## Audit of Revenue Items (Profit & Loss Account)
### Auditor's Core Concern
The auditor must obtain reasonable assurance that:
- Recorded income arose from transactions during the relevant period and pertains to the bank.
- There is no unrecorded income and income is recorded at the appropriate amount.
### RBI's 1% Materiality Threshold
Income items exceeding 1% of total income (gross basis) or 1% of net profit before tax (net basis) must be recognised on accrual basis per AS 9. Items below this threshold may be recognised on receipt without audit qualification.
### Accrual vs. Cash Recognition
| Condition | Treatment |
|---|---|
| Income where collection is reasonably certain | Accrue (recognise as earned) |
| Income on Non-Performing Assets (NPAs) | Do not recognise until actually realised |
### NPA Income Rules — Critical Points
1. When an account is classified as NPA for the first time, reverse or provide for interest accrued and credited in the previous year that remains unrealised.
2. This rule applies to Government-guaranteed accounts as well.
3. Fees, commission, and similar income on NPAs must cease to accrue and must be reversed for past periods if uncollected.
4. Banks that wrongly recognised income in the past must reverse (if current year) or provide for (if prior year) the equivalent amount.
### Special Income Recognition Rules
| Type | Rule |
|---|---|
| Advances against Term Deposits, NSCs, IVPs, KVPs, Life policies | Interest may be taken to income on due date if adequate margin is available |
| Bills purchased / discounted | Discount must be apportioned between periods; unexpired discount recorded as 'Other Liabilities' |
| Bills for collection | Commission accrues only when the bill is actually collected from the drawee |
| Renegotiated/rescheduled debt | Fees/commissions spread over the extension period on accrual basis |
| Finance income on leased assets (NPA) | Reverse unrealised accrued finance income per AS 19 |
| Take-out finance (NPA) | No income recognition unless actually realised from borrower/taking-over institution |
### Partial Recoveries in NPAs
- In absence of a clear agreement on appropriation, banks must adopt a uniform and consistent accounting policy.
- Interest partly/fully realised in NPAs can be taken to income — but credits must not come from fresh/additional credit facilities to the same borrower.
### Memorandum Account
- On turning NPA: reverse accrued interest by debiting P&L; stop further interest application.
- Banks may continue recording accrued interest in a Memorandum Account for control purposes.
- Memorandum account balances must not be included in Gross Advances.
### Income from Investments
| Stream | Treatment |
|---|---|
| Interest on Govt. securities, bonds, debentures | Included in interest income; broken-period interest paid on purchase and amortisation of premium on SLR investments is netted off |
| Profit/loss on sale of investments | Taken to P&L account |
| Profit/loss on revaluation | Recognised at periodic intervals per RBI guidelines; taken to P&L |