Disclosures prescribed by Accounting Standards
This Guidance Note deals with only those disclosure requirements where RBI has issued guidelines in respect of disclosure as per Accounting Standards.
1. As the format of the profit and loss account of banks prescribed in Form B under Third Schedule to the Banking Regulation Act 1949 does not specifically provide for disclosure of the impact of prior period items on the current year’s profit and loss, such disclosures, wherever warranted, may be made in the Notes on Accounts of banks. (AS-5, “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”)
2. Disclosure with regards to the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties. (AS-9, “Revenue Recognition”)
3. Banks may follow the disclosure requirements prescribed under AS 15 (revised), ‘Employees Benefits’ issued by ICAI.
4. While complying with AS-17, “Segment Reporting”, banks are required to adopt the following:
i) The business segment should ordinarily be considered as the primary reporting format and geographical segment would be the secondary reporting format.
ii) Reported business segments should be ‘Treasury’, ‘Corporate/Wholesale Banking’, ‘Retail Banking’ and ‘Other banking operations’.
iii) ‘Domestic’ and ‘International’ segments will be the geographic segments for disclosure.
iv) Banks may adopt their own methods, on a reasonable and consistent basis, for allocation of expenditure among the segments. For the formats relating to the segment reporting disclosures, readers may refer to the above Master Circular.
5. Related Parties: Related parties for a bank are its parent, subsidiary(ies), associates/joint ventures, Key Management Personnel (KMP) and relatives of KMP. KMP are the whole time directors for an Indian bank and the chief executive officer for a foreign bank having branches in India Banks need to report related party relationships and transactions between a reporting enterprise and its related parties. No disclosure is required in respect of related parties, which are “State-controlled Enterprises” as per paragraph 9 of Accounting Standard (AS) 18. Further, in terms of paragraph 5 of AS 18, transactions in the nature of Banker-customer relationship are not required to be disclosed in respect of Key Management Personnel and relatives of Key Management Personnel. Further, where there is only one entity in any category of related party, banks need not disclose any details pertaining to that related party other than the relationship with that related party. RBI has modified illustrative disclosure format recommended by the ICAI to suit banks. (AS-18, “Related Party Disclosures”).
6. As regards disclosures in the ‘Notes on Accounts’ to the Consolidated
Financial Statements (AS-21, “Consolidated Financial Statements”), banks may follow the general clarifications issued by Institute of Chartered Accountants of India from time to time. A parent company, presenting the CFS, should consolidate the financial statements of all subsidiaries – domestic as well as foreign, except those specifically permitted to be excluded under the AS-21. The reasons for not consolidating a subsidiary in CFS should be disclosed in the CFS. The responsibility of determining whether a particular entity should be included or not for consolidation would be that of the Management of the parent entity. In case, its Statutory Auditors are of the opinion that an entity, which ought to have been consolidated, has been omitted, they should incorporate their comments in this regard in the “Auditors Report”.
7. Adoption of AS 22, “Accounting for Taxes on Income”, may give rise to creation of either a deferred tax asset (DTA) or a deferred tax liability (DTL) in the books of accounts of banks. This would give rise to certain issues, which have a bearing on the computation of capital adequacy ratio and banks’ ability to declare dividends. In this regard RBI has clarified as under:
(i) DTL created by debit to opening balance of Revenue Reserves on the first day of application of the Accounting Standards 22 or to Profit and Loss account for the current year should be included under item
(vi)‘others (including provisions)’ of Schedule 5 – ‘Other Liabilities and Provisions’ in the balance sheet. The balance in DTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it is not an eligible item of capital.
(ii) DTA created by credit to opening balance of Revenue Reserves on the first day of application of Accounting Standards 22 or to Profit and Loss account for the current year should be included under item (vi) ‘others’ of Schedule 11 ‘Other Assets’ in the balance sheet.
(iii) The DTA computed as under should be deducted from Tier I capital:
DTA associated with accumulated losses; and
The DTA (excluding DTA associated with accumulated losses), net of DTL. Where DTL is in excess of the DTA (excluding DTA associated with accumulated losses), the excess shall neither be adjusted against item (i) nor added to Tier I capital.
8. A bank may acquire more than 20% of voting power in the borrower entity in satisfaction of its advances and it may be able to demonstrate that it does not have the power to exercise significant influence since the rights exercised by it are protective in nature and not participative. In such a circumstance, such investment may not be treated as investment in associate under AS 23, “Accounting for Investments in Associates in Consolidated Financial Statements”. Hence the test should not be merely the proportion of investment but the intention to acquire the power to exercise significant influence.
9. Merger/ closure of branches of banks by transferring the assets/ liabilities to the other branches of the same bank may not be deemed as a discontinuing operation and hence AS 24, “Discontinuing Operations”, will not be applicable to merger / closure of branches of banks by transferring the assets/ liabilities to the other branches of the same bank. Disclosures would be required under the Standard only when:
(i) discontinuing of the operation has resulted in shedding of liability and realization of the assets by the bank or decision to discontinue an operation which will have the above effect has been finalized by the bank and
(ii) the discontinued operation is substantial in its entirety.
10. With regards to Accounting Standard (AS) 25, “Interim Financial Reporting”, the half yearly review prescribed by RBI for public sector banks, in consultation with SEBI, vide circular DBS. ARS. No. BC 13/ 08.91.001/ 2000- 01 dated 17th May 2001 is extended to all banks (both listed and unlisted) with a view to ensure uniformity in disclosures. Banks may also refer to circulars DBS.ARS.No.BC.4/08.91.001/2001-02 dated October 25, 2001 and DBS.ARS.No.BC.17/08.91.001/2002-03 dated June 5, 2003 and adopt the format prescribed by the RBI for the purpose.
11. Other Accounting Standards – Banks are required to comply with the disclosure norms stipulated under the various Accounting Standards issued by the Institute of Chartered Accountants of India.
Other Disclosures:
Disclosure as required under Micro, Small and Medium Enterprises Development Act, 2006 (MSMED).
The disclosure requirements in Section 22 requires any buyer, whose annual accounts audited under any law for the time being in force, to furnish the following additional information in his annual statement of accounts. 12.56 The following details relating to Micro, Small and Medium Enterprises shall be disclosed in the notes:-
1. The principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier at the end of each accounting year;
2. The amount of interest paid by the buyer in terms of section 16 of the Micro, Small and Medium Enterprises Development Act, 2006, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;
3. The amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under the Micro, Small and Medium Enterprises Development Act, 2006;
4. The amount of interest accrued and remaining unpaid at the end of each accounting year; and
5. The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues above are actually paid to the small enterprise, for the purpose of disallowance of a deductible expenditure under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006.