NPA tag does not remove interest liability: NFRA | The Financial Express

NPA tag does not remove interest liability: NFRA

To ensure that such violations do not occur when firms make financial statements, the NFRA has issued a circular dated October 20.

NPA tag does not remove interest liability: NFRA
It may be relevant to note that the RBI guidelines also require the banks to maintain a memorandum record of accrued interest on the loans classified as NPAs, reflecting the fact that the bank has not yet legally released the borrowers from their contractual liability to pay interest on their borrowings from the bank. (IE)

Discontinuation of interest expense recognition based solely on the expectations of waiver or concession by the lender is a violation of the Indian Accounting Standards, the National Financial Reporting Authority (NFRA) said, cautioning against such practices by firms with regard to loans classified as NPAs.

To ensure that such violations do not occur when firms make financial statements, the NFRA has issued a circular dated October 20. The idea is to draw the attention of all companies, audit committees and statutory auditors. Also, company secretaries have been advised to take note and apprise the boards of directors of companies of the issue.

“It has come to the attention of the NFRA during a disciplinary action under Section 132(4) of the Act for professional misconduct of the statutory auditor (CA Som Prakash Aggarwal) of a listed company (Vikas WSP Limited), that the company in the Financial Statements of 2019-20, had discontinued accrual/recognition of interest expense on its bank borrowings, which had been reportedly classified as non-performing asset (NPA) by the lender banks and for which the company was negotiating one time settlement with the banks,” the NFRA said.

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This accounting treatment was in contravention of the provisions of applicable accounting standards, as these borrowings, as well the interest payable thereon, continued to be the financial liabilities of the company and were required to be accounted for as amortised cost, following the requirements of Indian Accounting Standard (Ind AS) 109, Financial Instruments. Similar violations have been observed in respect of several other companies too, it said.

“Mere classification of the company’s borrowings as NPAs by the lender banks does not relieve the borrowing company from its liability towards payment of interest and/or the principal,” the NFRA said.

It may be relevant to note that the RBI guidelines also require the banks to maintain a memorandum record of accrued interest on the loans classified as NPAs, reflecting the fact that the bank has not yet legally released the borrowers from their contractual liability to pay interest on their borrowings from the bank.

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In the above context, it said the discontinuation of interest expense recognition on borrowings without evidence of the legally enforceable contractual documents results in an incorrect presentation of financial performance and financial position of the borrowing company to its shareholders, investors, creditors and lenders.

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First published on: 29-10-2022 at 01:00 IST