seminar on audit of urban co operative banks

 Users Of Financial Statements Need Information
For Making Economic Decisions.
 Wants To Know Liquidity, Solvency And Risks
Related To Assets And Liabilities.
 Information In The Nature Of Notes On Accounts
To Financial Statements Helps The Users To Take
Effective Decision.
 Summary Of “Significant Accounting Policies”
And “Notes To Accounts” To Be Shown After
Financial Statements.
Notes on Accounts – Accounting
 Significant Accounting policies – AS-4
 Accounting conventions
 Revenue Recognition
 Expenditure
 Staff Retirement Benefit
 Fixed Assets
 Advances
 Investments
 Notes on Accounts.
Additional Disclosure – RBI Norms
 RBI Circular dated 30.10.2002 – Disclosure of
To Enhance the transparency, Comprehensive disclosure is
Net worth, Investment details, Advances to Directors and
relatives, cost of deposits
Concentration of deposits, Advances, Exposures and NPA
Sector wise NPA
Movement of NPAs
Overseas assets, NPAs and revenue
Separate disclosure for penalty levied by RBI
NO. 14/21.04.018/2012-13
 Circular dated 30.10.2002 – Disclosure of Information
for UCB having deposits of Rs. 100 Crore or more.
Accounting Conventions :
The accompanying financial statements have
been prepared on historical cost convention on
Going Concern basis and confirm to the
statutory provisions and practices prevailing in
India, unless otherwise stated.
 This standard requires that in addition to the
disclosure required by Accounting standard 1 on
“Disclosure of Accounting policies (AS 1) bank should
also disclose the circumstances in which revenue
recognition has been postponed pending the
resolution of significant uncertainties.
All revenues are accounted for on accrual basis. However,
considering the nature of transactions, smallness of
amounts, uncertainties involved and consistent practice,
locker rent, Commission, Brokerage and Exchange and
Interest and other income on Non Performing Assets
are recognized on Cash basis. Liability is created for
locker rent received in advance.
 Expenditure :
All Expenses except as otherwise stated are accounted for
on accrual basis. However, considering the nature of
transactions, smallness of amounts, uncertainties involved
and consistent practice:
 Interest on Overdue Deposits is accounted for at the
time of Renewal however interest on O D deposit is
accounted on accrual basis as per saving rate of interest.
 Legal Expenses incurred in suit filed/NPA accounts have
been accounted as current assets till the same is
recovered from the borrower.
 Staff Retirement Benefits : ACCOUNTING STANDARD 15
 Banks
have to follow the disclosure requirements
prescribed under AS 15 (revised) on “Employees Benefits”
issued by ICAI.
 The bank has not made provision for gratuity during the year
as in the opinion of the management, the existing gratuity
fund is sufficient to discharge the liability of gratuity at the
time of retirement of employees.
 Liability for Leave Encashment is accounted on cash basis.
Since the format of the profit and loss account
of banks prescribed in Form B under Third
Schedule to the Banking Regulation Act. 1949
does not specifically provide for disclosure of
the impact of prior period items on the current
year’s profit and loss, such disclosure, wherever
warranted, may be made in the ‘Notes to
Accounts’ to the balance sheet of banks.
Merger closure of branches of banks by
transferring the assets / liabilities to the other
branches of the same bank may not be deemed as a
operation and
hence this
Accounting Standard will not be applicable to
merger / closure of branches of banks by
transferring the assets / liabilities to the Standard
only when:
a) Discontinuing of the operation has resulted in
shedding of liability and realization of the assets by
the bank or decision to discontinue an operation
which will have the above effect has been finalized
by the bank and
b) The discontinued operation is substantial in its
c) This is to be reported for the bank which under
Fixed Assets – AS -10
 Fixed Assets :
 Fixed Assets are stated at their historical cost
less depreciation.
 Depreciation is provided on Written Down
Value Method and rates of Depreciation are
as under:
Sr. No.
Fixed Assets
Rate of Depreciation
Furniture & Fixtures
Safe Deposit Vault
Electric Equipments
Sr. No.
Fixed Assets
Rate of Depreciation
Dead Stock
Air Conditioner
D.G. Set Generator
 Depreciation on Fixed Assets (except computer)
purchased after 30th September is provided at 50% of the
above rates while no depreciation is provided on
sale/deduction from fixed assets during the year.
 Depreciation on Computers & UPS is provided in 3
equal installments as per RBI guidelines.
 Advances :
 Advances are classified into Performing & Non
Performing Assets and provision is made based on
Management assessment, which is not less than the
requirement as per RBI guidelines.
 Advances are stated at gross value while provision for
performing & Non Performing Assets required to be
made as per R.B.I. guidelines are shown under the head
Reserve & Other Funds under sub head Bad & Doubtful
Debts Reserve Fund, Special Bad Debts Reserve Fund
and Standard Assets Reserve fund in accordance with
requirement of the applicable statute for disclosure.
Investments :
 Investments are categorized as under :
State & Central Government Securities
Approved Trustee Securities
Shares of Co-operative Banks
Other Investments
 Investments are further classified as under :
Held to Maturity
Held for Trading
Available for Sale
 Classification & Valuation of Investments :
 Held to Maturity
Premium Paid on securities classified as HTM is
required to be amortized over a period of Maturity
and disclosure is required for amortization of
 Available for Sale
 Provision for diminution in value of Investments held
for trading is made on year to year basis whereas in
respect of those held to maturity no provision is
required as per RBI guidelines.
-- Disclosure for depreciation in investments held
for sale/trading is required.
• Note for Priority & Weaker sector advance:
-The Bank has achieved the overall exposure of advances to
Priority Sector as per RBI guidelines. However part of this
exposure required for weaker section has not been
• Note for implementation of share Linkages on
- When CRAR of the bank is above 9%,
implementation of share linkages is not applied.
Notes for Compliance with Accounting
The Bank is primarily engaged in banking activity as defined by
RBI. As interest income accounts for nearly 95% of banks total
revenue, separate business segment reporting as per AS-17 is not
considered necessary.
Earning per share is not disclosed as it is not considered relevant
for a cooperative bank.
Expenditure on software is not treated as intangible asset as per
past practice.
No provision is made for deferred tax liability/assets as per AS-22.
Note for Taxation:
 During the year, provision for current year Income Tax
amounting to Rs. Lacs is computed as per total
Income computed under the Income Tax Act, 1961 after
taking into account available deductions and
Note for Urban Banks Equalization Fund:
 The Bank is required to transfer
15% of the profits
remaining after allocation as per by laws to Urban Bank
Branch Equilization Fund and pay the same to the State
Government. However, the bank has not paid Rs.
accumulated till 31.03.2013 in view of the stay granted by
the Honorable Gujarat High Court as per the writ
petition filed by the Federation of Cooperative Banks.
• Disclosure Note on Movement of CRAR:
31.03.2013 31.03.2012
 Capital to Risk
Assets Ratio
Disclosure Note on Advances:
 Advances against real estate, construction business
and housing are Rs. lacs
Advances against Shares & Debentures are Rs. Nil
Unrealized Interest Income amounting to Rs.
Lacs on Non Performing Asset accounts which are
debited to borrower accounts are reversed and
credited to Overdue Interest Reserve Account on
the basis of excess balance over sanction limit.
The Bank has created Interest Reserve Account for
interest accrued in respect of Non Performing Asset
by debiting Interest Receivable Account and crediting
Overdue Interest Reserve Account amounting to Rs.
The Bank has created Interest Reserve Account for
interest accrued in respect of Non Performing Asset
by debiting Interest Receivable Account and crediting
Overdue Interest Reserve Account amounting to Rs.
Disclosure of Movement of NPAs
Gross NPAs* as on 1st April of particular year (Opening Balance)
Additions (Fresh NPAs) during the year
Sub-total (A)
Less :
(i) Up gradations
(ii) Recoveries (excluding recoveries made from upgraded
(iii) Write-offs
Sub-total (B)
Gross NPAs as on 31st March of following year (closing balance)
Amount in
At present, Reserve Bank is empowered to impose penalties
on a commercial bank under the provision of Section 46
(4) of the Banking Regulation Act, 1949, for contraventions
of any of the provisions of the Act or non-compliance with
any other requirements of the Banking Regulation Act,
1949; order, rule or condition specified by Reserve Bank
under the Act. Consistent with the international best
practices in disclosure of penalties imposed by the
regulator, placing the details of the levy of penalty on a
bank in public domain will be in the interests of the
investors and depositors. Further, strictures or directions
on the basis of inspection reports or other adverse findings
should also be placed in the public domain. The penalty
should also be disclosed in the “Notes on Accounts” to
be Balance Sheet.
Disclosure on Profitability
Following disclosure is required with reference to
Profitability of UCB:
a) Interest income as a percentage of working funds
b) Non-Interest income as a percentage of working
c) Operating profit as a percentage of working funds
d) Return on Assets
e) Business(Deposit+Advances) per Employee
f) Profit per Employee
Management Representation Report
 To obtain MRR from Bank regarding followings
 Accounting policies followed by the bank.
 Assets/Fixed Assets/Investments/Loans &
Advances/Other Current Assets/Cash & Bank Balance
 Capital Commitment
 Liabilities/provision for loss/ Profit & Loss
Account/Balancing of Books/ General/Statutory
Submission of Statutory Returns:
 Submission of SLR/CRR Statements
 Submission of CTR/STR transaction Report
 Submission of ALM
 Submission of other OSS Statements
 Submission of DICGC Premium Correctly
Taxation of co op Banks
 Section 36(viia) – In respect of provision for Bad &
Doubtful debts
 7.5% of total income computed before making any
provision under this clause – No special reserve is
required to be deducted.
 Section 36(viii) – Deduction of 20% of profit on
eligible business subject to creation of special
Taxation of co op Banks
 Written off of Investment in MMCB Bank. Whether to
be allowed under section 37 or is restricted under
section 36(viia)?
 Whether proceedings under section 263 on account of
interest on NPA which is not offered for tax as the
same is accounted on the basis of realization as per
RBI guideline is correct where the bank is follows
accrual basis of accounting?
 Applying ruling in case of Oriental Bank of Commerce
Vs IAC (1989) 31 ITD 519 (Delhi) on the basis of Board
circular F.No. 201/21/84 –ITA-II dated 09.10.1984.
Taxation of co op Banks
United Bank of India Vs. Deputy Commissioner
of Income Tax ITAT Calcutta ‘D’ Bench (1999) 64
TTJ (Cal) 432
Deputy Commissioner of Income Tax Vs.
Syndicate Bank & Others ITAT Bangalore Bench
(1995) 51 TTJ (Bang) 365
Income Tax Officer Vs. Oriental Bank of
Commerce Ltd. ITAT Delhi ‘B” Bench (1983) 3 ITD
(DEL) 226
State Bank of Patiala Vs. Joint Commissioner of
Income Tax ITAT, Chandigarh ‘B’ Bench.
(2008) 10 DTR (Chd) (Trib) 527

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