What changed
Paragraph 4(11)(i)(c) of the Master Direction is replaced with a detailed formula for including quarterly profits in Owned Fund. Eligible profit is net profit up to quarter t minus 0.25 times average dividend paid over last three years. Quarterly profits require limited review or audit by statutory auditors. Any losses in the current year must be fully deducted from Owned Fund.
What it means for you
ARCs must now follow a stricter, formula-based approach to include quarterly profits in Owned Fund, ensuring capital adequacy is not overstated. The deduction of average dividends and full deduction of current year losses will reduce the amount of profit that can be counted, potentially impacting capital ratios. This aligns ARC capital treatment with prudential norms seen in other regulated entities.
What you must do
- Update internal Owned Fund computation models to incorporate the new formula for quarterly profits.
- Ensure quarterly financial statements are subjected to limited review or audit by statutory auditors before including profits.
- Calculate and deduct average dividend paid over the last three financial years from eligible quarterly profits.
- Deduct any current year losses in full from Owned Fund without offsetting against future profits.
- Review capital adequacy positions immediately to assess impact of the revised Owned Fund calculation.
Who it affects
All Asset Reconstruction Companies (ARCs), Statutory auditors of ARCs, ARC compliance and finance teams
What is the formula for eligible quarterly profit under the new direction?
Eligible profit up to quarter t (EP_t) equals net profit up to quarter t (NP_t) minus 0.25 times average dividend paid over the last three financial years (D).
Do we need auditor certification for quarterly profits included in Owned Fund?
Yes, the financial statements must be subjected to limited review or audit on a quarterly basis by the statutory auditors.
How are current year losses treated in Owned Fund computation?
Losses in the current year must be fully deducted from Owned Fund, with no provision for offsetting against future profits.