Viewing Banking Industry From Lens of IND AS

I. Background & Overview:

The decision of Reserve Bank Of India to defer of Ind-AS to April 1^st, 2019 in respect of Scheduled Commercial Banks gives breather to Indian Banking Industry which is currently grappling with issues emanating from Stressed Assets, Risk Management, Governance, Insolvency and Bankruptcy Code etc. The financial statements of Banks and NBFCs would predominantly be affected by following standards:

1. Ind AS 109 Financial Instruments

2. Ind AS 32 Financial Instruments: Presentation

3. Ind AS 107 Financial Instruments: Disclosures

4. Ind AS 113 Fair Value Measurement

It is estimated that the impact of implementing provisions of above standards alone, shall cause incremental provisioning upto Rs 89,000 crores on advances held by Scheduled Commercial Banks[1]

Considering the quantum of impact that above referred IND AS can have on the financial statements of entities in Banking Industry, it is crucial for investors, regulators and implementors, to ensure that several dimensions of referred four  standards are thoroughly understood from practical perspective. With the objective to traverse the “Jargon Ridden World Of IND AS” , the author of this article presents series of writeups complemented with illustrations, aimed to progress from facts to knowledge to wisdom.

II. Financial Instruments ,Financial Assets & Financial Liabilities:

A. Financial Instruments:

The definition of a financial instrument is broad. A financial instrument is defined as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Trade receivables and payables, bank loans and overdrafts, issued debt, equity and preference shares, investments in securities (e.g. shares and bonds), and various derivatives are just some of the examples of financial instruments.

B. Financial assets:

A financial asset is any asset that is:

• Cash;
• An equity instrument of another entity;
• A contractual right :
  • To receive cash or another financial asset from another entity; or
  • To exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or

• A contract that will or may be settled in the entity’s own equity instruments under certain circumstances.

Examples of financial assets are investments in equity instruments, investments in debt instruments, trade receivables, cash and cash equivalents, derivative financial assets.

The term “Contractual” used in the definition of “Financial Assets” refers to those actions and duties which each party to the contract are responsible for, based on the contents of the contract agreement.

C. Financial liabilities:

A financial liability is any liability that is:

• A contractual obligation
  • to deliver cash or another financial asset to another entity; or
  • to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
• A contract that will or may be settled in the entity’s own equity instruments under certain circumstances.

Examples of financial liabilities are accounts payable, loans issued by an entity, and derivative financial liabilities

III. Initial Recognition:

• An entity shall recognise a financial asset or a financial liability in its balance sheet when, and only when, the entity becomes party to the contractual provisions of the instrument. Thus unlike other standards, the emphasis here is on “Contract” and not on “Future Economic Benefits”.
• At initial stages, always 3 Step Approach is applied which is:
  • Recognise
  • Classify
  • Measure
• A regular way purchase or sale of financial assets is recognised using either trade date accounting or settlement date accounting. The trade date is the date that an entity commits itself to purchase or sell an asset. The settlement date is the date at which an asset is delivered to or by an entity.

IV. Derecognition:

• Note that the rules for Derecognition of an Financial Asset / Financial Liabilities are far more complicated than the initial recognition rules, the reason being that the standard is aimed at deterring companies from hiding their bad loans. Thus it is much easier to recognize an asset rather than to derecognise an asset.
• An entity shall derecognise a financial asset when, and only when:
  • The contractual rights to the cash flows from the financial asset expire,
  • It transfers the financial asset and the transfer qualifies for derecognition
• An entity transfers a financial asset if, and only if, it either:
  • Transfers the contractual rights to receive the cash flows of the financial asset, or
  • Retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions.

V. Pause ……

With above discussion we have very broadly touched the key landmarks that we would come across during our journey into the world of “IND AS For Financial Instruments”. It is said that “Not Until We Are Lost Do We Begin To Understand Ourselves”. Thus if above writeup has in anyway made us lost into some of the concepts, then surely the beginning to understand has commenced. See you soon in upcoming article.

Disclaimer: Opinions expressed are current opinions only as of the date indicated. The Author does not accept any responsibility to update any opinions or other information contained in this material.This material should not form the primary basis for any decision that you make in relation to matters referred to herein.Review carefully the material and perform such due diligence as you deem fit, including consulting your own independent legal, tax, accountancy and other professional or specialist advisors, as necessary or appropriate.Neither the Author, nor any of his officers, directors, agents or employees, makes any warranty, express or implied, of any kind whatsoever, or assumes any responsibility for any losses, damages, costs or expenses, of any kind or description, relating to the adequacy, accuracy or completeness of this material or its use including, but not limited to, information provided by third parties. You should not construe silence by the Author, or any of his officers, directors, agents or employees as approval or endorsement of any statements made by a third party.

The Author is a partner with  YSP & Co LLP with over 20 years of experience in myriad areas of GST, Direct Tax, System Audits, Controllership and CFO Functions. He can be reached at rajeevj12@gmail.com

[1]https://economictimes.indiatimes.com/markets/stocks/news/rbi-defers-implementation-of-ind-as-by-one-year/articleshow/63626690.cms