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APMH Management & IT Consultant
Author: CA Mitesh Katira
Posted On: Wednesday 04 April 2018

Tags: NBFC IND AS 107 IND AS 32 IND AS 109 ECL model expected credit loss Fair value loan IND AS NPA Adoption of IND AS IND AS Impact on NBFC IND AS

Introduction :

IND AS is hitting the NBFC industry from current financial year & it will become important to understand the potential impact of IND AS on NBFC’s financial statement for forecasting the impact on key ratios, profitability, net worth & other important financial determinants & planning for such forecasted impact in advance rather than facing it without proper preparation.

As per the phase wise roadmap announced by MCA, NBFC will be required to report as per IND AS in following 2 phases:

Phase 1: Mandatory for accounting periods beginning from 1 April 2018 onwards

  • NBFCs having a net worth of 500 crore INR or more
  • Holding, subsidiary, joint venture or associate companies of the above.
  • Comparative information required for the period ending 31 March 2018.

Phase 2: Mandatory for accounting periods beginning from 1 April 2019 onwards

  • All remaining Listed NBFCs (Having Net worth below Rs. 500 crores)
  • NBFCs that are unlisted companies, having a net worth of 250 crore INR or more but less than 500 crore INR
  • Holding, subsidiary, joint venture or associate companies of companies covered above, other than those companies already covered under the corporate roadmap announced by MCA
  • Comparative information required for the period ending 31 March 2019.

Voluntary IND AS adoption option which was available for corporates is not applicable for NBFCs. 

Focus Areas / Major Impact:

Currently NBFCs are following existing Accounting standards issued by ICAI & RBI guidelines. Adoption of IND AS will have considerable impact in many areas & hence understanding those areas of difference becomes important.

  • Financial Instruments

Financial instrument standards (IND AS 109, IND AS 32 & IND AS 107) are considered as challenging standard in terms of practical implementation as well as understanding. In case of NBFC, this standard will have major impact as NBFC’s major balance sheet items are financial instruments only.

Under the existing guidelines issued by the RBI, investments are classified into the held to maturity, available for sale and held for trading. Investments in the shares of subsidiaries are classified under the held to maturity category. According to the current guidelines, net loss in the available for sale and held for trading classifications is computed category wise and recognized in the profit and loss account while net gains are ignored. AS 13 gives limited guidance about classification of investment into long term & current. Fair value emphasis was not there in current Accounting practices. 

As per Ind AS 109, all financial assets (Investments, loans, advances, trade receivables, deposits etc) will have to be classified at amortized costs, fair value through other comprehensive income (FVOCI) or FVTPL. This classification will be decided based on the business model test and the contractual cash flow tests. All unrealized gains or losses for financial assets classified at FVOCI income would be accounted for in the other comprehensive income and on assets at fair value through the profit and loss in the profit and loss account.

  • Impairment of Financial Assets (Expected Credit Loss model)

Under the extant IRACP norms, the provisioning is based on objective criteria fixed by the RBI, which are based on the 180-day past due concept for NBFCs. The provisioning requirements are based on the period for which the asset has remained nonperforming and the security available.

This shows that provisioning is done after actual situation of NPA arising. Though RBI has also prescribed for provision on standard asset as a prudent measure, it still remains rule based provisioning without taking into consideration the actual macro & micro economic factors, business environment, past organization specific history etc.

Ind AS 109 has introduced a new “expected credit loss” (ECL) model for the impairment of financial assets. It applies to financial assets that are not measured at FVTPL, including certain bank deposits, loans, lease and trade receivables, debt securities, and specified financial guarantees and loan commitments issued. The expected credit losses model will likely result in earlier recognition of credit losses because it will require the recognition of either a 12-month or lifetime expected credit loss allowance or provision that includes not only credit losses that have already occurred, but also losses that are expected in the future. The proposals may

Increase the credit loss allowance or provision recorded by many banking entities.

Preparing & setting up a ECL model & its yearly updating will be a challenge faced by NBFCs as it has direct impact on profitability through provisions.

  • Effective Interest rate

Under existing GAAP, loan processing, service charges, commission or such origination fees are charged to P&L in very first year.

Under IND AS these fees will be amortized over the life of loan through EIR(Effective Interest rate) model.

  • Income recognition on NPA

RBI guidelines require interest income on NPAs to be recognized on receipt basis.

Under IND AS, interest income will be recognized on gross carrying amount less impairment in case asset is in stage 3 of ECL. Hence, ECL model will decide the recognition of income on NPA & its timing.

  • Fair valuation disclosures

As explained above, classification & valuation on financial instruments will lead to major use of Fair valuation. Hence, fair valuation being an important aspect, its disclosure & calculation becomes important to understand. IND AS has separate standard IND AS 113 which provide details of computation & disclosure of the computation in financial statement. It provides hierarchy about what inputs should be used in computation.

Entities need to classify and disclose fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements, according to the following levels:

  • Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1)
  • Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (Level 2)
  • Unobservable inputs for the asset or liability (Level 3)
  • Disclosures

IND AS 107 entirely talks about disclosures regarding IND AS to be made in financial statement of the company. Comprehensive information on the fair value of financial instruments would enhance the transparency and accountability of financial statements.

  • Other areas

Other areas like hedge & derivative accounting guidance provided by IND AS, property, plant & equipment valuation & component accounting, related party disclosures & changes in “CONTROL” scenario at consolidation level will become other important factors while IND AS implementation in NBFCs.


NBFC is a financial institution like banking industry & also deals in money & having similar characteristics like banking sector. Hence, IND AS compliance will show a true picture of NBFCs financial statement with maximum use of fair valuation. Also models like ECL may increase early provisioning. So it becomes important for any NBFC to do impact analysis & plan their implementation program along with impact on system & business processes.

Please free to write to us on for any further queries on the above blog.


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