Master Circular - Disclosure in Financial Statements - Notes to Accounts - RBI - Reserve Bank of India
Master Circular - Disclosure in Financial Statements - Notes to Accounts
RBI/2012-13/41 July 2, 2012 The Chairmen/Chief Executives of Dear Sir, Master Circular - Disclosure in Financial Statements - Notes to Accounts Please refer to the Master Circular DBOD.BP.BC.No.16/21.04.018/2011-12 dated July 1, 2011 consolidating all operative instructions issued to banks till June 30, 2011 on matters relating to disclosures in the ‘Notes to Accounts’ to the Financial Statements. The Master Circular has now been suitably updated by incorporating instructions issued upto June 30, 2012. The Master Circular has also been placed on the RBI web-site (http://www.rbi.org.in). 2. It may be noted that all relevant instructions on the above subject contained in the circulars listed in the Annex have been consolidated. In addition, disclosure requirements contained in "Master Circular – Prudential Guidelines on Capital Adequacy and Market Discipline - Implementation of the New Capital Adequacy Framework (NCAF)" will be applicable. 3. Further, Guidelines on Implementation of Basel III Capital Regulations in India have been issued vide Circular DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012. Disclosure requirements specified vide these guidelines, when effective, would be in addition to the instructions consolidated in this Master Circular. Yours faithfully, (Deepak Singhal) Purpose To provide a detailed guidance to banks in the matter of disclosures in the ‘Notes to Accounts’ to the Financial Statements. Classification 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 Previous Guidelines superseded Master Circular on ‘Disclosure in Financial Statements – Notes to Accounts’ issued vide DBOD.BP.BC No.16/21.04.018/2011-12 dated July 1, 2011. Scope of application To all scheduled commercial banks (excluding RRBs).
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 framework on capital adequacy by recognizing it as one of its three Pillars. Summary of Significant Accounting Policies’ and ‘Notes to Accounts’ may be shown under Schedule 17 and Schedule 18 respectively, to maintain uniformity. 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. 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 1 (AS 1) 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”:
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3.2.1 Repo Transactions (in face value terms)
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3.2.2. Non-SLR Investment Portfolio i) Issuer composition of Non SLR investments
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ii) Non performing Non-SLR investments
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3.2.3 Sale and Transfers to/ from HTM Category If the value of sales and transfers of securities to / from HTM category exceeds 5 per cent of the book value of investments held in HTM category at the beginning of the year, bank should disclose the market value of the investments held in the HTM category and indicate the excess of book value over market value for which provision is not made. This disclosure is required to be made in ‘Notes to Accounts’ in banks’ audited Annual Financial Statements. The 5 per cent threshold referred to above will exclude the one - time transfer of securities to / from HTM category with the approval of Board of Directors permitted to be undertaken by banks at the beginning of the accounting year and sales to the Reserve Bank of India under pre-announced OMO auctions. 3.3.1 Forward Rate Agreement/ Interest Rate Swap
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3.3.2 Exchange Traded Interest Rate Derivatives
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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:
Quantitative Disclosures
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3.4.2 Particulars of Accounts Restructured
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3.4.3 Details of financial assets sold to Securitisation/ Reconstruction Company for Asset Reconstruction
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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 to Accounts to their Balance sheets: A. Details of non-performing financial assets purchased
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B. Details of non-performing financial assets sold:
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3.4.5 Provisions on Standard Assets
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3.6 Asset Liability Management Maturity pattern of certain items of assets and liabilities
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3.7.1 Exposure to Real Estate Sector
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3.7.2 Exposure to Capital Market
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3.7.3 Risk Category wise Country Exposure
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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 to 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. In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks’ balance sheet, it is advised as under: a) For determining the amount of unsecured advances for reflecting in Schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured. b) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken as also the estimated value of such intangible collateral. The disclosure may be made under a separate head in “Notes to Accounts”. This would differentiate such loans from other entirely unsecured loans. 3.8 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, placing the details of the levy of penalty on a bank in public domain will be in the interests of the investors and depositors. Further, strictures or directions on the basis of inspection reports or other adverse findings should also be placed in the public domain. The penalty should also be disclosed in the "Notes to 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 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 to 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 follow the disclosure requirements prescribed under AS 15 (revised) on ‘Employees Benefits’ issued by ICAI. 4.4 Accounting Standard 17 – Segment Reporting While complying with the above Accounting Standard, banks are required to adopt the following:
Accounting Standard 17 - Format for disclosure under segment reporting Part A: Business segments
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Part B: Geographic segments
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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 18 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.
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Illustrative disclosure of names of the related parties and their relationship with the bank 1. Parent A Ltd 4.6 Accounting Standard 21 – Consolidated Financial Statements (CFS) As regards disclosures in the ‘Notes to 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 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 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:
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:
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. 5.1 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:
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Banks should make comprehensive disclosures on floating provisions in the “Notes to Accounts” to the balance sheet as follows:
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Suitable disclosures are to be made regarding any draw down of reserves in the ‘Notes to Accounts’ to the Balance Sheet. 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
5.5 Disclosure of Letters of Comfort (LoCs) issued by banks Banks should disclose full particulars of all the Letters of Comfort (LoCs) issued by them during the year, including their assessed financial impact, as also their assessed cumulative financial obligations under the LoCs issued by them in the past and outstanding, in its published financial statements, as part of the ‘Notes to Accounts”. 5.6 Provisioning Coverage Ratio (PCR) The PCR (ratio of provisioning to gross non-performing assets) should be disclosed in the Notes to Accounts to the Balance Sheet. Banks should disclose in the ‘Notes to Accounts’, from the year ending March 31, 2010, the details of fees/remuneration received in respect of the bancassurance business undertaken by them. 5.8 Concentration of Deposits, Advances, Exposures and NPAs 5.8.1 Concentration of Deposits
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5.8.2 Concentration of Advances*
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5.8.3 Concentration of Exposures**
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5.11 Overseas Assets, NPAs and Revenue
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5.12 Off-balance Sheet SPVs sponsored
5.13 Unamortised Pension and Gratuity Liabilities Appropriate disclosures of the accounting policy followed in regard to amortization of pension and gratuity expenditure may be made in the Notes to Accounts to the financial statements. 5.14 Disclosures on Remuneration In terms of Compensation Guidelines, private sector banks and foreign banks (to the extent applicable), are advised to disclose the following information in their notes to accounts.
5.15 Disclosures relating to Securitisation The Notes to Accounts of the originating banks should indicate the outstanding amount of securitised assets as per books of the SPVs sponsored by the bank and total amount of exposures retained by the bank as on the date of balance sheet to comply with the Minimum Retention Requirements (MRR). These figures should be based on the information duly certified by the SPV's auditors obtained by the originating bank from the SPV. These disclosures should be made in the format given below.
Banks using a proprietary model for pricing CDS, shall disclose both the proprietary model price and the standard model price in terms of extant guidelines in the Notes to the Accounts and should also include an explanation of the rationale behind using a particular model over another. Annex List of Circulars consolidated by the Master Circular
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