Voices on Reporting - Ind AS implementation for NBFCs 20 June 2018 KPMG.com/in
Welcome 01 Series of knowledge sharing calls 02 Covering current and emerging reporting issues 03 Scheduled towards the end of each month 04 Look out for our Accounting and Auditing Update, IFRS Notes and First Notes publications 2018 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. 2
Speakers for the call Sagar Lakhani Partner Assurance KPMG in India Venkateswaran Narayanan Director Accounting Advisory Services KPMG in India Ruchi Rastogi Partner Assurance KPMG in India 2018 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. 3
Ind AS road map for NBFCs Quick recap 4
Ind AS implementation road map Quick recap NBFCs Phase I NBFCs Phase II 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. 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. 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. 2018 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. 5
Ind AS Key impact areas for NBFCs 6
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. 2018 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. 7
Derecognition Accounting guidance 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. Key issues 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. 2018 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. 8
Financial instruments Equity vs financial liability Potential impact Substance 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. 2018 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. 9
Financial instruments Expected Credit Loss (ECL) General approach Increase in credit risk since initial recognition Stage 1 Stage 2 Stage 3 Impairment recognition 12-month expected credit losses Losses resulting from default events possible within 12 months after reporting date. 12-month expected loss Lifetime expected loss Lifetime expected loss Lifetime expected credit losses Interest revenue recognition Losses resulting from all possible default events over expected life of financial instrument. EIR* on gross amount (excluding loss allowance) EIR* on gross amount (excluding loss allowance) EIR* on amortised cost (net of loss allowance) *EIR Expected Interest Rate 2018 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. 10
ECL Key considerations Investment portfolio/non fund coverage Segmentation Staging determination Expected loss computation Data requirements Cliff effects Impact on capital requirements 2018 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. 11
Impairment of financial assets Key decisions Definition of default Segmentation Significant Increase in Credit Risk (SICR) Loss Given Default (LGD) Exposure At Default (EAD) 2018 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. 12
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. 2018 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. 13
First-time adoption considerations 1 Application 2 3 4 5 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, Sharebased 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. 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. 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. 2018 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. 14
Other issues Consolidation Consolidation of trust or funds. Employee benefits Actuarial gain or loss will be recognised in other comprehensive income. Employee Stock Option Plan (ESOP) computation in unlisted companies. 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. 2018 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. 15
Disclosure requirements Fair valuation and fair value related hierarchy disclosures Reconciliation type disclosures Credit quality, rating and past due status disclosures Extensive disclosures required to be provided includes qualitative and quantitative information 2018 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. 16
Key points for consideration Budgeting and forecasting for 2018-19 Process, technology and governance New transactions/customers Capital raising and related disclosures Integration of changes into the business Communicating with investors Integrating current disclosures with first-time adoption choices 2018 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. 17
Q&A
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 2018 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. 19
Our Publications Accounting and Auditing Update First Notes Coming up next New issue of: Accounting and Auditing Update First Notes IFRS Notes Download from www.kpmg.com/in IFRS Notes 2018 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. 20
Thank you KPMG in India contacts: Sagar Lakhani Partner Assurance E-mail: sagarl@kpmg.com Ruchi Rastogi Partner Assurance E-mail: ruchirastogi@kpmg.com Venkateswaran Narayanan Director Accounting Advisory Services Email: vnarayanan4@kpmg.com Feedback/queries can be sent to: aaupdate@kpmg.com
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