Accounting and Provisioning in AIFIs – Basel III

Accounting and Provisioning in AIFIs – Basel III

Income Recognition:

  • AIFIs should recognize income on an accrual basis for specific securities, including those guaranteed by the Central or State Government, provided interest is regularly serviced and not in arrears.
  • Income from shares is recognized when the dividend is declared and the
  • Income from government securities, corporate bonds, and debentures is recognized on an accrual basis if interest is regularly serviced.
  • Income from mutual fund units is recognized on a cash basis.

Accounting for Broken Period Interest:

Broken period interest paid to the seller in government securities transactions should not be capitalized. It should be treated as an expenditure in the Profit & Loss Account.

Investment Reserve Account (IRA):

  • Excess provisions in the AFS or HFT categories can be credited to the Profit & Loss Account and an equivalent amount (after taxes and statutory reserves) should be appropriated to an IRA.
  • The IRA can be included under Tier 2 capital, within the 1.25% ceiling of total Risk Weighted Assets.
  • Amounts from the IRA can’t be used for dividend payments.
  • The IRA balance transferred to reserves or Profit & Loss Account can be counted as Tier I capital.
  • AIFIs can use the IRA to offset provisions for depreciation in AFS and HFT categories, but this should be reflected in the Profit & Loss Account.

Non-Performing Investments (NPI):

  • Income should not be recognized on securities where interest/principal is in arrears. Appropriate provisions for depreciation must be made.
  • An investment is classified as NPI if interest or principal remains unpaid for over 90 days.
  • This applies to preference shares with unpaid dividends and equity shares valued at Re.1 due to non-availability of the latest balance sheet.
  • If a borrower’s credit facility is NPA, investments in their securities are also treated as NPI, and vice versa. This doesn’t apply if only preference shares are NPI.
  • Converted instruments from principal/interest are treated as NPA from the start, with provisions made as per norms.
  • Investments in State Government Guaranteed securities are subject to NPI norms if payments are overdue for over 90 days. Central Government Guaranteed bonds are not classified as NPI unless the guarantee is repudiated.