Note-1 A Corporate Information & Significant Accounting Policies
A. Corporate Information
The stand-alone financial statements of "Chennai Petroleum Corporation Limited" ("the Company" or "CPCL") are for the year ended 31 March 2017. The Company is a public company domiciled in India and is incorporated under the provisions of the Companies Act applicable in India. Its shares are listed on two recognized stock exchanges in India. The registered office of the Company is located at 536, Anna Salai, Teynampet, Chennai- 600018. (CIN - L40101 TNI 965GOI005389)
CPCL is in the business of refining crude oil to produce & supply various petroleum products.
Information on related party relationships of the Company is provided in Note 34
The stand-alone financial statements were approved for issue in accordance with a resolution of the directors on May 15 2017.
B. Standards issued but not yet effective
The MCA has notified Companies (Indian Accounting Standards) (Amendment) Rules, 2017 to amend Ind AS 7 ‘Statement of Cash flows'''' and Ind AS 102 “Share-based payment". They shall come into force w.e.f 1st April 2017. These have not been adopted early by the Company and accordingly, have not been considered in the preparation of the financial statements. The Company intends to adopt these standards, if applicable, when they become effective. The information that is expected to be relevant to the financial statements is provided below.
- Amendments to Ind AS 7, Statement of Cash flows
The amendment to Ind AS 7 introduces an additional disclosure that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. Management is of the view that the amendment will have impact only on disclosures in relation to cash flow statement within the financial statements.
- Amendments to Ind AS 102, Share Based payments
The amendment is not relevant for the Company as it does not have any cash-settled share based payments or share based payments with a net-settled feature.
C. Significant Accounting Policies 1. BASIS OF PREPARATION
1.1. The financial statements have been prepared in accordance with Indian Accounting Standards (Ind AS) notified under the Companies (Indian Accounting Standards) Rules, 2015 and with Companies (Indian Accounting Standards) (Amendment) Rules, 2016 and comply in all material aspects with the relevant provisions of the Act.
For all periods up to 31st March 2015, the financial statements were prepared under historical cost convention in accordance with the accounting standards specified under Section 133 of the Companies Act, 2013, read with Rule 7 of the Companies (Accounts) Rules, 2014. These financial statements for the year ended 31 March 2017 are the first the Company has prepared in accordance with Ind AS. Refer to Note-42 for information on how the Company adopted Ind AS.
The stand-alone financial statements have been prepared on a historical cost basis, except for the following assets and liabilities which have been measured at fair value:
Derivative financial instruments, and
Certain financial assets and liabilities measured at fair value (refer accounting policy regarding financial instruments)
The stand-alone financial statements are presented in Indian Rupees (INR) and all values are rounded to the nearest lakhs (INR 00,000), except when otherwise indicated.
2. FIXED ASSETS
2.1. Property, plant and equipment
2.1.1. The cost of an item of property, plant and equipment (PPE) is recognized as an asset if, and only if:
(i) it is probable that future economic benefits associated with the item will flow to the entity; and
(ii) the cost of the item can be measured reliably.
2.1.2. Property, plant and equipment are stated at acquisition cost less accumulated depreciation / amortization and cumulative impairment.
2.1.3. Technical know-how / license fee relating to plants/facilities and specific software that are integral part of the related hardware are capitalized as part of cost of the underlying asset.
2.1.4. Spare parts are capitalized when they meet the definition of PPE, i.e., when the Company intends to use these during more than a period of 12 months.
2.1.5. The acquisition of property, plant and equipment, directly increasing the future economic benefits of any particular existing item of property, plant and equipment, which are necessary for the Company to obtain the future economic benefits from its other assets, are recognized as assets.
2.1.6. On transition to Ind AS, the Company has elected to continue with the carrying value of all of its property, plant and equipment recognized as at 1st April 2015 measured as per the previous GAAP and use that carrying value as the deemed cost of the capital work in progress and property, plant and equipment.
2.2. Capitalization of Construction period expenses:
2.2.1. Revenue expenses exclusively attributable to projects incurred during construction period are capitalized.
2.2.2. Financing cost incurred during construction period on loans specifically borrowed and utilized for projects is capitalized on quarterly basis up to the date of capitalization.
2.2.3. Financing cost, if any, incurred on General Borrowings used for projects is capitalized at the weighted average cost. The amount of such borrowings is determined on quarterly basis.
2.3. Capital Stores included in CWIP
2.3.1. Capital stores are valued at cost. Specific provision is made for likely diminution in value, wherever required.
2.4. Intangible assets
2.4.1. Technical know-how / license fee relating to production process and process design are recognized as Intangible Assets and amortized on a straight line basis over the life of the underlying plant/facility.
2.4.2. Expenditure incurred on Research & Development, other than on capital account, is charged to revenue.
2.4.3. Computer software/licenses, other than specific software that are integral part of the related hardware, are capitalized as Intangible Asset and amortized over a period of three years beginning from the quarter in which such software is capitalized.
2.4.4. Right of ways with indefinite useful lives are not amortized, but are tested for impairment annually at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
2.4.5. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses.
3.1.3. Operating Leases as a less or
Rental income from operating lease is recognized on a straight-line basis over the term of the relevant lease except where-
(i) Another systematic basis is more representative of the time pattern of the benefit derived from the asset taken or given on lease.; or
(ii) The payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor''''s expected inflationary cost increases.
3.1.4. Finance leases as lessee
(i) Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the statement of profit and loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Company''''s general policy on the borrowing costs. Contingent rentals are recognized as expenses in the periods in which they are incurred.
(ii) A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the ester mated useful 11 life of the asset and the lease term.
3.1.5. 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 fulfillment 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.
For arrangements entered into prior to 1st April 2015, the Company has determined whether the arrangement contain lease on the basis of facts and circumstances existing on the date of transition.
4. IMPAIRMENT OF NON-FINANCIAL ASSETS
Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset''''s recoverable amount. An asset''''s recoverable amount is the higher of an asset''''s or cash-generating units (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 groups of assets.
Impairment loss is recognized when the carrying amount of an asset exceeds 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.
Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company''''s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of 10 years. For longer periods, a long term growth rate is calculated and applied to project future cash flows after the fifth year. To estimate cash flow projections beyond periods covered by the most recent budgets/forecasts, Company extrapolates cash flow projections in the budget using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.
An assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Company
estimates the asset''''s or CGU’s recoverable amount. A previously recognized 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 recognized. 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 recognized for the asset in prior years.
5. BORROWING COSTS
5.1. Borrowing costs that are attributable to the acquisition and construction of the qualifying asset are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are charged to revenue.
6. FOREIGN CURRENCY TRANSACTIONS/TRANSLATION
6.1. The Company''''s financial statements are presented in Indian Rupee (f), which is also its functional currency.
6.2. Transactions in foreign currency are initially recorded at exchange rates prevailing on the date of transactions.
6.3. Monetary items denominated in foreign currencies (such as cash, receivables, payables etc) outstanding at the end of reporting period, are translated at exchange rates prevailing as at the end of reporting period.
6.4. Non-monetary items denominated in foreign currency, (such as investments, fixed assets etc.) are valued at the exchange rate prevailing on the date of the transaction, other than those measured at fair value.
6.5. Any gains or losses arising due to differences in exchange rates at the time of translation or settlement are recognized in statement of profit or loss either under the head foreign exchange fluctuation or interest cost, as the case may be.
7.1. Raw Materials & Stock-in-Process
7.1.1. Crude oil is valued at cost determined on weighted average basis or net realizable value, whichever is lower.
7.1.2. Crude oil in Transit is valued at cost or net realizable value, whichever is lower.
7.1.3. Stock in Process is valued at raw material cost plus fifty percent conversion costs as applicable or net realizable value, whichever is lower.
7.2. Finished Products and Stock-in-Trade
7.2.1. Finished products and stock in trade are valued at cost determined on ''''First in First Out'''' basis or net realizable value, whichever is lower. Cost of Finished Products produced is determined based on raw material cost and processing cost.
7.3. Stores and Spares
7.3.1. Stores and spares are valued at weighted average cost.
7.3.2. In case of declared surplus/obsolete stores and spares, provision is made for likely loss on sale/disposal and charged to revenue. Further, provision is made to the extent of 97 per cent of the value of non moving inventory of stores and spares (excluding maintenance, repair & operation items, pumps and compressors) which have not moved for more than six years. Stores and spares in transit are valued at cost.
7.3.3. Spent catalysts are valued at lower of the weighted average cost or net realizable value.
8. PROVISIONS, CONTINGENT LIABILITIES AND COMMITMENTS
8.1.1. Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
8.1.2. When the Company expects some or all of a provision to be reimbursed, reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the statement of profit and loss net of any reimbursement.
8.1.3. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
8.2. Contingent Liabilities
8.2.1. Show-cause Notices issued by various Government Authorities are not considered as Obligation.
When the demand notices are raised against such show-cause notices and are disputed by the Company, these are classified as disputed obligations.
8.2.2. The treatment in respect of disputed obligations are as under:
a) a provision is recognized in respect of present obligations where the outflow of resources is probable;
b) all other cases are disclosed as contingent liabilities unless the possibility of outflow of resources is remote.
8.3. Capital Commitments
Estimated amount of contracts remaining to be executed on capital account are considered for disclosure.
9. REVENUE RECOGNITION
9.1. Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is received. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duties collected on behalf of the government.
9.2. The recovery of excise duty flows to the Company on its own account and hence, revenue includes excise duty. However, sales tax/ value added tax (VAT) is not received by the Company on its own account. Rather, it is tax collected on value added to the commodity by the seller on behalf of the government. Accordingly, it is excluded from revenue.
9.3. The specific recognition criteria described below must also be met before revenue is recognized:
(i) Sale of goods
Revenue is recognized when the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates.
The timing of the transfer of risks and rewards varies depending on the individual terms of the sales agreement.
(ii) Interest income
For all debt instruments measured either at amortized cost or at fair value through other comprehensive income, interest income is recorded using the effective interest rate (EIR). EIR is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the gross carry i ng amount of the financial asset.
Dividend income is recognized when the Company''''s right to receive dividend is established.
Claims (including interest on outstanding) are recognized at cost when there is reasonable certainty regarding its ultimate collection.
9.4. Claims on Petroleum Planning and Analysis Cell (Formerly known as Oil Coordination Committee)/ Government arising on account of erstwhile Administered Pricing Mechanism / notified schemes are booked on acceptance in principle thereof. Such claims and provisions are booked on the basis of available instructions /clarifications subject to final adjustment as per separate audit.
10. EXCISE DUTY
10.1. Excise duty is accounted on the basis of both, payments made in respect of goods cleared as also provision made for goods lying in stock. Value of stock includes excise duty payable / paid on finished goods.
11. TAXES ON INCOME
11.1. Current income tax
Provision for current tax is made as per the provisions of the Income Tax Act, 1961.
Current income tax assets and liabilities 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, at the reporting date.
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). 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.
11.2. Deferred tax
11.2.1. Deferred tax is recognized using the Balance Sheet method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences.
Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized.
Deferred tax assets and liabilities are measured based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
11.2.2. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
11.2.3. Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss (either in other comprehensive income or in equity).
11.2.4. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
12. EMPLOYEE BENEFITS
12.1. Short Term Benefits
Short Term Employee Benefits are accounted for in the period during which the services have been rendered.
12.2. Post-Employment Benefits and Other Long Term Employee Benefits
12.2.1. The Company''''s contribution to the Provident Fund is remitted to separate trust established for this purpose based on a fixed percentage of the eligible employee''''s salary and charged to Statement of Profit and Loss/CWIP. Shortfall, if any, in the fund assets, based on the Government specified minimum rate of return, is made good by the Company and charged to Statement of Profit and Loss/CWI P.
12.2.2. The Company operates defined benefit plan for Gratuity and Post Retirement Medical Benefits. The cost of providing such defined benefits is determined using the projected unit credit method of actuarial valuation made at the end of the year. Out of these plans, Gratuity is administered through a trust.
Obligations on other long term employee benefits viz. Compensated absences and Long Service Awards are provided using the projected unit credit method of actuarial valuation made at the end of theyear.
12.2.3. The Company also operates a defined contribution scheme for Pension benefits for its employees and the contribution is remitted to a separate Trust.
12.3. Termination Benefits
Payments made under Voluntary Retirement Scheme are charged to Statement of Profit and Loss on incurrence.
12.4. Remeasurement of Post-Employment defined benefit plans
Remeasurements, comprising of actuarial gains and losses, the effect of the changes in 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 recognized 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.
Past service costs are recognized in profit or loss on the earlier of:
(i) the date of the plan amendment or curtailment, and
(ii) the date that the Company recognizes related restructuring costs
Net interest is calculated by applying the discount rate to the net benefit liability or asset. The Company recognizes the following changes in the net defined benefit obligation as an expense in the statement of profit and loss:
- Service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-routine settlements; and
- Net interest expense or income
13.1. Capital Grants
In case of depreciable assets, the cost of the asset is shown at gross value and grant thereon is treated as Capital Grants which are recognized as income in the Statement of Profit and Loss over the period and in the proportion in which depreciation is charged.
13.2. Revenue Grants
Government grants are recognized where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. Government grants is recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.
In case of waiver of duty under EPCG license, such grant is considered as revenue grant and recognized in "Other Operating Revenue" in proportion of export obligations actually fulfilled during the accounting period.
When the Company receives grants of non-monetary assets, the asset and the grant are recorded at fair value amounts and released to profit or loss over the expected useful life in a pattern of consumption of the benefit of the underlying asset.
When loans or similar assistance are provided by governments or related institutions, with an interest rate below the current applicable market rate or NIL interest rate, the effect of this favorable interest is regarded as a government grant. The loan or assistance is initially recognized and measured at fair value and the government grant is measured as the difference between the initial carrying value of the loan and the proceeds received. The loan is subsequently measured as per the accounting policy applicable to financial liabilities.
14. CURRENT VERSUS NON-CURRENT CLASSIFICATION
14.1. The Company presents assets and liabilities in the balance sheet based on current/ non-current classification.
14.2. An asset is treated as current when it is:
Expected to be realized or intended to be sold or consumed in normal operating cycle Held primarily for the purpose of trading
Expected to be realized within twelve months after the reporting period, or
Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period
14.3. All other assets are classified as non-current.
14.4. A liability is current when:
It is expected to be settled in normal operating cycle It is held primarily for the purpose of trading
It is due to be settled within twelve months after the reporting period, or
There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period
14.5. The Company classifies all other liabilities as non-current.
14.6. Deferred tax assets and liabilities are classified as non-current assets and liabilities.
15. FINANCIAL INSTRUMENTS
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
15.1. Financial assets
15.1.1. Initial recognition and measurement
All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset.
15.1.2. Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in four categories:
Financial Assets at amortized cost
Debt instruments at fair value through other comprehensive income (FVTOCI)
Equity instruments at fair value through other comprehensive income (FVTOCI)
Financial assets and derivatives at fair value through profit or loss (FVTPL)
15.1.3. Financial Assets at amortized cost
A financial asset is measured at the amortized cost if both the following conditions are met:
a) The asset is held within a business model whose objective is to hold assets for collecting contractual cash flows, and
b) Contractual terms of the asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest rate (EIR) method. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the profit or loss. The losses arising from impairment are recognized in the profit or loss. This category generally applies to trade and other receivables.
15.1.4. Debt instrument at FVTOCI
A ‘debt instrument'''' is classified as at the FVTOCI if both of the following criteria are met:
a) the objective of the business model is achieved both by collecting contractual cash flows and selling the financial assets, and
b) the asset''''s contractual cash flows represent solely payments of principal and interest (SPPI).
Debt instruments included within the FVTOCI category are measured initially as well as at each reporting date at fair value. Fair value movements are recognized in the other comprehensive income (OCI).
However, the Company recognizes interest income, impairment losses & reversals and foreign exchange gain or loss in the P&L. On derecognition of the asset, cumulative gain or loss previously recognized in OCI is reclassified from the equity to P&L. Interest earned whilst holding FVTOCI debt instrument is reported as interest income using the EIR method.
15.1.5. Equity instrument at FVTOCI
A. Equity investments (Other than JVs and associates)
All equity investments in scope of Ind AS 109 are measured at fair value. The Company has made an irrevocable election to present subsequent changes in the fair value in other comprehensive income, excluding dividends. The classification is made on initial recognition/transition and is irrevocable.
There is no recycling of the amounts from OCI to P&L, even on sale of investment. However, the Company will transfer the cumulative gain or loss within equity.
B. Equity investments in JVs and associates
Investment in joint ventures and associates are accounted for at cost in standalone financial statements.
15.1.6. Debt Instruments and derivatives at FVTPL
FVTPL is a residual category for debt instrument. Any debt instrument, which does not meet the criteria for categorization as at amortized cost or as FVTOCI, is classified as at FVTPL.
This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by Ind AS 109.
Debt instruments included within the FVTPL category are measured at fair value with all changes recognized in the P&L. Interest income on such instruments has been presented under interest income.
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e. removed from the balance sheet) when:
- The rights to receive cash flows from the asset have expired, or
- The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ''''pass-through'''' arrangement and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Company continues to recognize the transferred asset to the extent of the Company''''s continuing involvement. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.
15.2. 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 on the following financial assets and credit risk exposure:
a. Financial assets that are debt instruments, and are measured at amortized cost e.g., loans, debt securities, deposits, trade receivables and bank balance; and
b. Lease receivables under Ind AS 17
The Company follows ''''simplified approach'''' for recognition of impairment loss allowance, if any, on trade receivables.
The application of simplified approach does not require the Company to track changes in credit risk. Rather, it recognizes impairment loss allowance based on lifetime ECLs at each reporting date, right from its initial recognition.
For recognition of impairment loss on other financial assets and risk exposure, the Company determines that whether there has been a significant increase in the credit risk since initial recognition. If credit risk has not increased significantly, 12-month ECL is used to provide for impairment loss. However, if credit
risk has increased significantly, lifetime ECL is used. If, in a subsequent period, credit quality of the instrument improves such that there is no longer a significant increase in credit risk since initial recognition, then the entity reverts to recognizing impairment loss allowance based on 12-month ECL.
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 a portion of the lifetime ECL which results from default events that are possible within 12 months after the reporting date.
As a practical expedient, the Company uses a provision matrix to determine impairment loss allowance on portfolio of its trade receivables. The provision matrix is based on its historically observed default rates over the expected life of the trade receivables and is adjusted for forward-looking estimates. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed.
ECL impairment loss allowance (or reversal) recognized during the period is recognized as income/ expense in the statement of profit and loss (P&L). The balance sheet presentation for various financial instruments is described below:
Financial assets measured as at amortized cost: ECL is presented as an allowance, i.e., as an integral part of the measurement of those assets in the balance sheet. The allowance reduces the net carrying amount. Until the asset meets write-off criteria, the Company does not reduce impairment allowance from the gross carrying amount.
Debt instruments measured at FVTOCI: Since financial assets are already reflected at fair value, impairment allowance is not further reduced from its value. Rather, ECL amount is presented as ''''accumulated impairment amount'''' in the OCI.
15.3. Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss and financial liabilities at amortized cost, as appropriate.
All financial liabilities are recognized initially at fair value and, in the case of liabilities measured at amortized cost net of directly attributable transaction costs.
The Company''''s financial liabilities include trade and other payables and loans and borrowings including derivative financial instruments.
The measurement of financial liabilities depends on their classification, as described below:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred forthe purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by Ind AS 109.
Gains or losses on liabilities held for trading are recognized in the profit or loss.
Financial liabilities at amortized cost
Financial liabilities that are not held-for-trading and are not designated as at FVTPL are measured at amortized cost at the end of subsequent accounting periods. The carrying amounts of financial liabilities that are subsequently measured at amortized cost are determined based on the effective interest method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statement of profit and loss.
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When 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 the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of profit or loss.
If the hybrid contract contains a host that is a financial asset within the scope of Ind AS 109, the Company does not separate embedded derivatives. Rather, it applies the classification requirements contained in Ind AS 109 to the entire hybrid contract. Derivatives embedded in all other host contracts are accounted for as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contracts and the host contracts are not held for trading or designated at fair value though profit or loss. These embedded derivatives, if any, are measured at fair value with changes in fair value recognized in profit or loss, unless designated as effective hedging instruments. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss.
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 recognized amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.
Derivative instrument Initial recognition / Subsequent measurement
The Company uses derivative financial instruments, such as forward currency contracts, to hedge its foreign currency risks. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
Commodity contracts, if any, those are entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company''''s expected purchase, sale or usage requirements are held at cost.
Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss. 16. FAIR VALUE MEASUREMENT
16.1. The Company measures financial instruments, such as, derivatives at fair value at each balance sheet date.
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.
16.2. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
16.3. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities
Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
In case of Level 3 valuations, external values are also involved in some cases.
Forthe 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 as explained above.