The Karnataka Bank Limited incorporated at Mangaluru in India is a publicly held Banking Company governed by the Banking Regulation Act, 1949 and is engaged in providing a wide range of banking & financial services involving retail ,corporate banking and para-banking activities in addition to treasury and foreign exchange business.
BASIS OF PREPARATION:
The accompanying financial statements have been prepared following the going concern concept, on historical cost basis and conform to the Generally Accepted Accounting Principles, (GAAP) in India which encompasses applicable statutory provisions, regulatory norms prescribed by the Reserve Bank of India (RBI) from time to time, notified Accounting Standards (AS) issued under the Companies (Accounting Standards) Rules, 2006 to the extent applicable and current practices prevailing in the banking industry in India.
The preparation of the financial statements require management to make estimates and assumptions that affect the reported amounts of assets and liabilities including contingent liabilities as of the date of the financial statements and the reported income and expenses during the reported period. The Management believes that the estimates and assumptions used in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. The differences, if any between estimates and actual will be dealt appropriately in future periods.
SIGNIFICANT ACCOUNTING POLICIES
1. REVENUE RECOGNITION:
Income is accounted for on accrual basis except in respect of income from Non Performing Assets, commission, exchange, Funded Interest Term Loan (FITL) and rent on safe deposit lockers, which are all accounted on cash basis. Recoveries made in Non-performing advances are appropriated as under:
a) In case of Term Loan/DPN the recoveries are appropriated towards the principal, interest and charges in order of demand.
b) In case of Overdraft accounts the recoveries are first appropriated towards excess allowed in overdraft account if any, followed by expired sanctioned TOD and then towards interest.
c) In case of One Time Settlement (OTS) accounts the recoveries are first adjusted to principal balance.
Investments are classified under the heads “Held to Maturity”, “Available for Sale" and “Held for Trading” categories and are valued in accordance with the RBI guidelines. The value, net of depreciation is shown in the Balance Sheet.
The excess of acquisition cost over the face value of securities under “Held to Maturity” category is amortized over the remaining period to maturity.
Transfers of scrip, if any, from one category to another, are done at the lowest of the acquisition cost / book value/ market value on the date of transfer and the depreciation, if any, on such transfers is fully provided for.
Provisions for non-performing investments are made as per RBI guidelines.
3. DERIVATIVE CONTRACTS
Derivative contracts are designated as hedging or trading and accounted in accordance with Reserve Bank of India''''s guidelines.
Derivatives deals for trading are marked to market and net depreciation is recognized while net appreciation is ignored.
Derivatives used for hedging are marked to market in cases where the underlying assets/ liabilities are marked to market and Income /expenditure is accounted on accrual basis.
a) Advances are classified into (a) Standard; (b) Sub-Standard; (c) Doubtful; and (d) Loss assets, in accordance with the RBI Guidelines and are stated net of provisions made towards Non- performing advances and unrealized interest. Provisions are made in accordance with the prudential norms prescribed by Reserve Bank of India.
b) In case of financial assets sold to Securitization/Reconstruction Company, if the sale is for the price higher than the net book value, excess provision held is not reversed but held till redemption of the security receipt, wherever applicable. If the sale is at a price below the net book value (NBV), the shortfall is debited to the Profit and Loss account, except wherein Reserve Bank of India has specifically permitted amortization of the loss on sale of advances over the subsequent periods.
5. FIXED ASSETS:
Premises and other fixed assets are shown at Cost / Revalued amount as reduced by depreciation written off to date. The land and buildings are capitalized based on conveyance/letters of allotment/physical possession of the property.
Software is capitalized along with computer hardware and included under Other Fixed Assets.
Depreciation on fixed assets is provided following Straight Line Method (SLM) as per the useful life specified under Schedule II of the Companies Act, 2013, except in respect of computers (including software) where depreciation is provided at a flat rate of 33.33% as per RBI guidelines.
Where during any financial year, addition has been made to any Asset or where any Asset has been sold, discarded, demolished or destroyed, the Depreciation on such Asset is calculated on Pro rata basis from the date of such addition or as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.
Premium paid on lease hold properties is charged off over the lease period.
Depreciation of leased assets is calculated so as to spread the depreciable amount over the primary lease period.
Carrying amount of assets is reviewed at each balance sheet date for indication of impairment, if any, and is recognized wherever the carrying amount of an asset exceeds its recoverable value.
7. FOREIGN CURRENCY TRANSACTIONS:
Monetary Assets and Liabilities, Forward Exchange Contracts, Guarantees, Letters of Credit, Acceptances, Endorsements and other obligations are evaluated at the closing spot rates/forward rates for the residual maturity of the contract, as published by FEDAI and in accordance with the Accounting Standard 11.
Income and expenditure items are translated at the exchange rates ruling on the respective dates of the transaction.
The gain or loss on evaluation of outstanding monetary assets/liabilities and Foreign Exchange Contracts are taken to Profit and Loss Account.
8. EMPLOYEE BENEFITS:
Contribution made by the Bank to the Provident Fund and Contributory Pension Scheme are charged to the Profit and Loss Account.
Contribution to the recognized Gratuity Fund, Pension Fund and encashable Leave are determined and recognized in the accounts based on actuarial valuation as at the Balance Sheet date and net actuarial gains/losses are recognized as per the Accounting Standard 15.
Short term employee benefits are accounted for on actual basis.
9. EMPLOYEE STOCK OPTION:
The Bank uses Intrinsic Value method to account for compensation cost of stock options granted to employees of the Bank. Intrinsic Value is the amount by which the quoted market price of the underlying shares exceeds the exercise price of the options.
10. SEGMENT REPORTING:
The Bank recognizes the Business Segment as the Primary Reporting Segment and Geographical Segment as the Secondary Reporting Segment, in accordance with the RBI guidelines and in compliance with the Accounting Standard 17.
Business Segment is classified into (a) Treasury, (b) Corporate and Wholesale Banking, (c) Retail Banking and (d) Other Banking Operations.
Geographical Segment consists only of the Domestic Segment since the Bank does not have any foreign branches.
11. SHARE ISSUE EXPENSES:
Share issue expenses are adjusted in share premium account.
12. EARNINGS PER SHARE:
Earnings per share are calculated by dividing the net profit or loss for the year attributable to the equity share holders by the weighted average number of equity shares outstanding during the year.
Diluted Earnings per equity share are computed by using the weighted average number of equity shares and dilutive potential equity shares outstanding as at the year end.
Tax expenses comprise current and deferred taxes. Current income tax is measured at the amount expected to be paid to the tax authorities in accordance with the Income Tax Act, 1961 and are made after due consideration of the judicial pronouncement and legal opinions.
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 is measured based on the tax rates and the tax laws enacted or substantively enacted at the Balance Sheet date. Deferred tax assets are not recognized unless there is a virtual certainty that sufficient future taxable income will be available against which such deferred tax assets will be realized.
14. PROVISIONS AND CONTINGENT LIABILITIES:
A provision is recognized when there is an obligation as a result of past event, it is probable that an outflow of resources will be required to settle the obligation and in respect of which a reliable estimate can be made. Provisions are not discounted to their present value and are determined based on the best estimate required to settle the obligation as at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates.
In case where the available information indicates that the loss on the contingency is reasonably possible but the amount of loss cannot be reasonably estimated, a disclosure is made in the financial statements under Contingent Liabilities.
15. NET PROFIT
The net profit disclosed in the Profit & Loss Account is after making provisions for (i) Taxes, (ii) Non Performing Assets, (iii) Standard Advances, (iv) Restructured Advances, (v) Depreciation on Investments and (vi) other necessary and applicable provisions.