RBI/2007-08/53
DBOD.BP.BC No.14 / 21.04.018/2007-08

July 2, 2007

The Chairmen/Chief Executives of
All Commercial Banks
(excluding RRBs)

Dear Sir,

Master Circular - Disclosure in Financial Statements - Notes to Accounts

Please refer to the master circular DBOD.BP.BC.No.16/21.04.018/2006-07 dated July 1, 2006 consolidating all operative instructions issued to banks till June 30, 2006 on matters relating to disclosures in the ‘Notes to Accounts’. The Master Circular has now been suitably updated by incorporating instructions issued upto June 30, 2007. The Master Circular has also been placed on the RBI web-site (http://www.rbi.org.in).

Yours faithfully,

(Prashant Saran)
Chief General Manager-in-Charge

Purpose

To provide a detailed guidance to banks in the matter of disclosures in the ‘Notes to Accounts’ to the Financial Statements.

Classification

Master Circular. A statutory guideline issued by the Reserve Bank of India under Section 35A of the Banking Regulation Act 1949.

Previous Guidelines superseded

Master Circular on ‘Disclosure in Balance Sheets’ issued vide DBOD.BP.BC No.16/21.04.018/2006-07 dated July 1, 2006

Scope of application

To all commercial banks (except RRBs and LABs)

Structure

1. Introduction

The users of the financial statements need information about the financial position and performance of the bank in making economic decisions. They are interested in its liquidity and solvency and the risks related to the assets and liabilities recognised on its balance sheet and to its off balance sheet items. In the interest of full and complete disclosure, some very useful information is better provided, or can only be provided, by notes to the financial statements. The use of notes and supplementary information provides the means to explain and document certain items, which are either presented in the financial statements or otherwise affect the financial position and performance of the reporting enterprise. Recently, a lot of attention has been paid to the issue of market discipline in the banking sector. Market discipline, however, works only if market participants have access to timely and reliable information, which enables them to assess banks’ activities and the risks inherent in these activities. Enabling market discipline may have several benefits. Market discipline has been given due importance under Basel II by recognizing it as one of its three Pillars.

2.1 Presentation

‘Summary of Significant Accounting Policies’ and ‘Notes to Accounts’ may be shown under Schedule 17 and Schedule 18 respectively, to maintain uniformity.

2.2 Minimum Disclosures

At a minimum, the items listed in the circular should be disclosed in the ‘Notes to Accounts’. Banks are also encouraged to make more comprehensive disclosures than the minimum required under the circular if they become significant and aid in the understanding of the financial position and performance of the bank. The disclosure listed is intended only to supplement, and not to replace, other disclosure requirements under relevant legislation or accounting and financial reporting standards. Where relevant, a bank should comply with such other disclosure requirements as applicable.

2.3 Summary of Significant Accounting Policies

Banks should disclose the accounting policies regarding key areas of operations at one place (under Schedule 17) along with notes to accounts in their financial statements. A suggestive list includes - Basis of Accounting, Transactions involving foreign exchange, Investments – classification, valuation, etc, Advances and Provisions thereon, Fixed Assets and Depreciation, Revenue Recognition, Employee Benefits, Provision for Taxation, Net Profit, etc, etc.

2.4 Disclosure Requirements

In order to encourage market discipline, Reserve Bank has over the years developed a set of disclosure requirements which allow the market participants to assess key pieces of information on capital adequacy, risk exposures, risk assessment processes and key business parameters which provide a consistent and understandable disclosure framework that enhances comparability. Banks are also required to comply with the Accounting Standard (AS I) on Disclosure of Accounting Policies issued by the Institute of Chartered Accountants of India (ICAI). The enhanced disclosures have been achieved through revision of Balance Sheet and Profit & Loss Account of banks and enlarging the scope of disclosures to be made in “Notes to Accounts”. In addition to the 16 detailed prescribed schedules to the balance sheet, banks are required to furnish the following information in the “Notes to Accounts”:

3.1  Capital

*The total amount of subordinated debt through borrowings from Head Office for inclusion in Tier II capital may be disclosed in the balance sheet under the head 'Subordinated loan in the nature of long term borrowings in foreign currency from Head Office'.

3.2 Investments

3.2.1 Repo Transactions

3.2.2.  Non-SLR Investment Portfolio

i) Issuer composition of Non SLR investments

Note: (1) *Total under column 3 should tally with the total of Investments included under the following
categories in Schedule 8 to the balance sheet :

a) Shares
b) Debentures & Bonds
c) Subsidiaries/joint ventures
d) Others

(2) Amounts reported under columns 4, 5, 6 and 7 above may not be mutually exclusive.

ii)  Non performing Non-SLR investments

3.3 Derivatives

3.3.1 Forward Rate Agreement/ Interest Rate Swap

Note: Nature and terms of the swaps including information on credit and market risk and the accounting policies adopted for recording the swaps should also be disclosed.

$ Examples of concentration could be exposures to particular industries or   swaps with highly geared companies
@ If the swaps are linked to specific assets, liabilities, or commitments, the fair value would be the estimated amount that the bank would receive or pay to terminate the swap agreements as on the balance sheet date. For a trading swap the fair value would be its mark to market value.

3.3.2 Exchange Traded Interest Rate Derivatives

3.3.3 Disclosures on risk exposure in derivatives

Qualitative Disclosure

Banks shall discuss their risk management policies pertaining to derivatives with particular reference to the extent to which derivatives are used, the associated risks and business purposes served. The discussion shall also include:

a) the structure and organization for management of risk in derivatives trading,

b) the scope and nature of risk measurement, risk reporting and risk monitoring systems,

c) policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants, and

d) accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation.

Quantitative Disclosures

3.4 Asset Quality

3.4.1 Non-Performing Asset

3.4.2 Details of Loan Assets subjected to Restructuring

3.4.3 Details of financial assets sold to Securitisation/Reconstruction Company for Asset Reconstruction

3.4.4   Details of non-performing financial assets purchased/sold

Banks which purchase non-performing financial assets from other banks shall be required to make the following disclosures in the Notes on Accounts to their Balance sheets:

A. Details of non-performing financial assets purchased:

B. Details of non-performing financial assets sold:

3.4.5 Provisions on Standard Asset

Note: Provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets', under 'Other Liabilities and Provisions - Others' in Schedule No. 5 of the balance sheet.

3.5. Business Ratio

$ Working funds to be reckoned as average of total assets (excluding accumulated losses, if any) as reported to Reserve Bank of India in Form X under Section 27 of the Banking Regulation Act, 1949, during the 12 months of the financial year.

@'Return on Assets would be with reference to average working funds (i.e. total of assets excluding accumulated losses, if any).

# For the purpose of computation of business per employee (deposits plus advances) inter bank deposits may be excluded.

3.6 Asset Liability Management

Maturity pattern of certain items of assets and liabilities

3.7  Exposures

3.7.1 Exposure to Real Estate Sector

3.7.2   Exposure to Capital Market

3.7.3   Risk Category wise Country Exposure

Till such time, as banks move over to internal rating systems, banks may use the seven category classification followed by Export Credit Guarantee Corporation of India Ltd. (ECGC) for the purpose of classification and making provisions for country risk exposures. ECGC shall provide to banks, on request, quarterly updates of their country classifications and shall also inform all banks in case of any sudden major changes in country classification in the interim period.

3.7.4 Details of Single Borrower Limit (SGL), Group Borrower Limit (GBL) exceeded by the bank.

The bank should make appropriate disclosure in the ‘Notes on account’ to the annual financial statements in respect of the exposures where the bank had exceeded the prudential exposure limits during the year. The sanctioned limit or entire outstanding, whichever is high, shall be reckoned for arriving at exposure limit and for disclosure purpose.

3.8 Miscellaneous

3.8.1 Amount of Provisions made for Income-tax during the year;

3.8.2 Disclosure of Penalties imposed by RBI

At present, Reserve Bank is empowered to impose penalties on a commercial bank under the provision of Section 46 (4) of the Banking Regulation Act, 1949, for contraventions of any of the provisions of the Act or non-compliance with any other requirements of the Banking Regulation Act, 1949; order, rule or condition specified by Reserve Bank under the Act. Consistent with the international best practices in disclosure of penalties imposed by the regulator, it has been decided that the details of the levy of penalty on a bank in public domain will be in the interests of the investors and depositors. It has also been decided that strictures or directions on the basis of inspection reports or other adverse findings should be placed in the public domain. The penalty should also be disclosed in the "Notes on Accounts" to the Balance Sheet.

4. Disclosure Requirements as per Accounting Standards where RBI has issued guidelines in respect of disclosure items for ‘Notes to Accounts :

4.1 Accounting Standard 5 – Net Profit or Loss for the period, prior period items and changes in accounting policies.

Since the format of the profit and loss accounts 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 to the balance sheet of banks.

4.2 Accounting Standard 9 – Revenue Recognition

This Standard requires that in addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of Accounting Policies’ (AS 1), an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.

4.3 Accounting Standard 15 – Employee Benefits

Banks may disclose the change in accounting policy in the appropriate schedule relating to ‘Significant changes in Accounting Policies’ / ‘Principal Accounting Policies’. The Board of Directors of a bank must disclose the accounting policies followed in respect of VRS expenditure. If VRS applications were accepted subsequent to the closure of the accounting year, the Board of Directors would be required to make a disclosure in the Board Report of that fact and of the likely impact of the VRS.

4.4 Accounting Standard 17 – Segment Reporting

While complying with the Accounting Standard, banks are required to adopt the following:

a) The business segment should ordinarily be considered as the primary reporting format and geographical segment would be the secondary reporting format.

b) The business segments will be ‘Treasury’, ‘Corporate/Wholesale Banking’, ‘Retail Banking’ and ‘Other banking operations’.

c) ‘Domestic’ and ‘International’ segments will be the geographic segments for disclosure.

d) Banks may adopt their own methods, on a reasonable and consistent basis, for allocation of expenditure among the segments.

Part B: Geographic segments

4.5 Accounting Standard 18 – Related Party Disclosures

This Standard is applied in reporting related party relationships and transactions between a reporting enterprise and its related parties. The illustrative disclosure format recommended by the ICAI as a part of General Clarification (GC) 2/2002 has been suitably modified to suit banks. The illustrative format of disclosure by banks for the AS is furnished below.

Accounting Standard 18 - Format for Related Party Disclosures
The manner of disclosures required by paragraphs 23 and 26 of AS 18 is illustrated below.  It may be noted that the format is merely illustrative and is not exhaustive.

Note: 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 [c.f. Para 8.3.1 of the Guidelines]

* Contract services etc. and not services like remittance facilities, locker facilities etc.

@  Whole time directors of the Board and CEOs of the branches of foreign banks in India.

#   The outstanding at the year-end and the maximum during the year are to be disclosed.

Illustrative disclosure of names of the related parties and their relationship with the bank

1. Parent                                                                      A Ltd
2. Subsidiaries                                                              B Ltd and C Ltd
4. Associates                                                                P Ltd, Q Ltd and R Ltd
5. Jointly controlled entity                                               L Ltd
6. Key Management Personnel                                       Mr.M and Mr.N
7. Relatives of Key Management Personnel                      Mr.D and Mr.E

4.6  Accounting Standard 21 – Consolidated Financial Statements

As regards disclosures in the ‘Notes on Accounts’ to the Consolidated Financial Statements, banks may be guided by general clarifications issued by Institute of Chartered Accountants of India from time to time.

A parent, 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 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".

4.7 Accounting Standard 22 – Accounting for Taxes on Income

This Standard is applied in accounting for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements. Adoption of AS 22 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 and creation of DTA or DTL 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 it is clarified as under:

• 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.



• 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.



• Creation of DTA results in an increase in Tier I capital of a bank without any tangible asset being added to the banks’ balance sheet. Therefore, in terms of the extant instructions on capital adequacy, DTA, which is an intangible asset, should be deducted from Tier I Capital.

4.8 Accounting Standard 23 – Accounting for Investments in Associates in Consolidated Financial Statements

This Accounting Standard sets out principles and procedures for recognising, in the consolidated financial statements, the effects of the investments in associates on the financial position and operating results of a group. 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 this Accounting Standard. Hence the test should not be merely the proportion of investment but the intention to acquire the power to exercise significant influence.

4.9 Accounting Standard 24 – Discontinuing Operations

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 this Accounting Standard 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:

a) discontinuing of the operation has resulted in shedding of liability and realisation of the assets by the bank or decision to discontinue an operation which will have the above effect has been finalised by the bank and

b) the discontinued operation is substantial in its entirety.

4.10 Accounting Standard 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 adopt the format prescribed by the RBI for the purpose.

4.11 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.

4.12 Additional Disclosures

4.12.1 Provisions and Contingencies

To facilitate easy reading of the financial statements and to make the information on all Provisions and Contingencies available at one place, banks are required to disclose in the ‘Notes to Accounts’ the following information:

4.12.2 Floating Provisions

Banks should make comprehensive disclosures on floating provisions in the “notes to accounts” to the balance sheet as follows:

Note: The purpose of draw down made during the accounting year may be mentioned

4.12.3 Draw Down from Reserves

Suitable disclosures are to be made regarding any draw down of reserves in the ‘Notes to Accounts’ to the Balance Sheet.

4.12.4 Disclosure of complaints

Banks are also advised to disclose the following brief details along with their financial results:

A. Customer Complaints

B. Awards passed by the Banking Ombudsman

Annex 1

Annex 2

List of Circular consolidated by the Master Circular