IFRS convergence to Ind AS – Banking scene: 2 – Study of new Financial Statements

 Yes, it is time to learn, understand the new concepts actually intended to be used by banks and apply the knowledge while investing in banks.

 The Proforma Ind AS Financial Statements prescribed were as under:

(a) Balance Sheet including Statement of Changes in Equity

(b) Profit and Loss Account

(c) Notes

Discussion on Balance Sheet including Statement of Changes in Equity

Reserve Bank of India in its introduction titled “Application Guidance for Preparation of Financial Statements” observes as under (page 142 of RBI report of the working group on implementation of Ind AS by banks in India”):

“Introduction

This document provides broad guidance to preparers on the major line items/sub-line items in the financial statements devised by Working Group on implementation of Ind AS by banks in India. It may be noted that it is not always necessary or possible to define a term/title/line item specifically and exclusively. Banks are also advised to refer to relevant Indian accounting standards and its framework to interpret the meaning thereof. Prevailing industry practices may also be borne in mind in this regard.”

Keeping in mind the advice of R.B.I., the relevant Ind AS standards which have direct relevance to banks have been given below. RBI has also given detailed guidelines for implementing the Indian accounting standards to suit their needs.

Let us have a look at various Ind AS standards related to banks:

• Ind AS 1: Presentation of Financial Statements
• Ind AS 7: Cash flow statements
• Ind AS 8: Accounting policies, changes in accounting estimates and errors
• Ind AS12 Income Taxes
• Ind AS 16: Property, Plant, & Equipment
• Ind AS 19: Employee benefits
• Ind AS 27 Separate Financial Statements
• Ind AS 28: Investment in Associates and Joint Ventures
• Ind AS 32 Financial Instruments: Presentation
• Ind AS 33: Earnings per share
• Ind AS: 36 Impairment of assets
• Ind AS: 101 First time adoption of International Financial Reporting Standards
• Ind AS: 107 Financial Instruments: Disclosure
• Ind AS: 109 Financial Instruments
• Ind AS: 112 Consolidated Financial Statements: Disclosure requirements
• Ind AS: 113 Fair value measurement

(My earlier article has extensively covered various Indian Accounting Standards and hence this article will just mention some of them, by name only)

RBI committee has prescribed the presentation of items to broadly follow a descending order of liquidity. Among the instructions given under various heads of assets, the following were interesting, indicating the new approach due to Ind AS application:

• Derivative financial instruments on the assets side of balance sheet to have fair value of derivatives.
• The head “investments” to include total investments net of impairment loss allowance held by the bank, including investments at amortized cost and at fair value, both within and outside India. The granular details are to be given as per Note 6 on “investments”. Where the bank has used a basis other than amortized cost or fair value, the same may be included under the column ‘others’, with the basis of measurement disclosed as a footnote. Certificate of deposits are to be shown under ‘debt securities’.
• Under contingent liabilities, banks may disclose contingent liabilities under these heads only to the extent the same has not been provided for. For instance, in case of financial guarantee contracts, Ind AS specify certain recognition and measurement criteria.

Statement of Profit and Loss

The recommendation of RBI group is again quoted.

 ‘Considering the nature of the business, the formats have been designed in a manner to: (i) clearly identify and segregate net interest income and net fee/commission income, (ii) segregate trading income from other miscellaneous income, (iii) identify impairment losses separately from other provisions.’

Certain heads like ‘fee and commission income’, ‘fee and commission expense’ and ‘net gain/loss on fair value changes’ find mention on pages 154 of the RBI report under various paras;

‘‘Fee and Commission Income’ includes all remuneration on services such as commission on collections, commission/ exchange on remittances and transfers, commission on letters of credit, and guarantees, commission on Government business, commission on other permitted agency business including consultancy, distribution of third party products and other services, brokerage, rental on lockers, etc. If any of these elements are required to be included under effective interest under Indian Accounting Standards, it should not be considered under this head.

  ‘Fee and Commission Expense’ includes all expenses on services such as commission on documents sent on collection, commission/ exchange on remittances and transfers, commission on letters of credit, and guarantees, commission on other permitted agency business including consultancy and other services, brokerage, etc. If any of these elements are required to be included under effective interest under Indian Accounting Standards, it should not be considered under this head.

  Net realized and unrealized gains and losses on financial assets/liabilities at fair value through profit or loss are included in the head ‘Net Gain/loss on fair value changes’. However, contractual interest income and expense on financial instruments held at or designated at fair value through profit or loss may be recognized under interest income and expense respectively.

 The effect of the same should be suitably adjusted while determining fair value gains and losses. Further, subject to compliance with the requirements of Indian Accounting Standards, the gains or losses arising out of changes in exchange rates on vanilla foreign exchange contracts where the changes in the fair value occur only on account of changes in exchange rates should be shown under this head. The subhead ‘Others’ would include reclassification from OCI.

The RBI report contains certain valuable instructions under “Significant Accounting Policies” and the same are reproduced below:

Compliance with Indian Accounting Standards • Briefly explain about the accounting standard framework i.e. Ind AS, which has been followed for preparation of financial statements.

• The transition date for adopting new framework (only at the time of first time adoption). and the basis of preparation of financial statements and exceptions.
• Use of judgments, estimates and assumptions
• Information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements.
• Information about valuation of investments in subsidiaries, associates. in a separate statement
• Components of assets and liabilities measured at fair value( a major change from current practices)
• Financial assets/liabilities measured at amortized cost
• Impairment of investments(both policy and reversal)
• Property, plant, and equipment(both historical cost or revaluation)

We had so far sufficient theoretical input from RBI implementation committee and it is time to know from authorized sources in big organizations like ICICI Securities, PNB GILTS and others how do they intend to interpret Ind AS. It is a common information that they are using the services of big accounting firms for adopting Ind AS. I had the privilege of meeting some professionals from big financial firms who gave their views on various issues raised by me related to Ind AS. But exactly how big banks/their subsidiaries would react could only be known in due course of time after release of financial statements.

However, some of my views on various items used in the audited financial statements of PNB GILTS LTD for the year ended March 31, 2016 are given below. These are just academic views. Obviously, history may or may not corroborate my calculations.

 Let us have the fun of looking at them in a lay man’s language.

• The treatment of General Reserves, Share Premium, Market Fluctuation Reserve and Capital Reserve are unlikely to be retained under Ind AS and hence would be transferred to Retained Earning/Surplus
• Retained earnings is also expected to have some impact after first time adoption of Ind AS.
• Discount income, trading income, interest income and other operational income from page 57(PNB GILTS LTD 20^th Annual Report 2015-2016) report may be treated as under:

• Discount income from commercial papers, certificate of deposits, etc., as per Ind AS 109 are to be classified as per fair value through profit and loss and profit or loss on financial asset measured at fair value measured at fair value shall be recognized in retained earnings as on the date of transition and subsequently to P &L though under Indian GAAP, these are measured at carrying cost.
• Discount income from treasury bills/cash management bills., as per Ind AS 109 are to be classified as per fair value through profit and loss and profit and loss on financial asset measured at fair value shall be recognized in retained earnings as on the date of transition and subsequently to profit and loss account but under current GAAP, the treatment is different. The new guideline may be opted for.
• Trading income from government dated securities, corporate bonds etc. as per Ind AS 109 are to be classified as per fair value through profit and loss and profit and loss on financial asset measured at fair value shall be recognized in retained earnings as on the date of transition and subsequently to profit and loss account but under current GAAP, the treatment is different. The new guideline may be opted for.

A detailed analysis of Ind AS vis-à-vis current GAAP would naturally result in changes to be adopted for convergence into IFRS. However, some glimpse into the first-time exemption in terms of Ind AS 101 is really breathtaking and curiously effective. Let us just note down some of the likely changes.

First time adoption – Mandatory exceptions

In any major transition from one set of accounting standards like GAAP to another newly accepted standards like Ind AS(IFRS) convergence, mandatory exceptions availing by the entity like PNB GILTS Ltd is not unusual. Naturally, I expect the above entity to avail the following mandatory exceptions:

• Estimates
• Impairment of assets
• Classification and measurement of financial assets
• Embedded derivatives
• Derecognition of financial assets and financial liabilities
• Embedded derivatives
• Hedge accounting

Following may constitute non-applicable mandatory exception:

• Non- controlling interests
• Government loans

For the next natural question, whether optional exemption may be available for other items, one can try to answer that an entity may elect to measure an item of property, plant, and equipment at the date of transition to Ind AS at fair value and use that fair value as its deemed cost at that date or use the previous GAAP value as a deemed cost. However, the writer feels that any Indian organization would opt for current and easy process of opting for current GAAP value as deemed cost.” Easier, lesser work or comfortable feeling, perhaps!” one can feel.

Well, the optional exemption availed items may be property, plant equipment and intangibles, leases, employee benefits, designation of previously recognized financial instruments.

Let us turn our attention towards measurement of Government securities and other types of investments by PNB GILTS LTD and other similar companies whose Ind AS requirements are being studied.

Category of investments:

• Quoted securities – as per current RBI guidelines, these are being valued at market values and these do concur with the fair value measurement of Ind AS 109.
• Shares and quoted units of mutual funds – market price of the scrip available from the trades/quotes on the stock exchange which tally with the requirements of Ind AS 109.
• Government Securities – Market prices are available from SGL account transactions, price list of RBI, prices declared by Primary Dealers Association of India (PDAI) jointly with FIMMDA which are in consonance with Ind AS 109 prescriptions of market price; and in rare cases, valuations of FIMMDA are to be used.

Conclusion

The writer decided to revisit the operational aspects of implementation of Ind AS in banks since August 30, 2016 when the first article on Ind AS convergence to IFRS was written. Luckily, various inputs from agencies like PNB GILTS LTD and Punjab National Bank which are professionally managed were available. The professionals from these organizations could easily answer the route map of the convergence to IFRS through Ind AS. A detailed list of applicable Ind AS has been given at beginning of this article for a serious accounting professional who may be a banker, a CA, CS, or any IT professional involved in designing the required computer requirements. A detailed list of various agencies involved in this process has also been given in my earlier article. RBI has done a yeoman’s service in association with experienced bankers in drawing the route map. Still, until the banks actually merge their systems/procedures/accounting standards with the required level and officially publish their accounts in April 1, 2018, we may not fully understand the full picture.

Anyway, the mere thought of making our financial organizations to the world level by IFRS converged Ind AS gives full satisfaction to CPA professional like myself who has been dreaming big for our nation

References 

1. https://taxguru.in/chartered-accountant/convergence-ifrs-ind-indian-banking-scene.html
2. https://rbidocs.rbi.org.in/rdocs/Content/PDFs/FAS93F78EF58DB84295B9E11E21A91500B8.PDF
3. Report of the Working Group on Implementation of Ind AS by banks in India dated September 8, 2015
4. RBI letter addressed to all commercial banks dated June 23, 2016 available from RBI website.
5. Illustrated Guide to Indian Accounting Standards (Ind AS) by the brilliant CA B.D. Chatterjee
   
6. Balance Sheet including Statement of Changes in Equity (from RBI letter dated June 23, 2016 for which website address is https://taxguru.in/rbi/implementation-indian-accounting-standards.html
7. Profit and Loss Account- web site address is https://taxguru.in/rbi/implementation-indian-accounting-standards.html
   

About the author:

 Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIB took voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilization, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specializing in international tax, auditing, IFRS etc., he continues his practice in New Delhi, India. He can be reached at subcpa@gmail.com. Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi. He is thankful to various suggestions received from readers and is delighted to see the enormous enthusiasm of readers.