3. Significant Accounting Policies
3.1 Use of Estimates and Judgement
The preparation of financial statements in conformity with Ind AS requires that
management make judgments, estimates and assumptions that affect the application
of accounting policies and the reported amounts of revenues, expenses, assets,
liabilities and disclosures of contingent assets and liabilities at the end of the reporting
period. The actual results could differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised in the period in which the estimate is revised
and in any future periods affected.
In partiular, information about significant areas of estimation, uncertainty and critical
judgements in applying accounting policies that have the most significant effect on
the amounts recognised in the financial statements is included in the following notes:
A) Effective Interest Rate (EIR) Method
The Company recognizes interest income / expense using a rate of return that
represents the best estimate of a constant rate of return over the expected life
of the loans given / taken. This estimation, by nature, requires an element of
judgement regarding the expected behaviour and life-cycle of the instruments,
as well as expected changes to other fee income/expense that are integral parts
of the instrument.
B) Impairment of loans portfolio
The measurement of impairment losses across all categories of financial assets
requires judgement, in particular, the estimation of the amount and timing of
future cash flows and collateral values when determining impairment losses
and the assessment of a significant increase in credit risk. These estimates are
driven by a number of factors, changes in which can result in different levels of
allowances. It has been the Company's policy to regularly review its models in
the context of actual loss experience and adjust when necessary.
C) Defined employee benefit assets and liabilities
The cost of the defined benefit gratuity plan and the present value of the gratuity
obligation are determined using actuarial valuations. An actuarial valuation
involves making various assumptions that may differ from actual developments
in the future. These include the determination of the discount rate, future salary
increases and mortality rates. Due to the complexities involved in the valuation
and its long-term nature, a defined benefit obligation is highly sensitive to
changes in these assumptions. All assumptions are reviewed at each reporting
date.
D) Fair value measurement:
When the fair values of financial assets and financial liabilities recorded in the
balance sheet cannot be measured based on quoted prices in active markets,
their fair value is measured using various valuation techniques. The inputs to
these models are taken from observable markets where possible, but where
this is not feasible, a degree of judgment is required in establishing fair values.
Judgments include considerations of inputs such as liquidity risk, credit risk and
E) Other Estimates:
These include contingent liabilities, useful lives of tangible and intangible assets
etc.
3.2 Financial Instruments
A) Initial Recognition and measurement
All financial assets and financial liabilities are recognised when the company
become a party to the contractual provisions of the instruments. Financial
assets and financial liabilities are initially measured at fair value. Transaction
costs that are directly attributable to the acquisition or issue of the financial
assets and financial liabiities (other than financial assets and financial liabilities
at FVTPL) 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
FVTPL are recognised immediately in Statement of profit and loss.
B) Classification and Subsequent measurement of Financial Assets-
The company classifies its financial assets into various measurements
categories. The classification depends on the contractual terms of the financial
assets' cash flows and the company's business model for managing financial
assets.
a. Amortised Cost
A financial asset is 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.
b. FVOCI- debt instruments
A debt instruments in nature of financial asset is measured at FVOCI when the
instrument is held within a business model, the objective of which is achieved
by both collecting contractual cash flows and selling financial assets; 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.
c. FVOCI- Equity Instruments
Equity instruments in nature of financial assets are measured at fair value
through profit or loss, unless the Company's management has elected to
classify irrevocably some of its equity instruments at FVOCI, when such
instruments meet the definition of Equity under Ind AS 32 Financial Instruments
and are not held for trading.
Financial assets are not reclassified subsequent to their initial recognition,
except if and in the period the Company changes its business model for
managing financial assets.
d. FVTPL
A financial asset which is not classified in any of the above categories are
measured at FVTPL.
Subsequent Measurement of Financial Assets
Financial assets at amortised cost are subsequently measured at amortised
cost using effective interest method. The amortised cost is reduced by
impairment losses. Interest income, foreign exchange gains and losses and
impairment are recognised in Statement of profit and loss. Any gain and loss on
derecognition is recognised in Statement of profit and loss.
Debt investment at FVOCI are subsequently measured at fair value. Interest
income under effective interest method, foreign exchange gains and losses and
impairment are recognised in Statement of profit and loss. Other net gains and
losses are recognised in OCI. On derecognition, gains and losses accumulated
in OCI are reclassified to Statement of profit and loss.
For equity investments, the Company makes an election on an instrument-
by-instrument basis to designate equity investments as measured at FVOCI.
These elected investments are measured at fair value with gains and losses
arising from changes in fair value recognised in other comprehensive income
and accumulated in the reserves. The cumulative gain or loss is not reclassified
to Statement of profit and loss on disposal of the investments. These
investments in equity are not held for trading. Instead, they are held for strategic
purpose. Dividend income received on such equity investments are recognised
in Statement of profit and loss.
Equity investments that are not designated as measured at FVOCI are
designated as measured at FVTPL and subsequent changes in fair value are
recognised in Statement of profit and loss.
Financial assets at FVTPL are subsequently measured at fair value. Net
gains and losses, including any interest or dividend income, are recognised in
Statement of profit and loss.
C. Financial Liabilities and Equity instruments
Classification as debt or equity
Debt and 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 Company are recognised at the proceeds received. Transaction costs of an
equity transaction are recognised as a deduction from equity.
Financial Liabilities
Financial liabilities are classified as measured at amortised cost or FVTPL. A
financial liability is classified as at FVTPL if it is classified as held-fortrading or
it is a derivative or it is designated as such on initial recognition. Other financial
liabilities are subsequently measured at amortised cost using the effective
interest method. Interest expense and foreign exchange gains and losses are
recognised in Statement of profit and loss. Any gain or loss on derecognition is
also recognised in Statement of profit and loss.
D. Derecognition
Financial Assets
The Company derecognises a financial asset when the contractual rights to the
cash flows from the financial asset expire, or it transfers the rights to receive
the contractual cash flows in a transaction in which substantially all of the risks
and rewards of ownership of the financial asset are transferred or in which the
Company neither transfers nor retains substantially all of the risks and rewards
of ownership and does not retain control of the financial asset.
If the Company enters into transactions whereby it transfers assets
recognised on its balance sheet, but retains either all or substantially all of
the risks and rewards of the transferred assets, the transferred assets are not
derecognised.
Financial Liabilities
A financial liability is derecognised when the obligation in respect of the liability
is discharged, cancelled or expires. The difference between the carrying value
of the financial liability and the consideration paid is recognised in Statement of
profit and loss.
E. Offsetting
Financial assets and financial liabilities are offset and the net amount presented
in the balance sheet when, and only when, the Company currently has a legally
enforceable right to set off the amounts and it intends either to settle them on a
net basis or to realise the asset and settle the liability simultaneously.
F. Impairment
The Company recognises lifetime expected credit losses (ECL) when there
has been a significant increase in credit risk since initial recognition and when
the financial instrument is credit impaired. If the credit risk on the financial
instrument has not increased significantly since initial recognition, the Company
measures the loss allowance for that financial instrument at an amount equal to
12 month ECL. The assessment of whether lifetime ECL should be recognised
is based on significant increases in the likelihood or risk of a default occurring
since initial recognition. 12 month ECL represents the portion of lifetime ECL
that is expected to result from default events on a financial instrument that are
possible within 12 months after the reporting date.
3.3 Cash and Cash Equivalents
Cash and cash equivalents comprise of cash at banks and on hand and short-term
deposits with an original maturity of three months or less, which are subject to an
insignificant risk of changes in value.
For the purpose of the statement of cash flows, cash and cash equivalents consist of
cash and short- term deposits, as defined above, net of outstanding bank overdrafts
if any, as they are considered an integral part of the Company's cash management.
3.4 Property, Plant and Equipments (PPE)
Property, plant and equipment (PPE) are measured at cost less accumulated
depreciation and accumulated impairment, if any. Cost of an item of property, plant
and equipment comprises its purchase price, including import duties and non¬
refundable purchase taxes, after deducting trade discounts and rebates, any directly
attributable cost of bringing the item to its working condition for its intended use and
estimated costs of dismantling and removing the item and restoring the site on which
it is located.
Advances paid towards the acquisition of fixed assets, outstanding at each reporting
date are shown under other non-financial assets. The cost of property, plant and
equipment not ready for its intended use at each reporting date are disclosed as
capital work-in-progress.
Subsequent expenditure related to the asset are added to its carrying amount or
recognised as a separate asset only if it increases the future benefits of the existing
asset, beyond its previously assessed standards of performance and cost can be
measured reliably. Other repairs and maintenance costs are expensed off as and
when incurred.
Depreciation on PPE is provided on straight-line basis in accordance with the useful
lives specified in Schedule II to the Companies Act, 2013 on a pro-rata basis.
The estimated useful lives used for computation of depreciation are as follows:
Assets costing less than Rs.5000/- are fully depreciated in the period of purchase.
PPE is derecognised on disposal or when no future economic benefits are
expected from its use. Any gain or loss arising on derecognition of the asset
(caculated as the differnce between the net disposal proceeds and the net carrying
amount of the asset) is recognised in other income / netted off from any loss on
disposal in the Statement of profit and loss in the year the asset is derecognised.
3.5 Intangible Assets :
Intangible assets comprises of computer software which is amortized over the
estimated useful life. The amortization period is lower of license period or 36 months
which is based on management's estimates of useful life. Amortisation is calcualted
using the straight line method to write down the cost of intangible assets over their
estimated useful lives.
3.6 Impairment of Assets other than Financial Assets :
The Company reviews the carrying amounts of its tangible and intangible assets
at the end of each reporting period, to determine whether there is any indication
that those assets have impaired. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent of the impairment
loss (if any). Recoverable amount is determined for an individual asset, unless the
asset does not generate cash flows that are largely independent of those from other
assets or group of assets.
Recoverable amount is the higher of fair value less costs to sell and value in use.
In assessing value in use, the estimated future cash flows are discounted to their
present value using a pretax discount rate that reflects current market assessments
of the time value of money and the risks specific to the asset for which the estimates
of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cashgenerating unit) is estimated to be less
than its carrying amount, the carrying amount of the asset (or cash-generating unit) is
reduced to its recoverable amount.
When an impairment loss subsequently reverses, the carrying amount of the asset
(or a cashgenerating unit) is increased to the revised estimate of its recoverable
amount such that the increased carrying amount does not exceed the carrying
amount that would have been determined if no impairment loss had been recognised
for the asset (or cash-generating unit) in prior years. The reversal of an impairment
loss is recognised in Statement of profit and loss.
3.7 Investments in Subsidiaries and Associates :
Investments in subsidiaries and associate are measured at cost less accumulated
impairment, if any.
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