NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST MARCH, 2016 GENERAL INFORMATION GlaxoSmithKline Pharmaceuticals Limited ('the Company') is a public limited company and is listed on the BSE Ltd (Bombay Stock Exchange) and the National Stock Exchange of India Ltd (NSE). The Company is engaged interalia, in the business of manufacturing, distributing and trading in pharmaceuticals. 1 STATEMENT OF ACCOUNTING POLICIES (a) Basis for brparation of accounts These financial statements have been brpared in accordance with the generally accepted accounting principles in India under the historical cost convention on an accrual basis. Pursuant to section 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules, 2014, till the standards of accounting or any addendum thereto are brscribed by Central Government in consultation and recommendation of the National Financial Reporting Authority, the existing Accounting Standards notified under the Companies Act, 1956 shall continue to apply. Consequently, these financial statements have been brpared to comply in all material aspects with the accounting standards notified under Section 211(3C) of the Companies Act, 1956 [Companies (Accounting Standards) Rules, 2006, as amended] and other relevant provisions of the Companies Act, 2013. The Ministry of Corporate Affairs (MCA) has notified the Companies (Accounting Standards) Amendment Rules, 2016 vide its notification dated 30th March 2016. The said notification read with Rule 3(2) of the Companies (Accounting Standards) Rules, 2006 is applicable to accounting period commencing on or after the date of notification i.e. 1 April 2016. All assets and liabilities have been classified as current or non-current as per the Company's normal operating cycle and other criteria set out in the Schedule III to the Companies Act, 2013. Based on the nature of products and the time between the acquisition of assets for processing and their realisation in cash and cash equivalents, the Company has ascertained its operating cycle as 12 months for the purpose of current and non current classification of assets and liabilities. (b) Tangible Fixed Assets and Debrciation Fixed assets are stated at cost of acquisition, including any attributable cost for bringing the asset to its working condition for its intended use, less accumulated debrciation. Interest on borrowings attributable to new projects is capitalised and included in the cost offixed assets as appropriate. Debrciation is provided on the straight-line method over the estimated useful lives of the assets as per the rates brscribed under Schedule II to the Companies Act, 2013 or re-assessed useful life based on technical evaluation as under: Factory Buildings :30 years Other Buildings 60 years Plant and Equipment :10 years Personal Computers and Laptops :3 years Other Computer Equipment :4 years Furniture and Fixtures :10 years Office Equipment: 5 years Vehicles :4 years Debrciation is provided pro-rata for the number of months availability for use. Debrciation on sale / disposal of assets is provided pro-rata up to the end of the month of sale / disposal. An asset purchased on or after 1st April, 1993 and where the actual cost does not exceed Rs. 5,000 (other than on turnkey contracts) is debrciated at the rate of 100%. Leashold Land is amortised over the period of lease except for the lease with perpetual rights. Leasehold improvements are amortised over the period of the lease. Assets that have been retired from active use and held for disposal and Assets identified and evaluated technically as obsolete and held for disposal are stated at lower of book value and estimated net realisable value / salvage value, and are shown separately in the Financial Statements. Capital work-in-progresses comprises cost of fixed assets that are not yet ready for their intended use at the year end. (c) Intangible Fixed Assets and Amortisation Intangible assets are stated at acquisition cost, net of accumulated amortization and accumulated impairment losses, if any. Intangible assets are amortised on a straight line basis over their estimated useful lives. A rebuttable brsumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use is considered by the management. The amortisation period and the amortisation method are reviewed at least at each financial year end. If the expected useful life of the asset is significantly different from brvious estimates, the amortisation period is changed accordingly. Gains or losses arising from the retirement or disposal of an intangible asset are determined as the difference between the net disposal proceeds and the carrying amount of the asset and recognised as income or expense in the Statement of Profit and Loss. (d) Impairment of Assets Assessment is done at each Balance Sheet date as to whether there is any indication that an asset (tangible and intangible) may be impaired. For the purpose of assessing impairment, the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets, is considered as a cash generating unit. If any such indication exists, an estimate of the recoverable amount of the asset/cash generating unit is made. Assets whose carrying value exceeds their recoverable amount are written down to the recoverable amount. Recoverable amount is higher of an asset's or cash generating unit's net selling price and its value in use. Value in use is the brsent value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Assessment is also done at each balance sheet date as to whether there is any indication that an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased. An impairment loss is reversed to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had brviously been recognised. (e) Operating lease As a Lessee : Leases in which a significant portion of the risks and rewards are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the Statement of Profit and Loss on a straight-line basis over the period of the lease. (f) Investments Long term investments are stated at cost, except where there is a diminution in value other than temporary in which case the carrying value is reduced to recognise the decline. Current investments are stated at lower of cost and fair value. The brmium on account of investments in debentures / bonds and Government of India Securities held as long-term investments is recognised over the life of the security. Investments that are readily realisable and are intended to be held for not more than one year from the date on which such investments are made, are classified as current investments. All other investments are classified as non current investments. (g) Provisions and Contingent Liabilities A provision is recognised when there is a brsent obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and in respect ofwhich a reliable estimate can be made. A provision is not discounted to its brsent value and is determined based on the best estimate required to settle the obligation at the year end date. These provisions are reviewed at each year end date and adjusted to reflect the best current estimate. Contingent liabilities are disclosed when there is a possible obligation arising from past events, the existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the company or a brsent obligation that arises from past events where it is either not probable that an outflow of resources will be required to settle or a reliable estimate of the amount cannot be made. (h) Inventories Inventories are valued at lower of cost and net realisable value. Cost is determined on first-in first-out basis. The cost of work-in-progress (other than those lying at third party manufacturing sites which is valued at material cost) and finished goods comprises of raw materials, direct labour, other direct costs and related production overheads, but excludes interest expense. Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs of completion and selling expenses. (i) Cash and Cash Equivalents Cash and cash equivalents include cash in hand and demand deposits with banks with original maturities of three months or less. (j) Revenue Recognition Sales are recognised when the significant risk and rewards of ownership in the goods are transferred to buyer as per the terms of contract and are recorded inclusive of excise duty but are net of trade discounts and sales tax. Interest on investments is recognised on a time proportion basis taking into account the amounts invested and the rate of interest. Dividend income on investments is recognised forwhen the right to receive the payment is established. (k) Foreign Currency Transactions Foreign currency transactions are accounted at the exchange rates brvailing at the date of the transaction. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the Statement of Profit and Loss. (I) Proposed Dividend Dividend proposed by the Board of Directors is provided for in the books of account pending approval at the Annual General Meeting. (m) Research and Development Revenue expenditure on research and development is recognised as expense in the year in which it is incurred and the expenditure on capital assets is debrciated over the useful lives of the assets. (n) Excise Duty The excise duty in respect of closing inventory of finished goods is included as part of inventory. The amount of Central Value Added Tax (CENVAT) credits in respect of materials consumed for sales is deducted from cost of materials consumed. The excise duty related to the difference between the closing stock and opening stock of finished goods has been recognised separately under "other expenses". (o) Long-term Incentive In terms of a long-term incentive plan, the eligible members of the senior management are entitled to receive an incentive payment at the end of a three year 'restricted period', provided they remain in continuous employment with the Company for the aforesaid period. The value of such incentive is based on the price of shares of GlaxoSmithKline pic, U.K. An amount equal to one-third of the aggregate approximate value of the incentive is recognised as expense each year based on the fair value of such shares. (p) Taxes on Income Current tax is determined as the amount of tax payable in respect of taxable income for the period. Deferred tax is recognised, subject to the consideration of prudence in respect of deferred tax assets, on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax assets and deferred tax liabilities are measured using the tax rates and tax laws that have been enacted or substantively enacted by the Balance Sheet date. Current tax assets and current tax liabilities are offset when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle the asset and the liability on a net basis. Deferred tax assets and deferred tax liabilities are offset when there is a legally enforceable right to set off assets against liabilities rebrsenting current tax and where the deferred tax assets and deferred tax liabilities relate to taxes on income levied by the same governing taxation laws. (q) Employee Benefits (i) Long-term Employee Benefits In case of Defined Contribution plans, the Company's contributions to these plans are charged to the Statement of Profit and Loss as incurred. Liability for Defined Benefit plans is provided on the basis of valuations, as at the Balance Sheet date, carried out by an independent actuary. The actuarial valuation method used for measuring the liability for Gratuity and Post Retirement Medical is Projected Unit Credit method . The obligations for Gratuity and Post Retirement Medical are measured as the brsent value of estimated future cashflows discounted at rates reflecting the brvailing market yields of Indian Government securities as at the Balance Sheet date for the estimated term of the obligations. The estimate of future salary increases considered takes into account the inflation, seniority, promotion and other relevant factors. The expected rate of return of plan assets is the Company's expectation of the average long term rate of return expected on investments of the fund during the estimated term of the obligations. Plan assets are measured at fair value as at the Balance Sheet date. Provident Fund contributions are made to a Trust administered by the Company. The actuarial valuation method, carried out by an independent actuary, used for measuring the liability for Providend Fund is Projected Accrued Benefit method. This approach determines the brsent value of the interest rate guarantee under three interest rate scenarios: base case scenario, rising interest rate scenario and falling interest rate scenario. The Defined Benefit Obligation of the interest rate guarantee is set equal to the average of the brsent values determined under these scenarios in respect of accumulated provident fund contributions as at the valuation date. The liability for leave encashment and compensated absences is provided on the basis of valuation, as at Balance Sheet date, carried out by an independent actuary. (ii) The expenditure on voluntary retirement schemes is charged to the Statement of Profit and Loss in the year in which it is incurred. (iii) Actuarial gains and losses comprise experience adjustments and the effects of changes in actuarial assumptions and are recognised in the Statement of Profit and Loss in the year in which they arise. (r) Earnings Per Share Basic earnings per share is calculated by dividing the net profit for the period attributable to equity shareholders by the weighted average number ofequity shares outstanding during the period. The weighted average number of equity shares outstanding during the period and for all periods brsented is adjusted for events, such as bonus shares, other than the conversion of potential equity shares, that have changed the number of equity shares outstanding, without a corresponding change in resources. For the purpose of calculating diluted earnings per share, the net profit for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period is adjusted for the effects of all dilutive potential equity shares. 2 The demand of Rs. 71,79 lakhs made by the Central Government on the Company in respect of Betamethasone bulk drugs and formulations made there from during the period May 1981 to August 1987 has been under litigation fora period spanning nearly 30 years. Pursuant to the special leave petition of the Central Government in the Subrme Court of India against the Delhi High Court's Judgment and Order dated 19th October 2001 which was held in favour of the Company, the Subrme Court has, vide its Judgement and Order dated 31st March,, 2011, upheld the demand. The Company had accrued a liability of Rs.18,68 lakhs in earlier years and a further provision of Rs. 53,11 lakhs was accrued in 2011. Based on a legal advice, the Company has filed an Application in the Subrme Court seeking, inter alia, clarifications on some aspects of the Judgement and directions for recomputation of the demand. Simultaneously, the Company without brjudice to and subject to the outcome of the Application filed in the Subrme Court, has tendered as a further deposit, an amount of ^ 63,60 lakhs, which together with the amount of Rs. 8,19 lakhs brviously deposited with the Government, aggregates to the demand of Rs. 71,79 lakhs made by the Government in November 1990. The Company filed a Review Petition in the Subrme Court which was rejected in March 2012. In October 1996, the Government had claimed interest of Rs. 117,66 lakhs for the period 12th May 1981 to 17th October 1996, for which no provision was made in earlier years. The Government has vide letter dated 4th May 2011 called upon the Company to discharge the entire liability, including upto date interest calculated at 15% p.a., and has vide letter dated 10th October 2011, raised a demand on the Company for the interest amount amounting to Rs. 247,44 lakhs. Without brjudice to the position that interest is not payable, the Company has recognized a provision of Rs. 247,44 lakhs in respect of the Government's claim for interest in 2011. The Company has filed a Writ Petition at Delhi High Court against the above demand which has been admitted. The Company also filed stay applications which have been dismissed and has filed a Special Leave Petition (SLP) before the Subrme Court for stay of the interest demand until final determination of the Writ Petition filed in the Delhi High Court. The Subrme Court on hearing the above SLP, passed an order on 3rd April 2012. The said order stayed the Demand Notice dated 10th October 2011 during the pendency of the Writ Petition at the Delhi High Court subject to the Company depositing Rs. 136,82 lakhs in three equal installments within six month's time from the date of order. All three instalments have been deposited with the Government as of date. The Subrme Court, vide its order dated 5th October 2012, directed the Delhi High Court to dispose of the Writ Petition as expeditiously as possible.The Delhi High Court has listed the Writ Petition for hearing on 11th August, 2016. 3 Matters in respect of erstwhile Burroughs Wellcome (India) Limited (BWIL): (i) The Government of India, Ministry of Chemicals and Fertilisers, New Delhi, passed a final order on 21st July, 1993, directing erstwhile BWIL to pay an amount ofRs. 1,91.15 lakhs along with interest due thereon from the date of default into the Drugs Prices Equalisation Account (DPEA) in respect of a bulk drug procured by erstwhile BWIL during the period April 1981 to April 1983. Erstwhile BWIL filed a writ petition in August 1993 which was admitted by the Bombay High Court. After hearing both the parties, the High Court granted an interim injunction restraining the Government of India from taking any action in furtherance of and/or implementation of the order dated 21st July, 1993 or from in any manner seeking to compel erstwhile BWIL to deposit any amount into the DPEA, pending the hearing and final disposal of the petition on the condition that erstwhile BWIL furnishes a bank guarantee for Rs. 2,00 lakhs from a nationalised bank and undertakes to pay the amount demanded with interest at the rate of 20% per annum in case the petition fails. Erstwhile BWIL had accordingly furnished the required bank guarantee. If calculated on the basis of correct data, taking into account set offs claimable for earlier years for which data has been provided by erstwhile BWIL, no amount will be payable by the Company and accordingly no provision in that respect is considered necessary. The Company's stand that the demand is not sustainable has been confirmed by an eminent counsel. The Government of India's application in the Subrme Court praying that the writ petition be transferred to the the Subrme Court from the Bombay High Court was not allowed and the Company's writ petition will now be heard by the Bombay High Court. (ii) Erstwhile BWIL had made an application to the Government of India for approval under Section 198(4) of the Companies Act, 1956, in respect of payment of the Managing Director and three whole time Directors amounting to Rs. 10.93 lakhs for the year ended 31st August, 1986, which was in accordance with the minimum remuneration provided in the agreement entered into with them prior to erstwhile BWIL becoming public, which required such Government of India's sanction. The approval is still awaited. (iii) Remittances in transit rebrsent monies deposited by customers in favour of erstwhile BWIL with banks in Zambia -Rs. 0.31 lakhs and in Tanzania - Rs. 5.61 lakhs, the remittance of which is pending clearance of the authorities in those countries. 4 Matters in respect of erstwhile SmithKline Beecham Pharmaceuticals (India) Limited: (i) Rs. 1,44.44 lakhs received from Beckman Instruments International S.A. on account of disputed alleged additional commission has been included under Long term provisions and Income tax paid thereon aggregating to Rs. 64.77 lakhs has been included under long term loans and advances. The Company is contesting the matter with the concerned authorities. (ii) Refund of surtax Rs. 96.81 lakhs, and interest thereon amounting to Rs. 48.52 lakhs, received during 1994, have not been adjusted against the provision for tax in the books of account and recognised as income respectively, since the Income tax department had filed a reference application against the income tax tribunal's order which was pending before the High Court of Karnataka. The Company has received an order dated 18th April, 2007 from the High Court of Karnataka which is partially in the Company's favour. On the basis of the aforesaid order, Income Tax Appellate Tribunal (ITAT), Bangalore will pass an order giving directions. On receipt of the ITAT order, the Company will take appropriate steps in the matter. 5 The recurring expenditure on research and development charged off to revenue amounts to Rs. 1,99.57 lakhs (Previous period - Rs. 2,19.35 lakhs). 6 Miscellaneous expenses in Note 34 include loss on foreign currency transactions (net) Rs. 8,82.11 lakhs (Previous period -Rs. 1,64.38 lakhs) 7 "Reimbursement of expenses (net)" in Note 34 are amounts recovered from GlaxoSmithKline Asia Private Limited 13.38 lakhs (Previous period - Rs. 1,64.65 lakhs), from subsidiary company Rs. 2,26.13 lakhs (Previous period - Rs. 3,03.15 lakhs), from Stiefel India Private Limited Rs. 19.85 lakhs (Previous period - Rs. 24.97 lakhs), from GlaxoSmithKline Pte Limited Rs. 8.18 lakhs (Previous period - Rs. 30.96 lakhs), from GlaxoSmithKline Service Unlimited Rs. 71.33 lakhs (Previous period - 2,19.75 lakhs), GlaxoSmithKline Brasil Ltda Rs. 40.34 Lakhs (Previous period - Rs. 46.98 Lakhs), from GlaxoSmithKline Research and Development Limited Rs. 98.19 lakhs (Previous period - Rs. 1,05.74 lakhs) and paid to GlaxoSmithKline Consumer Healthcare Limited Rs. 23,09.50 lakhs (Previous period - Rs. 27,69.44 lakhs), GlaxoSmithKline Asia Private Limited Rs. 1,26.45 lakhs (Previous period - Nil), towards the value of costs apportioned, in accordance with the agreements on allocation of expenses with the companies. 8 The Company has only one reportable segment which is Pharmaceuticals. Accordingly, no separate disclosures of segment information have been made. 9 Disclosures as required by Accounting Standard 19, "Leases", notified under Section 133 of the Companies Act, 2013 given below: (i) The Company has taken various residential, office and godown brmises under operating lease or leave and licence agreements. These are not non-cancellable and range between 11 months and 3 years under leave and licence, or longer for other leases and are renewable by mutual consent on mutually agreeable terms. The Company has given refundable interest free security deposits under certain agreements. (ii) Lease payments are recognised in the Statement of Profit and Loss under 'Rent' in Note 34. 10 In April 2014, GlaxoSmithKline Pic (GSK), London, UK, entered into an inter-conditional agreement with NovartisAG (Novartis),Basel, Switzerland where GSK (i) will acquire the Novartis's Vaccines Business and manufacturing capabilities and facilities from Novartis, and (ii) will sell the rights to its Marketed Oncology Portfolio, related R&D activities and AKT Inhibitors currently in development to Novartis. Globally, this transaction with Novartis was completed on March 2nd 2015. In connection to the above transactions, the GlaxoSmithKline Pharmaceuticals Limited ("Company") Board in its meeting held on 12th February 2015, approved the transactions on an Asset Sale basis with Novartis Healthcare Private Limited, a private unlisted Company incorporated under the Companies Act 1956. Pursuant to the global deal, the Company will have its distribution rights terminated for the oncology portfolio in return for accessing the distribution rights of the acquired vaccines portfolio. The Company has completed this transaction on September 30, 2015 on receipt of all applicable legal and regulatory approvals. The transaction is not material and is profit neutral for the Company. The Company continues to sell the Oncology portfolio relating to this transaction up until the marketing authorisations transfer to Novartis Healthcare Private Limited. 11 (a) Provision for tax is net of advance tax and tax deducted at source amounting to Rs. 204,42.17 lakhs (Previous year -Rs. 251,92.00 lakhs). (b) Advance income-tax (net) rebrsents payments in excess of provisions of Rs. 3247,99.75 lakhs (Previous period -Rs. 2980,21.26 lakhs) and includes a net tax refund with interest ofRs. 110,35.00 lakhs which has been held as provision pending the final outcome ofa litigation. Other Loans and advances are net of allowances for doubtful loans and advances aggregating Rs. 29,96.83 lakhs (brvious year Rs. 29,96.83 lakhs). 12 Increase in the value of 'Capital work-in-progress' and 'Estimated amount of contracts (net of advances) remaining to be executed on capital account and not provided for' is mainly on account of the ongoing investments in the new greenfield manufacturing factory being constructed at Bengaluru. 13 The Company has appointed Mr. A. Vaidheesh as the Managing Director of the Company for the period August 3, 2015 to September 30, 2019 at the Board Meeting held on June 22, 2015 and has re-appointed Mr. Ronald C Sequeira as the Whole-time Director of the Company for the period of three years from October 25, 2015 at the Board Meeting held on October 31,2015, both subject to approval of members in ensuing Annual General Meeting. Consequently, the total remuneration paid to these directors for the aforesaid period amounting to Rs. 2,81.61 lakhs is subject to shareholders approval. 14 The accounting year of the company has been changed from January - December to April - March with effect from the brvious period. Consequently, the brvious period's financial statements are for the 15 months from 1st January, 2014 to 31st March, 2015. In view of this, the current year's figures are not comparable with those of the brvious period. Previous period's figures have been regrouped wherever necessary. The accompanying notes are an integral part of the financial statements. For Price Waterhouse & Co Bangalore LLP Firm Registration No. 007567S / S-200012 Chartered Accountants Asha Ramanathan Partner Membership No. 202660 For and on behalf of the Board D. S. PAREKH DIN: 9078 Chairman A. Vaidheesh DIN: 1444303 Managing Director A.A. Aristidou DIN: 7034424 CFO & Executive Director D. Sundaram DIN: 16304 Audit Committee Chairman A.A. Nadkarni Company Secretary Mumbai, 25th May, 2016 |