Voices on Reporting - Ind AS implementation for NBFCs · investment properties and intangible...
Transcript of Voices on Reporting - Ind AS implementation for NBFCs · investment properties and intangible...
Voices on Reporting -Ind AS implementation for NBFCs
20 June 2018
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KPMG.com/in
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Welcome
01 Series of knowledge sharing calls
03 Scheduled towards the end of each month
02 Covering current and emerging reporting issues
04 Look out for our Accounting and Auditing Update, IFRS Notes and First Notes publications
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Speakers for the call
Ruchi RastogiPartner
AssuranceKPMG in India
Sagar LakhaniPartner
AssuranceKPMG in India Accounting Advisory Services
KPMG in India
Venkateswaran NarayananDirector
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Ind AS road map for NBFCs – Quick recap
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Ind AS implementation road map – Quick recapNBFCs – Phase I NBFCs – Phase II
Date of transition: 1 April 2018
First Ind AS financial statements: 2019-20
Comparative year: 2018-19
a) 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 with net worth of less than INR500 crore
b) NBFCs that are unlisted entities, with net worth of INR250 crore or more but less than INR500 crore
c) Holding, subsidiary, joint venture or associate entities of the above class of entities, other than those already covered under the corporate road map.
Date of transition: 1 April 2017
First Ind AS financial statements: 2018-19
Comparative year: 2017-18
a) NBFCs with net worth of INR500 crore or more, and
b) Their holding, subsidiary, joint venture or associate entities, other than those entities already covered under the corporate road map.
• The NBFCs with a net worth below INR250 crores and not covered in Phase I or II will continue to comply with the existing accounting standards.
• On 14 June 2018, the National Housing Bank (NHB) issued a circular and reiterated that Housing Finance Companies (HFCs) should implement Ind AS from 1 April 2018.
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Ind AS – Key impact areas for NBFCs
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Financial instruments - Business model assessment
Determination of business model
• In order to classify and measure financial assets, entities need to assess the business model.
• Business model is required to determine the basis of measurement for financial assets at amortised cost, Fair Value Through Profit and Loss (FVTPL) or Fair Value Through Other Comprehensive Income (FVOCI).
• Business model is required to be approved by key management personnel.
Key issue
• Transactions such as securitisation/direct assignment of loans may affect the business model within which underlying loans are measured.
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Derecognition
• Ind AS 109, Financial Instruments specifies the criteria for derecognition of a financial asset.• The derecognition criteria would apply if any of the below mentioned criteria is met:
a) The cash flows from that portion of the asset are specifically identifiable, b) The cash flows are a proportionate share of the total cash flows of the asset, or c) The cash flows are a proportionate share of specifically identified cash flows of the asset.
Accounting guidance
• Securitisation/direct assignment transactions which qualify for ‘true sale’ accounting under Indian GAAP may not do so under Ind AS.
• Under Ind AS, true sale may not be adequate, additionally risks and rewards also need to be transferred.
• All losses and gains on derecognition of a financial asset are to be recognised upfront i.e. they cannot be deferred.
• The RBI stance on Priority Sector Lending (PSL) will be an important driver on how transactions are structured in future.
• Need to assess possible impact on consolidated financial statements in case of securitisation.
Key issues
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Financial instruments – Equity vs financial liability
Potential impactSubstance of the contractual arrangement determines classification of an instrument as equity and/or financial liability classification e.g.
• Redeemable preference shares are presented as financial liability
• Convertible bonds/debentures may need to be split between liability and equity.
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Financial instruments – Expected Credit Loss (ECL)
12-month expected loss
Lifetime expected loss
Lifetime expected loss
EIR* on gross amount (excluding
loss allowance)
EIR* on gross amount (excluding
loss allowance)
Stage 1 Stage 2 Stage 3
EIR* on amortised cost (net of loss
allowance)
Increase in credit risk since initial recognition
Impairment recognition
Interest revenue recognition
Losses resulting from default events possible within 12 months after reporting date.
12-month expected credit losses
Losses resulting from all possible default events over expected life of financial instrument.
Lifetime expected credit losses
General approach
*EIR – Expected Interest Rate
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ECL – Key considerations
Investment portfolio/non fund
coverageSegmentation
Staging determination
Expected loss computation
Cliff effects
Data requirements
Impact on capital requirements
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Impairment of financial assets – Key decisions
Definition of default
Segmentation
Exposure At Default (EAD)
Significant Increase in Credit Risk(SICR)
Loss Given Default (LGD)
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EIR – Income recognition
Guidance under Ind AS 109• Financial assets and liabilities that are classified at amortised
cost are subsequently measured using EIR method under Ind AS 109.
• Financial assets classified into FVOCI category may also require application of the EIR method for recognition of interest income.
Determination of EIR – Key considerations
• Only directly attributable and incremental fees and costs to be considered.
• The fees and costs would need to be amortised over the expected life of the contract.
• Interest income continues to be recognised on financial assets classified within Stage 3.
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First-time adoption considerations
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1 Application of derecognition requirements of Ind AS 109 for transfers done on or from the date of transition.
The NBFC may choose not to apply the requirements of Ind AS 102, Share-based Payments) to equity instruments that vested before the date of transition to Ind AS.
Classification of financial assets as measured at amortised cost/fair value through comprehensive income should be based on facts/circumstances as on the date of transition to Ind AS.
As on the date of transition, the NBFC has the option to grandfather Indian GAAP carrying amounts as deemed cost under Ind AS for property, plant and equipment, investment properties and intangible assets.
Differences in the amount arising from transition to Ind AS would form part of retained earnings as a transitional reserves.
On the date of transition in the stand-alone financial statements, the NBFC has an option to account for investment in subsidiaries, joint ventures and associates either at cost or fair value.
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Other issues
Consolidation • Consolidation of trust or funds.
Segment reporting• Under Ind AS segment reporting model requires management approach.
Impact on key ratios• Cost to income.• Gross Non-Performing Asset (NPA), provision coverage.• Return on assets/return on equity.
Employee benefits• Actuarial gain or loss will be recognised in other comprehensive income.• Employee Stock Option Plan (ESOP) computation in unlisted companies.
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Disclosure requirements
Fair valuation and fair value related hierarchy disclosures
Credit quality, rating and past due status disclosures
Reconciliation type disclosures
Extensive disclosures required to be provided –includes qualitative and quantitative information
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Key points for consideration
New transactions/customers Capital raising and related disclosures
Integration of changes into the business
Budgeting and forecasting for 2018-19
Process, technology and governance
Communicating with investors
Integrating current disclosures with first-time adoption choices
Q&A
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Links to previous recordings of VOR
Month Topics Link
January 2018
• Companies (Amendment) Bill, 2017• SEBI Corporate Governance Committee Report• ITFG clarification: Bulletin 12• Delhi HC decision on constitutional validity of ICDS
Click here
January 2018(special session) • Ind AS 115, Revenue from Contract with Customers Click here
March 2018(special session) • Ind AS 115 - Sector series 1 Click here
April 2018
• Ind AS 115, Revenue from Contracts with Customers• New/revised Standards on Auditing (SAs)• SEBI accepts some recommendations of the committee report on corporate
governance• Other regulatory updates
Click here
April 2018(special session) • Ind AS 115 - Sector series 2 Click here
May 2018(special session) • SEBI implements Kotak Committee recommendations Click here
June 2018 • Special session on ICDS implementation issues Click here
For other archives of VOR calls, visit www.KPMG.com/in
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Coming up next
Our Publications
New issue of:• Accounting and Auditing Update • First Notes• IFRS Notes
Accounting and Auditing Update First Notes
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IFRS Notes
Thank youKPMG in India contacts:
Feedback/queries can be sent to: [email protected]
Sagar LakhaniPartnerAssuranceE-mail: [email protected]
Venkateswaran NarayananDirectorAccounting Advisory ServicesEmail: [email protected]
Ruchi RastogiPartnerAssuranceE-mail: [email protected]
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