NFRA has issued a Circular/ Advisory against Companies not accruing the Interest Liability on NPA Borrowings in violation of the IND AS 109.
During a disciplinary proceeding u/s 132(4) of the Companies Act, 2013 for professional misconduct of the statutory auditor (CA Som Prakash Aggarwal) of a publicly traded co. (Vikas WSP Limited), the The National Financial Reporting Authority (NFRA) noticed that the company had discontinued accrual/recognition of interest expense on its bank borrowings, which had allegedly been classified as a non-performing asset (NPA) by the lender banks. The company was negotiating with the lender banks for one time settlement (OTS).
This accounting treatment violated ‘Indian Accounting Standard (IND AS) 109: Financial Instruments’, because these borrowings and the interest due on them were financial liabilities of the company and had to be accounted for. NFRA observed that similar violation is being committed by other entities too.
The company must pay interest and principal even if lender banks classify its borrowings as non-performing. The RBI guidelines require banks to keep a Memorandum Record of Accrued Interest on all such non-performing loans, which shows that the bank has not legally released the borrowers from their interest obligations.
In the above scenario, ceasing to recognise interest expense on bank borrowings solely based on the expectations of a probable waiver or concession as part of the settlement with the Lender banks is not acceptable. Also, such treatment simply based on negotiations with lender banks in the payment of interest/principal misrepresents the borrowing entity’s financial performance and position to shareholders, investors, creditors, and lenders, in absence of any proof of legally enforceable contractual documents.
This Advisory has been issued to alert/ caution all such Enterprises, Audit Committees, and Statutory Auditors to prevent such violations for presenting a true and fair view of the financial statements. Also the Company Secretaries have been advised to inform their boards of directors about the same.
NFRA Press Release dt. 28/10/2022: Circular on Non-Accrual of interest on NPA Borrowings by the companies in violation of Indian Accounting Standards (IND AS)
NFRA Circular dt. 20/10/2022: Non-Accrual of interest on NPA Borrowings by the companies in violation of Indian Accounting Standards (IND AS)