Technical Guide

on
Accounting Treatment of Bullion (Gold)
Borrowing and Lending Transactions

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
New Delhi
 Technical Guide on

Accounting Treatment of Bullion (Gold)

Borrowing and Lending Transactions

Accounting Standards Board

The Institute of Chartered Accountants of India
New Delhi
© The Institute of Chartered Accountants of India

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Year of Publication : 2019

Committee/Department : Accounting Standards Board

E-mail : [email protected]

Website : www.icai.org

Price : ₹ 60/-

ISBN : 978-81-8441-960-3

Published by : The Publication Department on behalf

of the Institute of Chartered
Accountants of India, ICAI Bhawan,
Post Box No. 7100, Indraprastha Marg,
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July/2019/1,000 Copies
 FOREWORD

The Gems and Jewellery sector in India is witnessing major changes in

consumer preferences due to its cultural and social background. Moreover,
increase in per capita income has led to an increase in sales of jewellery and in
the coming years, a mammoth growth is expected. India being the largest
exporters of gems and jewellery, this industry is expected to play a vital role in
the Indian economy as it contributes a major portion to the total foreign reserves
of the country.

In this context, Banking system plays a pivotal role in facilitating the availability of
physical gold from international markets as India’s demand for gold is far in
excess of the local supply. Of course, this market feature necessitates use of
highly valuable and, at times volatile, foreign exchange resources of India. The
Reserve Bank of India (RBI), monitors and supervises various activities in this
area and has issued many specified circulars and papers to provide necessary
regulatory framework.

Predominant volume of transactions among three critical constituents in this area

of activity viz. Indian Banks, Indian Jewellers and International Suppliers (mostly
International Banks) assume the form of borrowing and lending like any currency
or security. This distinct feature lends itself to a few special accounting
implications and challenges. Therefore, a need was being felt for specific
guidance to suggest appropriate and uniform accounting treatment for banks.
Accordingly, the Accounting Standards Board of the ICAI has taken an initiative
to provide necessary guidance and has decided to come out with this Technical
Guide.

I would like to extend my warm wishes to CA. M.P. Vijay Kumar, Chairman,
Accounting Standards Board, CA. (Dr.) Sanjeev Singhal, Vice-Chairman,
Accounting Standards Board and the members of the Board for their immense
contribution towards the publication. I am confident that this technical guide will
be extremely useful to all including to the Indian Banking Sector in standardising
the accounting practices.

New Delhi CA. Prafulla P. Chhajed

June 29, 2019 President, ICAI
 Preface
In India, gold holds a very important place not only in the cultural environment
but also in the economic terms. It is generally observed that marriages in India
are not complete without exchange of gold jewellery. India is considered to be
the largest consumer of gold in the world on account of the rising middle-class
population and increasing income levels.

So as to meet the country’s gold requirements, the Indian Banks extend gold
loan in its physical form to the Indian Jewellers. The gold so borrowed by the
Indian Jewellers act as a direct raw-material for the main purpose of
manufacturing of jewellery which can either be sold locally in the domestic
market or exported outside India. Thus, we can say that the Indian Banks play a
pivotal role in making the raw-material available to the jewellers.

Considering the importance of this sector in the Indian economy and keeping in
view, the peculiarities of the transactions that have specialised accounting
implications, it was paramount task for ICAI to provide guidance for this sector.
Also, it has been noted that currently, the sector do not have uniform accounting
system for the entered transactions.

This Technical Guide aims at providing accounting perspective for the Indian
Banks who enters into borrowing transactions with the international bullion
supplier and extends the borrowed loan to the Indian jewellers.

I am very grateful to our Honourable President, CA. Prafulla P. Chhajed and

Vice-President, CA. Atul Kumar Gupta, for providing an opportunity of bringing
out this Technical Guide. I would also like to extend my gratitude to CA. Dr.
Sanjeev Kumar Singhal, Vice-Chairman, ASB. Further, I would also like to make
special mention of the significant contributions made by the Study Group
members who actively participated in the discussions and extended their
continuous guidance and support in bringing this Technical Guide.

I would like to place on record my deep appreciation of the dedicated efforts put
in by CA. Vidhyadhar Kulkarni, Head, Technical Directorate and his team
including CA. Parminder Kaur and CA. Anjali Butani.
I hope this Technical Guide will be of enormous use to all the stakeholders and
look forward to suggestions to further improve this publication and to keep it
updated.

New Delhi CA. M P. Vijay Kumar

June 27, 2019 Chairman
Accounting Standards Board
Contents
1 Introduction 1

2 Scope and Objective of this Technical Guide 2

3 Detailed Background and Types of Transactions 3

4 Legal Arrangements and Salient Features 6

5 Regulatory Environment 11

6 Analysis of Accounting Aspects 14

7 Appendix 27
1. Introduction
India's gems and jewellery sector is one of the largest in the world contributing
29 per cent to the global jewellery consumption. The market size of the sector is
about US$ 75 billion as of 2018 and is estimated to reach US$ 100 billion by
2025. The sector is home to more than 300,000 gems and jewellery players,
contributes about 7 per cent to India’s Gross Domestic Product (GDP) and
provides employment to over 4.64 million people.
India's gems and jewellery sector contributes about 15 per cent to India’s total
merchandise exports. The overall net exports of gems and jewellery stood at
US$ 32.71 billion during FY18 registering a Compound Annual Growth Rate
(CAGR) of 5.83 per cent over FY05; whereas gems and jewellery imports
increased at a CAGR of 7.97 per cent from US$ 11.63 billion in FY05 to US$
31.52 billion in FY18.
India is the largest consumer of gold in the world. Rising middle class population
and increasing income levels are the key drivers for the demand of gold and
other jewellery in India. Gold demand in India rose 11 per cent year-on-year to
760.40 tonnes during January-December 2018.The Bureau of Indian Standards
(BIS) has revised the standard on gold hallmarking in India from January 2018,
to include a BIS mark, purity in carat and fitness as well as the unit’s
identification and the jeweller’s identification mark on gold jewellery. The move is
aimed at ensuring a quality check on gold jewellery. (Source: India Brand Equity
Foundation’s (IBEF) April 2019 report on Gems and Jewellery industry).
India imports around 800 tonnes of gold and the imports are normally channeled
through the RBI approved banks and nominated agencies. The gold imported is
used for meeting the domestic investment demand, jewellery demand both
domestic and export. Banks play a very important canalising agency role while
meeting the gold metal loan demand of the entire jewellers’ fraternity.
Gold imports inflict a drag on the foreign exchange reserves and would impact
the volume of external debt. Divergent factors have contributed to the spike in
gold imports by India in more recent years. Large gold imports, if unchecked, can
potentially threaten the external stability and, therefore, there is an unambiguous
need to moderate them. For controlling the same, there is a need to opt for not
only demand reduction measures but also supply management measures. On
the demand front, the RBI and the Government has always been coming out with
gold-backed investment / financial products and on the supply front, bank’s role
in canalising gold imports is multi-fold and useful. Banking sector as a formal
channel has been playing an important role in the gold imports and gold supply
catering to the huge demand for gold and their discontinuation though may not

1
materially alter the demand, but possibly can give rise to participation by
unauthorised channels. Involvement of banks help in tracking the gold supply
sources and users of gold and further the exchequer will continue to garner the
assured revenue if imports are routed through the banking channel.

2. Scope and Objective of this Technical Guide

This Technical Guide aims at providing guidance on the accounting of Gold
Borrowing by the Nominated Indian Banks from the International Bullion Banks/
Suppliers (IBBS) and Gold Lending by the Nominated Indian Banks to the Indian
Jewellers. The Technical Guide specifically deals with the following aspects:
 Detailed Background and Types of the Transactions;
 Legal Arrangements and Salient Features;
 Regulatory Environment;
 Accounting Aspects and
 Illustrations
This Technical Guide prescribes the accounting treatment only for recording the
transactions in the books of the Nominated Indian Banks and at this stage do not
address the accounting treatment in the books of the Indian Jewellers.
The Accounting Standards generally are not intended to be industry specific but
prescribe the accounting principles to be applied for different types of
transactions and events across all category of industries. Over a period of time
Accounting Standards in India and globally have become very comprehensive
and robust to be relevant to the contemporary world. However, continuous
growth, economic development, research and innovation lead to a situation
necessitating a specific accounting guidance relating a particular set of
transactions or industry segment.
This Technical Guide provides an analysis of the transaction from the
perspective of the Accounting Standards notified by the Ministry of Corporate
Affairs of the Government of India under Companies Accounting Standards
Rules, 2006 for companies and Accounting Standards issued by the Institute of
Chartered Accountants of India (ICAI) for entities other than companies.
Further, accounting aspects relating to Goods and Service Tax (GST), Excise,
Customs and Import Duties and Other Taxes are not within the scope of this
Technical Guide.

2
3. Detailed Background and Types of Transactions
3.1. Detailed Background
In India, the RBI has nominated few Indian banks known as “Nominated Indian
Bank” who are permitted to enter into Gold (Metal) Borrowing (GMB) transactions
with the International Bullion Banks/ Suppliers (IBBS) and extend the borrowed
gold to the Indian Jewellers by entering Gold (Metal) Loan (GML) agreement.
These Nominated Indian Banks are authorised to offer GML to the users who are
the manufacturers/ exporters of jewellery.
Gold borrowing and lending is a popular mechanism under which a bullion
manufacturer and/or exporter such as Jeweller instead of borrowing money to
purchase the physical gold, borrows gold in physical form. The physical gold
borrowed acts as a direct raw-material for the purpose of manufacturing of
jewellery which can either be sold locally in the domestic market or exported
outside India. The initial disbursement is always in gold with purity 995 or above
and the repayment of the borrowed gold generally happens in Indian Rupee
(INR) terms. Regulations permit the contractual arrangements between the
lender and borrower to provide an option to the borrower to repay the borrowed
gold in physical gold.
The two transactions entered by the Nominated Indian Bank namely with the
IBBS (i.e. lender) and the Indian Jeweller (i.e. borrower) have been explained
below:

3
 Transactions entered by the Nominated Indian Bank with:
(A) Transaction 1 - International Bullion Bank/Supplier
(IBBS)
(B) Transaction 2 - Indian Jeweller

Transaction 1 Transaction 2
Transaction 1

Physical Physical Gold

Gold Lending
Borrowing

INTERNATION Fixed Fixed

AL BULLION Interest NOMINATED Interest INDIAN
SUPPLIERS/ Payment INDIAN BANK Payment JEWELLER
BANKS (BORROWER (higher than (BORROWER)
(IBBS) AND LENDER) for
transaction
(LENDER)
1)

Return of Return of
physical physical
gold/ cash gold/ cash
payment payment
(if cash (if cash
settlement settlement
option option
exists) exists)

It may be noted that gold is a fungible commodity and also highly liquid in nature.
Further, it may be noted that in the above demonstrated transactions there are
no cash inflows and outflows at the inception of the GMB and GML.
Typically, the Indian banks that are nominated by the RBI to import gold from
IBBS are authorised to offer GML to the users who are jewellery manufacturers/
exporters. Banks do the necessary credit assessment and set credit limits in INR
and against the limit set in INR, disburse out the physical gold ensuring that the
value of gold in INR terms (as per the prevalent GOLD/INR rate) is within the INR
limits. Each of the banks have margining policy in place whereby at the time of
disbursement, the necessary volatility margin is considered and earmarked

4
against the INR limit to ensure that the price fluctuations (if any) during the tenor
of the GML do not lead to value of gold exceeding the INR limits and in case if it
does exceed, the short-fall is replenished by the jeweller by submitting the
necessary margins in cash or fixed deposit form.
This lending arrangement helps jewellery manufacturers to plan the repayment of
GML in line with the jewellery sales cycle which will vary from jeweller to jeweller
depending upon the geographical presence (domestic, international outlets),
artisans employed, clientele, branch network, seasonality, unique specialty of
jewellery design (e.g. machine made chains or handmade crafting) etc. In GML,
jewellers can opt for taking a Flexi Loan wherein, they can opt to pre-pay the
GML by fixing the price any time during the tenor of the GML and avail of fresh
disbursement which will again be used in the jewellery manufacturing cycle. Also,
not only can the customer fix the price and pre-pay, certain jewellers can also fix
the price and decide to pay at a future date which is generally very short, say one
week or 10 or 15 days. GMLs can be disbursed for maximum period of 180 days
for domestic usage and up to 270 days for export usage whereby jewellers get
additional 90 days to complete the export commitment post disbursement and
180 days’ time to plan for export realisation.
For the purpose of determining carrying value of GMB or GML, the gold in
kilograms is first converted to ounces depending upon the purity of gold
(Example 1 kg 995 = 31.99 ounces and 1 kg 999 = 32.12 ounces). The value of
gold will generally comprise following elements.
(a) Gold / USD rate which is US dollars per ounce
(b) USD / INR rate which is INR amount per USD
(c) Prevalent Customs duty (levied at the time of import of gold and which
changes every fortnight as per the Customs Regulations) and
(d) Goods and Service Tax (GST) Rate

3.2. Types of Transactions

Based on review of legal agreements, discussions with bankers/ jewellers and
regulatory environment (Reserve Bank of India master circulars/directions), in
India, various types of transactions are undertaken for bullion borrowing and
lending which are as follows:
From Nominated Indian Banks’ perspective:
(i) Gold stock imported and held on consignment basis on behalf of
the IBBSs

5
 (ii) Gold (Metal) Borrowing (GMB) by Nominated Indian Banks from
IBBSs*
(iii) GMB settlements with IBBSs - Fixed and Unfixed Basis (11 days)
(iv) Gold (Metal) Loans (GML) to Borrowers (i.e. jewellers) by
Nominated Indian Banks*
(v) Gold inventory held by the bank out of the gold borrowed from
IBBSs (Indian banks are unlikely to have gold inventory of material
quantity and value)
(vi) Gold Deposits taken by the Nominated Indian Banks under Gold
Monetisation Scheme of India**
*Generally, these two transactions occur simultaneously on back to
back basis. Also, the Nominated Indian Banks can lend to borrowers
(i.e. jewellers) out of the gold deposits accepted under Short Term Gold
Deposit Scheme and gold acquired out of gold deposit collected under
Medium and Long Term Government Deposit scheme under Gold
Monetisation Scheme, 2015 of RBI.
**In order to avoid complexity, these transactions are not covered in this
Technical Guide.
From Indian Jewellers’ perspective:
(i) Gold Borrowing from the Nominated Indian Banks

4. Legal Arrangements and Salient Features

Following paragraphs highlight some of the key features which are generally
noticed in the legal arrangements between the parties.

4.1 Types of Legal Arrangements and Salient Features – Borrowing

by Indian Nominated Bank from IBBS
Gold importing arrangement by the Nominated Indian Banks from the IBBS can
be of the following two types:
 On Consignment Basis
 On Borrowing Basis
Consignment Arrangement - Banks import gold from IBBS on consignment
basis and then either sell it in the local market to wholesalers on outright basis

6
against INR funded by the clients or do lend gold in physical form to jewellery
manufacturers. While offering GML to Indian Jewellers, banks do borrow gold
from IBBS and fix the price of gold during the tenor of the borrowing and remit
the equivalent US Dollars (USD) to the IBBS. The tenor of the gold borrowings
and the prepayment or repayment arrangement is similar to the GML offering
explained above. Typically, the IBBS source the gold (metal) in the physical form
from the bullion refiners and send it to India through their appointed Logistics
Partners (LP). In the said import transaction, Authorised Dealer (AD), Banks,
who are authorised by RBI, act as consignee and the IBBS act as consignor. The
ownership and the insurable interest in the said gold though shipped, cleared
from customs and vaulted at the LP’s vault in India remains with the consignor. It
is consignee’s responsibility to pay the regulatory levies (Customs duty in this
case) since the consignee is recorded as importer in the books of Customs
Authorities. The ownership of the Gold (Metal) gets transferred to consignee on
making full and final payment to the consignor (in case of outright purchase) or
upon borrowing of metal by the Nominated Indian Bank. The insurable interest
passes from consignor to the consignee when consignee takes the physical
delivery of metal either on its own or consignee’s customer taking delivery of
physical metal (with underlying transaction being either outright sale or gold
lending).
Ownership of Consignment –
Full legal, beneficial and equitable title to the consignment stock and any other
part thereof remains vested at all the times with the consignor.
a) The title of the consignment stock passes to the consignee only when the
price for the said stock is finalised and the consignee makes the complete
payment for the same as per the terms agreed by both the parties.
b) Once the title of the consignment stock passes to the consignee, the
consignee shall cease to have any liability as a consignee to the
consignor in respect to the said consignment stock.
Obligations of Consignee –
The consignee shall procure the relevant licenses for import of the consignment
stock (if such licenses are not in place).
a) Consignee should execute and respond to all reasonable requests and
deliver any and all instruments that may from time to time be required by
law or reasonably requested by the consignor to establish.

7
 b) The consignee is expected to maintain at its principal place of business
records reasonably satisfactory to consignor with respect to the
consignment stock.
c) The consignee should ensure clearance of customs and take delivery of
the consignment stock after its arrival/unloading in India, failing which the
consignee shall bear all costs and fees associated with any such delay.
d) The consignee should keep a Gold Account in its books in the name of the
consignor and record in such account any consignment stock that has
been made available and all transactions entered into under this
agreement in respect of such consignment stock.
e) The consignee should keep a Gold Interest Account in its books in the
name of the consignor and record in such account all interest accruing
under transactions entered into under the agreement.
f) The consignee is expected to make all payments on the due dates thereof
and is also responsible for all loss, damage, or disappearance of the
consignment stock from any cause whatsoever.
g) If the consignee is not able to take the consignment stock by the end of
the consignment period, the consignee is liable to pay all the costs,
charges, duties, taxes, and expenses necessary to effect any re-delivery
or re-export of the consignment stock to the consignor in accordance with
the terms agreed by the parties.
Borrowing Arrangement: In the Borrowing Arrangement by the Nominated
Indian Bank from the IBBS, following category of transactions are observed:
 Fixed Term Loan Transactions
 Overdraft Loan Transactions
Fixed Term Loan Transactions - Fixed Term Metal Loans are defined as loans
of precious metal with a fixed interest rate and a pre-determined fixed repayment
date. Fixed Term Loans bear interest at the fixed rate agreed between the
parties that will be fixed for the entire tenor of the loan or varies on a bench-mark
such as London Interbank Offered Rate (LIBOR) or Mumbai Interbank Offered
Rate (MIBOR). Interest accrues in USD which is computed with reference to the
method agreed by the parties for conversion of gold value into USD or in ounces
of gold at the rate agreed which is commonly referred to as Offered Lease Rate.
The Nominated Indian Bank (i.e. borrower) can repay the gold borrowed and
accrued interest in USD equivalent value calculated on repayment date. The
USD equivalent is computed based on the settlement amount that would have
been payable had the parties entered into a sale transaction on the last day of

8
the loan period or such other price as mutually agreed between the borrower and
the lender; the former is generally termed as prevailing spot value two business
days prior to the last day of the term of the loan. Generally, Nominated Indian
Bank (i.e. borrower) is required to notify the method of repayment (cash/gold) to
the IBBS (i.e. lender) at least two business days prior to the repayment date of
each Fixed Term Loan.
Overdraft Loan Transactions – In this type of transaction, the Nominated
Indian Bank (i.e. borrower) has flexibility to repay the loan at any time. In this
case the interest accrues on daily basis and computed on daily outstanding
balances. The repayment terms/ options are same as that of Fixed Term Loan.
It may be noted from the above terms that the Nominated Indian Bank has an
option to repay the gold loan either in foreign currency viz. USD or in physical
gold, which has to be delivered at specified overseas locations at London or
Zurich, as per Rules of London Bullion Market Association (LBMA) or London
Platinum and Palladium Market (LPPM).
The calculation of interest on the two transactions viz. Fixed Term Loan and
Overdraft Loan Transaction is subject to the in-built features of the transaction.
The Fixed Term loan, is subjected to fixed interest rate for a fixed period that
does not exceed the pre-decided term between the parties to the transaction and
is calculated on such rate based on a 360 day year, with interest payable on the
last day of the relevant loan period in most of the cases (certain exceptions basis
the requirement of IBBS where they demand interest payment at a different
frequency). On the other hand, interest on the Overdraft Loan Transaction, is
payable quarterly in arrears to the first business day of each calendar quarter
and on the date when the overdraft facility is cancelled by the IBBS or generally
payable on monthly basis and the interest in ounces is converted to equivalent
USD using average Gold AM (morning) or PM (afternoon) FIX rate which is
considered as benchmark for conversion of interest amount from ounces to US
Dollars (certain exceptions basis the requirement of IBBS where they demand
interest payment at a different frequency).
Other important Terms and conditions - The borrower and lender agree that the
relationship created by the agreement is not of a mercantile agency. The
borrower is entering into this transaction as a principal and not as an agent of
any other person or entity. USD equivalent computation for repayment of gold
borrowed is based on mutually agreed method - it is generally based on the
USD/Gold price prevailing spot price two business days prior to the loan maturity
date.

9
4.2 Salient Feature of Legal Arrangements – Lending to the Indian
Borrowers (Jewellers) by the Nominated Indian Banks
Lending by the Nominated Indian Bank to the Jewellers is commonly known as
Gold (Metal) Loan or GML. In case of GMLs, the Nominated Indian Bank enters
into an agreement with the Borrower (i.e. jeweller), who is the manufacturer of
the gold jewellery and is in requirement of gold bars for the manufacture of gold
jewellery either for domestic use or for exports to countries outside India, and not
for other purpose. Below are the salient features of the agreements entered
between the Nominated Indian Banks and Jewellers:
 Grant of Facility and Disbursement - The Nominated Indian Bank agrees
to grant the Borrower (Jeweller) and the Borrower (Jeweller) agrees to avail
from the Nominated Indian Bank, disbursements in the form of delivery of
gold as a loan facility subject to the terms and conditions agreed to by both
the parties. The facility shall be released in Kilograms of gold and for credit
limit utilisation and would be reckoned at equivalent to Rupees (INR) as on
the date of delivery/release of the gold to the Borrower (Jeweller). Individual
GML term is generally based on the prevailing RBI regulations and generally
varies between 90 days to 360 days. This maximum tenor is dependent
upon the prevailing regulations of RBI.
 Conditions Precedent to Disbursement - Before the disbursement of loan
by the Nominated Indian Bank, the Borrower (Jeweller) is expected to: (i)
Deposit the provisional value of gold as determined by the Bank at its
discretion and agreed by the Borrower, as cash margin with the Bank in
Term Deposit/ Current Account OR (ii) Furnish unconditional and irrevocable
guarantee(s) from a commercial bank of the repute accepted by the Bank in
connection with the loan facility. However, the above stated conditions are
not required to be satisfied if the GML is taken as part of the working capital
limits.
 Interest Payment - The Borrower (Jeweller) shall pay to the Nominated
Indian Bank interest at monthly intervals or on maturity date on the
outstanding loans at the rates specified by the Nominated Indian Bank in the
sanction letter approving the respective disbursements under the said
facility. The interest shall be calculated on a 360 day year basis at the
monthly intervals in gold weight terms and converted to rupees terms at the
prevailing conversion rates. The conversion rate is prevailing rate of gold in
Indian Rupees (the currency of value) on the relevant date(s) as may be
determined by the Nominated Indian Bank from time to time. In some cases,
the conversion rate is specifically stated as “London A.M. Rate for Gold/US
Dollar (XAU/USD) and RBI reference rate for US Dollar/Indian Rupee
(USD/INR) or prevailing market rate/ card rate”.

10
 Repayment of Loan Amount - The Borrower shall repay the loan in rupee
terms within the periods specified in the sanction letter issued by the
Nominated Indian Bank. Such repayment of the loan shall be made by the
Borrower by paying the equivalent price of the gold at the prevailing rate on
the date of maturity. Repayment amount shall include the cost of gold,
commission, taxes including octroi and other costs, if any, incurred by the
Nominated Indian Bank. In some cases, it is expressly stated that the
Borrower (Jeweller) shall not be entitled to repay the loan in physical gold. In
other cases, it is explicitly mentioned that Borrower (Jeweller) has to
purchase the gold from the lending bank i.e. the Nominated Indian Bank, if
the Borrower wants to repay the gold borrowed in physical gold instead of
Rupee equivalent. In another case, repayment in physically delivery is
subject to mutual agreement between the parties. It may be noted that
settlement of gold loan in either Rupee equivalent or by purchasing of
gold from the lending bank itself, is primarily intended to ensure purity
and quality of the gold lent i.e. same quality/purity gold is returned by
the borrower.
 Transfer of Legal Title and Risks and Rewards to the borrower - Risks
relating to all gold advanced to the Borrower (Jeweller) will pass to the
Borrower upon delivery of the gold at the destination requested by the
Borrower, and from such time until repayment or discharge of such drawings
in full by the Borrower. The Nominated Indian Bank will assume no risk of
loss, theft, detention, deterioration or destruction of or damage to any gold
advanced to the Borrower from the Nominated Indian Bank. The title to the
said gold will generally pass on from Nominated Indian Bank to the Borrower
on either Borrower repaying the Gold (Metal) Loan in full or in some
scenarios on delivery.
 It may be noted that the some GML agreements transfer the legal title in the
gold lent to the Jewellers to facilitate the legally trouble free use of gold
borrowed only.

5. Regulatory Environment
Although India is a large consumer of gold due to its cultural and social
background, however, it is heavily dependent upon import of gold to meet its
consumers’ demands. Import of gold may have severe implications on India’s
foreign exchange reserves and exchange rate policy and also monetary policy.
Therefore, gold lending and borrowing transactions including imports are subject
to comprehensive regulatory prescriptions and control by the Banking Sector
Regulator viz. the Reserve Bank of India (RBI) and Government of India. These
regulations are also subject to regular monitoring and review and amendments,

11
where required. The following circulars have been issued by the RBI in the said
context:
a) Guidelines on Import of Gold by Nominated Banks/ Agencies, Circular
dated February 18, 2015 – This circular consist clarifications issued by RBI
in consultation with the Government. Also, through this circular, the RBI
permitted the Nominated Indian Banks to import gold on consignment basis.
The circular also mentions that Star and Premier Trading Houses
(STH/PTH) can import gold on Documents against Payment (DP) basis as
per entitlement without any end use restrictions.
b) Master Circular – Loans and Advances – Statutory and Other
Restrictions dated July 1, 2015 – Salient features mentioned in paragraph
2.3.12 – Gold (Metal) Loans of the above circular have been summarised as
follows:
 RBI has nominated certain Banks that can grant Gold (Metal) Loans to
exporters of jewellery, domestic jewellery manufacturers.
 The borrowers can be the customers of the nominated banks or of other
scheduled commercial banks. In the case of former, the Gold (Metal)
Loans will be within the credit limits or Gold (Metal) Loans sanctioned
by the Bank. Whereas in case of the later, the Gold (Metal) Loan shall
be secured by Stand-By letter of Credit (SBLC) or Bank Guarantees
(BG) by their Banks.
 GML can be availed of only by gold jewellers who are themselves
manufacturers of gold jewellery. The jewellers cannot sell the gold
borrowed under GML scheme to any other party for manufacture of
jewellery.
 In case of GML to jewellery exporters, it should not involve any direct or
indirect liability of the borrowing entity towards foreign suppliers of gold.
 The banks may calculate their exposure and compliance with prudential
norms daily by converting into INR the gold quantity by crossing London
AM fixing for Gold / US Dollar rate with the Rupee- Dollar reference rate
announced by RBI.
 Banks should recognise the overall risks in extending Gold (Metal)
Loans as also in extending SBLC / BG. Banks should lay down an
appropriate risk management / lending policy in this regard and comply
with the recommendations of the Ghosh Committee and other internal
requirements relating to acceptance of guarantees of other banks to
obviate the possibility of frauds in this area.

12
c) Gold Monetisation Scheme, 2015, Master Direction
No.DBR.IBD.No.45/23.67.003/2015-16 dated October 22, 2015 as
updated March 31, 2016 - The scheme modifies the existing ‘Gold Deposit
Scheme’ (GDS) and ‘Gold (Metal) Loan Scheme (GML), and intends to
mobilise gold held by households and institutions of the country and facilitate
its use for productive purposes, and in the long run, to reduce country’s
reliance on the import of gold. The deposit scheme can be divided into
schemes viz. Short Term Bank Deposit (STB) and Medium and Long Term
Government Deposit (MLTGD).
 The key features of STB includes – the tenure of the deposit to be as
short as 1-3 years, the principal and interest shall be denominated in
gold, the interest accrues from the date of conversion of gold deposited
into tradable gold bars after refinement or 30 days after the receipt of
gold and so on.
 Similarly key features of MLTGD includes - deposits under this category
will be accepted by designated banks on behalf of the Central
Government, the deposit will not be reflected in the balance sheet of the
designated banks and shall be the liability of Central Government and
the designated banks will hold this gold deposit on behalf of Central
Government until it is transferred to such person as may be determined
by the Central Government, rate of interest to be determined by the
Central Government and notified by RBI.
d) RBI Circular – RBI/ FED/ 2016-17/12 and FED Master Direction No.
17/2016-17 dated January 1, 2016 as updated January 12, 2017 Master
Direction – Import of Goods and Services, – Paragraph C.11 – Import of
Gold, of the above referred circular lays down the operating guidelines
summarised below:
 Nominated Banks and Nominated Agencies, as notified by Directorate
General of Foreign Trade (DGFT), are permitted to import gold on
consignment basis. All sale of gold domestically will, however, be
against upfront payment. Nominated banks are free to grant Gold
(Metal) loans

However, as per the above RBI circulars/ references, it can be observed that
these circulars are generally silent on the accounting aspects of the Gold (Metal)
Borrowing (GMB) and Gold (Metal) Lending (GML) transactions undertaken by
the Nominated Indian Banks. Hence, it is essential for the Nominated Indian
Banks to follow uniform treatment while accounting such transactions.

13
6. Analysis of Accounting Aspects
The accounting issues pertaining to the gold borrowing and lending by the
Nominated Indian Banks are required to be analysed from two main angles viz.

 Recognition of Assets and Liabilities and;

 Measurement of Assets and Liabilities and recognition of measurement
changes in the Profit or Loss Account
In order to address the accounting issues referred above, it is important to
evaluate which of the Accounting Standards potentially address these kinds of
gold borrowing and lending transactions. Following Accounting Standards are
considered to be the potential ones:

(i) AS 2, Valuation of Inventories

(ii) AS 13, Accounting for Investments
(iii) AS 19, Leases
(iv) AS 29, Provisions, Contingent Liabilities and Contingent Assets

Apart from the above stated Accounting Standards, the application of the
Framework for Preparation and Presentation of Financial Statements (The
Framework) has also been considered to evaluate the accounting issues.

6.1. Accounting Analysis - In the books of the Nominated Indian

Bank

(A) Gold stock imported on consignment basis and held by the

banks
As per RBI instructions vide ‘Master Direction – Import of Goods and
Services’ (RBI/FED/2016-17/12 FED Master Direction No. 17/2016-17
updated on January 12, 2017) certain categories of banks are permitted to
import gold on consignment basis. An accounting question arises whether
banks shall recognise the physical gold received on consignment basis
from IBBS as its asset with a corresponding liability to pay. In this regard,
it may be useful to refer to principles of AS 9, Revenue Recognition in
respect of consignment sales. AS 9 states that revenue shall not be
recognised until the goods are sold to a third party. The key criterion being
neither the property nor the significant risks and rewards of ownership of
the goods are transferred from the consignor to the consignee. Further,
the gold imported on consignment basis by the bank does not meet the

14
definition of an asset under the Framework elaborated in subsequent
paragraphs.

(B) Gold borrowed by Nominated Indian Bank from IBBS

So as to address the accounting issues, an analysis of the transaction is

done basis the below listed potential applicable Accounting Standards:
(i) AS 2, Valuation of Inventories
As per paragraph 3.1 of this standard, inventory is defined as under:

Inventories are assets:

 held for sale in the ordinary course of business;
 in the process of production for such sale; or
 in the form of materials or supplies to be consumed in the
production process or in the rendering of services.

In case of bank, the gold borrowed is not held for sale in the ordinary
course of business as the transaction with borrower does not clearly
represent a sale because the significant risks and rewards of
ownership of the gold are not considered to have been transferred to
the borrower as discussed in the later section of this Technical Guide.
The gold borrowed is neither in the process of production for sale, nor
is it materials or supplies that the entity will consume in production or
in rendering services. Therefore, the gold borrowed would not meet
the definition of inventory stated above and hence this transaction
cannot be covered by the above standard.

(ii) AS 13, Accounting for Investments

This AS specifically excludes banks from the scope of the standard.

(iii) AS 19, Leases

As per paragraph 3.1 of this standard, lease is defined as:

 an agreement whereby the lessor conveys to the lessee in

return for payment or series of payment the right to use an
asset for an agreed period of time.
In some transactions like the present gold borrowing from IBBS,
further analysis and guidance is needed to determine whether a
transaction contains a lease. In this regard since the definition of
lease and other principles are similar under AS 19 and Ind AS 17, it is
useful to refer Indian Accounting Standard (Ind AS) 17, Leases, for

15
 addition guidance provided therein1. Ind AS 17has an additional
guidance in particular whether the arrangement depends on the use
of a specific asset or assets. Accordingly, considering the fungible
nature of gold, the borrower’s ability to return another piece of gold of
same quality, settlement alternatives etc. the transaction does not
meet the criteria of “use of specific asset(s)” and therefore, not a
lease.
(iv) AS 29, Provisions, Contingent Liabilities and Contingent Assets
This standard assumes importance when one has to analyse whether
the borrowers’ (or bank when it borrows from the international market)
obligation to deliver back the gold to the lender is within the scope of
AS 29. This standard defines a provision as “a liability which can be
measured only by using a substantial degree of estimation”. Since the
contract between the bank and lender does not contain any
uncertainty about the timing or quantity of gold to be delivered, there
is no need for substantial degree of estimation. Further, AS 29
addresses the question of how provisions can be distinguished from
other liabilities such as trade payables and accruals and states that
trade payables are not provisions because they are liabilities that
have been formally agreed with the lender. Therefore, the gold
borrowing transaction of the Nominated Indian Bank is not a provision
subject to AS 29.

The Framework for Preparation and Presentation of Financial

Statements (The Framework)

In the absence of any specific AS addressing any type of transaction, it is

necessary to develop a specific accounting policy keeping in mind the
descriptions in Paragraph 1 (a) of the Framework as reproduced below.
The part relevant in the present context is highlighted in bold and italic.

“assist preparers of financial statements in applying Accounting

Standards and in dealing with topics that have yet to form the
subject of an Accounting Standard”

While developing accounting policies, it is important to bear in the

following important aspects of the Framework:

1 Ind AS 116, Leases, which has replaced Ind AS 17 also provides guidance on this
concept.

16
a) Underlying Assumptions- Accrual basis –
In order to meet their objectives, financial statements are prepared on
the accrual basis of accounting. Under this basis, the effects of
transactions and other events are recognised when they occur (and not
as cash or its equivalent is received or paid) and they are recorded in
the accounting records and reported in the financial statements of the
periods to which they relate. Financial statements prepared on the
accrual basis inform users not only of past transactions involving the
payment and receipt of cash but also of obligations to pay cash in the
future and of resources that represent cash to be received in the future.
Hence, they provide the type of information about past transactions and
other events that is most useful to users in making economic decisions.

b) Qualitative Characteristics of Financial Statements –

Understandability, Relevance, Reliability, Faithful Representation,
Substance over Form, Neutrality , Prudence, Completeness, True
and Fair View

The demand for accounting information by investors, lenders, creditors,

etc., creates fundamental qualitative characteristics that are desirable in
accounting information. Principal qualitative characteristics include:
 Understandability – An essential quality of the information
provided in financial statements is that it is readily
understandable by users. For this purpose, users are assumed to
have a reasonable knowledge of business and economic
activities and accounting and a willingness to study the
information with reasonable diligence. However, information
about complex matters that should be included in the financial
statements because of its relevance to the economic decision-
making needs of users should not be excluded merely on the
grounds that it may be too difficult for certain users to
understand.
 Relevance - To be useful, information must be relevant to the
decision-making needs of users. Information has the quality of
relevance when it influences the economic decisions of users by
helping them evaluate past, present or future events or
confirming, or correcting, their past evaluations.
 Reliability - To be useful, information must also be reliable.
Information has the quality of reliability when it is free from
material error and bias and can be depended upon by users to

17
 represent faithfully that which it either purports to represent or
could reasonably be expected to represent.
 Faithful Representation - To be reliable, information must
represent faithfully the transactions and other events it either
purports to represent or could reasonably be expected to
represent..
 Substance over Form - If information is to represent faithfully the
transactions and other events that it purports to represent, it is
necessary that they are accounted for and presented in
accordance with their substance and economic reality and not
merely their legal form. The substance of transactions or other
events is not always consistent with that which is apparent from
their legal or contrived form.
 Neutrality - To be reliable, the information contained in financial
statements must be neutral, that is, free from bias. Financial
statements are not neutral if, by the selection or presentation of
information, they influence the making of a decision or judgement
in order to achieve a predetermined result or outcome.
 Prudence - Prudence is the inclusion of a degree of caution in
the exercise of the judgements needed in making the estimates
required under conditions of uncertainty, such that assets or
income are not overstated and liabilities or expenses are not
understated.
 Completeness - To be reliable, the information in financial
statements must be complete within the bounds of materiality
and cost. An omission can cause information to be false or
misleading and thus unreliable and deficient in terms of its
relevance.
 True and Fair View – Financial statements are expected to
provide true and fair view of the financial position, performance
and cash flows of the entity.

c) Definition of elements of financial statements – Asset,

Liability, income, Expense.
For the purposes of this Technical Guide, the following terms are
used with the meanings specified in the Framework for the
Preparation and Presentation of Financial Statements
 An asset is a resource controlled by the entity as a result of past
events and from which future economic benefits are expected to
flow to the entity.

18
  A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.
 Income – The definition of income encompasses both revenue
and gains. Revenue arises in the course of the ordinary activities
of an entity and is referred to by a variety of different names
including sales, fees, interest, dividends, royalties and rent.
 Expenses - The definition of expenses encompasses losses as
well as those expenses that arise in the course of the ordinary
activities of the entity. Expenses that arise in the course of the
ordinary activities of the entity include, for example, cost of sales,
wages and depreciation. They usually take the form of an outflow
or depletion of assets such as cash and cash equivalents,
inventory, property, plant and equipment.
 Gains - represent other items that meet the definition of income
and may, or may not, arise in the course of the ordinary activities
of an entity. Gains represent increases in economic benefits and
as such are no different in nature from revenue.
 Losses - represent other items that meet the definition of
expenses and may, or may not, arise in the course of the
ordinary activities of the entity. Losses represent decreases in
economic benefits and as such they are no different in nature
from other expenses.
 Exchange Differences – It is the difference resulting from
reporting the same numbers of units of a foreign currency in the
reporting currency at different exchange rates.

Based on the analysis of the GMB and GML transactions in practice,

regulatory prescriptions and the spirit of the legal arrangements
between the parties to the transaction, it is considered as a
transaction in the nature of financing arrangement in substance.
Accordingly, considering the nature and substance of the
transaction from a Nominated Indian Bank’s perspective, the
accounting in this Technical Guide is prescribed as appropriate for a
Financing Transaction. Further, in the absence of any AS addressing
this kind of unique transaction, the accounting prescriptions herein
are derived from the Framework applicable in the context of AS.

19
Recognition of the elements of Financial Statements

In respect of recognition of asset and liability for gold borrowing by

Nominated Indian Bank, following accounting policy is considered
appropriate:

A. an asset representing the gold received from IBBS (lender) as

“Gold (Metal) Stock-Borrowed”.

B. a liability representing the contractual obligation to return the gold

to the lender as ‘Gold (Metal) Borrowing’.

The gold borrowed by the bank meets the definition of an asset as

reproduced above

The reason being, the Nominated Indian Bank obtains control of the gold
when it receives it from IBBS (lender). There are no restrictions on the
borrower’s use of the gold from the date on which it receives the gold. The
Bank obtains the commodity for the purpose of generating profits by
lending it to another entity by charging interest/fees. Therefore, future
economic benefits will flow to the bank when it lends the gold to its
borrowers.

Further, the obligation to deliver gold back to lender at the end of the
contract term meets the definition of a liability under paragraph 49(b) of
the Framework for Preparation and Presentation of Financial Statements
(The Framework) reproduced below.

“(b) A liability is a present obligation of the enterprise arising from past

events, the settlement of which is expected to result in an outflow from the
enterprise of resources embodying economic benefits.”

This is because (i) the obligation arises as a result of the borrowing

transaction with Lender; and (ii) the obligation exists regardless of what
the bank entity does with the commodity during the contract term.

Measurement of Asset and Liability

The next question is how to measure the asset and liability recognised for
gold borrowed by the Nominated Indian Banks from IBBS. The
measurement requirements can be divided into two parts viz. initial
measurement and subsequent measurement. As noted in the previous

20
section, there is no specific Accounting Standard which addresses
accounting aspect of this transaction. While the Framework gives various
types of measurement bases, but there is very limited guidance about
selection of measurement bases to different type of situations. Therefore,
measurement bases should be developed bearing in mind the following
fundamental underlying assumptions and qualitative characteristics of
financial statements as explained in the above paragraphs namely:
a. Accrual accounting
b. Understanding
c. Relevance
d. Reliability
e. Faithful Representation
f. Substance over from
g. Neutrality
h. Prudence
i. Completeness
j. True and Fair View

Initial Recognition and Measurement

At the time of borrowing of gold, the Nominated Indian Bank has to
recognise a liability for the borrowed gold from the IBBS and an asset.
The liability and asset should be recorded in USD terms with an amount
equivalent to the prevailing spot value on the date of borrowing.
Computation of measurement are given in the illustration section (Refer
Appendix).
Subsequent Measurement of the Gold Borrowing
After initial measurement, the liability has to be measured by applying the
gold price and USD /INR exchange prevailing on that date. The reason
being the bank is exposed to the changes in gold price until the gold is
returned, which results in changes in the carrying amount of bank’s
liability. Any changes in the carrying amounts arising due to subsequent
measurement should be recognised in the Profit and Loss account. The
changes in the carrying amount of the borrowing comprises of the
following two elements.
(a) the movement in gold price and
(b) the movement in US$/ INR exchange rate.
The change in the carrying amount due to gold prices movement results
into gains or losses. In accordance with the provisions of the Framework

21
as mentioned in paragraph 6 above, gain/loss are in the nature of
income/expense. Accordingly, the change in the carrying amount due to
movement in gold price as mentioned in (a) above shall be recognised in
the statement of profit and loss. The changes in the carrying amount due
to movement in foreign exchange rate as mentioned in (b) above are
covered under AS 11, The Effects of Changes in Foreign Exchange Rate
and, accordingly, shall be recognised as foreign exchange differences in
statement of profit and loss.

It has generally been observed that the Nominated Indian Banks while
borrowing the gold from IBBS, simultaneously lends the same quantity of
gold to the Indian Jewellers. Hence, the Metal Stock – Borrowing and
Lending account will have a Nil balance.
While subsequently measuring the liability for the borrowed gold, the
Nominated Indian Bank, must take into consideration the change on
account of the two components (mentioned above).
Interest expense on Gold Borrowing
At each reporting date, the Nominated Indian Bank shall also recognise
the interest expense charged by the IBBS in the Statement of Profit and
Loss. Interest expense is in terms of gold quantity at the agreed rate of
interest, generally a rate called as ‘Offered Lease Rate’.
Please refer Illustration 1 in the Appendix Part.

(C) Gold (Metal) Loans (GML) extended by the Nominated

Indian Bank to Borrowers (i.e. Jewellers)
The accounting issues in the books of the Nominated Indian Banks are
required to be analysed from two main angles viz.

a) What is the type of transaction?

i. Is it sale?
ii. Is it a lease?
iii. Is it a loan?
b) Measurement of assets and liabilities and recognition of measurement
changes in the statement of profit or loss.

22
In order the address the above accounting issues, the nature of the
transaction has been evaluated against following Accounting
Standards:
(i) AS 9, Revenue Recognition
(ii) AS 19, Lease

Apart from the stated AS, the application of the Framework for
Preparation and Presentation of Financial Statements (The Framework)
has also been considered to evaluate the accounting issues.

Transaction Analysis
(i) AS 9, Revenue Recognition – We consider the following facts/
circumstances, to understand whether the transaction can be
accounted as sale transaction from the date of lending of gold to the
borrower:
 Borrower (Jeweller) of the Nominated Indian Bank who is borrowing
the gold has the option to use the asset freely without restrictions;
however, control over the gold with regard to risk and reward of
ownership are not yet transferred to the borrower as the sale price
of gold will be fixed at the future date.
 Borrower (Jeweller) borrows the gold primarily for use in its
manufacturing operations and, therefore, there are practical
constraints for the borrower to return the physical gold and instead
may settle the borrowing in cash only.
 Contractual feature that the settlement/repayment is based on the
price prevailing at a future date i.e. the settlement/repayment date,
can be viewed as embedded derivative in the host contract i.e. of
financial liability.
However, considering the underlying substance, structure and
intent of the transaction, together with important aspect of “control”
over gold i.e. significant risks and rewards of ownership of the
asset are not transferred to the Borrower (Jeweller) until the
repayment date (because sale price or settlement price is not fixed
at the time of gold lending). Also, the Borrower (Jeweller) has no
legal title over the gold borrowed. Therefore, it is not appropriate to
account this transaction as sale at the time of initial lending of
gold. Secondly, there are concerns whether the settlement based

23
 on unknown future price meets the definition of derivative and
measurement of fair value. It may also be noted that the
Nominated Indian Bank treats it as sale for Indian Indirect Tax
Laws and also pay Customs Duty on the gold borrowed from the
IBBS. However, this tax treatment does not change the underlying
nature of the transaction form lending and borrowing for general
purpose financial statements. It is well known fact the general
purpose accounting treatment under GAAP may differ from the
one applied under Tax laws.
(ii) AS 19, Leases: Paragraph 3.1 of this standard, defines lease as –
an agreement whereby the lessor conveys to the lessee in return for
payment or series of payment the right to use an asset for an agreed
period of time.
In some transactions like the present Gold lending, further analysis
and guidance is needed to determine whether a transaction contains
a lease. In this regard since the definition of lease and other
principles are similar under AS 19 and Ind AS 17, it is useful to refer
Indian Accounting Standard (Ind AS) 17, Leases, for addition
guidance provided therein2. Ind AS 17 has additional guidance in
particular whether the arrangement depends on the use of a specific
asset or assets. Accordingly, considering the nature of fungible nature
of the gold, borrower's ability to return another piece of gold of same
quality, settlement alternatives etc., the transaction does not meet the
criteria of 'use of specific asset(s)' and therefore, not a lease.
The Framework for Preparation and Presentation of Financial
Statements (The Framework)
In the absence of any specific AS addressing this type transaction, it is
necessary to develop a specific accounting policy keeping in mind the
following important aspects of the Framework explained in the above
paragraphs:
 Accrual basis of accounting
 Understandability
 Reliability
 Faithful Representation
 Substance over Form

2Ind AS 116, Leases, which has replaced Ind AS 17 also provides guidance on this
concept.

24
  Neutrality
 Prudence
 Completeness
 True and Fair View

How to account for this transaction?

In view of the fact that the transaction is neither a lease nor sale covered by AS
19 and AS 9 respectively, there is no specific Accounting Standard which
addresses the accounting aspect of this transaction. In the absence of a specific
Accounting Standard, the transaction needs to be recognised in the financial
statements considering the provisions of the Framework. In relation to another
important accounting aspect viz. Measurement, the Framework gives various
types of measurement bases, but there is very limited guidance about selection
of measurement bases to different type of situations. Therefore, measurement
bases should be developed bearing in mind the following fundamental underlying
assumptions and qualitative characteristics of General Purpose Financial
Statements as explained in the above paragraphs namely:
 Accrual accounting
 Understanding
 Relevance
 Reliability
 Faithful Representation
 Substance over from
 Neutrality
 Prudence
 Completeness
 True and Fair View

Initial Recognition and Measurement

At the time lending of gold, the Nominated Indian Bank has to an recognise as
asset i.e. Gold (Metal) Loan for the amount of gold lent to its customers with a
corresponding credit to Gold (Metal) Stock account. The right to receive the gold
back or equivalent INR of physical quantity of gold from the Borrower (Indian
Jeweller) is an asset for the Nominated Indian Bank.
The loan extended to the Indian Jewellers should be recorded in USD terms with
an amount equivalent to the prevailing spot value of gold on the date of lending.
Computation of amounts is given in the Illustration section (Refer Appendix).

25
Subsequent Measurement of the Gold (Metal) Loan
After initial recognition, the carrying amount of the Gold (Metal) Loan should be
measured using the prevailing gold price and USD /INR exchange prevailing on
that date. The reason being the bank is exposed to the changes in gold price
until the gold is returned by the Jeweller. This results in changes in the carrying
amount of bank’s asset i.e. GML. Any changes in the carrying amounts arising
due to subsequent measurement should be recognised in the Statement of Profit
and Loss account. The changes in the carrying amount of the borrowing
comprises of the following two elements.
(a) the movement in gold price and
(b) the movement in US$/ INR exchange rate.

The change in the carrying amount due to gold prices movement results into
gains or losses. In accordance with the provision of the Framework as mentioned
in paragraph 6 above, gain/loss are in the nature of income/expense.
Accordingly, the change in the carrying amount due to movement in gold price as
mentioned in (a) above shall be recorded in the statement of profit and loss. The
changes in the carrying amount due to movement in foreign exchange rate as
mentioned in (b) above is covered under AS 11, The Effects of Changes in
Foreign Exchange Rate and, accordingly, shall be recorded as foreign exchange
differences in statement of profit and loss.

Interest income on Gold (Metal) Loan

At each reporting date, the Nominated Indian Bank shall also recognise the
Interest Income charged to its customer in the Statement of Profit and Loss
account. Interest income generally accrues in terms of quantity of gold at the
agreed rate of interest, generally based on an agreed rate called as ‘Offered
Lease Rate’.
Please refer Illustration 2 in the Appendix Part.

26
Appendix
Illustration 1 – Gold (Metal) Borrowing (GMB) by
Nominated Indian Bank from International Bullion Bank/
Supplier (IBBS)
Transaction Details: Transaction spreads over the two accounting periods

Date of Borrowing January 1, 2019

Borrowing Tenor & Repayment date 6 months & June 30, 2019
Gold Quantity Borrowed 100Oz [1 Ounce (1 Oz) = 28.3495
gms]
Prevailing Gold Price LBMA– on US$ 1,200/Oz
01/01/2019
US$/INR RBI Reference Rate – on INR 65/US$1
01/01/2019
Prevailing Gold Price LBMA – on US$ 1,300/Oz
31/03/2019
US$/INR RBI Reference Rate – on INR 68/US$1
31/03/2019
Prevailing Gold Price LBMA – on US$ 1,400/Oz
30/06/2019
US$/INR RBI Reference Rate – on INR 70/US$1
30/06/2019
Interest Rate (Offered Lease Rate) 5% pa. (Simple Interest considered)
Repayment It can be in US$ equivalent or in
Physical Gold

CALCULATION OF BORROWING AMOUNT OF THE NOMINATED INDIAN

BANK

DATE PARTICULARS Foreign Local

Currency currency
($) (₹)

Accounting at the time of initial Borrowing – January 1, 2019

01.01.2019 Gold (Metal) Borrowing 120,000 7,800,000
Amount
(100 Ounces * USD 1,200 *
INR 65)

27
 Accounting at the Year-End – March 31, 2019
31.03.2019 Revalued amount of Gold 131,625 8,950,500
(Metal) Borrowing
[ (100+1.25 Ounces) * USD
1,300 * INR 68]
31.03.2019 Components of 1,150,500
Revaluation i.e. difference [(A)+(B)+(C)]
in INR value of borrowed
Gold (Metal) from January
01, 2019 to March 31, 2019
and interest calculation for
the said period:
(A) Gold Price Difference 650,000
[100 Ounces * (US$ 1,300-
1,200) * INR 65]
(B) Foreign Exchange 390,000
Rate Difference
[100 Ounces * US$ 1,300 *
(INR 68-INR 65)]
(C) Interest 110,500
100 Ounces * 5% * 3/12
(for three months) = 1.25
grams of interest
[1.25 grams * USD 1,300 *
INR 68]

Accounting at the Maturity Date of the Borrowing–June 30, 2019

30.06.2019 Revalued amount of Gold 143,500 10,045,000
(Metal) Borrowing
[ (100+1.25+1.25 Ounces)
* USD 1,400 * INR 70]
30.06.2019 Components of 1,094,500
Revaluation i.e. difference [(A)+(B)+(C)]
in INR value of borrowed
Gold (Metal) from April 1,
2019 to June 30, 2019 and
interest calculation for the
said period:
(A) Gold Price Difference 688,500
[101.25 Ounces * (US$
1,400- 1,300) * INR 68]

28
 (B) Foreign Exchange 283,500
Rate Difference
[101.25 Ounces * US$
1,400 * (INR 70-INR 68)]
(C) Interest 122,500
100 Ounces * 5% * 3/12
(for three months) = 1.25
grams of interest
[1.25 grams * USD 1,400 *
INR 70]

TRANSACTION CONSIDERED AS FINANCING TRANSACTION

BOOKS OF NOMINATED INDIAN BANK

JOURNAL ENTRIES FOR THE BORROWING TRANSACTION WITH IBBS

SR. DATE PARTICULARS PL/ DEBIT CREDIT

NO BS# AMOUNT AMOUNT
(₹) (₹)

Accounting at the time of initial Borrowing – January 1, 2019

1. 01.01.2019 Gold (Metal) Stock A/c BS 7,800,000
To Gold (Metal) BS 7,800,000
Borrowing A/c
(Being physical Gold
(Metal) Stock borrowed
from the International
Supplier)

Accounting at the Year-End – March 31, 2019

2. 31.03.2019 Interest Expense A/c PL 110,500
To Accrued Interest BS 110,500
Payable A/c
(Being interest expense
on the amount of Gold
(Metal) borrowing
accrued for the period
January to March 2019)

3*. 31.03.2019 Accrued Interest BS 110,500

29
 Payable A/c
To Gold (Metal) BS 110,500
Borrowing A/c
(Being interest accrued
for the period January to
March 2019 transferred
to the Gold (Metal)
Borrowing account)
* It is assumed that interest payable is capitalised to the Gold (Metal) Borrowing
account on quarterly basis.

4. 31.03.2019 Gold Price Difference PL 650,000

A/c
Foreign Exchange PL 390,000
Rate Difference A/c
To Gold (Metal) BS 1,040,000
Borrowing A/c
(Being loss on account of
changes in gold price and
foreign currency
recognised for the period
January to March 2019)

5. 31.03.2019 Profit and Loss A/c PL 110,500

To Interest Expense PL 110,500
A/c
(Being interest expense
for the period January to
March 2019 charged to
the Profit & Loss account)

6. 31.03.2019 Profit and Loss A/c PL 1,040,000

To Gold Price PL 650,000
Difference A/c
To Foreign Exchange PL 390,000
Rate Difference A/c
(Being gold price
difference & foreign
exchange rate difference
for the period January to
March 2019 charged to
the Profit and Loss
account )

30
 Accounting at the Maturity Date of the Borrowing–June 30, 2019
7. 30.06.2019 Interest Expense A/c PL 122,500
To Accrued Interest BS 122,500
Payable A/c
(Being interest expense
on the amount of Gold
(Metal) Borrowing
accrued for the period
April to June 2019)

8*. 30.06.2019 Accrued Interest BS 122,500

Payable A/c
To Gold (Metal) BS 122,500
Borrowing A/c
(Being interest accrued
for the period April to
June 2019 transferred to
the Gold (Metal)
Borrowing account)
* It is assumed that interest payable is capitalised to the Gold (Metal) Borrowing
account on quarterly basis.

9. 30.06.2019 Gold Price Difference PL 688,500

A/c
Foreign Exchange PL 283,500
Rate Difference A/c
To Gold (Metal) BS 972,000
Borrowing A/c
(Being loss on account of
changes in gold price and
foreign currency
recognised for the period
April to June 2019)

10. 30.06.2019 Profit and Loss A/c PL 122,500

To Interest Expense PL 122,500
A/c
(Being interest expense
for the period April to
June 2019 charged to the
Profit & Loss account )

11. 30.06.2019 Profit and Loss A/c PL 972,000

31
 To Gold Price PL 688,500
Difference A/c
To Foreign Exchange PL 283,500
Rate Difference A/c
(Being gold price
difference & foreign
exchange rate difference
for the period April to
June 2019 charged to the
Profit and Loss account )

12. 30.06.2019 Gold (Metal) Borrowing BS 10,045,000

A/c
To Nostro Bank A/c BS 10,045,000
(Being settlement of
physical gold borrowed
from the International
Supplier)
# PL refers to the Statement of Profit and Loss and BS refers to Balance Sheet

Illustration 2 - Gold (Metal) Loan (GML) extended to the

Indian Jeweller by the Nominated Indian Bank
Transaction Details: Transaction spreads over the two accounting periods

Date of Loan January 1, 2019

Loan Tenor & Repayment date 6 months & June 30, 2019
Gold Quantity Lent 100Oz [1 Ounce (1 Oz) = 28.3495
gms]
Prevailing Gold Price LBMA– on US$ 1,200/Oz
01/01/2019
US$/INR RBI Reference Rate – on INR 65/US$1
01/01/2019
Prevailing Gold Price LBMA– on US$ 1,300/Oz
31/03/2019
US$/INR RBI Reference Rate – on INR 68/US$1
31/03/2019
Interest Rate 8% pa. (Simple Interest considered)
Prevailing Gold Price LBMA– on US$ 1,400/Oz
30/06/2019
US$/INR RBI Reference Rate – on INR 70/US$1

32
 30/06/2019
Repayment It is generally in INR equivalent or if
the borrower wants to repay in
Physical Gold, it has to purchase
gold from the lending bank only.

CALCULATION OF LENDING AMOUNT TO BE EXTENDED BY THE

NOMINATED INDIAN BANK TO INDIAN BORROWER (JEWELLER)

DATE PARTICULARS Foreign Local

Currency currency
($) (₹)

Accounting at the time of initial Lending – January 1, 2019

01.01.2019 Gold (Metal) Loan Amount 120,000 7,800,000
(100 Ounces * USD 1,200 *
INR 65)

Accounting at the Year-End – March 31, 2019

31.03.2019 Revalued amount of Gold 132,600 9,016,800
(Metal) Loan
[(100+2.00 Ounces)* USD
1,300 * INR 68]
31.03.2019 Components of Revaluation 1,216,800
i.e. difference in INR value [(A)+(B)+(C)]
of Gold (Metal) Loan from
January 1, 2019 to March
31,2019 and interest
calculation for the said
period:
(A) Gold Price Difference 650,000
[100 Ounces * (US$ 1,300-
1,200) * INR 65]
(B) Foreign Exchange Rate 390,000
Difference
[100 Ounces * US$ 1,300 *
(INR 68-INR 65)]
(C) Interest 176,800
100 Ounces * 8% * 3/12
(for three months) = 2.00
grams of interest

33
 [2.00 grams * USD 1,300 *
INR 68]

Accounting at the Maturity Date of the Lending transaction –June 30, 2019
30.06.2019 Revalued amount of Gold 145,600 10,192,000
(Metal) Loan
[ (100+2.00+2.00 Ounces) *
USD 1,400 * INR 70]
30.06.2019 Components of Revaluation 1,175,200
i.e. difference in INR value [(A)+(B)+(C)]
of Gold (Metal) Loan from
April 1, 2019 to June 30,
2019 and interest
calculation for the said
period:
(A) Gold Price Difference 693,600
[102 Ounces * (US$ 1,400-
1,300) * INR 68]
(B) Foreign Exchange Rate 285,600
Difference
[102 Ounces * US$ 1,400 *
(INR 70-INR 68)]
* (C) Interest 196,000
100 Ounces * 8% * 3/12
(for three months) = 2.00
grams of interest
[2.00 grams * USD 1,400 *
INR 70]

34
 TRANSACTION CONSIDERED AS FINANCING TRANSACTION

BOOKS OF NOMINATED INDIAN BANK

JOURNAL ENTRIES FOR THE LENDING TRANSACTION WITH INDIAN

BORROWER i.e. JEWELLER

SR. DATE PARTICULARS PL/ DEBIT CREDIT

NO BS# AMOUNT AMOUNT
₹ ₹

Accounting at the time of initial Lending – January 1, 2019

1. 01.01.2019 Gold (Metal) Lending A/c BS 7,800,000
To Gold (Metal) Stock BS 7,800,000
A/c
(Being physical Gold
(Metal) Stock lent to the
Indian Borrower i.e. jeweler)

Accounting at the Year-End – March 31, 2019

2. 31.03.2019 Accrued Interest BS 176,800
Receivable A/c
To Interest Income A/c PL 176,800
(Being interest income on
the amount of Gold (Metal)
Stock lent to the Borrower
i.e. Jeweller accrued for the
period January to March
2019 )
3*. 31.03.2019 Gold (Metal) Lending A/c BS 176,800
To Accrued Interest BS 176,800
Receivable A/c
(Being interest accrued for
the period January to March
2019 transferred to the
Gold (Metal) Lending
account)
* It is assumed that interest receivable is capitalised to the Gold (Metal) Lending
account on quarterly basis.

4. 31.03.2019 Gold (Metal) Lending A/c BS 1,040,000

To Gold Price Difference PL 650,000
A/c

35
 To Foreign Exchange PL 390,000
Rate Difference A/c
(Being profit on account of
changes in gold price and
foreign currency recognised
for the period January to
March 2019)

5. 31.03.2019 Interest Income A/c PL 176,800

To Profit and Loss A/c PL 176,800
(Being interest income for
the period January to March
2019 transferred to the
Profit & Loss account )

6. 31.03.2019 Gold Price Difference A/c PL 650,000

Foreign Exchange Rate PL 390,000
Difference A/c
To Profit and Loss A/c PL 1,040,000
(Being gold price difference
& foreign exchange rate
difference for the period
January to March 2019
transferred to the Profit and
Loss account )

Accounting at the Maturity Date of the Lending transaction –June 30, 2019
7. 30.06.2019 Accrued Interest BS 196,000
Receivable A/c
To Interest Income A/c PL 196,000
(Being interest income on
the amount of Gold (Metal)
Stock lent to the Borrower
i.e. jeweler accrued for the
period April to June 2019)

8*. 30.06.2019 Gold (Metal) Lending A/c BS 196,000

To Accrued Interest BS 196,000
Receivable A/c
(Being interest income
accrued for the period April
to June 2019 transferred to
the Gold (Metal) Lending
account)

36
* It is assumed that interest receivable is capitalised to the Gold (Metal) Lending
account on quarterly basis.

9. 30.06.2019 Gold (Metal) Lending A/c BS 979,200

To Gold Price Difference PL 693,600
A/c
To Foreign Exchange PL 285,600
Rate Difference A/c
(Being income on account
of changes in gold price
and foreign currency
recognised for the period
April to June 2019)

10. 30.06.2019 Interest Income A/c PL 196,000

To Profit and Loss A/c PL 196,000
(Being interest income for
the period April to June
2019 transferred to the
Profit & Loss account )

11. 30.06.2019 Gold Price Difference A/c PL 693,600

Foreign Exchange Rate PL 285,600
Difference A/c
To Profit and Loss A/c PL 979,200
(Being gold price difference
& foreign exchange rate
difference for the period
April to June 2019
transferred to the Profit and
Loss account )

12. 30.06.2019 Customer Current A/c BS 10,192,000

To Gold (Metal) Lending BS 10,192,000
A/c
(Being settlement of
physical gold lent to the
Borrower i.e. Jeweller)
# PL refers to the Statement of Profit and Loss and BS refers to Balance Sheet

37
 ISBN : 978-81-8441-960-3

December | 2019 | P2610 (New)

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