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ARTICLE

GAAP practices with Ind AS requirements. Key focus areas Stage 1: Performing assets with no significant
included: credit risk increase (12-month ECL).
Ind AS 109 (Financial Instruments): Assessing the shift Stage 2: Assets with a significant increase in credit
from incurred loss to expected credit loss (ECL) risk (lifetime ECL).
provisioning.
Stage 3: Credit-impaired assets (lifetime ECL with
Ind AS 116 (Leases): Evaluating the impact of
interest recognition adjustments).
recognizing branch lease obligations on the balance
sheet. ABC developed a probability-weighted ECL model, factoring
Ind AS 115 (Revenue Recognition): Reviewing fee- in historical default rates (adjusted for its 2017 NPA peak),
based income streams like loan processing fees. current portfolio health, and forward-looking indicators like
monsoon forecasts for agricultural loans. The bank classified
The analysis revealed that ABC's provisioning would rise 70% of its loans as Stage 1, 20% as Stage 2, and 10% as
significantly under ECL, and its lease-heavy branch network Stage 3 in 2019-20, a marked shift from Indian GAAP's binary
would inflate both assets and liabilities. The bank allocated "performing" vs. "non-performing" approach.
INR 50 crore for IT upgrades and hired a Big Four Ind AS 116: Leases
consultancy to guide the process. With 1,800 leased branches, Ind AS 116 hit ABC hard.
The bank recognized right-of-use (ROU) assets and lease
Phase 2: System Upgrades and Training (January liabilities worth INR 3,500 crore, calculated using a 7%
2019 - March 2019) discount rate based on its incremental borrowing cost.
ABC overhauled its IT infrastructure, integrating a new data This increased total assets by 1.4% and liabilities by a
warehouse to handle ECL modelling. The bank trained 1,500 similar magnitude, altering leverage ratios.
employees-accountants, branch managers, and risk officers-
on Ind AS principles, focusing on judgment-based ECL Ind AS 115: Revenue from Contracts with
assumptions. External actuaries were engaged to develop Customers
credit risk models, incorporating macroeconomic variables ABC's fee income-INR 1,200 crore annually from loan
like GDP growth and inflation. origination and service charges-required reclassification.
Under Indian GAAP, these were recognized upfront; Ind
Phase 3: Implementation and Reporting (April AS 115 deferred recognitions over loan tenures,
2019 - March 2020) reducing FY 2019-20 revenue by INR 150 crore.
ABC's first Ind AS-compliant financial statements were
prepared for FY 2019-20, with comparatives for FY 2018-19 Challenges During Transition
restated. The transition date was April 1, 2018, requiring
Data and Technology Gaps
retrospective adjustments to opening retained earnings. The
The bank's legacy systems lacked the granularity for ECL
bank faced initial resistance from auditors, who demanded
modelling. Historical data on rural loans was
robust documentation for ECL estimates, but finalized its
incomplete, forcing ABC to rely on proxies and external
reports by July 2020.
credit bureau inputs. The IT overhaul, while successful,
overshot budgets by 20%, straining finances.
Key Ind AS Standards and Their
Application at ABC bank Skill Deficiencies

The transition hinged on implementing specific standards Staff accustomed to Indian GAAP's simplicity struggled
that reshaped ABC's financial reporting and operations. with Ind AS's judgment-based approach. ECL
assumptions varied across branches, prompting the task
Ind AS 109: Financial Instruments force to standardize methodologies-a process that
Ind AS 109 was the linchpin of ABC's transition. The ECL delayed reporting by two months.
model required the bank to estimate losses across its
INR 1 lakh crore loan portfolio, segmented into three Regulatory Divergence
stages: The RBI's prudential norms clashed with Ind AS. For

42 | 2025 | JULY | BANKING FINANCE