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

An NBFC that follows Ind AS has computed expected credit loss (ECL) provisions of Rs 18 crore under Ind AS 109. Its provision under the RBI's IRACP norms for the same portfolio is Rs 25 crore. What is the regulatory treatment of the difference?

The NBFC transfers Rs 7 crore from profit or retained earnings to an impairment reserve. The shortfall of ECL provision (Rs 18 crore) against IRACP provision (Rs 25 crore) is held as an appropriation, not a profit and loss expense, and is not available for dividend.

  1. ATransfer Rs 7 crore from profit to an impairment reserve, not available for dividendCorrect
  2. BIncrease the ECL charge to profit and loss by Rs 7 crore
  3. CMake no entry, because the ECL figure prevails
  4. DReduce the ECL allowance to Rs 11 crore

Explanation

Where the ECL provision is lower than the IRACP provision, the shortfall (25 minus 18 = Rs 7 crore) is appropriated from net profit or retained earnings to an impairment reserve. This reserve is not distributed as dividend. The Ind AS profit and loss charge stays at the ECL figure, so charging Rs 7 crore to profit and loss is wrong.

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