While Indian Banks will converge towards Ind-AS (IFRS) with effect from 1 April 2018 onwards, Some of them already started taking action to make their books in line with the requirements of Ind-AS.
There are many areas where Banks needs to work upon, however in this article we will touch upon some potential changes/ differences where regulator and the Standard setters need to provide more clarity in order to make all such accounting treatments consistent across Industry.
Many Banks including Indian banks use write-offs of loans as one of the measure to clean their books and improve assets quality and that also increases return on assets also. An Industry expert made a comment about these “written off of loans by Banks” in which he said most of the write-offs are being done for big loans only and not for retail portfolios.
First we look at the real meaning of write-offs and see how it is being done/ handled in India before we adopt Ind-AS.
When a Bank does write-offs it does not mean that it has given borrower a clean chit and assumed the loss on that loan in its books, Hence it is very clear that even the loan is being removed/ cleaned from the books of Bank, it remains in the records of the Bank and borrower needs to pay the same as it has contracted with the Bank.
Under the current accounting practice the loans can be written off from the books of the banks as per the approval from credit committee of the bank (subject to limits as prescribed) and by issuing subsequent instructions from the Head office of the Bank, such loans can be removed from the books of the banks. However as per the RBI circular, all these write offs are to be disclosed properly in the books of account of the banks with the respective movements in amounts.
Example policy on Write-offs by one of Indian bank (extracted from “ICICI Bank” annual report) :
As per forthcoming requirement under Ind-AS 109- Financial Instruments:
As per Ind-AS 109 – “Financial Instruments” para 5.4.4 states that an entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof.
Further it says “An entity has no reasonable expectations of recovering the contractual cash flows on a financial asset in its entirety or a portion thereof.
Now, there are some issues which are be dealt in due course in order to make this transitional changes in accounting systems as the new requirement brings more stringent rules which were not very similar in the current practice within the Industry –
These are few pointers that could be argued and one has to deal in detail while re-drafting a policy/ processes for bank write-off systems. Also regulator has to come up with the clarity on the use of technical write offs Vs. Write off as applicable by Ind-AS- 109.
A reader will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that Ind-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
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