Regulator NFRA has directed companies not to discontinue recognition of interest expenses on borrowings merely on the basis of expectations of a likely settlement with or without concessions from the banks.
The National Financial Reporting Authority's directive has come against the backdrop of instances of companies discontinuing accrual/recognition of interest expense on bank borrowings, which had reportedly been classified as Non-Performing Asset (NPA).
According to the watchdog, such an accounting treatment was in contravention of the provisions of applicable Indian Accounting Standard (Ind AS).
"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.
"It may be relevant to note that the 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," NFRA said in a release on Friday.
Violations with respect to recognising interest expenses on borrowing has been observed by the regulator with respect to several companies.
Against this backdrop, the regulator has also issued a circular to draw the attention of all companies, audit committees, and statutory auditors. Also, company secretaries have been advised to draw attention of the board of directors of their companies to the circular.
"All companies which are required to follow Ind AS and their audit committees are hereby advised not to discontinue recognition of the principal or interest merely because of the borrowings being declared NPA or the management's expectation of a likely settlement with or without concessions from the banks," NFRA said.