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
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 provisionsofthe 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.
G. Write offs
The gross carrying amount of a financial asset is written-off (either
partially or in full) to the extent that there is no reasonable expectation
of recovering the asset in its entirety or a portion thereof. This is
generally the case when the Company determines that the debtor
does not have assets or sources of income that could generate
sufficient cash flows to repay the amounts subject to the write-off.
However, financial assets that are written-off could still be subject to
enforcement activities under the Company’s recovery procedures,
taking into account legal advice where appropriate. Any recoveries
made are recognised in statement of profit and loss.
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 six 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.
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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