Banks are required to make provisions for depreciation on investment as a ‘below the line’ item, after arriving at the profit for the period. Whenever provisions so created on AFS and HFT categories is in excess of requisite amount in any year, such excess amount can be credited to the profit and loss account and an equivalent amount (net of taxes, if any and net of transfer to Statutory Reserves as applicable to such excess provision) shall be appropriated to an IRA Account in Schedule 2 – “Reserves & Surplus” under the head “Revenue and Other Reserves”. This amount is eligible for inclusion under Tier-II within the overall ceiling of 1.25 per cent of total Risk Weighted Assets prescribed for General Provisions/ Loss Reserves. However, the provision amount should appear in the respective investment account before arriving at the profit for the accounting period.
The amount transferred from the IRA to the P&L Account, should be shown as ‘below the line’ item in the Profit and Loss Appropriation Account, after determining the profit for the year. In terms of RBI guidelines on payment of dividend by banks, the dividends should be payable only out of current year’s profit. Thus, the amount drawn down from the IRA will not be available to a bank for payment of dividends among the shareholders.