Applicability
The MCA on March 30, 2016 notified the Companies
(Indian Accounting Standards) (Amendment) Rules, 2016, which includes a road
map for implementation of Indian Accounting Standards (Ind AS) by Non-Banking
Financial Companies (NBFCs) (NBFC road map). NBFCs will be required to comply
with Ind AS in a phased manner, from accounting periods beginning on or after 1
April 2018 for the first phase and 1 April 2019 for the second phase.
Phase I
From April 01, 2018, onwards, with comparative
figures for the periods ending on or after 31 March 2018:
- NBFCs having net worth of INR 500 crores or more, and
- The holding, subsidiary, joint venture or associate companies of the above, other than those companies already covered under the road map for companies issued by MCA (corporate road map) in February 2015.
From April 01, 2019, onwards with comparatives for
the periods ending on or after 31 March 2019:
- NBFCs whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth of less than INR 500 crore.
- NBFCs that are unlisted companies, having net worth of INR 250 crores or more but less than INR500 crore.
- Holding, subsidiary, joint venture or associate companies of the above class of companies, other than those already covered by the road map for companies issued by MCA (corporate road map) in February 2015.
NBFCs with a net worth below INR 250 crores and not
covered in Phase I or II will continue to comply with the existing accounting
standards.
Impact on
NBFC
Transition
to Ind AS, while primarily being an accounting change, is expected to have a
profound impact on the business of NBFCs.
Ind AS
should be as much part of the CEO agenda as it is of the CFO/ Controller’s
agenda as it is expected to significantly alter the KPIs and business ratios including
cost-to-income ratio, NPA ratios and provision coverage ratios etc, based on
the choices made. NBFCs are advised to proactively reach out to internal and
external stakeholders to highlight impacts of these changes
Some of
the significant potential changes in practices that are expected due to Ind AS are
as follows:
- Upfront fees and loan origination costs such as commission and incentives are incurred by NBFCs. Ind AS requires amortisation of these directly attributable and incremental origination fees and costs.
- Generally, costs that are incurred in-house are not eligible for amortisation, this makes the choice of the operating model, i.e., insourcing vs outsourcing, relevant in the way these costs impact the statement of profit and loss.
- One of the key changes in impairment provision is consideration around Expected Credit Losses ‘ECL’ from the current delinquency based provision. In case NBFCs do not embed concepts like risk-based measures for pricing of loans and asset allocation, then there would be a direct impact in the statement of profit and loss account.
- For assets where there had been significant increase in credit risks since origination (Stage 2), i.e. when the facility is more than 30 days overdue, Ind AS requires recognition of lifetime ECL as against 12 months ECL (Stage1). This will create a cliff effect and will tantamount to a high impairment charge being recognised upfront. Hence, NBFCs may now need to spend greater effort on early collections so as to avoid recognition of life-time provisions.
- Employee stock options will also impact NBFCs, as Ind AS mandates fair valuation of these options to be recognized as a charge in the statement of profit and loss, as against not recognising any charge in the erstwhile Indian GAAP.
- Several NBFCs frequently enter into securitisation and direct assignment transactions. The assessment of whether significant risks and rewards have been transferred to the purchaser or the secularisation trust is different under Ind AS when compared to Indian GAAP. This results into the loans being recognised back on the books of the originator and in other cases loans may need to be fair valued.
- Compulsorily convertible preference shares are eligible for consideration as Tier 1 capital under the RBI regulations. Ind AS, however, would require the assessment of the terms of conversion and certain instruments would not be eligible to be considered as an equity instrument impacting Tier I capital ratio.
- NBFCs are required to submit periodic returns to the RBI, however it is still unclear as to whether these returns would be prepared under the erstwhile Indian GAAP or under Ind AS. While a harmonious approach would be to align the financial reporting and regulatory reporting, it is a significant area where clarification is still to be received from RBI.
- The treatment of Ind AS transition adjustments on capital adequacy is also unclear, since there could be instances wherein the transition adjustments have a significant impact on the net worth of NBFCs on transition.
The current
environment where Ind AS transition is being conducted has considerable
ambiguity due to the lack of certain key regulatory clarifications and
guidance.
Making
business decisions in such an environment may prove to be challenging. The NBFC
industry will look forward to receiving inputs from the regulators like the RBI
to help companies achieve a smoother transition for both financial and
regulatory reporting.
Schedule III
The Ministry of Corporate Affairs (MCA),
vide its notification dated 11 October 2018, has notified Ind AS Schedule
III applicable to NBFCs as defined in the Companies (Indian
Accounting Standards) (Amendment) Rules, 2016. This Schedule III will apply to
NBFCs covered under Ind AS applicability.
Conclusion
With the world becoming a global village and with
the liberalisation and globalisation of the economy it is imperative the
disclosures and reporting of companies are made in line with that the
International Regulations. The MCA had come a long way with the introduction of
e-filing and the XBRL filing of financial results. With the introduction of
Companies Act, 2013, many sweeping changes have brought into the system which
will help in ease of doing business and thwart the fraudulent web of activities
hitherto followed by many companies. The reporting under the Ind-AS makes the
financials easily comparable with the financials of the peers globally. Once
the provisions of the Ind-AS becomes applicable or it voluntarily adopted, it
shall be followed for the subsequent years even if the criteria as per the
Rules are not applicable. Though the transition has serious implications on the
financial reporting, it paves way for better standards and governance. The
challenges in implementation can be overcome with proper planning and preparation
in advance.