1. (a) General information
Balkrishna Industries Limited (‘the Company’) is engaged in the business of manufacturing and selling of “Off-Highway Tyres” (OHT) in the specialist segments such as Agricultural, Industrial & Construction, Earthmovers & Port, Mining, Forestry, Lawn & Garden and All Terrain Vehicles (ATV).
The company is a public limited company incorporated and domiciled in India and has its registered office at Waluj MIDC, Aurangabad, Maharashtra, India.
NOTE NO. 2
First - time adoption of Ind AS
I. Transition to Ind AS
These are the company’s first financial statements prepared in accordance with Ind AS.
The accounting policies set out in note 1(b) have been applied in preparing the financial statements for the year ended 31 March 2017, the comparative information presented in these financial statements for the year ended 31 March 2016 and in the presentation of an opening Ind AS balance sheet at 1 April 2015 (the Company’s date of transition). In preparing its opening Ind AS balance sheet, the Company has adjusted the amount reported previously in financial statements prepared in accordance with the accounting standards notified under Companies (Accounting Standards) Rules, 2006 (as amended) and other relevant provisions of the Act (previous GAAP or Indian GAAP). An explanation of how the transition from previous GAAP to Ind AS has affected the company’s financial position and financial performance is set out in the following tables and notes.
II. 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
Ind AS 101 permits a first time adopters to continue with the carrying value for all its property, plant and equipment, intangible assets and investment property as recognised in the financial statements as at the date of transition to Ind AS, measured as per the previous GAAP and use that as its deemed cost as at the date of transition.
Accordingly, the company has elected to measure all of its PPE, intangible asset and investment property at their previous GAAP carrying values.
b) Deemed cost for investment in subsidiary
The Company has elected to use the previous GAAP carrying amount of its investment in subsidiary on the date of transition as its deemed cost on that date, in its separate financial statements.
c) Designation of previously recognised financial
Instruments Ind AS 101 allows an entity to designate investments in equity instruments at FVOCI on the basis of the facts and circumstances at the date of transition to Ind AS.
The company has elected to apply this exemption for its investment in quoted equity shares.
The remaining voluntary exemptions as per Ind AS 101 - First time adoption either do not apply or are not relevant to the Company
III. Exceptions from full retrospective application:
a) Sales tax deferral loan
By applying the exception available as per Ind AS 101, the company has used previous GAAP carrying amount of the loan at the date of transition to Ind AS as the carrying amount of the loan in the opening Ind AS Balance Sheet.
b) Hedge accounting
Hedge accounting is applied from 1st April 2016 and therefore previous period comparative i.e., F.Y 2015-16 has not been restated and the same will continue to reflect fair value through profit and loss accounting.
Upon an assessment of the estimates made under Indian GAAP, the Company has concluded that there was no necessity to revise such estimates under Ind AS, except where estimates were required by Ind AS and not required by Indian GAAP The company made estimate for following items in accrodance with Ind AS at the date of transition as these were not required under previous GAAP:
- Investment in equity instruments carried at FVOCI; and
- Investment in debt instruments carried at FVTPL.
d) Classification and measurement of financial assets
The Company has classified and measured the financial assets (investment in debt instruments) on the basis of facts and circumstances that exist at the date of transition to Ind AS.
e) Long term foreign currency monetary items
Under previous GAAP, paragraph 46/ 46A of AS 11 The Effects of Changes in Foreign Exchange rate, provide an alternative accounting treatment to companies with respect to exchange differences arising on restatement of long term foreign currency monetary items. Exchange differences on account of depreciable assets could be added/deducted from the cost of the depreciable asset, which would then be depreciated over the balance life of the asset. The company has availed optional exemption to continue the above accounting treatment in respect of the long term foreign currency monetary items recognised in the financial statements for the period immediately before the begining of first Ind As reporting period i.e 1st April 2016. The remaining mandatory exceptions either do not apply or are not relevant to the Company.
(f) Reconciliation of statement of Cash Flow;
There are no material adjustments to the statement of cash flow as reported under previous GAAP
(g) Notes to the reconciliation:
1. Fair valuation of investments in mutual funds
Under previous GAAP, investments in mutual funds were classified as long term investments or current investments based on the intended holding period and realisability. Current investments were measured at lower of cost or market price as of each reporting date while long term investments were measured at cost reduced for dimunition. Under Ind AS, these investments are required to be measured at fair value. The resulting fair value changes of these investments have been recognised in retained earnings as at the date of transition and subsequently in the profit or loss for the year ended 31 March 2016.
2. Fair valuation of Investment in quoted equity shares
Under previous GAAP, investments in quoted equity shares were classified as non current investments based on the intended holding period and realisability and was measured at cost as of each reporting date. Under Ind AS, these investments are required to be measured at Fair Value through Other Comprehensive Income (FVOCI) or Profit and Loss (FVTPL) and the company has elected to measure it at FVOCI. The resulting fair value changes of these investments have been recognised in retained earnings as at the date of transition.
3. Proposed dividend
Indian GAAP, proposed dividends are recognised as a liability in the period to which they relate, irrespective of when they are declared. Under Ind-AS, a proposed dividend is recognised as a liability in the period in which it is declared by the company (usually when approved by shareholders in a general meeting) or paid. In the case of the Company, the declaration of dividend occurs after transition date. Therefore, the liability recorded for this dividend has been derecognised against retained earnings.
4. Deferred revenue
Ind AS 18 requires an evaluation of continuing managerial involvement and effective control of goods in case of sale of goods. In view of this requirement, the company has deferred revenue of sale of goods.
5. Accounting for derivative and foreign exchange differences
a) Ind AS 109 requires all derivatives to be measured at fair value as per Ind AS 113 on the reporting date with both unrealised gains and losses being recognised in the statement of profit and loss for the period in which such changes arise, unless hedge accounting is applied. Accordingly the company has fair valued foreign currency forward contracts outstanding as at transition date and as at 31st March 2016 and recognised gain / loss in the retained earnings and statement of profit and loss respectively and corresponding effect is given to asset or liability for gain and loss respectively, as Derivative Asset and Derivative liability.
b) The group has also translated all financial assets / financial liabilities denominated in foreign currency at the year end rates.
6. Interest bearing loans and borrowings :
Under Indian GAAP, transaction costs incurred in connection with interest bearing loans and borrowings are amortised upfront and charged to profit or loss for the period. Under Ind-AS, transaction costs are included in the initial recognition amount of financial liability and charged to profit or loss using the effective interest method or amortised on straight line basis over the period of loan.
7. Fair valuation of preference shares:
The investment in preference shares with below market rate of interest was made with the objective of procuring electricity from the vendor at a subsidised rate when compared to the market rates. As per Ind AS 109, investments in preference shares is to measured at fair value using market rate of interest for discounting of future cash flows from those investments. The difference between the fair value and nominal value of the preference shares is treated as prepaid power cost. The preference shares have been subsequently amortised under effective interest rate method and the prepaid power cost on a straight line basis over the term of the preference shares. This has resulted in recognising prepaid power cost and corresponding reduction in investment amount.
8. Other deferred tax adjustments :
Indian GAAP requires deferred tax accounting using the income statement approach, which focuses on differences between taxable profits and accounting profits for the period. Ind AS 12 requires entities to account for deferred taxes using the balance sheet approach, which focuses on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. The application of Ind AS 12 approach has resulted in recognition of deferred tax on new temporary differences which was not required under Indian GAAP.
9. Government Grant:
Apportionment of Government Grant recognised under Export Promotion Capital Goods (EPCG) scheme and corresponding charge of depreciation on account of grossing-up of Property, Plant & Equipment.
10. Property, Plant and Equipment: Interest bearing loans and borrowings:
Under Indian GAAP, transaction costs incurred in connection with interest bearing loans and borrowings are capitalized as a part of PPE. Under Ind-AS, transaction costs are included in the initial recognition amount of financial liability and charged to profit or loss using the effective interest method or amortised on straight line basis over the period of loan. To restate the carrying amount of loan in accordance with Ind AS 109, the carrying amount of PPE as at the date of the transition is reduced by the amount of processing cost (net of cumulative depreciation impact).
11. Remeasurement of post employment benefit obligation:
Under Ind AS, remeasurements 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 recognised in other comprehensive income instead of profit and loss under the previous GAAP.
B. Measurement of fair values
Ind AS 107, ‘Financial Instrument - Disclosure’ requires classification of the valuation method of financial instruments measured at fair value in the Balance Sheet, using a three level fair-value-hierarchy (which reflects the significance of inputs used in the measurements). The hierarchy gives the highest priority to un-adjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to un-observable inputs (Level 3 measurements). Fair value of derivative financial assets and liabilities are estimated by discounting expected future contractual cash flows using prevailing market interest rate curves. The three levels of the fair-value-hierarchy under Ind AS 107 are described below:
Level 1: Level 1 Heirarchy includes financial instruments measured using quoted prices.
Level 2: The fair value of financial instruments that are not traded in an active market are determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.
Level 3: If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. e.g. unlisted equity securities.
Transfers between Levels
There have been no transfers between Levels during the reporting periods
The following tables show the valuation techniques used in measuring Level 2 and Level 3 fair values, as well as the significant unobservable inputs used.
C. Financial risk management
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 risk management framework. The board of directors is responsible for developing and monitoring the Company risk management policies.
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 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, and arises principally from the Company’s receivables from customers and investments in debt securities, cash and cash equivalents, mutual funds, bonds etc.
The carrying amount of financial assets represents the maximum credit exposure.
Trade and other receivables
Around 85% of the sales are export sales. For major part of the sales, customer credit risk is managed by requiring domestic and export customers to pay advances before transfer of ownership, therefore substantially eliminating the Company’s credit risk in this respect.
Based on prior experience and an assessment of the current economic environment, management believes that no provision is required for credit risk wherever credit is extended to customers.
Concentration of credit risk
At 31st March 2017, the carrying amount of the Company’s most significant customer is INR 8,855 Lakhs (31st March, 2016 : INR 6,971 Lakhs; 1st April, 2015 : INR 5,218 Lakhs)
Loans to others
The credit worthiness of the counter party is evaluated by the management on an ongoing basis and is considered to be good. The Company did not have any amounts that were past due but not impaired. The Company has no collateral in respect of these loans.
Investment in debentures
The company does not pereceive any risk as these are either issued by subsidiary company or other reputed financial institution.
Investment in mutual funds and bonds
The investment in mutual funds, Government bonds are entered into with credit worthy fund houses, Government of India and financial institution respectively. The credit worthiness of these counter parties are evaluated by the management on an ongoing basis and is considered to be good. The Company does not expect any losses from non-performance by these counter-parties.
The derivatives are entered into with bank and financial institution counterparties with good credit ratings.
Cash and cash equivalents
Credit risk from balances with banks is managed by the Company’s treasury department in accordance with the company’s policy. Investment of surplus funds are made in mainly in mutual funds with good returns and within approved credit ratings.
Other than trade and other receivables, the Company has no other financial assets that are past due but not impaired.
iii. Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by ensuring, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risk to the Company’s reputation.
The Company has obtained fund and non-fund based working capital lines from various banks. The Company also constantly monitors funding options available in the debt and capital markets with a view to maintaining financial flexibility.
As at 31st March, 2017, the Company had working capital of INR 10,430 Lakhs, including cash and cash equivalents of INR 1,141 Lakhs, and highly marketable current investment of INR 45,898 Lakhs.
As at 31st March, 2016, the Company had working capital of INR 4,868 Lakhs, including cash and cash equivalents of INR 30,118 Lakhs, and highly marketable current investment of INR 27,966 Lakhs.
As at 1st April, 2015 the Company had working capital of INR 77,677 Lakhs, including cash and cash equivalents of INR 43,037 Lakhs, and highly marketable current investment of INR 42,506 Lakhs.
Exposure to liquidity risk
The table below analyses the Company’s financial liabilities into relevant maturity groupings based on their contractual maturities for:
* all non derivative financial liabilities
* net and gross settled derivative financial instruments for which the contractual maturites are essential for the understanding of the timing of the cash flows.
^Guarantees issued by the company on behalf of step down subsidiaries are with respect to borrowings raised by the respective entities. These amounts will be payable on default by the concerned entity. As of the reporting date, none of the step down subsidiaries have defaulted and hence, the company does not have any present obligation to third parties in relation to such guarantees.
iv. Market risk
Market risk is the risk of loss of future earnings, fair values or future cash flows that may result from adverse changes in market rates and prices (such as interest rates, foreign currency exchange rates ) or in the price of market risk-sensitive instruments as a result of such adverse changes in market rates and prices. Market risk is attributable to all market risk-sensitive financial instruments, all foreign currency receivables and payables and all short term and long-term debt. The Company is exposed to market risk primarily related to foreign exchange rate risk, interest rate risk and the market value of its investments. Thus, the Company’s exposure to market risk is a function of investing and borrowing activities and revenue generating and operating activities in foreign currencies.
a) Currency risk
The company is exposed to currency risk to the extent that there is a mismatch between the currencies in which sales, purchase, other expenses and borrowings are denominated and the functional currency of the company. The functional currency of the company is Indian Rupees (INR). The currencies in which these transactions are primarily denominated are EURO and USD.
At any point in time, the Company generally hedges its estimated foreign currency exposure in respect of its forecast sales over the following 12 to 18 months. The Company uses forward exchange contracts to hedge its currency risk. Such contracts are generally designated as cash flow hedges.
Hedge accounting is followed from 1st April, 2016.
The Company, as per its risk management policy, uses foreign exchange forward contract and cross currency forward contracts primarily to hedge foreign exchange. The Company does not use derivative financial instruments for trading or speculative purposes.
The strenghtening / weakening of the respective foreign currencies with respect to functional currency of Company would result in increase or decrease in profit or loss and equity as shown in table below. This analysis assumes that all other variables, in particular interest rates, remain constant. The following analysis has been worked out based on the exposures as of the date of statements of financial position.
b) 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 interest rates.
For details of the Company’s short-term and long term loans and borrowings, including interest rate profiles, refer to Note 52 of these financial statements.
Interest rate sensitivity - fixed rate instruments
The company’s fixed rate borrowings are carried at amortised cost. They are therefore not subject to interest rate risk as defined in IND AS 107, since neither the carrying amount nor the future cash flow will fluctuate because of a change in market interest rates.
Interest rate sensitivity - variable rate instruments
A reasonably possible change of 100 basis points in interest rates at the reporting date would have increased / decreased equity and profit or loss by amounts shown below. This analysis assumes that all other variables, in particular, foreign currency exchange rates, remain constant. This calculation also assumes that the change occurs at the balance sheet date and has been calculated based on risk exposures outstanding as at that date. The period end balances are not necessarily representative of the average debt outstanding during the period.
Offsetting financial assets and financial liabilities
The following table presents the recognised financial instruments that are offset, or subject to enforceable master netting arrangements and other similar agreements but not offset, as at 31st March 2017, 31st March 2016 and 1st April 2015. The column ‘net amount’ shows the impact on the company’s balance sheet if all set-off rights were exercised.
As part of its risk management strategy, the company generally hedges its net foreign currency exposure of highly forecasted sale transactions for the next 12 to 18 months in advance. The company uses forward contracts to hedge its currency exposure. Such contracts are designated as cash flow hedges.
The forward contracts are generally denominated in the same currency in which the sales realization is likely to take place. The hedge ratio is 1:1.
For derivative contracts designated as hedge, the Company documents, at inception, the economic relationship between the hedging instrument and the hedged item, the hedge ratio, the risk management objective for undertaking the hedge and the methods used to assess the hedge effectiveness.
Financial contracts designated as hedges are accounted for in accordance with the requirements of Ind AS 109 depending upon the type of hedge.
The Company applies cash flow hedge accounting to hedge the variability in the future cash flows attributable to foreign exchange risk.
Hedge effectiveness is ascertained at the time of inception of the hedge and periodically thereafter. The Company assesses hedge effectiveness both on prospective and retrospective basis. The prospective hedge effectiveness test is a forward looking evaluation of whether or not the changes in the fair value or cash flows of the hedging position are expected to be highly effective on offsetting the changes in the fair value or cash flows of the hedged position over the term of the relationship. On the other hand, the retrospective hedge effectiveness test is a backward-looking evaluation of whether the changes in the fair value or cash flows of the hedging position have been highly effective in offsetting changes in the fair value or cash flows of the hedged position since the date of designation of the hedge.
Hedge effectiveness is assessed through the application of critical terms match method. Any ineffectiveness in a hedging relationship is accounted for in the statement of profit and loss.
The company has formally designated and documented hedge relationship from 1st April 2016.
NOTE NO. 4
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 ‘net debt’ to ‘equity’. For this purpose, net debt is defined as total debt, comprising interest-bearing loans and borrowings less cash and cash equivalents, other bank deposits with banks and current investments.
The Company’s net debt to equity ratio as at 31st March 2017, 31st March 2016 and 1st April 2015 was as follows.
NOTE NO. 5
DISCLOSURE ON SPECIFIED BANK NOTES (SBNs)
During the year, the Company had specified bank notes or other denomination note as defined in the MCA notification G.S.R. 308(E) dated 31st March, 2017 on the details of Specified Bank Notes (SBN) 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:
Earning Per Share (EPS):
Basic EPS and Diluted 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.
Related Party Disclosures *
(Where transactions have taken place)
I Related Party Relationships
a) Key Management Personnel (KMP)
Mr. Arvind Poddar - Chairman & Managing Director, Mrs. Vijayalaxmi Poddar - Executive Director( up to 08.08.2015), Mr. Rajiv Poddar - Joint Managing Director, Mr.Vipul Shah - Director & Company Secretary#, Mr. Basant Bansal - Director Finance.
b) Relatives of Key Management Personnel :
Mrs. Vijayalaxmi Poddar-( w.e.f. 09.08.2015 ) Mrs. Khushboo Poddar, Mrs. Pooja Dhoot, Mrs. Shyamlata Poddar, Mr. Abhishek Bansal, Mr, Gunal Bansal
c) Other Related Parties -(Enterprises-KMP having significant influence/owned by major shareholders) Clothing Culture Ltd.
a) As at 31st March,2017, there are no Micro, Small and Medium Enterprises, as defined in the Micro, Small, Medium Enterprises Development Act, 2006, to whom the Company owes dues on account of principal amount together with interest and accordingly no additional disclosures have been made.
b) The above information regarding Micro, Small and Medium Enterprises has been determined to the extent such parties have been identified on the basis of information available with the Company. This has been relied upon by the auditors.
Employee Benefit obligations
(A) Defined Contribution Plan
The Company has various schemes for long-term benefits such as provident fund and superannuation. In case of funded schemes, the funds are recognised by the Income tax authorities and administered through trustees /appropriate authorities. The Company’s defined contribution plans are superannuation and employees’ pension scheme (under the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952) since the Company has no further obligation beyond making the contributions. The liability of the Company on the exempt Provident Fund managed by the trustees is restricted to the interest shortfall if any.
(B) Defined Benefit Plan
In accordance with the provisions of the Payment of Gratuity Act, 1972, the Company has a defined benefit plan which provides for gratuity payments. The plan provides a lump sum gratuity payment to eligible employees at retirement or termination of their employment. The amounts are based on the respective employee’s last drawn salary and the years of employment with the Company. Liabilities in respect of the gratuity plan are determined by an actuarial valuation, based upon which the Company makes annual contributions to the Group Gratuity cum Life Assurance Schemes administered by the LIC of India, a funded defined benefit plan for qualifying employees. Trustees administer the contributions made by the Company to the gratuity scheme.
The most recent actuarial valuation of the defined benefit obligation along with the fair valuation of the plan assets in relation to the gratuity scheme was carried out as at 31st March 2017. 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.
Based on the actuarial valuation obtained in this respect, the following table sets out the details of the employee benefit obligation and the plan assets as at balance sheet date:
EVENTS AFTER THE REPORTING PERIOD
The Board of Directors have recommended a final dividend of Rs.2.50 (125 %) per equity share of Rs.2/-each. The cash outgo on account of final dividend and dividend tax will be INR 2,908 Lakhs.
Previous year’s figures have been regrouped/reclassified wherever necessary to correspond with the current year’s classification/disclosure.