Guidelines on implementation of Ind AS by NBFCs

Guidelines on implementation of Ind AS by NBFCs

The Reserve Bank of India has released guidelines for the implementation of Indian Accounting Standards (Ind AS) by Non-Banking Financial Companies (NBFCs) and Asset Reconstruction Companies (ARCs). The responsibility of preparing and ensuring fair presentation of financial statements vests primarily with the Board of Directors of the NBFC/ARC. The guidelines provide clarity on regulatory capital in the light of Ind AS implementation, including asset classification and provisioning, and the need to ensure consistency in the application of the accounting standards in specific areas. NBFCs/ARCs are required to put in place board-approved policies, and articulate objectives for managing each portfolio. The guidelines also focus on the need to maintain an Impairment Reserve to benchmark the adequacy of provisioning for credit losses, and to compute regulatory capital and regulatory ratios. The document advises NBFCs/ARCs to follow the recommended definition of default and put in place sound methodologies for the computation of Expected Credit Losses.

The Reserve Bank of India (RBI) has issued guidelines for Non-Banking Financial Companies (NBFCs) and Asset Reconstruction Companies (ARCs) to ensure the high quality implementation of Indian Accounting Standards (Ind AS) for financial reporting. The guidelines emphasize the need for consistency in applying accounting standards in specific areas such as asset classification, provisioning, and regulatory capital, as well as the importance of detailed documentation to support judgments made in financial reporting.

The guidelines also establish a governance framework for NBFCs and ARCs to ensure that their business models and portfolios are clearly articulated and documented, and that sound methodologies are approved for computing Expected Credit Losses (ECL). NBFCs and ARCs are advised not to change the parameters, assumptions, and other aspects of their ECL models for the purpose of profit smoothing. Any changes to the model output should be approved by the Audit Committee of the Board and documented.

The guidelines require NBFCs and ARCs to disclose a comparison between provisions required under Income Recognition, Asset Classification, and Provisioning (IRACP) norms and impairment allowances made under Ind AS 109 to provide a benchmark on the adequacy of provisioning for credit losses.

Furthermore, the guidelines require NBFCs and ARCs to appropriate the difference between impairment allowances made under Ind AS 109 and provisioning required under IRACP from their net profit or loss after tax to a separate “Impairment Reserve,” which shall not be reckoned for regulatory capital. No withdrawals from this reserve shall be permitted without prior permission from the Department of Supervision, RBI.

Lastly, the guidelines provide guidance for NBFCs and ARCs to determine their regulatory capital, including the treatment of net unrealized gains arising on fair valuation of financial instruments, and the inclusion of such gains in regulatory capital.