Examination of classification and shifting
The auditor should examine whether the shifting of the investments to/from HTM category is carried out only once during a financial year and at the beginning of the financial year unless otherwise stipulated by RBI under special dispensation. Such shifting is required to be duly approved by the Board of Directors of the bank. As regards the shifting of investments from AFS to HFT, the auditor should verify the same as having been duly approved by the Board of Directors / ALCO / Investment Committee. In case of exigencies, the shifting from AFS to HFT may be done with the approval of the Chief Executive of the Bank/ Head of ALCO, but should be ratified by the Board of Directors later. Shifting of investments from HFT to AFS is generally not allowed. However, it will be permitted only under exceptional circumstances like not being able to sell the security within 90 days due to tight liquidity conditions, or extreme volatility, or market becoming unidirectional. Such transfer is permitted only with the approval of the Board of Directors/ ALCO/ Investment Committee.
Transfer of scrips from AFS / HFT category to HTM category should be made at the lower of book value or market value. In other words, in cases where the market value is higher than the book value at the time of transfer, the appreciation should be ignored and the security should be transferred at the book value. In cases where the market value is less than the book value, the provision against depreciation held against this security (including the additional provision, if any, required based on valuation done on the date of transfer) should be adjusted to reduce the book value to the market value and the security should be transferred at the market value.
In the case of transfer of securities from HTM to AFS / HFT category, a. If the security was originally placed under the HTM category at a discount, it may be transferred to AFS / HFT category at the acquisition price / book value. (It may be noted that as per existing instructions banks are not allowed to accrue the discount on the securities held under HTM category and, therefore, such securities would continue to be held at the acquisition cost till maturity). After transfer, these securities should be immediately re-valued and resultant depreciation, if any, may be provided.
b. If the security was originally placed in the HTM category at a premium, it may be transferred to the AFS / HFT category at the amortised cost. After transfer, these securities should be immediately re-valued and resultant depreciation, if any, may be provided.
It is to be noted that in case if the bank is following ‘Weighted Average Method’, the cost of acquisition of the security is required to be considered redundant and instead book value (which would be weighted average value) needs to be considered for the purpose of above mentioned both clauses.
If the value of sale or transfer (excluding one-time shifting and additional shifting explicitly permitted by RBI), exceeds 5% of the book value of HTM investments as at the beginning of the year, the bank should disclose market value of the investments under HTM category along with disclosure of excess of book value over market value for which provision is not made.
The audit procedures in this regard would include:
obtaining list of shifting of investments during the reporting period.
checking compliance with RBI guidelines and existence of proper approvals for same.
checking proper recording/ accounting of book value and depreciation on date of shifting.