c. Terms/rights attached to equity shares
The Company has only one class of equity shares having a par values of Rs.1 per share. Each holder of equity shares is entitled to one vote per share. The Company declares and pays dividends in Indian rupees. The dividend proposed by the Board of Directors is subject to the approval of shareholders in the ensuing Annual General Meeting.
For the year ended 31 March 2017, the amount of dividend per share declared as distributions to equity shareholders was Rs.2.5 (March 31, 2016: Rs.2.5). Refer Note 14(c) for details of dividend declared/recognized in financial statements.
In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts. However, no such preferential amounts exist currently. The distribution will be in proportion to the number of equity shares held by the shareholders.
D. Terms of borrowings
i. Secured term loans in foreign currency carry interest in the range of LIBOR plus 1% to 1.5%. Out of these loans, loans amounting to Rs.540.5 (March 31, 2016 Rs.1,104.3; April 1, 2015: Rs.1,562.5) are repayable in one (March 31, 2016: two; April 1, 2015: three) equal installments in 6th (March 31, 2016 5th, 6th, April 1, 2015: 4th, 5th and 6th) years from the respective final draw down, and loans amounting to Rs.648.5 (March 31, 2016 Rs.1,987.7; April 1, 2015: Rs.1,666.7) is repayable at the end of 4th, 5th and 6th years from the respective final draw down and loan amounting Rs. Nil (March 31, 2016 Rs. Nil; April 1, 2015: Rs.3,229.2) is repayable at the end of 5th year from the respective final draw down date.
ii. Deferred sales tax loan is interest free and payable in various installments as per sales tax deferment scheme. During the current year, the Company has repaid the entire amount of deferred sales tax loan.
iii. Term loans are secured by first pari passu charge on all the present and future fixed assets, both movable and immoveable property of the Company.
iv. All secured loans payable on demand and secured short term loans from banks are secured by first charge by way of hypothecation of all the stocks, book debts and other current assets (both present and future).
1. COMMITMENTS AND CONTINGENCIES
Operating lease commitments - Company as lessee
i. The Company has operating leases agreements, which are mainly in the nature of lease of office premises for a period up to five years, with no restrictions and are renewable/cancellable at the option of either of the parties except for details in (ii) below. These leases include a general clause to enable upward revision of the rental charge on an annual basis according to the prevailing market conditions. There is no other escalation clause in the lease agreement. There are no sub-leases. There are no restrictions imposed by lease arrangements. The aggregate amount of operating lease payments recognized in the Statement of Profit and Loss is Rs.73.9 (March 31, 2016: Rs. 71.1). The Company has not recognized any contingent rent as expense in the Statement of Profit and Loss.
ii. The Company has entered into non cancellable leases for office premises in current year and previous year. These leases have remaining non cancellable period of 5 months (March 31, 2016: 17 months; April 1, 2015: 29 months). The lease includes an escalation clause in the lease agreement. Future minimum lease rentals under non cancellable operating leases are as follows:
Finance lease - Company has lessee
Building includes factory buildings acquired on finance lease. The lease term is for major part of the economic life of the buildings and the agreement is silent on renewal terms and transfer of legal title at the end of lease term.
The lease agreement did not specify minimum lease payments over the future period. The factory building has been acquired on lease at a consideration of Rs.25.5 (March 31, 2016: Rs.25.5; April1, 2015: Rs.25.5).
The net carrying amount of the buildings obtained on finance lease: Rs.9.5 (March 31, 2016: Rs.10.8; April1, 2015: Rs.12.1).
* in respect of above matters, future cash outflows in respect of contingent liabilities are determinable only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the Company. The Company is contesting these demands and the management, including its advisors, believe that its position will likely be upheld in the appellate process. No expense has been accrued in the financial statements for the demands raised. The management believes that the ultimate outcome of this proceeding will not have a material adverse effect on the Company’s financial position and results of operations.
# Excludes Rs.13.4 (March 31, 2016 Rs.13.4; April 1, 2015 Rs.13.4) where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. All these cases are under litigation and are pending with various authorities, expected timing of resulting outflow of economic benefits cannot be specified.
** Guarantees furnished towards business requirement in respective subsidiaries. The Company has assessed that it is only possible, but not probable, that outflow of economic resources will be required.
A The Company is involved in disputes, claims, governmental and/or regulatory inspection, inquires, including patents and commercial maters that arise from time to time in the ordinary course of business. The same are subject to uncertain future events not wholly within the control of the Company. The management does not expect the same to have materially adverse effect on its financial position, as it believes the likelihood of any loss is not probable.
2. SHARE BASED PAYMENTS
Employee Stock Option Plan ‘ES0P-2006''''
The Company instituted an Employee Stock Option Plan ''''ESOP-2006'''' for issue of shares to eligible employees of the Company as per the special resolution passed in the 19th Annual General Meeting held on September 18, 2006. The compensation committee of the Board of Directors accordingly, granted 3,240,500 options under eight grants of 175,000; 25,000; 90,000; 1,205,000; 300,000; 500,000; 915,500 and 30,000 options to eligible employees on October 30, 2006; July 31, 2007; October 31, 2007; December 16, 2011; June 19, 2012; January 09, 2013; January 28, 2013 and August 09, 2013 respectively. The method of settlement under scheme is by issue of equity shares of the Company and there are no cash settlement alternatives for the employees. Each option comprises of one underlying equity share of Rs.1 each. The said options vest on an annual basis at 10%, 15%, 25% and 50% over a period of four years and can be exercised over a period of six years from the date of grant of options. The options have been granted at the then prevailing market price of Rs.120.70; Rs.132.35; Rs.114.50; Rs.91.60; Rs.106.05; Rs.200.70; Rs.187.40 and Rs.161.30 per share, respectively. The fair value of share options grants is estimated at the date of grant using Black-Scholes model, taking into account the terms and conditions upon which the share options were granted.
b. Disclosures related to defined benefit plan of the parent company
The Company has a defined benefit gratuity plan governed by the Payment of Gratuity Act, 1972. Every employee who has completed five years or more of service is entitled to gratuity on departure at 15 days last drawn salary for each completed year of service or part thereof in excess of six months.
The plan is funded with Life Insurance Corporation in the form of a qualifying insurance policy. The following tables summarize the components of net benefit expense recognized in the statement of profit and loss, the fund status and amounts recognized in the balance sheet:
1. The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market.
2. The Company expects to contribute Rs.65.0 (March 31, 2016: Rs.65.0) during the year ended March 31, 2018 (March 31, 2017) to the qualifying insurance policy.
3. The sensitivity analysis above have been determined based on a method that extrapolates the impact on defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period by varying one actuarial assumption, keeping all other actuarial assumptions constant.
3. In respect of the amounts mentioned under Section 125 of the Companies Act, 2013 there are no dues that are to be credited to the Investor Education and Protection Fund as at March 31, 2017 (March 31, 2016: Rs. Nil; (April 1, 2015: Rs. Nil).
4. Related party disclosures
Names of related parties and description of relationship Subsidiaries
1. APL Pharma Thai Limited, Thailand
2. ALL Pharma (Shanghai) Trading Company Limited, China
3. Aurobindo Pharma USA Inc., U.S.A.
4. Aurobindo Pharma Industria Farmaceutica Ltda, Brazil
5. Helix Healthcare B.V., The Netherlands
6. APL Holdings (Jersey) Limited, Jersey (Liquidated w.e.f. November 18, 2015)
7. Aurobindo Pharma Produtos Farmaceuticos Ltda, Brazil
8. APL Healthcare Limited, India
9. Auronext Pharma Private Limited, India
10. APL Research Centre Limited, India
11. Auro Pharma Inc., Canada
12. Aurobindo Pharma (Pty) Limited, South Africa
13. Aurobindo Pharma (Australia) Pty Limited, Australia (Liquidated w.e.f. April 10, 2015)
14. Agile Pharma B.V., The Netherlands
15. Auro Healthcare (Nigeria) Limited, Nigeria
16. Aurobindo ILAC Sanayi ve Ticaret Limited, Turkey
17. Aurobindo Pharma (Singapore) Pte Limited, Singapore (Liquidated w.e.f. December 31, 2015)
18. Aurobindo Pharma Japan K.K., Japan
19. Aurex B.V. (Formerly Pharmacin B.V.), The Netherlands
20. Aurobindo Pharma GmbH, Germany
21. Aurobindo Pharma (Portugal) Unipessoal LDA, Portugal
22. Laboratorios Aurobindo S.L., Spain
23. Aurobindo Pharma B.V., The Netherlands*
24. Aurobindo Pharma (Romania) s.r.l., Romania
25. Aurobindo Pharma (Italia) S.r.l., Italy
26. Aurobindo Pharma (Malta) Limited, Malta
27. APL IP Company Limited, Jersey (Liquidated w.e.f. November 18, 2015)
28. APL Swift Services (Malta) Limited, Malta
29. Milpharm Limited, U.K.
30. Aurolife Pharma LLC, U.S.A.
31. Auro Peptides Limited, India
32. Auro Medics Pharma LLC, U.S.A.
33. Aurobindo Pharma NZ Limited, New Zealand (Liquidated w.e.f. April 10, 2015)
34. Aurovida Farmaceutica S.A. DE C.V., Mexico
35. Curepro Parenterals Limited, India
36. Hyacinths Pharma Private Limited, India
37. Silicon life sciences Private Limited, India
38. AuroZymes Limited, India
39. Aurobindo Pharma Columbia S.A.S., Columbia
40. Aurovitas, Unipessioal LDA, Portugal
41. Arrow Generiques SAS, France
42. Actavis B.V., The Netherlands*
43. Auro Health LLC, U.S.A.
44. Aurobindo Antiboitics Limited, India
45. Pharmacin B.V. (Formerly Aurex B.V.), The Netherlands
46. Actavis France SAS, France (Merged with Arrow Generiques SAS w.e.f. April 1, 2015)
47. 1980 Puren Pharma GmbH (Formerly Actavis Management GmbH), Germany
48. Puren Pharma GmbH & Co., KG (Formerly Actavis Deutschland GmbH & Co., KG), Germany
49. Aurovitas Spain SA (Formerly Actavis Spain SA)
50. Natrol LLC, U.S.A.
51. Aurobindo Pharma Limited S.R.L., Dominican Republic (Liquidated w.e.f. December 18, 2014)
52. Aurovitas Pharma Polska, Poland (w.e.f. March 31, 2017)
53. Aurogen South Africa (Pty) Limited, South Africa (w.e.f. January 25, 2017)
54. Aurobindo Pharma USA LLC, U.S.A. (w.e.f. April 14, 2016)
55. Auro AR LLC USA, U.S.A. (w.e.f. May 2, 2017)
56. Auro Vaccines LLC, U.S.A. (w.e.f. January 27, 2017)
*Aurobindo Pharma B.V. was merged with Actavis B.V. Subsequently, the name of Actavis B.V. was changed to Aurobindo Pharma B.V. w.e.f. July 1, 2015.
1. Novagen Pharma (Pty) Limited, South Africa (Joint benture of a subsidiary)
2. Eugia Pharma Specialities Limited
3. Tergene Biotech Private Limited, India (w.e.f. April 1, 2015)
Enterprises over which key management personnel or their relatives exercise significant influence
1. Pravesha Industries Private Limited, India
2. Sri Sai Packaging, India (Partnership firm)
3. Trident Chemphar Limited, India
4. Auropro Soft Systems Private Limited, India
5. Axis Clinicals Limited, India
6. Pranit Projects Private Limited, India
7. Pranit Packaging Private Limited, India
8. SGD Pharma India Limited (formerly Cogent Glass Limited), India
9. Orem Access Bio Inc, India
10. Veritaz Healthcare Limited, India
11. Alex Merchant PTE. LTD, Singapore
12. Trident Petrochemicals DMCC, Dubai
13. Axis Clinicals LLC, U.S.A.
14. Alex Merchant DMCC, Dubai
15. Crest Cellulose Private Limited, India
16. East Pharma Technologies, India (Partnership firm)
Key managerial personnel
1. Mr. K. Nithyananda Reddy, Whole-time Director
2. Dr. M. Sivakumaran, Whole-time Director
3. Mr. M. Madan Mohan Reddy, Whole-time Director
4. Mr. P. Sarath Chandra Reddy, Whole-time Director (From June 1, 2016)
5. Mr. N. Govindarajan, Managing Director
6. Mr. Santhanam Subramanian, Chief Financial Officer
7. Mr. A. Mohan Rami Reddy, Company Secretary (Upto May 31, 2016 )
8. Mr. B. Adi Reddy, Company Secretary (w.e.f. June 1, 2016)
9. Mr. K. Ragunathan, Independent Director
10. Mr. M. Sitarama Murty, Independent Director
11. Mr. D. Rajagopala Reddy, Independent Director
12. Dr. Avnit Bimal Singh, Independent Director
13. Mr. Rangaswamy Rathakrishnan Iyer, Independent Director
Relatives to key managerial personnel
1. Mr. P. Sarath Chandra Reddy (Son-in-law of Mr. K. Nithyananda Reddy, Whole-time Director) (Upto May 31, 2016)
2. Mr. Vishnu M. Sriram (Son-in-law of Dr. M. Sivakumaran, Whole-time Director)
Note: i. Managerial remuneration does not include provision for gratuity and leave encashment, which is determined for the Company as a whole.
ii. All transactions with related parties are made on terms equivalent to those that prevail in arm''''s length transactions. Outstanding balances for trade receivable, trade payable and other payables are unsecured, interest free and settlement occurs in cash. The Company has not recorded any impairment of balances relating to amounts owed by related parties during the year ended March 31, 2017 (March 31, 2016: Rs. Nil; April 1, 2015: Rs. Nil). The assessment is undertaken each financial year through evaluating the financial position of the related party and the market in which the related party operates.
5. Details of advances due from private companies in which Company''''s Director is a director:
Pranit Packaging Private Limited, India Rs. Nil (March 31, 2016: Rs. Nil; April 1, 2015: Rs.0.6).
6. i. Details of trade receivables due from private companies in which Company''''s director is a director:
Pravesha Industries Private Limited, India Rs.0.1 (March 31, 2016: Rs.0.1; April 1, 2015; Rs. Nil).
ii. Details of trade receivables due from partnership firm in which Company''''s director is a partner:
Sri Sai Packaging, India ?0.0 (March 31, 2016: Rs.0.0; April 1, 2015: Rs. Nil).
7. The Board of Directors at their meeting held on September 12, 2013 decided to transfer its injectable unit of the Company on a going concern basis comprising assets and liabilities pertaining to the said unit to its wholly owned subsidiary Curepro Parentals Limited w.e.f. April 1, 2014. The same was subject to requisite consent, approval or permission of the statutory or regulatory authorities. Pending such approvals, no effect of this scheme has been given in the above results. During the current year, the Board of Directors decided not to transfer the unit, considering the expansion and growth plans of the Company. The same is subject to the approval of appropriate authorities including Hon''''ble High Court or Tribunal as the case may be.
a. Contingent liabilities of the above joint ventures Rs. Nil (March 31, 2016: Rs. Nil).
b. Capital commitments of the above joint ventures Rs.67.1 (March 31, 2016: Rs.120.8).
c. The joint ventures are engaged in distribution of pharmaceuticals products.
d. All figures presented above represent Company''''s share only.
8. Significant accounting judgments, estimates and assumptions
The preparation of the Company''''s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets 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.
In the process of applying the Company''''s accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognized in the financial statements.
i. Lease commitments - the Company as lessor
The company has entered into agreement to non cancellable leases for office premises. The Company has identified assets under operating and finance lease based on the factors indicated under Appendix C to Ind AS 17 and terms of the agreement, viz. economic life of the asset vs. lease term, ownership of the asset after the lease term.
ii. Lease commitments - the Company as lessee
The Company has entered into leases for land and office premises. The Company has determined, based on an evaluation of the terms and conditions of the arrangements, such as the lease term not constituting a major part of the economic life of the land and office premises and the fair value of the asset, that it does not retain significant risks and rewards of ownership of the land and the office premises and accounts for the contracts as operating leases.
The Company has unused tax credits [(Minimum Alternate Tax (MAT)] credit of Rs.2,836.3 as on March 31, 2017 (March 31, 2016: Rs.2,193.5; April 1, 2015: Rs.2,610.1). The Company based on its business plan along with supporting convincing evidence including future projections of profit believes that the used tax credits would be utilized within the stipulated time period as per the Income Tax Act, 1961.
B. Estimates and assumptions
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.
i. Share-based payments
The grant date fair value of employee stock options granted is recognized as an employee expense over the period that the employee becomes unconditionally entitled to the options. 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 estimation 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. The Black Scholes valuation model has been used by the management for share-based payment transactions. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 32.
ii. Defined employee benefit plans (Gratuity)
The cost of the defined benefit gratuity plan and other accumulated leave entitlement and the present value of the gratuity obligation and accumulated leave obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases and mortality rates. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. The parameter most subject to change is the discount rate. In determining the appropriate discount rate for plans operated in India, the management considers the interest rates of government bonds in currencies consistent with the currencies of the post-employment benefit obligation. The mortality rate is based on publicly available mortality tables for the specific countries. Those mortality tables tend to change only at interval in response to demographic changes. Future salary increases and gratuity increases are based on expected future inflation rates. Further details about gratuity obligations are given in Note 33.
iii. 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 including the DCF model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. See Notes 47 and 48 for further disclosures.
iv. Depreciation on property, plant and equipment
Depreciation on property, plant and equipment is calculated on a straight-line basis based on the useful lives estimated by the management. Considering the applicability of Schedule II of Companies Act, 2013, the management has re-estimated useful lives and residual values of all its property, plant and equipment. The management believes that useful lives currently used fairly reflect its estimate of the useful lives and residual values of property, plant and equipment, though these in certain cases are different from lives prescribed under Schedule II of the Companies Act, 2013.
v. 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.
vi. Intangible assets under development
The Company capitalizes acquired intangible asset under development for a project in accordance with the accounting policy. In determining the amounts to be capitalized, management makes assumptions regarding the expected future cash generation of the project, discount rates to be applied and the expected period of benefits. The carrying amount of capitalized intangible asset under development was Rs.286.7 (March 31, 2016: Rs. Nil; April 1, 2015: Rs. Nil). The innovative nature of the product gives rise to some uncertainty as to whether the final approval for the products will be obtained.
vii. Inventories provision
The Company estimates provision against obsolescence of inventory by applying certain percentages over different age category of the batch wise inventory held at the end of the reporting period. Inputs to the model include ageing of inventory, expected loss rate considering past trend and future outlook and expected net realizable value. Inventories are net of such provisions.
9. Hedging activities and derivatives - Derivatives not designated as hedging instruments
The Company uses foreign currency denominated borrowings and foreign exchange forward contracts to manage some of its transaction exposures. The foreign exchange forward contracts are not designated as cash flow hedges and are entered into for periods consistent with foreign currency exposure of the underlying transactions, generally from one week to twelve months.
The management assessed that cash and cash equivalents, trade receivables, trade payables, bank overdrafts and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. Further, management has assessed the fair value of the borrowings approximate their current value largely since they are carried at floating rate of interest.
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.
Fair value hierarchy
The following table provides the fair value measurement hierarchy of the assets and liabilities measured at fair value on recurring basis:
10. Financial risk management objectives and policies
The Company''''s principal financial liabilities, other than derivates, comprise borrowings, trade and other payable. The main purpose of these financial liabilities is to finance the Company operations. The Company''''s principal financial assets, other than derivatives, include loans, trade and other receivables, and cash and cash equivalents derived directly from its operations.
The Company is exposed primarily to credit risk, liquidity risk and market risk (including currency risk, interest rate risk and other price risk), which may adversely impact the fair value of its financial instruments. The Company''''s senior management oversees the management of these risks. The Company''''s senior management is supported by a Risk Management Committee of the Board of Directors that advices on the financial risk and the appropriate financial risk governance framework. The Company assesses the unpredictability of the financial environment and seeks to mitigate potential adverse effects on the financial performance of the Company. The Company does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.
a. Credit risk
Credit risk is the risk that counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. Credit risk encompasses of both, the direct risk of default and the risk of deterioration of creditworthiness as well as concentration of risks. Credit risk is controlled by analyzing credit limits and creditworthiness of customers on a continuous basis to whom the credit has been granted after obtaining necessary approvals for credit. Financial instruments that are subject to concentrations of credit risk principally consist of trade receivables, investments, derivative financial instruments, cash and cash equivalents, loans and other financial assets. None of the financial instruments of the Company result in material concentration of credit risk.
Trade receivables and other financial assets:
The Company''''s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, the Management also evaluates the factors that may influence the credit risk of its customer base, including the default risk and country in which the customers operate. The management has established a credit policy under which each new customer is analyzed individually for creditworthiness before the Company''''s standard payment and delivery terms and conditions are offered. The Company''''s review includes external ratings, if available, financial statements, credit agency information, industry information and in some case bank references. Sales limits are established for each customer and reviewed quarterly. The Company''''s receivables turnover is quick and historically, there was no significant default on account of trade and other receivables. 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 Company assesses at each reporting date whether a financial asset or a group of financial assets is impaired. Expected credit losses are measured at an amount equal to the 12 months expected credit losses or at an amount equal to the life time expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. The Company has used a practical expedient by computing the expected credit loss allowance for trade receivables based on a provision matrix. The provision matrix takes into account historical credit loss experience and is adjusted for forward looking information. The maximum exposure to credit risk at the reporting date is the carrying value of trade and other receivables. 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 operate in largely independent markets.
b. Liquidity risk
Liquidity risk refers to the risk that the Company cannot meet its financial obligations. The objective of liquidity risk management is to maintain sufficient liquidity and ensure that funds are available for use as per requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. The following are the remaining contractual maturities of financial liabilities at reporting date:
c. Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Such changes in the values of financial instruments may result from changes in the foreign currency exchange rates, interest rates, credit, liquidity and other market changes. The Company''''s exposure to market risk is primarily on account of foreign currency exchange rate risk and interest rate risk.
i. Foreign currency exchange rate risk
The fluctuation in foreign currency exchange rates may have potential impact on the statement of profit or loss, where any transaction references more than one currency or where assets/liabilities are denominated in a currency other than the functional currency of the Company. The Company is subject to foreign exchange risk primarily due to its foreign currency revenues, expenses and borrowings. Considering the countries and economic environment in which the Company operates, its operations are subject to risks arising from fluctuations in exchange rates in those countries. The risks primarily relate to fluctuations in US Dollar, Euro and GBP against the functional currency of the Company. The Company, as per its risk management policy, uses derivative instruments primarily to hedge foreign exchange. The Company has a treasury team which evaluates the impact of foreign exchange rate fluctuations by assessing its exposure to exchange rate risks and advises the management of any material adverse effect on the Company. It hedges a part of these risks by using derivative financial instruments in line with its risk management policies. The information on foreign exchange risk from derivative instruments and non derivative instruments is as follows:
ii. 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 change in market interest rates. The Company''''s exposure to risk of change in market interest rates because it borrows funds at both fixed and floating interest rates. The Company manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings.
As the Company has no significant interest bearing assets, the income and operating cash flows are substantially independent of changes in market interest rates.
Every 0.5% increase/decrease in the interest rate component applicable to the respective borrowings would effect the Company''''s net profit before tax resulting in an expense/income of Rs.172.0 and Rs.177.4 for the year ended March 31, 2017 and March 31, 2016, respectively.
11. Capital management
For the purpose of the Company''''s capital management, capital includes issued equity capital, share premium and all other equity reserves attributable to the equity holders. The primary objective of the Company''''s capital management is to maximize the shareholder value.
12. First time adoption of Ind AS
As stated in Note 2, these financial statements for the year ended March 31, 2017 are the first the Company has prepared in accordance with Ind AS. In preparing these financial statements, the Company''''s opening balance sheet was prepared as at April 1, 2015, the Company''''s date of transition to Ind AS. This note explains the principal adjustments made by the Company in restating its Indian GAAP financial statements, including the balance sheet as at April 1, 2015 and the financial statements as at and for the year ended March 31, 2016.
Ind AS 101 allows first-time adopters certain exemptions from the retrospective application of certain requirements under Ind AS. The Company has applied the following exemptions:
a. The Company has elected to continue with the carrying values under previous GAAP for all the items of property, plant and equipment as deemed cost at the date of the transition. The same election has been made in respect of intangible assets.
b. Appendix C to Ind AS 17 requires an entity to assess whether a contract or arrangement contains a lease. In accordance with Ind AS 17, this assessment should be carried out at the inception of the contract or arrangement. However, the Company has used Ind AS 101 exemption and assessed all arrangements based for embedded leases based on conditions in place as at the date of transition.
c. Ind AS 101 requires a first-time adopter to apply derecognition requirements in Ind AS 109 prospectively to transactions occurring on or after the date of transition to Ind AS. Accordingly, the Company continues to de-recognize the financial assets and financial liabilities for transactions which have occurred before the date of transition to Ind AS.
d. The Company has opted to carry the investment in subsidiaries and associate at the previous GAAP carrying amount at the transition date.
e. Ind AS 102 Share-based Payment has not been applied to equity instruments in share-based payment transactions that vested before April 1, 2015.
f. As per Ind AS 101, the Company has elected not to restate business combinations that occurred before the date of transition.
The estimates as at April 1, 2015 are consistent with those made for the same dates in accordance with Indian GAAP (after adjustments to reflect any differences in accounting policies) apart from impairment of financial assets based on expected credit loss model where application of Indian GAAP did not require estimation. The estimates used by the Company to present these amounts in accordance with Ind AS reflect conditions at April 1, 2015 (transition date) and March 31, 2016.
i. Proposed dividend
Under Indian GAAP, proposed dividends including Dividend Distribution Tax thereon were recognized as a liability in the period to which they relate, irrespective of when they are declared. Under Ind AS, a proposed dividend is recognized 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 period end. Therefore, the liability recognized towards dividend as at March 31, 2016 and April 01, 2015 has been derecognized against retained earnings and recognized in the year of payment.
ii. Financial assets at amortized cost
Under Indian GAAP, the Company accounted for long term investments in unquoted preference shares as investment measured at cost less provision for other than temporary diminution in the value of investments. Under Ind AS, the Company has designated such investments as investments at amortized cost, and interest income on investments held at amortized cost is recorded using the effective interest rate. At the date of transition to Ind AS, such interest income has been recognized in other equity.
iii. Remeasure of actuarial gains/(losses)
Both under Indian GAAP and Ind AS, the Company recognized costs related to its post-employment defined benefit plan on an actuarial basis. Under Indian GAAP, the entire cost, including actuarial gains and losses, were charged to profit or loss. Under Ind AS, remeasurements comprising of actuarial gains and losses are recognized immediately in the balance sheet with a corresponding debit or credit to retained earnings through OCI.
iv. Share based payments
Under Indian GAAP, the Company recognized only the intrinsic value for employee stock option plan as an expense. Under Ind AS, the Company is required to determine the fair value of share options using an appropriate model recognized over the vesting period. Accordingly, the same has been recognized as a separate component of equity in Employee stock option outstanding (ESOP) as at April 1, 2015 and March 31, 2016.
v. Valuation of foreign currency forward contracts
The Company had certain outstanding foreign currency forward contracts to hedge certain of its foreign currency financial assets. Under Indian GAAP, premium/discount on forward contracts are amortized over the period of forward contract and the outstanding forward contracts are restated as at the balance sheet date. However, under Ind AS 109, the foreign currency financial assets and liabilities are restated at closing rate and the derivative contracts are fair valued by recognizing the mark-to-market gain/loss on the forward contract in the statement of profit and loss. Further, premium/discounts on forward contracts are charged to the statement of profit and loss as and when they are incurred. Accordingly, the Company has charged off the unamortized premium on the outstanding forward contracts and fair valued the derivative contracts by recognizing the mark-to-market gain on the forward contract in the statement of profit and loss.
vi. Excise duty on sale of goods
Under Indian GAAP, sale of goods was presented as net of excise duty. However, under Ind AS, sale of goods includes excise duty. Excise duty on sale of goods is included as part of sales in the face of statement of profit and loss. Thus, sale of goods under Ind AS for the year ended March 31, 2016 has increased with a corresponding increase in other expenses.
vii. MAT credit entitlement
MAT credit entitlement is to be presented under loans and advance in accordance with Guidance Note on ''''Accounting for Credit available in respect of MAT under the Income Tax Act, 1961'''' issued by ICAI. However, as per Ind AS, MAT credit entitlement is generally recognized as a deferred tax asset with a corresponding deferred tax benefit in the statement of profit and loss. Accordingly, the Company has reclassified the MAT credit entitlement from loans and advances to deferred tax assets.
Under Indian GAAP, the Company de-recognized bills discounted of trade receivables with banks and disclosed the same as contingent liabilities. However, under Ind AS, based on evaluation of risks and rewards and control, the same does not meet the criteria for de-recognition. Accordingly, the same has been recognized as borrowings as at April 1, 2015 and March 31, 2016.
ix. Deferred tax assets
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 accounting for deferred taxes using the balance sheet approach, which focuses on temporary difference 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. In addition, the various transitional adjustments lead to temporary differences and the Company has accounted for such differences. Deferred tax adjustment are recognized in correlation to the underlying transaction either in retained earnings or a separate component in equity.
x. Trade receivables
Under Ind AS, impairment allowance has been determined based on Expected Credit Loss model (ECL).
xi. Other comprehensive income (OCI)
Under Indian GAAP, the Company had not presented other comprehensive income separately. Hence, it has reconciled Indian GAAP profit or loss to profit or profit or loss as per Ind AS. Further, Indian GAAP profit or loss is reconciled to total comprehensive income as per Ind AS.
xii. Cash flow statement
The transition from Indian GAAP to Ind AS has not had a material impact on the statement of cash flows.
13. Segment reporting
In accordance with Indian Accounting Standard (Ind AS) 108 on Operating segments, segment information has been given in the consolidated financial statements of the Company, and therefore no separate disclosure on segment information is given in these financial statements.