2. MATERIAL ACCOUNTING POLICIES2.1 Statement of Compliance
The Financial Statements have been prepared on
a going concern basis in accordance with Indian
Accounting Standards (Ind AS) notified under the
Section 133 of the Companies Act, 2013 ("the Act") read
with the Companies (Indian Accounting Standards)
Rules, 2015 as amended and other relevant provisions
of the Act.
2.2 Basis of Preparation and Presentation
The Financial Statements have been prepared on the
historical cost convention on accrual basis except
for certain financial instruments which are measured
at fair value at the end of each reporting period, as
explained in the accounting policies mentioned below.
Historical cost is generally based on the fair value of the
consideration given in exchange of goods or services.
All assets and liabilities have been classified as current
or non-current according to the Company's operating
cycle and other criteria set out in the Act. Based on the
nature of products and the time between the acquisition
of assets for processing and their realisation in cash
and cash equivalents, the Company has ascertained
its operating cycle as twelve months for the purpose
of current or non-current classification of assets and
liabilities.
The material accounting policies are set out below.
2.3 Use of Estimates and Judgments
The preparation of Financial Statements in conformity
with Ind AS requires management to make judgments,
estimates and assumptions that affect the application
of accounting policies and the reported amount of
assets, liabilities, income, expenses and disclosures
of contingent assets and liabilities at the date of these
Financial Statements and the reported amount of
revenues and expenses for the years presented. Actual
results may differ from the estimates.
Estimates and underlying assumptions are reviewed
at each Balance Sheet date. Revisions to accounting
estimates are recognised in the period in which the
estimates are revised and future periods affected.
2.4 Revenue Recognition
Revenue is measured at the transaction price (net of
variable consideration) allocated to that performance
obligation. Amounts disclosed as revenue are net
of returns, cash discount, trade allowances, sales
incentives and value added taxes. The Company
recognizes revenue when the amount of revenue and
its related cost can be reliably measured and it is
probable that future economic benefits will flow to the
entity and specific criteria have been met for each of
the Company's activities as described below.
A. Sale of Products
Revenue from contracts with customers is
recognized on transfer of control of promised
goods to a customer at an amount that reflects the
consideration to which the Company is expected
to be entitled to in exchange for those goods or
services.
B. Sale of Services
Revenue from services are recognized as related
services are performed.
C. Revenue recognises over time
The Company satisfies a performance obligation
and recognises revenue over time, if one of the
following criteria is met:
1. The customer simultaneously receives and
consumes the benefits provided by the
Company’s performance as the Company
performs;
2. The Company’s performance creates or
enhances an asset that the customer
controls as the asset is created or enhanced;
or
3. The Company’s performance does not
create an asset with an alternative use to the
Company and an entity has an enforceable
right to payment for performance completed
to date.
For performance obligations where one of
the above conditions are not met, revenue is
recognised at the point in time at which the
performance obligation is satisfied.
D. Dividend and interest income
Dividend income from investments is recognized
when the shareholders' right to receive payment
has been established (provided that it is probable
that the economic benefits will flow to the
Company and the amount of income can be
measured reliably).
Interest income from a financial asset is recognized
when it is probable that the economic benefits
will flow to the Company and the amount of
income can be measured reliably. For all financial
instruments measured either at amortised cost or
at fair value through other comprehensive income,
interest income is recorded using the effective
interest rate (EIR). Interest income is included in
other income in the Statement of Profit and Loss.
Interest income in respect of financial instruments
measured at fair value through profit or loss is
included in other income.
E. Royalty Income
Revenue from royalty is recognised on an accrual
basis in accordance with the substance of the
relevant arrangement.
F. Rent Income
Rent income from operating leases is recognized
on a straight-line basis over the lease term.
2.5 Leases
Effective April 1, 2019, the Company has adopted Ind
AS 116 "Leases" and applied to all lease contracts
existing on the date of initial application, using the
modified retrospective method along with transition
option to recognise right-of-use assets (RoU) at an
amount equal to the lease liabilities.
The Company as lessor
Leases are classified as finance leases whenever the
terms of the lease transfer substantially all the risks
and rewards of ownership to the lessee. All other leases
are classified as operating leases.
Amounts due from lessees under finance leases
are recognised as receivables at the amount of the
Company's net investment in the leases. Finance
lease income is allocated to accounting periods so
as to reflect a constant periodic rate of return on the
Company's net investment outstanding in respect
of the leases. When the Company is an intermediate
lessor, it accounts for its interests in the head lease and
the sub-lease separately. The sub-lease is classified as
a finance or operating lease by reference to the right-
of-use assets arising from the head lease.
Rental income from operating leases is recognised on
a straight-line basis over the term of the relevant lease.
Where the rentals are structured solely to increase in
line with expected general inflation to compensate for
the Company's expected inflationary cost increases,
such increases are recognised in the period in which
such benefits accrue.
The Company did not make any adjustments to the
accounting for assets held as a lessor as a result of
adopting the new lease standard.
The Company as lessee
The Company’s lease asset classes primarily consist
of leases for Land & office building. 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. 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' assets and a
corresponding 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.
Right-of-use assets are initially recognized at cost
comprising the following:
♦ the amount of initial measurement of liability
♦ any lease payments made at or before the
commencement date less the incentives received
♦ any initial direct costs, and
♦ restoration costs
They are subsequently measured at cost less
accumulated amortization and impairment losses.
Right-of-use assets are amortized from the
commencement over the shorter of asset's useful life
and the lease term on a straight-line basis. Right-of-
use assets are evaluated for recoverability whenever
events or changes in circumstances indicate that their
carrying amounts may not be recoverable.
Lease liabilities measured at amortised cost include
the net present value of the following lease payments:
♦ fixed payments (including in-substance fixed
payments), less any lease incentives receivable
♦ variable lease payment that are based on an index
or a rate, initially measured using the index or rate
as at the commencement date
♦ amounts expected to be payable by the Company
under residual value guarantees
♦ the exercise price of purchase option if the
Company is reasonably certain to exercise that
option, and
♦ payments of penalties for terminating the lease,
if the lease term reflects the Company exercising
the option.
Lease payments to be made under reasonably
certain extension options are also included in the
measurement of the liability. The lease payments are
discounted using the rate of interest implicit in the
lease. If that rate cannot be readily determined, which
is generally the case for leases in the Company, the
lessee’s incremental borrowing rate is used, being
the rate that the individual lessee would have to pay
to borrow the funds necessary to obtain an asset of
similar value to the right-of-use assets in the similar
economic environment with similar terms, security and
conditions.
The Company accounts for each lease component
within the contract as a lease separately from non¬
lease components of the contract in accordance with
Ind AS 116 and allocates the consideration in the
contract to each lease component on the basis of
the relative stand-alone price of the lease component
and the aggregate stand-alone price of the non-lease
components.
Lease payments are apportioned between finance
expenses and reduction of the lease obligation
so as to achieve a constant rate of interest on the
remaining balance of the liability. Finance expenses are
recognised immediately in the Statement of Profit and
Loss, unless they are directly attributable to qualifying
assets. Variable lease payments are recognised in the
Statement of Profit and Loss in the period in which the
condition that triggers those payments occur.
Lease liabilities
The lease liability is initially measured at amortised
cost 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,
using the incremental borrowing rates. Lease liabilities
are remeasured with a corresponding adjustment to
the related right of use asset if the Company changes
its assessment if whether it will exercise an extension
or a termination option.
Lease liability and ROU asset have been separately
presented in the Balance Sheet and lease payments
have been classified as financing cash flows.
2.6 Foreign Currencies
Functional and presentation currency
Items included in the Financial Statements are
measured using the currency of the primary economic
environment in which the entity operates ('the functional
currency’). The Financial Statements are presented in
Indian rupee (INR), which is the Company’s functional
and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the
functional currency using the exchange rate at the date
of the transactions. Foreign exchange gains and losses
resulting from the settlement of such transactions
and from the translation of monetary assets and
liabilities denominated in foreign currencies at year end
exchange rates are generally recognised in Statement
of Profit and Loss.
Non-monetary items which are carried at historical
cost denominated in a foreign currency are reported
using the exchange rate at the date of the transaction.
Non-monetary items measured at fair value in a
foreign currency are translated using the exchange
rate at the date when the fair value is determined. The
gain or loss arising on translation of non-monetary
items is recognised in line with the gain or loss of
the item that gave rise to the translation difference
(translation differences on items whose gain or loss
is recognised in Other Comprehensive Income or the
Statement of Profit and Loss is also recognised in Other
Comprehensive Income or the Statement of Profit and
Loss respectively).
2.7 Borrowing Costs
Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets, which
are assets that necessarily takes a substantial period
of time to get ready for their intended use or sale, are
added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or
sale.
Where the funds used to finance a qualifying asset form
part of general borrowings, the amount capitalised is
calculated using a weighted average of rates applicable
to relevant general borrowings of the Company during
the year.
I nterest income earned on the temporary investment
of specific borrowings pending their expenditure on
qualifying assets is deducted from the borrowing costs
eligible for capitalization.
All other borrowing costs are recognised in the
Statement of Profit and Loss in the period in which they
are incurred.
Borrowing costs consist of interest, which is computed
as per effective interest method, and other costs that an
entity incurs in connection with the borrowing of funds.
Borrowing cost also includes exchange differences to
the extent regarded as an adjustment to the borrowing
costs.
2.8 Employee Benefits
Short-term obligations
Liabilities for wages and salaries including non¬
monetary benefits that are expected to be settled
within the operating cycle after the end of the period
in which the employees render the related services are
recognised in the period in which the related services
are rendered and are measured at the undiscounted
amount expected to be paid.
Other long-term employee benefit obligations
Liabilities for leave encashment and compensated
absences which are not expected to be settled wholly
within the operating cycle after the end of the period
in which the employees render the related service
are measured at the present value of the estimated
future cash outflows which is expected to be paid
using the projected unit credit method. The benefits
are discounted using the market yields at the end
of the reporting period on Government bonds that
have terms approximating to the terms of the related
obligation. Remeasurements as a result of experience
adjustments and changes in actuarial assumptions are
recognised in Statement of Profit and Loss.
Post-employment obligations
Defined benefit plans
The Company has defined benefit plans namely Gratuity
Fund for employees. The Gratuity Fund is recognised by
the Income Tax Authorities and is administered through
Trust set up by the Company. Any shortfall in the size
of the fund maintained by the Trust is additionally
provided for in Statement of Profit and Loss.
The liability or asset recognised in the Balance Sheet
in respect of gratuity plans is the present value of the
defined benefit obligation at the end of the reporting
period less the fair value of plan assets. The defined
benefit obligation is calculated annually by Actuary
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.
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 Statement of
Profit and Loss.
Remeasurement gains and losses arising from
experience adjustments and changes in actuarial
assumptions are recognised in the period in which they
occur, directly in other comprehensive income. They
are included in retained earnings in the Statement of
Changes in Equity and in the Balance Sheet.
Changes in the present value of the defined benefit
obligation resulting from plan amendments or
curtailments are recognised immediately in Statement
of Profit and Loss as past service cost.
Defined contribution plans
The Company has defined contribution plans for post
retirements benefits, namely, Employee Provident
Fund Scheme administered through Provident Fund
Commissioner. The Company’s contribution is charged
to revenue every year. The Company has no further
payment obligations once the contributions have
been paid. The Company’s contribution to State Plans
namely Employees’ State Insurance Fund Scheme,
Employees’ Pension Scheme and Labour welfare fund
are charged to the Statement of Profit and Loss every
year.
Termination Benefits
A liability for the termination benefit is recognised when
the Company can no longer withdraw the offer of the
termination benefit.
2.9 Taxation
Income tax expense represents the sum of the tax
currently payable and deferred tax.
Current tax
The tax currently payable is based on taxable profit
for the year. Taxable profit differs from 'profit before
tax' as reported in the Statement of Profit and Loss
because of items of income or expense that are taxable
or deductible in other years and items that are never
taxable or deductible. The Company's current tax is
calculated using tax rates that have been enacted
or substantively enacted by the end of the reporting
period.
Deferred tax
Deferred tax is recognized on temporary differences
between the carrying amounts of assets and liabilities
in the Financial Statements and the corresponding
tax bases used in the computation of taxable profits.
Deferred tax liabilities are recognised for all taxable
temporary differences. Deferred tax assets are
recognised for all deductible temporary differences and
incurred tax losses to the extent that it is probable that
taxable profits will be available against which those
deductible temporary differences can be utilised. Such
deferred tax assets and liabilities are not recognised
if the temporary difference arises from the initial
recognition (other than in a business combination)
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.
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 is 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 consequences 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.
Current and deferred tax for the year
Current and deferred tax are recognised in the
Statement of Profit and Loss, except when they relate
to items that are recognised in other comprehensive
income or directly in equity, in which case, the income
taxes are also recognised in other comprehensive
income or directly in equity respectively.
2.10 Property, Plant and Equipment (PPE)
Property, Plant and Equipment (PPE) are stated at cost
of acquisition, net of accumulated depreciation and
accumulated impairment losses, if any. The cost of
tangible asset includes purchase cost (net of rebates
and discounts) including any import duties and non¬
refundable taxes, and any directly attributable costs on
making the asset ready for its intended use. Freehold
land is measured at cost and is not depreciated.
Interest cost incurred on qualifying asset is capitalized
up to the date the asset is ready for its intended
use, based on borrowings incurred specifically for
financing the asset or the weighted average rate of all
other borrowings if no specific borrowings have been
incurred for the asset where the funds used to finance
a qualifying asset form part of general borrowings.
Subsequent costs are included in the asset’s
carrying amount or recognized 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. The carrying amount of any component
accounted for as a separate asset is derecognized
when replaced. The other repairs and maintenance of
revenue nature are charged to the Statement of Profit
and Loss during the reporting period in which they have
incurred.
Transition to IND AS
On transition to Ind AS, the Company had elected
to continue with the carrying value of its property,
plant and equipment recognised as at April 01, 2016,
measured as per the previous GAAP and use that
carrying value as the deemed cost of the property, plant
and equipment.
Depreciation methods, estimated useful lives and
residual value
Depreciation is calculated using the straight-line
method on a pro-rata basis from the date on which
each asset is ready to use to allocate their cost, net
of their residual values, over their estimated useful
lives of the assets as prescribed in Schedule II of the
Companies Act, 2013 except in respect of the following
assets where estimated useful life is determined as
per management's estimate based on technical advice
which considered the nature of assets, the usage of
asset, expected physical wear & tear:
The assets' residual values, estimated useful lives and
depreciation method are reviewed at the end of each
reporting period, with the effect of any changes in
estimate accounted for on a prospective basis.
Gains and losses on disposal are determined by
comparing proceeds with carrying amount and are
credited / debited to Statement of Profit and Loss.
2.11 Intangible Assets
Intangible assets acquired separately are measured on
initial recognition at cost of acquisition and are stated
net of accumulated amortization and accumulated
impairment losses, if any.
The cost of an intangible asset includes purchase cost
(net of rebates and discounts), including any import
duties and non-refundable taxes, and any directly
attributable costs on making the asset ready for its
intended use.
Internally generated intangible assets
Research costs are charged to the Statement of Profit
and Loss in the year in which they are incurred. Product
development costs incurred on new vehicle platform
and new products are recognized as intangible assets,
when feasibility has been established, the Company
has committed technical, financial and other resources
to complete the development and it is probable that
asset will generate probable future economic benefits.
The costs capitalized include the cost of materials, direct
labour and directly attributable overhead expenditure
incurred up to the date the asset is available for use.
Interest cost incurred on qualifying asset is capitalized
up to the date the asset is ready for its intended
use, based on borrowings incurred specifically for
financing the asset or the weighted average rate of all
other borrowings if no specific borrowings have been
incurred for the asset where the funds used to finance
a qualifying asset form part of general borrowings.
Capitalized development expenditure is measured at
cost less accumulated amortization and accumulated
impairment, if any.
Transition to IND AS
On transition to Ind AS, the Company had elected to
continue with the carrying value of its intangible asset
recognised as at April 01, 2016, measured as per the
previous GAAP and use that carrying value as the
deemed cost of the intangible assets.
Amortization methods and useful lives
The cost of Intangible assets are amortized on a
straight-line basis over their estimated useful life.
Technical know-how/license fee/product development
relating to process design/plants/facilities are
capitalized at the time of capitalization of the said
plants/facilities and amortized as follows:
Residual Value is considered as Nil for intangible
assets.
The amortization period and method are reviewed
at least at each financial year end. If the expected
useful life of the asset is significantly different from
previous estimates, the amortization period is changed
accordingly.
Gains or losses arising from derecognition of an
intangible asset are measured as the difference between
the net disposal proceeds and the carrying amount of
the asset and are recognized in the Statement of Profit
and Loss when the asset is derecognized.
Impairment of tangible and intangible assets
At the end of each reporting period, the Company reviews
the carrying amount of its tangible and intangible
assets to determine whether there is any indication that
those assets have suffered an impairment loss. 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 the higher of fair value less
costs of disposal and value in use. In assessing value
in use, the estimated future cash flows are discounted
to their present value using a pre-tax 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.
2.12 Inventories
Inventories are valued at the lower of cost or net
realizable value.
Cost is determined on the following basis:
Raw Material is recorded at cost on a weighted average
cost formula
Stores & spares are recorded at cost on a weighted
average cost formula
Finished goods and Work in progress are valued
at raw material cost plus cost of conversion and
attributable proportion of manufacturing overhead
incurred in bringing inventories to its present location
and condition.
By products and Scrap are valued at net realizable
value.
Machinery spares (other than those qualified to be
capitalized as PPE and depreciated accordingly)
are charged to Statement of Profit and Loss on
consumption.
Net realizable value is the estimated selling price in the
ordinary course of business, less estimated costs of
completion and estimated costs necessary to make the
sale.
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