1. Corporate Information
Arvind Limited (‘the Company’) is one of India’s leading vertically integrated textile companies with the presence of almost eight decades in this industry. It is among the largest denim manufacturers in the world. It also manufactures a range of cotton shirting, denim, knits and bottom weights (Khakis) fabrics and Jeans and Shirts Garments. Arvind, through its subsidiary company Arvind Fashions Limited and its subsidiaries is marketing in India the branded apparel under various brands. The brands portfolio of the Company includes Domestic and International brands like Flying Machine, Arrow, US Polo, Izod, Elle, Cherokee etc. It also operates apparel value retail stores UNLIMITED. Arvind also has the presence in Telecom business directly and through joint venture companies. Recently Arvind has made foray in to Technical Textiles on its own and in joint venture with leading global players.
The Company is a public company domiciled in India and is incorporated under the provisions of the Companies Act applicable in India. Its shares are listed on two recognised stock exchanges in India. The registered office of the Company is located at Naroda Road, Ahmedabad - 380025.
The financial statements were authorised for issue in accordance with a resolution of the directors on May 11, 2017.
2. Statement of Compliance and Basis of Preparation
2.1 Compliance with Ind AS
The financial statements have been prepared in accordance with Indian Accounting Standards (“Ind AS”) as issued under the Companies (Indian Accounting Standards) Rules, 2015.
For all periods up to and including the year ended March 31, 2016, the Company prepared its financial statements in accordance with Accounting Standards specified in Section 133 of the Companies Act, 2013, read with Rule 7 of the Companies (Accounts) Rules, 2014 (“Indian GAAP") and other relevant provision of the Act. These financial statements for the year ended March 31, 2017 are the first financial statements that the Company has prepared in accordance with Ind AS. Refer to Note 46 for information of how the transition from previous GAAP to Ind AS has affected the Company’s Balance sheet, Statement of profit & loss and Statement of cash flow.
2.2 Historical Cost Convention
The financial statements have been prepared on a historical cost basis, except for the followings:
- Certain financial assets and liabilities measured at fair value (refer accounting policy regarding financial instruments);
- Derivative financial instruments measured at fair value;
- Assets held for sale - measured at fair value less cost to sell;
- Share based payments;
- Defined benefit plans - plan assets measured at fair value;
- Value in Use
In addition, the carrying values of recognised assets and liabilities designated as hedged items in fair value hedges that would otherwise be carried at amortised cost are adjusted to record changes in the fair values attributable to the risks that are being hedged in effective hedge relationships.
2.3 Rounding of amounts
The financial statements are presented in INR and all values are rounded to the nearest crore as per the requirement of Schedule III, except when otherwise indicated.
3. Significant accounting judgements, estimates and assumptions
The preparation of the Company’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and 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.
3.1. Significant judgements in applying the Company’s accounting policies
In the process of applying the Company’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the financial statements:
Finance lease commitments - Company as lessee
The Company has entered into leases whereby it has taken land on lease. The Company has determined, based on an evaluation of the terms and conditions of the arrangements, such as the lease term constituting a major part of the economic life of the property and the fair value of the asset, that it retains all the significant risks and rewards of ownership of these properties and accounts for the contracts as finance leases.
The Company assesses its revenue arrangement in order to determine if its business partner is acting as a principle or as an agent by analysing whether the Company has primary obligation for pricing latitude and exposure to credit / inventory risk associated with the sale of goods. The Company has concluded that certain arrangements are on principal to agent basis where its business partner is acting as an agent. Hence, sale of goods to its business partner is recognised once they are sold to the end customer.
3.2. Estimates and assumption
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.
Defined benefit plans
The cost of the defined benefit plans and other post-employment benefits and the present value of the 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, mortality rates and future pension increases. 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, management considers the interest rates of government bonds in currencies consistent with the currencies of the post-employment benefit obligation and extrapolated as needed along the yield curve to correspond with the expected term of the defined benefit obligation. The underlying bonds are further reviewed for quality. Those having excessive credit spreads are excluded from the analysis of bonds on which the discount rate is based, on the basis that they do not represent high quality corporate bonds.
The mortality rate is based on publicly available mortality tables. Those mortality tables tend to change only at intervals in response to demographic changes. Future salary increases are based on expected future inflation rates for the country.
Further details about defined benefit obligations are provided in Note 34.
Fair value measurement of financial instruments
When the fair values of financial assets and financial liabilities recorded in the Balance Sheet cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments. See Note 42 for further disclosures.
Allowance for uncollectible trade receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Estimated irrecoverable amounts are based on the ageing of the receivable balance and historical experience. Additionally, a large number of minor receivables is grouped into homogeneous groups and assessed for impairment collectively. Individual trade receivables are written off when management deems them not to be collectible. The carrying amount of allowance for doubtful debts is Rs.4.03 Crores (March 31, 2016 : Rs.0.95 Crores and April 1, 2015 : Rs.0.75 Crores).
The Company initially measures the cost of equity-settled transactions with employees using a binomial 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 equity-settled share-based payment transactions, the liability needs to be measured at the time of grant. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 37. Taxes
Deferred tax assets are recognised for unused tax credits to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
The Company has Rs.240.81 Crores (March 31, 2016 : Rs.231.90 Crores, April 1, 2015 : Rs.242.65 Crores) of tax credits carried forward. These credits expire in 15 years. The Company has taxable temporary difference and tax planning opportunities available that could partly support the recognition of these credits as deferred tax assets. On this basis, the Company has determined that it can recognise deferred tax assets on the tax credits carried forward.
Further details on taxes are disclosed in Note 29.
Revenue recognition - Customer loyalty program reward points
The Company estimates the fair value of points awarded under the Customer loyalty program by applying statistical techniques. Inputs to the model include making assumptions about expected redemption rates, the mix of products that will be available for redemption in the future and customer preferences. As points issued under the programme do not expire, such estimates are subject to significant uncertainty. As at 31 March 2017, the estimated liability towards unredeemed points amounted to approximately Rs.0.45 Crores (March 31, 2016 : Rs.0.83 Crores and April 1, 2015: Rs.0.33 Crores).
Refer Note 3.10 for the estimated useful life of Intangible assets. The carrying value of Intangible assets has been disclosed in Note 7.
Property, plant and equipment
Refer Note 3.6 for the estimated useful life of Property, plant and equipment. The carrying value of Property, plant and equipment has been disclosed in Note 5.
Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a DCF model. The cash flows are derived from the budget for the next five 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.
Above Assets and liability are of Real Estate Undertaking of Arvind Limited which has been classified as held for sale considering the following scheme of arrangement.
Scheme of Arrangement
A Composite Scheme of Arrangement (“the Scheme”) in the nature of Demerger and transfer of Real Estate Undertaking of Arvind Limited (“the Company”) to Arvind Infrastructure Limited (“AIL”) and Restructuring of Share Capital, under sections 391 to 394 read with sections 78, 100 and 103 of the Companies Act, 1956 has been sanctioned by the High Court of Gujarat at Ahmedabad on April 22, 2015. The Scheme has become effective from the appointed date 1st April 2015.
Pursuant to the Scheme, the Real Estate Undertaking stood demerged from the Company and transferred to and vested in AIL as a going concern with effect from the appointed date 1st April 2015. Upon the Scheme becoming effective:
a) From the appointed date, the assets and liabilities of the Real Estate Undertaking of the Company (Demerged Undertaking) have been transferred to AIL at their respective Book values.
b) AIL has credited its Share Capital Account with the aggregate face value of the equity shares issued 1 (One) fully paid Equity Shares of Rs.10/- each of AIL for every 10 (Ten) fully paid up Equity Shares of Rs.10/- each held by the shareholders of the Company.
c) The existing shares of AIL held by the Company and its nominees shall stand cancelled and the amount of such investment in the books of the Company shall be written off against the Securities Premium Account.
d) The amount of difference in the net value of assets transferred pursuant to the Scheme and the amount of consideration as issued, netted by existing share capital cancelled shall be adjusted against the Securities Premium Account.
Pursuant to the Scheme, Demerged Undertaking has been demerged from the Company with effect from 1st April 2015, (the appointed date):
a) As on appointed date, all the assets and the liabilities have been transferred to AIL at their respective book values.
b) As consideration, AIL has subsequently issued and allotted Equity Shares of Rs.10/- each fully paid up in the ratio of 1 (One) Equity Share of Rs.10/- each for every 10 (Ten) Equity Shares of Rs.10/- each of the Company, to the shareholders of the Company.
c) The amount of investment in AIL in the books of the Company of Rs.100.05 Crores has been adjusted against the Securities Premium Account.
d) The difference between the value of assets and liabilities transferred of Rs.0.08 Crores has been adjusted against the Securities Premium Account.
4.1. Terms/Rights attached to the equity shares
The Company has one class of shares referred to as equity shares having a par value of Rs.10 each. Each shareholder is entitled to one vote per share held. The dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting. In the event of liquidation, the equity shareholders are eligible to receive the remaining assets of the Company after distribution of all preferential amounts, in proportion to their shareholding.
4.2. Shares allotted as fully paid up pursuant to contract without payment being received in cash (during 5 years immediately preceding March 31, 2017)
3,410,528 Equity Shares of Rs.10 each were issued during the year 2012-2013 to the erstwhile shareholders of Arvind Products Limited pursuant to the Scheme of Amalgamation without payment being received in cash.
4.3. Shares reserved for issue under options
Refer Note 37 for details of shares to be issued under options
4.4 Objective, policy and procedure of capital management, refer Note 45
Nature of security:
Term loan of Rs.656.87 Crores
a Loans amounting to Rs.639.56 Crores (March 31, 2016 Rs.1499.36 Crores , April 01, 2015 Rs.1407.86 crores) are secured by (a) first charge on all the Immovable Properties, Movable Properties, Intangible Properties and General Assets of the Company presently relating to the Textile Plants excluding Immovable properties of Asoka Spintex Textile Plant and Arvind International Textile Plant and all Immovable Properties, Movable Properties, Intangible Properties and General Assets acquired by the Company at any time after execution of and during the continuance of the Indenture of Mortgage; (b) additional charge by way of mortgage on Immovable Properties at villages Jethlaj, Karoli, Vadsar, Moti Bhoyan, Santej and Khatrej; (c) charge on the Company’s Trademarks; (d) Secured by second charge on all the Company’s Current Assets both present and future relating to the Textile Plants and (e) first charge on Movable Fixed Assets of Jeans and Shirts Garment divisions at Bangalore.
b Loans of Rs.17.31 Crores (March 31, 2016 Rs.14.42 Crores , April 01, 2015 Rs.8.15 Crores) are secured by hypothecation of related vehicles.
c Rate of Interest and Terms of Repayment
d Nature of Security
Cash Credit and Other Facilities from Banks
Secured by first charge on all the Company’s Current Assets presently relating to the Textile Plants and all the Current Assets acquired by the Company at any time after the execution of and during the continuance of the Indenture of Mortgage. They are also secured by a second charge over all the Immovable Properties, Movable Properties, Intangible Properties and General Assets of the Company presently relating to the Textile Plants and all Immovable Properties, Movable Properties, Intangible Properties and General Assets acquired by the Company at any time after execution of and during the continuance of the Indenture of Mortgage. Some of the facilities are additionally secured by second charge on movable Plant and Machinery of the Jeans and Shirts Garment divisions at Bangalore.
e Rate of Interest
i. Working Capital Loans from banks carry interest rates ranging from 4.95% to 10.35% per annum.
ii. Inter Corporate Deposit carries interest rate of 8% to 10.25% per annum.
iii. Commercial Papers carry interest rates ranging from 6.44% to 6.50% per annum.
iv. Buyer’s credit arrangements carry interest rates ranging from 0.22% to 2.73%
5 (a) Trade payable
a The Company has not received any intimation from suppliers regarding their status under the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 and hence disclosures as required under Section 22 of The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 regarding:
(a) Principal amount and the interest due thereon remaining unpaid to any suppliers as at the end of accounting year;
(b) Interest paid during the year;
(c) Amount of payment made to the supplier beyond the appointed day during accounting year;
(d) Interest due and payable for the period of delay in making payment;
(e) Interest accrued and unpaid at the end of the accounting year; and
(f) Further interest remaining due and payable even in the succeeding years, until such date when the interest dues above are actually paid to the small enterprise. have not been given.
The Company is making efforts to get the confirmations from the suppliers as regard to their status under the said Act.
Note 6 : Segment Reporting
In accordance with Ind AS 108 ‘Operating Segment’, segment information has been given in the Consolidated Financial Statements of the Company and therefore, no separate disclosure on segment information is given in the Standalone Financial Statements.
The Company’s Provident Fund is administered by the Trust. The Rules of the Company’s Provident Fund administered by a Trust require that if the Board of the Trustees are unable to pay interest at the rate declared for Employees’ Provident Fund by the Government under Para 60 of the Employees’ Provident Fund Scheme, 1952 for the reason that the return on investment is less or for any other reason, then the deficiency shall be made good by the Company. Having regard to the assets of the fund and the return on the investments, the Company does not expect any deficiency in the foreseeable future.
B. Defined benefit plans:
The Company has following post employment benefits which are in the nature of defined benefit plans:
The Company provides for gratuity for employees in India as per the Payment of Gratuity Act, 1972. Employees who are in continuous service for a period of 5 years are eligible for gratuity. The amount of gratuity payable on retirement/termination is the employees last drawn basic salary per month computed proportionately for 15 days salary multiplied for the number of years of service. The gratuity plan is a funded plan administered by a Trust and the Company makes contributions to recognised Trust.
The company has instituted Employee Stock Option Scheme 2008 (ESOP 2008), pursuant to the approval of the shareholders of the company at their extra ordinary general meeting held on October 23, 2007. Under ESOP 2008, the Company has granted options convertible into equal number of equity shares of the face value of Rs.10 each.
During the year, the Company had specified bank notes or other denomination notes as defined in MCA notification G.S.R. 308(E) dated March 31, 2017 on the details of Specified Bank Notes (SBNs) held and transacted during the period from November 8, 2016 to December 30, 2016, the denomination wise SBNs and other notes as per notification is given below:
*For the purposes of this clause, the term ‘Specified Bank Notes’ shall have the same meaning provided in the notification of the Government of India, Ministry of Finance, Department of Economic Affairs number S.O. 3407(E), dated November 8, 2016.
Note 7 : Long-term foreign currency monetary items
The Company has elected the option to continue the below stated policy adopted for accounting for exchange differences arising from translation of long-term foreign currency monetary items recognized in the financial statements for the period ending immediately before March 31, 2016 as per the previous GAAP
(a) Exchange rate differences of long-term foreign currency loans which are related to acquisition of depreciable fixed assets have been added to or deducted from the cost of the assets and depreciated over the balance life of the assets and;
(b) Exchange rate differences on other long-term foreign currency loans have been transferred to ‘Foreign Currency Monetary Item Translation Difference Account’ to be amortized over the balance period of loans.
As a result:
(a) An amount of Rs.0.44 Crores (March 31, 2016 : 3.76 Crores and April 1, 2015 : 2.84 Crores) being the exchange rate loss for the year has been adjusted against the fixed assets.
(b) An amount of Rs.Nil (March 31, 2016 : Nil and April 1, 2015 : Rs.3.88 Crores) being the exchange rate loss for the year remains to be amortized as at the balance sheet date.
Note 8 : Lease Rent
(A) Factory Building is taken on lease period of 8 to 20 years with no option of renewal, no sub lease of the building. The particulars of these leases are as follows:
(B) Plant & Machineries are taken on operating lease for a period of 8 years with the option of renewal The particulars of these leases are as follows:
(C) The Company has taken various residential and office premises under operating lease or leave and license Agreements. These are generally cancellable, having a term between 11 months and 9 years and have no specific obligation for renewal. Payments are recognised in the Statement of Profit and Loss under ‘Rent’ in Note 27.
(D) Rent Income also includes Lease Rental received towards Land and Buildings. Such operating lease is generally for a period from 12 to 15 years with the option of renewal on mutual consent and premature termination of agreement through agreed notice period.
Note 9 : Corporate Social Responsibility (CSR) Activities:
a. The Company is required to spend Rs.8.76 Crores ; (March 31, 2016 7.27 Crores, April 01, 2015 : Rs.4.39 Crores) on CSR activities.
b. Amount spent during the year on:
Note 10 : Fair value disclosures for financial assets and financial liabilities
Set out below is a comparison, by class, of the carrying amounts and fair value of the Company’s financial instruments, other than those with carrying amounts that are reasonable approximations of fair values:
The management assessed that the fair values of cash and cash equivalents, other bank balances, loans, trade receivables, other current financial assets, trade payables and other current financial liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values:
The fair value of borrowings and other financial liabilities is calculated by discounting future cash flows using rates currently available for debts on similar terms, credit risk and remaining maturities.
The discount for lack of marketability represents the amounts that the Company has determined that market participants would take into account when pricing the investments.
The Company’s principal financial liabilities, other than derivatives, comprise borrowings and trade & other payables. The main purpose of these financial liabilities is to finance the Company’s operations and to support its operations. The Company’s principal financial assets include Investments, loans given, trade and other receivables and cash & short-term deposits that derive directly from its operations.
The Company’s activities expose it to market risk, credit risk and liquidity risk. In order to minimise any adverse effects on the financial performance of he company, derivative financial instruments, such as foreign exchange forward contracts, foreign currency option contracts are entered to hedge certain foreign currency exposures and interest rate swaps to hedge certain variable interest rate exposures. Derivatives are used exclusively for hedging purposes and not as trading / speculative instruments.
The Company’s risk management is carried out by a Treasury department under policies approved by the Board of directors. Company’s treasury identifies, evaluates and hedges financial risks in close co-operation with the Company’s operating units. The board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.
(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 three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments affected by market risk include borrowings, deposits, Investments, trade and other receivables, trade and other payables and derivative financial instruments.
Within the various methodologies to analyse and manage risk, Company has implemented a system based on “sensitivity analysis” on symmetric basis. This tool enables the risk managers to identify the risk position of the entities. Sensitivity analysis provides an approximate quantification of the exposure in the event that certain specified parameters were to be met under a specific set of assumptions. The risk estimates provided here assume:
- a parallel shift of 50-basis points of the interest rate yield curves in all currencies.
- a simultaneous, parallel foreign exchange rates shift in which the INR appreciates / depreciates against all currencies by 2%
- 10% increase / decrease in equity prices of all investments traded in an active market, which are classified as financial asset measured at FVOCI.
The potential economic impact, due to these assumptions, is based on the occurrence of adverse / inverse market conditions and reflects estimated changes resulting from the sensitivity analysis. Actual results that are included in the Statement of profit & loss may differ materially from these estimates due to actual developments in the global financial markets.
The analyses exclude the impact of movements in market variables on: the carrying values of gratuity, pension and other post-retirement obligations and provisions.
The following assumption has been made in calculating the sensitivity analyses:
- The sensitivity of the relevant statement of 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, March 31, 2016 and April 1, 2015 including the effect of hedge accounting.
- The sensitivity of equity is calculated by considering the effect of any associated cash flow hedges as at March 31, 2017, March 31, 2016 and April 1, 2015 for the effects of the assumed changes of the underlying risk
Interest rate risk
Interest rate risk arises from the sensitivity of financial assets and liabilities to changes in market rates of interest. The Company seeks to mitigate such risk by entering into interest rate derivative financial instruments such as interest rate swaps or cross-currency interest rate swaps. Interest rate swap agreements are used to adjust the proportion of total debt, that are subject to variable and fixed interest rates.
Under an interest rate swap agreement, the Company either agrees to pay an amount equal to a specified fixed-rate of interest times a notional principal amount, and to receive in return an amount equal to a specified variable-rate of interest times the same notional principal amount or, vice-versa, to receive a fixed-rate amount and to pay a variable-rate amount. The notional amounts of the contracts are not exchanged. No other cash payments are made unless the agreement is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and usually represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract.
As at March 31, 2017, after taking into account the effect of interest rate swaps, approximately 38% of the Company’s Borrowings are at fixed rate of interest (March 31, 2016 : 20% and April 1, 2015 : 19%)
Interest rate sensitivity
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on that portion of loans and borrowings affected, after the impact of hedge accounting. With all other variables held constant, the Company’s profit before tax is affected through the impact on floating rate borrowings, as follows:
Exclusion from this analysis are as follows:
- Fixed rate financial instruments measured at cost : Since a change in interest rate would not change the carrying amount of this category of instruments, there is no net income impact and they are excluded from this analysis
- The effect of interest rate changes on future cash flows is excluded from this analysis.
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 transacts business in local currency and in foreign currency, primarily in USD. The Company has obtained foreign currency loans and has foreign currency trade payables and receivables etc. and is, therefore, exposed to foreign exchange risk. The Company may use forward contracts, foreign exchange options or currency swaps towards hedging risk resulting from changes and fluctuations in foreign currency exchange rate. These foreign exchange contracts, carried at fair value, may have varying maturities varying depending upon the primary host contract requirements and risk management strategy of the company.
The Company manages its foreign currency risk by hedging appropriate percentage of its foreign currency exposure, as approved by Board as per established risk management policy. Details of the hedge & unhedged position of the Company given in Note no.32
Foreign currency sensitivity
The following tables demonstrate the sensitivity to a reasonably possible change in USD ,EUR and GBP rates to the functional currency of respective entity, with all other variables held constant. The Company’s exposure to foreign currency changes for all other currencies is not material. The impact on the Company’s profit before tax is due to changes in the fair value of monetary assets and liabilities. The impact on the Company’s pre-tax equity is due to changes in the fair value of foreign currency monetary items designated as cash flow hedge.
The movement in the pre-tax effect is a result of a change in the fair value of financial instruments not designated in a hedge relationship. Although the financial instruments have not been designated in a hedge relationship, they act as an economic hedge and will offset the underlying transactions when they occur.
Equity price risk
The Company’s investment consists of investments in publicly traded companies held for purposes other than trading. Such investments held in connection with non-consolidated investments represent a low exposure risk for the Company and are not hedged.
As at March 31, 2016, the exposure to listed equity securities at fair value was Rs.99.51 Crores. A decrease of 10% on the BSE market index could have an impact of approximately Rs.9.95 Crores on the OCI or equity attributable to the Company. An increase of 10% in the value of the listed securities would also impact OCI and equity. These changes would not have an effect on profit or loss.
As at March 31, 2017 the Company does not have any material exposure to listed equity securities
(b) Credit risk
Credit risk is the risk that a 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) and from its financing activities, including deposits with banks, foreign exchange transactions and other financial instruments.
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. Trade receivables are non-interest bearing and are generally on 7 days to 180 days credit term. Credit limits are established for all customers based on internal rating criteria. Outstanding customer receivables are regularly monitored and any shipments to major customers are generally covered by letters of credit. The Company has no concentration of credit risk as the customer base is widely distributed both economically and geographically.
An impairment analysis is performed at each reporting date on an individual basis for major clients. In addition, a large number of minor receivables are grouped into homogenous groups and assessed for impairment collectively. The calculation is based on actual incurred historical data. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in Note 8. The Company does not hold collateral as security. The Company evaluates the concentration of risk with respect to trade receivables as low, as its customers are located in several jurisdictions and industries and operate in largely independent markets.
The requirement of impairment is analysed as each reporting date. Refer Note 8 for details on the impairment of trade receivables.
Financial instruments and cash deposits
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 who meets the minimum threshold requirements under the counterparty risk assessment process. The Company monitors the ratings, credit spreads and financial strength of its counterparties. Based on its on-going assessment of counterparty risk, the group adjusts its exposure to various counterparties. The Company’s maximum exposure to credit risk for the components of the Balance sheet as of March 31, 2017, March 31, 2016 & April 1, 2015 is the carrying amount as disclosed in Note 42 except for financial guarantees. The Company’s maximum exposure for financial guarantee is given in Note 30.
(c) Liquidity risk
Liquidity risk is the risk that the Company may not be able to meet its present and future cash and collateral obligations without incurring unacceptable losses. The Company’s objective is to, at all times maintain optimum levels of liquidity to meet its cash and collateral requirements. The Company closely monitors its liquidity position and deploys a robust cash management system. It maintains adequate sources of financing including bilateral loans, debt and overdraft from both domestic and international banks at an optimised cost. It also enjoys strong access to domestic capital markets across equity.
For the purpose of the Company’s capital management, capital includes issued equity capital and all other equity reserves attributable to the equity holders of the Company. The primary objective of the Company’s capital management is to ensure that it maintains an efficient capital structure and healthy capital ratios in order to support its business and maximise shareholder value.
The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions or its business requirements. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Company monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. The Company includes within net debt, interest bearing loans and borrowings less cash and short-term deposits (including other bank balance).
In order to achieve this overall objective, the Company’s capital management, amongst other things, aims to ensure that it meets financial covenants attached to the interest-bearing loans and borrowings that define capital structure requirements. Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. There have been no breaches in the financial covenants of any interest-bearing loans and borrowing in the current period.
No changes were made in the objectives, policies or processes for managing capital during the years ended March 31, 2017, March 31, 2016 and April 1, 2015.
Under the terms of the major borrowing facilities, the Company has complied with the required financial covenants through out the reporting periods.
These financial statements, for the year ended March 31, 2017, are the first annual Ind AS financial statements, 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 previously published Indian GAAP financial statements as at and for the year ended March 31, 2016.
A. Exemptions applied
Ind AS 101 “First-time Adoption of Indian Accounting Standards” allows first-time adopter certain exemptions from the retrospective application of certain requirements under Ind AS. The Company has applied the following exemptions:
Ind AS optional exemptions
1 Deemed cost
Ind AS 101 permits a first time adopter to elect to measure an item of property, plant and equipment at the transition to Ind AS at its fair value and use that fair value as its deemed cost at that date. 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 & intangible assets at fair value on the date of transition to Ind AS and used those fair value as deemed cost of Property, plant and equipment & Intangible assets.
Ind AS 101 permits a first time adopter to elect to continue with the carrying value for all of its 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, since there is no change in the functional currency, the Company has elected to continue with the carrying value for all of its Investment properties, as recognised in its Indian GAAP financials, as deemed cost at the transition date.
2 Long Term Foreign Currency Monetary Items
The Company has elected the option provided under Ind AS 101 to continue the policy adopted for accounting for exchange differences arising from translation of long-term foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP.
3 Designation of previously recognised financial instruments
Ind AS 101 allows an entity to designate investments in equity instruments at FVOCI on the basis of facts and circumstances at the date of transition to Ind AS.
The Company has elected to apply this exemption.
4 Investment in Subsidiaries and Joint ventures
The Company has elected the option provided under Ind AS 101 to measure all its investments in Subsidiaries and Joint venture at previous GAAP carrying value on the date of transition in its separate financial statement and used that carrying value as the deemed cost of such investments.
5 Non-current assets held for sale and discontinued operations
The Company has elected the option provided under Ind AS 101 to measure non-current assets held for sale and discontinued operations at the lower of carrying value and fair value less cost to sell at the date of transition to Ind ASs.
Ind AS mandatory exceptions
An entity’s estimates in accordance with Ind AS at the date of transition to Ind AS shall be consistent with estimates made for the same date in accordance with previous GAAP, unless there is objective evidence that those estimates were in error.
Ind AS estimates as at April 1, 2015 and March 31, 2016 are consistent with the estimates as at the same date made in the conformity with previous GAAP . The Company made estimates for the following in accordance with Ind AS at the date of transition as these were not required under previous GAAP.
1. Investment in equity instruments carried at FVOCI
2. Impairment of financial assets based on Expected Credit Loss model
The estimates used by the Company to present these amounts in accordance with Ind AS reflect conditions at April 1, 2015, the date of transition to Ind AS and as of March 31, 2016.
2 Classification and measurement of financial assets
Ind AS 101 requires an entity to assess classification and measurement of financial assets (investment in debt instruments) on the basis of the facts and circumstances that exist at the date of transition to Ind AS.
Reconciliations between previous GAAP and Ind AS
Ind AS 101 requires an entity to reconcile equity, total comprehensive income and cash flows for prior periods. The following tables represent the reconciliations from previous GAAP to Ind AS:
Notes to the reconciliation of equity as at April 1, 2015 and March 31, 2016 and total comprehensive income for the year ended March 31, 2016
i. Fair Valuation of Property, plant and equipment & Intangible assets
The Company has elected to measure all items of Property, Plant and Equipment (PPE) & certain item of Intangible assets at fair value at the date of transition to Ind AS and to use the fair value as deemed cost on the date of transition. The resulting change has been adjusted in retained earnings. Change in depreciation & amortisation of the subsequent period due to fair valuation of items of PPE & Intangible assets have been recognised in statement of profit & loss.
ii. Impact of fair valuation of Financial Instruments
Under previous GAAP, the long-term investments were measured at cost less permanent diminution in value, if any. Ind AS requires all investments to be measured at fair value at the reporting date and all changes in the fair value subsequent to the transition date to be recognised either in the Statement of profit and loss or Other Comprehensive Income (based on the category in which they are classified).
Under previous GAAP, financial guarantee provided to the Banks on behalf of the subsidiaries, joint ventures and other third parties are disclosed as contingent liability. Under Ind AS, financial guarantee contracts are recognised as liability on the date of transition at the higher of (i) the amount of the loss allowance determined on the date of transition and (ii) the amount initially recognised less, when appropriate, the cumulative amount of income recognised in accordance with the principles of Ind AS 18.
iii. Proposed Dividend and tax thereon
Under Previous GAAP, proposed dividends are recognized as liability in the period to which they relate irrespective of the approval by shareholders. Under Ind AS, a proposed dividend is recognised as a liability in the period in which it is declared by the company (on approval of Shareholders in a general meeting) or paid. Therefore, the liability recorded under previous GAAP has been derecognised.
iv. Provision for Expected Credit Losses on financial instruments
Under previous GAAP, the Company has created provision for impairment of receivables consists only in respect of specific amount for incurred losses. Under Ind AS, impairment allowance has been determined based on Expected Loss model (ECL). On the date of transition, Expected Credit Loss on trade receivables and on loans have been adjusted in retained earnings and subsequent changes in Expected credit loss have been charged to the Statement of profit and loss.
v. Tax impacts on Ind AS adjustments
The impact of transition adjustments together with Ind AS mandate of using balance sheet approach (against profit and loss approach under previous GAAP) for computation of deferred tax has resulted in adjustment to Reserves, with consequential impact in the subsequent periods to the Statement of profit and loss or Other comprehensive income, as the case may be.
vi. Share based payment
Under the previous GAAP, the cost of equity-settled employee shares-based plan were recognised using the intrinsic method. Under Ind AS, the cost of equity-settled share based payment plan is recognised based on the fair value of the options as at the grant date. Consequently, the amount recognised in share based payment reserve account increased by Rs.4.79 crores as at March 31, 2016 (April 1, 2015 : Rs.2.20 crores). The profit for the year ended March 31, 2016 decreased by Rs.2.59 crores. There is no impact on total equity.
vii. Re-measurement gain / loss on defined benefit plan
Under Ind AS, re-measurement i.e. actuarial gain loss 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 or loss. Under the previous GAAP, these remeasurement were forming part of the profit or loss for the year. As a result of this change, the profit for the year ended on March 31, 2016 increased by Rs.2.21 crores. There is no impact on the total equity as at March 31, 2016.
viii. Other comprehensive income
Under Ind AS, all items of income and expense recognised in a period should be included in profit or loss for the period, unless a standard requires or permits otherwise. Item of income and expense that are not recognised in profit or loss but are shown in the Statement of profit and loss as “other comprehensive income” includes fair value gain / loss on FVOCI equity instruments, effective portion of gains / losses on cash flow hedging instruments and re-measurement of defined benefit plans. The concept of other comprehensive income did not exist under previous GAAP.
ix. Other adjustments
Other adjustments includes adjustments due to the GAAP differences related to recognition and measurement of employee benefits, financial charges etc.
x. Retained earnings
Retained earnings as at April 1, 2015 has been adjusted consequent to the above Ind AS transition adjustments.
xi. Classification & Presentation
a. Trade receivables where bills discounted
Under the previous GAAP, on discounting of bills receivables, such receivables are derecognised and are shown as contingent liability. Under Ind AS, as such bill discounting arrangement does not comply the derecognition criteria stated in Ind AS 109, such receivables are not derecognised and liability in the form of bill discounted has been recognised as borrowings.
b. Recognition of certain Government grant as deferred income
The government grant related to fixed assets was netted off with the cost respective Property, Plant and Equipment under previous GAAP. Under Ind AS, Property, Plant and Equipment has been recognised at gross cost and government grant has been recognised as deferred income.
The deferred income is recognised as income in the statement of Profit and Loss on a systematic basis over the useful life of the assets for which it is received.
c. Investment property
Under the previous GAAP, Land & Building given on lease has been shown as Investment property and disclosed under the head Investments. Moreover, some portion of the land which is not in use are classified as Land held for sale and shown under the head other current assets. Under Ind AS, Land & Building given on lease are disclosed separately as Investment property on the face of the Balance sheet. Land which is currently not in determined use and does not comply the criteria for classification of non-current assets held for sale as per the requirement of Ind AS 105 are also classified as Investment property.
d. Assets classified as held for sale and discontinued operation
A Composite Scheme of Arrangement (“the Scheme") in the nature of Demerger and transfer of Real Estate Undertaking of Arvind Limited (“the Company") to Arvind Infrastructure Limited (“AIL”) and Restructuring of Share Capital, under sections 391 to 394 read with sections 78, 100 and 103 of the Companies Act, 1956 has been sanctioned by the High Court of Gujarat at Ahmedabad on April 22, 2015 and the Scheme has become effective from the appointed date 1st April 2015. Under the previous GAAP, the concept of disposal group held for sale does not exist. The assets and liabilities of disposal group have not been presented as held for sale.
Ind AS 105 Non-current assets held for sale and Discontinued operations required disposal group to be identified as held for sale if the carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. Ind AS 105 lays down detailed guidelines and criteria in this regards. Based on the assessment performed by the management, it has been determined that the assets and liabilities of Real Estate undertaking should be presented as held for sale under Ind AS. Consequently, the assets and liabilities of disposal group held for sale have been presented separately from the other assets and other liabilities respectively in the opening balance sheet as at April 1, 2015 (Refer note 12 for details) . There is no impact on the total equity as a result of this adjustment.
e. Excise duty
Under the previous GAAP, sale of goods was presented as net of excise duty. Under Ind AS, revenue from sale of products is presented inclusive of excise duty. The excise duty paid on sale of products is separately presented on the face of statement of profit and loss as a part of expense. Thus sale of goods under Ind AS has increased by Rs.7.55 crores with a corresponding increase in other expense.
f. Discounts and incentives to customers
Under the previous GAAP, discounts and incentives to the customers were shown as a part of finance cost and other expense respectively. Under Ind AS, revenue from sale of products are recognised at net of discounts and incentives to the customers. Thus, sale of products under Ind AS has decreased by Rs.44.80 crores with a corresponding decrease in finance cost and other expense.
xii. Statement of cash flows
The impact of transition from previous GAAP to Ind AS on the statement of cash flows is due to various reclassification adjustments recorded under Ind AS in Balance sheet and Statement of profit and loss and difference in the definition of cash and cash equivalents under these two GAAPs like bank overdraft.
Note 11 : Standards issued but not yet effective
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’ and Ind AS 102, ‘Share-based payment.’ The amendments are applicable to the Company from April 1, 2017.
Amendment to Ind AS 7:
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 effect on the financial statements is being evaluated by the Company.
Amendment to Ind AS 102:
The amendment to Ind AS 102 provides specific guidance to measurement of cash-settled awards, modification of cash-settled awards and awards that include a net settlement feature in respect of withholding taxes. It clarifies that the fair value of cash-settled awards is determined on a basis consistent with that used for equity settled awards. Market-based performance conditions and non-vesting conditions are reflected in the ‘fair values’, but nonmarket performance conditions and service vesting conditions are reflected in the estimate of the number of awards expected to vest. Also, the amendment clarifies that if the terms and conditions of a cash-settled share-based payment transaction are modified with the result that it becomes an equity-settled share-based payment transaction, the transaction is accounted for as such from the date of the modification. Further, the amendment requires the award that include a net settlement feature in respect of withholding taxes to be treated as equity-settled in its entirety. The cash payment to the tax authority is treated as if it was part of an equity settlement. The effect on the financial statements is being evaluated by the Company.
The Company has separate In-House Research & Development Centre at Naroda and Santej locations. Both the centres are involved into new product development, new process development etc. and are duly recognised and approved by Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India. The details of Capital and Revenue Expenditure incurred on Research and Development by both the Centres are as under:
Note 12 : Rounding off
Figures less than Rs.50,000/- which are required to be shown separately, have been shown as actual in brackets.
Note 13 : Regrouped, Recast, Reclassified
Figures of the earlier year have been regrouped or reclassified to conform to Ind AS presentation requirements. The accompanying notes are an integral part of the financial statements.