The National Financial Reporting Authority had issued a circular to all companies and their audit committees to follow Indian Accounting Standards (Ind AS) and advised them not to discontinue recognition of the principal or interest merely because of the borrowings being declared a non-performing asset (NPA) or the management's expectation of a likely settlement with or without concessions from the banks.
Also, company secretaries have been advised to draw the attention of the board of directors of their companies to the contents of the circular.
NFRA said it had come to its attention that during a disciplinary action under section 132(4) of the Act for professional misconduct of a statutory auditor, namely chartered accountant Som Prakash Aggarwal, of a listed company -- Vikas WSP Ltd, that the company in the financial statements of 2019-20 had discontinued accrual/recognition of interest expense on its bank borrowings, which had been reportedly classified as NPA by the lender banks and for which the company was negotiating one-time settlement with the banks.
The authority said that this accounting treatment was in contravention of the provisions of applicable accounting standard, as these borrowings as well the interest payable thereon continued to be the financial liabilities of the company and were required to be accounted for as amortised cost in accordance with the requirements of Ind AS 109, Financial Instruments.
The authority said similar violations have been observed in respect of several other companies, too.
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, the authority said.
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.
In the above 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/ principal without evidence of the legally enforceable contractual documents results in incorrect/erroneous presentation of financial performance and financial position of the borrowing company to its shareholders, investors, creditors and lenders.
To ensure that such violations do not occur and to ensure the presentation of true and fair view of the financial statements of the companies, NFRA issued the circular on October 20, 2022, on this subject to draw attention of all companies, audit committees, and statutory auditors.
( With inputs from ANI )
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