NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2016 1 General information : Mastek Limited (the 'Company') is a public limited company domiciled in India and is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The Company is a provider ofvertically-focused enterprise technology solutions. The Company's offering portfolio includes business and technology services comprising IT Consulting, Application Development, Systems Integration, Application Management Outsourcing, Testing, Data Warehousing and Business Intelligence, Application Security, CRM services and Legacy Modernisation. The Company carries out its operations through its subsidiaries and branch in the UK and has its offshore software development centres at Mumbai, Pune, Chennai and Mahape. Summary of significant accounting policies: 2.1 Basis of brparation These financial statements have been brpared in accordance with generally accepted accounting principles in India under the historical cost convention on 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) [Companies (Accounting Standards) Rules, 2006, as amended] and other relevant provisions of the Companies Act, 2013. All assets and liabilities have been classified as current or non-current as per the Group's normal operating cycle and other criteria set out in the Schedule III to the Companies Act, 2013. Based on the nature of services and the time between the acquisition of assets / inputs for processing and their realisation in cash and cash equivalents, the Group has ascertained its normal operating cycle as 12 months for the purpose of current / non current classification of assets and liabilities. The Ministry of Corporate Affairs (MCA) has notified the Companies (Accounting Standards) Amendment Rules, 2016 vide its notification dated 30 March 2016. The said notification read with Rule 3(2) of the Companies (Accounting Standard) Rules, 2006 is applicable to accounting period commencing on or after the date of notification i.e. 1 April, 2016. 2.2 Use of estimates The brparation of the financial statements in conformity with generally accepted accounting principles requires that the management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as at the date of the financial statements, and the reported amounts of revenue and expenses during the reported year. Actual results could differ from those estimates. 2.3 Tangible assets and debrciation Tangible assets are stated at cost of acquisition less accumulated debrciation and accumulated impairment losses, if any. Direct costs are capitalized until the assets are ready for use and include inward freight, duties, taxes and expenses incidental to acquisition and installation. Subsequent expenditures related to an item of tangible asset are added to its book value only if they increase the future benefits from the existing asset beyond its brviously assessed standard of performance. Losses arising from the retirement of, and gains or losses arising from disposal of tangible assets which are carried at cost are recognised in the Statement of Profit and Loss. Debrciation on tangible assets is provided on the straight line method, on a pro rata basis, over the estimated useful lives of assets which are not longer than the useful lives brscribed under Schedule II to the Companies Act, 2013, in order to reflect the period over which the debrciable asset is expected to be used by the company. The estimates of useful lives of the assets based on a technical evaluation, have not undergone a change on account of transition to the Companies Act, 2013. Assets Useful Life Buildings 25 - 30 years Computers 2 years Plant and equipment 5 years Furniture and fixtures 5 years Vehicles 5 years Office equipment 2-5 years Leasehold land Lease Term ranging from 95-99 years Leasehold improvements 5 years or the primary period of lease whichever is less 2.4 Intangible assets and amortization Intangible assets are stated at cost of acquisition less accumulated amortization and accumulated impairment losses, if any. Intangible assets are amortized on a straight line method over their estimated useful lives as follows: Assets Useful Life Goodwill 3 years Computer software 1 - 5 years Expenditure on research is recognised as an expense when it is incurred. Development costs of products are also charged to the Statement of Profit and Loss unless all the criteria for capitalisation as set out in paragraph 44 of AS 26 - 'Intangible Assets' have been met by the Company. 2.5 Impairment of assets At each Balance Sheet date, the Company assesses whether there is any indication that an asset may be impaired. If any such indication exists, management estimates the recoverable amount. Recoverable amount is higher of an asset's net selling price and 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 the its useful life. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognised in the Statement of Profit and Loss to the extent carrying amount exceeds recoverable amount. 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 many have decreased. 2.6 Investments 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. Current investments are carried at cost or fair value, whichever is lower. Non-current investments are carried at cost. However, provision for other than temporary decline in value is made to recognise a decline, other than temporary, in the value of non-current investments, such reduction being determined and made for each investment individually. Investment property: Investment in buildings that are not intended to be occupied substantially for use by, or in the operations of, the Company, have been classified as investment property. Investment properties are carried at cost less accumulated debrciation and accumulated impairment losses, if any. Refer note 2.3 for debrciation rate used for buildings. 2.7 Foreign currency transactions and translation Foreign currency transactions of the Company and of its integral foreign branch are accounted at the exchange rates brvailing on the date of the transaction or at an average rate that approximates the actual rate at the date of the transaction. Monetary assets and liabilities are translated at the rate brvailing on the Balance Sheet date whereas non-monetary assets and liabilities are translated at the rate brvailing on the date of the transaction. Gains and losses resulting from the settlement of foreign currency monetary items and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Profit and Loss. In case of forward exchange contracts which are open on the balance sheet date and are backed by receivables, the brmium or discount arising at the inception of such a forward exchange contract is amortized as expense or income over the life of the contract. The exchange difference on such contracts is computed by multiplying the foreign currency amount of the forward exchange contract by the difference between a) the foreign currency amount of the contract translated at the exchange rate at the reporting date or the settlement date where the transaction is settled during the reporting period, and b) the same foreign currency amount translated at the latter of the date of inception of the forward exchange contract and the last reporting date. The exchange difference so computed on such contracts is recognised in the Statement of Profit and Loss. Any profit or loss arising on cancellation or renewal of such forward exchange contracts is recognised as income or expense for the year. 2.8 Derivative instruments and hedge accounting The Company uses foreign currency forward contracts to hedge its risks associated with foreign currency fluctuations relating to certain firm commitment and forecasted transactions. The Company designates these hedging instruments as cash flow hedges. The use of hedging instruments is governed by the policies of the Company which are approved by its Board of Directors. Hedging instruments are initially measured at fair value, and are remeasured at subsequent reporting dates. Changes in the fair value of these derivatives that are designated and effective as hedges of future cash flows are recognised directly in the hedging reserve and the ineffective portion is recognised immediately in the Statement of Profit and Loss. For derivative financial instruments that do not qualify for hedge accounting, the brmium or discount arising at the inception of the contract is amortized as expense or income over the life of the contract. Gains/losses on settlement of transaction arising on cancellation or renewal of such a forward exchange contract are recognized as income or expense for the year. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time for forecasted transactions, any cumulative gain or loss on the hedging instrument recognised in shareholders' funds is retained there until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in hedging reserve is transferred to the Statement of Profit and Loss for the year. 2.9 Employee benefits (i) Long-term employee benefits (a) Defined contribution plans The Company has defined contribution plans for post employment benefits in the form of provident fund, employees' state insurance, labour welfare fund and superannuation fund in India which are administered through Government of India and/ or Life Insurance Corporation of India (LIC). The Company also makes contributions towards defined contribution plans in respect of its branch in foreign jurisdiction, as applicable. Under the defined contribution plans, the Company has no further obligation beyond making the contributions. Such contributions are charged to the Statement of Profit and Loss as incurred. (b) Defined benefit plans The Company has defined benefit plans for post employment benefits in the form of gratuity for its employees in India. The gratuity scheme of the Company is administered through Life Insurance Corporation of India (LIC). Liability for defined benefit plans is provided on the basis of actuarial valuations, as at the Balance Sheet date, carried out by an independent actuary. The actuarial valuation method used by independent actuary for measuring the liability is the projected unit credit method. Actuarial gains and losses are recognised immediately in the Statement of Profit and Loss as income or expense. (c) Other long-term employee benefits The employees of the Company are also entitled for other long-term benefit in the form of compensated absences as per the policy of the Company. Leave encashment vests to employees on an annual basis for leave balance above the upper limit as per the Company's policy. At the time of retirement, death while in employment or on termination of employment, leave encashment vests equivalent to salary payable for number of days of accumulated leave balance subject to an upper limit as per the Company's policy. Liability for such benefit is provided on the basis of actuarial valuations, as at the Balance Sheet date, carried out by an independent actuary. The actuarial valuation method used by independent actuary for measuring the liability is the projected unit credit method. Actuarial gains and losses are recognised immediately in the Statement of Profit and Loss as income or expense. (ii) Short-term employee benefits The undiscounted amount of short term employee benefits expected to be paid in exchange for the services rendered by employees is recognised in the year during which the employee rendered the services. These benefits comprise compensated absences such as paid annual leave and performance incentives. (in) Termination benefits Termination benefits, in the nature of voluntary retirement benefits or those arising from restructuring, are recognised in the Statement of Profit and Loss when the Company has a brsent obligation as a result of past event, when a reliable estimate can be made of the amount of the obligation and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations. 2.10 Revenue recognition The Company derives revenues primarily from information technology services. Revenue is recognised in accordance with the terms of the contracts with customers as the service is performed by the proportionate completion method and when it is reasonably certain that the ultimate collection will be made. Revenues on time and material contracts are recognised when services are rendered and related costs are incurred. Revenues on fixed price, fixed time bound contracts are recognised over the life of the contract measured by the proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs. The cumulative impact of any revision in estimates of the percentage of work completed is reflected in the period in which the change becomes known. Provisions for estimated losses on such contracts are made during the period in which a loss becomes probable and can be reasonably estimated. When the uncertainty, relating to the collectability arises subsequent to the rendering of the service, a separate provision is made to reflect the uncertainty and the amount of revenue originally recorded is not adjusted. Revenues from maintenance contracts are recognised on a straight line basis over the period of the contract. Revenues from resale of software and hardware are recognised upon delivery of products to the customer, when the significant risks and rewards of ownership are transferred to the buyer and the ultimate collection is reasonably certain. Accrued revenue included in 'Other current assets', rebrsents amounts in respect of services performed in accordance with contract terms, not yet billed to customers at the year end. Unearned revenue included in 'Other current liabilities' rebrsents amounts received/billed in excess of the value of work performed in accordance with the terms of the contracts with customers. 2.11 Other income Dividend income from subsidiaries and on other investments is recognised when the right to receive payment is established. Interest income is recognised on time proportion basis taking into account the amount outstanding and the applicable rate of interest. Rental income is recognised on a straight line basis over the term of the lease as per the terms of the base contract. 2.12 Leases Assets taken on leases which transfer substantially all the risks and rewards incidental to ownership of the assets to the lessee i.e. finance leases, in terms of provisions of Accounting Standard (AS) 19 - "Leases', are capitalised. The assets acquired under finance leases are capitalised at the lower of the fair value at the inception of the lease and the brsent value of minimum lease payments and a liability is created for an equivalent amount. Such assets are disclosed as leased assets under tangible assets and are debrciated in accordance with the Company's debrciation policy described in note 2.3. Each lease rental paid on the finance lease is allocated between the liability and interest cost, so as to obtain a constant periodic rate of interest on the outstanding liability for each period. Other leases are classified as operating leases and rental payments in respect of such leases are charged to the Statement of Profit and Loss on a straight line basis over the lease term. Assets given under operating leases are capitalised in the Balance Sheet under tangible assets and are debrciated as per the Company's debrciation policy described in note 2.3. 2.13 Earnings per share Basic earnings per share (EPS) are calculated by dividing the net loss / profit after tax for the year attributable to equity shareholders by the weighted average number of equity shares outstanding during the year. Diluted earnings per share is computed by adjusting the number of shares used for basic EPS with the weighted average number of shares that could have been issued on the conversion of all dilutive potential equity shares. Dilutive potential equity shares are deemed converted as of the beginning of the year, unless they have been issued at a later date. The diluted potential equity shares have been adjusted for the proceeds receivable had the shares been actually issued at fair value i.e. average market value of outstanding shares. The number of shares and potentially dilutive shares are adjusted for share splits and bonus shares, as appropriate. In calculating diluted earnings per share, the effects of anti dilutive potential equity shares are ignored. Potential equity shares are anti-dilutive when there conversion to equity shares would increase earnings per share or decrease loss per share. 2.14 Income Taxes Tax expense for the year comprises of current tax and deferred tax. Current tax is measured by the amount of tax expected to be paid to the taxation authorities on the taxable profits after considering tax allowances and exemptions and using applicable tax rates and laws. Deferred tax is recognised on timing differences between the accounting income and the taxable income for the year and quantified using the tax rates and tax laws enacted or substantively enacted as on the Balance Sheet date. Deferred tax assets are recognised and carried forward to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Deferred tax assets in respect of unabsorbed debrciation or carry forward losses are recognised only to the extent there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised. The carrying amount of deferred tax assets is reviewed at each balance sheet date for any write down or reversal, as considered appropriate. Minimum Alternative Tax (MAT) credit is recognised as an assets only when and to the extent their is convincing evidence that the Company will pay normal income tax during the specified period. Such asset is reviewed at each balance sheet date and the carrying amount of the MAT credit asset is written down to the extent their is no longer convincing evidence to the effect that the Company will pay normal income tax during the specified period. Current tax assets and liabilities are offset when there is a legally enforceable right to set off the recognised amount and there is an intention to settle the asset and liability on a net basis. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off assets against liabilities rebrsenting the current tax and where the deferred tax assets and liabilities relate to taxes on income levied by the same governing taxation laws. 2.15 Accounting for Employee Stock Options Stock options granted to employees of Mastek Limited and its subsidiaries under the stock option schemes established after June 19, 1999 are accounted as per the treatment brscribed by the Guidance Note on Employee Share-based Payments issued by the Institute of Chartered Accountants of India as required by the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014. The intrinsic value of the option being excess of market value of the underlying share immediately prior to date of grant over its exercise price is recognised as deferred employee compensation with a credit to share options outstanding account. The Expense on deferred employee compensation is charged to Statement of Profit and Loss on straight line basis over the vesting period of the option. The options that lapse are reversed by a credit to Expense on Employee Stock Option Scheme, equal to the amortized portion of value of lapsed portion and a debit to share options outstanding account equal to the un-amortised portion. 2.16 Provisions and Contingent Liabilities Provisions are recognised when the Company has a brsent obligation as a result of past events, for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount can be made. A disclosure for a contingent liability is made where there is a possible obligation that arises from past events and 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 the past events where it is either not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount cannot be made. Provisions are reviewed regularly and are adjusted where necessary to reflect the current best estimates of the obligation. Where the Company expects a provision to be reimbursed, the reimbursement is recognized as a separate asset, only when such reimbursement is virtually certain. 2.17 Cash and Cash Equivalents Cash and cash equivalents include cash in hand, demand deposits with banks and other short term highly liquid investments with original maturities of three months or less. 3. Income Taxes (a) In accordance with the Indian Income Tax Act, the Company has calculated its tax liability after considering Minimum Alternate Tax (MAT). Payments under MAT can be carried forward and set off against future tax liability for a period often years. Accordingly, a sum ofRs. 2,436.59 (Previous year Rs. 2,694.26) has been carried forward and shown under 'Long-term loans and advances' (Refer note 14). (b) The Company had received tax demands aggregating to Rs. 2,835.05 (including interest of Rs. 853.09) primarily on account of transfer pricing issues for the assessment years 2006-07 to 2011-12. For the assessment year 2006-07 and assessment year 200708, the second appellate authority (the Income Tax Appellate Tribunal) has allowed these issues in favour of the company and the income tax authorities have filed an appeal with the Honourable High Court. For the assessment years 2008-09 to 2010-11, the first appellate authority (the Commissioner of Income tax (Appeals)) has allowed most of these issues in favour of the company and the income tax authorities have filed an appeal with the second appellate authority (the Income Tax Appellate Tribunal). For the assessment years 2011-12 the matter is pending before the first appellate authority (the Commissioner of Income tax (Appeals)). Considering the facts, materiality and favourable order of the second appellate authority for assessment years 2006-07 and 2007-08 and the first appellate authority for 2008-09 to 2010-11, the management believes that the final outcome of majority of the above disputes for the remaining years should be in favour of the Company and there should not be any material impact on the financial statements. 4. Segment reporting The Company has brsented data relating to its segments in its consolidated financial statements which are brsented in the same annual report as Mastek Limited. In terms of provisions of Accounting Standard (AS) 17 - "Segment Reporting', no disclosures related to segments are therefore brsented in these stand-alone financial statements. 5. Micro, Small and Medium Enterprises Disclosure of payable to vendors as defined under the "Micro, Small and Medium Enterprise Development Act, 2006" is based on the information available with the Company regarding the status of registration of such vendors under the said Act, as per the intimation received from them on requests made by the company. There are no overdue principal amounts / interest payable amounts for delayed payments to such vendors at the Balance Sheet date. There are no delays in payment made to such suppliers during the year or for any earlier years and accordingly there is no interest paid or outstanding interest in this regard in respect of payments made during the year or on balance brought forward from brvious year. 6. Acquisition of Majesco Limited (Formerly - Minefields Computers Limited), India During the brvious year, the Company had purchased 10,000 equity shares (including 6 equity shares purchased jointly with other shareholders) of face value of Rs. 10/- each of Majesco Limited for a total consideration of Rs. 1. Further, the Company had subscribed to 40,000 additional equity shares of Majesco Limited of Rs. 10/- each for a total consideration of Rs. 4. Thus the total shareholding of the Company in Majesco Limited at March 31, 2015 amounted to 50,000 equity shares of Rs. 10/- each for a total consideration of Rs. 5 [Refer note 12(b)]. Pursuant to the Scheme of Arrangement Majesco Limited is no longer a subsidiary of the Company (Refer note 44). 7. Sale of Investment in Majesco Canada Limited, Canada (formerly MajescoMastek Canada Limited, Canada) During the brvious year, the Company sold its entire holding of 3,500,000 equity shares of Majesco Canada Limited, Canada ("MCAN") (a wholly owned subsidiary) to Majesco, USA for a total consideration of Rs. 439.47. This sale resulted in a gain of Rs. 439.47, as the carrying value of MCAN in the books of Mastek was reduced to nil, considering the provision for other than temporary decline in value made in earlier year. The Gain had been included under the heading "exceptional items" in the Statement of Profit and Loss (Refer note 29). 8. Purchase of Investment in Majesco, USA (formerly MajescoMastek, USA) During the brvious year, the Company had purchased 24,765,750 equity shares of Majesco, USA from Mastek (UK) Limited for a total consideration of Rs. 3,024.79 (USD 4,953 K). The investment in Majesco, USA is transferred pursuant to a Scheme of Arrangement (Refer note 44). 9. Sale of Investment in Majesco Sdn. Bhd., Malaysia (formerly Mastek MSC Sdn. Bhd., Malaysia) During the brvious year, the Company sold its entire holding of 11,262,000 equity shares of Majesco Sdn. Bhd., Malaysia ("MSC") (a wholly owned subsidiary) to Majesco, USA (a wholly owned subsidiary) for a total consideration of Rs. 2,042.94. This sale resulted in a gain of Rs. 599.52 to the Company which had been included under the heading "exceptional items" in the Statement of Profit and Loss (Refer note 29). 10. Sale of Investment in Mastek Asia Pacific Pte. Limited, Singapore ("MAP") During the year, the Company sold its entire holding of 2,850,000 equity shares of MAP (a wholly owned subsidiary) to Majesco Sdn Bhd, Malaysia for a total consideration of Rs. 180.49. This sale resulted in a gain of Rs. 4.95 after considering the provision for other than temporary decline in value made in earlier years. The Gain has been included under the heading "exceptional items" in the Statement of Profit and Loss (Refer note 29). 11. Previous year figures have been regrouped or reclassified wherever necessary. In terms of our report of even date For Price Waterhouse Chartered Accountants LLP Firm Registration Number: 012754N/N500016 Pradip Kanakia Partner Membership Number: 39985 For and on behalf of the Board Sudhakar Ram Managing Director & Group CEO S. Sandilya Non-Executive Chairman and Independent Director Jamshed Jussawalla Chief Financial Officer Dinesh Kalani Company Secretary Mumbai, April 19, 2016 |