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Module: General Practice

Q73: According to the Income Recognition norms for Non-Performing Assets (NPAs), which of the following statements is NOT correct?

A
Income from NPA accounts is recognized only on a realization basis, not on an accrual basis.
B
Interest on NPAs that has been accrued and credited to the income account in the past, but remains unrealized, must be reversed.
C
Fees and commissions earned by banks on NPA accounts can be recognized on an accrual basis if the principal is secured.
D
If an account is upgraded to Standard Asset status, the uncollected interest can be recognized as income.
✅ Correct Answer: C
🎯 Quick Answer:
Statement C is NOT correct. Fees and commissions from NPAs must also be recognized strictly on a realization basis, regardless of security.
Concept Definition: The "Record of Recovery" principle dictates income recognition for NPAs.
Standard assets use "Accrual Basis" (assuming income will come), while NPAs use "Cash Basis" (booking income only when cash hits the till). Structural Breakdown: 1. Reversal Rule: When an account turns NPA, all unrealized interest previously booked must be reversed (debited from P&L). 2. Cost Recovery: In strict accounting, recoveries in NPAs are often first applied to principal and then to interest, though regulatory reporting allows booking interest if fully recovered.
3. Exception C Correction: Even fees/commissions are subject to the same risk; booking them on accrual would inflate profits with "paper money" that may never be received.
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