{"id":1012,"date":"2021-01-08T09:27:01","date_gmt":"2021-01-08T09:27:01","guid":{"rendered":"https:\/\/swaritadvisors.com\/blog\/?p=1012"},"modified":"2021-03-17T12:17:46","modified_gmt":"2021-03-17T12:17:46","slug":"rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/","title":{"rendered":"RBI Issues Guidelines For Implementation Of Indian Accounting Standards By NBFCs"},"content":{"rendered":"\n<p class=\"has-drop-cap\">In order to promote and\nencourage high quality and constant implementation of the Indian Accounting\nStandards or AS, as well as to facilitate comparison and improved supervision,\nthe RBI (Reserve Bank of India) had framed regulatory guidance concerning these\nstandards, issued on 13 March 2020. <\/p>\n\n\n\n<p>Further, these\nstandards will apply to both NBFCs (Non Banking Finance Companies) and ARCs\n(Asset Reconstruction Companies) for the preparation of their financial\nstatements and balance sheets from the financial year 2019- 2020 onwards.<\/p>\n\n\n\n<p>In this blog, we will discuss the\nguidelines issued by the apex bank pertaining to the implementation of Indian\nAccounting Standards by NBFCs.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a3ad405aa967\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a3ad405aa967\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Need_For_Implementation_of_Indian_Accounting_Standards\" title=\"Need For Implementation of Indian\nAccounting Standards\">Need For Implementation of Indian\nAccounting Standards<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Effects_on_Audit_Committees_and_Board_of_Directors\" title=\"Effects on Audit Committees and Board of Directors\">Effects on Audit Committees and Board of Directors<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Preparing_Financial_Statements\" title=\"Preparing\nFinancial Statements\">Preparing\nFinancial Statements<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Approval_of_Plans_and_Policies\" title=\"Approval of Plans\nand Policies\">Approval of Plans\nand Policies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Approval_of_Sound_Methodologies\" title=\"Approval of Sound\nMethodologies\">Approval of Sound\nMethodologies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Sensitivity_to_ECL_Output\" title=\"Sensitivity to ECL Output\">Sensitivity to ECL Output<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Adjustments_in_the_Model_Output\" title=\"Adjustments in the Model Output\">Adjustments in the Model Output<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Classification_of_Accounts_beyond_90_Days\" title=\"Classification of Accounts beyond\n90 Days\">Classification of Accounts beyond\n90 Days<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Rebuttable_Presumption_Concerning_Accounts\" title=\"Rebuttable Presumption Concerning\nAccounts\">Rebuttable Presumption Concerning\nAccounts<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Stricter_Rules_Than_Before\" title=\"Stricter Rules Than Before\">Stricter Rules Than Before<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Effects_of_Implementation_of_Indian_Accounting_Standards_on_Management\" title=\"Effects of Implementation of Indian Accounting Standards on Management\">Effects of Implementation of Indian Accounting Standards on Management<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Policy_for_Sales_Made_Out_of_Amortized_Cost_of_Business_Model\" title=\"Policy for Sales Made Out of\nAmortized Cost of Business Model\">Policy for Sales Made Out of\nAmortized Cost of Business Model<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Classification_of_Accounts_beyond_90_Days-2\" title=\"Classification of Accounts beyond\n90 Days\">Classification of Accounts beyond\n90 Days<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Comparison_Between_Provisions\" title=\"Comparison Between Provisions\">Comparison Between Provisions<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Effects_on_Prudential_Floor_for_Expected_Credit_Losses\" title=\"Effects on Prudential Floor for\nExpected Credit Losses \">Effects on Prudential Floor for\nExpected Credit Losses <\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#If_the_Impairment_Allowance_Lower_than_the_Provisioning_Needed\" title=\"If the Impairment\nAllowance Lower than the Provisioning Needed\">If the Impairment\nAllowance Lower than the Provisioning Needed<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Need_of_New_Requirement\" title=\"Need of New Requirement\">Need of New Requirement<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-18\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Effects_of_Implementation_on_Auditors_and_Investors\" title=\"Effects of Implementation on\nAuditors and Investors\">Effects of Implementation on\nAuditors and Investors<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-19\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Conclusion\" title=\"Conclusion \">Conclusion <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-20\" href=\"https:\/\/swaritadvisors.com\/blog\/rbi-issues-guidelines-for-implementation-of-indian-accounting-standards-by-nbfcs\/#Official_Copy_of_the_RBI_Notification\" title=\"Official Copy of the RBI Notification\">Official Copy of the RBI Notification<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Need_For_Implementation_of_Indian_Accounting_Standards\"><\/span>Need For Implementation of Indian\nAccounting Standards<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In view of the already\nexisting chaos in the financial services sector aggravated by the unfortunate\nCOVID -19 epidemic, there was an added stress in the economy and accordingly on\nthe lending business. Therefore, the apex bank decided to implement this\nguidance, which had something in store for everyone, i.e., Audit Committees,\nBoard of Directors, Management, Investors and Auditors.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Effects_on_Audit_Committees_and_Board_of_Directors\"><\/span>Effects on Audit Committees and Board of Directors<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Audit-Committees-and-Board-of-Directors.png\" alt=\"Effects on Audit Committees and Board of Directors\" class=\"wp-image-1018\" width=\"544\" height=\"490\" srcset=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Audit-Committees-and-Board-of-Directors.png 857w, https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Audit-Committees-and-Board-of-Directors-300x270.png 300w, https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Audit-Committees-and-Board-of-Directors-768x692.png 768w\" sizes=\"(max-width: 544px) 100vw, 544px\" \/><\/figure><\/div>\n\n\n\n<p>Audit Committees and Boards of Directors have a responsibility and accountability to contribute and manage high-quality Corporate Governance (CG) at their company. Therefore, in this respect, the Reserve Bank of India(RBI) has now provided the following specific responsibilities and duties of both audit committees and board of director of a registered NBFC or ARC in context of Indian Accounting Standards of financial reporting:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Preparing_Financial_Statements\"><\/span>Preparing\nFinancial Statements<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The responsibility to\nprepare and guarantee fair and true presentation of the financial statements\nand records mainly vests with the board of directors of the respective company.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Approval_of_Plans_and_Policies\"><\/span>Approval of Plans\nand Policies<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Approval of the\npolicies and plans that clearly articulate and document the different business\nmodels for the portfolios of financial assets of a registered NBFC or ARC. <\/p>\n\n\n\n<p>Further, it is\nsignificant because the subsequent measurement of such assets at an amortized\ncost or fair value because of other all-inclusive income or profit &amp; loss\ndepends on whether such a business model is to hold &amp;accumulate cash flows\nof the underlying financial assets until maturity or to hold\/ accumulate\/ and\nsell or trade in those financial assets. <\/p>\n\n\n\n<p>Moreover, such plans\nand policies shall also articulate the purposes for managing each portfolio and\nthe restrictions imposed on subsequent reclassification.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Approval_of_Sound_Methodologies\"><\/span>Approval of Sound\nMethodologies<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Approval of the sound methodologies for\nthe calculation of Expected Credit Losses or ECL must be according to the size,\ncomplexity, and risk profile particular to the NBFClicense (Non Banking\nFinancial Company) or ARC (Asset Reconstruction Company).<\/p>\n\n\n\n<p>Further, the term sound methodologies\ninclude addressing procedures, policies, and controls for assessing and\ncalculating credit risk on all the lending entities.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Sensitivity_to_ECL_Output\"><\/span>Sensitivity to ECL Output<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>All\nthe parameters and assumptions considered, together with their sensitivity to\nthe ECL (Expected Credit Losses) output, are to be properly documented and\narticulated. Further, the rationale and justification behind any change in the\nECL model also need to be documented and sanctioned by the board of directors.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Adjustments_in_the_Model_Output\"><\/span>Adjustments in the Model Output<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Any adjustments or modifications made to\nthe model output, i.e., a management overlay, needs to be approved and\nsanctioned by the audit committee. Moreover, there is a need to clearly and\nspecifically document the rationale or the basis behind adjustments. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Classification_of_Accounts_beyond_90_Days\"><\/span>Classification of Accounts beyond\n90 Days<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The classification of accounts that are\npresented after 90 days, still are not treated as impaired, needs to be\napproved by the audit committee, together with a clearly documented rationale.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Rebuttable_Presumption_Concerning_Accounts\"><\/span>Rebuttable Presumption Concerning\nAccounts<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>As per the Indian Accounting Standard 109, there is a \u201cRebuttable Presumption\u201d that whenever the books of accounts are past more than 30 days, it means a significant rise in the credit risk for that particular financial asset. <\/p>\n\n\n\n<p>Further, this would typically consequence\nin a \u201cHigher Impairment Loss Provision\u201d from \u201c12 months ECL (Expected\nCredit Losses)\u201d to \u201cLifetime\nECL (Expected Credit Losses)\u201d. <\/p>\n\n\n\n<p>Moreover, the said presumption can be rebutted only if the registered NBFC (Non-Banking Financial Company) and ARC (Asset Reconstruction Company) has reasonable and acceptable information. <\/p>\n\n\n\n<p>However, as per the guidance issued by\nRBI for the Implementation of Indian Accounting Standards, such a presumption\nis rebuttable only if there is clear documentation regarding the justification\nfor doing so, together with the approval by the audit committee.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Stricter_Rules_Than_Before\"><\/span>Stricter Rules Than Before<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Now, the RBI or Reserve Bank of India has specified comparatively stricter rules than Indian Accounting Standards, as now these regulations prohibit NBFCs and ARCs from deferring the recognition of the substantial rise in the credit risk for any exposure that is past 60 days.<\/p>\n\n\n\n<p>Therefore, the board of directors and the\naudit committee may now require to spend some more time with the management to comprehend\nand understand these detailed necessities prior approving, moreover, the same comprisingof\ninteractions with the auditors as well.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Effects_of_Implementation_of_Indian_Accounting_Standards_on_Management\"><\/span>Effects of Implementation of Indian Accounting Standards on Management<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Implementation-of-Indian-Accounting-Standards-on-Management-889x1024.png\" alt=\"Effects of Implementation of Indian Accounting\" class=\"wp-image-1019\" width=\"457\" height=\"526\" srcset=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Implementation-of-Indian-Accounting-Standards-on-Management-889x1024.png 889w, https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Implementation-of-Indian-Accounting-Standards-on-Management-260x300.png 260w, https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Implementation-of-Indian-Accounting-Standards-on-Management-768x885.png 768w, https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Effects-on-Implementation-of-Indian-Accounting-Standards-on-Management.png 1319w\" sizes=\"(max-width: 457px) 100vw, 457px\" \/><\/figure><\/div>\n\n\n\n<p>As stated above, from now onwards it shall be mandatory for the BOD (Board of Directors) and Audit Committee to efficiently discharge these responsibilities, in the same manner, the management of NBFCs (Non-Banking Financial Companies) and ARCs (Asset Reconstruction Companies) will need to guarantee the timely implementation of these various policies, processes, models, controls, assumptions and other related documentation.<\/p>\n\n\n\n<p>Also, all the prepared\ndocuments are then provided to the Audit Committee and Board for their review\nand approval.<\/p>\n\n\n\n<p>Further,\nthe RBI has recommended NBFCs and ARCs to not to make any change in the\nassumptions, parameters, and other aspects of their ECL (Expected Credit\nLosses) model for profit smoothening. <\/p>\n\n\n\n<p>Also,\nthe definition of the default used for accounting purposes is to be directed by\nthe definition adopted for the regulatory purposes. RBI has provided guidance\non determining \u201cNet Owned Funds\u201d,\u201cOwned Funds\u201d, and \u201cRegulatory Capital\u201d as\nwell.<\/p>\n\n\n\n<p>Furthermore, it shall be noteworthy to note that, the management of an <strong><a href=\"https:\/\/swaritadvisors.com\/nbfc-registration\" class=\"text-primary\">NBFC registration<\/a><\/strong> or ARC will now have to comprise the following additional disclosures as follows in their financial statements:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Policy_for_Sales_Made_Out_of_Amortized_Cost_of_Business_Model\"><\/span>Policy for Sales Made Out of\nAmortized Cost of Business Model<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>As per Indian Accounting Standards 109,\nthe sales that are made frequent or of high value or without any specific reason\nare not consistent with the amortized cost business model.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Classification_of_Accounts_beyond_90_Days-2\"><\/span>Classification of Accounts beyond\n90 Days<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The classification of accounts that are presented after 90 days, still are not treated as impaired, then, in that case, the management will have to disclose information concerning the total amount of outstanding and overdue amounts.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Comparison_Between_Provisions\"><\/span>Comparison Between Provisions<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Now, the management needs to compare the prescribed template of provisions needed under extant prudential norms for asset classification, income recognition, with the provisions concerning impairment allowances made under <strong>Indian Accounting Standard 109<sup><a href=\"https:\/\/mca.gov.in\/Ministry\/pdf\/INDAS109.pdf\" class=\"text-primary\"><strong><em>[1]<\/em><\/strong><\/a><\/sup><\/strong>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Effects_on_Prudential_Floor_for_Expected_Credit_Losses\"><\/span>Effects on Prudential Floor for\nExpected Credit Losses <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As per the guidelines issued by RBI, all the NBFCs and ARCs will keep on to record the impairment allowances as needed by Indian Accounting Standards 109, using the three-stage ECL (expected credit losses) model. <\/p>\n\n\n\n<p>However, in parallel, they will continue to maintain the asset classification and determine provisions in accordance with the asset classification, income recognition, and provisioning, but the same shall comprise of borrower\/beneficiary wise classification, restructured assets, and NPA ageing as well.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"If_the_Impairment_Allowance_Lower_than_the_Provisioning_Needed\"><\/span>If the Impairment\nAllowance Lower than the Provisioning Needed<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>If in case the impairment allowance provided under Indian Accounting Standard 109 is lower than the provisioning needed under asset classification, income recognition, and provisioning (comprising of standard asset provisioning), then, in that case, all the NBFCs and ARCs shall use the difference from their net profits or losses after tax to a separate and distinct reserve, known as \u201cImpairment Reserve\u201d. The main objective of this condition is to set a benchmark to the BOD (Board of Directors), RBI, and all the other stakeholders, on the suitability of provisioning for credit losses.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Need_of_New_Requirement\"><\/span>Need of New Requirement<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This is a significant new requirement,\nserving the dual aim of ensuring that the PAT (Net Profit After Tax)continues\nto be calculated as per the Indian Accounting Standards, and at the same time,\nall the registered NBFCs or ARCs will set aside or appropriate the amounts from\nprofits generated into a separate reserve if in case the Indian AS 109 concerning\nECL provision is less than the asset classification, income recognition, and\nprovisioning.<\/p>\n\n\n\n<p>Further, it is a balanced and\nconventional approach recommended by the RBI, as under this approach, the\namount in such impairment reserve will not be counted for any regulatory\ncapital. The reason behind the same is that the amount is prohibited to be\nwithdrawn without obtaining the prior approval from RBI. Also, the same will be\nreviewed by the apex bank going forward as well.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Effects_of_Implementation_on_Auditors_and_Investors\"><\/span>Effects of Implementation on\nAuditors and Investors<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>From now onwards, the auditors need to\nconsider the guidelines concerning the implementation of accounting standards\nin the audit procedure of NBFCs and ARCs financial statements.<\/p>\n\n\n\n<p>Further, in the same manner, the investors and the users of the financial statements will need to access all the additional financial information or disclosures to satisfy that there is an effective implementation of the above processes and the same will result in improved Financial Reporting and CG (Corporate Governance).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In a nutshell, the implementation of Indian Accounting Standards by RBI is a welcome move, and now it is up to all the registered ARCs (Asset Reconstruction Companies) and NBFCs (Non-Banking Financial Companies) to embrace and efficiently implement these measures and guidelines both in letter and spirit.<\/p>\n\n\n\n<p>Further, in case of any other doubt in Implementation Of Indian Accounting Standards and complexity in understanding the provisions suggested, reach out to <strong><a href=\"https:\/\/swaritadvisors.com\/contact-us\" class=\"text-primary\">Swarit Advisors<\/a><\/strong>, out proficient experts are there to cater to all your doubts and queries and will assist you in the process of NBFC registration as well.<\/p>\n\n\n\n<p><b>Also, Read:<\/b> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/learning\/nbfc-supervision-to-cover-auditors-rbi-measures-to-strengthen-financial-sector\/\">NBFC Supervision to Cover Auditors- RBI measures to strengthen Financial Sector<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Official_Copy_of_the_RBI_Notification\"><\/span>Official Copy of the RBI Notification<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n<a href=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/01\/Indian-AS-RBI-NOTI170F341D8DE49C04D4B8382D855A9858583.pdf\" class=\"pdfemb-viewer\" style=\"\" data-width=\"max\" data-height=\"max\"  data-toolbar=\"bottom\" data-toolbar-fixed=\"off\">Indian-AS-RBI-NOTI170F341D8DE49C04D4B8382D855A9858583<br\/><\/a>\n<p class=\"wp-block-pdfemb-pdf-embedder-viewer\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In order to promote and encourage high quality and constant implementation of the Indian Accounting Standards or AS, as well as to facilitate comparison and improved supervision, the RBI (Reserve Bank of India) had framed regulatory guidance concerning these standards, issued on 13 March 2020. Further, these standards will apply to both NBFCs (Non Banking [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":1013,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[58,56],"tags":[156],"acf":[],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/1012"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/comments?post=1012"}],"version-history":[{"count":5,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/1012\/revisions"}],"predecessor-version":[{"id":3413,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/1012\/revisions\/3413"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media\/1013"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media?parent=1012"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/categories?post=1012"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/tags?post=1012"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}