IMPAIRMENT TESTING OF GOODWILL
Goodwill acquired through various business combinations has been allocated to the three Cash Generating Units (CGUs) as below.
1 Pantaloons CGU
2 Madura Fashion & Lifestyle CGU
3 Forever 21 CGU Pantaloons CGU
During the year ended March 31, 2013, the company acquired the Pantaloons Format Business (''''Pantaloons Business'''') from Future Retail Limited ("FRL") which consisted of fashion retail business operating under the brand name "Pantaloons". Pantaloons is a leading large format fashion retailer engaged in retailing of apparel and accessories. The business thus acquired is Pantaloons CGU.
Madura Fashion & Lifestyle CGU
Pursuant to the Composite Scheme of Arrangement amongst the Company, Aditya Birla Nuvo Limited ("ABNL"), Madura Garments Lifestyle Retail Company Limited ("MGLRCL") and their respective shareholders and creditors ("Composite Scheme"), Madura Undertaking of ABNL and MGL Retail Undertaking of MGLRCL ("demerged undertakings") were transferred to the Company on a going concern basis w.e.f. April 1, 2015 Madura Undertaking is a leading premium branded apparel player in India with brands like Louis Philippe, Van Heusen, Allen Solly and Peter England and MGL Retail Undertaking is primarily engaged in promoting lifestyle brands and having licenses to retail various international brands like Armani Collezioni, Hugo Boss, Versace Collection and many more under one roof ''''The Collective''''. Both these divisions jointly comprise the Madura Fashion & Lifestyle CGU.
Forever 2 CGU
The Company has, effective July 1, 2016, acquired exclusive franchise rights for the Indian market of Forever 21 business comprising of the operating retail stores in India for sale of clothing, artificialjewellery, accessories and related merchandise under the brand name "Forever 21" (F21) and is considered as separate CGU.
For the purpose of Segment reporting, Madura Fashion & Lifestyle and Forever 21 CGUs have been aggregated to form one segment in accordance with Ind AS 108.
Disclosures with respect to Goodwill allocated to Unit which is significant with the entity''''s total carrying amount of goodwill
Value in use calculation of CGUs
The recoverable amount of the CGU, as at March 31, 2017, given below has been determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a three year period. The pre-tax discount rate is applied to cash flow projections for impairment testing during the current year. The Company has estimated Free Cash Flow for the year ending March 31, 2020 and then have considered that as a base to arrive at the value of perpetuity beyond March 31, 2020 based on the H model. It was concluded that the fair value less costs of disposal does not exceed the value in use. As a result of this analysis the management did not identify impairment for these CGUs,
Key assumptions used for value in use calculations Discount rates:
Discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation of each CGU is derived from its weighted average cost of capital (WACC). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return by the Company''''s investment. The cost of debt is based on the interest-bearing borrowings of the Company. Adjustments to the discount rate are made to factor in the specific amount and timing of the future tax flows in order to reflect a pre-tax discount rate.
Growth rate estimates:
Rates are based on published industry research. Long term growth rate is based on Company''''s projection of business and growth of the industry in which the Company is operating.
Sensitivity to changes in assumption Discount rate assumption
A change in the discount rate by 100 basis points will result in change of Rs. 101,307 Lakh in the carrying value, Growth rate assumption
The management recognize s the change in fashion industry and the possibility of new entrants which can have an impact on growth rate assumptions. Change in growth rate by 100 basis points will result in change of Rs. 80,499 Lakh in the carrying value.
(i) Terms / rights attached to equity shares
The Company has only one class of equity shares having face value of Rs. 10/- per share. Each holder of equity shares is entitled to one vote per share. The dividend proposed by the Board of Directors, if any, is subject to the approval of the shareholders in the ensuing Annual General Meeting.
In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution to all preference shareholders. The distribution will be in proportion to the number of the equity shares held by the shareholders.
Details of security
1. Term loans from Axis Bank is secured by way of first pari passu charge on present and future movable and immovable Fixed Assets of Company''''s Pantaloons Division. Second pari passu charge on current assets of Company''''s Pantaloons Division.
2. Term loans from SBI is secured by way of first pari passu charge on the entire Fixed Assets, of Company''''s Pantaloons Division, both present and future with all other term lenders, first pari passu charge on long term lease deposits, of Company''''s Pantaloons Division, both present and future with all other term lenders. Second pari passu charge on all current assets, of Company''''s Pantaloons Division, both present and future,
3. Term loan from SBI (TUF) is secured by way of first pari passu charge created by mortgage of immovable properties of the Company''''s Madura Garment Export Plants at Kasaba Hobli, Karnataka and hypothecation of movable Fixed Assets of the Company at these plants.
4. Term loan from IDBI Bank (TUF) is secured by way of first pari passu charge created by hypothecation of movable Fixed Assets of the Company''''s Madura Garment Export Plant at Kasaba Hobli, Karnataka.
5. Term loan from HDFC Bank (TUF) is secured by way of first pari passu charge created by hypothecation of movable plant and machinery of the Company''''s Madura Clothing Plant at Marasur Village, Karnataka,
6. Term loan from HDFC Bank (TUF) is secured by way of first pari passu charge on movable assets of the units CCL and FCL (# 527 & # 324) Marasur Village, Karnataka.
7. Term loan from SBI (TUF) is secured by way of first pari passu charge created by hypothecation of movable plant and machinery of the Company''''s MG Lifestyle Clothing Plant at Bangalore.
8. Term loan from EXIM Bank (TUF) is secured by way of first pari passu charge created by mortgage of immovable properties of the Company''''s Madura Garment Export Plant at Parappana Agrahara, Karnataka and hypothecation of movable Fixed Assets of the Company at these plants.
9. Term loan from EXIM Bank (TUF) is secured by way of first pari passu charge created by mortgage of immovable properties of the Company''''s Madura Clothing Plant at Marasur Village, Karnataka and hypothecation of movable Fixed Assets of the Company at these plants.
Details of Preference Shares
10. Redeemable Cumulative Preference Shares: 5,00,000 8% Redeemable Cumulative Preference Shares of Rs. 10/- each are entitled to a cumulative dividend @ 8% p.a. The dividend proposed by the Board of Directors, if any, is subject to the approval of the shareholders in the ensuing Annual General Meeting. These preference shares are redeemable by the Company at any time after completion of ten years from March 31, 2009, at the face value. In the event of liquidation of the Company before redemption of preference shares, the holders of preference shares will have priority over the holders of equity shares in the payment of dividend and repayment of capital.
11. Redeemable Cumulative Preference Shares: 500 6% Redeemable Cumulative Preference Shares of Rs. 100/each are entitled to a cumulative dividend @ 6% p.a. The dividend proposed by the Board of Directors, if any, is subject to the approval of the shareholders in the ensuing Annual General Meeting. These preference shares are redeemable by the Company at any time after completion of ten years from October 14, 2009 at the face value. In the event of liquidation of the Company before redemption of preference shares, the holders of preference shares will have priority over the holders of equity shares in the payment of dividend and repayment of capital.
* Commercial papers are shown net of unamortized discounting charges,
# The foreign currency loans from banks were transferred from ABNL pursuant to the Scheme of Demerger (Refer Note - 44).
TUF - Technology Up gradation Fund
EARNINGS PER SHARE (EPS)
Basic EPS amounts are calculated by dividing the profit for the year attributable to equity holders of the Company by the weighted average number of equity shares outstanding during the year.
Diluted EPS amounts are calculated by dividing the profit attributable to equity holders by the weighted average number of equity shares outstanding during the year plus the weighted average number of equity shares that would be issued on conversion of all the dilutive potential equity shares into equity shares.
The following reflects the profit / (loss) and share data used in the basic and diluted EPS computations:
# Since the conversion of stock options into 198,984 equity shares for March 31, 2016 would decrease the loss per share, these potential equity shares are considered as anti-dilutive and the effect of anti-dilutive potential equity shares have been ignored.
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the Company''''s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, the accompanying disclosures and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods, The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Company. Such changes are reflected in the assumptions when they occur.
Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is higher of its fair value less costs of disposal and its value in use. The value in use calculation is based on discounted cash flow (DCF) model. The cash flows are derived from the budget for the next three years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset''''s performance of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the dCf model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. These estimates are most relevant to goodwill and other intangibles with indefinite useful lives recognized by the Company. The key assumptions used to determine the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in Note - 4.
The Company initially measures the cost of cash-settled transactions with employees using Black Scholes model to determine the fair value of the liability incurred. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them, For cash-settled share-based payment transactions, the liability needs to be re-measured at the end of each reporting period up to the date of settlement, with any changes in fair value recognized in the Statement of Profit and Loss. This requires a re-assessment of the estimates used at the end of each reporting period. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note - 36.
Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
The Company has Rs. 117,848 Lakh (March 31, 2016: Rs. 123,400 Lakh; April 1, 2015: Rs. 106,151 Lakh) of tax losses carried forward. These losses relate to previous years and shall expire in 8 years except unabsorbed depreciation. Further details on taxes are disclosed in Note - 43.
Defined benefits plans (gratuity benefits)
The cost of the defined benefit gratuity plan and other post-employment medical benefits and the present value of the gratuity obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases and mortality rates. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
The parameter most subject to change is the discount rate. In determining the appropriate discount rate for plans, the management considers the interest rates of government bonds in currencies consistent with the currencies of the post-employment benefit obligation. The mortality rate is based on publicly available mortality tables for India. Those mortality tables tend to change only at intervals in response to demographic changes, Future salary increases and gratuity increases are based on expected future inflation rates.
Further details about gratuity obligations are given in Note - 35.
Revenue recognition - Loyalty points
The Company estimates the fair value of points awarded under the loyalty programme by applying statistical techniques. Inputs to the model include making assumptions about expected redemption basis the Company''''s historic trends of redemption and expiry period of the points and such estimates are subject to significant uncertainty. As at March 31, 2017, the estimated liability towards unredeemed points amounted to approximately Rs. 1,797 Lakh (March 31, 2016: Rs. 2,430 Lakh; April 1, 2015: Rs. 2,846 Lakh).
Acquisitions during the year ended March 31, 2017
On July 5, 2016, the Company executed a Business Transfer Agreement with Diana Retail Private Limited ("Diana Retail") and DLF Brands Limited (the promoter of Diana Retail) for acquisition of the exclusive online and offline rights of the global brand "Forever 21" for the Indian market along with its existing store network in India on a going concern basis w.e.f. July 1, 2016, by means of a "slump sale" (as defined in Section 2 (42C) of the Income Tax Act, 1961) for a lump sum consideration. The Company has also executed a franchise agreement with Forever 21 Inc. in terms of which the Company has been appointed as the exclusive franchisee for the brand "Forever 21" for the Indian market. The results of "Forever 21" segment have been included in Madura Fashion & Lifestyle segment of the Company.
As per para 18 of Ind AS 103 "Business Combinations" the acquired assets have been fair valued. Fair value of assets has been carried out on "Fair Market Value" basis which has been done using replacement cost method. The Company has recognized and measured the Goodwill acquired in the business combination as per Ind AS 103 and has aggregated the fair values of net assets acquired and reduced the amount of total consideration paid for acquisition of the business so as to derive the amount attributable to goodwill after recognizing any identifiable intangible asset,
The Goodwill of Rs. 6,438 Lakh comprises the value of expected synergies and the value derived from selling goods under Forever 21 brand arising from the acquisition which is not separately recognized. Goodwill is allocated entirely to the Madura Fashion & Lifestyle division. The Company has identified franchisee rights as acquired intangibles in the business combination. These franchisee rights represent the right to operate Forever 21 stores in India. The fair value of these rights have been amortized over a period of 12 years based on management''''s estimate of useful life.
Transaction cost of Rs. 213 Lakh has been expensed and is included in other expenses,
From the date of acquisition, Forever 21 has contributed Rs. 20,057 Lakh of revenue and Rs. 5,971 Lakh to the loss before tax of the Company. If the combination had taken place at the beginning of the year, revenue from operations would have been Rs. 26,743 Lakh and loss before tax for the Company would have been Rs. 7,961 Lakh,
GRATUITY AND OTHER POST EMPLOYMENT BENEFIT PLANS
The Company operates gratuity plan through a Trust wherein every employee is entitled to the benefit equivalent to fifteen days salary last drawn for each completed year of service. The same is payable on termination of service or retirement whichever is earlier. The benefit vests after five years of continuous service. In case of some employees, the Company''''s scheme is more favorable as compared to the obligation under Payment of Gratuity Act, 1972. A part of the gratuity plan is funded and managed within the Company, hence the liability has been bifurcated into Funded and Unfunded,
The Company contributes to the Fund based on the actuarial valuation report. The Company has contributed to the Insurer Managed Fund (managed by Life Insurance Corporation of India), details of which is available in the table of Investment pattern of Plan assets. Hence, the Company is not exposed to any market risk,
The following tables summaries the components of net benefit expense recognized in the Statement of Profit and Loss and the funded status and amounts recognized in the Balance Sheet for the respective plans:
The estimates of future salary increase, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors such as supply & demand in the employment market,
The overall expected rate of return on plan assets is determined based on the market prices prevailing as on that date, applicable to the period over which the obligation is expected to be settled,
The sensitivity analyses above have been determined based on a method that extrapolates the impact on Defined Benefit Obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period, There has been no change from the previous period in the method and assumptions used in preparing the sensitivity analysis,
The average duration of the defined benefit plan obligation at the end of the reporting period is 13.18 to 19.27 years (March 31, 2016: 11.92 to 13.56 years).
Defined Benefit and Contribution Plans
Amount recognized as an expense and included in Note - 21 as "Contribution to provident and other funds"
a. Employee Stock Option Plans (Options and RSUs)
The Company provides share-based payment schemes to its employees. During the year ended March 31, 2014, an Employee Stock Option Plan (ESOP) was introduced. The relevant details of the scheme and the grant are as below.
On July 22, 2013, the Nomination and Remuneration Committee (then named as ESOP Compensation Committee) ("Committee") and the Board of Directors ("Board") approved the introduction of an ESOP Scheme Viz. Pantaloons Employee Stock Option Scheme-2013 ("Scheme") for issue of stock options ("Options") and Restricted Stock Units ("RSUs") to the key employees and directors of the Company, subject to the approval of the shareholders of the Company. Shareholders of the Company, vide a resolution passed at the Sixth Annual General Meeting of the Company, held on August 23, 2013, approved the introduction of the Scheme and authorized the Board / Committee to finalize and implement the Scheme. Accordingly, pursuant to the resolution passed by the Committee on October 25, 2013, the Committee finalized the Scheme and granted Options and RSUs to the eligible employees.
# The weighted average share price at the date of exercise of these Options was Rs. 136.82,
* The weighted average share price at the date of exercise of these Options was Rs. 224.55,
The remaining contractual life for the share Options outstanding as at March 31, 2017 was 6 years (March 31, 2016: 7 years) and for RSUs outstanding as on March 31, 2017 is 5 years (March 31, 2016: 6 years).
The ESOP compensation cost is amortized on a straight line basis over the total vesting period of the Options. Accordingly Rs. 481 Lakh (March 31, 2016: Rs. 115 Lakh) has been charged to the Statement of Profit and Loss.
* Expected volatility of the Company''''s stock price is based on the Company''''s comparable peer group''''s stock price on NSE based on the price data of the last three years up to the date of grant as the Company was listed only for a few months prior to the date of grant.
b. Stock Appreciation Rights (SARs)
On October 25, 2013, Nomination and Remuneration Committee of the Board of Directors of the Company (then known as ESOP Compensation Committee) approved a plan for granting Stock Appreciation Rights ("SARs") to the eligible employees of the Company and also to its present future holding and/or subsidiary companies named as "Plan for Stock Appreciation Rights, 2013" ("Plan").
The SAR compensation cost is amortized on a straight line basis over the total vesting period of the SARs, Accordingly Rs.12 Lakh (March 31, 2016: Rs. 34 Lakh) has been charged to the Statement of Profit and Loss, The remaining contractual life for SAR outstanding as on March 31, 2017 is 3 years (March 31, 2016: 4 years),
iii) The following tables list the inputs to the models used for SARs for the years ended March 31, 2017 and March 31, 2016, respectively:
* Expected volatility of the Company''''s stock price is based on the Company''''s comparable peer group''''s stock price on NSE based on the price data of the last three years up to the date of grant as the Company was listed only for a few months prior to the date of grant.
The expected life of the share Options, RSUs and SARs is based on historical data and current expectations, and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the Options is indicative of future trends, which may not necessarily be the actual outcome.
NOTE: 6 COMMITMENTS
Operating lease commitments as lessee
The Company has entered into agreements for taking on lease certain residential / office / store premises, warehouses, fixed assets on lease and license basis. The lease term is for a period ranging from 3 to 25 years with escalation clauses in the lease agreements.
The contingent liabilities, if materialized, shall entirely be borne by the Company, as there is no likely reimbursement from any other party.
The Company''''s pending litigations comprise of claims against the Company primarily for Excise Duty, comprising various cases demanding duty on reversal of CENVAT credit on sale of capital goods, reversal of credit on inputs used for manufacturing dutiable and exempted goods, etc., and for Commercial Taxes, comprising various cases in respect of short fall of Forms F, H, I and C, disallowance of input credit, etc.
The Company has reviewed all its pending litigations and proceedings and has adequately provided for where provisions are required and disclosed the contingent liabilities where applicable, in its financial statements. The Company does not expect the outcome of these proceedings to have a materially adverse effect on its financial results. Refer above note for details on contingent liability. In respect of litigations, where the management assessment of a financial outflow is probable, the Company has made a provision of Rs. 2,888 Lakh as at March 31, 2017 (Rs. 609 Lakh as at March 31, 2016).
The Company has a process whereby periodically all long term contracts are assessed for material foreseeable losses. At the year end, the Company has reviewed and ensured that adequate provision as required under any law / accounting standards for material foreseeable losses on such long term contracts has been made in the books of account.
RELATED PARTY TRANSACTIONS
Names of related parties and related party relationship with whom transactions have taken place during the year:
a. Aditya Birla Retail Limited - Key Managerial Personnel has significant influence
b. Aditya Birla Management Corporation Private Limited - Private Company whose Director is a Director in the Company
c. Aditya Birla Online Fashion Private Limited - Private Company whose Director is a Director in the Company Key Managerial Personnel
a. Pranab Barua (Managing Director)
b. Bharat Patel (Independent Director)
c. Sukanya Kripalu (Independent Director)
d. Arun Thiagarajan (Independent Director with effect from May 11, 2015)
e. Sanjeeb Chaudhuri (Independent Director with effect from January 9, 2017)
f. Ashish Dikshit (Chief Executive Officer with effect from November 1, 2016) (previously Business Head - Madura Fashion & Lifestyle with effect from January 9, 2016)
g. Shital Mehta (Chief Executive Officer - Pantaloons with effect from January 9, 2016) (previously Chief Executive Officer of the Company with effect from January 1, 2013)
h. S. Visvanathan (Chief Financial Officer)
i. Vishak Kumar (Chief Executive Officer - Madura Fashion & Lifestyle with effect from November 1, 2016)
Key Managerial Personnel as per Companies Act, 2013 with whom transactions have taken place during the year
a. Geetika Anand (Company Secretary)
The following table provides the total amount of transactions that have been entered into with related parties for the relevant financial year:
No amounts in respect of the related parties have been written off / back are provided for during the year, Terms and conditions of transactions with related parties
The sales to and purchases from related parties are made on terms equivalent to those that prevail in arm''''s length transactions. Outstanding balances at the year-end are unsecured and interest free and settlement occurs in cash. There have been no guarantees received or provided for any related party receivables or payables. For the year ended March 31, 2017, the Company has not recorded any impairment of receivables relating to amounts owed by related parties (March 31, 2016: Nil; April 1, 2015: Nil). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.
Based on the "management approach" as defined under Ind AS 108 - Operating Segments, the Chief Operating Decision Maker evaluates the Company''''s performance and allocates the resources based on the analysis of various performance indicators by business segments. Accordingly the business of the Company is divided into two business segments. The business segment comprise of the following:
The Forever 21 business has been included in Madura Fashion & Lifestyle considering both the divisions comprise of distribution of branded apparel and is viewed as a branded business.
Intersegment revenues are recognized at sales price,
Inter segment revenues are eliminated upon consolidation and reflected in the ''''Adjustments and Eliminations'''' column. All other adjustments and eliminations are part of detailed reconciliations presented further below.
Adjustments and Eliminations
Finance income and costs are not allocated to individual segments as the underlying instruments are managed on a Company basis,
Current taxes, deferred taxes and certain financial assets and liabilities are not allocated to those segments as they are also managed on a Company basis,
Capital expenditure consists of additions of property, plant and equipment and intangible assets,
Derivatives not designated as hedging instruments
The Company uses foreign exchange forward contracts to manage some of its transaction exposure. The foreign exchange forward contracts are not designated as cash flow hedges and are entered into for periods consistent with foreign currency exposure of the underlying transactions, generally from 2 to 6 months,
NOTE: 10 FAIR VALUES AND FAIR VALUE HEIRARCHY
The carrying amounts of trade receivables, trade payables, capital creditors and cash and cash equivalents are considered to be same as their fair values, due to their short-term nature.
The carrying values of loans, security deposits and investments in preference shares are considered to be reasonably same as their fair values. These are classified as level 2 fair values in the fair value hierarchy due to the inclusion of unobservable inputs including counterparty credit risk,
1. As at April 1, 2015, Madura Undertaking of Aditya Birla Nuvo Limited ("ABNL") and MGL Retail Undertaking of Madura Garments Lifestyle Retail Company Limited ("MGLRCL") (collectively hereinafter referred to as ''''Madura Fashion & Lifestyle'''' or ''''Demerged Undertakings'''') , were demerged and transferred to the Company (then named as Pantaloons Fashion & Retail Limited) (hereinafter referred to as ''''resulting Company''''), pursuant to a Scheme of Arrangement under section 391 to 394 of the Companies Act, 1956, duly approved by the shareholders and creditors of the Company, ABNL and MGLRCL and subsequently sanctioned by Hon''''ble High Court of Judicature at Gujarat and Bombay by virtue of their respective orders dated October 23, 2015 and December 5, 2015 (the ''''Composite Scheme''''), on a going concern basis, with effect from the appointed date of the Scheme i.e. April 1, 2015.
Board of Directors of the Company, the Madura Demerger Committee of the Board of Directors of ABNL and Madura Garments Lifestyle Demerger Committee of the Board of Directors of MGLRCL, at their respective meetings held on January 9, 2016, made and declared the effective date of the Composite Scheme to be January 9, 2016.
Further to the effectiveness of the Composite Scheme, name of the Company was changed from "Pantaloons Fashion & Retail Limited" to "Aditya Birla Fashion and Retail Limited".
2. In accordance with the Scheme, the Company has acquired the following assets and liabilities as on the appointed date of the Demerged Undertaking at book value as set out below:
3. 679,819,778 equity shares of Rs.10/- each fully paid up of the Company were to be issued to the shareholders of ABNL and MGLRCL, whose names were registered in the register of members on the record date, without payment being received in cash respectively, in the following share entitlement ratio (as enumerated in the Composite Scheme):
i) 26 equity shares of the Company to the equity shareholders of ABNL for every 5 equity shares held by them in ABNL - pursuant to transfer of the Madura Undertaking;
ii) 7 equity shares of the Company to the equity shareholders of MGLRCL for every 500 equity shares held by them in MGLRCL and 1 equity share to the preference shareholders of MGLRCL - pursuant to transfer of the MGL Retail Undertaking.
Out of the aforesaid total issued shares, Board of Directors, on January 27, 2016, allotted 676,037,600 equity shares of Rs. 10/- each to the shareholders of ABNL and MGLRCL.
Pursuant to Clause 21 of the Composite Scheme, allotment of 3,782,178 equity shares of Rs. 10/- each to the non-resident public shareholders of ABNL has been kept pending until receipt of applicable regulatory approvals. Subsequently till March 31, 2017, the Company has allotted 1,036,736 equity shares.
The face value of pending allotment of 2,745,442 equity shares has been accounted as "Share suspense account" as at March 31, 2017.
4. In terms of the Scheme, all assets and liabilities of the Demerged Undertakings have been transferred and stands vested with the Company with effect from the appointed date i.e April 1, 2015 at their respective book values as on that date. Further with effect from the appointed date and up to and including the effective date the demerged Company was deemed to have been carrying on all business activities of the Demerged Undertakings and all the profit / losses accruing to the demerged Company in relation to the Demerged Undertakings for the period commencing from the appointed date and up to the effective date for all purposes was treated as the profit / losses, as the case may be of the Company.
5. In accordance with the Scheme, the difference between the share capital issued and the net assets taken over has been treated as Goodwill / Capital reserve. Further, in absence of convincing evidence the Deferred Tax Asset of Madura Undertaking amounting to Rs. 5,216 Lakh has been adjusted to the Goodwill arising from the Composite Scheme and MGL Retail Undertaking has not recognized net deferred tax asset arising on the assets and liabilities of the Demerged Undertakings taken over as on the appointed date,
6. The acquisition has been accounted by the Company in accordance with the terms of the Scheme of Arrangement as approved by the High Court of Gujarat and Bombay and has not been restated in accordance with Ind AS 103.
NOTE: 12 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Company''''s principal financial liabilities, other than derivatives, comprise loans and borrowings, trade and other payables. The main purpose of these financial liabilities is to finance the Company''''s operations. The Company''''s principal financial assets include trade and other receivables, and cash and cash equivalents that derive directly from its operations,
The Company is exposed to market risk, credit risk and liquidity risk. The Company''''s senior management oversees the management of these risks. It is the Company''''s policy that no trading in derivatives for speculative purposes may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarized below,
a) Market Risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of risk: interest rate risk and currency risk. Financial instruments affected by market risk include loans and borrowings, deposits and derivative financial instruments, The sensitivity analyses in the following sections relate to the position as at March 31, 2017 and March 31, 2016, The sensitivity analyses have been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives and the proportion of financial instruments in foreign currencies are all constant and on the basis of hedge designations in place at March 31, 2017,
The analyses exclude the impact of movements in market variables on: the carrying values of gratuity and other post-retirement obligations; provisions.
The sensitivity of the relevant profit or loss item is the effect of the assumed changes in respective market risks, This is based on the financial assets and financial liabilities held at March 31, 2017 and March 31, 2016,
i) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company''''s exposure to the risk of changes in market interest rates relates primarily to the Company''''s debt obligations with floating interest rates,
The Company manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings. At March 31, 2017 approximately 62% of the Company''''s borrowings are at a fixed rate of interest (March 31, 2016: 16%).
The assumed movement in basis points for the interest rate sensitivity analysis is based on the currently observable market environment, showing a significantly higher volatility than in prior years.
ii) Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Company''''s exposure to the risk of changes in foreign exchange rates relates primarily to the Company''''s operating activities denominated in foreign currency.
The Company manages foreign currency risk by hedging its transactions using foreign currency forward contracts. As at March 31, 2017, the Company has hedged100% (March 31, 2016:100%) of its receivables in foreign currency and 74% of its payables in foreign currency (March 31, 2016:100%),
Foreign currency sensitivity
The following table demonstrates the sensitivity to a reasonably possible change in USD, with all other variables held constant. The impact on the Company''''s profit before tax is due to changes in the fair value of monetary assets and liabilities. The Company''''s exposure to foreign currency changes for all other currencies is not material,
b) Credit risk
Credit risk is the risk that counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily trade receivables),
Customer credit risk is managed by each business unit subject to the Company''''s established policy, procedures and control relating to customer credit risk management. Credit quality of a customer is assessed and individual credit limits are defined in accordance with this assessment. Outstanding customer receivables are regularly monitored. At March 31, 2017, the Company had 11 customers (March 31, 2016: 9 customers) that owed the Company more than Rs. 500 Lakh and accounted for approximately 75% (March 31, 2016: 71%) of all the receivables outstanding. There were 88 customers (March 31, 2016: 88 customers) with balances greater than Rs. 50 Lakh accounting for just over 14% (March 31, 2016: 20%) of the total amounts receivable,
Credit risk from balances with banks and financial institutions is managed by the Company''''s treasury department in accordance with the Company''''s policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty.
The Company''''s maximum exposure to credit risk for the components of the Balance Sheet at March 31, 2017 and March 31, 2016 is the carrying amounts as provided in Note - 9.
c) Liquidity risk
The Company monitors its risk of shortage of funds. The Company''''s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, debentures, preference shares and commercial papers. Approximately 38% of the Company''''s debt will mature in less than one year at March 31, 2017 (March 31, 2016: 63%) based on the carrying value of borrowings reflected in the financial statements. The Company assessed the concentration of risk with respect to refinancing its debt and concluded it to be low. The Company has access to a sufficient variety of sources of funding and debt maturing within 12 months can be rolled over with existing lenders,
Excessive risk concentration
Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographical region, or have economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Company''''s performance to developments affecting a particular industry.
The Company is leader in apparels in the country and has a diversified portfolio of brands,
The Company''''s objective when managing capital is to ensure the going concern operation and to maintain an efficient capital structure to reduce the cost of capital, support the corporate strategy and meet shareholder expectations. The policy of the Company is to borrow through banks / financial institutions supported by committed borrowing facilities to meet anticipated funding requirements,
The capital structure is governed by policies approved by the Board of Directors and is monitored by various metrics. Funding requirements are reviewed periodically with any debt issuances,
FIRST-TIME ADOPTION OF IND AS
These financial statements, for the year ended March 31, 2017, are the first the Company has prepared in accordance with Ind AS. For periods up to and including the year ended March 31, 2016, the Company prepared its financial statements in accordance with accounting standards notified under section 133 of the Companies Act, 2013, read together with paragraph 7 of the Companies (Accounts) Rules, 2014 (Indian GAAP). Accordingly, the Company has prepared financial statements which comply with Ind AS applicable for periods ending on March 31, 2017, together with the comparative period data as at and for the year ended March 31, 2016, as described in the summary of significant accounting policies. In preparing these financial statements, the Company''''s opening Balance Sheet was prepared as at April 1, 2015, the Company''''s date of transition to Ind AS. This note explains the principal adjustments made by the Company in restating its Indian GAAP financial statements, including the Balance Sheet as at April 1, 2015 and the financial statements as at and for the year ended March 31, 2016.
Ind AS 101 allows first-time adopters certain exemptions from the retrospective application of certain requirements under Ind AS. The Company has applied the following exemptions:
a. Business Combinations
Ind AS 101 provides the option to apply Ind AS 103 prospectively from the transition date or from a specific date prior to the transition date. This provides relief from full retrospective application that would require re-statement of all business combinations prior to the transition date.
The Company has elected to apply Ind AS 103 prospectively to business combinations occurring after its transition date. Business combinations occurring prior to the transition date have not been restated, Ind AS 101 also requires that Indian GAAP carrying amount of Goodwill must be used in the opening Ind AS Balance Sheet. In accordance with Ind AS 101, the Company has tested Goodwill for impairment at the date of transition to Ind AS. No Goodwill impairment was deemed necessary at April 1, 2015,
b. Deemed cost
Ind AS 101 permits a first-time adopter to elect to continue with the carrying value for all of its Property, plant and equipment as recognized in the financial statements as at the date of transition to Ind AS, measured as per previous GAAP and use that as its deemed cost as at the date of transition after making necessary adjustments for decommissioning liabilities. This exemption can also be used for Intangible assets covered by Ind AS 38.
Accordingly, the Company has elected to measure all of its Property, plant and equipment and Intangible assets at their previous GAAP carrying value.
Appendix C to Ind AS 17 requires an entity to assess whether a contract or arrangement contains a lease, In accordance with Ind AS 17, assessment should be carried out at the inception of the contract or arrangement, Ind AS 101 provides an option to make this assessment on the basis of facts and circumstances existing at the date of transition to Ind AS, except where the effect is expected to be not material.
Accordingly, the Company has elected to assess all the contracts existing at the date of transition to Ind AS,
The estimate as at April 1, 2015 and as at March 31, 2016 are consistent with those made for the same dates in accordance with Indian GAAP,
Footnotes to the reconciliation of equity as at April 1, 2015 and March 31, 2016 and profit or loss for the year ended March 31, 2016
1. Export Promotion Capital Goods (EPCG) - Under the previous GAAP, assets against which grants are available are recognized at value excluding import duties during capitalization. Under Ind AS, assets needs to be capitalized including the import duties waived and Company can recognize these grants when there is reasonable assurance that it will meet all the conditions. Capital subsidy has to be setup as deferred income and recognized as income over the useful life of the asset. Consequently, the value of Property, plant and equipment is increasing by Rs. 154 Lakh and there is an increase in the amount of depreciation on the asset by Rs. 5 Lakh as at March 31, 2016. Also, the waiver in duty is recognized as deferred income which is recognized during the life of the asset. The amount recognized as income during the year March 31, 2016 is Rs. 6 Lakh. Further since the Company has adopted IGAAP values as deemed cost as at April 1, 2015, no other adjustment has been done.
2. Security deposits - Under the previous GAAP, interest free lease security deposits (that are refundable on completion of the lease term) are recorded at their transaction value. Under Ind AS, all financial assets are required to be recognized at fair value. Accordingly, the Company has fair valued these security deposits under Ind AS. Difference between the fair value and transaction value of the security deposit has been recognized as prepaid rent, Consequent to this change, the amount of security deposits decreased by Rs. 4,124 Lakh as at March 31, 2016 (April 1, 2015: Rs. 4,670 Lakh). The prepaid rent increased by Rs. 3,862 Lakh as at March 31, 2016 (April 1, 2015 : Rs. 4,272 Lakh). Total equity decreased by Rs. 397 Lakh as at April 1, 2015. The profit for the year and total equity as at March 31, 2016 increased by Rs. 133 Lakh due to amortization of the prepaid rent of Rs. 1,132 Lakh which is partially off-set by the notional interest income of Rs. 1,265 Lakh recognized on security deposits.
3. De-recognition of sales under the previous GAAP where there is a right to return - The revenue is de-recognized net of expenses and the total equity is decreased by Rs. 727 Lakh as at March 31, 2016 (April 1, 2015: Rs. 1,636 Lakh).
4. Redeemable Preference Shares - The Company has issued Cumulative Redeemable Preference Shares. Under previous GAAP, the preference shares were classified as equity and cumulative dividend payable thereon of Rs. 14 Lakh was treated as contingent liability. Under Ind AS, preference shares are classified as liability based on the terms of the contract. Thus the preference share capital is reduced by Rs. 51 Lakh as at March 31, 2016 (April 1, 2015: Rs. 51 Lakh) with a corresponding increase in borrowings as liability component, The profit or loss for the Company has reduced by Rs. 5 Lakh for the year ended March 31, 2016 on account of interest on preference share capital. There is an impact of Rs. 14 Lakh on total equity as at April 1, 2015, The opening contingent liability of Rs. 14 Lakh has been adjusted in the opening reserves,
5. Lease incentive - Under the previous GAAP, the lease incentive was not provided for in the books of account. Under Ind AS, the lease rentals are straight lined over the rent-free period. This change has resulted in an increase / (decrease) in the profit or loss for the year ended March 31, 2016 by Rs. 77 Lakh (April 1, 2015: Rs. (1,198) Lakh). Also, there is an increase in provision for rent straightlining by Rs. 1,121 Lakh as at March 31, 2016 (April 1, 2015: Rs. 1,198 Lakh).
6. Franchisee deposits - Under the previous GAAP, franchisee deposits (that are refundable on completion of the lease term) are recorded at their transaction value. Under Ind AS, all financial liabilities are required to be recognized at fair value. Accordingly, the Company has fair valued these franchisee deposits under Ind AS, Difference between the fair value and transaction value of the franchisee deposit has been recognized as deferred income. Consequent to this change, the amount of franchisee deposits decreased by Rs. 729 Lakh as at March 31, 2016 (April 1, 2015: Rs. 472 Lakh). The deferred income increased by Rs. 682 Lakh as at March 31, 2016 (April 1, 2015: Rs. 446 Lakh). The profit for the year and total equity as at March 31, 2016 increased by Rs. 20 Lakh due to amortization of deferred income of Rs. 171 Lakh which is partially off-set by the notional interest expense of Rs. 151 Lakh recognized on franchisee deposits,
7. Forward contracts MTM - Under the previous GAAP, the gain / (loss) on reinstatement of forward contracts were recognized basis closing rates as on reporting date. Under Ind AS, the gain / (loss) on forward contracts are recognized basis mark-to-market. The profit or loss for the Company is reduced by Rs. 15 Lakh for the year ended March 31, 2016. There is a corresponding impact on total equity as at March 31, 2016,
8. Employee stock option expense - Under the previous GAAP, the cost of equity-settled employee share-based plan were recognized using the intrinsic value method. Under Ind AS, the cost of equity-settled share based plan is recognized based on the fair value of the Options as at the grant date. Consequently, the amount recognized in share-based payment reserve increased by Rs. 51 Lakh as at March 31, 2016 (April 1, 2015: Rs. 202 Lakh). There is no impact on total equity.
In case of cash-settled employee share-based plan, there is an impact of Rs. (17) Lakh in the profit or loss for the year ended March 31, 2016. There is a similar impact in the total equity as at March 31, 2016 (April 1, 2015: 53 Lakh).
9. Excise duty - Under the previous GAAP, revenue from sale of goods was presented exclusive of excise duty. Under Ind AS, revenue from sale of goods is presented inclusive of excise duty. The excise duty is presented on the face of the Statement of Profit and Loss as part of expenses. This change has resulted in an increase in total revenue and total expenses for the year ended March 31, 2016 by Rs. 66 Lakh. There is no impact in the total equity and profit,
10. Deferred revenue - Customer Loyalty Programme - The Company operates a loyalty point programme which allows customers to accumulate points when they purchase products in the Company''''s retail stores. The points can be redeemed for future purchase, subject to a minimum number of points being obtained. Under the previous GAAP, the Company creates a provision towards its liability under the reward programme and recognize s the same as an expense. Under Ind AS, fair value of the points is determined by applying a statistical analysis which is no different than the value recognized as an expense under earlier GAAP. The fair value allocated to the points issued is deferred and recognized as revenue when the points are redeemed. There is a change in revenue and expense by Rs. 411 Lakh but no change in total equity due to the above adjustment,
11. Cash discount and Shrinkage - Under the previous GAAP, the cash discount offered to customers on early payment and shrinkages at large format customer premises to be reimbursed by the Company, forms part of other expenses. Under Ind AS, the cash discount and shrinkage of Rs. 1,063 Lakh is reduced from revenue, There is no impact on total equity due to the corresponding adjustment,
12. Discount on gift vouchers - Under the previous GAAP, the discount on gift vouchers issued to customers forms part of other expenses. Under Ind AS, the discount on gift vouchers of Rs. 97 Lakh needs to be reduced from revenue. There is no impact on total equity due to the corresponding adjustment,
13. Re-measurement on defined benefit plans - Under Ind AS, re-measurements i.e. actuarial gains and losses and the return on plan assets, excluding amounts included in the net interest expense on the net defined benefit liability are recognized in Other Comprehensive Income (OCI) instead of profit or loss. Under the previous GAAP, these re-measurements were forming part of the profit or loss for the year. As a result of this change there is no impact on the total equity as at March 31, 2016,
14. Other comprehensive income - Under Ind AS, all items of income and expense recognized during the year should be included in profit or loss for the year, unless a standard requires or permits otherwise. Items of income and expense that are not recognized in profit or loss are shown in the Statement of Profit and Loss as "other comprehensive income". OCI for the Company includes re-measurement of defined benefit plans of Rs. 13 Lakh net of taxes. The concept of other comprehensive income did not exist under previous GAAP
15. Retained earnings - Retained earnings as at April 1, 2015 and March 31, 2016 has been adjusted consequent to the above Ind AS transition adjustments,
16. Statement of cash flows - The transition from previous GAAP to Ind AS has not had a material impact on the Statement of cash flows.
During the year ended March 31, 2016, the Company with respect to its "Pantaloons" business had reassessed the useful life of leasehold improvements and immovable fixtures from the period of lease to six years as the same better reflects the expected usage of such assets.
Had the Company continued to use the earlier life of depreciating the leasehold improvements and immovable fixtures, its depreciation and loss for the year ended March 31, 2016 would have been lower by Rs. 10,040 Lakh,
During the year ended March 31, 2016, the Company with respect to its "Pantaloons" business had changed its estimate of using the premises on lease for the period of 6 years instead of erstwhile lease period, hence the lease rentals have been straight lined for a period of 6 years,
Had the Company continued to use the earlier lease period of straight lining its operating lease, its rent and losses for the year ended March 31, 2016 would have been higher by Rs. 5,190 Lakh,
DEBENTURE REDEMPTION RESERVE
The Company has made profits in the current financial year, however considering the accumulated losses of the previous periods and the profit of the current year being inadequate to set off the accumulated losses, the Company has not transferred the required amount in the Debenture Redemption Reserve as per provisions of section 71 of the Act.
PREVIOUS YEAR FIGURES
The Company has reclassified previous year figures to conform to this year''''s classification,
The figures for the current year includes the figures of the Forever 21 business acquired by the Company with effect from July 1, 2016 and are therefore to that extent not comparable with those of previous year.