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CMA Final · Corporate Financial Reporting · NBFCs - Provisioning Norms, Accounting and Reporting

An Ind AS NBFC has these exposures: Stage 1 EAD Rs 2,000 lakh, 12-month PD 1%, LGD 50%; Stage 2 EAD Rs 500 lakh, lifetime PD 10%, LGD 40%; Stage 3 EAD Rs 100 lakh, PD 100%, LGD 60%. Discounting is ignored. Provision required under IRACP norms, taken in aggregate, is Rs 110 lakh. What amount must be transferred to the Impairment Reserve?

Rs 20 lakh. Total ECL is Rs 90 lakh (Rs 10 lakh Stage 1, Rs 20 lakh Stage 2 on lifetime PD, Rs 60 lakh Stage 3). Since the IRACP provision is Rs 110 lakh, the Rs 20 lakh shortfall goes to the Impairment Reserve.

  1. ARs 20 lakhCorrect
  2. BRs 35 lakh
  3. CRs 90 lakh
  4. DNil

Explanation

Stage 1 ECL = 2,000 x 1% x 50% = 10. Stage 2 uses lifetime PD: 500 x 10% x 40% = 20. Stage 3 = 100 x 100% x 60% = 60. Total ECL = Rs 90 lakh. Shortfall against IRACP = 110 - 90 = Rs 20 lakh. Using the 12-month PD for Stage 2 gives ECL of 75 and a reserve of 35, which is wrong.

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