Auditing and EthicsQuestion 5661 of 212
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10. Is the bank's decision not to apply NPA and income recognition norms to account of SJ Ltd. valid under regulatory guidelines?

Options

AThe bank is correct to the extent of not applying the NPA norms for provisioning purposes. However, this exemption is not available in respect of income recognition norms.
BThe bank is not correct for not applying the NPA norms for provisioning purposes. But this exemption is available in respect of income recognition norms. AUDITING AND ETHICS
CThe bank is correct in not applying the NPA norms and income recognition norms as both are not applicable.
DThe bank is not correct in not applying the NPA norms and income recognition norms as both are applicable. (2 Marks)
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Correct Answer

Option AThe bank is correct to the extent of not applying the NPA norms for provisioning purposes. However, this exemption is not available in respect of income recognition norms.

All Options:

  • AThe bank is correct to the extent of not applying the NPA norms for provisioning purposes. However, this exemption is not available in respect of income recognition norms.
  • BThe bank is not correct for not applying the NPA norms for provisioning purposes. But this exemption is available in respect of income recognition norms. AUDITING AND ETHICS
  • CThe bank is correct in not applying the NPA norms and income recognition norms as both are not applicable.
  • DThe bank is not correct in not applying the NPA norms and income recognition norms as both are applicable. (2 Marks)

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Detailed Solution & Explanation

Under RBI guidelines, advances guaranteed by the Central Government are exempt from NPA classification and provisioning requirements *only for provisioning purposes* (meaning they are not treated as NPA for provisioning until the guarantee is repudiated).
However, this exemption is not available for income recognition norms. Interest on such accounts can be recognized as income only when it is actually realized, not on accrual basis.
Hence, **Option A** is the correct answer.

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