2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Income
(i) Interest income
The Company recognises interest income using Effective Interest Rate (EIR) on all financial
assets subsequently measured at amortised cost or fair value through other comprehensive
income (FVOCI). EIR is calculated by considering all costs and incomes attributable to
acquisition of a financial asset or assumption of a financial liability and it represents a rate
that exactly discounts estimated future cash payments/receipts through the expected life of
the financial asset/ financial liability to the gross carrying amount of a financial asset or to
the amortised cost of a financial liability.
The Company recognises interest income by applying the EIR to the gross carrying amount
of financial assets other than credit-impaired assets. In case of credit-impaired financial
assets [as set out in note no. 2.4(i)] regarded as 'stage 3', the Company recognises interest
income on the amortised cost net of impairment loss of the financial asset at EIR. If the
financial asset is no longer credit-impaired [as outlined in note no. 2.4(1)], the Company
reverts to calculating interest income on a gross basis.
Delayed payment interest (penal interest) levied on customers for delay in
repayments/non-payment of contractual cash flows is recognised on realisation.
Interest on financial assets subsequently measured at fair value through profit or loss
(FVTPL) is recognised at the contractual rate of interest.
(ii) Dividend income
Dividend income on equity shares is recognised when the Company's right to receive the
payment is established, which is generally when shareholders approve the dividend.
(iii) Lease Income
The Company as a lessor, classifies leases as either operating lease or finance lease. A lease
is classified as a finance lease if it transfers substantially all the risks and rewards incidental
to ownership of an underlying asset. Initially asset held under finance lease is recognised in
balance sheet and presented as a receivable at an amount equal to the net investment in the
lease. Finance income is recognised over the lease term, based on a pattern reflecting a
constant periodic rate of return on Company's net investment in the lease. A lease which is
not classified as a finance lease is an operating lease. Accordingly, the Company recognises
lease payments as income on a straight-line basis in case of assets given on operating leases.
The Company presents underlying assets subject to operating lease in its balance sheet
under the respective class of asset.
(iv) Other revenue from operations
The Company recognises revenue from contracts with customers (other than financial
assets to which Ind AS 109 'Financial Instruments' is applicable) based on a comprehensive
assessment model as set out in Ind AS 115 'Revenue from contracts with customers'. The
Company identifies contract(s) with a customer and its performance obligations under the
contract, determines the transaction price and its allocation to the performance obligations
in the contract and recognises revenue only on satisfactory completion of performance
obligations. Revenue is measured at fair value of the consideration received or receivable.
a) Fees and commission
The Company recognises loan processing fees to its loan customers on satisfactory
completion of service delivery.
b) Net gain on fair value changes
Financial assets are subsequently measured at fair value through profit or loss (FVTPL)
or fair value through other comprehensive income (FVOCI), as applicable. The
Company recognises gains/losses on fair value change of financial assets measured as
FVTPL and realised gains/losses on de-recognition of financial asset measured at
FVTPL and FVOCI.
(v) Taxes
Incomes are recognised net of the Goods and Services Tax/Service Tax, wherever
applicable.
2.2 Expenditures
(i) Finance costs
Borrowing costs on financial liabilities are recognised using the EIR [refer note no.
2.1(i)].
(ii) Fees and commission expenses
Fee and commission expenses with regards to services are accounted for as and when
the services are delivered.
(iii) Other Expenses
All other expenses are recognised in the period they occur.
(iv) Taxes
Expenses are recognised net of the Goods and Services Tax/Service Tax, except where
credit for the input tax is not statutorily permitted.
2.3 Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, together with other
short-term, highly liquid investments maturing within 3 months from the date of acquisition
that are readily convertible into known amounts of cash along with bank overdrafts and
which are subject to an insignificant risk of changes in value. Bank overdrafts are shown
within borrowings in current liabilities.
2.4 Financial instruments
A financial instrument is defined as any contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument of another entity. Trade receivables and
payables, loan receivables, investments in securities and subsidiaries, debt securities and
other borrowings, preferential and equity capital etc. are some examples of financial
instruments.
All the financial instruments are recognised on the date when the Company becomes party
to the contractual provisions of the financial instruments. For tradable securities, the
Company recognises the financial instruments on settlement date.
(i) Financial assets
Financial assets include cash, or an equity instrument of another entity, or a contractual right
to receive cash or another financial asset from another entity. Few examples of financial
assets are loan receivables, investment in equity and debt instruments, trade receivables and
cash and cash equivalents.
Initial measurement
All financial assets are recognised initially at fair value including transaction costs that are
attributable to the acquisition of financial assets except in the case of financial assets recorded
at FVTPL where the transaction costs are charged to profit or loss.
Subsequent measurement
For the purpose of subsequent measurement, financial assets are classified into four
categories:
(a) Debt instruments at amortised cost
(b) Debt instruments at FVOCI
(c) Debt instruments at FVTPL
(d) Equity instruments designated at FVOCI
(a) Debt instruments at amortised cost
The Company measures its financial assets at amortised cost if both the following
conditions are met:
• The asset is held within a business model of collecting contractual cash flows; and
• Contractual terms of the asset give rise on specified dates to cash flows that are
Sole Payments of Principal and Interest (SPPI) on the principal amount
outstanding.
To make the SPPI assessment, the Company applies judgment and considers relevant
factors such as the nature of portfolio and the period for which the interest rate is set.
The Company determines its business model at the level that best reflects how it
manages groups of financial assets to achieve its business objective. The Company's
business model is not assessed on an instrument by instrument basis, but at a higher
level of aggregated portfolios. If cash flows after initial recognition are realised in a way
that is different from the Company's original expectations, the Company does not
change the classification of the remaining financial assets held in that business model,
but incorporates such information when assessing newly originated financial assets
going forward.
The business model of the Company for assets subsequently measured at amortised cost
category is to hold and collect contractual cash flows. However, considering the
economic viability of carrying the delinquent portfolios in the books of the Company, it
may sell these portfolios to banks and/ or asset reconstruction companies.
After initial measurement, such financial assets are subsequently measured at amortised
cost on effective interest rate (EIR). For further details, refer note no. 2.1(i).
(b) Debt instruments at FVOCI
The Company subsequently classifies its financial assets as FVOCI, only if both of the
following criteria are met:
• The objective of the business model is achieved both by collecting contractual cash
flows and selling the financial assets; and
• Contractual terms of the asset give rise on specified dates to cash flows that are
Solely Payments of Principal and Interest (SPPI) on the principal amount
outstanding.
Debt instruments included within the FVOCI category are measured at each reporting
date at fair value with such changes being recognised in other comprehensive income
(OCI). The interest income on these assets is recognised in profit or loss. The ECL
calculation for debt instruments at FVOCI is explained in subsequent notes in this
section.
Debt instruments such as long term investments in Government securities to meet
regulatory liquid asset requirement of the Company's deposit program and mortgage
loans portfolio where the Company periodically resorts to partially selling the loans by
way of assignment to willing buyers are classified as FVOCI.
On de-recognition of the asset, cumulative gain or loss previously recognised in OCI is
reclassified to profit or loss.
(c) Debt instruments at FVTPL
The Company classifies financial assets which are held for trading under FVTPL
category. Held for trading assets are recorded and measured in the Balance Sheet at fair
value. Interest and dividend incomes are recorded in interest income and dividend
income, respectively according to the terms of the contract, or when the right to receive
the same has been established. Gain and losses on changes in fair value of debt
instruments are recognised on net basis through profit or loss.
The Company's investments into shares and mutual funds (trading portfolio) for trading
and short term cash flow management have been classified under this category.
De-recognition of Financial Assets
The Company derecognises a financial asset (or, where applicable, a part of a financial asset)
when:
• The right to receive cash flows from the asset have expired; or
• The Company has transferred its right to receive cash flows from the asset or has
assumed an obligation to pay the received cash flows in full without material delay to
a third party under an assignment arrangement and the Company has transferred
substantially all the risks and rewards of the asset. Once the asset is derecognised, the
Company does not have any continuing involvement in the same.
On de-recognition of a financial asset in its entirety, the difference between:
• the carrying amount (measured at the date of de-recognition) and
• the consideration received (including any new asset obtained less any new liability
assumed) is recognised in profit or loss.
Impairment of financial assets
ECL are recognised for financial assets held under amortised cost, debt instruments
measured at FVOCI and certain loan commitments.
Financial assets where no significant increase in credit risk has been observed are considered
to be in 'stage 1' and for which a 12 month ECL is recognised. Financial assets that are
considered to have significant increase in credit risk are considered to be in 'stage 2' and
those which are in default or for which there is an objective evidence of impairment are
considered to be in 'stage 3'. Lifetime ECL is recognised for stage 2 and stage 3 financial
assets.
At initial recognition, allowance (or provision in the case of loan commitments) is required
for ECL towards default events that are possible in the next 12 months, or less, where the
remaining life is less than 12 months.
In the event of a significant increase in credit risk, allowance (or provision) is required for
ECL towards all possible default events over the expected life of the financial instrument
('lifetime ECL').
Financial assets (and the related impairment loss allowances) are written off in full, when
there is no realistic prospect of recovery.
Treatment of the different stages of financial assets and the methodology of
determination of ECL
(a) Credit impaired (stage 3)
The Company recognises a financial asset to be credit impaired and in stage 3 by considering
relevant objective evidence, primarily whether:
• Contractual payments of either principal or interest are past due for more than 90
days;
• The loan is otherwise considered to be in default.
Restructured loans, where repayment terms are renegotiated as compared to the original
contracted terms due to significant credit distress of the borrower, are classified as credit
impaired. Such loans continue to be in stage 3 until they exhibit regular payment of
renegotiated principal and interest over a minimum observation period, typically 12
months- post renegotiation, and there are no other indicators of impairment. Having
satisfied the conditions of timely payment over the observation period these loans could be
transferred to stage 1 or 2 and a fresh assessment of the risk of default be done for such
loans.
Interest income is recognised by applying the EIR to the net amortised cost amount i.e. gross
carrying amount less ECL allowance.
(b) Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is
performed at each reporting period by considering the change in the risk of default of the
loan exposure. However, unless identified at an earlier stage, 30 days past due is considered
as an indication of financial assets to have suffered a significant increase in credit risk.
The measurement of risk of defaults under stage 2 is computed on homogenous portfolios,
generally by nature of loans, tenors, underlying collateral, geographies and borrower
profiles. The default risk is assessed using PD (probability of default) derived from past
behavioural trends of default across the identified homogenous portfolios. These past trends
factor in the past customer behavioural trends, credit transition probabilities and
macroeconomic conditions. The assessed PDs are then aligned considering future economic
conditions that are determined to have a bearing on ECL.
(c) Without significant increase in credit risk since initial recognition (stage 1)
ECL resulting from default events that are possible in the next 12 months are recognised for
financial instruments in stage 1. The Company has ascertained default possibilities on past
behavioural trends witnessed for each homogenous portfolio using application/behavioural
score cards and other performance indicators, determined statistically.
(d) Measurement of ECL
The assessment of credit risk and estimation of ECL are unbiased and probability weighted.
It incorporates all information that is relevant including information about past events,
current conditions and reasonable forecasts of future events and economic conditions at the
reporting date. In addition, the estimation of ECL takes into account the time value of
money. Forward looking economic scenarios determined with reference to external forecasts
of economic parameters that have demonstrated a linkage to the performance of our
portfolios over a period of time have been applied to determine impact of macro-economic
factors.
The Company has calculated ECL using three main components: a probability of default
(PD), a loss given default (LGD) and the exposure at default (EAD). ECL is calculated by
multiplying the PD, LGD and EAD using a rate which is a reasonable approximation of EIR.
• Determination of PD is covered above for each stages of ECL.
• EAD represents the expected balance at default, taking into account the repayment of
principal and interest from the Balance Sheet date to the date of default together with
any expected drawdowns of committed facilities.
• LGD represents expected losses on the EAD given the event of default, taking into
account, among other attributes, the mitigating effect of collateral value at the time it is
expected to be realised and the time value of money.
A more detailed description of the methodology used for ECL is covered in the 'credit risk'
section of Note No. 33.
(ii) Financial liabilities
Financial liabilities include liabilities that represent a contractual obligation to deliver cash or
another financial assets to another entity, or a contract that may or will be settled in the
entities own equity instruments. Few examples of financial liabilities are trade payables, debt
securities and other borrowings and subordinated debts.
Initial measurement
All financial liabilities are recognised initially at fair value and, in the case of borrowings and
payables, net of directly attributable transaction costs. The Company's financial liabilities
include trade payables, other payables, debt securities and other borrowings.
Subsequent measurement
After initial recognition, all financial liabilities are subsequently measured at amortised cost
using the EIR [Refer note no. 2.1(i)]. Any gains or losses arising on de-recognition of
liabilities are recognised in the Statement of Profit and Loss.
De-recognition
The Company derecognises a financial liability when the obligation under the liability is
discharged, cancelled or expired.
(iii) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the
Balance Sheet only if there is an enforceable legal right to offset the recognised amounts with
an intention to settle on a net basis or to realise the assets and settle the liabilities
simultaneously.
2.5 Property, Plant and Equipment (PPE)
Property, Plant & Equipments are stated at cost of acquisition less accumulated depreciation
and accumulated impairment losses, if any. PPE is recognized when the cost of an asset can
be reliably measured and it is probable that the entity will obtain future economic benefits
from the asset.
PPE is measured initially at cost. Cost includes the fair value of the consideration given to
acquire the asset (net of discounts and rebates) and any directly attributable cost of bringing
the asset to working condition for its intended use (inclusive of import duties and non¬
refundable purchase taxes).
The Company has elected to use the exemption available under Ind AS 101 to continue the
carrying value for all of its PPE as recognised in the standalone financial statements as at the
date of transition to Ind AS, measured as per the previous GAAP and use that as its deemed
cost as at the date of transition (April 1, 2018).
2.6 Depreciation/Amortization
Depreciation on Property, Plant & Equipments is calculated as per the useful life specified in
Schedule II to the Act.
The management believes that the estimated useful lives are realistic and reflects fair
approximation of the period over which the assets are likely to be used. At each financial
year end, management reviews the residual values, useful lives and method of depreciation
of property, plant and equipment and values of the same are adjusted prospectively where
needed.
2.7 Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. Cost
comprises the acquisition price, development cost and any attributable / allocable incidental
cost of bringing the asset to its working condition for its intended use. The useful life of
intangible assets is assessed as either finite or indefinite. All finite-lived intangible assets, are
accounted for using the cost model whereby intangible assets are stated at cost less
accumulated amortisation and impairment losses, if any. Intangible assets are amortised over
the estimated useful economic life. Residual values and useful lives are reviewed at each
reporting date. Intangible assets with indefinite useful lives are not amortised, but are tested
for impairment annually, either individually or at the cash-generating unit level. The
assessment of indefinite life is reviewed annually to determine whether the indefinite life
continues to be supportable. If not, the change in useful life from indefinite to finite is made
on a prospective basis.
When an intangible asset is disposed of, the gain or loss on disposal is determined as the
difference between the proceeds and the carrying amount of the asset, and is recognised in
the statement of profit and loss within 'other income' or 'other expenses' respectively.
2.8 Impairment of non-financial Assets
The company assesses at each reporting date as to whether there is any indication that any
property, plant and equipment and intangible assets be impaired. If any such indication
exists the recoverable amount of an asset is estimated to determine the extent of impairment,
if any.
An impairment loss is recognized in the Statement of Profit and Loss to the extent, asset's
carrying amount exceeds its recoverable amount. The recoverable amount is higher of an
asset's fair value less cost of disposal and value in use. Value in use is based on the estimated
future cash flows, discounted to their present value using pre-tax discount rate that reflects
current market assessments of the time value of money and risk specific to the assets.
The impairment loss recognized in prior accounting period is reversed if there has been a
change in the estimate of recoverable amount.
2.9 Fair value measurement
The Company measures certain financial instruments at fair value at each balance sheet date.
Certain accounting policies and disclosures require the measurement of fair values, for both
financial and nonfinancial assets and liabilities. Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
The best estimate of the fair value of a financial instrument on initial recognition is normally
the transaction price - i.e. the fair value of the consideration given or received. If the
Company determines that the fair value on initial recognition differs from the transaction
price and the fair value is evidenced neither by a quoted price in an active market for an
identical asset or liability nor based on a valuation technique that uses only data from
observable markets, then the financial instrument is initially measured at fair value, adjusted
to defer the difference between the fair value on initial recognition and the transaction price.
Subsequently that difference is recognised in Statement of Profit and Loss on an appropriate
basis over the life of the instrument but no later than when the valuation is wholly supported
by observable market data or the transaction is closed out.
The fair value measurement is based on the presumption that the transaction to sell the asset
or transfer the liability takes place either:
• In the principal market for the asset or liability, or
• In the absence of a principal market, in the most advantageous market for the asset or
liability.
All assets and liabilities for which fair value is measured or disclosed in the standalone
financial statement are categorized within the fair value hierarchy that categorizes into
three levels, described as follows, the inputs to valuation techniques used to measure value.
The fair value hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs
(Level 3 inputs).
> Level 1 — quoted (unadjusted) market prices in active markets for identical assets or
liabilities
> Level 2 — inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly
> Level 3 — inputs that are unobservable for the asset or liability
For the purpose of fair value disclosures, the Company has determined classes of assets
and liabilities on the basis of the nature, characteristics and risks of the asset or liability and
the level of the fair value hierarchy as explained above.
2.10 Leases
The company has elected not to recognise right-of-use assets and lease liabilities for short
term leases of real estate properties that have a lease term of 12 months and for leases of low-
value assets. The company recognises the lease payments associated with these leases as an
expense on a straight-line basis over the lease term.
2.11 Employee benefits
The liability for retirement benefits, if any payable as per applicable laws and common
practices followed by the Company, is provided for in books of accounts.
2.12 Income Taxes
The tax expense for the period comprises current and deferred tax. Taxes are recognised in
the statement of profit and loss, except to the extent that it relates to the items recognised in
the comprehensive income or in Equity in which case, the tax is also recognised in the
comprehensive income or in Equity.
2.12.1. Current tax
Current income tax is measured at the amount expected to be paid to the tax authorities in
accordance with the Indian Income-tax Act. Current income tax relating to items recognised
outside statement of profit and loss is recognised outside statement of profit and loss (either
in OCI or in equity).
2.12.2. Deferred tax
Deferred tax is recognised on temporary differences between the carrying amounts of assets
and liabilities in the standalone financial statements and the corresponding tax bases used in
the computation of taxable profit. Deferred tax liabilities are generally recognized for all
taxable temporary timing difference. Deferred tax assets are recognized for deductible
temporary differences to the extent that they are probable that taxable profit will be available
against which the deductible temporary difference can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and adjusted
to the extent that it is no longer probable that sufficient taxable profit will be available to
allow all or part of the deferred tax asset to be utilized. Deferred tax assets and liabilities are
measured at the tax rates that are expected to apply in the year when the asset is realized or
liability is settled, based on tax rates (and tax laws) that have been enacted or substantively
enacted on the reporting date.
Current and deferred tax for the year are recognized in profit or loss, except when they relate
to items that are recognized in other comprehensive income or directly in equity, in which
case, the current and deferred tax are also recognized in other comprehensive income or
directly in equity respectively.
2.13 Earnings per share
Basic EPS is calculated by dividing the profit or loss for the period attributable to the
equity holders of the parent company by the weighted average number of ordinary shares
outstanding (including adjustments for bonus and rights issues).
Diluted EPS is calculated by adjusting the profit or loss and the weighted average number of
ordinary shares by taking into account the conversion of any dilutive potential ordinary
shares.
Basic and diluted EPS are presented in the statement of profit and loss for each class of
ordinary shares in accordance with Ind AS 33.
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