6. MATERIAL ACCOUNTING POLICIES
6.1 Financial instruments
(i) Business Model Assessment
The Company determines its business model at the level that best reflects how it manages
groups of financial assets to achieve its business objective.
The Company's business model is not assessed on an instrument-by-instrument basis, but at a
higher level of aggregated portfolios and is based on observable factors such as:
a. How the performance of the business model and the financial assets held within that
business model are evaluated and reported to the entity's key management.
b. The risks that affect the performance of the business model (and the financial assets held
within that business model) and the way those risks are managed.
c. How managers of the business are compensated (for example, whether the compensation is
based on the fair value of the assets managed or on the contractual cash flows collected).
d. The expected frequency, value and timing of sales are also important aspects of the
Company's assessment. The business model assessment is based on reasonably expected
scenarios without taking ‘worst case' or ‘stress case' scenarios into account. If cash flows after
initial recognition are realised in a way that is different from the Company's original
expectations, the Company does not change the classification of the remaining financial
assets held in that business model, but incorporates such information when assessing newly
originated or newly purchased financial assets going forward.
(ii) The Solely Payments of Principal and Interest (SPPI) test
As a second step of its classification process the Company assesses the contractual terms of
financial assets to identify whether they meet the SPPI test.
‘Principal' for the purpose of this test is defined as the fair value of the financial asset at initial
recognition and may change over the life of the financial asset (for example, if there are
repayments of principal or amortisation of the premium/ discount).
In making this assessment, the Company considers whether the contractual cash flows are
consistent with a basic lending arrangement i.e. interest includes only consideration for the
time value of money, credit risk, other basic lending risks and a profit margin that is consistent
with a basic lending arrangement. Where the contractual terms introduce exposure to risk or
volatility that are inconsistent with a basic lending arrangement, the related financial asset is
classified and measured at fair value through profit or loss.
The Company classifies its financial liabilities at amortised cost unless it has designated
liabilities at fair value through the profit and loss account or is required to measure liabilities at
fair value through profit or loss such as derivative liabilities.
(iii) Financial Assets
a. Initial recognition and measurement
All financial assets are recognized initially at fair value when the parties become party to the
contractual provisions of the financial asset. In case of financial assets which are not
recorded at fair value through profit or loss, transaction costs that are directly attributable to
the acquisition or issue of the financial assets, are adjusted to the fair value on initial
recognition.
b. Subsequent measurement
The Company classifies its financial assets into various categories for subsequent
measurements. The classification depends on the contractual terms of the financial assets,
cash flows and the company's business model for managing financial assets. The basis of
classification and methodology for subsequent measurement is described below:
(i) Financial assets measured at 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.
(ii) Financial assets measured at fair value through other comprehensive income (FVOCI)
A financial asset is measured at FVOCI if it is held within a business model whose
objective is achieved by both collecting contractual cash flows and selling financial
assets and contractual terms of financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount outstanding.
(iii) Financial assets measured at fair value through profit or loss (FVTPL)
A financial asset which is not classified in any of the above categories are measured at
FVTPL.
(iv) Financial Liabilities
a. Initial recognition and measurement
All financial liabilities are recognized initially at fair value and, in the case of
borrowings and payables, net of directly attributable transaction costs.
b. Subsequent Measurement
Financial Liabilities are subsequently measured at amortized cost using the effective
interest method, except those that are classified as FVTPL. Financial Liability is
classified at FVTPL if it is held for trading or it is a derivative or it is designated as such
on initial recognition.
(v) Derecognition of financial assets and liabilities
a. Financial Asset
The Company derecognises a financial asset when the contractual cash fIows from
the asset expire or it transfers its rights to receive contractual cash fIows from the
financial asset in a transaction in which substantially all the risks and rewards of
ownership are transferred. Any interest in transferred financial assets that is created
or retained by the Company is recognized as a separate asset or liability.
An entity has transferred the financial asset if, and only if, either:
i) It has transferred its contractual rights to receive cash fIows from the financial
asset or
ii) It retains the rights to the cash fIows, but has assumed an obligation to pay the
received cash fIows in full without material delay to a third party under a ‘pass¬
through' arrangement.
b. Financial Liability
A financial liability is derecognised when the obligation under the liability is
discharged, cancelled or expired. Where 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 derecognition of the original liability and the recognition of a new liability.
The difference between the carrying value of the original financial liability and the
consideration paid is recognized in profit or loss.
The Company's lease asset class consist of lease of buildings.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 recognizes a right-of-use asset
(“ROU”) and a corresponding lease liability for all lease arrangements in which it is
a lessee for a period of twelve months or less (short-term leases).For short-term ,
the Company recognizes the lease payments as an operating expense on a
straight-line basis over the term of the lease. The lease liability is the present
value of the lease payments to be made over the lease term using the
incremental borrowing rates.The right-of-use assets are initially recognized at
adjusted for any lease payments made at or prior to the commencement date of
the lease plus any initial direct costs incurred. They are subsequently measured at
cost less accumulated depreciation and impairment losses.
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.
(vi) Determination of Fair Value
On initial recognition, all the Financial Instruments are measured at fair value. For subsequent
measurement, the Company measures certain categories of Financial Instruments (eg.
Derivatives) at fair value on each Balance Sheet date.
Fair value is the price that would be received on selling an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to sell the asset or transfer the
liability takes place either:
i. In the principal market for the asset or liability, or
ii. In the absence of a principal market, in the most advantageous market for the asset or
liability. The principal or the most advantageous market must be accessible by the Company.
The fair value of an asset or a liability is measured using the assumptions that market
participants would use when pricing the asset or liability, assuming that market participants
act in their economic interest.
A fair value measurement of a Non-Financial Asset takes into account a market participant's
ability to generate economic benefits by using the asset in its highest and best use or by
selling it to another market participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for
which sufficient data are available to measure fair value, maximising the use of relevant
observable inputs and minimising the use of unobservable inputs.
In order to show how fair values have been derived, financial instruments are classified based
on a hierarchy of valuation techniques, as summarised below:
Level 1 Financial Instruments - These inputs used in the valuation are at unadjusted quoted
prices from active markets for identical assets or liabilities that the Company has access to at
the measurement date. The Company considers markets as active only if there are sufficient
trading activities with regard to the volume and liquidity of the identical assets or liabilities
and when there are binding and exercisable price quotes available on the Balance Sheet
date.
Level 2 Financial Instruments - These inputs used for valuation are significant, and are
derived from directly or indirectly observable market data available over the entire period of
the instrument's life. Such inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical instruments in inactive markets and observable inputs
other than quoted prices such as interest rates and yield curves, implied volatilities, and
credit spreads. In addition, adjustments may be required for the condition or location of the
asset or the extent to which it relates to items that are comparable to the valued instrument.
However, if such adjustments are based on unobservable inputs which are significant to the
entire measurement, the Company will classify the instruments as Level 3.
Level 3 Financial Instruments - Those that include one or more unobservable input that is
significant to the measurement as a whole.
(vii) Impairment of Financial Assets
In accordance with Ind AS 109, the company uses Expected Credit Loss model (ECL) for
evaluating impairment of Financial Assets other than those measured at fair value through
profit or loss.
The ECL allowance is based on the credit losses expected to arise over the life of the asset (the
lifetime expected credit loss), unless there has been no significant increase in credit risk since
initial recognition, in which case, the allowance is based on the 12 months' expected credit loss.
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 the portion of Lifetime ECL that
represent the ECL that result from default events on a financial instrument that are possible
within the 12 months after the reporting date.
Both Lifetime ECLs and 12-month ECLs are calculated either on an individual basis or a
collective basis, depending on the nature of the underlying portfolio of financial instruments.
The Company has established a policy to perform an assessment, at the end of each reporting
period, of whether a financial instrument's credit risk has increased significantly since initial
recognition, by considering the change in the risk of default occurring over the remaining life of
the financial instrument. The Company does the assessment of significant increase in credit risk
at a borrower level.
Pursuant to the Ind AS 109 - Financial Instruments , the Company is following the ‘three-stage'
model to evaluate impairment of assets based on changes in credit quality since initial
recognition which is summarized as below:
Stage 1 (Upto 30 days default)
Includes loan assets that have not had a significant increase in credit risk since initial
recognition or that have low credit risk at the reporting date; sub-categorized into “0” bucket
and “1-30” bucket.
Stage 2 (31-90 days default)
Includes loan assets that have had a significant increase in credit risk since initial recognition,
but that do not have objective evidence of impairment; sub categorized into “31-60” and “61-90”
buckets.
Stage 3 (All accounts marked as credit-impaired in line with the revised RBI circular noted
below)
In line with Reserve Bank of India Master Circular on Prudential norms on Income Recognition,
Asset Classification and Provisioning pertaining to Advances and Clarifications dated November
12, 2021 borrower accounts shall be flagged as overdue as part of the day-end processes for the
due date, irrespective of the time of running such processes. Similarly, classification of borrower
accounts as Non-Performing Asset / Stage 3 shall be done as part of day-end process for the
relevant date i.e. more than 90 days overdue and NPA/Stage 3 classification date shall be the
calendar date for which the day end process is run. In other words, the date of Non-Performing
Asset / Stage 3 shall reflect the asset classification status of an account at the day-end of that
calendar date. The Company has carried out the requirement in line with Reserve Bank of India
Clarification and accordingly the change in accounting policy is effective financial year 2021-22.
Upgradation of accounts classified as Stage 3/Non-performing assets (NPA) - The Company
upgrades loan accounts classified as Stage 3/NPA to standard” asset category only if the entire
arrears of interest, principal and other amount are paid by the borrower and there is no change
in the accounting policy followed by the company in this regard.
Credit-impaired financial assets:
At each reporting date, the company assesses whether financial assets carried at amortised
cost are credit- impaired. A financial asset is 'credit-impaired' when one or more events that
have a detrimental impact on the estimated future cash flows of the financial asset have
occurred.
Evidence that a financial asset is credit-impaired includes the following observable data:
a) Significant financial difficulty of the borrower or issuer;
b) A breach of contract such as a default or past due event;
c) The restructuring of a loan or advance by the company on terms that the company would
not consider otherwise;
d) It is becoming probable that the borrower will enter bankruptcy or other financial
reorganization; or
e) The disappearance of an active market for a security because of financial difficulties.
The Expected Credit Loss (ECL)
As per Ind AS 109, the loan losses are to be provided based on ECL method. ECL is measured at
12-month ECL for Stage 1 loan assets and at Lifetime ECL for Stage 2 and Stage 3 loan assets.
ECL is the product of the Probability of Default, Exposure at Default and Loss Given Default, i.e.,
ECL=PD X EAD X LGD
PD: Probability of Default ("PD") is an estimate of the likelihood of default over a given time
horizon. A default may only happen at a certain time over the assessed period, if the facility has
not been previously derecognized and is still in the portfolio. The PD is computed for Stage 1,
Stage 2 and Stage 3 independently by determining default rates based on the historical data
after giving due weightage for abnormal period and events, probability of roll back etc.
EAD: Exposure at Default ("EAD") is an estimate of the exposure at a future default date, taking
into account expected changes in the exposure after the reporting date, including repayments
of principal and interest, whether scheduled by contract or otherwise, expected draw down on
committed facilities, etc.
LCD: Loss Given Default ("LGD") is an estimate of the loss arising in the case where a default
occurs at a given time. It is based on the difference between the contractual cash flows due
and those that the lender would expect to receive, including from the realization of any
collateral. It is usually expressed as a percentage of the EAD. In respect of Financial Assets
where historical information is not available, minimum provision as mandated under RBI
guidelines would be made along with additional provision as considered necessary by the
management.
Forward Looking Information
While estimating the expected credit losses, the Company reviews macro-economic
developments occurring in the economy and the market it operates in. On a periodic basis, the
Company analyses if there is any relationship between key economic trends like GDP,
unemployment rates, benchmark rates set by the Reserve Bank of India, inflation etc. with the
estimate of PD, LGD and EAD determined by the Company based on its internal data as
described above. While the internal estimates of PD, LGD and EAD rates by the Company may
not be always reflective of such relationships, temporary overlays, if any, are embedded in the
methodology to reflect such macro-economic trends reasonably.
To mitigate its credit risks on Financial Assets, the Company seeks to use collateral where
possible. The collateral comes in various forms such as vehicles, guarantees, securities etc.
However, the fair value of collateral affects the calculation of ECL. The collateral is majorly the
property for which the loan is given. The fair value of the same is based on historical data of
recovery/management estimates provided by third party on management judgements.
(viii) Write-Offs
The Company reduces the gross carrying amount of a Financial Asset when the Company has
no reasonable expectations of recovering a Financial Asset in its entirety or a portion thereof.
This is generally the case when the Company determines that the borrower does not have
assets or sources of income that could generate sufficient cashflows to repay the amounts
subjected to write-offs. Any subsequent recoveries against such loans are credited to the
Statement of Profit and Loss.
6.2 Revenue from Operations
6.2.1 Interest Income
i) Interest income is recognized by applying the Effective Interest Rate (EIR) to the gross
carrying amount of financial assets except for purchased or originated credit impaired
Financial Assets and other credit impaired assets.The EIR in case of a Financial Asset is
computed
a. At the rate that exactly discounts estimated future cash receipts through the expected
life of a Financial Asset to the gross carrying amount of the Financial Asset.
b. By considering all the contractual terms of the financial instrument in estimating the
cash fIows.
c. Including all fees received between parties to the contract that are an integral part of the
Effective Interest Rate, transaction costs, and all other premiums or discounts.
ii) Interest income on overdue interest levied on customers for delay in repayment of
contractual cash flows are both recognized on receipt basis.
iii) Interest income on credit-impaired financial assets: 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, the Company reverts to calculating interest
income on a gross basis.
6.2.2 Recognition of revenue from sale of goods or services and Fees and Charges Income
Revenue (other than for Financial Instruments within the scope of Ind AS 109) is measured at
an amount that reflects the considerations, to which an entity expects to be entitled in
exchange for transferring goods or services to customer, excluding amounts collected on
behalf of third parties.
The Company recognizes revenue basis on receipts from contracts with customers based on a
five-step model as set out in Ind AS 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 respective 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: For a
contract that has more than one performance obligation, the respective company allocates the
transaction price to each performance obligation in an amount that depicts the amount of
consideration to which the company expects to be entitled in exchange for satisfying each
performance obligation.
Step 5: Recognise revenue when (or as) the respective company satisfies a performance
obligation. Revenue from contract with customer for rendering services is recognized at a
point in time when the performance obligation is satisfied.
6.2.3 Net Gain on Derecognition of Financial Instruments Under Amortized Cost Category
Net gain/loss arising on derecognition of Financial Instruments is recognised directly in the
Statement of Profit and Loss and presented separately under the head Net Gain on
Derecognition of Financial Instruments Under Amortized Cost Category.
6.2.4 Income for acting as Corporate Agent
The Company is acting as a corporate agent for its insurance service against its customers
offered by the insurance partner.For this the company is getting an agreed commission.
6.3 Expenses
6.3.1 Finance Costs
Finance costs represents Interest expense recognized by applying the Effective Interest Rate
(EIR) to the gross carrying amount of financial liabilities other than financial liabilities classified
as FVTPL.
The EIR in case of a financial liability is computed:
a. At the rate that exactly discounts estimated future cash payments through the expected life
of the Financial Liability to the gross carrying amount of the amortised cost of a Financial
Liability.
b. By considering all the contractual terms of the Financial Instrument in estimating the cash
flows.
c. Including all fees paid between parties to the contract that are an integral part of the
Effective Interest Rate, transaction costs, and all other premiums or discounts.
Interest expense includes issue costs that are initially recognized as part of the carrying
value of the Financial Liability and amortized over the expected life using the effective
interest method. These include fees and commissions payable to advisors and other
expenses such as external legal costs, rating fee etc, provided these are incremental costs
that are directly related to the issue of a Financial Liability.
6.3.2 Taxes
a) Current Tax
Current Tax Assets and Liabilities for the current and prior years 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,
by the reporting date in the countries where the Company operates and generates taxable
income.
Current income tax relating to items recognized outside profit or loss is recognized outside
profit or loss (either in Other Comprehensive Income or in Equity). Current tax items are
recognized in correlation to the underlying transaction either in Other Comprehensive
Income (OCI) or directly 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.
b) Deferred Tax
Deferred Tax Assets and Liabilities are recognized for temporary differences arising between
the tax bases of assets and liabilities and their carrying amounts. Deferred Income Tax is
determined using tax rates (and laws) that have been enacted or substantively enacted by
the reporting date and are expected to apply when the related Deferred Income Tax asset is
realized or the Deferred Income Tax liability is settled.
Deferred Tax Assets are recognized for detectable temporary differences, carry forward,
unused tax losses and unused tax credits if it is probable that future taxable amounts will
arise to utilise those temporary differences and losses. Deferred Tax Assets are reviewed at
each reporting date and are reduced to the extent that it is no longer probable that the
related tax benefit will be realized.
Deferred Tax Assets and Liabilities are offset where there is a legally enforceable right to
offset Current Tax Assets and Liabilities and they relate to income taxes levied by the same
tax authority on the same taxable entity, or on different tax entities, but they intend to settle
Current Tax Liabilities and assets on a net basis or their tax assets and liabilities are realised
simultaneously.
6.4 Cash and Cash Equivalents
Cash and Cash Equivalents comprise the net amount of short-term, highly liquid investments that
are readily convertible to known amounts of cash (short-term deposits with an original maturity of
three months or less) and are subject to an insignificant risk of change in value, cheques on hand
and balances with banks. They are held for the purposes of meeting short-term cash commitments
(rather than for investment or other purposes).
For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and short¬
term deposits, as defined above.
6.5 Property, Plant and Equipment
Property, Plant and Equipment (PPE) are measured at cost less accumulated depreciation and
accumulated impairment, (if any). The total cost of assets comprises its purchase price, freight,
duties, taxes and any other incidental expenses directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in the manner intended by the
management. Changes in the expected useful life are accounted for by changing the amortisation
period or methodology, as appropriate, and treated as changes in accounting estimates.
Subsequent expenditure related to an item of tangible asset are added to its gross value 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.
6.5.1 Depreciation
Depreciation is calculated using the written down value method to write down the cost of
Property, Plant and Equipment to their residual values over their estimated useful lives which is
in line with the estimated useful life as specified in Schedule II of the Companies Act, 2013.
Property, Plant and Equipment is derecognised on disposal or when no future economic
benefits are expected from its use. Any gain or loss arising on derecognition of the asset
(calculated as the difference between the net disposal proceeds and the carrying amount of
the asset) is recognized in other income/ expense in the Statement of Profit and Loss in the
year the asset is derecognised. The date of disposal of an item of Property, Plant and
Equipment is the date the recipient obtains control of that item in accordance with the
requirements for determining when a performance obligation is satisfied in Ind AS 115.
6.6 Intangible Assets
An intangible asset is recognized only when its cost can be measured reliably and it is probable that
the expected future economic benefits that are attributable to it will flow to the Company.
Intangible assets acquired separately are measured on initial recognition at cost. The cost of an
intangible asset comprises its purchase price and any directly attributable expenditure on making
the asset ready for its intended use and net of any trade discounts and rebates. Following initial
recognition, intangible assets are carried at cost less any accumulated amortisation and any
accumulated impairment losses.
The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets
with finite lives are amortised over the useful economic life. The amortisation period and the
amortisation method for an intangible asset with a finite useful life are reviewed at least at each
financial year-end. Changes in the expected useful life, or the expected pattern of consumption of
future economic benefits embodied in the asset, are accounted for by changing the amortisation
period or methodology, as appropriate, which are then treated as changes in accounting estimates.
The amortisation expense on intangible assets with finite lives is presented as a separate line item in
the Statement of Profit and Loss. Amortisation on assets acquired/sold during the year is recognised
on a pro-rata basis in the Statement of Profit and Loss from/upto the date of acquisition/sale.
Amortisation is calculated using the written down value method to write down the cost of intangible
assets to their residual values over their estimated useful lives. Intangible assets comprising of
software are amortised on a written down value basis over a period of 3 years, unless it has a shorter
useful life.
The Company's intangible assets consist of computer software with definite life.
Gains or losses from derecognition of intangible assets, measured as the difference between the net
disposal proceeds and the carrying mount of the asset are recognized in the Statement of Profit and
Loss when the asset is derecognised.
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