2 Significant accounting policies
2.01 Revenue recognition
Interest income (Effective interest rate method)
Under Ind AS 109 interest income is recorded using the effective interest rate (EIR) method for all financial instruments measured at amortised cost, debt
instrument measured at FVOCI and debt instruments designated at FVTPL. The EIR is the rate that exactly discounts estimated future cash receipts through
the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset. The EIR (and therefore, the
amortised cost of the asset) is calculated by taking into account any discount or premium on acquisition, fees and costs that are an integral part of the EIR. The
Company recognises interest income using a rate of return that represents the best estimate of a constant rate of return over the expected life of the loan.
Hence, it recognises the effect of potentially different interest rates charged at various stages, and other characteristics of the product life cycle (including
prepayments, penalty interest and charges). If expectations regarding the cash flows on the financial asset are revised for reasons other than credit risk. The
adjustment is booked as a positive or negative adjustment to the carrying amount of the asset in the balance sheet with an increase or reduction in interest
income. The adjustment is subsequently amortised through interest income in the statement of profit and loss.
The Company calculates interest income by applying the EIR to the gross carrying amount of financial assets other than credit-impaired assets net of upfront
processing fees. When a financial asset becomes credit-impaired and is, therefore, regarded as ‘Stage 3’, the Company calculates interest income by applying the
effective interest rate to the net amortised cost of the financial asset. If the financial assets cures and is no longer credit-impaired, the Company reverts to
calculating interest income on a gross basis. For purchased or originated credit-impaired (POCI) financial assets, the Company calculates interest income by
calculating the credit-adjusted EIR and applying that rate to the amortised cost of the asset. The credit-adjusted EIR is the interest rate that, at original
recognition, discounts the estimated future cash flows (including credit losses) to the amortised cost of the POCI assets. Interest income on all trading assets
and financial assets mandatorily required to be measured at FVTPL is recognised using the contractual interest rate in net gain on fair value changes.
Dividend income
Dividend income (including from FVOCI investments) is recognised when the Company’s right to receive the payment is established, it is probable that the
economic benefits associated with the dividend will flow to the entity and the amount of the dividend can be measured reliably.
Trading income
Trading income includes all gains and losses from changes in fair value and the related interest income or expense and dividends, for financial assets and
financial liabilities held for trading.
2.02 Financial instruments
Point of recognition
Financial assets and liabilities, with the exception of loans, debt securities, deposits and borrowings are initially recognised on the trade date, i.e., the date that the
Company becomes a party to the contractual provisions of the instrument. This includes regular way trades: purchases or sales of financial assets that require
delivery of assets within the time frame generally established by regulation or convention in the market place. Loans are recognised when funds are transferred
to the customers’ account. The Company recognises debt securities, deposits and borrowings when funds reach the Company.
Initial recognition
The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments, as per
the principles of the Ind AS. 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. Trade receivables are measured at the transaction price. When the fair value of
financial instruments at initial recognition differs from the transaction price, the Company accounts mentioned below:
When the transaction price of the instrument differs from the fair value at origination and the fair value is based on a valuation technique using only inputs
observable in market transactions, the Group recognises the difference between the transaction price and fair value in net gain on fair value changes. In those
cases where fair value is based on models for which some of the inputs are not observable, the difference between the transaction price and the fair value is
deferred and is only recognised in profit or loss when the inputs become observable, or when the instrument is derecognised.
Subsequent measurement of financial liabilities
All financial liabilities of the Company are subsequently measured at amortized cost using the effective interest method. Under the effective interest method, the
future cash payments are exactly discounted to the initial recognition value using the effective interest rate. The cumulative amortization using the effective
interest method of the difference between the initial recognition amount and the maturity amount is added to the initial recognition value (net of principal
repayments, if any) of the financial liability over the relevant period of the financial liability to arrive at the amortized cost at each reporting date. The
corresponding effect of the amortization under effective interest method is recognized as interest expense over the relevant period of the financial liability. The
same is included under finance cost in the Statement of Profit and Loss.
Subsequent measurement of financial assets
For subsequent measurement, the Company classifies a financial asset in accordance with the below criteria:
i. The Company’s business model for managing the financial asset; and
ii. The contractual cash flow characteristics of the financial asset.
Based on the above criteria, the Company classifies its financial assets into the following categories:
(a) Financial assets measured at amortized cost
(b) Financial assets measured at fair value through other comprehensive income (FVTOCI)
(c) Financial assets measured at fair value through profit or loss (FVTPL)
(a) Financial assets measured at amortized cost:
A Financial asset is measured at the amortized cost if both the following conditions are met:
(i) The Company’s business model objective for managing the financial asset is to hold financial assets in order to collect contractual cash flows; and
(ii) 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.
This category applies to cash and cash equivalents, other bank balances, trade receivables, loans and other financial assets of the Company. Such financial assets
are subsequently measured at amortized cost using the effective interest method. Under the effective interest method, the future cash receipts are exactly
discounted to the initial recognition value using the effective interest rate. The cumulative amortization using the effective interest method of the difference
between the initial recognition amount and the maturity amount is added to the initial recognition value (net of principal repayments, if any) of the financial
asset over the relevant period of the financial asset to arrive at the amortized cost at each reporting date. The corresponding effect of the amortization under
effective interest method is recognized as interest income over the relevant period of the financial asset. The same is included under other income in the
Statement of Profit and Loss. The amortized cost of a financial asset is also adjusted for loss allowance, if any.
(b) Financial assets measured at FVTOCI:
A financial asset is measured at FVTOCI if both of the following conditions are met:
(i) The Company’s business model objective for managing the financial asset is achieved both by collecting contractual cash flows and selling the financial assets;
and
(ii) 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.
This category applies to certain investments in debt and equity instruments. Such financial assets are subsequently measured at fair value at each reporting date.
Fair value changes are recognized in the Statement of profit and loss under ’Other Comprehensive Income (OCI)’. However, the Company recognizes interest
income and impairment losses and its reversals in the Statement of Profit and Loss. On de-recognition of such financial assets, cumulative gain or loss
previously recognized in OCI is reclassified from equity to the Statement of Profit and Loss, except for instruments which the Company has irrevocably elected
to be classified as equity through OCI at initial recognition, when such instruments meet the definition of Equity under Ind AS 32 Financial Instruments:
Presentation and they are not held for trading. The Company has made such election on an instrument by instrument basis.
Gains and losses on these equity instruments are never recycled to profit or loss. Dividends are recognised in the statement of profit or loss as dividend income
when the right of the payment has been established, except when the Company benefits from such proceeds as a recovery of part of the cost of the instrument,
in which case, such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment.
(c) Financial assets measured at FVTPL:
A financial asset is measured at FVTPL unless it is measured at amortized cost or at FVTOCI as explained above. This is a residual category applied to all other
investments of the Company excluding investments in subsidiary and associate companies. Such financial assets are subsequently measured at fair value at each
reporting date. Fair value changes are recognized in the Statement of Profit and Loss.
Financial assets or financial liabilities held for trading:
The Company classifies financial assets as held for trading when they have been purchased or issued primarily for short-term profit making through trading
activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit
taking. Held-for-trading assets and liabilities are recorded and measured in the balance sheet at fair value. Changes in fair value are recognised in net gain on fair
value changes.
Interest and dividend income or expense is recorded in net gain on fair value changes according to the terms of the contract, or when the right to payment has
been established. Included in this classification are debt securities, equities, and customer loans that have been acquired principally for the purpose of selling or
repurchasing in the near term.
De-recognition:
(a) Financial asset:
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized (i.e. removed from the Company’s
balance sheet) when any of the following occurs:
i. The contractual rights to cash flows from the financial asset expires;
ii. The Company transfers its contractual rights to receive cash flows of the financial asset and has substantially transferred all the risks and rewards of
ownership of the financial asset. A regular way purchase or sale of financial assets has been derecognised, as applicable, using trade date accounting.
iii. The Company retains the contractual rights to receive cash flows but assumes a contractual obligation to pay the cash flows without material delay to one or
more recipients under a ’pass-through’ arrangement (thereby substantially transferring all the risks and rewards of ownership of the financial asset);
iv. The Company neither transfers nor retains substantially all risk and rewards of ownership and does not retain control over the financial asset.
In cases where Company has neither transferred nor retained substantially all of the risks and rewards of the Financial asset, but retains control of the financial
asset, the Company continues to recognize such financial asset to the extent of its continuing involvement in the financial asset. In that case, the Company also
recognizes an associated liability. The financial asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company
has retained.
On de-recognition of a financial asset, (except as mentioned in ii above for financial assets measured at FVTOCI), the difference between the carrying amount
and the consideration received is recognized in the Statement of Profit and Loss.
(b) Financial liability:
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. 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 a de-recognition 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 recognised in profit or loss.
Impairment of financial assets:
In accordance with Ind AS 109, the Company applies expected credit loss (’ECL’) model for measurement and recognition of impairment loss for financial
assets.
ECL is the weighted-average of difference between all contractual cash flows that are due to the Company in accordance with the contract and all the cash flows
that the Company expects to receive, discounted at the original effective interest rate, with the respective risks of default occurring as the weights. When
estimating the cash flows, the Company is required to consider:
- All contractual terms of the financial assets (including prepayment and extension) over the expected life of the assets.
- Cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
Trade receivables
In respect of trade receivables, 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 a financial instrument.
Other financial assets:
In respect of its other financial assets, the Company assesses if the credit risk on those financial assets has increased significantly since initial recognition. If the
credit risk has not increased significantly since initial recognition, the Company measures the loss allowance at an amount equal to 12-month expected credit
losses, else at an amount equal to the lifetime expected credit losses.
When making this assessment, the Company uses the change in the risk of a default occurring over the expected life of the financial asset. To make that
assessment, the Company compares the risk of a default occurring on the financial asset as at the balance sheet date with the risk of a default occurring on the
financial asset as at the date of initial recognition and considers reasonable and supportable information, that is available without undue cost or effort, that is
indicative of significant increases in credit risk since initial recognition. The Company assumes that the credit risk on a financial asset has not increased
significantly since initial recognition if the financial asset is determined to have low credit risk at the balance sheet date.
Offsetting of financial instruments:
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet if there is a currently enforceable legal right to offset the
recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.
2.03 Fair Value
The Company measures its financial instruments at fair value in accordance with the accounting policies mentioned above. Fair value is the price that would be
received to sell 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:
• In the principal market for the asset or liability, or
• In the absence of a principal market, in the most advantageous market for the asset or liability.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy that categorizes
into three levels, described as follows, the inputs to valuation techniques used to measure value. The fair value hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities (Level I inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
- Level 1 (unadjusted) - Those where the inputs used in the valuation are 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 regards 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 - Those where the inputs that are used for valuation and are significant, are derived from directly or indirectly observable market data available over
the entire period of the instrumenfs 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 - Those that include one or more unobservable input that is significant to the measurement as whole.
For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Company determines whether transfers have
occurred between levels in the hierarchy by re-assessing categorization at the end of each reporting period and discloses the same.
2.04 Income Taxes
Tax expense is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax.
Current tax
Current tax is the amount of income taxes payable in respect of taxable profit for a period. 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
under the Income Tax Act, 1961. Current tax is measured using tax rates that have been enacted by the end of reporting period for the amounts expected to be
recovered from or paid to the taxation authorities.
Current income tax relating to items recognised outside profit or loss is recognised outside profit or loss (either in other comprehensive income or in equity).
Current tax items are recognised in correlation to the underlying transaction either in 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.
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 profit under Income tax Act, 1961.
Deferred tax liabilities are generally recognized for all taxable temporary differences. However, in case of temporary differences that arise from initial recognition
of assets or liabilities in a transaction (other than business combination) that affect neither the taxable profit nor the accounting profit, deferred tax liabilities are
not recognized. Also, for temporary differences if any that may arise from initial recognition of goodwill, deferred tax liabilities are not recognized.
Deferred tax assets are generally recognized for all deductible temporary differences to the extent it is probable that taxable profits will be available against
which those deductible temporary difference can be utilized. In case of temporary differences that arise from initial recognition of assets or liabilities in a
transaction (other than business combination) that affect neither the taxable profit nor the accounting profit, deferred tax assets are not recognized. 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 the benefits of part or all of such deferred tax assets to be utilized.
Deferred tax assets and liabilities are measured at the tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Company has not recognised a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries and associates, and
interests in joint arrangements, except to the extent that both of the following conditions are satisfied:
- the parent, investor, joint venture or joint operator is able to control the timing of the reversal of the temporary difference; and
- it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss (either in other comprehensive income or in equity). Deferred
tax items are recognised in correlation to the underlying transaction either in OCI or directly in equity.
Presentation of current and deferred tax:
Current and deferred tax are recognized as income or an expense in the Statement of Profit and Loss, except when they relate to items that are recognized in
Other Comprehensive Income, in which case, the current and deferred tax income/expense are recognized in Other Comprehensive Income. The Company
offsets current tax assets and current tax liabilities, where it has a legally enforceable right to set off the recognized amounts and where it intends either to settle
on a net basis, or to realize the asset and settle the liability simultaneously. In case of deferred tax assets and deferred tax liabilities, the same are offset if the
Company has a legally enforceable right to set off corresponding current tax assets against current tax liabilities and the deferred tax assets and deferred tax
liabilities relate to income taxes levied by the same tax authority on the Company.
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