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Moneycontrol.com India | Accounting Policy > Finance - Leasing & Hire Purchase > Accounting Policy followed by Mahindra & Mahindra Financial Services - BSE: 532720, NSE: M&MFIN
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Mahindra & Mahindra Financial Services

BSE: 532720|NSE: M&MFIN|ISIN: INE774D01024|SECTOR: Finance - Leasing & Hire Purchase
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Accounting Policy Year : Mar '18

1.1 Basis for preparation of financial statements:

The financial statements have been prepared in accordance with the Generally Accepted Accounting Principles in India (IGAAP) under the historical cost convention as a going concern and on accrual basis, unless otherwise stated, and in accordance with the provisions of the Companies Act, 2013 and the Accounting Standards specified under section 133 of the Companies Act, 2013 (“the Act”) read with rule 7 of the Companies (Accounts) Rules 2014 (as amended).

All assets and liabilities have been classified as current and non - current as per the Company’s normal operating cycle and other criteria set out in the Schedule III of Act. Based on the nature of services and their realisation in cash and cash equivalents, the Company has ascertained its operating cycle as 12 months for the purpose of current / non-current classification of assets and liabilities.

Further, the Company follows prudential norms for Income Recognition, assets classification and provisioning for Non-performing assets as well as contingency provision for Standard assets as prescribed by The Reserve Bank of India (RBI) for Non-Banking Financial Companies and the guidelines issued by Securities and Exchange Board of India (SEBI) to the extent applicable. The Company has a policy of making additional provision on a prudential basis (refer note 34).

The accounting policies set out below have been applied consistently to the periods presented in these financial statements.

1.2 Use of estimates:

The preparation of financial statements requires the management to make judgements, estimates and assumptions considered in the reported amount of assets and liabilities (including contingent liabilities) as on the date of financial statements and the reported income and expenses during the reporting period. Management believes that the estimates used in the preparation of the financial statement are prudent and reasonable. Actual results could differ from these estimates. Any revision to accounting estimates is recognized prospectively in current and future periods.

1.3 Revenue recognition:

a) General:

Revenue is recognised as earned and accrued when it is reasonably certain that its ultimate collection will be made and the revenue is measureable.

Interest income from retail loan transactions is accounted based on applying Internal Rate of Return (‘IRR’) and from other loans is accounted based on applying the interest rate implicit in such contracts. Interest income on all other assets is recognised on time proportion basis.

Service charges and other fees on loan transactions are recognised at the commencement of the contract.

Income from operating leases is recognised in the statement of profit and loss as per contractual rentals unless another systematic basis is more representative of the time pattern in which benefit derived from the leased asset is diminished.

Delayed payment charges, fee based income and interest on trade advances, are recognised when they become measurable and when it is not unreasonable to expect their ultimate collection.

Income from bill discounting is recognised over the tenure of the instrument so as to provide a constant periodic rate of return.

Income on assets classified as Non-performing Assets, is recognised strictly in accordance with the guidelines issued by The Reserve Bank of India for Non-Banking Financial Companies. Unrealized interest recognized as income in the previous period is reversed in the month in which the asset is classified as non-performing.

b) Commission and brokerage income:

Commission and brokerage income earned for the services rendered are recognised as and when they are due.

c) Subvention income:

Subvention received from manufacturers/ dealers on vehicles financed is booked over the period of the contract. The unamortized balance is being disclosed as part of liabilities. For contracts foreclosed / securitised / assigned, balance of subvention income is recognised as income at the time of such foreclosure / securitization / assignment.

1.4 Income from securitization / assignment transactions:

a) Securitisation transactions:

Securitized receivables are de-recognized in the balance sheet when they are sold i.e. if they fully meet the true sale criteria.

Gains arising on securitisation of assets are recognised over the tenure of securities issued by Special Purpose Vehicles Trust [SPV].

Company’s contractual rights to receive the share of future interest [i.e. interest spread] in the transferred assets from the SPV is capitalised at the present value as Interest Only [I/O] strip with a corresponding liability created for unrealised gains on loan transfer transactions. The excess interest spread on the securitisation transactions are recognised in the Statement of profit and loss only when it is redeemed in cash by the SPV. Losses, if any, are recognised upfront.

b) Assignment transactions:

Receivables under the assignment transactions are de-recognized in the balance sheet when they are sold subject to the portion of loan assets which is required under the Minimum Retention Criteria and reflected as Loans and Advances [refer note 15 and 20].

The amount of profit in cash on such transactions is held under an accounting head styled as “Cash profit on loan transfer transactions pending recognition” maintained on an individual transaction basis. The amortisation of cash profit arising out of loan assignment transaction is done at every reporting period end based on the formula prescribed as per the Circular dated 21 August 2012. The unamortized portion is reflected as “Other long-term liabilities” / “Other current liabilities” [refer note 6 and 10].

1.5 Income from investments:

- Dividend from investments is accounted for as income when the right to receive dividend is established.

- Interest income is accounted on accrual basis.

- Interest income from investments made in structured instruments are accounted based on implicit rate built in such instruments.

- Profit/ loss earned on sale of investments is recognised on trade date basis. Profit or loss on sale of investments is determined on the basis of weighted average cost method. On disposal of an investment, the difference between its carrying amount and net disposal proceeds is charged or credited to the statement of profit and loss.

1.6 Fixed assets, depreciation and amortization:

a) Property, Plant and Equipments (PPE):

PPE are stated at cost of acquisition [including incidental expenses], less accumulated depreciation.

Assets given on operating lease [new and refurbished vehicles] are shown at the cost of acquisition less accumulated depreciation. These have been grouped under the head ‘Vehicles given on operating lease’ forming part of Company’s PPE in note no.12.

Assets held for sale or disposals are stated at the lower of their net book value and net realisable value

Advances paid towards the acquisition of PPE outstanding at each balance sheet date are disclosed as long-term loans and advances. Capital work in progress comprises the cost of Property, Plant and Equipments that are not ready for its intended use at the reporting date.

b) Depreciation on PPE:

Depreciation on PPE including new assets given on operating lease is charged on Straight Line Method (SLM) in accordance with the useful lives specified in Schedule II to the Companies Act, 2013 on a pro-rata basis except for following assets in respect of which useful life is taken as estimated by the management based on the actual usage pattern of the assets.

Assets costing less than Rs.5000/- are fully depreciated in the period of purchase.

Vehicles used by employees are depreciated over the period of 48 months considering this period as the useful life of vehicle for the Company.

Repossessed assets, which are primarily used vehicles, that have been capitalised for own use are depreciated at the rate of 15% on SLM over the remaining useful life of these assets. The same have been grouped under the head ‘Vehicles’ forming part of Company’s PPE in note no.12.

Used and Refurbished assets given on operating lease are depreciated at the rate of 15% on SLM over the remaining useful life of these assets.

Residual value of the assets is considered as nil reflecting the estimate of realisable values at the end of the useful life of an asset.

c) Intangible assets:

Intangible assets are stated at cost less accumulated amortization and impairment loss, if any.

d) Amortization of Intangible assets:

Intangible assets comprises of computer software which is amortized over the estimated useful life. The maximum period for such amortization is taken as 36 months based on management’s estimates of useful life.

1.7 Foreign exchange transactions and translations:

a) Initial recognition

Transactions in foreign currencies are recognised at the prevailing exchange rates between the reporting currency and a foreign currency on the transaction date.

b) Conversion

Foreign currency monetary assets and liabilities at the year-end are translated at the year-end exchange rates and the resultant exchange differences are recognised in the Statement of profit and loss.

Non-monetary items, which are measured in terms of historical cost denominated in a foreign currency, are reported using the exchange rate at the date of the transaction. Non-monetary items, which are measured at fair value or other similar valuation denominated in a foreign currency, are translated using the exchange rate at the date when such value was determined.

c) Exchange differences

The Company accounts for exchange differences arising on translation/settlement of foreign currency monetary items as below:

Realized gains and losses on settlement of foreign currency transactions are recognised in the Statement of profit and loss.

Foreign currency monetary assets and liabilities at the year-end are translated at the year-end exchange rates and the resultant exchange differences are recognised in the Statement of profit and loss.

d) Forward exchange and other derivative contracts entered into to hedge foreign currency risk of an existing assets/ liabilities

In case of forward contracts with underlying assets or liabilities, the difference between the forward rate and the exchange rate which is either a premium or discount arising at the inception of a forward contract is amortised over the life of the contract. Unamortised forward premium as at the yearend is reflected as Other long-term / short-term liabilities depending on the period over which the premium is amortised.

Any profit or loss arising on cancellation or renewal of forward exchange contracts are recognised as income or expense for the period.

As per the risk management policy, the Company has taken currency swap to cover the risk exposure on account of foreign currency loans. These transactions are structured in such a way that the Company’s foreign currency liability is crystallized at a rate of exchange prevailing on the date of taking the swap. The foreign currency loans are valued at the exchange rate prevailing on the reporting date. Foreign currency swaps are marked to market on reporting date and resultant gain or loss is charged to Statement of profit and loss.

Cross currency Interest rate swaps in the nature of hedge, taken to manage currency risk as well as interest rate risk on foreign currency liabilities, whereby variable interest rate in foreign currency is swapped for fixed interest rate in Indian rupees or vice-versa. Such Interest rate swaps are marked to market at each reporting date and resultant gain or loss is recognised in Statement of profit and loss.

1.8 Investments:

Investments are classified into non-current investments and current investments. Investments which are intended to be held for one year or more, based on intention of management at the time of purchase, are classified as non-current investments and investments which are intended to be held for less than one year are classified as current investments. Non-current investments in structured instruments are carried at cost less principal repayments till reporting date.

Non-current investments are carried at cost comprising of acquisition and incidental expenses less diminution in value. Provision for diminution in value of investments, if any, is made if in the opinion of management, such diminution is other than temporary, determined separately for each individual non-current investment.

Any premium on acquisition is amortised over the remaining maturity of the security on a straight line basis. Such amortisation of premium is adjusted against interest income from investments. The book value of the investments is reduced to the extent of amount amortised during the relevant accounting period.

Current investments are carried at lower of cost and net realisable value. The comparison of cost and net realisable value is done separately in respect of each investment.

1.9 Loans against assets:

Loans against assets are stated at agreement value net of instalments received less unmatured finance charges.

1.10 Employee benefits:

a) Contribution to provident fund and National Pension Scheme -

Company’s contribution paid/payable during the year to provident fund and National Pension Scheme is recognised in the Statement of profit and loss.

b) Gratuity -

The Company provides for the gratuity, a defined benefit retirement plan covering all employees. The plan provides for lump sum payments to employees upon death while in employment or on separation from employment after serving for the stipulated period mentioned under ‘The Payment of Gratuity Act, 1972’. The Company accounts for liability of future gratuity benefits based on an external actuarial valuation on projected unit credit method carried out for assessing liability as at the reporting date. Actuarial gains/losses are immediately taken to the Statement of profit and loss and are not deferred.

c) Superannuation -

The Company makes contribution to the Superannuation scheme, a defined contribution scheme, administered by Life Insurance Corporation of India, which are charged to the Statement of profit and loss. The Company has no obligation to the scheme beyond its contributions.

d) Leave encashment / compensated absences / sick leave -

The Company provides for the encashment / availment of leave with pay subject to certain rules. The employees are entitled to accumulate leave subject to certain limits for future encashment / availment. The liability is provided based on the number of days of unutilized leave at each balance sheet date on the basis of an independent actuarial valuation.

1.11 Borrowing costs:

Borrowing costs include interest, brokerage on fixed deposits mobilised, discounting charges on commercial papers/zero coupon nonconvertible debentures issued and exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to the interest cost.

Borrowing costs are charged to the Statement of profit and loss. Incidental expenditure incurred in connection with the arrangement of borrowings is amortised over the tenure of the respective borrowings.

1.12 Commercial papers and zero coupon nonconvertible debentures:

Commercial papers and zero coupon nonconvertible debentures are recognised at redemption value, net of unamortized discounting charges. The difference between redemption value and issue value is amortised on a time proportion basis and is included under finance costs.

1.13 Taxation - Current and deferred tax:

Tax expense for the period, comprising current tax and deferred tax, are included in the determination of the net profit or loss for the period.

a) Current tax:

Current tax is measured at the amount expected to be paid to the tax authorities in accordance with the provisions of the Income Tax Act, 1961.

b) Deferred tax:

Deferred tax on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods is accounted for using the tax rates and tax laws enacted or substantively enacted as on the balance sheet date. Deferred tax assets arising on account of unabsorbed depreciation or carry forward of tax losses are recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised. Other deferred tax assets are recognised only when there is a reasonable certainty of their realisation.

1.14 Securities issue expenses:

Expenses incurred in connection with fresh issue of Share capital and public issue of debt securities are adjusted against Securities premium reserve as per the provisions of section 52 of the Act.

1.15 Impairment of assets:

The carrying value of assets/cash generating units at each balance sheet date are reviewed for impairment. If any indication of impairment exists, the recoverable amount of such assets is estimated and impairment is recognised, if the carrying amount of these assets exceeds their recoverable amount. The recoverable amount is the greater of the net selling price and their value in use. Value in use is arrived at by discounting the future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life to their present value based on an appropriate discount factor. The impairment loss is recognized in the statement of profit and loss. If, at the balance sheet date there is an indication that a previously assessed impairment loss no longer exists, the recoverable amount is reassessed and the asset is reflected at the recoverable amount subject to a maximum of the depreciable historical cost.

1.16 Provisions and contingent liabilities:

Provisions are recognised when there is a present obligation as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and there is a reliable estimate of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.

Contingent liabilities are disclosed when there is a possible obligation arising from past events, the existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the Company or a present obligation that arises from past events where it is either not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount cannot be made.

When there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made.

1.17 Provisioning / Write-off on assets:

The provisioning / write-off on overdue assets is as per the management estimates, subject to the minimum provision required as per Master Direction-Non Banking Financial Company-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

1.18 Employee Stock Compensation Costs:

Measurement and disclosure of the Employee Share-based Payment plans is done in accordance with Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 and the Guidance Note on Accounting for Employee Share-based Payments, issued by the Institute of Chartered Accountants of India. The Company measures compensation cost relating to employee stock options using the Intrinsic value method (i.e. excess of market value of shares over the exercise price of the option at the date of grant). Compensation cost is amortized over the vesting period of the option on a straight line basis. The options which have lapsed are reversed by a credit to Employee compensation cost, equal to the amortised portion of value of lapsed portion and credit to Deferred employee compensation cost equal the unamortised portion.

1.19 Leases:

Where the Company is the lessee -

Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of profit and loss on a straight line basis over the tenure of the lease.

Where the Company is the lessor -

The Company has given certain vehicles on lease where it has substantially retained the risks and rewards of ownership and hence these are classified as operating leases. These assets given on operating lease are included in PPE. Lease income is recognised in the Statement of profit and loss as per contractual rental unless another systematic basis is more representative of the time pattern in which the benefit derived from the leased asset is diminished. Cost including depreciation are recognized as an expense in the Statement of profit and loss. Initial direct cost are recognised immediately in Statement of profit and loss.

1.20 Earnings Per Share:

Basic earnings per share is calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. Earnings considered in ascertaining the Company’s earnings per share is the net profit for the period after deducting preference dividends and any attributable tax thereto for the period. The weighted average number of equity shares outstanding during the period and for all periods presented is adjusted for events, such as bonus shares, sub-division of shares etc. that have changed the number of equity shares outstanding, without a corresponding change in resources. For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders is divided by the weighted average number of equity shares outstanding during the period, considered for deriving basic earnings per share and weighted average number of equity shares that could have been issued upon conversion of all dilutive potential equity shares.

Source : Dion Global Solutions Limited
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