A Background
IDFC FIRST Bank Limited (The "Bank") was incorporated on October 21, 2014 as a Company under the Companies Act, 2013 and had commenced its banking operations on October 01, 2015 after receiving universal banking license from the Reserve Bank of India (The "RBI") on July 23, 2015. The Bank provides a complete suite of banking and financial services including retail banking, wholesale banking, digital banking and treasury operations. The Bank is primarily governed by the Banking Regulation Act, 1949.
The Bank's shares are listed on National Stock Exchange of India Limited and BSE Limited.
B Basis of preparation
The financial statements have been prepared and presented based on historical cost convention and accrual basis of accounting, unless otherwise stated and are in accordance with the requirements prescribed under Section 29 and Third Schedule of the Banking Regulation Act, 1949. The accounting and reporting policies of the Bank used in the preparation of these financial statements are in conformity with Generally Accepted Accounting Principles in India ('Indian GAAP'), circulars and guidelines issued by the RBI from time to time, the Accounting Standards notified under section 133 of the Companies Act, 2013 read together with para 7 of the Companies (Accounts) Rules, 2014 and the Companies (Accounting Standards) Rules, 2021 to the extent applicable and practices generally prevalent in the banking industry in India.
C Use of estimates
The preparation of financial statements in conformity with the Generally Accepted Accounting Principles requires the management to make estimates and assumptions that affects the reported amount of assets and liabilities, disclosure of contingent liabilities as of the date of the financial statements and revenues and expenses during the reporting period. The management believes that the estimates used in preparation of financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision to the accounting estimates is recognised prospectively in the current and future periods.
D Significant accounting policies :
17.01 Investments
Classification and Valuation of the Bank's investments is carried out in accordance with the RBI guidelines and
Fixed Income Money Market and Derivatives Association (‘FIMMDA') and Financial Benchmark India Private Limited (‘FBIL') guidelines respectively, prescribed in this regard from time to time.
Classification :
In accordance with the RBI guidelines on investment classification and valuation; Investments are classified into following categories :
• Held for Trading ('HFT'),
• Available for Sale ('AFS') and
• Held to Maturity ('HTM').
However, for disclosure in the Balance Sheet, Investments in India are classified under six categories - (i) Government securities, (ii) Other approved securities, (iii) Shares, (iv) Debentures and bonds, (v) Investment in subsidiaries and / or joint ventures and (vi) Others.
Investments made outside India are classified under three categories - (i) Government securities, (ii) Subsidiaries and / or joint ventures abroad and (iii) Others.
Transfer of security between categories :
Transfer of securities between categories of investments is accounted as per the RBI guidelines. Transfer of scrip from AFS / HFT category to HTM category is made at the lower of book value or market value. In the case of transfer of securities from HTM to AFS / HFT category, the investments held under HTM category originally acquired at a discount are transferred to AFS / HFT category at the acquisition price and investments held under the HTM category originally acquired at a premium are transferred to AFS / HFT at the amortised cost.
Transfer of investments from AFS to HFT or vice-a-versa is done at the book value.
Depreciation carried, if any, on such investments is also transferred from one category to another.
Basis of classification and accounting :
Investments that are held principally for resale within 90 days from the date of purchase are classified under HFT category. Further, as per the RBI guidelines, HFT securities, which remain unsold for a period of 90 days are reclassified to AFS category. Investments which the Bank intends to hold till maturity are classified as HTM securities. Investments which are not classified in either of the above categories are classified under AFS category. Investments in the equity of subsidiaries / joint ventures are categorised as HTM / HTM or AFS respectively, in accordance with the RBI guidelines. Purchase and sale transactions in securities are recorded under settlement date of accounting, except in the case of equity shares where trade date accounting is followed.
Cost of acquisition :
• Costs such as brokerage and commission pertaining to investments paid at the time of acquisition are charged to the Profit and Loss Account.
• Cost of investments is computed based on First in First Out Method (FIFO) for all categories of Investments including short sales.
• Broken period interest (the amount of interest from the previous interest payment date till the date of purchase / sale of instrument) on debt instrument is treated as a revenue item.
Valuation :
Investments classified under HTM category are carried at their acquisition cost and not marked to market. Any premium on acquisition is amortised over the remaining maturity period of the security on a straight line method basis, while discount is not accreted. Such amortisation of premium is adjusted against interest income under the head “Income on Investments” as per the RBI guidelines. Any diminution, other than temporary, in the value of investments in HTM category is provided for each investment individually.
• The market value of unquoted government securities which qualify for determining the Statutory Liquidity Ratio (‘SLR') included in the AFS and HFT categories is computed as per the prices published by FBIL.
• Special bonds such as oil bonds, DISCOM bonds, fertilizer bonds, etc. that do not qualify for SLR are valued using the prices published by FBIL or as per the extant FIMMDA / RBI guidelines.
• Traded bond investments are valued based on the trade / quotes on the recognised stock exchanges, or prices / yields published by Primary Dealers Association of India (‘PDAI') jointly with FIMMDA / FBIL, periodically. The valuation of other unquoted fixed income securities (viz. State Government securities, Other approved securities, Bonds and Debentures) and preference shares, wherever linked to the YTM rates, is done with a mark - up (reflecting associated credit and liquidity risk) over the YTM rates for government securities published by FIMMDA / FBIL. For Tax - free bonds, the valuation is done after grossing up the coupon in line with FIMMDA / FBIL guidelines.
• Traded equity investments are valued at the closing price as available on National Stock Exchange (NSE). In case the equity script is not listed on NSE, then closing price as available on BSE is considered. In case the script is not listed in either NSE or BSE then closing from the exchange on which the script is listed shall be considered.
• Unquoted equity shares are valued at the break - up value, if the latest Balance Sheet is available (which should not be more than 18 Months prior to the date of valuation) or at ' 1 as per the RBI guidelines in case the latest Balance Sheet is not available.
• Units of mutual funds are valued at the latest repurchase price / Net Asset Value ('NAV') declared by the mutual fund.
• The valuation of discounted instruments such as Treasury Bills, Commercial Papers, Certificate of Deposits is reckoned at carrying cost, while STRIPS are valued as per the prices published by FBIL / FIMMDA, in line with FIMMDA / Market Risk Management Policy. The accretion of discount on discounted money market securities (CP / CD / T-Bill) is computed basis the straight line method while the STRIPS is reckoned as per constant yield method.
• Security receipts (‘SR') are valued at the lower of realisation value and Net Asset Value ('NAV') considering as per the Net Asset Value provided by the Asset Reconstruction Companies ('ARCs').
• Investments in units of Venture Capital Funds (‘VCF') / Alternate Investment Fund ('AIF') are classified under HTM for an initial period of three years and valued at cost during this period, in accordance with the RBI guidelines. Units of VCF / AIF held under AFS category are marked to market based on the NAV provided by VCF / AIF based on the latest financial statements. Valuation is based on audited financial statements at least, once in a year. In case the audited financials are not available for a period beyond 18 months, the investments are valued at ' 1.
• Banks do not make investments in any scheme of AIF's which has downstream investments (exclude investment in equity shares but shall include all other investment including investment in hybrid instruments) either directly or indirectly in a debtor company of the Bank. If the Bank has already invested into such schemes having downstream investment in the AIF Scheme in their debtor companies as on the date of RBI circular including investment in subordinate units of an AIF scheme, the 30-day period for liquidation shall be counted from date of issuance of this circular i.e. December 19, 2023. In case the Banks is not able to liquidate their investments within the above - prescribed time limit, it shall make 100 percent provision on such investments. As clarified by the RBI, provisioning will be required only to the extent of investment by the Bank in AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the Bank in the AIF scheme.
• Pass Through Certificates (‘PTCs') and Priority Sector PTCs are valued as per extant FIMMDA guidelines.
Investments in subsidiaries are categorised as HTM and assessed for impairment to determine permanent diminution, if any, in accordance with the RBI guidelines. Dividend received from pre - acquisition profits is reduced from cost of investments as per AS - 13 - Accounting for Investments.
Investments classified under AFS and HFT categories are marked to market as per the extant RBI guidelines. Book value of the individual securities does not undergo any change after the marked to market.
Securities are valued script wise and depreciation / appreciation is aggregated for each category of investment in their respective classifications. Net depreciation, if any, compared to the acquisition cost, in any of the categories, is charged to the Profit and Loss Account. The net appreciation in each category, if any, is not recognised. Net depreciation required to be provided for in any one classification is not reduced on account of net appreciation in any other classification.
Non - performing investments ('NPI') are identified and depreciation / provision is made thereon based on the RBI guidelines. The depreciation / provision against NPI is not set - off against the appreciation in respect of other performing securities. Interest on non - performing investments is recognised on cash basis.
As a prudent risk measure, specific provision against identified investments are made based on management's assessment of impairment based on qualitative factors, subject to minimum provision determined as per valuation guidelines. These provisions are netted - off from carrying value of such investments. Further, interest on such identified investments is recognised on cash basis.
Bonds and debentures are classified as other receivables under other assets on maturity date and disclosed under Schedule - 11.
Investment fluctuation reserve ('IFR') :
The RBI had advised banks to create an Investment Fluctuation Reserve ('IFR'). An amount not less than the lower of net profit on sale of investments in the HFT and AFS portfolio during the year or net profit for the year less mandatory appropriations shall be transferred to the IFR, until the amount of IFR is at least 2 percent of the HFT and AFS portfolio, on a continuing basis.
Further, the Bank may, at its discretion, draw down the balance available in IFR in excess of 2 percent of its HFT and AFS portfolio, for credit to the balance of Profit / Loss as disclosed in the Profit and Loss Account at the end of any accounting year. In the event the balance in the IFR is less than 2 percent of the HFT and AFS
investment portfolio, a draw down is permitted subject to the following conditions :
(a) The drawn down amount is used only for meeting the minimum Common Equity Tier 1 / Tier 1 capital requirements by way of appropriation to free reserves or reducing the balance of loss and
(b) The amount drawn down shall not be more than the extent, the MTM provisions made during the aforesaid year exceed the net profit on sale of investments during that year.
IFR is eligible for inclusion in Tier 2 capital.
Short sales :
The Bank undertakes short sale transactions in Central Government dated securities in accordance with the RBI guidelines and these are shown under Schedule 8 -Investments. The short sale position is categorised under HFT category and netted - off from HFT investments. The short position is marked to market along with other securities in that category and loss, if any, is charged to the Profit and Loss Account while gain, if any, is ignored. Profit / loss on settlement of the short position is recognised in the Profit and Loss Account.
Repurchase and reverse repurchase transactions :
In accordance with the RBI guidelines, Repurchase (Repo) and Reverse repurchase (Reverse Repo) transactions in government securities and corporate debt securities, including transactions conducted under Liquidity Adjustment Facility (‘LAF') and Marginal Standing Facility (‘MSF') with RBI are reflected as collateralised borrowing and lending transactions respectively. Balances held under Standing Deposit Facility ('SDF') are reported under Schedule 6 - Cash and Balance with Reserve Bank of India. Borrowing cost on repo transactions is accounted as interest expense and revenue on reverse repo transactions are accounted as interest income.
As per the RBI circular RBI/2022-23/55 DOR.ACC.REC. No.37/21.04.018/2022-23 dated May 19, 2022, reverse repos with banks and other institutions having original tenors more than 14 days are classified under Schedule 9 - Advances.
17.02 Advances
In accordance with the RBI guidelines, advances are classified as performing and non - performing. Non -Performing Advances ('NPA') are further classified as Sub - Standard, Doubtful and Loss Assets in accordance with the RBI guidelines on Income Recognition and Asset Classification ('IRAC'). In addition, based on extant environment or specific information on risk of possible slippages or current pattern of servicing, the Bank makes provision on specific advances which are classified as standard advances as these are not non - performing advances ('identified standard advances'). Advances
are stated net of provisions against NPA, specific provisions against identified advances, claims received from Export Credit Guarantee Corporation, provisions for non - performing funded interest term loan, net of direct assignment and provisions in lieu of diminution in the fair value of restructured asset.
The Bank may transfer advances through inter - bank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating, the aggregate amount of the participation is classified as due from banks under advances. In the case of participation without risk, the aggregate amount of participation issued by the Bank is classified under borrowings and where the Bank is participating, the aggregate amount of participation is shown as due from banks under advances.
The Bank makes general provisions on all standard advances and restructured advances based on the rates under each category of advance as prescribed by the RBI. In addition, the Bank makes provisions for standard assets in stressed sectors, at rates higher than the regulatory minimum, based on evaluation of risk and stress as per the Board approved policy. The provision on standard advances is not reckoned for arriving at net NPAs. The provision against standard advances (other than provision against identified advances) is shown separately as “Contingent Provisions against Standard Assets” under “Schedule 5 - Other Liabilities”.
In case of corporate loans, specific loan loss provisions in respect of identified advances and non - performing advances are made based on the management's assessment of the degree of impairment, subject to the minimum provisioning level prescribed by the RBI. The Bank can provide additional specific provision on standard advances at higher than prescribed rates as a prudent risk measure. These provisions are reviewed and reassessed at least once in a year. Provision on / write - off of homogeneous retail loans and advances, subject to minimum provisioning requirement of the RBI, is assessed on the basis of ageing of loans as prescribed in the Board approved policy of the Bank. Provision due to diminution in the fair value of restructured / rescheduled loans and advances is made in accordance with the applicable RBI guidelines.
Non - performing and restructured loans are upgraded to standard as per the extant RBI guidelines.
Under the Large Exposure Framework, the sum of all exposure values of the Bank to a counterparty or a group of connected counterparties is considered as a ‘Large Exposure', if it is equal to or more than 10 percent of the Bank's eligible capital base (i.e. Tier 1 capital). The Bank's incremental exposures from FY 2018-19 onwards to the specified borrowers exceeding the Net
Permitted Lending Limits ('NPLL') shall attract prudential measures. Incremental Exposure of the Banking System to a specified borrower beyond NPLL shall be deemed to carry higher risk which shall be recognised by way of additional standard asset provisioning and higher risk weights.
Further, the RBI has issued guidelines on “Prudential Framework for Resolution of Stressed Assets dated June 07, 2019” with a view to providing a framework for early recognition, reporting and time bound resolution of stressed assets. The Bank has put in place Board approved policy for resolution of distressed borrowers with an objective to initiate the process of resolution even before a default and prior to the initiation of proceedings under the Insolvency Bankruptcy Code.
The Bank is required to make an additional provisioning for the delayed implementation of Resolution Plan (RP) as under:
(a) Additional provision of 20% of total outstanding if RP is implemented beyond 180 days from the end of the review period.
(b) Additional provision of 35% of total outstanding if RP is implemented beyond 360 days from the end of the review period.
The additional provisions shall be made over and above the higher of the following, subject to the total provisions held being capped at 100% of total outstanding :
(a) The provisions already held; or,
(b) The provisions required to be made as per IRAC norms.
In the event of substantial erosion in value of loan and remote possibility of collection, non - performing loans with adequate provisions are evaluated for technical / prudential write - off based on Bank's policy and the RBI guidelines. Such write - off does not have an impact on the Bank's legal claim against the borrower. The Bank may also write - off non - performing loans on One Time Settlement (‘OTS') with the borrower or otherwise. Amounts recovered from borrowers against debts written - off is recognised in the Profit and Loss Account under “Provisions and contingencies”.
Loans reported as fraud are classified as loss assets, and fully provided for immediately without considering the value of security.
In respect of borrowers classified as non - cooperative and wilful defaulters, the Bank makes accelerated provisions as per the extant RBI guidelines.
Unhedged foreign currency exposure :
Provision for Unhedged Foreign Currency Exposure of borrowers is made as per the RBI guidelines and disclosed under Contingent Provision against Standard Assets.
Country risk :
In addition to the provisions required to be held according to the asset classification status, provisions are held for individual country exposure (other than for home country as per the RBI guidelines). The countries are categorised into seven risk categories as mentioned in the ECGC guidelines namely Insignificant, Low, Moderately Low, Moderate, Moderately High, High and Very High and provision is made on exposures exceeding 180 days on a graded scale ranging from 0.25% to 100%. For exposures with contractual maturity of less than 180 days, 25% of the normal provision requirement is held. If the funded exposure (net) of the Bank in respect of each country does not exceed 1% of the total assets, no provision is maintained on such country exposure.
17.03 Revenue recognition
Interest income :
Interest income is recognised on accrual basis in the Profit and Loss Account, except in the case of Non - Performing Assets ('NPAs') and identified standard advances, where it is recognised upon realisation. The unrealised interest booked in respect of NPAs and identified standard advances and any other facility given to the same borrower is reversed to the Profit and Loss Accounts and subsequent interest income is accounted into interest suspense.
The unrealised interest represented by Funded Interest Term Loan ('FITL') is reversed in Profit and Loss Account with the corresponding credit in Sundry Liabilities Account - Interest Capitalisation account. Interest income is booked in Profit and Loss Account upon realisation, by debiting the sundry liabilities account.
Subvention income on loans is recognised as income over the tenor of the loan agreements. The unamortised balance is disclosed as part of other liabilities. On foreclosure, balance unamortised subvention income is recognised in the Profit and Loss Account. Income on retained interest in the assigned asset, if any, is accounted on accrual basis except in case of NPAs wherein interest income is recognised on receipt basis as per the RBI guidelines.
Interest income on coupon bearing securities is recognised over the tenure of the instrument on a straight line method and on non - coupon bearing securities over the tenure on yield basis. Any premium on acquisition of securities held under HTM category is amortised over the remaining maturity period of the security on a straight line method basis.
Dividend on equity shares, preference shares and on mutual fund units is recognised as income when the right to receive the dividend is established.
Fees and charges :
Loan originating fees, when it becomes due, is recognised upfront as income. Arrangership / Syndication fee is accounted on completion of the agreed service and when right to receive is established. Fee and commission income is recognised as income when due and reasonable right of recovery is established and can be reliably measured.
Commission received on guarantees and letter of credit issued is recognised on straight line basis over the period of the contract or the period for which commission is received.
Fee on rescheduling of outstanding debt is recognised on accrual basis over the period of time covered by the rescheduled extension period.
Underwriting commission earned to the extent not reduced from the cost of the securities is recognised as fees on closure of issue.
All other fees and charges are recognised as and when they become due and revenue can be reliably measured and reasonable right of recovery is established.
Investments :
Profit / loss on sale of investments under the HTM, AFS and HFT categories are recognised in the Profit and Loss Account. The profit from sale of investment under HTM category, is appropriated from Profit and Loss Account to “Capital Reserve” (net of applicable taxes and transfer to Statutory Reserve) in accordance with the RBI guidelines.
Exchange gain or loss arising on account of revaluation of monetary assets and liabilities is recognised in the Profit and Loss Account as per the revaluation rates published by Foreign Exchange Dealers' Association of India ('FEDAI').
Other operating income :
Gain / loss on sell down of loans is recognised in line with the extant RBI guidelines.
Securitisation transactions :
The Bank enters into sale of retail loans through Special Purpose Vehicle (‘SPV'). In most cases, post securitisation, the Bank continues to service the loans transferred to the SPV. The Bank also provides credit enhancement in the form of cash collaterals and / or by subordination of cash flows to Senior Pass - Through Certificate holders. In respect of credit enhancements provided or recourse obligations accepted by the Bank, appropriate disclosure is made at the time of sale in accordance with AS-29, Provisions, Contingent Liabilities and Contingent Assets as specified under section 133 and the relevant provision of the Companies Act, 2013 read with the Companies (Accounting Standards) Rules, 2021.
In accordance with the RBI guidelines on Securitisation of Standard Assets dated September 24, 2021, the profit, loss or premium on account of securitisation of assets at the time of sale is computed as the difference between the sale consideration and the book value of the securitised asset.
Any resultant profit, loss or premium realised on account of securitisation is recognised to the Profit and Loss Account in the period in which the sale is completed.
In case of non - performing assets sold to Securitisation Company ('SC') / Reconstruction Company ('RC') for cash, excess provision is reversed to Profit and Loss Account. Any loss arising on account of sale is recognised in the Profit and Loss Account in the year in which the sale occurs. If sale is against issuance of Security Receipts (SRs) by SC / RC, the SR is recognised at lower of redemption value of SRs and net book value of underlying loan sold. On realisation, the proceeds are reduced against the carrying value of SRs and surplus, if any, is recognised in the Profit and Loss Account.
In cases of investments in SRs by more than 10 percent of the SRs backed by the assets sold and issued under the scheme of securitisation, provisioning requirement on SRs will be higher of provisioning rate required in terms of net asset value declared by the SCs / RCs or provisioning rate as applicable to the underlying loans, assuming that the loans notionally continued in the books.
Direct assignments :
Assets transferred through direct assignment of cash flows are de - recognised in the Balance Sheet when they are sold (true sale criteria being fully met with) and consideration is received by the Bank.
Profit / premium arising on account of sale of standard asset, being the difference between the sale consideration and book value, is amortised over the residual life of the loan. Any loss arising on account of sale is recognised in the Profit and Loss Account in the year in which the sale occurs. In case of gain on sale of non - performing assets, the excess provision shall not be reversed but will be utilised to meet the shortfall / loss on account of sale of other non - performing financial assets and shortfall, if any, is charged to the Profit and Loss Account.
17.04 Priority sector lending certificates ('PSLCs')
The Bank enters into transactions for the purchase or sale of Priority Sector Lending Certificates ('PSLCs'). In case of a purchase transaction, the Bank buys the fulfilment of priority sector obligation and in case of a sale transaction, the Bank sells the fulfilment of priority sector obligation through the RBI trading platform without any transfer of underlying risk or loan assets. Fees paid for purchase of the PSLCs is recorded as ‘Other Expenditure' and fees received for the sale of PSLCs is
recorded as ‘Miscellaneous Income' in Profit and Loss Account. These are amortised on straight line basis over the tenor of the certificate.
17.05 Transactions involving foreign exchange
Foreign currency income and expenditure items of domestic operations are translated at the exchange rates prevailing on the date of the transaction. Monetary foreign currency assets and liabilities of domestic and integral foreign operations are translated at closing exchange rates notified by FEDAI relevant to the Balance Sheet date. The resulting gain or loss on revaluation are included in the Profit and Loss Account in accordance with the RBI / FEDAI guidelines. All outstanding forward exchange contracts are revalued based on the Forward rates notified by FEDAI for specified maturities and at interpolated rates for contracts of interim maturities. The forward exchange contracts of longer maturities (i.e. greater than or equal to 2 years) where exchange rates are not notified by FEDAI are revalued at the forward exchange rates implied by the swap curves in respective currencies. The resultant gains or losses are recognized in the Profit and Loss Account.
Contingent liabilities on account of forward exchange and derivative contracts, guarantees, acceptances, endorsements and other obligations denominated in foreign currencies are valued and disclosed at closing rates of exchange notified by FEDAI as at the Balance Sheet date.
17.06 Accounting for derivative transactions
Derivative transactions comprises of forward contracts, futures, swaps and options. The Bank undertakes derivative transactions for trading and hedging Balance Sheet assets and liabilities. All trading transactions are marked to market and resultant gain or loss is recognised in the Profit and Loss Account.
Foreign exchange contracts and derivative contracts are classified as assets when the fair value is positive (positive marked to market value) or as liabilities when the fair value is negative (negative marked to market value).
For hedge transactions, the Bank identifies the hedged item (asset or liability) and assesses the effectiveness at inception as well as at each reporting date. Funding swaps are accounted in accordance with FEDAI guidelines. The hedge swaps and funding swaps are accounted on accrual basis except the swap designated with an asset or liability that is carried at lower of cost or market value in the financial statements. In such cases swaps are marked to market with the resulting gain or loss recorded as an adjustment to the market value of designated asset or liability. Hedge transactions that are entered after June 26, 2019 through rupee interest rate derivatives are accounted for as per the guidance note issued by ICAI on accounting for derivative contracts. Any
resultant profit or loss on termination of hedge swaps is amortised over the life of the swap or underlying liability whichever is shorter. Upon ineffectiveness of hedge on re - assessment or termination of underlying, the Bank designates the derivative as trade.
Premium / discount on currency swaps undertaken to hedge foreign currency assets and liabilities and funding swaps is recognised as interest income / expense on accrual basis and is amortised on a pro - rata basis over the underlying swap period.
Premium in option transaction is recognised as income / expense on expiry or early termination of the transaction. Mark to market gain / loss (adjusted for premium received / paid on options contracts) is recorded as other income. The amounts received / paid on cancellation of option contracts are recognised as realised gain / loss on options. Pursuant to the RBI guidelines, any receivables under derivative contracts which remain overdue for more than 90 days and mark to market gains on all derivative contracts with the same counter parties are reversed in Profit and Loss Account.
Currency futures contracts are mark to market using daily settlement price on a trading day, which is the closing price of the respective futures contracts on that day. All open positions are marked to market based on the settlement price and the resultant marked to market profit / loss settled with the exchange. Charges receivable / payable on cancellation / termination of foreign exchange forward contracts is recognised as income / expense on the date of cancellation / termination under ‘Other Income'. Valuation of Exchange Traded Currency Options is carried out on the basis of the daily settlement price of each individual option provided by the exchange and valuation of Interest Rate Futures is carried out on the basis of the daily settlement price of each contract provided by the exchange.
As per the RBI guidelines on ‘Prudential Norms for Off Balance Sheet Exposures of Banks' a general provision is made on the current gross MTM gain of the contract for all outstanding interest rate and foreign exchange derivative transactions. For provisioning purpose, the exposure for all the counterparties with whom the Bank has bilateral agreement in place / Qualified Central Counter Party ('QCCP'), is reckoned as net positive MTM adjusted for collateral, if any, at the counterparty level. The exposure under standard provisioning for remaining counterparties is computed as the gross positive MTM at deal level and adjusted for collateral at the counterparty level.
17.07 Fixed assets and depreciation
Fixed assets are carried at cost of acquisition less accumulated depreciation and impairment, if any. Cost includes freight, duties, taxes and incidental expenses related to the acquisition and installation of the asset.
Subsequent expenditure incurred on assets put to use is capitalised only when it increases the future benefit / functioning capability from / of such assets.
The Bank believes that the useful life of assets assessed, pursuant to the Companies Act, 2013, taking into account changes in environment, changes in technology, the utility and efficacy of the asset in use, fairly reflects its estimate of useful lives of the fixed assets.
Capital work - in - progress includes cost of fixed assets that are not ready for their intended use and also include advances paid to acquire fixed assets.
Depreciation is charged over the estimated useful life of a fixed asset on a straight line basis. The rates of depreciation for fixed assets, which are not lower than the rates prescribed in Part C of Schedule II of the Companies Act, 2013, are given below :
Depreciation on vehicles and mobile phones is higher than the rates prescribed under the Schedule II of the Companies Act, 2013, based on the internal assessment of the useful life of these assets.
Fixed assets individually costing less than ' 5,000 are fully depreciated in the year of installation.
Depreciation on assets sold during the year is recognised on a pro - rata basis to the Profit and Loss Account till the date of sale. The gain or loss on sale of fixed assets is recognised to Profit and Loss Account. Profit on sale of premises net of taxes and transfer to Statutory Reserve is appropriated to Capital Reserve as per the RBI guidelines.
17.08 Income tax
Income tax expense is the aggregate amount of current tax and deferred tax charge. The current tax expense and deferred tax expense is determined in accordance with the provisions of the Income Tax Act, 1961 and as per As 22 - Accounting for Taxes on Income respectively. Deferred income taxes reflect the impact of current year timing differences between taxable income and accounting income for the year and reversal of timing differences of earlier years. Deferred tax assets and
liabilities are measured using tax rates and tax laws that have been enacted or substantively enacted at the Balance Sheet date.
Current tax assets and liabilities and deferred tax assets and liabilities are off - set when they relate to income taxes levied by the same taxation authority, when the Bank has a legal right to off - set and when the Bank intends to settle on a net basis.
Deferred tax assets are recognised only to the extent there is reasonable certainty that the assets can be realised in future. In case of unabsorbed depreciation or carried forward loss under taxation laws, deferred tax assets are recognised only if there is virtual certainty of realisation of such assets. Deferred tax assets are reviewed at each balance sheet date and appropriately adjusted to reflect the amount that is reasonably / virtually certain to be realised. The impact of changes in the deferred tax assets / liabilities is recognised in the Profit and Loss Account.
17.09 Employees stock option scheme The Bank has formulated Employees Stock Option Scheme - IDFC FIRST Bank Limited ESOS - 2015 (‘the Scheme') in accordance with the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 [‘SEBI (SBEB & SE) Regulations']. The scheme provides for the grant of options to acquire equity shares of the Bank to its employees. The options granted to employees vest in a graded manner and these may be exercised by the employees within a specified period.
The Bank follows the intrinsic value method to account for its stock - based employee compensation plans (for employees other than Whole Time Directors / Chief Executive Officers / Material Risk Takers and Control Function Staff). Intrinsic value is the amount by which the quoted market price of the underlying share on the date, prior to the date of the grant, exceeds the exercise price on the options. The quoted market price is the closing price on the stock exchange with highest trading volume of the underlying shares, immediately prior to the grant date. Compensation cost is measured by the excess, if any, of the market price of the underlying stock over the grant price as determined under the option plan. Compensation cost is amortised over the vesting period on a straight line method with a corresponding credit to Employee Stock Options Reserve. In case the vested stock options get lapsed / cancelled / expire unexercised, the balance in stock options outstanding is transferred to the general reserve. In case the unvested stock options get lapsed / cancelled, the balance in stock option outstanding account is transferred to the Profit and Loss Account.
Further, the Bank recognises fair value of share -linked instruments on the date of grant as an expense for all instruments granted after the accounting period
ending March 31, 2021 for Whole Time Directors / Chief Executive Officers / Material Risk Takers and Control Function Staff as required in the RBI clarification dated August 30, 2021 on Guidelines on Compensation of Whole Time Directors / Chief Executive Officers / Material Risk Takers and Control Function Staff. The fair value of the stock - based compensation is estimated on the date of grant using Black - Scholes model and the inputs used in the valuation model include assumptions such as the stock price, volatility, risk free interest rate, exercise price, time to maturity / expected life of options, Expected dividend yield. The cost of stock options is recognised as compensation expense over the vesting period.
17.10 Employee benefits
Provident fund, superannuation fund and pension fund :
The contribution to provident fund, superannuation fund and pension fund are considered as defined plans and are charged to the Profit and Loss Account as they fall due, based on the amount of contribution required to be made and when services are rendered.
Gratuity :
The net present value of obligations towards gratuity to employees is actuarially determined as at the Balance Sheet based on the projected unit credit method. The defined gratuity benefit plans are valued by an independent actuary as at the Balance Sheet date using the projected unit credit method as per the requirement of AS-15, Employee Benefits, to determine the present value of the defined benefit obligation and the related service costs. The actuarial calculations entail assumptions about discount rate, expected rate of return on plan assets, salary escalation rate, demographics assumptions include retirement age, mortality, leaving service, disability. Actuarial gains and losses are recognised in the Profit and Loss Account for the year.
Compensated absences :
Any unavailed privilege leave to the extent encashable is paid to the employees and charged to the Profit and Loss Account for the year based on estimates of availment / encashment of leaves.
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