3. Material 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
volatility. Changes in assumptions about these factors could affect the reported
fair value of financial instruments.
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 months 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 months 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 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 (calculated 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.
3.4 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 calcuted
using the straight line method to write down the cost of intangible assets over their
estimated useful lives.
3.5 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 cash generating 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.
3.6 Investments
Investments in subsidiaries and asociates :
Investments in subsidiaries and associate are measured at cost less accumulated
impairment, if any.
Investment in equity instruments
Investment in equity securities are initially measured at fair value. Any subsequent
fair value gain or loss is recognized through profit or loss if such investments in
equity securities are held for trading purposes. The fair value gains or losses of all
other equity securities are recognized in other comprehensive income. Where the
company's management has elected to present fair value gains and losses on equity
investments in other comprehensive income, there is no subsequent reclassification
of fair value gains and losses to profit and loss. Dividends from such investments
are recognised in profit and loss, when the Company's right to receive payments
is established. Impairment losses (and reversal of impairment losses) on equity
investments measured at FVOCI are not reported separately from other changes in
fair value.
3.7 Trade Receivables
A receivable is classified as a 'trade receivable' if it is in respect to the amount due
from customers on account of goods sold or services rendered in the ordinary course
of business. Trade receivables are recognised initially at transaction value except
trade receivable that contains significant financing component that are subsequently
measured at amortised cost using the effective interest method, less provision for
impairment. For some trade receivables, the Company may obtain security in the
form of guarantee, security deposit orletter of credit which can be called upon ifthe
counterparty is in default underthe terms of the agreement.
3.8 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.
3.9 Inventories
Inventories are valued at the lower of cost and net realizable value. 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. The cost
of inventories comprises of cost of purchase, cost of conversion and other costs
incurred in bringing the inventories to their respective present location and condition.
Cost is computed on the weighted average basis.
3.10 Borrowing Costs
Borrowing costs include finance costs, commitment charges, interest expense on
lease liabilities. Borrowing costs are recognized in the statement of profit and loss
using the effective interest rate method.
3.11 Provisions :
Provisions are recognised when there is a present obligation as a result of a past event,
and it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation and there is a reliable estimate of the amount of the
obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect
the current best estimate.
The amount recognised as a provision is the best estimate of the consideration
required to settle the present obligation at the end of the reporting period, taking into
account the risks and uncertainties surrounding the obligation.
Provisions are determined by discounting the expected future cash flows at a pre-tax
rate that reflects current market assessments of the time value of money and the risks
specific to the liability.
When there is a possible obligation or a present obligation in respect of which the
likelihood of outflow of resources is remote, no provision or disclosure is made.
3.12 Revenue recognition
A) Sale of goods/ commodities
Revenue from goods with customers is recognised when control of the goods
are transferred to the customer. Generally, control is transferred upon shipment
of goods to the customer or when the goods is made available to the customer,
provided transfer of title to the customer occurs and the Company has not
retained any significant risks of ownership or future obligations with respect
to the goods shipped. Revenue is recognized at the fair value of consideration
received or receivable and represents the net invoice value of goods supplied to
third parties after deducting discounts, volume rebates and amounts collected
on behalf of third parties (for example taxes and duties collected on behalf of
the government) are recognized either on delivery or on transfer of significant
risk and rewards of ownership of the goods as per IND AS 115.
B) Fees and commission income :
Fee based income are recognised when they become measurable and when it
is probable to expect their ultimate collection.
Commission and brokerage income earned for the services rendered are
recognised as and when they are due.
C) Dividend and interest income on investments :
- Dividends are recognised in Statement of profit and loss only when the
right to receive payment is established, it is probable that the economic
benefits associated with the dividend will flow to the Company and the
amount of the dividend can be measured reliably.
- Interest income from investments is recognised when it is certain that the
economic benefits will flow to the Company and the amount of income
can be measured reliably. Interest income is accrued on a time basis, by
reference to the principal outstanding and at the effective interest rate
applicable.
D) Recognition of interest income on loans
Interest income is recognised in Statement of profit and loss using the effective
interest method for all financial instruments measured at amortised cost, debt
instruments measured at FVOCI and debt instruments designated at FVTPL.
The 'effective interest rate' is the rate that exactly discounts estimated future
cash payments or receipts through the expected life of the financial instrument.
The calculation of the effective interest rate includes transaction costs and fees
that are an integral part of the contract. Transaction costs include incremental
costs that are directly attributable to the acquisition of financial asset.
If expectations regarding the cash flows on the financial asset are revised
for reasons other than credit risk, the adjustment is recorded as a positive or
negative adjustment to the carrying amount of the asset in the balance sheet
with an increase or reduction in interest income. The adjustment is subsequently
amortised through Interest income in the Statement of profit and loss.
The Company calculates interest income by applying the EIR to the gross
carrying amount of financial assets other than credit-impaired assets.
When a financial asset becomes credit-impaired, the Company calculates
interest income by applying the effective interest rate to the net amortised cost
of the financial asset. If the financial asset cures and is no longer creditimpaired,
the Company reverts to calculating interest income on a gross basis.
Additional interest and interest on trade advances, are recognised when they
become measurable and when it is not unreasonable to expect their ultimate
collection.
Income from bill discounting is recognised over the tenure of the instrument so
as to provide a constant periodic rate of return.
3.13 Employee Benefits :
A) Short-term employee benefits
Short-term employee benefits are expensed as the related service is provided.
A liability is recognised for the amount expected to be paid if the Company has
a present legal or constructive obligation to pay this amount as a result of past
service provided by the employee and the obligation can be estimated reliably.
B) Contribution to provident fund
Company's contribution paid/payable during the year to provident fund is
recognised in the Statement of profit and loss.
C) Gratuity
The Company's liability towards gratuity scheme is determined by independent
actuaries, using the projected unit credit method. The present value of the
defined benefit obligation is determined by discounting the estimated future
cash outflows by reference to market yields at the end of the reporting period
on government bonds that have terms approximating to the terms of the related
obligation. Past services are recognised at the earlier of the plan amendment /
curtailment and recognition of related restructuring costs/ termination benefits.
The net interest cost is calculated by applying the discount rate to the net
balance of the defined benefit obligation and the fair value of plan assets. This
cost is included in employee benefit expense in the Statement of profit and loss.
Liability for Gratuity is funded with Life India Corporation of India
Remeasurement gains/ losses-
Remeasurement of defined benefit plans, comprising of actuarial gains / losses,
return on plan assets excluding interest income are recognised immediately in
the balance sheet with corresponding debit or credit to Other Comprehensive
Income (OCI). Remeasurements are not reclassified to Statement of profit and
loss in the subsequent period.
Remeasurement gains or losses on long-term compensated absences that are
classified as other long-term benefits are recognised in Statement of profit and
loss.
D) Superannuation fund
The Company makes contribution to the Superannuation scheme, a defined
contribution scheme, administered by Life Insurance Corporation of India,
which are charged to the Statement of profit and loss. The Company has no
obligation to the scheme beyond its contributions.
E) Leave encashment / compensated absences/ sick leave -
The Company provides for the encashment / availment of leave with pay
subject to certain rules. The employees are entitled to accumulate leave subject
to certain limits for future encashment / availment. The liability is provided based
on the number of days of unutilized leave at each balance sheet date on the
basis of an independent actuarial valuation.
3.14 Finance costs
Finance costs include interest expense computed by applying the effective interest
rate on respective financial instruments measured at Amortised cost. Financial
instruments include bank term loans, non-convertible debentures, fixed deposits
mobilised, commercial papers, subordinated debts and exchange differences arising
from foreign currency borrowings to the extent they are regarded as an adjustment to
the interest cost. Finance costs are charged to the Statement of profit and loss.
3.15 Taxation - Current and deferred tax:
Income tax expense comprises of current tax and deferred tax. It is recognised in
Statement of profit and loss except to the extent that it relates to an item recognised
directly in equity or in other comprehensive income.
A) Current tax :
Current tax comprises amount of tax payable in respect of the taxable income or
loss for the year determined in accordance with Income Tax Act, 1961 and any
adjustment to the tax payable or receivable in respect of previous years. The
Company's current tax is calculated using tax rates that have been enacted or
substantively enacted by the end of the reporting period.
B) Deferred tax :
Deferred tax assets and liabilities are recognized for the future tax consequences
of temporary differences between the carrying values of assets and liabilities
and their respective tax bases. Deferred tax liabilities and assets are measured
at the tax rates that are expected to apply in the period in which the liability
is settled or the asset realised, based on tax rates (and tax laws) that have
been enacted or substantively enacted by the end of the reporting period. The
measurement of deferred tax liabilities and assets reflects the tax consequence
that would follow from the manner in which the Company expects, at the end of
the reporting period, to recover or settle the carrying amount of its assets and
liabilities.
Deferred tax assets are recognized to the extent that it is probable that future
taxable income will be available against which the deductible temporary
difference could be utilized. Such deferred tax assets and liabilities are not
recognised if the temporary difference arises from the initial recognition of
assets and liabilities in a transaction that affects neither the taxable profit nor
the accounting profit. The carrying amount of deferred tax assets is reviewed at
the end of each reporting period and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the
asset to be recovered.
3.16 Leases
Company as a lessee
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.
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.
The right of-use asset is initially measured at cost, which comprises the initial
amount of lease liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct cost incurred and an estimate of costs to
dismantle and remove the underlying asset or to restore the underlying asset or the
site on which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method
from the commencement date to the earlier of the end of the useful life of the right-
to-use asset or the end of the lease term. The estimated useful life of the right-to-use
asset is determined on the same basis as those of property, plant and equipment.
The Company measures the lease liability at the present value of the lease payments
that are not paid at the commencement date of the lease. The lease payments are
discounted using the interest rate implicit in the lease, if that rate can be readily
determined. If that rate cannot be readily determined, the Company uses incremental
borrowing rate. When the lease liability is re-measured in this way, a corresponding
adjustment is made to the carrying amount of the right -of-use asset, or is recorded in
the Profit and Loss if the carrying amount of the right-of-use asset has been reduced
to zero.
The lease liability is subsequently increased by the interest cost on the lease liability
and decreased by lease payment made. The carrying amount of lease liability is
remeasured to reflect any reassessment or lease modifications or to reflect revised
in-substance fixed lease payments.
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