Note 2 Material Accounting Policies
i Basis of Preparation
The standalone financial statements ("financial statements") of the Company have been
prepared to comply in all material respects with the Indian Accounting Standards (""Ind AS"")
notified under the Companies (Accounting Standards) Rules, 2015 (as amended from time to time).
The financial statements have been prepared under the historical cost convention with the
exception of certain financial assets and liabilities which have been measured at fair value, on an
accrual basis of accounting and defined benefit plans where assets are measured at fair value.
The Company is covered in the definition of Non-Banking Financial Company as defined in
Companies (Indian Accounting Standards) (Amendment) Rules, 2016. As per the format prescribed
under Division III of Schedule III to the Companies Act, 2013 on 11 October 2018, the Company
presents the Balance Sheet, the Statement of Profit and Loss and the Statement of Changes in
Equity in the order of liquidity.A maturity analysis of recovery or settlement of assets and liabilities
within 12 months after the reporting date and more than 12 months after the reporting date is
presented in the financials
The Company's financial statements are reported in Indian Rupees, which is also the Company's
functional currency.
ii Accounting Estimates
The preparation of the financial statements, in conformity with the Ind AS, requires the management
to make estimates and assumptions that affect the application of accounting policies and the
reported amounts of assets and liabilities and disclosure of contingent liabilities as at the date
of financial statements and the results of operation during the reported period. Although these
estimates are based upon management's best knowledge of current events and actions, actual
results could differ from these estimates which are recognized in the period in which they are
determined.
iii Historical cost convention
These financial statements have been prepared on the historical cost basis except for certain
financial assets and liabilities which are measured at fair value (refer accounting poilicy regarding
financial instruments).
1. Financial instruments measured at fair value through profit or loss, if applicable
2. Financial instruments measured at fair value through other comprehensive income, if
applicable
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at
the reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year. The Company based its assumptions
and estimates on parameters available when the financial statements were prepared. Existing
circumstances and assumptions about future developments, however, may change due to
market changes or circumstances arising that are beyond the control of the Company. Such
changes are reflected in the financial statements in the period in which changes are made and,
if material, their effects are disclosed in the notes to the financial statements.
Deferred tax assets
In assessing the realizability of deferred income tax assets, management considers whether some
portion or all of the deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable income during
the periods in which the temporary differences become deductible. Management considers the
scheduled reversals of deferred income tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based on the level of historical taxable income
and projections for future taxable income over the periods in which the deferred income tax
assets are deductible, management believes that the Company will realize the benefits of those
deductible differences. The amount of the deferred income tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income during the
carry forward period are reduced.
Provision and contingent liability
On an ongoing basis, Company reviews pending cases, claims by third parties and other
contingencies. For contingent losses that are considered probable, an estimated loss is recorded
as an accrual in financial statements. Loss Contingencies that are considered possible are not
provided for but disclosed as Contingent liabilities in the financial statements. Contingencies the
likelihood of which is remote are not disclosed in the financial statements. Gain contingencies are
not recognized until the contingency has been resolved and amounts are received or receivable.
Allowance for impairment of financial asset:
The Company applies expected credit loss model (ECL) for measurement and recognition of
impairment loss. The Company recognises lifetime expected losses for all contract assets and / or
all trade receivables that do not constitute a financing transaction. At each reporting date, the
Company assesses whether the loans have been impaired. The Company is exposed to credit
risk when the customer defaults on his contractual obligations. For the computation of ECL, the
loan receivables are classified into three stages based on the default and the aging outstanding.
The Company recognises life time expected credit loss for trade receivables and has adopted
simplified method of computation as per Ind AS 109.
Property, plant and equipment and Intangible Assets
Management reviews the estimated useful lives and residual values of the assets annually in
order to determine the amount of depreciation to be recorded during any reporting period.
The useful lives and residual values as per schedule II of the Companies Act, 2013 or are based
on the Company's historical experience with similar assets and taking into account anticipated
technological changes, whichever is more appropriate.
Determining whether an arrangement contains a lease
The Company evaluates if an arrangement qualifies to be a lease as per the requirements of
Ind AS 116. Identification of a lease requires significant judgment. The Company uses significant
judgement in assessing the lease term (including anticipated renewals) and the applicable
discount rate. The Company determinesthe lease term as the non-cancellable period of a
lease, together with both periods covered by an option to extend the lease if the Company is
reasonably certain to exercise that option; and periods covered by an option to terminate the
lease if the Company is reasonably certain not to exercise that option.
iv Property, Plant and Equipment
Property, Plant and Equipment are stated at cost of acquisition including attributable interest
and finance costs, if any, till the date of acquisition/ installation of the assets less accumulated
depreciation and accumulated impairment losses, if any. Subsequent expenditure relating
to Property, Plant and Equipment is capitalized 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. All other repairs and maintenance costs are charged to the Statement of
Profit and Loss as incurred. The cost and related accumulated depreciation are eliminated from
the financial statements, either on disposal or when retired from active use and the resultant gain
or loss are recognized in the Statement of Profit and Loss.
v Depreciation/ Amortization
Depreciation is provided as per the written down value method in accordance with useful life
specified in Schedule II to the Companies Act, 2013.
vi Financial Instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity.
a) Financial Assets
A financial asset is
(i) a contractual right to receive cash or another financial asset; to exchange financial
assets or financial liabilities under potentially favourable conditions;
(ii) or a contract that will or may be settled in the entity's own equity instruments and a non¬
derivative for which the entity is or may be obliged to receive a variable number of the
entity's own equity instruments; or a derivative that will or may be settled other than by
the exchange of a fixed amount of cash or another financial asset for a fixed number of
the entity's own equity instruments.
Initial Recognition
In the case of financial assets, not recorded at fair value through profit or loss (FVTPL),
financial assets are recognized initially at fair value plus transaction costs that are directly
attributable to the acquisition of the financial asset. Purchases or sales of financial assets that
require delivery of assets within a time frame established by regulation or convention in the
market place (regular way trades) are recognized on the trade date, i.e., the date that the
Company commits to purchase or sell the asset.
Subsequent Measurement
For purposes of subsequent measurement, financial assets are classified in following
categories:
Financial Assets at Amortized Cost and Effective interest method
Financial assets are subsequently measured at amortized cost if these financial assets
are held within a business model with an objective to hold these assets 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. Interest income from these financial assets is included in finance income using
the Effective Interest Rate (EIR) method. Impairment gains or losses arising on these assets are
recognized in the Statement of Profit and Loss.
The Company classifies financial assets as held for trading when they have been purchased
or issued primarily for short-term profit making through trading activities or form part of a
portfolio of financial instruments that are managed together, for which there evidence of a
recent pattern of short-term profit is taking. Held-for-trading assets and liabilities are recorded
and measured in the balance sheet at fair value.
Financial asset measured at FVOCI
Unrealised gains or losses on debt instruments measured at FVOCI are recognised in other
comprehensive income, and on derecognition of such instrument accumulated gains
or losses are recycled to profit and loss statement. Interest income on such instrument is
recognised in profit and loss statements as per EIR method.
Impairment of Financial Assets
In accordance with Ind AS 109, the Company applies the Expected Credit Loss (ECL) model
for measurement and recognition of impairment loss on financial assets and credit risk
exposures.
The Company follows ‘simplified approach' for recognition of impairment loss allowance on
trade receivables. Simplified approach does not require the Company to track changes in
credit risk. Rather, it recognizes impairment loss allowance based on lifetime ECL at each
reporting date, right from its initial recognition.
For recognition of impairment loss on other financial assets and risk exposure, the Company
determines that whether there has been a significant increase in the credit risk since initial
recognition. If credit risk has not increased significantly, 12-month ECL is used to provide for
impairment loss. However, if credit risk has increased significantly, lifetime ECL is used. If, in a
subsequent period, credit quality of the instrument improves such that there is no longer a
significant increase in credit risk since initial recognition, then the entity reverts to recognizing
impairment loss allowance based on 12-month ECL.
ECL is the difference between all contractual cash flows that are due to the group in
accordance with the contract and all the cash flows that the entity expects to receive (i.e.,
all cash shortfalls), discounted at the original EIR. Lifetime ECL are the expected credit losses
resulting from all possible default events over the expected life of a financial instrument.
The 12-month ECL is a portion of the lifetime ECL which results from default events that are
possible within 12 months after the reporting date.
ECL impairment loss allowance (or reversal) recognized during the period is recognized as
income/ expense in the Statement of Profit and Loss.
De-recognition of Financial Assets
The Company de-recognizes a financial asset only when the contractual rights to the cash
flows from the asset expire, or it transfers the financial asset and substantially all risks and
rewards of ownership of the asset to another entity.
If the Company neither transfers nor retains substantially all the risks and rewards of ownership
and continues to control the transferred asset, the Company recognizes its retained interest
in the assets and an associated liability for amounts it may have to pay.
If the Company retains substantially all the risks and rewards of ownership of a transferred
financial asset, the Company continues to recognize the financial asset and also recognizes
a collateralized borrowing for the proceeds received.
b) Equity Instruments and Financial Liabilities
Financial liabilities and equity instruments issued by the Company are classified according
to the substance of the contractual arrangements entered into 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 the
Company after deducting all of its liabilities. The Company subsequently measures all equity
investments at fair value through profit or loss, unless the management has elected to classify
irrevocably some of its strategic equity investments to be measured at FVOCI, when such
instruments meet the definition of equity under Ind AS and are not held for trading. Such
classification is determined on an instrumentby-instrument basis.
Financial Liabilities
A financial liability is
(i) a contractual obligation to deliver cash or another financial asset to another entity; or
to exchange financial instruments under potentially unfavourable conditions;
(ii) or a contract that will or may be settled in the entity's own equity instruments and is a
non-derivative for which the entity is or may be obliged to deliver a variable number of
its own equity instruments; or a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset for a fixed number of the
entity's own equity instruments.
Initial Recognition
Financial liabilities are classified, at initial recognition, as financial liabilities at FVTPL, loans
and borrowings and payables as appropriate. All financial liabilities are recognized initially at
fair value and, in the case of loans and borrowings and payables, net of directly attributable
transaction costs.
Subsequent Measurement
The measurement of financial liabilities depends on their classification, as described below
Financial liabilities at FVTPL
Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities
designated upon initial recognition as at FVTPL. Financial liabilities are classified as held for
trading if they are incurred for the purpose of repurchasing in the near term. Gains or losses
on liabilities held for trading are recognized in the Statement of Profit and Loss.
Financial guarantee contracts issued by the Company are those contracts that require a
payment to be made to reimburse the holder for a loss it incurs because the specified debtor
fails to make a payment when due in accordance with the terms of a debt instrument.
Financial guarantee contracts are recognized initially as a liability at fair value, adjusted for
transaction costs that are directly attributable to the issuance of the guarantee. Subsequently,
the liability is measured at the higher of the amount of loss allowance determined as
per impairment requirements of Ind AS 109 and the amount recognized less cumulative
amortization. Amortization is recognized as finance income in the Statement of Profit and
Loss.
After initial recognition, interest-bearing loans and borrowings are subsequently measured
at amortized cost using the EIR method. Any difference between the proceeds (net of
transaction costs) and the settlement or redemption of borrowings is recognized over the
term of the borrowings in the Statement of Profit and Loss.
Amortized cost is calculated by taking into account any discount or premium on acquisition
and fees or costs that are an integral part of the EIR. The EIR amortization is included as
finance costs in the Statement of Profit and Loss.
De-recognition of Financial Liabilities
Financial liabilities are de-recognized when the obligation specified in the contract is
discharged, cancelled or expired. 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 de-recognition of the
original liability and recognition of a new liability. The difference in the respective carrying
amounts is recognized in the Statement of Profit and Loss.
c) Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount is reported in the
Balance Sheet if there is a currently enforceable legal right to offset the recognized amounts
and there is an intention to settle on a net basis to realize the assets and settle the liabilities
simultaneously.
vii Employee Benefits
a Defined Contribution Plan
Contributions to defined contribution schemes such as provident fund, employees' state
insurance, labour welfare are charged as an expense based on the amount of contribution
required to be made as and when services are rendered by the employees. The above
benefits are classified as Defined Contribution Schemes as the Company has no further
obligations beyond the monthly contributions.
b Defined Benefit Plan
The company provides for retirement benefits in the form of Gratuity. Since there are no
employees during the year Actuaries gratuity valuation and provision for gratuity is not
required.subsequent periods.
c Leave entitlement and compensated absences
Accumulated leave which is expected to be utilized within next twelve months, is treated
as short-term employee benefit. Leave entitlement, other than short term compensated
absences, are provided based on a actuarial valuation, similar to that of gratuity benefit.
Re-measurement, comprising of actuarial gains and losses, in respect of leave entitlement
are recognized in the Statement of Profit and Loss in the period in which they occur.
d Short-term Benefits
Short-term employee benefits such as salaries, wages, performance incentives etc. are
recognized as expenses at the undiscounted amounts in the Statement of Profit and Loss
of the period in which the related service is rendered. Expenses on non-accumulating
compensated absences is recognized in the period in which the absences occur.
viii Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and term deposits with bank, with original
maturities of 3 months or less.
ix Revenue Recognition
The Company recognisesrevenue from contracts with customers based on a five step model
asset out in Ind AS 115, Revenue from Contracts with Customers, to determine when to recognize
revenue and at what amount. Revenue is measured based on the consideration specified in the
contract with a customer. Revenue from contracts with customers is recognised when services
are provided and it is highly probable that a significant reversal of revenue is not expected to
occur.Revenue is measured atfair value ofthe consideration received orreceivable. Revenue
isrecognised when (or as)the Company satisfies a performance obligation by transferring a
promised service (i.e. an asset) to a customer. An asset istransferred when (or as) the customer
obtains control of that asset. When (or as) a performance obligation is satisfied, the Company
recognizes as revenue the amount of the transaction price (excluding estimates of variable
consideration) that is allocated to that performance obligation.
The Company recognizes revenue from contracts with customers based on a five step model as
set out in Ind 115:
Step 1: Identify contract(s) with a customer: A contract is defined as an agreement between two
or more parties that creates enforceable rights and obligations and sets out the criteria for every
contract that must be met.
Step 2: Identify performance obligations in the contract: A performance obligation is a promise in
a contract with a customer to transfer a good or service to the customer.
Step 3: Determine the transaction price: The transaction price is the amount of consideration
to which the Company expects to be entitled in exchange for transferring promised goods or
services to a customer, excluding amounts collected on behalf of third parties.
Step 4: Allocate the transaction price to the performance obligations in the contract: Fora contract
that has more than one performance obligation, the Company allocates the transaction price
to each performance obligation in an amountthat depicts the amount of consideration to which
the Company expects to be entitled in exchange for satisfying each performance obligation.
Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation
(i) Interest Income
The Company recognises interest income using Effective Interest Rate (EIR) on all financial
assets subsequently measured at amortised cost or fair value through other comprehensive
income (FVOCI). EIR is calculated by considering all costs and incomes attributable to
acquisition of a financial asset or assumption of a financial liability and it represents a rate
that exactly discounts estimated future cash payments/receipts through the expected life
of the financial asset/financial liability to the gross carrying amount of a financial asset or to
the amortised cost of a financial liability.
The Company recognises interest income by applying the EIR to the gross carrying amount of
financial assets other than credit-impaired assets. In case of credit-impaired financial assets
[as set out in note no. 3.4(i)] regarded as ‘stage 3', the Company recognises interest income
on the amortised cost net of impairment loss of the financial asset at EIR. If the financial
asset is no longer credit-impaired [as outlined in note no. 3.4(i)], the Company reverts to
calculating interest income on a gross basis.
Delayed payment interest (penal interest) levied on customers for delay in repayments/non
payment of contractual cashflows is recognised on realisation.
Interest on financial assets subsequently measured at fair value through profit or loss (FVTPL)
is recognised at the contractual rate of interest.
(ii) Dividend Income
Dividend income on equity shares is recognised when the Company's right to receive the
payment is established, which is generally when shareholders approve the dividend.
(iii) Fees and Commission
The Company recognises service and administration charges towards rendering ofadditional
services to its loan customers on satisfactory completion of service delivery.
Fees on value added services and products are recognised on rendering of services and
products to the customer.
Distribution income is earned by selling of services and products of other entities under
distribution arrangements. The income so earned is recognised on successful sales on behalf
of other entities subject tothere being no significant uncertainty of its recovery.
Foreclosure charges are collected from loan customers for early payment/closure of loan
and are recognised on realisation.
(iv) Net gain on fair value changes
Financial assets are subsequently measured at fair value through profit or loss (FVTPL) or
fair value through other comprehensive income (FVOCI), as applicable. The Company
recognises gains/losses on fair value change of financial assets measured as FVTPL and
realised gains/losses on derecognition of financial asset measured at FVTPL and FVOCI.
(v) Taxes
Incomes are recognised net of the Goods and Services Tax/Service Tax, wherever applicable.
x Income Tax:
Income tax comprises of current and deferred income tax. Income tax is recognized as an
expense or income in the Statement of Profit and Loss, except to the extent it relates to items
directly recognized in equity or in OCI.
a Current Income Tax
Current income tax is recognized based on the estimated tax liability computed after taking
credit for allowances and exemptions in accordance with the Income Tax Act, 1961. Current
income tax assets and liabilities are measured at the amount expected to be recovered
from or paid to the taxation authorities. The tax rates and tax laws used to compute the
amount are those that are enacted or substantively enacted, at the reporting date.
b Deferred Income Tax
Deferred tax is determined by applying the Balance Sheet approach. Deferred tax assets
and liabilities are recognized for all deductible temporary differences between the financial
statements' carrying amount of existing assets and liabilities and their respective tax base.
Deferred tax assets and liabilities are measured using the enacted tax rates or tax rates that
are substantively enacted at the Balance Sheet date. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes the enactment
date. Deferred tax assets are only recognized to the extent that it is probable that future
taxable profits will be available against which the temporary differences can be utilized.
Such assets are reviewed at each Balance Sheet date to reassess realization.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset.
Current tax assets and tax liabilities are offset where the entity has a legally enforceable
right to offset and intends either to settle on a net basis, or to realize the asset and settle the
liability simultaneously.
Minimum Alternative Tax (MAT)
Minimum Alternative Tax ("MAT") credit is recognised as an asset only when and to the
extent it is probable that the Company will pay normal income tax during the specified
period.
Minimum Alternative Tax (MAT) credit is recognized as an asset only when and to the extent
it is probable that the Company will pay normal income tax during the specified period. In
the year in which the Company recognizes MAT credit as an asset in accordance with the
Guidance Note on Accounting for Credit Available in respect of Minimum Alternative Tax
under the Income-tax Act, 1961, the said asset is created by way of credit to the statement
of profit and loss and shown as ‘MAT Credit Entitlement'. The Company reviews the ‘MAT
Credit Entitlement' asset at each reporting date and writes down the asset to the extent the
Company does not have convincing evidence that it will be able to utilize the MAT Credit
Entitlement within the period specified under the Income-tax Act, 1961.
xi Leases
The company has adopted Ind AS 116-Leases effective 1st April, 2019, using the modified
retrospective method.The company has applied the standard to its leases with the cumulative
impact recognised on the date of initial application (1st April, 2019).
The company's lease asset classes primarily consist of leases for Premises.The company assesses
whether a contract is or 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 recognises 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 leases of low value assets. For
these short term and leases of low value assets, the company recognises the lease payments as
an operating expense on a straight line basis over the term of the lease.
The right-of-use assets are initially recognised at cost, which comprises the initial amount of the
lease liability adjusted for any lease payments made at or prior to the commencement date of
the lease plus any initial direct costs less any lease incentives. They are subsequently measured at
cost less accumulated depreciation and impairment losses, if any.
Right-of-use assets are depreciated from the commencement date on a straight-line basis over
the shorter of the lease term and useful life of the underlying asset.
The lease liability is initially measured at the present value of the future lease payments. The lease
payments are discounted using the interest rate implicit in the lease or, if not readily determinable,
usingtheincrementalborrowingrates.Theleaseliabilityissubsequentlyremeasured byincreasingthe
carrying amount to reflect interest on the lease liability, reducing the carrying amount to reflect the
lease payments made.
A lease liability is remeasured upon the occurrence of certain events such as a change in the
lease term or a change in an index or rate used to determine lease payments. The remeasurement
normally also adjusts the leased assets.Lease liability and ROU asset have been separately
presented in the Balance Sheet and lease payments have been classified as financing cash
flows.
xii Impairment of Non-Financial Assets
As at each Balance Sheet date, the Company assesses whether there is an indication that a non¬
financial asset may be impaired and also whether there is an indication of reversal of impairment
loss recognized in the previous periods. If any indication exists, or when annual impairment testing
for an asset is required, the Company determines the recoverable amount and impairment loss is
recognized when the carrying amount of an asset exceeds its recoverable amount.
Recoverable amount is determined:
- In case of an individual asset, at the higher of the assets' fair value less cost to sell and value
in use; and
- In case of cash generating unit (a group of assets that generates identified, independent
cash flows), at the higher of cash generating unit's fair value less cost to sell and value in use.
In assessing value in use, the estimated future cash flows are discounted to their present value
using pre-tax discount rate that reflects current market assessments of the time value of money
and risk specified to the asset. In determining fair value less cost to sell, recent market transaction
are taken into account. If no such transaction can be identified, an appropriate valuation model
is used.
Impairment losses of continuing operations, including impairment on inventories, are recognized
in the Statement of Profit and Loss, except for properties previously revalued with the revaluation
taken to OCI. For such properties, the impairment is recognized in OCI up to the amount of any
previous revaluation.
When the Company considers that there are no realistic prospects of recovery of the asset,
the relevant amounts are written off. If the amount of impairment loss subsequently decreases
and the decrease can be related objectively to an event occurring after the impairment was
recognized, then the previously recognized impairment loss is reversed through the Statement of
Profit and Loss.
xiii Earnings Per Share
Basic earnings per share is computed by dividing the net profit or loss for the period attributable
to the equity shareholders of the Company by the weighted average number of equity shares
outstanding during the period. The weighted average number of equity shares outstanding
during the period and for all periods presented is adjusted for events, such as bonus shares, other
than the conversion of potential equity shares, that have changed the number of equity shares
outstanding, without a corresponding change in resources.
Diluted earnings per share is computed by dividing the net profit or loss for the period attributable
to the equity shareholders of the Company and weighted average number of equity shares
considered for deriving basic earnings per equity share and also the weighted average number
of equity shares that could have been issued upon conversion of all dilutive potential equity
shares. The dilutive potential equity shares are adjusted for the proceeds receivable had the
equity shares been actually issued at fair value (i.e. the average market value of the outstanding
equity shares).
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