Considerable time of two years had been given to NBFCs and also to professionals to adopt Ind AS itself is an indication that expected impact on the financials for these industries was going to be huge.
- Rajat Mohan and Gaurav Mohan
With Indian Accounting Standards (AS) applicable for various categories of companies and NBFCs, financials of Indian Companies have significantly increased comparability with global companies. Ind AS roadmap was issued by MCA via press release on 18 January 2016. However, Non-Banking Finance Companies (NBFCs) are required to apply for Ind AS from financial year March 2019 with comparative figures of March 2018. One of the rationales for deferred implementation on NBFCs for the transition to Ind AS framework is key impact on its financial statements. In the Indian financial system, NBFCs form an integral part of the system complementing the banking sector and thus it is important that readers of financial statements understand this impact.
Considerable time of two years had been given to NBFCs and also to professionals to adopt Ind AS itself is an indication that expected impact on the financials for these industries was going to be huge. Apart from financial figures, presentation and disclosure, one major impact was expected on financial ratios such as NPA ratio, current ratio.
Most of the NBFCs had taken benefit of relaxation provided by SEBI for the presentation of data on the first-time adoption of Ind AS for publishing results up to December 2018. In Mid of October 2018, MCA came up with notification which prescribes a specific format for presentation of financial statements for all the NBFCs to which Ind AS shall be applicable, however, the period for which the format will be applicable was not clear. In November 2018, BSE with circular notification clarified the period for which new format will be applicable.
From published results of various NBFCs, migration impact has been observed due to provision for expected credit loss (ECL), application of effective interest rate (EIR), valuation of derivatives, investments valuations, recognition of employee cost and deferred tax. This transition has resulted in the temporary deferral of revenues and effect on operating profits. Few of these impacts are analysed in subsequent paragraphs.
Where current accounting GAAP (IGAAP) are silent for treatment of derivative contracts other than forwarding contracts, Ind AS 109 requires recognition of all derivative contracts on the mark to market basis. One more considerable impact is due to no “Prudence” approach for the accounting of derivative contracts which means both losses or gains on mark to market basis needs to be recorded on derivatives under IND AS, whereas under IGAAP only losses were recorded. This can be a positive impact on the bottom line on financial statements of NBFCs because major stream of financials instrument items contains a material weight in the balance sheet.
Borrowing cost now needs to be recognized based on Effective Rate of Interest of Borrowing at Amortised Cost. The effective annual interest rate is the interest rate that is actually earned or paid on an investment, loan or other financial product due to the result of directly attributable and incremental transaction costs such as processing fees, stamp duty, commission to amortise over a period of time along with the cost of borrowing. Under Indian GAAP, in the absence of any specific guidance, these were either accounted upfront or amortised over the contractual term of the instrument.
Another major impact on the bottom line of the financial statement has been observed because of the methodology provided to recognize expected credit loss (ECL) on receivables. Reason for the increased impact is because current Indian GAAP required recognition based on past trends and judgments, Ind AS 109 requires futuristic approach for and requires provision as the difference between contractual cash flow due to entity and cash flow that entity expects to receive.
In an overall view, an increase in quality and comparability of Indian financials with the global market will give investors a clear understanding of performance which will be a great achievement. Impact of the financial results and implementation are just transitional in nature. Basis of recording and reporting transactions by NBFC is up for a change, regulators including corporate affairs and reserve bank of India both would play a role in helping corporate’s transition to this new scheme of reporting in international formats.
Rajat Mohan is a Senior Partner at AMRG & Associates and Gaurav Mohan is CEO of AMRG & Associates. Views expressed are the author’s personal.