ALKEM LABORATORIES Notes to Accounts

1 General Information


Alkem Laboratories Limited (‘the Company’) was incorporated in 1973 under the provisions of Companies Act, 1956 of India, as a company with limited liability. The Company is domiciled in India with its registered office address being Alkem House, Senapati Bapat Marg, Lower Parel, Mumbai - 400013, India.The Company is engaged in pharmaceutical business with global operations. The Company is engaged in the development, manufacture and sale of pharmaceutical and nutraceutical products.


2A Critical accounting judgements and key sources of estimation uncertainty


The Company prepares its financial statements in accordance with Ind AS as issued by the MCA, the application of which often requires judgments to be made by management when formulating the Company’s financial position and results. The Directors are required to adopt those accounting policies most appropriate to the Company’s circumstances for the purpose of presenting fairly the Company’s financial position, financial performance and cash flows.


In determining and applying accounting policies, judgment is often required in respect of items where the choice of specific policy, accounting estimate or assumption to be followed could materially affect the reported results or net asset position of the Company should it later be determined that a different choice would be more appropriate.


Management considers the accounting estimates and assumptions discussed below to be its critical accounting estimates and, accordingly, provide an explanation of each below. The discussion below should also be read in conjunction with the Company’s disclosure of significant accounting policies which are provided in Note 2A to the standalone financial statements, ‘Significant accounting policies’


a. Estimate of current and deferred tax


The Company’s tax charge on ordinary activities is the sum of the total current and deferred tax charges. The calculation of the Company’s total tax charge necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a formal legal process. The final resolution of some of these items may give rise to material profits/losses and/or cash flows.


The complexity of the Company’s structure makes the degree of estimation and judgement more challenging. The resolution of issues is not always within the control of the Company and it is often dependent on the efficiency of the legal processes in the relevant taxing jurisdictions in which the Company operates. Issues can, and often do, take many years to resolve. Payments in respect of tax liabilities for an accounting period result from payments on account and on the final resolution of open items. As a result there can be substantial differences between the tax charge in the Statement of Profit and Loss and tax payments.


b. Recognition of MAT credit entitlement


The credit availed under MAT is recognised as an asset only when and to the extent there is convincing evidence that the company will pay normal income tax during the period for which the MAT credit can be carried forward for set off against the normal tax liability. This requires significant management judgement in determining the expected availment of the credit based on business plans and future cash flows of the Company.


c. Recognition of deferred tax assets


The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. To determine the future taxable profits, reference is made to the latest available profit forecasts. Where the temporary differences are related to losses, relevant tax law is considered to determine the availability of the losses to offset against the future taxable profits.


d. Estimation of useful life


The useful life used to amortise or depreciate intangible assets or property, plant and equipment respectively relates to the expected future performance of the assets acquired and management’s judgement of the period over which economic benefit will be derived from the asset based on its technical expertise. The charge in respect of periodic depreciation is derived after determining an estimate of an asset’s expected useful life and the expected residual value at the end of its life. Increasing an asset’s expected life or its residual value would result in a reduced depreciation charge in the Statement of Profit and Loss.


The useful lives and residual values of Company’s assets are determined by management at the time the asset is acquired and reviewed annually for appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events which may impact their life such as changes in technology.


e. Provisions and contingent liabilities


The Company exercises judgement in measuring and recognising provisions and the exposures to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgement is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of the financial settlement. Because of the inherent uncertainty in this evaluation process, actual losses may be different from the originally estimated provision.


f. Fair value measurements and valuation processes


Some of the Company’s assets and liabilities are measured at fair value for the financial reporting purposes. Central corporate treasury team works with various banks for determining appropriate fair value of derivative assets and liabilities. Central treasury team reports to the Chief Financial Officer. In estimating the fair value of derivative assets and liabilities, the Company uses market-observable data to the extent it is available.


Information about the valuation techniques and inputs used in determining the fair value of various assets and liabilities are disclosed in note


g. Defined Benefit Plans:


The cost of the defined benefit gratuity plan and other post-employment benefits and present value of the gratuity obligation are determined using actuarial valuation. An actuarial valuation involves making various assumptions that may defer from actual development in the future. These includes the determination of the discount rate, future salary increases and mortality rates. Due to 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.


h. Provision for anticipated sales return:


In determining the provision for anticipated sales returns, estimates for probable saleable and non-saleable returns of goods from the customers are made on scientific basis after factoring in the historical data of such returns and its trend.


3) At 31 March 2017: Investments in 8% Indian Railway Finance Corporation Limited, 8.63% NHB Limited, 9.01% NHB Limited,11% Bank of India, 9.55% Kotak Mahindra Prime Aggregating to face value of Rs.1,378.0 Million has been pledged against issuance of Stand by letter of credit required for Loan of US$ 25.0 Million advanced by Citi Bank USA to ThePharmaNetwork LLC (USA), a 100% step down subsidiary of the company and Loan of US$ 20.0 Million advanced by Citi Bank USA to S&B Pharma Inc. (USA), a wholly owned subsidiary of the Company and Loan of US$ 4 Million advanced by Banco De Chile to Ascend Laboratories SpA, Chile, a wholly owned subsidiary of the Company


At 31 March 2016 Investments in 8% Indian Railway Finance Corporation Limited, 10.17% HDB Financial Services Limited, 8.63% NHB Limited, 9.01% NHB Limited,11% Bank of India, 9.55% Kotak Mahindra Prime Aggregating to face value of Rs.1,578.0 Million has been pledged against issuance of Stand by letter of credit required for Loan of US$ 25.0 Million advanced by Citi Bank USA to ThePharmaNetwork LLC (USA), a 100% step down subsidiary of the company and Loan of US$ 20.0 Million advanced by Citi Bank USA to S&B Pharma Inc. (USA), a wholly owned subsidiary of the Company and Loan of US$ 4 Million advanced by Banco De Chile to Ascend Laboratories SpA, Chile, a wholly owned subsidiary of the Company At 1 April 2015: Investments in 8% Indian Railway Finance Corporation Limited, 10.17% HDB Financial Services Limited, 8.63% NHB Limited, 9.01% NHB Limited,11% Bank of India, 9.55% kotak Mahindra Prime Aggregating to Rs.1,387.5 Million were in the process of pledge against issuance of Stand by letter of credit required for Term Loan of US$ 29.80 Million advanced by Citi Bank USA to ThePharmaNetwork LLC (USA), a 100% step down Subsidiary of the Company.


4a) During the year, the Company has contributed Rs.67.9 Million in wholly owned subsidiary in South Africa viz, “Alkem Laboratories (Pty) Limited” by way of a capital contribution.


4b) During the year, the Company has contributed Rs.67.5 Million in wholly owned subsidiary in Philippines viz, “Alkem Laboratories Corporation” by way of a capital contribution.


4c) During the year, the Company has contributed Rs.57.1 Million in wholly owned subsidiary in Kazakhstan viz, “The PharmaNetwork LLP, Kazakhstan:” by way of a capital contribution.


4d) During the year, the Company has contributed Rs.250.0 Million in partly owned subsidiary in India viz, “Cachet Pharmaceuticals Private Limited” by way of a capital contribution.


4e) During the year, the Company has contributed Rs. 133.7 Million in wholly owned subsidiary in Chile viz, “Ascend Laboratories SpA” by way of a capital contribution. 6f) During the year, the Company has contributed Rs. 500.0 Million and Rs. 532.6 Million in wholly owned subsidiary in India viz,”Enzene Biosciences Limited” by way of a capital contribution and by way of conversion of loans and advances to equity respectively.


4g) During the year, the Company has contributed Rs. 1,069.2 Million and Rs. 480.4 Million in wholly owned subsidiary in USA viz,”S&B Pharma Inc.” byway of a capital contribution and by way of conversion of loans and advances to equity respectively.


5) During the previous year ended 31 March 2016, pursuant to the approval of the Board of Directors in its meeting held on 9 March 2016, the Company in order to focus on its core business activities and for other commercial reasons, restructured its investment in Avenue Venture Real Estate Fund (“Fund”) by entering into an option agreement with Mr.Tushar Kumar for grant of unconditional option exercisable without restriction at the option of the option holder to purchase the trust units held by the Company in the Fund at an option price of 102% of the fair market value of each trust unit as on the exercise date. This Agreement shall remain in force for a period of 2 years from the execution date and may be renewed with mutual consent of the parties.


The company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.


In India, in case income tax payable on book profit (that is Minimum alternate tax - ‘MAT’) exceeds the income tax payable on tax profit, the differential amount shall be carried forward as a MAT credit for a period of 15 years. The said MAT credit can be offset against any future income tax payable. The Company has carry forward amount of MAT of Rs.6,988.8 Million as at 31 March 2017. (Rs.5,079.4 million as at March 31, 2016; Rs.4,470.5 million as at April 1, 2015).


Significant management judgement is required in determining provision for income tax, deferred income tax assets and liabilities and recoverability of deferred income tax assets. The recoverability of deferred income tax assets is based on estimates of taxable income by each jurisdiction in which the relevant entity operates and the period over which deferred income tax assets will be recovered.


5.1 Dues to Micro and Small enterprises


Under the Micro, Small and Medium Enterprises Development Act, 2006, (MSMED) which came into force from 2 October 2006, certain disclosures are required to be made relating to Micro and Small Enterprises. On the basis of the information and records available with the Management, the outstanding dues to the Micro & Small enterprises as defined in MSMED are set out in following disclosure.


5.2 Disclosure of Employee Benefits as per Indian Accounting Standard 19 is as under:


i) Defined contribution plans:


The Company makes contributions towards provident fund and superannuation fund to a defined contribution retirement benefit plan for qualifying employees. Under the plan, the Company is required to contribute a specified percentage of payroll cost to the retirement benefit plan to fund the benefits. The provident fund plan is operated by the Government administered employee provident fund. Eligible employees receive the benefits from the said Provident Fund. Both the employees and the Company make monthly contribution to the Provident Fund plan equal to a specific percentage of the covered employee’s salary. The Company has no obligations other than to make the specified contributions.


The Superannuation fund is administered by the Life Insurance Corporation of India (LIC). Under the plan, the Company is required to contribute pre determined percentage of payroll cost of the eligible employee to the superannuation plan to fund the benefit.


ii) Defined benefit plan:


The Company earmarks liability towards unfunded Group Gratuity and Compensated absences and provides for payment to vested employees as under:


a) On Normal retirement/ early retirement/ withdrawal/resignation:


As per the provisions of Payment of Gratuity Act, 1972 with vesting period of 5 years of service.


b) On death in service:


As per the provisions of Payment of Gratuity Act, 1972 without any vesting period.


The most recent actuarial valuation of the present value of the defined benefit obligation for gratuity was carried out as at 31 March 2017 by an independent actuary. The present value of the defined benefit obligations and the related current service cost and past service cost, were measured using the Projected Unit Credit Method.


Discount rate: The discount rate is based on the prevailing market yields of Indian government securities as at the balance sheet date for the estimated term of the obligations.


Salary Escalation Rate: The estimates of future salary increases, considered in actuarial valuation, takes into account the inflation, seniority, promotion and other relevant factors such as supply and demand in the employment market.


5.3 The Company has entered into non - cancellable operating lease agreements for premises/car/Computers. Rent expenses debited to the Statement of Profit and Loss is as below:


5.4 The aggregate amount of revenue expenditure incurred during the period on Research and Development and shown in the respective heads of account is Rs.2,886.6 Million (Previous year Rs.2,020.1 Million).


5.5 Segment Reporting


The Company has presented data relating to its segments based on its consolidated financial statements, Accordingly, in terms of paragraph 4 of the Indian Accounting Standard 108 (IND AS-108) “Segment Reporting”, no disclosures related to segments are presented in this standalone financial statement.


5.6 Information on related party transactions as required by Indian Accounting Standard 24 (Ind AS 24) on related party disclosures for the year ended 31 March 2017.


Based on the recommendation of the Nomination and Remuneration committee, all decisions relating to the remuneration of the directors are taken by the Board of Directors of the Company, in accordance with shareholders’ approval, wherever necessary.


All other related party transactions are made in the normal course of business and on terms equivalent to those that prevail in an arm’s length transactions.


Figures in the brackets are the comparative figures of the previous year.


Note:


1 The Company’s international transactions with related parties are at arm’s length as per the independent accountants report for the year ended 31 March 2016. Management believes that the Company’s international transactions and domestic transactions with related parties post 31 March 2016 continue to be at arm’s length and that the transfer pricing legislation will not have any material impact on these financial statements,particularly on amount of tax expense and that of provision for taxation.


2 Disclosures pursuant to Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Section 186 of the Companies Act, 2013 (hereinafter referred to as “Act”)


a) Loans and Advances in the nature of loans to subsidiaries (net of provision for doubtful advances) *


*The above loans given during the year are given towards meeting working capital requirements and are repayable in accordance with the terms and conditions of loan agreements carries an interest rate of 9% p.a. for foreign subsidiaries and 10% p.a. for Indian subsidiaries


b) Details of investments made under section 186 of the Act are given in Note 3.2 “Non Current Investments”.


c) Securities pledged against loan taken by subsidiaries **


** The securities pledged against loans taken by subsidiaries are for the purpose of meeting working capital requirements


d) The Company has issued corporate guarantee to its wholly owned subsidiary, Pharmacor Pty Limited, Australia amounting to Rs.272.7 Million (5.5 Million AUD) (31 March 2016 Rs.Nil; 1 April 2015 Rs.Nil) in respect of term loan taken to meet working capital requirements.


5.7 Financial instruments - Fair values and risk management


A. Accounting classification and fair values


The Company uses the following hierarchic structure of valuation methods to determine and disclose information about the fair value of financial instruments:


Level 1: Observable prices in active markets for identical assets and liabilities;


Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities;


Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities


B. Measurement of fair values


The Management assessed that cash and bank balances, trade receivables, trade payables, cash credit and other financial assets and liabilities approximate their carrying amounts largely due to short-term maturities of these instruments.


The following methods and assumptions were used to estimate the fair value


a) The fair value of the quoted investments/units of mutual fund scheme are based on market price/net asset value at the reporting date.


b) The fair value of the remaining financial instrument is determined using discounted cash flow analysis. The discount rates used is based on management estimates.


The significant unobservable inputs used to determine the fair value of investment in fund together with the quantitative sensitivity analysis as at 31 March 2017; 31 March 2016 and 1 April 2015 are as shown below:


Level 3 fair values


Reconciliation of Level 3 fair values


The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values of Investment in avenue venture real estate fund.


Transfer out of Level 3


There has been no transfer out of Level 3 during the period


Sensitivity analysis


For the fair values of Avenue venture real estate fund investment possible changes at the reporting date to one of the significant unobservable inputs, holding other inputs constant, would have the following effects.


The Company has exposure to the following risks arising from financial instruments:


- Credit risk ;


- Liquidity risk ; and


- Market risk


i. Risk management framework


The Company’s board of directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The board of directors has established the Risk Management Committee, which is responsible for developing and monitoring the Company’s risk management policies. The committee reports regularly to the board of directors on its activities


The Company’s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls and to monitor risks and adherence to the limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations.


The audit committee oversees how management monitors compliance with the company’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. The audit committee is assisted in its oversight role by internal audit. Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the audit committee.


ii. Credit risk


Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its operating activites (primarily trade receivables) and from its financing/investing activities, including investments in debt securities, deposits with banks, equity securities and venture capital and mutual fund investments. The Company has no significant concentration of credit risk with any counterparty.


The carrying amount of following financial assets represents the maximum credit exposure:


Trade receivables


Trade receivables are consisting of a large number of customers. The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the factors that may influence the credit risk of its customer base, including the default risk of the industry and country in which customers operate.


The Risk Management Committee has established a credit policy under which each new customer is analysed individually for creditworthiness before the Company’s standard payment and delivery terms and conditions are offered. The Company’s review includes external ratings, if they are available, and in some cases bank references. Sale limits are established for each customer and reviewed quarterly.


At 31 March 2017, the carrying amout of the Company’s most significant customer (Ascend Laboratories LLC, its wholly owned step-down subsidiary) is Rs.2,650.2 million (31 March 2016 Rs.1,646.1 million ;1 April 2015 Rs.963.5 million)


Impairment


As per simplified approach the Company makes provision of expected credit losses on trade receivable using a provision matrix to mitigate the risk of default payment and make appropriate provision at each reporting date wherever.


Management believes that the unimpaired amounts that are past due by more than 180 days are still collectible in full, based on historical payment behaviour and extensive analysis of customer credit risk, including underlying customers’ credit ratings if they are available.


Loans to subsidiaries


The Company has an exposure of Rs.335.5 million as 31 March 2017 (Rs.1,317.5 million : 31 March 2016; Rs.884.6 Million 1 April 2015) for loans given to subsidiaries. Such loans are classified as financial asset measured at amortised cost.


The Company did not have any amounts that were past due but not impaired at 31 March 2017 or 31 March 2016. The Company has no collateral in respect of these loans.


Investments, Cash and Cash equivalents and Bank Deposits


Credit risk on cash and cash equivalents, deposits with banks is generally low as the said deposits have been made with the banks who have been assigned high credit rating by international and domestic credit rating agencies.


Investments of surplus funds are made only with approved financial institutions. Investments primarily include investments in subsidiaries, mutual funds, venture capital funds, quoted bonds and non-convertible debentures. These mutual funds and counterparties have low credit risk.


Total non-current and current investments as on 31 March 2017 is Rs.15,176.4 million (31 March 2016: Rs.11,576.8 million; 1 April 2015 Rs.10,777.9 million)


Debt securities:


The Company has an exposure of Rs.2,310.3 million as at 31 March 2017 (Rs.2,014.9 million : 31 March 2016; Rs.2,358.2 million as at 1 April 2015) for debt securities classified as financial asset measured at amortised cost. All the debt securities have been issued by companies registered in India in Indian Rupees.


There has been no allowance for impairment in respect of such debt securities - financial asset measured at amortised cost till 31 March 2017.


The Company did not have any debt securities that were past due but not impaired at 31 March 2017 ,31 March 2016 and 1 April 2015. The Company has no collateral in respect of these investments.


iii. Liquidity risk


Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.


The majority of the Company’s trade receivables are due for maturity within 21 days from the date of billing to the customer.


Further, the general credit terms for trade payables are approximately 45 days. The difference between the above mentioned credit period provides sufficient headroom to meet the short-term working capital needs for day-to-day operations of the Company. Any short-term surplus cash generated, over and above the amount required for working capital management and other operational requirements, are retained as Cash and Investment in short term deposits with banks. The said investments are made in instruments with appropriate maturities and sufficient liquidity.


Exposure to liquidity risk


The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments and exclude the impact of netting agreements.


The gross inflows/(outflows) disclosed in the above table represent the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes and which are not usually closed out before contractual maturity. The disclosure shows net cash flow amounts for derivatives that are net cash-settled and gross cash inflow and outflow amounts for derivatives that have simultaneous gross cash settlement


The gross inflows/(outflows) disclosed in the above table represent the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes and which are not usually closed out before contractual maturity. The disclosure shows net cash flow amounts for derivatives that are net cash-settled and gross cash inflow and outflow amounts for derivatives that have simultaneous gross cash settlement


iv. Market risk


Market risk is the risk that changes in market prices - such as foreign exchange rates, interest rates and equity prices - will affect the Company’s income or the value of its holdings of financial instruments. Market risk is attributable to all market risk sensitive financial instruments including foreign currency receivables and payables and long term debt. We are exposed to market risk primarily related to foreign exchange rate risk, interest rate risk and the market value of our investments. Thus, our exposure to market risk is a function of investing and borrowing activities and revenue generating and operating activities in foreign currency. The objective of market risk management is to avoid excessive exposure in our foreign currency revenues and costs.


Currency risk


The Company is exposed to currency risk on account of its borrowings, other payables, receivables and loans and advances in foreign currency. The functional currency of the Company is Indian Rupee. The Company has exposure to USD, EURO, GBP and AUD. The Company has formulated hedging policy for monitoring its foreign currency exposure.


Exposure to currency risk


The currency profile of financial assets and financial liabilities as at March 31, 2017, March 31, 2016 and April 1, 2015 in there respective currencies are as below:


Sensitivity analysis


A reasonably possible strengthening (weakening) of the Indian Rupee against various foreign currencies at March 31 would have affected the measurement of financial instruments denominated in foreign currencies and affected equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases.


Interest rate risk


Interest rate risk can be either fair value interest rate risk or cash flow interest rate risk. Fair value interest rate risk is the risk of changes in fair values of fixed interest bearing investments, borrowings and loans because of fluctuations in the interest rates. Cash flow interest rate risk is the risk that the future cash flows of floating interest bearing investments, borrowings and loans will fluctuate because of fluctuations in the interest rates.


Exposure to interest rate risk


Company’s interest rate risk arises from borrowings and fixed income securities. Fixed income securities exposes the Company to fair value interest rate risk. The interest rate profile of the Company’s interest-bearing financial instruments as reported to the management of the Company is as follows.


Fair value sensitivity analysis for fixed-rate instruments


The Company does not account for any fixed-rate financial assets or financial liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect profit or loss.


A change of 100 basis points in interest rates would not have any material impact on the equity


Cash flow sensitivity analysis for variable-rate instruments


A change of 100 basis points in interest rates would not have any material impact on the equity


5.8 Capital Management


The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management monitors the return on capital as well as the level of dividends to ordinary shareholders.


The Company monitors capital using a ratio of ‘adjusted net debt’ to ‘total equity’. For this purpose, adjusted net debt is defined as total liabilities, comprising interest-bearing loans and borrowings and obligations under finance leases, less cash and cash equivalents. Adjusted equity comprises all components of equity.


5.9 First- time adoption of Ind AS


I. First-time adoption of Ind AS


The financial statements for the year ended March 31, 2016 have been prepared in accordance with Ind AS as issued and effective as at March 31, 2016. The Company’s opening Ind AS balance sheet was prepared as at 1 April 2015, the Company’s date of transition to Ind AS. In preparing the opening balance sheet, the Company has applied the mandatory exceptions and certain optional exemptions from full retrospective application of Ind AS in accordance with the guidance in Ind AS 101 ‘First Time Adoption of Indian Accounting Standards’


This note explains the principal adjustments made by the Company in restating its previous GAAP financial statements to Ind AS, in the opening balance sheet as at April 1, 2015 and in the financial statements as at and for the year ended 31 March 2016.


II. Optional exemptions from retrospective application


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) Deemed cost for Property, Plant and Equipment (PPE), Intangible assets and investment property


The Company has elected to measure all the items of PPE and intangible assets at its previous GAAP carrying values which shall be the deemed cost as at the date of transition. As per FAQs issued by Accounting Standards Board (ASB) by Ind AS Transition Facilitation Group of Ind AS (IFRS) Implementation Committee of ICAI, deemed cost, is the amount used as a surrogate for the cost or depreciated cost and for the purpose of subsequent depreciation or amortisation, deemed cost becomes the cost as the starting point. Information regarding gross block of assets, accumulated depreciation and provision for impairment under Previous GAAP has been disclosed by way of a note forming part of the financial statements.


b) Deemed cost for investment in subsidiary


The Company has elected to use the previous GAAP carrying amount of its investment in subsidiaries on the date of transition as its deemed cost on that date, in its standalone financial statements. Consequently, deemed investment arising on account of financial guarantee contract on behalf of the subsidiaries, for no consideration, has not been recognised.


III. Mandatory exemptions from retrospective application


The Company has applied the following exceptions to the retrospective application of Ind AS as mandatorily required under Ind AS 101:


i. Estimates


On assessment of the estimates made under the Previous GAAP financial statements, the Company has concluded that there is no necessity to revise the estimates under Ind AS, as there is no objective evidence of an error in those estimates. However, estimates that were required under Ind AS but not required under Previous GAAP are made by the Company for the relevant reporting dates reflecting conditions existing as at that date.


ii. Classification and measurement of financial assets


The classification of financial assets to be measured at amortised cost or fair value through other comprehensive income is made on the basis of the facts and circumstances that existed on the date of transition to Ind AS.


IV Transition to Ind AS - Reconciliations


The following reconciliations provide the explanations and quantification of the differences arising from the transition from Previous GAAP to Ind AS in accordance with Ind AS 101:


i. Reconciliation of equity as at 1st April 2015


ii. Reconciliation of equity as at 31 March 2016


iii. Reconciliation of Statement of Profit and Loss for the year ended 31 March 2016


iv. Adjustments to Statement of Cash Flows for the year ended 31 March 2016


Previous GAAP figures have been reclassified/regrouped wherever necessary to conform with financial statements prepared under Ind AS.


Notes to reconciliation of equity as at 1 April 2015 between Previous GAAP to Ind AS:


(a) Fair valuation of investment in venture capital funds and amortisation of investment in fixed income corporate bonds under effective interest rate method:


The Company has invested Rs.169.4 million in venture capital funds. It has designated such investments as financial assets measured at fair value through profit and loss on the date of transition. The fair value of the investments is Rs.226.4 million on the date of transition and an unrealised gain of Rs.57.0 million has been recognised in retained earnings.


The Company has invested in certain fixed income corporate bonds at a premium to the face value of the bonds with the sole intention to collect payments of principal and interest till maturity. Accordingly, the investments has been classified as financial assets measured at amortised cost. The premium over the face value of the bonds has been amortised under effective interest rate (EIR) method with a negative impact of Rs.4.2 million on the equity on the date of transition.


(b) Fair valuation of interest free and concessional interest rate loans to subsidiaries:


The Company has provided interest free and concessional interest rate loans to subsidiaries. These loans to subsidiaries have been fair valued on the date of their initial recognition, by discounting such loans using the market rate of interest on the date of initial recognition, and subsequently amortised under effective interest rate. This has resulted in a negative impact of Rs.259.0 million on the equity on the date of transition.


(c) Fair valuation of security deposits for rented premises The Company has given interest free security deposits for rented premises. The interest free security deposits have been fair valued on the date of initial recognition and the difference between the transaction amount and the fair value has been recognised as prepaid rent. The security deposits have been subsequently amortised under effective interest rate method and the prepaid rent on a straight line basis over the term of the lease. This has resulted in recognising prepaid rent of Rs.2.0 million in other non-current assets and Rs. 0.7 million in other current assets. Also, security deposits have been reduced by Rs.2.7 million with a cumulative impact of Rs. 0.2 million on retained earnings on the date of transition.


(d) Fair valuation of investment in quoted equity shares:


The Company has investment in quoted equity shares of other companies. These investments have been fair valued on the date of transition with a corresponding unrealised gain of Rs. 19.6 million, being recognised in retained earnings.


(e) Fair valuation of loans to entities other than subsidiaries: The Company has provided an interest free loan to an entity which is not its subsidiary. It has fair valued this loan on initial recognition and subsequently accounted these at amortised cost using effective interest rate method. As a result the amount has been reduced from Rs.59.3 million to Rs.45.2 million.


(f) Amortisation of loan processing fees under effective interest rate method:


Transaction cost incurred on external commercial borrowings have been reduced from the borrowings on the date of initial recognition and amortised using effective interest rate method. Accordingly, Non-current borrowings are reduced by Rs.2.3 million and current maturity of Non-current borrowings by Rs.2.3 million with a corresponding gain recognised in Retained earnings.


(g) Restatement of provision for compensated absences


An amount of Rs.51.5 million pertaining to the period prior to 1 April 2015 was recognised during the financial year ended 31 March 2016. The same has been restated on the date of transition with a corresponding loss recognised in equity on the date of transition.


(h) Deferral of income related to dossier licensing arrangement


An amount of Rs.11.3 million in respect of consideration received for dossier licensing arrangement is not considered as a separate obligation and shall be recognised when the corresponding goods under the agreement are sold. There were no sales till the date of transition and the entire amount has been deferred with a corresponding negative impact recognised in Retained earnings.


(i) Fair valuation of financial guarantee contract


The Company has provided guarantees for loans taken by the subsidiaries. This financial guarantees have been measured at fair value on the date of initial recognition with corresponding amount being recognised as unearned guarantee commission. The same has been amortised over the term of the guarantee on a straight line basis. As a result an amount of Rs.16.2 million has been recognised as unearned guarantee commission on the date of the transition with a corresponding negative impact to retained earning.


(j) Deferred tax


The Company has recognised a deferred tax asset of Rs.85.3 million on the temporary differences arising on account of the above Ind AS adjustments


Notes to reconciliation of equity as at 31 March 2016 between Previous GAAP to Ind AS:


(a) Fair valuation of investment in venture capital funds and amortisation of investment in fixed income corporate bonds under effective interest rate method:


The Company has invested Rs.252.1 million in venture capital funds as at 31 March 2016. The fair value of the investment was Rs.332.3 million on that date. Cumulatively the amount of investment has increased by Rs.80.2 million under Ind AS from that under previous GAAP, as at 31 March 2016.


The Company has invested in certain fixed income corporate bonds at a premium to the face value of the bonds with the sole intention to collect payments of principal and interest till maturity. Hence the investments has been classified as financial assets measured at amortised cost. The premium over the face value of the bonds has been amortised under effective interest rate (EIR) method. Also the Company has reversed the premium that it had written off against such investments during the year ended 31 March 2016. As a result, there is a net increase of Rs.0.2 million in non-current investments.


(b) Fair valuation of interest free and concessional interest rate loans to subsidiaries:


The Company has provided interest free and concessional interest rate loans to subsidiaries. These loans to subsidiaries have been fair valued on the date of their initial recognition by discounting such loans using the market rate of interest on the date of initial recognition, and subsequently amortised under effective interest rate. Also, interest rates have been revised for loans given during the financial year 2014-15 in the year ended 31 March 2016. This change resulted in substantial modification of contractual cash flows, requiring to remeasure the financial assets in accordance with the revised terms. This has resulted in a net decrease of Rs. 177.6 million in the loans to subsidiaries.


(c) Fair valuation of security deposits for rented premises The Company has given interest free security deposits for rented premises. The interest free security deposits have been fair valued on the date of initial recognition and the difference between the transaction amount and the fair value has been recognised as prepaid rent. The security deposits have been subsequently amortised under effective interest rate method and the prepaid rent on a straight line basis over the term of the lease. This has resulted in recognising prepaid rent of Rs.2.2 million in other non-current assets and Rs.1.1 million in other current assets. Also, security deposits have been reduced by Rs.3.6 million as at 31 March 2016 from other current financial assets with a cumulative impact of Rs.0.3 million in statement of profit and loss.


(d) Fair valuation of investment in Avenue Venture Capital Fund:


The Company lost control over Avenue Venture Capital Fund and designated the investment in the fund as financial asset measured at fair value through profit and loss. This has resulted in increase of Rs.785.0 million in current investment on account of fair value measurement of the same as at 31 March 2016.


(e) Fair valuation of loans to entities other than subsidiaries: The Company has provided an interest free loan to an entity which is not its subsidiary. It has fair valued this loan on initial recognition and subsequently accounted these at amortised cost using effective interest rate method. As a result the amount has been reduced from Rs.52.3 million to Rs.41.4 million.


(f) Amortisation of loan processing fees under effective interest rate method:


The Company has incurred transaction costs on its external commercial borrowing. The same has been reduced from the borrowing on the date of initial recognition and amortised using effective interest rate method. As a result current maturity of long term borrowing has been reduced by Rs.1.6 million.


(g) Deferral of income related to dossier licensing arrangement


An amount of Rs.23.7 million pertains to amount received in consideration for dossier licensing arrangement. The same is not considered as a separate obligation and shall be recognised when goods are sold. There were no sales till 31 March 2016 and the entire amount has been deferred and recognised as advance from customers in other current liabilities.


(h) Deferred tax


The Company has recognised a net deferred tax liability of Rs.226.3 million on the temporary differences arising on account of the above Ind AS adjustments as at 31 March 2016


Notes to reconciliation of Statement of profit and loss for the year ended 31 March 2016 between previous GAAP to Ind AS:


(a) Reclassification of excise duty and customers’ incentives Excise duty (net of excise benefits) of Rs.856.2 million has been reclassified from revenue to other expenses. This has resulted in increase of revenue and other expenses by Rs.856.2 million.


Cash discount and other incentives directly attributable to sales of Rs.559.0 million have been reclassified from other expenses to revenue. This has resulted in decrease of revenue and other expenses by Rs.559.0 million


(b) Reclassification of cash discount from suppliers, deferral of income from dossier license agreement and foreign exchange loss arising on amortisation of loans to subsidiaries in foreign currency under EIR method Cash discount received from suppliers of Rs.11.1 million has been reclassified from other operating income to cost of raw material consumed. An income of Rs.12.4 million from the dossier licence agreement has been deferred and recognised as advance from customers.


Foreign exchange loss of Rs.10.2 million arising on amortisation of loans to subsidiaries in foreign currency under EIR method has been reduced from other operating revenue.


(c) Reversal on account of restatement of provision of compensated absences and reclassification of period cost from employee benefit expense to finance cost A provision of compensated absences of Rs.51.5 million pertained to period before 1 April 2015 and hence has been restated under Ind AS, resulting in reversal of the expense recognised during the year ended 31 March 2016.


The interest cost of Rs.50.7 million on long term employee benefits has been reclassified from employee benefit expense to finance costs.


(d) Amortisation of prepaid rent arising on fair valuation of security deposits on initial recognition


An amount of Rs.2.1 million has been recognised as rent expenses on account of amortisation of prepaid rent arising on fair valuation of security deposit on initial recognition


(e) Unwinding of interest income on interest free and concessional interest rate loans to subsidiaries:


An amount of Rs.21.9 million has been recognised as interest income on unwinding of interest free and concessional rate loans to subsidiaries recognised at fair value on initial recognition.


(f) Gain on substantial modification of contractual cash flows from loans to subsidiaries


An amount of Rs.69.8 million has been recognised as gain on substantial modification of cash flows from loans to subsidiaries on account of change in interest rates on loans disbursed, during the financial year 2014-15, in the year ended 31 March 2016.


(g) Gain on change in fair value of investment in venture capital fund


An amount of Rs.808.4 million has been recognised as gain on change in fair value of investment in venture capital funds during the financial year ended 31 March 2016.


(h) Unwinding of interest income on interest free loans to entities other than subsidiaries:


The Company has provided an interest free loan to an entity which is not its subsidiary. It has fair valued this loan on initial recognition and amortised the same under effective interest rate method. The Company has recognised an interest income Rs.3.2 million on unwinding of such loan which was recognised at fair value on initial recognition.


(i) Amortisation of unearned guarantee commission The Company has recognised guarantee commission on financial guarantee provided on loans taken by subsidiaries. This has resulted in an increase of other income by Rs.16.2 million.


(j) Fair valuation of quoted equity shares recognised in earlier period


The Company has recognised mark to market gain on quoted equity shares amounting to Rs.19.6 million in retained earnings on transition to Ind AS. Accordingly, the realised gain accounted under previous GAAP on sale of such equity shares in the year ended 31 March 2016 was reversed.


(k) Reversal of amortisation of premium on Bonds and unwinding of interest income on discounted interest free premise deposits


The other income has been increased due to reversal of amortisation of premium on bonds amounting to Rs.4.4 million and unwinding of interest income on discounted interest free premise deposits amounting to Rs.1.9 million.


(l) Amortisation of loan processing fees under effective interest rate method:


The Company has incurred transaction costs on its external commercial borrowing. The same has been reduced from the borrowing on the date of initial recognition and amortised using effective interest rate method. As a result an amount of Rs.3.0 million has been recognised as finance cost on account of amortisation under the effective interest rate method


(m) Deferred tax


The Company has recognised a deferred tax expense of Rs.311.6 million on the temporary differences arising on account of the above Ind AS adjustments


(n) Actuarial gain/loss


Under Ind AS, all actuarial gain and loss are recognised in other comprehensive income. Under previous GAAP the Company has recognised actuarial gains and losses in the statement of profit and loss amounting to Rs.0.7 million.


(iv) Adjustments to Statement of Cash Flows for the year ended 31 March 2016


There are no material differences between the Statement of Cash Flows presented under Ind AS and previous GAAP


5.10 During the previous year ended 31 March 2016, the Company has sold brands and trademarks relating to its In Vitro Fertilisation (IVF) formulations to Ordain Health Care Global Private Limited for a total consideration of Rs.205.0 million.


5.11 Derivative Contracts


Company has entered into an interest rate swap contract to hedge the interest rate risk with respect to the foreign currency borrowing with a variable interest rates based on LIBOR. However the Company has opted not to follow hedge accounting and it has fair valued the financial instruments and the reversal of mark to market losses on the instrument has been recognised to the Statement of Profit and Loss during the year amounting to Rs.Nil ( for the previous year ended 31 March 2016 Rs.3.1 million). During the year Company has repaid the loan as per repayment schedule.


5.12 The gross amount required to be spent on Corporate Social Responsibility (“CSR”) by the Company during the year is Rs.106.4 million (Previous year : Rs.90.9 million) The Company has spent Rs.61.8 million (Previous Year : 30.1 million) towards CSR as per the approved CSR policy of the Company on healthcare, women empowerment, education, sanitation, conservation of environment, rural development.


Figures in the brackets are the corresponding figures of the previous year.


5.13 Disclosure for specified bank notes:


During the year, the Company had specified bank notes (SBNs) and other denomination notes as defined in the MCA notification G.S.R. 308(E) dated 31st March, 2017, on the details of Specified Bank Notes (SBNs) held and transacted during the period from 8th November, 2016 to 30th December, 2016, the denomination wise SBNs and other notes as per the notification is given below:


*For the purpose of this clause ‘Specified Bank Notes’ shall have the same meaning provided in the notification of the Government of India, in the Ministry of Finance, Department of Economic Affairs number S.O. 3407(E), dated the 8th November, 2016.


5.14 Recent accounting pronouncements


In March 2017, the Ministry of Corporate Affairs issued the Companies (Indian Accounting Standards) (Amendments) Rules, 2017, notifying amendments to Ind AS 7, ‘Statement of Cash Flows’. These amendments are in accordance with the recent amendments made by International Accounting Standards Board (IASB) to IAS 7, ‘Statement of Cash Flows’. The amendments are applicable to the Company from 1 April 2017.


The amendment to Ind AS 7 requires the entities to provide disclosures 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, suggesting inclusion of a reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities, to meet the disclosure requirement.


The Company is evaluating the requirements of the amendment and the effect on the financial statements is being evaluated.


5.15 Government Grant


The Company is eligible for government grants which are conditional upon construction of new factories in the Sikkim region. One of the grants, received in 2014-15 amounted to Rs.72.4 million with respect to the Kumrek facility. The factory has been constructed and been in operation since August 2007. The second grant is with respect to Samardung facility in Sikkim amounting to Rs.122.1 million for which the Company has initiated the process for claim. The factory has been constructed and been in operation since October, 2012. These grants, recognized as deferred income, is being amortized over the useful life of the plant and machinery in proportion in which the related depreciation expense is recognised.


5.16 Asset Held for Sale


During the year, the Company has decided to sell land situated at Panoli GIDC, Gujarat, being no longer required for business purposes. Accordingly, the said land has been stated at its carrying value (being lower of its fair value less costs to sell) amounting to Rs.18.2 Million and is presented as “Asset held for sale” as on 31 March 2017. The Company has entered into a Memorandum of Understanding (“MoU”) with the potential buyers for the sale of land.


5.17 During the year ended 31 March 2016, considering future growth requirement of domestic business, the Company had commenced construction of new units at Sikkim which would be entitled for fiscal incentives including benefit under income tax. Further, Finance Act 2016 had partially extended income tax benefit on R&D expenditure up to fiscal year 2019-20. Considering that these factors could result in to lower utilisation of accumulated MAT credit entitlement to the extent of Rs. 834.1 million as at 31 March 2016, the Company had charged off MAT credit entitlement to the extent of Rs.834.1 million under ‘tax expense’ in year ended 31 March 2016.

CIN: U67190WB2003PTC096617. Trading in Commodities is done through our Group Company Dynamic Commodities Pvt. Ltd. The company is also engaged in Proprietory Trading apart from Client Business.
“2019 © COPYRIGHT DYNAMIC EQUITIES PVT. LTD.”

Disclaimer: There is no guarantee of profits or no exceptions from losses. The investment advice provided are solely the personal views of the research team. You are advised to rely on your own judgment while making investment / Trading decisions. Past performance is not an indicator of future returns. Investment is subject to market risks. You should read and understand the Risk Disclosure Documents before trading/Investing.

Disclosure: We, Dynamic Equities Private Limited are also engaged in Proprietory Trading apart from Client Business. In case of any complaints/grievances, clients may write to us at compliance@dynamiclevels.com

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