2.2 Summary of material accounting
policies
a. Current versus non-current
classification
The Company presents assets and liabilities in
the standalone balance sheet based on current/
non-current classification. An asset is treated as
current when it is:
• Expected to be realized or intended to be sold
or consumed in normal operating cycle,
• Held primarily for the purpose of trading,
• Expected to be realized within twelve months
after the reporting period, or
• Cash or cash equivalent unless restricted from
being exchanged or used to settle a liability
for at least twelve months after the reporting
period.
All other assets are classified as non-current.
A liability is current when:
• It is expected to be settled in normal operating
cycle,
• It is held primarily for the purpose of trading,
• It is due to be settled within twelve months
after the reporting period, or
• There is no unconditional right to defer the
settlement of the liability for at least twelve
months after the reporting period.
The Company classifies all other liabilities as non¬
current.
Deferred tax assets and liabilities are classified as
non-current assets and liabilities.
Advance tax paid is classified as non-current
assets.
The operating cycle is the time between the
acquisition of assets for processing and their
realisation in cash and cash equivalents.
The Company has identified twelve months as its
operating cycle.
b. Fair value measurement of financial
instruments
The Company measures financial instruments, such
as, derivatives at fair value at each balance sheet
date using valuation techniques.
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 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.
The principal or the most advantageous market
must be accessible by the Company.
The fair value of an asset or a liability is measured
using the assumptions that market participants
would use when pricing the asset or liability,
assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset
takes into account a market participant's ability to
generate economic benefits by using the asset in
its highest and best use or by selling it to another
market participant that would use the asset in its
highest and best use.
The Company uses valuation techniques that are
appropriate in the circumstances and for which
sufficient data are available to measure fair value,
maximizing the use of relevant observable inputs
and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is
measured or disclosed in the standalone financial
statements are categorised within the fair value
hierarchy, described as follows, based on the
lowest level input that is significant to the fair value
measurement as a whole:
Level 1 - Quoted (unadjusted) market prices in
active markets for identical assets or liabilities.
Level 2 - Valuation techniques for which the lowest
level input that is significant to the fair value
measurement is directly or indirectly observable.
Level 3 - Valuation techniques for which the lowest
level input that is significant to the fair value
measurement is unobservable.
For assets and liabilities that are recognised in the
standalone financial statements on a recurring
basis, the Company determines whether transfers
have occurred between levels in the hierarchy by
re-assessing categorisation (based on the lowest
level input that is significant to the fair value
measurement as a whole) at the end of each
reporting period.
c. Foreign currencies
In preparing the standalone financial statements,
transactions in the currencies other than the
Company's functional currency are recorded at
the rates of exchange prevailing on the date of
transaction. At the end of each reporting period,
monetary items denominated in the foreign
currencies are re-translated at the rates prevailing
at the end of the reporting period. Non-monetary
items carried at fair value that are denominated
in foreign currencies are retranslated at the rates
prevailing on the date when the fair value was
determined. Non-monetary items are measured in
terms of historical cost in a foreign currency are
not retranslated.
Exchange differences arising on the retranslation
or settlement of other monetary items are included
in the statement of profit and loss for the period.
d. Revenue recognition
i. Revenue from Contracts with Customers:
Effective April 1, 2018, the Company adopted Ind
AS 115 "Revenue from Contracts with Customers”
using the cumulative catch-up transition method,
applied to contracts that were not completed as
of April 1, 2018. In accordance with the cumulative
catch-up transition method, the comparatives
have not been retrospectively adjusted.
The following is a summary of new and/or revised
significant accounting policies related to revenue
recognition.
Performance obligations and timing of revenue
recognition:
The Company derives its revenue primarily from
export of garments and related products, with
revenue recognised at a point in time when control
of the goods has transferred to the customer. This
is generally when the goods are delivered to the
customer/agent nominated by the customer.
There is limited judgement needed in identifying the
point when control passes:
- once physical delivery of the products has
occurred to the location as per agreement,
- the Company no longer has physical possession,
- usually will have a present right to payment (as
a single payment on delivery), and
- retains none of the significant risks and
rewards of the goods in question.
The Company also derives some revenue from
job work contracts. In these cases, revenue is
recognised as and when services are rendered
i.e. the products on which job work is performed is
delivered to the customer at agreed location.
Determining the transaction price:
The Company's revenue is derived from fixed price
contracts and therefore the amount of revenue
to be earned from each contract is determined
by reference to those fixed prices. There is no
significant variable consideration involved.
Allocating amounts to performance obligations
For most contracts, there is a fixed unit price for
each unit sold, therefore, there is no judgement
involved in allocating the contract price to each
unit.
Costs of fulfilling contracts:
The costs of fulfilling contracts do not result in
the recognition of a separate asset because
such costs are included in the carrying amount of
inventory for contracts involving the sale of goods.
The Company presents revenues net of indirect
taxes in its Statement of Profit and loss.
Advances received from customers are in the
nature of contract liability.
ii. Revenue from export incentives:
Export incentives are recognised on accrual
basis in accordance with the applicable schemes
formulated, by the Government of India and where
there is reasonable assurance that the enterprise
will comply with the conditions attached to them.
iii. Interest income:
For all debt instruments measured either at
amortised cost or at fair value through other
comprehensive income ('OCI'), interest income is
recorded using the effective interest rate (EIR). EIR
is the rate that exactly discounts the estimated
future cash payments or receipts over the
expected life of the financial instrument or a shorter
period, where appropriate, to the gross carrying
amount of the financial asset or to the amortised
cost of a financial liability. When calculating the
effective interest rate, the Company estimates
the expected cash flows by considering all the
contractual terms of the financial instrument but
does not consider the expected credit losses.
Interest income is included in finance income in the
statement of profit and loss.
iv. Dividends:
Dividend income on investments is accounted when
the right to receive the dividend is established,
which is generally when shareholders approve the
dividend.
v. Others:
Gain on investment in mutual fund units, interest
income on debentures, Interest income on bank
deposits and other claims are recognised on
acceptance basis.
e. Non-current assets held for sale
The Company classifies non-current assets as held
for sale if their carrying amounts will be recovered
principally through a sale rather than through
continuing use.
The criteria for held for sale classification is
regarded met only when the assets or disposal
group is available for immediate sale in its present
condition, subject only to terms that are usual
and customary for sales of such assets, its sale
is highly probable; and it will genuinely be sold, not
abandoned. The Company treats sale of the asset
to be highly probable when:
a) The appropriate level of management is
committed to a plan to sell the asset,
b) An active programme to locate a buyer and
complete the plan has been initiated,
c) The asset is being actively marketed for sale
at a price that is reasonable in relation to its
current fair value,
d) The sale is expected to qualify for recognition
as a completed sale within one year from the
date of classification, and
e) Actions required to complete the plan indicate
that it is unlikely that significant changes to
the plan will be made or that the plan will be
withdrawn.
f. Government grants
The Company recognizes government grants only
when there is reasonable assurance that the
conditions attached to them shall be complied
with, and the grants will be received. Government
grants related to assets are treated as income
in the standalone statement of profit and loss
upon fulfilment of the conditions attached to the
grant received. These grants are presented in the
standalone balance sheet by deducting the grant
in arriving at the carrying amount of the asset.
Government grants related to revenue are
recognized on a systematic basis in the statement
of profit and loss over the periods necessary to
match them with the related costs which they are
intended to compensate.
Export incentives are recognized on accrual
basis in accordance with the applicable schemes
formulated, by the Government of India and where
there is reasonable assurance that the enterprise
will comply with the conditions attached to them.
g. Taxes
Current income tax
Tax expense for the year comprises current and
deferred tax. The tax currently payable is based
on taxable profit for the year. Taxable profit differs
from net profit as reported in the statement
of profit and loss because it excludes items of
income or expense that are taxable or deductible
in other years and it further excludes items that
are never taxable or deductible. Current income
tax assets and liabilities are measured at the
amount expected to be recovered from or paid to
the taxation authorities. The Company's liability for
current tax is calculated using the tax rates and
tax laws that have been enacted or substantively
enacted by the end of the reporting period.
Current income tax relating to items recognised
outside profit or loss is recognised outside profit
or loss (either in other comprehensive income
or in equity). Current tax items are recognised in
correlation to the underlying transaction either in
OCI or directly in equity. Management periodically
evaluates positions taken in the tax returns with
respect to situations in which applicable tax
regulations are subject to interpretation and
establishes provisions where appropriate.
Deferred income tax
Deferred tax is the tax expected to be payable or
recoverable on differences between the carrying
values of assets and liabilities in the standalone
financial statements and the corresponding tax
bases used in the computation of the taxable
profit and is accounted for using the balance
sheet liability model. Deferred tax liabilities are
generally recognised for all the taxable temporary
differences. In contrast, deferred assets are only
recognised to the extent that is probable that
future taxable profits will be available against
which the temporary differences can be utilised.
Deferred income tax assets are recognized for all
deductible temporary differences, carry forward
of unused tax credits and unused tax losses, to the
extent that it is probable that taxable profit will be
available against which the deductible temporary
differences, and the carry forward of unused tax
credits and unused tax losses can be utilized.
The carrying amount of deferred income tax
assets is reviewed at each balance sheet date and
reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to
allow all or part of the deferred income tax asset
to be utilized.
Deferred income tax assets and liabilities are
measured at the tax rates that are expected to
apply in the year when the asset is realized or the
liability is settled, based on tax rates (and tax laws)
that have been enacted or substantively enacted
at the balance sheet date.
Deferred tax relating to items recognised outside
profit or loss is recognised outside profit or loss
(either in other comprehensive income or in equity).
Deferred tax items are recognised in correlation to
the underlying transaction either in OCI or directly
in equity.
Deferred tax assets and deferred tax liabilities are
offset if a legally enforceable right exists to set
off current tax assets against current tax liabilities
and the deferred taxes relate to the same taxable
entity and the same taxation authority.
Deferred tax assets include Minimum Alternative
Tax ('MAT') paid in accordance with the tax laws
in India, which is likely to give future economic
benefits in the form of availability of set off
against future income tax liability. Accordingly, MAT
is recognized as deferred tax asset in the balance
sheet when the asset can be measured reliably
and it is probable that the future economic benefit
associated with the asset will be realized.
h. Property, plant and equipment (PPE)
and Intangible assets and Depreciation/
amortization
On transition to Ind AS, the Company has elected
to continue with the carrying value of all of its
property, plant and equipment recognised as
at March 31, 2016 measured as per the previous
GAAP and use that carrying value as the deemed
cost of the property, plant and equipment as on
April 1, 2016.
Freehold land is carried at historical cost and is
not depreciated. Capital work in progress and all
other property, plant and equipment are stated
at historical cost less accumulated depreciation
and accumulated impairment losses, if any.
Historical cost includes expenditure that is directly
attributable to the acquisition of the items.
Subsequent costs are included in the asset's
carrying amount or recognised as a separate asset,
as appropriate, only when it is probable that future
economic benefits associated with the item will
flow to the Company and the cost of the item can
be measured reliably. The carrying amount of any
component accounted for as separate assets are
de-recognised when replaced. All other repairs and
maintenance are charged to profit and loss during
the reporting period in which they are incurred.
The Company identifies and determines cost of
each component/part of the asset separately, if
the component/part has a cost which is significant
to the total cost of the asset having useful life that
is materially different from that of the remaining
asset. These components are depreciated over
their useful lives; the remaining asset is depreciated
over the life of the principal asset.
Depreciation is provided using the written down
value method as per the useful lives of the assets
estimated by the management with residual value
upto 5%, which is equal to the corresponding rates
prescribed under schedule II of the Companies Act,
2013.
Leasehold improvements are capitalized at cost
and amortized over their expected useful life or
the non-cancellable term of the lease, whichever
is less.
The residual values, useful lives and methods of
depreciation of property, plant and equipment are
reviewed at each financial year end and adjusted
prospectively, if appropriate.
An item of property, plant and equipment and any
significant part initially recognized is derecognized
upon disposal or when no future economic benefits
are expected from its use or disposal. Any gain
or loss arising on derecognition of the asset
(calculated as the difference between the net
disposal proceeds and the carrying amount of the
asset) is included in the statement of profit and
loss when the asset is derecognized.
Intangible assets acquired separately are
measured on initial recognition at cost. Following
initial recognition, intangible assets are carried
at cost less any accumulated amortisation and
accumulated impairment losses, if any.
The useful lives of intangible assets are assessed
as either finite or indefinite.
Intangible assets with finite lives are amortised
over the useful economic life and assessed for
impairment whenever there is an indication that the
intangible asset may be impaired. The amortisation
period and the amortisation method for an
intangible asset with a finite useful life are reviewed
at least at the end of each reporting period with
the effect of any change in the estimate being
accounted for on a prospective basis. Changes
in the expected useful life or the expected
pattern of consumption of future economic
benefits embodied in the asset are considered
to modify the amortisation period or method,
as appropriate, and are treated as changes in
accounting estimates. The amortisation expense
on intangible assets with finite lives is recognised in
the standalone statement of profit and loss unless
such expenditure forms part of carrying value of
another asset.
Gains or losses arising from derecognition of an
intangible asset are measured as the difference
between the net disposal proceeds and the
carrying amount of the asset and are recognised
in the statement of profit and loss when the asset
is derecognised.
i. Borrowing costs
Borrowing costs consist of interest and other
costs that an entity incurs in connection with the
borrowing of funds. Borrowing cost also includes
exchange differences to the extent regarded as
an adjustment to the borrowing costs.
Borrowing costs directly attributable to the
acquisition, construction or production of an asset
that necessarily takes a substantial period of
time to get ready for its intended use or sale are
capitalised as part of the cost of the asset until
such time as the assets are substantially ready for
the intended use or sale. All other borrowing costs
are expensed in the period in which they occur.
j. Leases
The determination of whether an arrangement is
(or contains) a lease is based on the substance of
the arrangement at the inception of the lease. The
arrangement is, or contains, a lease if fulfilment
of the arrangement is dependent on the use of
a specific asset or assets and the arrangement
conveys a right to use the asset or assets,
even if that right is not explicitly specified in an
arrangement.
A lease is classified at the inception date as a
finance lease or an operating lease.
For arrangements entered into prior to April 1,
2016, the Company has determined whether
the arrangement contain lease on the basis of
facts and circumstances existing on the date of
transition.
Company as a lessee
A lease that transfers substantially all the risks and
rewards incidental to ownership to the Company is
classified as a finance lease.
A leased asset is depreciated over the useful life
of the asset. However, if there is no reasonable
certainty that the Company will obtain ownership by
the end of the lease term, the asset is depreciated
over the shorter of the estimated useful life of the
asset and the lease term.
Finance leases are capitalised at the
commencement of the lease at the inception date
fair value of the leased asset or, at the present value
of the minimum lease payments at the inception
of the lease, whichever is lower. Lease payments
are apportioned between finance charges and
reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance
of the liability. Finance charges are recognised in
finance costs in the statement of profit and loss
unless they are directly attributable to qualifying
assets, in which case they are capitalized in
accordance with the Company's general policy on
the borrowing costs.
The Company's lease asset classes primarily
consist of leases for Buildings. The Company
assesses whether a contract contains a lease, at
inception of a contract. A contract is, or contains,
a lease if the contract conveys the right to control
the use of an identified asset for a period of time
in exchange for consideration. To assess whether a
contract conveys the right to control the use of an
identified asset, the Company assesses whether:
(i) the contract involves the use of an identified
asset (ii) the Company has substantially all of the
economic benefits from use of the asset through
the period of the lease and (iii) the Company has
the right to direct the use of the asset.
At the date of commencement of the lease, the
Company recognizes a right-of-use asset ("ROU”)
and a corresponding lease liability for all lease
arrangements in which it is a lessee, except for
leases with a term of twelve months or less (short¬
term leases) and low value leases. For these short¬
term and low value leases, the Company recognizes
the lease payments as an operating expense on a
straight-line basis over the term of the lease.
Lease liability and ROU asset have been separately
presented in the Balance Sheet and lease payments
have been classified as financing cash flows.
k. Inventories
Inventories are valued as follows:
Raw materials, packing materials, stores, spares
and consumables are valued at lower of cost
or net realisable value. Cost includes cost of
purchase and other costs incurred in bringing the
inventories to their present location and condition.
Cost is determined on a weighted average basis.
However, materials and other items held for use in
the production of inventories are not written down
below cost if the finished products in which they
will be incorporated are expected to be sold at or
above cost.
Work in progress and finished goods are valued at
lower of cost or net realisable value. Cost includes
cost of direct materials and labour and a proportion
of manufacturing overheads based on the normal
operating capacity, but excluding borrowing costs.
Cost is determined on a weighted average basis.
These are valued at lower of cost and net realisable
value after considering provision for obsolescence
and other anticipated loss, wherever considered
necessary.
Net realisable value is the estimated selling price
in the ordinary course of business, less estimated
costs of completion and the estimated costs
necessary to make the sale.
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