2. Material Accounting Policies
2.1 Basis of preparation
(i) Statement of compliance
The Standalone Financial Statements of the Company have been prepared on going concern basis following accrual system of accounting and in accordance with accounting principles generally accepted in India, including the Indian Accounting Standards (Ind AS) notified under section 133 of the Companies Act, 2013 read together with Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015 (as amended from time to time) and presentation requirements of Division II of Schedule III to the Companies Act, 2013, (Ind AS compliant Schedule III), as applicable to the standalone financial statements.
(ii) Basis of measurement
The Standalone Financial Statements have been prepared under the historical cost convention, except for the following assets and liabilities which have been measured at fair value:
• Provisions, where the effect of time value of money is material are measured at present value
• Certain financial assets and liabilities measured at fair value
• Defined benefit plans and other long-term employee benefits
2.2 Summary of material accounting policies
A summary of the material accounting policies applied in the preparation of the financial statements are as given below. These accounting policies have been applied consistently to all periods presented in the financial statements.
2.2.1 Current vs Non-current classification
Based on the time involved between the acquisition of assets for processing and their realisation in cash and cash equivalents, the Company has determined twelve months as its operating cycle for the purpose of classification of its assets and liabilities as current and non-current in the balance sheet.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.
2.2.2 Property, plant and equipment
Property, plant and equipment are initially stated at their cost.
The cost of an item of property, plant and equipment includes:
a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;
b) Cost directly attributable to the acquisition of the asset which incurred in bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
c) Incidental expenditure during the construction period is capitalised as part of the indirect construction cost to the extent the expenditure is directly related to construction or is incidental there to.
d) Present value of the estimated costs of dismantling & removing the items & restoring the site to the original condition on which it is located if recognition criteria are met.
Freehold land is carried at historical cost.
Property, plant and equipment are subsequently measured at cost net of accumulated depreciation and accumulated impairment losses, if any. Subsequent costs are included in the assets carrying amount or recognised as a separate asset, as appropriate, 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. Cost of replacement, major inspection, repair of significant parts for longterm construction projects are capitalised if the recognition criteria are met.
Depreciation is calculated on cost of items of property, plant and equipment less their estimated residual values and is charged to the Statement of Profit and Loss. Depreciation on property, plant and equipment, excluding freehold land and leasehold land acquired on perpetual lease is provided on straight line basis over the estimated useful lives of the assets as specified under part C of schedule
II of the Companies act, 2013. However, in case of certain class of assets, the Company uses different useful life than those prescribed in Schedule II of the Companies Act, 2013. The useful life has been assessed based on technical evaluation, taking into account the nature of those classes of assets, the estimated usage of the asset on the basis of the management's best estimation of getting economic benefits from the asset. The estimated useful life as per the technical evaluation viz-a-viz Schedule II of the Companies Act, 2013 has been disclosed in the notes to accounts. The residual values is not more than 5% of the original cost of assets.
Each part of an item of Property, plant and equipment is depreciated separately if the cost of part is significant in relation to the total cost of the item and useful life of that part is different from the useful life of remaining asset.
Property plant and equipment acquired during the period, individually costing up to ?5000/- are fully depreciated, by keeping Re. 1 as token value for identification. However, Mobile phones provided to employees are charged to statement of profit and loss irrespective of its value.
Depreciation methods, useful lives and residual values are reviewed at each financial year-end.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in statement of profit and loss within other gains/(losses).
2.2.3 Capital work in progress
Property, plant and equipment that are not yet ready for their intended use on the reporting date are disclosed as “capital work in progress". Capital work in progress is carried at cost less accumulated impairment loss, if any. The cost comprises of direct cost and related incidental expenses.
2.2.4 Investment properties
Investment property comprises of completed property, property under construction and property held under a lease. Investment properties are measured initially at cost, including transaction costs. Subsequently investment properties are stated at cost less accumulated depreciation and accumulated impairment loss, if any. Subsequent cost is added if recognition criteria is met.
The Company depreciates building component of investment property on straight line basis over 60 years from the date of original purchase/ completion of construction. Leasehold land acquired on perpetual lease is not amortised. Depreciation methods and useful lives are reviewed at each financial year end.
Though the Company measures investment property using cost-based measurement, the fair value of investment property is disclosed in the notes. Fair value determined based on an annual
evaluation performed by an accredited external independent valuer applying valuation model acceptable internationally.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in statement of profit and loss within other gains/(losses).
2.2.5 Intangible assets
Intangible assets are initially measured at cost. Intangible assets not ready for the intended use on the date of the Balance Sheet are disclosed as “Intangible assets underdevelopment".
Subsequently, intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses, if any. Software cost up to ?1 Lakhs in each case is fully amortised in the period of purchase, by keeping ?1 as token value for identification.
The cost of capitalised software is amortised over a period 36 months from the date of its acquisition. The residual values is not more than 5% of the original cost of assets.
Amortisation methods and useful lives are reviewed at each financial year end.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in statement of profit and loss within other gains/(losses).
2.2.6 Impairment of non-financial assets
At each reporting date, the Company reviews the carrying amounts of its non-financial assets to determine whether there is any indication of impairment. 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).
If such assets are considered to be impaired, the impairment to be recognised in the Statement of Profit and Loss is measured by the amount by which the carrying value of the assets exceeds the estimated recoverable amount of the asset.
2.2.7 Investment in equity instruments of subsidiaries and joint ventures
Investment in equity instruments of subsidiaries and joint ventures are stated at cost as per Ind AS 27 ‘Separate Financial Statements’. Where the carrying amount of an investment is greater than its estimated recoverable amount, it is assessed for recoverability and in case of permanent diminution provision for impairment is recorded in statement of Profit and Loss. On disposal of investment, the difference between the net disposal proceeds and the carrying amount of investments is recognised to the statement of profit and loss.
Interests in joint operations
The Company as a joint operator recognises in relation to its interest in a joint operation, its share
in the assets/liabilities held/ incurred jointly with the other parties of the joint arrangement. Revenue is recognised for its share of revenue from the sale of output by the joint operation. Expenses are recognised for its share of expenses incurred jointly with other parties as part of the joint arrangement.
2.2.8 Inventories
Inventories are valued at the lower of cost and net realisable value. Cost is determined on First in First out (FIFO) basis.
Construction costs incurred for future contract activities are recognised as assets if it is probable that they will be recovered during the contract period and classified as construction work-inprogress under inventories.
Loose tools are expensed in the period of purchase.
2.2.9 Revenue recognition
The Company operates in construction industry and it earns revenue primarily from the Engineering, Procurement and Construction (‘EPC') business. The contracts with the customers are of construction of railways, construction of roads & highways, construction of commercial and residential buildings, electrification work and others. The type of work in these contracts involve geotechnical investigations, topographical surveys, resourceplanning, preparation of DPR, construction, engineering, designing, supply of materials, redevelopment of system, installation, project management, operations and management etc. (“together called as construction related services"). The company provides these construction services on a fixed-sum turnkey basis as well as on cost plus basis.
Revenue from contract with customers is recognised when control of the goods or services (“performance obligation") are transferred to the customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services (“transaction price").
a) Revenue from construction related services
The Company's contracts with the Customers for the construction related services are accounted for as a single performance obligation as contract is negotiated as a package with a single commercial objective and involves complex integration of construction and maintenance services.
Revenue is recognised over the time using input method (i.e. percentage-of-completion method) which is consistent with the transfer of control to the customer because there is a direct relationship between the Company's effort (i.e., cost incurred) and the transfer of service to the customer. Under input method, contract revenue is recognised as revenue by reference to the stage of completion as at the reporting date. The stage of completion
is measured in terms of a proportion of actual cost incurred to-date, to the total estimated cost attributable to the performance obligation. Changes to total estimated contract costs, if any, are recognised in the period in which they are determined as assessed at the contract level. In cases where the input method does not realiably depicts the progress towards completion of performance obligation, then output method is used to recognise revenue.
Any expected losses on contracts in progress are charged to Statement to Profit & Loss, in total, in the period the losses are identified.
Revenue is measured at the transaction price that is allocated to the performance obligation and is adjusted for variable considerations. Variability in the transaction price arises primarily due to liquidated damages, price variation clauses, incentives, if any. The Company recognises revenue for variable consideration when it is probable that a significant reversal in the amount cumulative revenue recognised will not occur. The company estimates the amount of revenue to be recognised on variable consideration using most likely amount method. Consequently, amounts allocated to a satisfied performance obligation are recognised as revenue, or as a reduction of revenue, in the period in which the transaction price changes.
The Company recognises asset from the costs incurred to fulfill the contract such as initial contract expenses on new projects for mobilisation which will be used in satisfying the contract and are expected to be recovered. The asset is amortised over the contract tenure on a systematic basis that is consistent with the transfer of control to the customer of the goods or services to which the asset relates i.e., stage of completion of the contract as at the end of reporting period. Site mobilisation expenditure to the extent not written off valued at cost.
Contract modifications are accounted for when additions, deletions or changes are approved either to the contract scope or contract price. The accounting for modifications of contracts involves assessing whether the services added to the existing contract are distinct and whether the pricing is at the standalone selling price. Services added that are not distinct are accounted for on a cumulative catch-up basis, while those that are distinct are accounted for prospectively, either as a separate contract, if additional services are priced at the standalone selling price, or as a termination of existing contract and creation of a new contract if not priced at the standalone selling price.
b) Contract balances
Contract assets: If the Company performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component since it is usually intended to provide customer with a form of security for Company's remaining performance as specified under the contract, which is consistent with the industry practice.
Trade receivables: A receivable represents the Company's right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Trade receivables are recognised initially at the transaction price as they do not contain significant financing components. The Company hold the trade receivable with the objective of collecting the contractual cash flows and therefore measure them subsequently at amortised cost using the effective interest rate method less loss allowance, if any.
Contract liabilities: If a customer pays consideration before the Company transfers goods or services to the customer, a contract liability is recognised when the payment is made, or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Company performs under the contract.
c) Other operating income
• The Rental income of the Company mainly arises from leasing of machinery, unutilised office space and investment properties. These rental incomes are accounted for on straight-line basis over the lease terms.
• Other operating income represents income earned from the activities incidental to business and is recognised when performance obligation is satisfied and right to receive the income is established as per terms of contract.
d) Other income
Dividend income is recognised when the right to receive payment is established.
• Interest income is recognised using Effective Interest rate method.
• Miscellaneous income is recognised when performance obligation is satisfied and right to receive the income is established as per terms of contract.
2.2.10 Borrowing cost
Borrowing costs consist of interest and other costs that the Company incurs in connection with the
borrowing of funds and are charged to statement of profit and loss in the period in which they are incurred except when it meets the criteria for capitalisation as part of qualifying assets as per Ind AS 23.
2.2.11 Taxes
Tax expense comprises current tax and deferred income tax.
a) Current income Tax
Current tax is determined as the tax payable in respect of taxable income for the period and is computed in accordance with relevant tax regulations. Current income tax is recognised in statement of profit and loss except to the extent it relates to items recognised outside profit or loss in which case it is recognised either in other comprehensive income or in equity. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
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 realise the asset and settle the liability simultaneously.
b) Deferred Tax
Deferred tax is provided for temporary taxable/ deductible difference arising on the difference of tax base and accounting base of assets/liabilities using the liability method and are measured at the enacted tax rates or substantively enacted tax rates at reporting date.
Deferred tax is recognised in statement of profit and loss except to the extent it relates to items recognised outside profit or loss, in which case it is recognised (either in other comprehensive income or in equity).
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority.
2.2.12 Foreign currencies
Functional and presentation currency
The functional currency and presentation currency of the Company is Indian Rupees.
Transactions and balances
Foreign currency transactions are recorded on initial recognition in the functional currency, by applying the exchange rate between the functional currency and the foreign currency at the date of the transaction.
Foreign currency monetary items outstanding at the reporting date are reported in the functional currency using the closing rate (Closing selling rates for liabilities and closing buying rate for assets). Non-monetary items denominated in a foreign currency which are carried at historical cost are not retranslated and are reported using the exchange rate at the date of the transaction.
Exchange differences on monetary items are recognised in Statement of Profit and Loss in the period in which they arise and are presented on net basis.
Foreign Operations
Financial statements of foreign operations whose functional currency is different from Indian Rupees are translated into Indian Rupees as follows:
a) assets and liabilities (both monetary and nonmonetary) are translated at the closing rate at the date of Balance Sheet;
b) income and expenses are translated at average exchange rate for the reporting period, unless exchange rate fluctuate significantly during the period, in which case, the exchange rates at the dates of transaction are used; and
c) all resulting exchange differences are recognised in other comprehensive income and accumulated in equity as foreign currency translation reserve for subsequent reclassification to statement of profit and loss on disposal of such foreign operations.
2.2.13 Employee benefit
a) Short-term employee benefits
Employee benefits such as wages and salaries, short term compensated absences, and Performance Related Pay (PRP) falling due wholly within twelve months of rendering the service are classified as short-term employee benefits and undiscounted amount of such benefits are expensed in the statement of profit and loss in the period in which the employee renders the related services.
b) Post-employment benefits
Defined Contribution Plan: The Company has a defined contribution employee pension scheme. Initially, this scheme was administered through a separate trust i.e., Ircon Defined Contribution Superannuation Pension Scheme 2009, Trust and subsequently transferred to National Pension Scheme. The Contributions towards the scheme are recognised in the
statement of profit and loss of the period when the contributions are due.
Defined Benefit Plan: The Company's liability towards gratuity, provident fund and postretirement medical benefit are in the nature of defined benefit plans.
The gratuity is funded by the Company and is managed by a separate trust (Ircon Employees Group Gratuity Trust). The contributions to the gratuity trust for the period are recognised as expense and are charged to statement of profit and loss. The Company pays fixed contribution to the recognised provident fund at predetermined rates to a separate trust (Ircon Contributory Provident Fund Trust), which invests the funds in permitted securities. The contributions to the fund for the period are recognised as expense and are charged to statement of profit and loss. The obligation of the company is to make such fixed contributions and to ensure a minimum rate of return to the members as specified by the Government of India. The Company has Post-Retirement Medical Facility (PRMF) which is also funded by the Company and is managed by a separate trust (Ircon Medical Trust). The contributions to the medical trust for the period are recognised as expense and are charged to statement of profit and loss.
The Company's net obligation in respect of defined benefit plans is measured separately for each plan at the present value of the estimated future cash flows using a discount rate based on the market yield on government securities of a maturity period equivalent to the weighted average maturity profile of the defined benefit obligations at each reporting date. The fair value of the plan assets is reduced from the gross obligation under the defined benefit plans to recognise the obligation on a net basis.
The calculation is performed by an independent actuary using the projected unit credit method and provided for if the circumstances indicate that the Trusts may not be able to generate adequate returns to cover the interest rates notified by the Govern ment.
Re-measurement, comprising actuarial gains and losses, the return on plan assets (excluding amounts included in net interest on the net defined benefit liability or asset) is recognised in other comprehensive income and is reflected in retained earnings and the same is not eligible to be reclassified to statement of profit and loss.
c) Other long-term employee benefits
The Company treats leave encashment expected to be carried forward beyond twelve months and leave travel concession as
long-term employee benefit for measurement purposes. The obligation recognised in respect of these long-term benefits is measured at present value of the obligation based on actuarial valuation using the projected unit credit method.
Long term employee benefit costs comprising current service cost, interest cost and gains or losses on curtailments and settlements, re-measurements including actuarial gains and losses are recognised in the statement of profit and loss as employee benefit expenses.
2.2.14 Cash and cash equivalents
For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes unrestricted cash and short-term deposits with original maturities of three months and less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.
2.2.15 Dividend
Annual Dividend distribution to the Company's equity shareholders is recognised as liability in the period in which dividend is approved by the shareholders. Any interim dividend is recognised as liability on approval by the Board of Directors. Dividend payable is recognised directly in equity.
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