##ical provisions built up bis central bankers ’ speeches under pcr freely and there were certain design issues too,. the buffer ( surplus of provisions over specific provisions ) will be allowed to be used by banks for making specific provisions for npas during periods of system wide downturn, with the prior approval of rbi. 20. the financial crisis also led to heavy criticism of accounting rules that permitted certain structured / special purpose entities and exposure to remain off - balance sheet. a key concern with such instruments and vehicles is that they have a tendency to veil the risks off - balance sheet and a robust accounting framework that provides for the recognition and disclosure of these risks is a prerequisite to their introduction. the iasb has tried to rectify the situation by introducing ifrs 10 on consolidated financial statements while the fasb has also worked towards toughening off - balance sheet accounting rules. 21. in india, the rbi has always followed a cautious and gradualist approach towards complex exotic financial products and has taken steps to reduce and contain the regulatory arbitrage between the banking and the shadow banking sectors ( mainly the non banking financial companies i. e. nbfcs ) by considerably upgrading the prudential rules for nbfcs. 22. overall accounting for financial instruments had become highly complex and rules based in the period leading up to the crisis and iasb ’ s project to replace ias 39 with ifrs 9 is a welcome initiative. however, delays in finalising proposals relating to impairment and hedge accounting coupled with recent proposals to reopen classification and measurement of financial assets are a cause of concern. iasb ’ s classification requirements for assets revolve around the business model approach whereas fasb ’ s approach is based more on the characteristics of the instrument. further, fasb ’ s approach may also entail more items in the balance sheet being carried at fair value. implementation of ifrs in india 23. the convergence to ifrs in india is a work - in - progress and i would like to dwell upon the implementation issues and challenges with particular reference to the indian banking system. 24. as part of the g20 ’ s efforts to evolve a single set of global high quality standards, the ministry of corporate affairs ( mca ), government of india released a roadmap that provided for a gradual convergence to ifrs in a phased manner commencing from april 1, 2011. in terms of the road map, commercial banks in india are required to converge with ifrs with effect from accounting periods beginning april

the key issues identified by the fcag involved : the difficulty of applying fair value ( “ mark to - market ” ) accounting in illiquid markets ; the delayed recognition of losses associated with loans, structured credit products, and other financial instruments by banks, insurance companies and other financial institutions ; issues surrounding the broad range of off - balance sheet financing structures, especially in the us ; and the extraordinary complexity of accounting standards for financial instruments, including multiple approaches to recognizing asset impairment. some of these weaknesses also highlighted areas in which ifrs and us generally accepted accounting principles ( us gaap ) diverged. 13. while these aspects were identified by accounting professionals, regulators expressed concerns on systemic risk arising out of procyclicality in accounting standards. procyclicality in policy making refers to financial developments and policies that add momentum to the economic cycle and have an amplifying effect on economic fluctuations. the procyclicality embodied in capital regulation and accounting standards was among the identified causes underlying the global financial crisis. the in - built procyclicality amplified business cycles, affecting both the degree of credit expansion in benign conditions and the degree of credit contraction in the downturn. 14. the requirement to use fair value accounting for assets and liabilities in illiquid markets has serious disadvantages from the point of view of regulators, and of systemic financial risk. a mark - to - market approach i. e. fair value accounting contributes to excessive leverage during boom periods and leads to excessive write - downs in busts. under such accounting irrational exuberance in asset prices can feed through to high published profits and perhaps bonuses, encouraging more irrational exuberance in a self - reinforcing fashion : when markets turn down, it can equally drive irrational despair. if all market participants attempt simultaneously to liquidate positions, markets which were previously reasonably liquid will also become illiquid, and realisable values may, for all banks, be significantly lower than the published accounts suggested. 15. volatility in financial statements is also a concern for the regulator. fair value accounting introduces volatility into financial statements through the following channels : volatility on account of changes in underlying economic parameters. for instance if interest rates increase, the fair value of bonds reduces and vice versa. volatility produced due to measurement errors and / or changing views regarding the economic prospects through the business cycle. fair value measures generally represent the present value of a stream of expected cash flows. very often