RBI Clarification – Accounting Procedure for Investments – Settlement Date Accounting

Investments in Company’s accounts can be accounted in two dates, Trade Date or the Settlement Date.

It is better that the particular industry follows a uniform rule, to ensure meaningful comparisons are possible. Otherwise, the same have to be mentioned in Notes of Accounts, which might distort comparisons amongst peers.

The uniform rule applies to Bank’s also.

To ensure uniformity amongst the Banks in Accounting Procedure for Investments, Reserve Bank of India, DBOD, vide RBI/2010-11/264 DBOD No. BP.BC. 58/21.04.141/2010-11 dt.November 4, 2010, has issued a clarification note.

The complete Notification can be accessed @ http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6080&Mode=0

The highlights are:

01)  Banks should follow ‘Settlement Date’ accounting for recording purchase and sale of transactions in Government securities.

02)  The new rule is effective from 01/01/2011 i.e two transaction time is available for the Banks.

What Does It Mean?

What Does Trade Date Accounting Mean?

A method company accountants and bookkeepers use to record transactions that take place on the date at which an agreement has been entered (the trade date), and not on the date the transaction has been finalized (the settlement date). If the transaction involves interest, the interest cannot be recorded on the books until the settlement date has arrived.

Investopedia Says:
The distinction between trade date and settlement date accounting is an important one, as it can impact the company’s financial statements. For example, assume ZXC Corp., which has a year end of December 31, purchases a new factory with debt on December 26, and takes possession of this factor on January 31 of the next year.

If ZXC uses trade date accounting, the asset and loan amount will be recorded in the company’s books – without any interest accruing for the five days – on December 26. If they used settlement data accounting, the asset and liability will be recorded in the company’s books on January 31 of the following year.


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