Page 206 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 4. All securitization transactions must be reviewed to ensure the following:

(a) Controls over receivables on due dates,
(b) Ratio of non-performing assets in the portfolio in relation to agreed % at the time of
takeover (though RBI only permits securitisations of standard assets),

(c) maintenance and disclosure of cash collaterals,
(d) compliance with terms of agreement,
(e) availability of financials of SPV to assess value in books of investors in PTC and
reports from collecting agent on recovery transferred to SPV.

10.10.1 Valuation

Held to Maturity

1. Investments classified under Held to Maturity category need not be marked to market and
will be carried at acquisition cost, unless it is more than the face value, in which case the
premium should be amortized over the period remaining to maturity.
2. Banks should recognize any diminution, other than temporary, in the value of their
investments in subsidiaries/joint ventures which are included under Held to Maturity
category and should be provided for. Such diminution should be determined and provided
for each investment individually.

Available for Sale

The individual scripts in the Available for Sale category will be marked to market at quarterly
or at more frequent intervals. Securities under this category shall be valued scrip-wise and
depreciation/appreciation shall be aggregated for each classification. Net depreciation, if any,
should be provided for. Net appreciation, if any, should be ignored. Net depreciation required
to be provided for in any one classification should not be reduced on account of net appreciation
in any other classification. The book value of the individual securities would not undergo any
change after the marking to market.

Held for Trading

The individual scripts in the Held for trading category will be marked to market at monthly or
at more frequent intervals and provided for as in the case of those in the Available for Sale
category. Consequently, the book value of the individual securities in this category would also
not undergo any change after marking to market.

Investment Fluctuation Reserve

Banks have been advised to build up Investment Fluctuation Reserve (IFR) of a minimum 5 per
cent of the investment portfolio within a period of 5 years.

Investment Reserve Account

In the event, provisions created on account of depreciation in the ‘Available for Sale’ or ‘Held for
Trading’ categories are found to be in excess of the required amount in any year, the excess
should be credited to the Profit & Loss account and an equivalent amount (net of taxes, if any and

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