Page 204 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 3. Classification: All outflows and PTCs or share in securitized assets may be classified into
Investments or Advances. Generally these are instruments, which are independently
realizable at will and classified as investments under non-SLR category. The above
investment should be carried in the books of the bank/FI at the price as determined
above, until its ultimate sale or realization, and on such sale or realization; the loss or gain
must be dealt with as under:
(a) If the sale to SC/RC is at a price below the Net Book Value (NBV) (i.e. Book value
less provisions held), the shortfall should be debited to the profit and loss account of
that year.
(b) If the sale is for a value higher than the NBV, the excess provision will not be
reversed but will be utilised to meet the shortfall/loss on account of sale of other
financial assets to SC/RC.
All instruments received by banks/FIs from SC/RC as sale consideration for financial
assets sold to them and also other instruments issued by SC/RC in which banks/FIs
invest, will be in the nature of non-SLR securities. Accordingly, the valuation, classification
and other norms applicable to investment in non-SLR instruments prescribed by RBI from
time to time would be applicable to bank’s/FI’s investment in debentures/bonds/security
receipts/PTCs issued by SC/RC. However, if any of the above instruments issued by
SC/RC is limited to the actual realization of the financial assets assigned to the instruments
in the concerned scheme the bank/FI shall reckon the Net Asset Value (NAV), obtained
from SC/RC from time to time, for valuation of such investments. There are exceptions
where certain bonds or subscriptions to equities for projects are termed as Advances.

4. Sub-classification: The entire investment portfolio of the banks (including SLR securities
and non-SLR securities) should be classified under three categories viz. ‘Held to Maturity’,
‘Available for Sale’ and ‘Held for Trading’. However, in the Balance sheet, the investments
will continue to be disclosed as per the existing six classifications viz. (a) Government
securities, (b) Other approved securities, (c) Shares, (d) Debentures & Bonds, (e) Subsidiaries/
joint ventures and (f ) Others (CP, Mutual Fund Units, etc.). Banks should decide the
category of the investment at the time of acquisition and the decision should be recorded
on the investment proposals.

Held To Maturity: The securities acquired by the banks with the intention to hold them up
to maturity will be classified under Held to Maturity. (Banks are allowed to include
investments included under ‘Held to Maturity’ category up to 25 per cent of their total
investments). SLR securities up to 25 per cent of their Demand and Time Liabilities (DTL)
as on the last Friday of the second preceding fortnight, Non-SLR securities included under
HTM as on September 2, 2004, Fresh re-capitalization bonds received by the bank from the
Government of India towards their re-capitalization requirement and held in their
investment portfolio, Fresh investment in the equity of subsidiaries and joint ventures
(holds more than 25 per cent of the equity) and RIDF/ SIDBI deposits.

10.9.3 Available For Sale & Held for Trading

The securities acquired by the banks with the intention to trade by taking advantage of the
short-term price/ interest rate movements will be classified under Held for Trading. The securities
which do not fall within the above two categories will be classified as ‘Available for sale’

1. Available For Sale: The banks will have the freedom to decide on the extent of holdings
under Available for Sale and Held for Trading categories. This will be decided by them
after considering various aspects such as basis of intent, trading strategies, risk management

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