Saturday, August 26, 2023

Interest Cost Recognition on Non-Performing Assets as per Ind AS 109

 Financial reporting is the backbone of transparency and accuracy in the business world. Within this realm, a critical area of focus revolves around how interest costs on borrowings classified as Non-Performing Assets (NPAs) are handled. By delving into real-world case studies guided by Ind AS 109, we can gain insights into the complexities and potential consequences of not recognizing interest costs in such scenarios.

Exploring the Dilemma of Unrecognized Interest Costs

Consider the case of PQR Ltd, a listed company that found itself entangled in loan defaults. The central question emerged: should the recognition of interest costs on NPAs be disregarded? PQR Ltd's argument rested on the premise that since banks had already labeled their loans as NPAs and had ceased charging interest, there was no obligation to acknowledge unpaid interest in their financial statements. This perspective was prominently disclosed in the notes to their financial accounts.

However, Ind AS 109, the authoritative accounting standard, stipulates that interest costs on borrowed funds should be recognized until the financial liability is fully resolved. The mere occurrence of ongoing negotiations for debt settlement did not absolve the company from its liability to account for interest costs. Disregarding this accounting principle amounted to a violation of the standard, resulting in a significant misrepresentation of the company's financial position.

Interestingly, the auditors in this case failed to report this discrepancy, which was deemed a breach of professional conduct. This instance underscores the auditors' responsibility to ensure adherence to accounting standards and to provide accurate reporting based on the prevailing circumstances.

Understanding the Auditor's Role and the Timing of Settlements

In a parallel scenario akin to the aforementioned case, banks later waived the entire interest dues after the audit period. The auditors defended their decision not to qualify the accounts, citing their alignment with the management's non-recognition of interest, hinging on the impending settlement.

However, it is crucial to note that the outcome of subsequent events should not influence auditors' decisions made during the audit. The absence of concrete evidence at the time of the audit regarding the banks' firm commitment to waive interest played a decisive role. Auditors are bound to report based on the factual state during the creation of the audit report, rather than speculating about potential future developments.

This case underscores the importance of auditors adhering to the circumstances as they existed during the audit and refraining from relying on subsequent events to justify their decisions.

Interpreting Contractual Obligations: An Auditor's Challenge

In yet another instance, the auditor raised the argument that if contractual obligations were rendered impracticable and not acknowledged by the company, there was no need to account for them. However, this argument was dismissed in light of fundamental accrual accounting principles.

Accrual accounting necessitates the recognition of liabilities as they are incurred, irrespective of the timeline for payment. Contractual obligations, even if not fulfilled, must be recognized unless explicitly waived. The timing of subsequent settlements remains the same as the auditor's duty to report based on the factual conditions that prevailed during the audit.

This case underscores the significance of upholding accounting principles and providing accurate reporting rooted in the actual circumstances.

Consistency in Responsibilities across Different Accounting Standards

In a final scenario, consider a company that adheres to Accounting Standards (AS) instead of Ind AS due to its unlisted status and lower net worth. Despite the change in standards, fundamental accounting principles like accrual and prudence continue to apply. The company's obligation to recognize incurred liabilities remains intact, and auditors should report any non-compliance with the relevant standards.This case underscores the consistency of accounting principles

across diverse standards and reaffirms that auditors are responsible for accurate reporting, irrespective of the standard being followed.

Conclusion: Upholding Transparency and Accountability

The Ind AS 109 case studies provide an illuminating view into the complexities of recognizing interest costs on NPAs and the pivotal role of auditors in ensuring compliance with accounting standards. Regardless of future developments or the specific accounting standard employed, auditors shoulder the responsibility of precise reporting rooted in the factual conditions present during the audit. These cases underscore the paramount importance of transparency, accountability, and adherence to accounting principles in upholding the credibility of financial reporting.