Practical Insights on Ind AS and SAs | Applicability of Ind AS to NBFCs

Taxmann presents Practical Insights on Ind AS and SAs, a weekly series exclusively for Accounts and Audit Module subscribers of Taxmann.com, focusing on the practical application of Ind AS and Standards on Auditing through structured, issue-based analysis.

Each week features a focused topic with real-world illustrations. This edition provides practical insights into the applicability and transition-related issues of Ind AS for Non-Banking Financial Companies (NBFCs), supported by regulatory references and real-world illustrative scenarios.

1. Introduction

The convergence to Indian Accounting Standards (Ind AS) represents a major reform in financial reporting, particularly for regulated entities such as Non-Banking Financial Companies (NBFCs), with the objective of improving transparency, consistency, and comparability of financial information. The transition to Ind AS for NBFCs has been introduced in a phased manner under the regulatory framework prescribed by the Reserve Bank of India and the applicable statutory rules, which specify thresholds, implementation timelines, and eligibility criteria. Given the varied business structures and operations within the NBFC sector, entities often encounter practical challenges during transition, especially in areas such as consolidation, net worth determination, and alignment of accounting policies across group entities following different reporting frameworks. This document provides practical insights into these issues through real-world illustrations.

2. Meaning of NBFC

Rule 2(g) of the Companies (Indian Accounting Standards) Rules, 2015, as amended by the Companies (Indian Accounting Standards) Rules, 2016, defines the term Non-Banking Financial Company (NBFC).

An NBFC means a company defined under clause (f) of Section 45-I of the Reserve Bank of India Act, 1934. The definition includes the following types of companies:

• Housing Finance Companies
• Merchant Banking Companies
• Micro Finance Companies
• Mutual Benefit Companies
• Venture Capital Fund Companies
• Stock Broker or Sub-Broker Companies
• Nidhi Companies
• Chit Companies
• Securitisation and Reconstruction Companies
• Mortgage Guarantee Companies
• Pension Fund Companies
• Asset Management Companies
• Core Investment Companies

2.1 Definition of NBFC under RBI Act

As per Section 45-I(f) of the Reserve Bank of India Act, 1934, a Non-Banking Financial Company means:

(a) A financial institution which is a company;

(b) A non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

(c) Such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.

3. Phased Implementation of Ind AS for NBFCs

Ind AS adoption for Non-Banking Financial Companies (NBFCs) was implemented in two phases to facilitate a gradual transition from Accounting Standards (AS) to Ind AS.

3.1 Phase 1 of Ind AS Implementation for NBFCs

Ind AS became applicable for accounting periods beginning on or after 1st April 2018 to:

(a) NBFCs having a net worth of ₹500 crore or more.

(b) Holding companies, subsidiaries, joint ventures or associate companies of such NBFCs.

These companies were required to prepare comparative financial statements for the period ending 31st March 2018.

However, any holding, subsidiary, associate or joint venture of an NBFC that had already adopted Ind AS voluntarily under Rule 4(1)(i) or mandatorily under Rule 4(1)(ii) or (iii) was excluded from this phased implementation.

3.2 Phase 2 of Ind AS implementation for NBFCs

Ind AS became applicable for accounting periods beginning on or after 1st April 2019 to:

(a) NBFCs whose equity or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth less than ₹500 crore.

(b) Unlisted NBFCs having net worth of ₹250 crore or more but less than ₹500 crore.

(c) Holding companies, subsidiaries, joint ventures or associate companies of the above companies.

These companies were required to present comparative financial statements for the period ending 31 st March 2019.

Entities already covered under voluntary or mandatory adoption provisions under Rule 4(1)(i), (ii) or (iii) were excluded from this phase.

Also See – Practical Insights on Ind ASs and SAs – An overview of transitioning framework under Ind AS 101

4. Determination of Net Worth for NBFCs to Determine Applicability of Ind AS

For the purpose of determining the applicability of Ind AS, net worth should be calculated in the following manner:

(a) An existing NBFC should calculate its net worth as on 31st March 2016.

(b) If an NBFC’s first accounting period ends after 31st March 2016, it should calculate net worth at the end of that accounting period.

(c) If an NBFC was not in existence as on 31st March 2016, net worth should be calculated on the basis of its first audited financial statements.

(d) If an existing NBFC meets the specified net worth threshold after 31st March 2016, the net worth should be calculated based on the financial statements of the year in which the threshold is crossed.

(e) Net worth must be calculated on the basis of standalone financial statements.

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