c. In case of SOCEa. Disclose the conditions or restrictions for distribution attached to statutory reserves

d. The ICAI has issued draft GN on Division III

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