RBI wants lenders to spell out nature of money parked in arms.
 
In a move to encourage banks to follow accounting standards instead of expecting guidelines from the regulator, the Reserve Bank of India (RBI) has asked bank boards to clearly spell out if an investment in a subsidiary, associate company or joint venture is temporary in nature or otherwise.

In a notification issued today, the banking regulator has clarified that the move is to make sure that investments that are not temporary are included in the consolidated financial statement.

The Institute of Chartered Accountants of India's (ICAI) Accounting Standards (AS) 21, 23 and 27 prescribe the norms for accounting of investments in subsidiaries, associates and joint ventures. These standards also specifically state the circumstances under which subsidiaries, associates or joint ventures can be excluded from consolidation, said RBI.

The exclusion from consolidation is permitted when the investment is held exclusively with a view to its subsequent disposal in the near future (within the next 12 months).

A public sector bank executive associated with making financial statement said these guidelines are not expected to have any immediate implication for making financial statements.

Most of the banks make such disclosure. If no specific reference is made about the short-term nature of investment, it is understood that the investment has been made in the normal course of business for the long term, he added.

Another banker said gradually RBI is sensitising banks to use accounting standards and let auditors take a call on the treatment of the investment decision. The habit of expecting the regulator to issue guidelines should reduce over a period.

"The intention with regard to the disposal of the relevant investment should be considered at the time of acquisition of the investment," said RBI.

The regulator made it clear that absence of record of intent by a board or at the time of making investments will mean that RBI will factor in the investment for purpose of consolidation of accounts.