Non-recognition of interest liability on expectation of bad loan tag a breach of accounting norm: NFRA
- Non-recognition of interest liability on expectation of a loan going NPA by lender is violation of accounting norms, according to National Financial Reporting Authority
Non-recognition of interest liability on accrual basis merely on expectation of a loan getting the tag of a non performing asset by the lender is a violation of accounting norms by companies, audit watchdog National Financial Reporting Authority (NFRA) said on Friday.
NFRA said in a statement that it has noticed that several companies have violated accounting norms relating to recognition in financial statements of the interest liability on loans turning bad.
Citing one particular instance in which the audit watchdog took disciplinary action against a chartered accountant, NFRA said that the company had in its FY20 financial statements discontinued recognition of interest expense on its bank borrowings, which had been reportedly classified as non-performing asset (NPA) by the lender banks and for which the company was negotiating one time settlement.
This accounting treatment, NFRA said, was in contravention of the provisions of applicable accounting standard, as these borrowings as well the interest payable on that continued to be the financial liabilities of the company and were required to be accounted for as amortized cost in accordance with the requirements of Indian Accounting Standard 109 dealing with financial instruments. Similar violations have been observed in respect of several other companies too, NFRA said.
“Mere classification of the company’s borrowings as NPAs by the lender banks does not relieve the borrowing company from its liability towards payment of interest and/or the principal. It may be relevant to note that the RBI guidelines also require the banks to maintain a Memorandum Record of accrued Interest on the loans classified as NPAs clearly reflecting the fact that the bank has not yet legally released the borrowers from their contractual liability to pay interest on their borrowings from the bank,” NFRA stated.
In this context, discontinuation of interest expense recognition on bank borrowings solely based on the borrowing company’s expectations of likely waiver/concession by the lender banks in the payment of interest or principal without evidence of the legally enforceable contractual documents results in erroneous presentation of financial performance and financial position of the borrowing
NFRA said that it has issued a circular to ensure that such violations do not occur and financial statements of companies present a true and fair view of the company’s affairs. Company secretaries have been advised to draw attention of the Board of Directors of their companies to the circular, NFRA said.
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Business NewsIndustryBankingNon-recognition of interest liability on expectation of bad loan tag a breach of accounting norm: NFRA
First Published:28 Oct 2022, 09:23 PM IST
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