According to the recent Banking Sector Prudential Regulations (Basel III Framework on Liquidity Standards – Liquidity Coverage Ratios (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards), banks are required to comply with a ratio known as ‘Liquidity Coverage Ratio (LCR)’, whose aim is to ensure that Banks maintain adequate level of High Quality Liquid Assets (HQLA) that can be converted into cash to meet its liquidity needs for a 30 calendar day time. Financial Statements shall contain the corresponding amounts (comparatives) for the immediately preceding reporting period, if any, for all items shown in the Financial Statements including Notes. Initial recognition at fair value is normally cost incurred and this will exclude transactions costs, which are charged to profit or loss as incurred. The Application Guidance vide paragraph B4.4.2 requires that a change in the objective of the entity’s business model must be effected before the reclassification date. In 2007, this Task Force published a comprehensive Concept Paper that recommended a convergence strategy rather than full fledged adoption, taking into consideration legal, regulatory and conceptual differences as well as existing business practices in India. provides evidence of circumstances that existed on the date(s) as at which those amounts are to be recognised, measured or disclosed; and. 27. Includes rent / lease charges on property, plant and equipment, municipal and other taxes (excluding income tax), electricity and other similar charges and levies. Bank Audi: Financial Assets at Fair Value reached 1.02 Billion USD in 2019. 8.3.6 Based on its deliberations, the Working Group arrived at the view that the differences between Ind AS 110 and AS 21 would affect all enterprises rather than the banking sector alone. 5.5.1 At present in the banking sector, with the exception of investments, other balance sheet items such as advances, borrowings, etc. Nature of restriction and amount placed in such restricted balance should be specified. Amortised cost measurement includes the capitalisation of transaction costs that are incremental for an entity and are directly attributable to the issuance of the related liability. Apart from the cases above, where adequate, timely and reliable information is available, banks may rely on valuations determined by themselves internally if based on sound and established internal systems with the approval of their Board of Directors provided, however, that a valuation of such instruments is carried out by an independent external valuer/expert at intervals not exceeding 12 months. You are on page 1 of 27. The accounting treatment for IRS on accrual basis is not aligned with Ind AS 109 as all derivatives are categorised under FVTPL. The Working Group deliberated on the issue of considering a 60 day threshold period initially for “significant increases in credit risk”, which will also be consistent with the SMA -2 threshold. D. RBI specified ECL model/ minimum requirements. Instead, information about past sales and expectations about future sales provide evidence related to how the entity’s stated objective for managing the financial assets is achieved, and, specifically, how cash flows are realised’. .11 Financial assets included within the FVOCI category are initially recognized and … The Group also deliberated as to what could be the categories of exposures across banks in our jurisdiction which could qualify for the “low credit risk “exemption in the standard. Directed lending (Priority sector lending (PSL)) mandates banks to lend at specified rates for certain products/ sectors– in such circumstances, are those loans considered off-market and require fair valuation using a valuation technique? The total of these two items should match with the figure of total debt securities. As per Indian Accounting Standard. In the case of non-integral operations as defined in AS 11/extant RBI guidelines (such as a subsidiary or branch or associate or Joint Venture of the bank abroad), the functional currency may be different from the reporting currency and it would involve a translation into the reporting entity’s presentation currency in terms of Ind AS 21. Ind AS 109 has corrected the anomaly of recognising in income statement gains/losses due to own credit risk. Estimation of 12 month expected credit losses. The nature of the restriction and amount placed in deposits where there are restrictions on withdrawal should be disclosed. Fair value is the actual selling value of an asset that is agreed to be paid by the buyer as set by the seller. However, the above referred application guidance also makes it very clear that if the entity is required by its regulator to routinely sell financial assets to demonstrate that the assets are liquid, and the value of the assets sold is significant, the entity’s business model is not to hold financial assets to collect contractual cash flows. Entities will often incur costs such as commissions, fees associated with raising funds through issuance of liabilities such as bonds both in the international and the domestic market. 30/06. 2. In order to increase consistency and comparability in financial statements and related disclosures, the standard establishes a fair value hierarchy that categorizes into the following three levels the inputs to valuation techniques used to measure fair value: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. The total of these two items should match with the figure of total borrowings. RBI circular MPD.BC.187/07.01.279/1999-2000 dated July 7, 1999, RBI circular IDMC.MSRD.4801/06.01.03/2002-03 dated June 3, 2003, RBI Master Circular on Risk Management and Inter-Bank Dealings dated July 1, 2015, IDMD.PCD.No.5053/14.03.04/2010-11 dated May 23, 2011, DBOD.BP.BC.No.61/21.06.203/2011-12 dated November 30, 2011, DBOD.No.BP.BC.31/21.04.157/2008-09 dated August 8, 2008, DBOD.No.BP.BC.57/21.04.157/2008-09 dated October 13, 2008, DBOD.No.BP.BC.28/21.04.157/2011-12 dated August 11, 2011, DBOD.No.BP.BC.31/21.04.157/2012-13 dated July 23, 2012, Master Circular DBR No BP.BC.6/21.04.141/2015-16 dated July 1, 2015, circular DBOD.No.BP.520/21.04.103/2002-03 dated October 12, 2002, circular DBOD.No.BP.BC.67/21.06.202/2011-12 dated December 22, 2011, circular DBOD.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015, RBI circular reference DBOD.No.BP.BC.89/21.04.018/2002-03 dated March 29, 2003, DBR. 7. Detailed entries have been prescribed for recording premium received/ paid and gains/losses on revaluation. revenue generation. amortised cost, FVOCI or FVTPL) may not necessarily be in alignment with the entity’s own business requirements. This process will require concurrent changes to the formats prescribed under the Third Schedule to the BR Act, which will have to be notified by the GoI and may not provide the flexibility and adaptability to changing requirements and regulatory prescriptions. The Working Group is of the view that administered (Regulated) interest rates will have to be considered as market rates because any exercise to arrive at market rates using the application guidelines given in the standard i.e. Result in differentiating the degree of credit risk in different credit exposures of a bank. (ii) Instruments with Write Off Feature. It should be noted that credit related considerations (need for provisions on guarantee exposures etc.) The difference between fair value and transaction price would generally be considered as an employee cost. Therefore, in order to provide consistency and comparability, the Working Group concluded that specific format be prescribed as part of the Third Schedule. It is general practice that in most cases, the terms and conditions governing the sanction of loans/credit facilities contain a clause enabling a bank to recall the loans in the event of credit quality deterioration of borrower, repayment defaults and violation of loan covenants etc. The requirements of the RBI guidelines on consolidation procedures for joint ventures need to be modified/ withdrawn since Ind AS111 does not provide for ‘proportionate consolidation’ method. The review helped develop a better understanding of financial statements presented under IFRS as well as allowed comparisons of alternative presentations options provided under IAS1 and IFRS 7. Match the investment accounting approach with the correct valuation approach: C Not held-for-collection Held-for-collection a. Amortized cost Amortized cost b. 4.1 Banks may disclose contingent liabilities under these heads only to the extent that the same has not already been provided for. 6. Equity instruments: fair value through other comprehensive income (FVOCI) Using FVOCI, the alternative treatment, transaction costs can be capitalised as part of the initial cost of the investment. The standard also states that the fair value of a financial instrument at initial recognition is normally the transaction price i.e. The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). For example, a trade receivable that ranks its creditor as a general creditor would qualify as having payments of principal and interest on the principal amount outstanding. 3.5.1 Financial liabilities are de-recognised when they are extinguished i.e. Equity, debentures and other financial instruments acquired by way of conversion of outstanding principal and/or interest should be classified in the AFS category and valued in accordance with the extant instructions on valuation of banks’ investment portfolio, except to the extent that : a) Equity may be valued at market value if quoted. This will continue to be at $5m as the following calculation confirms: In addition, interest received during the year of $0.25m will be taken to profit or loss for the year. The issue of DTL/DTA in respect of HTM investments and provision for bad and doubtful debts in the case of banks has been examined by the Expert Advisory Committee (EAC) of the ICAI in the past. Paragraph B4.1.19 states that “In almost every lending transaction the creditor's instrument is ranked relative to the instruments of the debtor's other creditors. Presentation of unrealised gains/losses (mark-to-market-MTM) of forex and derivatives. RBI may consider withdrawing its instructions specifying the segments and disclosure formats and banks may follow the requirements of Ind AS 108 for segment reporting. In order to ensure uniformity among banks, RBI had stated that the closing rate to be applied for the purposes of AS 11 (revised 2003) for the relevant accounting period would be the last closing spot rate of exchange announced by FEDAI for that accounting period. Further, hedging requirements and the hedge accounting model of the RBI circular is not consistent with Ind AS 109. are to be included under this category. Shri P R Ravi Mohan, the then Chief General Manger-in-charge, Department of Banking Supervision attended some Working Group meetings as a special invitee. (iv) Investments in subsidiaries, associates and joint ventures. As part of Basel III Capital Regulations in India, banks are permitted to include Perpetual Non Cumulative Preference Shares (PNCPS) and Perpetual Debt Instruments (PDI) issued by them subject to certain conditions as part of AT 1. If the entity prepares and publishes quarterly reports under Ind AS, it should apply the old classification up to 30 September and, as of 1 October, reclassify all affected financial assets and apply the new classification prospectively from that date. Further, the application guidance (paragraph B 4.1.2C) to Ind AS 109 states ‘it is necessary to consider the frequency, value and timing of sales in prior periods, the reasons for those sales and expectations about future sales activity’. However, some issues identified in this context and the recommendations of the Working Group thereon are discussed below: Presentation of Inter Bank Participation Certificates (IBPC). Therefore, trade date or settlement date accounting is required to be adopted at a higher level than at the level of a type of security viz. (AS 11 defines closing rate as the exchange rate at the balance sheet date). After three years unquoted shares / bonds / units transferred to AFS and valued as below: Units – Valuation will be done at NAV shown by the VCF in its financial statements. Fundamentals of Corporate Finance, 2nd Edition, Selt Test Ch03. A majority of internal costs (e.g. Further, individual bank’s deposit rates may be different from other banks’ rates for similar tenor/amount. The issue is whether there is a need to develop banking industry level guidelines to interpret and implement these terms for a uniform and consistent approach? Paragraph 47 of Ind AS 113 states that “the fair value of a financial liability with a demand feature (e.g. Therefore they may continue in the interest of consistent application across the banking industry. BP DBR.No.BP.BC.101/21.04.132/2014-15 dated June 8, 2015, circular DBOD.No.BP.BC. It is also not the credit losses on assets that are forecast to actually default in the next 12 months. Foreign Currency – Rupee Options (FEDAI circular SPL-24/ FC-Rupee Options/ 2003 dated May 29, 2003 read with RBI Master Circular on Risk Management and Inter-Bank Dealings dated July 1, 2015). Where there are such differences, a bank must document them and demonstrate their reasonableness to the RBI.” The intention of these instructions is perhaps to avoid scenarios where banks use an IRB approach merely to compute capital and not to manage risk. Application money pending allotment shall be used to allocate the depreciable amount of an asset a... Its predecessor, IAS® 39 with respect to disclosure requirements mandated by Ind AS 109 all financial instruments, Working. Year prior to date of disposal the transition date for adopting new framework ( only at the transaction (... 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