2 Material accounting policies
(a) Basis of preparation
“The financial statements have been prepared in
accordance with Indian Accounting Standards
(Ind AS) as per the Companies (Indian Accounting
Standards) Rules, 2015 as amended from time to time
and notified under section 133 of the Companies
Act, 2013 (the Act) along with other relevant
provisions of the Act and the Master Direction -
Non-Banking Financial Company (Reserve Bank)
Directions, 2016 (‘the NBFC Master Directions’),
Circulars, guidelines and directions issued by RBI.
These financial statements have been prepared
on a going concern basis and presented under
the historical cost convention, on accrual basis
of accounting except for certain financial assets
and liabilities that are measured at fair values
at the end of each reporting period, as stated
in the accounting policies stated out below.
Accounting policies have been consistently
applied except where newly issued accounting
standard is initially adopted or a revision to an
existing accounting standard requires a change in
the accounting policy hitherto in use.”
Rounding of amounts
These financial statements are presented in Indian
Rupees (INR)/(RS), which is also its functional
currency and all values are rounded to the nearest
lakh as per the requirement of schedule III (except
per share data), unless otherwise stated ‘0’ (zero)
denotes amount less than thousand.
(b) Presentation of financial statements
The Company presents its Balance Sheet in order
of liquidity. The Company prepares and present its
Balance Sheet, the Statement of Profit and Loss and
the Statement of Changes in Equity in the format
prescribed by Division III of Schedule III to the Act.
The Statement of Cash Flows has been prepared
and presented as per the requirements of Ind AS 7
‘Statement of Cash Flows’. The Company generally
reports financial assets and financial liabilities on a
gross basis in the Balance Sheet. They are offset and
reported net only when Ind AS specifically permits the
same or it has an unconditional legally enforceable
right to offset the recognised amounts without
being contingent on a future event. Similarly, the
Company offsets incomes and expenses and reports
the same on a net basis when permitted by Ind AS
specifically unless they are material in nature. The
preparation of the Company’s financial statements
requires Management to make use of estimates and
judgments. In view of the inherent uncertainties
and a level of subjectivity involved in measurement
of items, it is possible that the outcomes in the
subsequent financial years could differ from those
based on Management’s estimates.
(c) Property, plant and equipment
Property, Plant and Equipment are stated at cost
less accumulated depreciation and accumulated
impairment losses if any. Cost comprises the
purchase price and any attributable cost of
bringing the asset to its working condition for its
intended use.
(d) Depreciation on property, plant and equipment
“Depreciable amount for property, plant and
equipment is the cost of an asset or other amount
substituted for cost less its estimated residual value.
Depreciation on property, plant and equipment is
provided on straight-line method as per the useful
life prescribed in Schedule II to the Companies
Act, 2013.”
(e) Derecognition of property, plant and equipment
The carrying amount of an item of property, plant
and equipment is derecognised on disposal or
when no future economic benefits are expected
from its use or disposal. The gain or loss arising
from the derecognition of an item of property,
plant and equipment is measured as the difference
between the net disposal in proceeds and the
carrying amount of the item and is recognised in
the Statement of Profit and Loss when the item is
derecognised.
(f) Lease Accounting and Right of Use Assets (ROU)
Leases
The Company assesses at contract inception
whether a contract is, or contains, a lease. That
is, if the contract conveys the right to control the
use of an identified asset for a period of time in
exchange for consideration.
Company as a lessee
The Company applies a single recognition and
measurement approach for all leases, except
for short-term leases and leases of low-value
assets. The Company recognises lease liabilities
to make lease payments and right-of-use assets
representing the right to use the underlying
assets.
(i) Right of Use Assets (ROU)
The Company recognises right-of-use assets
at the commencement date of the lease (i.e.,
the date the underlying asset is available
for use). Right-of-use assets are measured
at cost, less any accumulated depreciation
and impairment losses, and adjusted for any
remeasurement of lease liabilities. The cost
of right-of-use assets includes the amount
of lease liabilities recognised, initial direct
costs incurred, and lease payments made at
or before the commencement date less any
lease incentives received. Right-of-use assets
are generally depreciated over the lease term
on a straight-line basis.
The right-of-use assets are also subject to
impairment. Refer to the material accounting
policies - Impairment of non-financial assets
(ii) Lease liabilities
(A) At the commencement date of the
lease, the Company recognises lease
liabilities measured at the present value
of lease payments to be made over the
lease term. The lease payments include
fixed payments (including insubstance
fixed payments) less any lease
incentives receivable, variable lease
payments that depend on an index or a
rate, and amounts expected to be paid
under residual value guarantees.
In calculating the present value of
lease payments, the Company uses
its incremental borrowing rate at the
lease commencement date. After the
commencement date, the amount of
lease liabilities is increased to reflect
the accretion of interest and reduced
for the lease payments made. In
addition, the carrying amount of lease
liabilities is remeasured if there is a
modification, a change in the lease
term, a change in the lease payments
(e.g., changes to future payments
resulting from a change in an index
or rate used to determine such lease
payments).
(B) Short-term leases and leases of low-
value assets
The Company applies the short-term
lease recognition exemption to its
short-term leases of rented premises
(i.e., those leases that have a lease
term of 12 months or less from the
commencement date and do not
contain a purchase option). It also
applies the lease of low-value assets
recognition exemption to leases of
office equipment that are considered to
be low value. Lease payments on short¬
term leases and leases of low-value
assets are recognised as expense on a
straight-line basis over the lease term.
(g) Impairment of non-financial assets
The carrying amounts of non financial assets are
reviewed at each balance sheet date if there is
any indication of impairment based on internal/
external factors. An asset is treated as impaired
when the carrying amount exceeds its recoverable
value. The recoverable amount is the greater of an
asset’s or cash generating unit’s, net selling price
and value in use. In assessing value in use, the
estimated future cash flows are discounted to the
present value using a pre-tax discount rate that
reflects current market assessment of the time
value of money and risks specific to the assets. An
impairment loss is charged to the statement ofprofit
and loss in the year in which an asset is identified
as impaired. After impairment, depreciation
is provided on the revised carrying amount
of the asset over its remaining useful life. The
impairment loss recognized in prior accounting
periods is reversed by crediting the statement of
profit and loss if there has been a change in the
estimate of recoverable amount.
(h) Cash and cash equivalents
(i) Cash and cash equivalents in the balance
sheet comprise cash at bank and on hand
and short-term deposit with original
maturity upto three months, which are
subject to insignificant risk of changes in
value.
(ii) For the purpose of presentation in the
statement of cash flows, cash and cash
equivalents consists of cash and short-term
deposit, as defined as they are considered
as integral part of Company’s cash
management.
(i) Fair value measurement
The Company has an established control framework
with respect to the measurement of fair values.
The management regularly reviews significant
unobservable inputs and valuation adjustments.
All financial assets and financial liabilities for
which fair value is measured or disclosed in the
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, or
• Level 3 — Valuation techniques for which the
lowest level input that is significant to the fair
value measurement is unobservable.
The Company recognises transfers between
levels of the fair value hierarchy at the end of the
reporting period during which the change has
occurred
(I) Financial instruments
Financial instruments is any contract that gives
rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
Financial assets
i Initial recognition
“Financial assets are recognized when the
Company becomes a party to the contractual
provisions of the financial instrument.
Financial assets and financial liabilities are
initially measured at fair value. Transaction
costs that are directly attributable to the
acquisition or issue of financial assets and
financial liabilities (other than financial
assets and financial liabilities at fair value
through profit and loss) are added to or
deducted from the fair value of the financial
assets or financial liabilities, as appropriate,
on initial recognition. Transaction costs
directly attributable to the acquisition of
financial assets or financial liabilities at fair
value through profit and loss are recognised
immediately in the statement of profit and
lose ”
ii Subsequent measurement
Financial assets are classified into the
following specified categories: amortised
cost, financial assets at fair value through
profit and loss (FVTPL), Fair value through
other comprehensive income (FVTOCI). The
classification depends on the Company’s
business model for managing the financial
assets and the contractual terms of cash
flows.
Debt Instrument
Amortised Cost
A financial asset is subsequently measured at
amortised cost if it is held within a business
model whose objective is to hold the asset in
order to collect contractual cash flows and
the contractual terms of the financial asset
give rise on specified dates to cash flows that
are solely payments of principal and interest
on the principal amount outstanding. This
category generally applies to cash and bank
balances, trade receivables, loans and other
financial assets
After initial measurement, such financial
assets are subsequently measured at
amortised cost using the effective interest
rate (EIR) method, less impairment, if any.
The EIR amortisation is included in finance
income in the Statement of Profit and Loss.
The losses arising from impairment are
recognised in the Statement of Profit and
Loss.
Fair value through other comprehensive
income (FVTOCI)
A ‘debt instrument’ is classified as at the
FVTOCI if both the following criteria
are met:
a. The objective of the business
model is achieved both by
collecting contractual cash flows
and selling the financial assets.
b. The asset’s contractual cash flows
represent solely payments of
principal and interest.
Debt instruments included within the
FVTOCI category are measured initially
as well as at each reporting date at
fair value. Fair value movements are
recognized in the other comprehensive
income (OCI). However, the Company
recognizes interest income, impairment
losses and reversals and foreign
exchange gain or loss in the statement of
profit and loss. On derecognition of the
asset, cumulative gain or loss previously
recognised in OCI is reclassified from
the equity to statement of profit and loss.
Interest earned whilst holding FVTOCI
debt instrument is reported as interest
income using the EIR method.
Fair value through Profit and Loss
(FVTPL)
FVTPL is a residual category for debt
instruments. Any debt instrument,
which does not meet the criteria
for categorization as at amortized
cost or as FVTOCI, is classified as at
FVTPL. In addition, the Company
may elect to designate a debt
instrument, which otherwise meets
amortized cost or FVTOCI criteria, as
at FVTPL. However, such election is
considered only if doing so reduces
or eliminates a measurement or
recognition inconsistency (referred to
as ‘accounting mismatch’).
Debt instruments included within the
FVTPL category are measured at fair
value with all changes recognized in
the statement of profit and loss.
Equity investments
The Company measures its equity
investments other than in subsidiary
at fair value through profit and loss.
However, where the Company’s
management makes an irrevocable
choice on initial recognition to
present fair value gains and losses on
specific equity investments in other
comprehensive income, there is no
subsequent reclassification, on sale
or otherwise, of fair value gains and
losses to statement of profit and loss.
When the investment is disposed of,
the cumulative gain or loss previously
accumulated in FVTOCI is transferred
from FVTOCI to Retained Earnings.
Investment in subsidiary
Investment in subsidiary is carried at
cost and are not adjusted to fair value
at the end of each reporting date. The
Company reviews at the end of each
reporting period, if there are any
indications, that the said investment
may be impaired. If so the Company
estimates the recoverable value/
amount of the investment and provides
for impairment, if any, i.e. deficit in the
recoverable value over cost.
Derivative financial instruments
Derivative financial instruments are
classified and measured at fair value
through profit and loss.
Purchased or originated credit-
impaired (POCI) financial assets
POCI financial assets are treated
differently because the asset is credit-
impaired at initial recognition. For
these assets, the Company recognises
all changes in lifetime ECL since initial
recognition as a loss allowance with
any changes recognised in Statement
of Profit and Loss. A favourable change
for such assets creates an impairment
gain.
iii Derecognition of financial assets
A financial asset is derecognised only when
i) The Company has transferred the
rights to receive cash flows from the
asset or the rights have expired ;
ii) The Company retains the contractual
rights to receive the cash flows of
the financial asset, but assumes
a contractual obligation to pay
the cash flows to one or more
recipients in an arrangement.
Where the entity has transferred an
asset, the Company evaluates whether
it has transferred substantially all
risks and rewards of ownership of
the financial asset. In such cases,
the financial asset is derecognised.
Where the entity has not transferred
substantially all risks and rewards of
ownership of the financial asset, the
financial asset is not derecognised.
Impairment of financial assets
The Company measures the expected
credit loss associated with its assets
based on historical trend, industry
practices and the business environment
in which the entity operates or any other
appropriate basis. The impairment
methodology applied depends on
whether there has been a significant
increase in credit risk.
Significant increase in credit risk
The Company monitors all financial
assets, issued irrevocable loan
commitments and financial guarantee
contracts that are subject to the
impairment requirements to assess
whether there has been a significant
increase in credit risk since initial
recognition. If there has been a
significant increase in credit risk
the Company will measure the
loss allowance based on lifetime
rather than twelve-months ECL. The
Company’s accounting policy is not
to use the practical expedient that
financial assets with ‘low’ credit risk
at the reporting date are deemed not
to have had a significant increase in
credit risk. As a result, the Company
monitors all financial assets, issued
irrevocable loan commitments and
financial guarantee contracts that are
subject to impairment for significant
increase in credit risk.
In assessing whether the credit risk on
a financial instrument has increased
significantly since initial recognition,
the Company compares the risk of
a default occurring on the financial
instrument at the reporting date based
on the remaining maturity of the
instrument with the risk of a default
occurring that was anticipated for
the remaining maturity at the current
reporting date when the financial
instrument was first recognised.
In making this assessment, the
Company considers both quantitative
and qualitative information that is
reasonable and supportable, including
historical experience and forward¬
looking information that is available
without undue cost or effort, based on
the Company’s historical experience
and expert credit assessment.
Given that a significant increase in
credit risk since initial recognition is
a relative measure, a given change, in
absolute terms, in the probability of
default (PD) will be more significant
for a financial instrument with a lower
initial PD than compared to a financial
instrument with a higher PD.
Definition of default
Critical to the determination of ECL is
the definition of default. The definition
of default is used in measuring the
amount of ECL and in the determination
of whether the loss allowance is based on
12-month or lifetime ECL, as default is a
component of the probability of default
(PD) which affects both the measurement
of ECLs and the identification of a
significant increase in credit risk.
The Company considers the following
as constituting an event of default:
• the borrower is past due more
than 90 days on any material
credit obligation to the Company;
or
• the borrower is unlikely to pay its
credit obligations to the Company
in full.
The definition of default is
appropriately tailored to reflect
different characteristics of
different types of assets.
When assessing if the borrower is
unlikely to pay its credit obligation,
the Company takes into account
both qualitative and quantitative
indicators. The information
assessed depends on the type of
the asset.
Write-off
Loans and debt securities are written-
off when the Company has no
reasonable expectations of recovering
the financial asset (either in its entirety
or a portion of it). This is the case
when the Company determines that
the borrower does not have assets or
sources of income that could generate
sufficient cash flows to repay the
amounts subject to the write-off. A
write-off constitutes a derecognition
event. The Company may apply
enforcement activities to financial
assets written off. Recoveries resulting
from the Company’s enforcement
activities will result in impairment
gains.
Presentation of allowance for ECL in
the Balance Sheet
Loss allowances for ECL are presented
in the Balance Sheet as follows:
• for financial assets measured at
amortised cost: as a deduction
from the gross carrying amount
of the assets;
• for debt instruments measured
at FVTOCI: no loss allowance is
recognised in the Balance Sheet
as the carrying amount is at fair
value.
• where a financial instrument
includes both a drawn and an
undrawn component, and the
Company cannot identify the
ECL on the loan commitment
component separately from
those on the drawn component:
the Company presents a
combined loss allowance
for both components. The
combined amount is presented
as a deduction from the gross
carrying amount of the drawn
component.
Financial liabilities and equity instruments
Debt or equity instruments issued by the
Company are classified as either financial
liabilities or as equity in accordance with the
substance of the contractual arrangements
and the definitions of a financial liability and
an equity instrument.
Equity instruments
An equity instrument is any contract that
evidences a residual interest in the assets of
an entity after deducting all of its liabilities.
Equity instruments issued by the Company
are recognised at the proceeds received, net
of direct issue costs.
Repurchase of the Company’s own equity
instruments is recognised and deducted
directly in equity. No gain or loss is
recognised on the purchase, sale, issue or
cancellation of the Company’s own equity
instruments.
Financial liabilities
i Classification
Financial liabilities are recognized
when Company becomes party
to contractual provisions of the
instrument. The Company determines
the classification of its financial
liability at initial recognition. All
financial liabilities are recognised
initially at fair value plus transaction
costs that are directly attributable to
the acquisition of the financial liability
except for financial liabilities classified
as fair value through profit or loss.
The Company classifies all financial
liabilities at amortised cost or fair value
through profit or loss.
ii Subsequent measurement
For the purposes of subsequent
measurement, financial liabilities are
classified in two categories:
i) Financial liabilities measured at
amortised cost
ii) Financial liabilities measured at
FVTPL (fair value through profit
or loss)
i) Financial liabilities
measured at amortised cost
After initial recognition,
financial liabilities are
subsequently measured at
amortized cost using the
EIR method. Gains and
losses are recognised in
the statement of profit and
loss when the liabilities
are derecognised as
well as through the EIR
amortization process.
Amortized cost is
calculated by taking into
account any discount or
premium on acquisition
and fee or costs that are
an integral part of the EIR.
The EIR amortisation is
included in finance costs in
the statement of profit and
loss.
ii ) Financial liabilities measured
at fair value through profit or
loss
A financial liability is
classified as at FVTPL if
it is classified as held for
trading or it is designated as
such on initial recognition.
Financial liabilities at
FVTPL are measured at
fair value and net gains
and losses, including
any interest expense, are
recognised in profit or loss.
Trade and other payables
These amounts represent
liabilities for goods and
services provided to the
Company prior to the end
of financial year which are
unpaid. For trade and other
payables maturing within
one year from the balance
sheet date, the carrying
amounts approximate fair
value due to the short¬
term maturity of these
instruments.
iii De-recognition of financial liabilities
A financial liability is de-recognised
when the obligation under the liability
is discharged or cancelled or expires.
When an existing financial liability
is replaced by another from the same
lender on substantially different
terms, or the terms of an existing
liability are substantially modified,
such an exchange or modification is
treated as the de-recognition of the
original liability and the recognition
of a new liability. The difference in
the respective carrying amounts is
recognised in the statement of profit or
loss.
(j) Borrowing costs
Borrowing costs attributable to the acquisition or
construction of qualifying assets are capitalised
as part of cost of such assets. All other borrowing
costs are expensed in the period in which they
occur. Borrowing costs consist of interest and
other costs that an entity incurs in connection
with the borrowing of funds and is measured with
reference to the effective interest rate applicable to
the respective borrowings.
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