3 MATERIAL ACCOUNTING POLICIES
3.1 Financial instruments
A financial instrument is defined as any contract
that gives rise to a financial asset of one entity and
a financial liability or equity instrument of another
entity. Receivables and payables, loan, investments
in subsidiaries and associates, borrowings, cash and
cash equivalents, other bank balances etc. are some
examples of financial instruments.
All financial instruments are at amortised cost, unless
otherwise specified.
All the financial instruments are recognised on the
date when the Company becomes party to the
contractual provisions of the financial instruments.
3.1.1 Initial measurement of financial
instruments
The classification of financial instruments at initial
recognition depends on their contractual terms and
the business model for managing the instruments.
Financial instruments are initially measured at their
fair value, except in the case of financial assets and
financial liabilities recorded at FVTPL, transaction
costs are added to, or subtracted from, this amount.
3.1.2 Subsequent measurement of financial
assets and liabilities
The Company classifies all of its financial assets based
on the business model for managing the assets and
the asset’s contractual terms, measured at either:
- Amortised cost
- Fair Value through Other Comprehensive Income
- Fair Value through Profit and Loss
The Company’s business model is not assessed on
an instrument-by-instrument basis, but at a higher
level of aggregated portfolios being the level at
which they are managed. The financial asset is held
with the objective to hold financial asset in order to
collect contractual cash flows as per the contractual
terms that give rise on specified dates to cash flows
that are solely payment of principal and interest (SPPI)
on the principal amount outstanding. Accordingly,
the Company measures Bank balances, Loans,
Trade receivables and other financial instruments at
amortised cost.
Financial liabilities are classified and measured
at amortised cost or FVTPL. A financial liability
is classified as at FVTPL if it is classified as held-
fortrading or it is a derivative or it is designated as
such on initial recognition. Other financial liabilities
are subsequently measured at amortised cost using
the effective interest method. Interest expense are
recognised in Statement of profit and loss. Any gain or
loss on derecognition is also recognised in Statement
of profit and loss.
3.1.3 Derecognition of financial assets and
liabilities
The Company derecognises a financial asset when the
contractual rights to the cash flows from the financial
asset expire, or it transfers the rights to receive the
contractual cash flows in a transaction in which
substantially all of the risks and rewards of ownership
of the financial asset are transferred or in which the
Company neither transfers nor retains substantially all
of the risks and rewards of ownership and does not
retain control of the financial asset.
A financial liability is derecognised when the obligation
in respect of the liability is discharged, cancelled or
expires. The difference between the carrying value
of the financial liability and the consideration paid is
recognised in Statement of profit and loss.
3.2 Impairment of financial assets
The Company recognises lifetime expected credit
losses (ECL) when there has been a significant
increase in credit risk since initial recognition and
when the financial instrument is credit impaired.
If the credit risk on the financial instrument has
not increased significantly since initial recognition,
the Company measures the loss allowance for that
financial instrument at an amount equal to 12 month
ECL. The assessment of whether lifetime ECL should
be recognised is based on significant increases in the
likelihood or risk of a default occurring since initial
recognition. 12 month ECL represents the portion
of lifetime ECL that is expected to result from default
events on a financial instrument that are possible
within 12 months after the reporting date.
When determining whether credit risk of a financial
asset has increased significantly since initial
recognition and when estimating expected credit
losses, the Company considers reasonable and
supportable information that is relevant and available
without undue cost or effort. This includes both
quantitative and qualitative information and analysis,
including on historical experience and forward¬
looking information.
The Company recognises lifetime ECL for loans and
other receivables. The expected credit losses on
these financial assets are estimated using a provision
matrix based on the Company’s historical credit loss
experience, adjusted for factors that are specific to
the debtors, general economic conditions and an
assessment of both the current as well as the forecast
direction of conditions at the reporting date, including
time value of money where appropriate. Lifetime ECL
represents the expected credit losses that will result
from all possible default events over the expected life
of a financial instrument.
Loss allowances for financial assets measured at
amortised cost are deducted from the gross carrying
amount of the assets.
The calculation of ECLs
In assessing the impairment of financial loans under
Expected Credit Loss (ECL) Model, the assets have
been segmented into three stages. The three stages
reflect the general pattern of credit deterioration of a
financial instrument.
Stage 1: (0-30 days) 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.
Stage 2: (31-90 days) includes loan assets that have
had a significant increase in credit risk since
initial recognition but that do not have
objective evidence of impairment.
Stage 3: (more than 90 days) includes loan assets
that have objective evidence of impairment
at the reporting date.
The Expected Credit Loss (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) Definition of default
The Company considers a financial asset to be in
"default” when a financial asset is 90 days past due
and therefore Stage 3 (credit impaired) for ECL
calculations when the borrower becomes 90 days
past due on its contractual payments.
(ii) Exposure at default
EAD is based on the amounts the Company expects
to be owed at the time of default. Forward-looking
economic information (including management
overlay) is included in determining the 12-month
and lifetime PD, EAD and LGD. The assumptions
underlying the expected credit loss are monitored
and reviewed on an ongoing basis. The EAD for Stage
3 assets is the gross principal outstanding at the date
of default.
(iii) Estimations and assumptions considered in
the ECL model
The probability of default (PD’) is the likelihood that
an obligor will default on its obligations in the future.
Ind AS 109 requires a separate PD for a 12-month
duration and lifetime duration depending on the
stage allocation of the obligor.
PD describes the probability of a loan to eventually
falling in default (>90 days past due) category. To
calculate the PD, loans are classified in three stages
based on risk profile of the loan products. PD %age
is calculated for each loan product separately and is
determined by using available historical observations.
PD for stage 1: derived as %age of all loans in stage
lmoving into stage 2 in 12 - months’
time.
PD for stage 2: derived as %age of all loans in
stage2 moving into stage 3 in the
maximum lifetime of the loans
under observation.
PD for stage 3: derived as 100% considering that
the default occurs as soon as the
loan becomes overdue for 90 days
that matches the definition of
stage 3.
(iv) Forward looking information
PDs has been converted into forward looking PD
which incorporates the forward-looking economic
outlook. For SME and Wholesale portfolio, Real GDP
(% change p.a.) is used as the macroeconomic variable.
(v) Assessment of significant increase in credit
risk
When determining whether the credit risk has
increased significantly since initial recognition, the
Company considers both quantitative and qualitative
information and analysis based on the Company’s
historical experience, including forward-looking
information. The Company considers reasonable and
supportable information that is relevant and available
without undue cost and effort.
(vi) Write Offs/Recoveries
The gross carrying amount of a financial asset is
written off when there is no realistic prospect of further
recovery. This is generally the case when the Company
determines that the debtor does not have assets or
sources of income that could generate sufficient cash
flows to repay the amounts subject to the write-off.
However, financial assets that are written off could
still be subject to enforcement activities under the
Company’s recovery procedures, taking into account
legal advice where appropriate. Any recoveries made
are recognised in profit or loss.
(vii) Undrawn commitments
These commitments pertain to the loans sanctioned
but amount remaining undrawn. The Company
can opt not to disburse the undrawn amount at its
discretion. Therefore, no provision has been created
on these commitments.
Other Financial Assets
In respect of other financial assets, the Company
applies the simplified approach of Ind AS 109, which
requires measurement of loss allowance at an amount
equal to lifetime expected credit losses. Lifetime
expected credit losses are the expected credit losses
that result from all possible default events over the
expected life of trade receivables.
3.3 Write-offs
If the amount to be written off is greater than the
accumulated loss allowance, the difference is first
treated as an addition to the allowance that is then
applied against the gross carrying amount. Any
subsequent recoveries are credited to impairment on
financial instrument in statement of profit and loss.
3.4 Fair value measurement
The Company measures its qualifying financial
instruments at fair value on each Balance Sheet date.
Fair value is the price that would be received against
sale of 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 in the
accessible principal market or the most advantageous
accessible market as applicable.
The Company uses valuation techniques that are
appropriate in the circumstances and for which
sufficient data is available to measure fair value,
maximising the use of relevant observable inputs and
minimising the use of unobservable inputs.
All assets and liabilities for which fair value is
measured or disclosed in the financial statements are
categorised within the fair value hierarchy into Level
I, Level II and Level III based on the lowest level input
that is significant to the fair value measurement as a
whole.
For assets and liabilities that are fair valued in the
financial statements on a recurring basis, the Company
determines whether transfers have occurred between
levels in the hierarchy by re-assessing categorisation
(based on the lowest level input that is significant to
the fair value measurement as a whole) at the end of
each reporting period.
For the purpose of fair value disclosures, the Company
has determined classes of assets and liabilities on the
basis of the nature, characteristics and risks of the
asset or liability and the level of the fair value hierarchy.
3.5 Foreign currency translation
Foreign currency transactions are recorded at the
exchange rate prevailing on the date of transaction.
Monetary assets and liabilities in foreign currency
existing at balance sheet date are translated at the
year end exchange rates. Exchange rate differences
arising on settlement of transaction and translation of
monetary items are recognized as income or expenses
in the year in which they arise. The long term foreign
currency monetary items are carried at the exchange
rate prevailing on the date of initial transaction.
Non- monetary items that are measured in terms of
historical cost in foreign currency are translated using
the exchange rates at the dates of initial transactions.
Non-monetary items measured at fair value in a
foreign currency are translated using the exchange
rates at the date when the fair value is determined.
Premium or discount on forward exchange contract
is amortised as income or expense over the life of
the contract. Exchange difference on such contract
is recognized in the Statement of Profit and Loss in
the reporting period in which the exchange rate
changes. Any profit or loss arising on cancellation or
renewal of forward contract is recognized as income
or expenditure during the period.
3.6 Leases
The determination of whether an arrangement is,
or contains, a lease is based on the substance of
the arrangement at the inception of the lease. The
arrangement is, or contains, a lease if fulfilment of the
arrangement is dependent on the use of a specific
asset or assets and the arrangement conveys a right
to use the asset or assets, even if that right is not
explicitly specified in an arrangement.
The Company has taken certain assets on Operating
Lease. Operating Lease is a contract, which conveys
the right to Lessee, to control the use of an identified
asset for a period of time, the lease term, in exchange
for consideration. The Company assesses whether a
contract is, or contains, a lease on inception.
The lease term is either the non-cancellable period
of the lease and any additional periods when there
is an enforceable option to extend the lease and it
is reasonably certain that the Company will extend
the term, or a lease period in which it is reasonably
certain that the Company will not exercise a right to
terminate. The lease term is reassessed if there is a
significant change in circumstances.
At commencement, or on the modification, of a
contract that contains a lease component, the
Company allocates the consideration in the contract
to each lease component on the basis of its relative
stand-alone prices.
The Company recognises a right-of-use asset and a
lease liability at the lease commencement date. The
right-of-use asset is initially measured at cost, which
comprises the initial amount of the lease liability
adjusted for any lease payments made at or before
the commencement date, plus any initial direct
costs incurred and an estimate of costs to dismantle
and remove the underlying asset or to restore the
underlying asset or the site on which it is located, less
any lease incentives received.
The right-of-use asset is amortised/depreciated using
straight-line method from the commencement date
to the end of the lease term. If the lessor transfers
ownership of the underlying asset to the Company by
the end of the lease term or if the Company expects to
exercise a purchase option, the right-of-use asset will
be depreciated over the useful life of the underlying
asset, which is determined on the same basis as the
Company’s other property, plant and equipment.
Right-of-use assets are reduced by impairment losses,
if any, and adjusted for certain re-measurements of
the lease liability.
The lease liability is initially measured at the present
value of the total lease payments due on the
commencement date, discounted using either the
interest rate implicit in the lease, ifreadily determinable,
or more usually, an estimate of the Company’s
incremental borrowing rate on the inception date for
a loan with similar terms to the lease. The incremental
borrowing rate is estimated by obtaining interest rates
from various external financing sources.
The lease liability is measured at amortised cost using
the effective interest method. It is remeasured when
there is a change in future lease payments arising
from a change in an index or rate, if there is a change
in the Company’s estimate of the amount expected
to be payable under a residual value guarantee, if the
Company changes its assessment of whether it will
exercise a purchase, extension or termination option or
if there is a revised in-substance fixed lease payment.
When the lease liability is remeasured in this way, a
corresponding adjustment is made to the carrying
amount of the right-of-use asset, or is recorded in the
statement of profit or loss if the carrying amount of
the right-of-use asset has been reduced to zero.
In accordance with Ind AS 116, the Company does
not recognise right-of-use assets and lease liabilities
for leases of low-value assets and short-term leases
i.e. leases with a lease term of 12 months or less and
containing no purchase options. Payments associated
with these leases are recognised as an expense on a
straight-line basis over the lease term.
3.7 Recognition of revenue and expenses
3.7.1 Revenues:
a. 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 calculation takes into account
all contractual terms of the financial instrument (for
example, prepayment options) and includes any fees
or incremental costs that are directly attributable to
the instrument and are an integral part of the EIR, but
not future credit losses.
The Company recognises interest income by applying
the EIR to the gross carrying amount of financial
assets other than credit-impaired assets after setting-
off of collateral amounts. In case of credit-impaired
financial assets regarded as ‘stage 3’, the Company
recognises interest income on the amortised cost
net of impairment loss of the financial asset at EIR,
except wherever not considered prudent, considering
the low probability of recovery. If the financial asset
is no longer credit-impaired, the Company reverts to
calculating interest income on a gross basis.
Interest on financial assets subsequently measured
at fair value through profit and loss, is recognized
on accrual basis in accordance with the terms of the
respective contract.
Delayed payment interest (penal interest and the
like) levied on customers for delay in repayment/non-
payment of contractual cash flows is recognised on
realisation.
b. Net gain on fair value changes
Any differences between the fair values of the financial
assets classified as fair value through the profit or loss,
held by the Company on the balance sheet date is
recognised as an unrealised gain/loss in the statement
of profit and loss. In cases there is a net gain in
aggregate, the same is recognised in "Net gains or fair
value changes” under revenue from operations and if
there is a net loss the same is disclosed "Expenses”, in
the statement of profit and loss.
c. Income from financial instruments at FVTPL
Income from financial instruments at FVTPL includes
all gains and losses from changes in the fair value
of financial assets and financial liabilities at FVTPL
except those that are held for trading.
d. The Company recognises revenue (other
than for those items to which Ind AS 109
'Financial Instruments' are applicable) based on a
comprehensive assessment model as set out in Ind
As 115 "Revenue from Contracts with Customers'
The Company identifies contract(s) with a customer
and its performance obligation under the contract,
determines the transaction price and its allocation to
performane obligation in the contract and recognises
reveune only on satisfactry completion of performance
obligations. Revenue is measured at the fai rvalue of
the consideration recieved or receivable.
i) Fees & Commission Income
Processing fees and other servicing fees is recognized
on accrual basis. The Company recognises service
and administration charges towards rendering of
additional 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.
ii) Other Income
All other income is recognised on an accrual
basis, when there is no uncertainty in the ultimate
realisation/collection.
iii) Dividend Income
Dividend Income on investments is recognized
when the Company’s right to receive the payment
is established, which is generally when shareholders
approve the dividend.
3.7.2 Expenditures:
a. Finance Costs:
Borrowing costs on financial liabilities are recognised
using the EIR.
b. Fees and commission expenses:
Fees and commission expenses which are not directly
linked to the sourcing of financial assets, such as
commission/incentive incurred on value added
services and products distribution, recovery charges
and fees payable for management of portfolio etc., are
recognised in the Statement of Profit and loss on an
accrual basis.
c. Other expenses:
Expenses are recognised on accrual basis net of the
goods and services tax, except where credit for the
input tax is not statutorily permitted.
3.8 Cash and cash equivalents
Cash and cash equivalents include cash on hand,
other short term, highly liquid investments with
original maturities of three months or less that are
readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes
in value.
3.9 Property, plant and equipment
Property plant and equipment and capital work
in progress are stated at cost, net of accumulated
depreciation and accumulated impairment losses,
if any. The cost comprises purchase price, borrowing
cost if capitalization criteria are met and directly
attributable cost of bringing the asset to its working
condition for the intended use.
Advances paid towards the acquisition of property,
plant and equipment outstanding at each balance
sheet date is classified as capital advances under
other non-financial assets and the cost of assets
not put to use before such date are disclosed under
‘Capital work-in-progress’.
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. All other repairs and
maintenance are charged to Statement of Profit and
Loss during the year in which they are incurred.
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 recognised in other income/
expense in the statement of profit and loss in the year
the asset is derecognised.
Depreciation methods, estimated useful lives
Depreciation on property, plant and equipment is
provided on straight-line method over the useful life
of the assets estimated by the management, in the
manner prescribed in Schedule II of the Companies
Act, 2013.
The residual values, useful lives and methods of
depreciation of property, plant and equipment are
reviewed at each financial year end and adjusted
prospectively, if appropriate.
Leasehold improvements are amortized over the
primary lease period, which corresponds with the
useful lives of the assets, or whichever is shorter.
Depreciation on addition or on sale/discard of an asset
is calculated pro-rata from/up to the date of such
addition or sale/discard.
3.10 Intangible assets
Intangible Assets are recognised only if it is
probable that the future economic benefits that
are attributable to assets will flow to the Company
and the cost of the assets can be measured reliably.
Intangible assets are recorded at cost and carried at
cost less accumulated depreciation and accumulated
Impairment losses, if any.
Intangible assets are amortised on a straight line basis
over their estimated useful lives. The amortisation
period and the amortisation 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 amortisation period is changed
accordingly.
Gains or losses arising from the retirement or disposal
of an intangible asset are determined as the difference
between the net disposal proceeds and the carrying
amount of the asset and recognised as income or
expense in the Statement of Profit and Loss.
Inatngible assets comprise of Computer software
(which is not an Integral part of the related hardware)
and the trademarks, and are being amortised over
the estimated useful life. The estimated useful lives of
Intangible assets are 5 years for Computer software
and 3 years for trademark
3.11 Impairment of non-financial assets
The Company assesses, at each reporting date,
whether there is an indication that an asset may be
impaired and when circumstances indicate that
the carrying value may be impaired. The Company
estimates the asset’s recoverable amount. An asset’s
recoverable amount is the higher of an asset’s or cash¬
generating unit’s (CGU) fair value less costs of disposal
and its value in use. Recoverable amount is determined
for an individual asset, unless the asset does not
generate cash inflows that are largely independent of
those from other assets or Company of assets. When
the carrying amount of an asset or CGU exceeds its
recoverable amount, the asset is considered impaired
and is written down to its recoverable amount.
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. In determining fair value less
costs of disposal, recent market transactions are taken
into account. If no such transactions can be identified,
an appropriate valuation model is used. These
calculations are corroborated by valuation multiples,
quoted share prices for publicly traded companies or
other available fair value indicators.
Impairment losses are recognised in the
statement of profit and loss
A previously recognised impairment loss is reversed
only if there has been a change in the assumptions
used to determine the asset’s recoverable amount
since the last impairment loss was recognised. The
reversal is limited so that the carrying amount of the
asset does not exceed its recoverable amount, nor
exceed the carrying amount that would have been
determined, net of depreciation, had no impairment
loss been recognised for the asset in prior years. Such
reversal is recognised in the statement of profit or
loss unless the asset is carried at a revalued amount,
in which case, the reversal is treated as a revaluation
increase.
3.12 Retirement and other employee
benefits
Short-term employee benefits:
All employee benefits payable within twelve months
of rendering the service are classified as short-term
employee benefits. Benefits such as salaries, wages
and bonus etc., are recognised in the Statement of
Profit and Loss in the period in which the employee
renders the related service.
Post employment benefits:
Defined contribution plans
A defined contribution plan is a post-employment
benefit plan under which an entity pays specified
contributions to a separate entity and has no obligation
to pay any further amounts. The Company makes
specified monthly contributions towards employee
provident fund to government administered provident
fund scheme which is a defined contribution plan. The
Company’s contribution is recognised as an expense
in the Statement of Profit and Loss during the period
in which the employee renders the related service.
Defined benefit plans
The Company provides for gratuity, a defined benefit
plan covering eligible employees. Gratuity is covered
under scheme administered by Kotak Mahindra Life
Insurance Company Limited and the contributions
made by the Company to the scheme are recognised
in the Statement of Profit and Loss. The liability
recognised in the Balance sheet in respect of defined
benefit plans is the present value of the defined
benefit obligation as at the balance sheet date less
the fair value of plan assets. The calculation of the
Company’s obligation under the plan is performed
annually by qualified independent actuary using the
projected unit credit method.
Remeasurements, comprising of actuarial gains
and losses, the effect of the asset ceiling, excluding
amounts included in net interest on the net defined
benefit liability and the return on plan assets (excluding
amounts included in net interest on the net defined
benefit liability), are recognised immediately in the
balance sheet with a corresponding debit or credit to
retained earnings through OCI in the period in which
they occur. Remeasurements are not reclassified to
profit or loss in subsequent periods.
3.13 Employee Stock Option Plan
Equity-settled share-based payments to employees
are measured at the fair value of equity stock options at
the grant date. The fair value determined at the grant
date of the equity-settled share-based payments
is expensed on a straight-line basis over the graded
vesting period, based on the Company’s estimate of
equity instruments that will eventually vest, with a
corresponding increase in equity.
The Company has created an Employee Stock Option
Plan Trust (ESOP Trust) for providing share-based
payment to its employees. The Company uses the
trust as a vehicle for distributing shares to employees
under the employee remuneration schemes. The
Company allots shares to the ESOP Trust. The
Company treats the ESOP trust as its extension and
shares held by ESOP Trust are treated as treasury
shares. Share options exercised during the reporting
period are satisfied with treasury shares.
The consideration paid for treasury shares including
any directly attributable incremental cost is presented
as a deduction from total equity, until they are
cancelled, sold or reissued. When treasury shares are
sold or reissued subsequently, the amount received is
recognized as an increase in equity, and the resulting
surplus or deficit on the transaction is transferred to/
from retained earnings.
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