Determining and Explaining the Different Impacts of Indian Accountancy Standards on NBFCs
Indian Accountancy Standards, popularly abbreviated as IndAS, is the new base of Indian financial reporting. Out of its many advantages is its transparency, which has resulted in the quality elevation of financial reporting. Assortment to IndAS has also paved a distinct way for Indian financial statements to comply with the global standards and mould itself with the concurrent pan-global scenario. Indian Banks have resented the implementation of IndAS for a long time now, but NBFCs are the first ones to adopt this. Let us have a look at the fundamental implications of Indian Accountancy Standards on NBFCs.
Writing Off Initial Asset Cost of Fee Income by Effective Interest Rate (EIR)
IndAS says that the fees generated over the loans shall undergo gradual amortization. This writing off shall extend over the loan’s lifespan and directly refer to the deferral of recognition over the revenue. If this is the case, accruing of yield over the loan period by NBFCs will be negatively impacted. This shall directly influence the diminution in the net worth of NBFCs.
This applies to the NBFCs that operate as joint ventures with several partners. IndAS proposes the re-evaluation of the agreement between the partners, resulting in balance sheet consolidation or deconsolidation. Multiple extreme situations can arise under such circumstances. This subsidiary consolidation term is a redefinition of the term Control wrt NBFCs and their relation with the subsidiaries. In some instances, it may also call for turning SPVs into subsidiaries and exerting control over them.
Reporting of Segments
The prevalent system of segment reporting relies on the “risk and reward” similarity mode of operation. Under the IndAS, NBFCs shall have to disclose all the various segments’ information and evaluate their management. These uncovered results shall form the basis of assessment and resource allocation. This is probably the best postulate posed by IndAS, and it helps a lot for the formulation of effective strategy and equitable resource allocation. It truly upholds one of the core objectives of IndAS – to bring about transparency.
Fair Value Implication
The IndAS proposes the fair valuation and recording of financial assets on balance sheets during the transition dates. The reflection of this implication is also observed in the profit and loss statement. This makes the profit and loss parameter much more volatile and dynamic. One can hardly predict whether it will lead to a loss incurred or profitability gained by the company.
Indian Accountancy Standards on NBFCs: Expected Credit Loss
In simple words, ECL is a model that proposes the calculation of loss in loan provision based on the history of the particular loan book. That means NBFCs will have to carry out a credit quality check to determine the expected possibility of future profits and assess the loan book’s history for references regarding the past loss cases. This is an extremely harmful model for novice companies that have nil loan book history.
If we assess overall, the possible impacts of Indian Accountancy Standards on NBFCs is a mixed platter. The changes are welcome, but many of them pose severe challenges to the finance community chain, including the agencies, brokers, investors, regulators, etc. The implication is quite challenging for NBFCs. It is complicated for amateurs of the finance community to understand the impacts of IndAS on NBFCs. For better understanding and expert guidance, you can always contact us at 3E Accounting. The team of accounting experts in India will guide you through the various nooks and corners of the finance industry for easy and hassle-free operation.