The government announces a road map for Ind AS implementation by banks, insurers and NBFCs

The government announces a road map for Ind AS

On 18 January 2016, the Ministry of Corporate Affairs (MCA) issued a press release announcing a road map for implementation of Indian Accounting Standards (Ind AS) converged with International Financial Reporting Standards (IFRS) for Scheduled Commercial Banks (banks), Insurance Companies and Non-Banking Financial Companies (NBFCs).

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This press release follows from the announcement by the Union Finance Minister in his budget speech in July 2014 on the convergence with IFRS, and requires adoption of Ind AS for accounting periods beginning from 1 April 2018 onwards for the above mentioned entities. It has been issued subsequent to consultations with the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA).

Background

The MCA through its notification dated 16 February 2015 issued a road map for implementation of Ind AS by companies other than banking companies, insurance companies and NBFCs.

On 29 September 2015, the RBI had recommended a road map to MCA for implementation of Ind AS from 2018-19 onwards for banks and NBFCs. Further, in October 2015, RBI issued a report of its Working Group on implementation of Ind AS by banks in India. This provided recommendations on key areas with a focus on financial instruments, as well as formats for financial statements of banks under Ind AS.

Further, the IRDA, through its order on 17 November 2015 stated that the insurance sector in India would be converging with IFRS after the issuance of the revised IFRS 4, Insurance Contracts (IFRS 4) by the International Accounting Standards Board (IASB). Currently, IFRS 4 is being deliberated by IASB and a final standard is expected to be issued later this year. On 7 December 2015, IRDA also issued a Discussion Paper on Ind AS implementation in the insurance sector with key recommendations.

The MCA press release on 18 January 2016 now provides certainty and states that rules/notifications will be issued by MCA, RBI and IRDA in due course mandating the implementation of Ind AS.

Overview

Banks and insurers/insurance companies 

From accounting periods beginning on or after 1 April 2018, following entities would prepare financial statements based on Ind AS (with comparatives for the periods ending on or after 31 March 2018):

  • Scheduled Commercial Banks (excluding Regional Rural Banks (RRBs) and Urban Cooperative Banks (UCBs))
  • All-India Term Lending Refinancing Institutions, and Insurers/insurance companies.
  • Ind AS would be applicable to both consolidated and individual financial statements.

In addition, the holding, subsidiary, joint venture or associate companies of banks would also be required to prepare Ind AS financial statements for accounting periods beginning on or after 1 April 2018, notwithstanding the road map issued for companies by MCA in February 2015.

UCBs and RRBs will continue to comply with the existing accounting standards to present their financial statements.

NBFCs

NBFCs would be required to prepare financial statements based on Ind AS in two phases.

Phase I

For accounting periods beginning from 1 April 2018 onwards, with comparatives for the periods ending on or after 31 March 2018:

  • NBFCs having a net worth of INR500 crore or more, and
  • Their holding, subsidiary, joint venture or associate companies, other than those companies already covered under the road map for companies issued by MCA in February 2015.

Phase II

For accounting periods beginning from 1 April 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 a net worth of less than INR500 crore.
  • NBFCs that are unlisted companies, having a net worth of INR250 crore 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 under the road map for companies issued by MCA in February 2015.

NBFCs with a net worth below INR250 crore and not covered in Phase I or II will continue to comply with the existing accounting standards.

Next steps

The press release is expected to be followed by the issuance of a formal notification/rules by MCA, RBI and IRDA. We expect that these will provide greater clarity on how the specified criteria should be applied to banks, insurance companies and NBFCs.

Our comments

Significant changes having an organisation wide impact 

The adoption of Ind AS by banks, insurance companies and NBFCs could have a significant impact on not just financial reporting, but also the way these entities are managed and the way they do business. In particular, the changes around the classification and measurement of financial assets, and the adoption of an expected loss model for loan loss provisioning would make the financial reporting more aligned to the company’s business model and risk management policies. This might also involve a significant overhaul of the internal processes and technology systems to enable capture of the relevant data and generation of financial information. This could also require significant changes to business and contracting processes, internal controls, etc.

Transition date

The press release states that the holding, subsidiary, joint venture or associate companies of banks would also be required to prepare Ind AS based financial statements for accounting periods beginning on or after 1 April 2018, notwithstanding the road map for companies issued earlier by MCA. It looks like group entities of banks will be covered from 2018, while group entities of NBFCs will be from 2018 or earlier, as applicable.

Timelines applicable to group entities

The press release states that the holding, subsidiary, joint venture or associate companies of banks would also be required to prepare Ind AS based financial statements for accounting periods beginning on or after 1 April 2018, notwithstanding the road map for companies issued earlier by MCA. It looks like group entities of banks will be covered from 2018, while group entities of NBFCs will be from 2018 or earlier, as applicable.

IFRS 4 not yet issued

The IRDA, in its order dated 17 November 2015, stated that the insurance sector in India would converge with IFRS after the revised standard on insurance contracts – IFRS 4 has been issued by IASB.

This is expected to be released in its final form later this year. The new standard is unlikely to be applicable internationally in 2018-19. In fact, IASB has proposed a deferral of the provisions of IFRS 9, Financial Instruments for insurance companies until IFRS 4 becomes applicable.

Therefore, it is unclear whether insurance companies in India will be required to apply the new standard prior to their international peers. This may pose several implementation difficulties when interpreting and applying the provisions of the new standard and the MCA should also take cognizance of the recent experience around implementation of the revenue standard (Ind AS 115, Revenue from Contracts with Customers) ahead of the rest of the world.

Voluntary adoption not permitted

Banks, NBFCs and insurance companies may apply Ind AS in preparing their financial statements only if they meet the criteria specified in this press release and are not permitted to voluntarily adopt Ind AS. However, financial information based on Ind AS can be provided for preparation of consolidated financial statements by the parent company/an investor as required by law.

Areas requiring further clarity

  • Reference date for calculation of net worth: The road map does not specify the reference date for calculation of net worth to determine if an entity meets the criteria for Ind AS implementation. Further, it does not specify whether consolidated or individual financial statements should be used in determining this net worth. While the notification/rules are likely to provide clarity on these matters, we expect that net worth would be determined on the basis of individual financial statements.
  • Applicability of this road map to subsidiaries, associates and joint ventures of banks: The press release states that holding, subsidiary, joint venture and associate companies of banks would implement Ind AS for accounting periods beginning on or after 1 April 2018, notwithstanding the corporate road map issued by MCA in February 2015. Therefore, the rules would need to provide clarity on how this implementation road map would apply to such companies that are already covered in the corporate road map.

To access the text of the MCA press release, please click here.

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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