Voices on Reporting -Ind AS implementation for NBFCs

20 June 2018

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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

4

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.

6

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

2345

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

Download from www.kpmg.com/in

IFRS Notes

Thank youKPMG in India contacts:

Feedback/queries can be sent to: aaupdate@kpmg.com

Sagar LakhaniPartnerAssuranceE-mail: sagarl@kpmg.com

Venkateswaran NarayananDirectorAccounting Advisory ServicesEmail: vnarayanan4@kpmg.com

Ruchi RastogiPartnerAssuranceE-mail: ruchirastogi@kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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