NOTES FORMING PART OF THE FINANCIAL STATEMENTS CORPORATE INFORMATION IDFC Limited ('the Company') is a public company incorporated in India and is a Non Banking Finance Company (NBFC) regulated by the Reserve Bank of India ('RBI'). It was operating as an Infrastructure Finance Company, i.e. financing infrastructure projects in sectors like energy, telecommunication, transportation, commercial and industrial projects including hospital, education, tourism and hotels up to September 30, 2015. The Company had received in principle approval from the RBI to set up a new private sector bank in April 2014. Since October 1, 2015 the company is operating as NBFC- Investment Company. In addition, as required under the Guidelines for Licensing of New Banks in the Private Sector issued by RBI on February 22, 2013, the Non Operative Financial Holding Company shall hold investment in the Bank as well as all other Financial Services entities of the group regulated by RBI or other Financial Sector regulators. Accordingly, IDFC Limited has transferred its entire investments in all regulated subsidiaries, i.e. IDFC Alternatives Limited, IDFC Asset Management Company Limited, IDFC AMC Trustee Company Limited, IDFC Infra Debt Fund Limited, IDFC Securities Limited & IDFC Trustee Company Limited to its wholly owned subsidiary, IDFC Financial Holding Company Limited ('IDFC FHCL') for consideration received in cash. DEMERGER OF FINANCING UNDERTAKING Pursuant to the filing and approval of the Scheme of Arrangement u/s. 391-394 of the Companies Act, 1956 ('Scheme of Arrangement') between IDFC Limited ('Transferor Company') and IDFC Bank Limited ('Transferee Company') and their respective shareholders and creditors, by the Hon'ble Madras High Court vide its order dated June 25,2015 and on fulfillment of all conditions specified under the Scheme of Arrangement and on receipt of final banking license from the Reserve Bank of India by IDFC Bank Limited, the Financing Undertaking of the Transferor Company was transferred at the book value to the Transferee Company with effect from October 1, 2015. Accordingly, assets aggregating to Rs. 66,237.46 crore and liabilities aggregating to Rs. 60,002.90 crore, resulting in net assets of Rs. 6,234.56 crore along with contingent liabilities of Rs. 285.63 crore, capital commitment of Rs. 840.05 crore and notional principal of derivative contracts of Rs. 13,903.57 crore pertaining to the Financing Undertaking were transferred from Transferor Company to Transferee Company. The Financing Undertaking as defined under the Scheme of Arrangement included all outstanding loans and deposits, borrowings, investments, current assets, sundry debtors, all debts, liabilities including contingent liabilities, licenses, approvals, tax credit, properties - movable and immovable, plant and machinery, furniture and fixtures, office equipment, software and licenses, insurance, policies, all contracts, agreements, collateral, all staff and employees employed in connection with Financing Undertaking etc. In consideration, the Transferee Company issued equity shares of Face value Rs. 10 each in the ratio of 1:1 to the shareholders of Transferor Company on the record date as determined by the Board of Directors. The Company through its wholly owned subsidiary, IDFC FHCL, has invested Rs. 7,030.07 crore resulting in effective equity holding of 53% in IDFC Bank Limited. In accordance with the accounting treatment, as provided under the Scheme of Arrangement; (i) The credit balance in the debenture redemption reserve is transferred and credited to general reserve. (ii) The Company has reduced the book value of assets (net of diminution/debrciation, if any) and liabilities relating to the Financing Undertaking transferred to IDFC Bank Limited. (iii) The excess of book value of the assets transferred (net of diminution/debrciation, if any) over the book value of the liabilities of the Financing Undertaking transferred to the transferee company, is debited proportionately to Reserves and Surplus (including the Securities Premium Account) other than statutory reserves created under Section 45IC of the Reserve Bank of India Act, 1934, under section 36(1)(viii) of the Income tax Act, 1961 and the stock option outstanding reserve as described in (iv) below. Accordingly, adjustments are made in Securities Premium Account Rs. 3,701.31 crore, General Reserve Rs. 918.87 crore, Statement of Profit and Loss account of Rs. 1,607.80 crore and Stock Option Outstanding Account of Rs. 6.56 crore on demerger of Financing Undertaking of IDFC Limited into IDFC Bank Limited. Details of net assets transferred on demerger of Financing Undertaking of IDFC Limited are as under iv) Stock option outstanding reserve is reduced in the proportion of the net book value of the Financing Undertaking to the net worth of Transferor Company. 02 BASIS OF brPARATION The financial statements of the Company have been brpared in accordance with Generally Accepted Accounting Principles in India ('Indian GAAP') to comply with the Accounting Standards specified Under Section 133 of the Companies Act, 2013 ("the 2013 Act"). The financial statements have been brpared on the accrual basis under the historical cost convention. The accounting policies adopted in the brparation of the financial statements are consistent with those followed in the brvious year unless stated otherwise. 03 SIGNIFICANT ACCOUNTING POLICIES A. USE OF ESTIMATES The brparation of the financial statements in conformity with Indian GAAP requires the Management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) and the reported income and expenses during the year. The Management believes that the estimates used in brparation of the financial statements are prudent and reasonable. Future results could differ due to these estimates and the differences between the actual results and the estimates are recognised in the periods in which the results are known / materialised. B. CASH AND CASH EQUIVALENTS Cash and cash equivalents for the purpose of the Cash Flow Statement comprises cash on hand, cash in bank, fixed deposits and other short-term highly liquid investments with an original maturity of three months or less that are readily convertible into known amount of cash and which are subject to an insignificant risk of change in value. C. CASH FLOW STATEMENT Cash flows are reported using the indirect method whereby cash flows from operating, investing and financing activities of the Company are segregated and profit before tax is adjusted for the effects of transactions of non-cash nature and any deferrals or accruals of past or future cash receipts or payments. D. INVESTMENTS Investments which are readily realisable and intended to be held for not more than one year from the date on which such investments are made are classified as current investments in accordance with the RBI guidelines and Accounting Standards notified under Section 133 of the Companies Act, 2013 ("the 2013 Act"). Current investments also include current maturities of long-term investments and also current portion of long-term investments. All other investments are classified as long-term investments. The Company follows trade date method of accounting for recording of purchase and sale of investments. All investments are initially recorded at cost. The cost of an investment includes purchase price, directly attributable acquisition charges and reduced by recovery of costs, if any. On disposal of an investment, the difference between its carrying amount and the net disposal proceeds is charged or credited to the Statement of Profit and Loss. Current investments are valued scrip-wise and debrciation / apbrciation is aggregated for each category. Net apbrciation in each category, if any, being unrealised gain is ignored, while net debrciation is provided for. Commercial papers, certificate of deposits and treasury bills are valued at carrying cost. Long-term investments are carried at acquisition cost. A provision is made for diminution other than temporary on an individual basis against long-term investments. Premium paid over the face value of long-term investment is amortised over the life of the investment on straight line method. Inter-class transfer of investments from one category to the other, if any, is done in accordance with the RBI guidelines at the lower of book value and fair value / market value on the date of transfer. E. REPURCHASE AND RESALE TRANSACTIONS (REPO) Repo transactions are treated as collateralised lending and borrowing transactions, with an agreement to repurchase, on the agreed terms, as per the RBI guidelines and accordingly disclosed in the financial statements. The difference between consideration amounts of the first leg and second leg of the repo are reckoned as repo interest. As regards repo / reverse repo transactions outstanding on the balance sheet date, only the accrued expenditure / income till the Balance Sheet date is taken to the Statement of Profit and Loss. Any repo expenditure / income for the remaining period is reckoned in the next accounting period. The securities sold under repo transactions are continued to be marked-to-market as per the investment classification of the security. F. LOANS In accordance with the RBI guidelines, all loans are classified under any of four categories i.e. (i) standard assets (ii) sub-standard assets (iii) doubtful assets and (iv) loss assets. G. TANGIBLE FIXED ASSETS Fixed assets are stated at cost of acquisition, including any cost attributable for bringing the asset to its working condition, less accumulated debrciation. Profit or loss arising from derecognition of fixed assets are measured as difference between the net disposal proceeds and the cost of the assets less accumulated debrciation up to the date of disposal and are recognised in the Statement of Profit and Loss. H. DEbrCIATION ON TANGIBLE FIXED ASSETS (SEE NOTE 40) Debrciation on tangible fixed assets is provided on the straight line method, as per the useful life brscribed in Schedule II to the Companies Act, 2013 except in respect of following categories of assets, in which case life of asset has been assessed based on the technical advice a) Mobile phones b) Motor Cars. Debrciation on additions during the year is provided on a pro-rata basis. Assets costing less than Rs. 5,000 each are fully debrciated in the year of capitalisation. Debrciation in respect of leasehold improvements is provided on a straight - line method over the extended period of the lease. I. INTANGIBLE ASSETS AND AMORTISATION Intangible assets comprising of computer software are stated at cost of acquisition, including any cost attributable for bringing the asset to its working condition, less accumulated amortisation. Any technology support cost or annual maintenance cost for such software is charged annually to the Statement of Profit and Loss. Intangible assets are being amortised over the estimated useful life of the asset on a straight-line method. The estimated useful life of the intangible assets and amortisation period are reviewed at the end of each financial year. J. IMPAIRMENT OF ASSETS The carrying amount of assets at each Balance Sheet date are reviewed for impairment. If any indication of impairment based on internal / external factors exists, the recoverable amount of such assets is estimated and impairment is recognised wherever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the greater of the net selling price and its value in use, which is arrived at by discounting the future cash flows to their brsent value, based on an appropriate discounting factor. If at the Balance sheet date, there is a indication that brviously recognised impairment loss no longer exists, the recoverable amount is reassessed and the asset is reflected at the recoverable amount, subject to a maximum of the debrciable historical cost and reversal of such impairment loss is recognised in the Statement of Profit and Loss, except in case of revalued assets. k. EXPENSE UNDER EMPLOYEE STOCK OPTION SCHEMES The Company has formulated Employee Stock Option Schemes 2007 ('ESOS 2007') in accordance with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 ('the Guidelines'). The ESOS provides for grant of stock options to employees (including employees of subsidiary companies) to acquire equity shares of the Company that vest in a graded manner and that are to be exercised within a specified period. In accordance with the Guidelines and the Guidance Note on 'Accounting for Employees Share-based Payments' issued by the Institute of Chartered Accountants of India, the excess, if any, of the closing market price on the day prior to the date of grant of the stock options under the ESOS over the exercise price is amortised on a straight-line method over the vesting period and is charged to the Statement of Profit and Loss as employee benefits expense. In case the vested stock options expires unexercised, the balance in stock options outstanding is transferred to the general reserve. In case the unvested stock options get lapsed / cancelled, the balance in stock option outstanding account is transferred to Statement of Profit and Loss. In addition, against each outstanding employee stock options granted by IDFC Limited to its employees, equivalent options of IDFC Bank Limited were granted under the Scheme of Arrangement. The price of these options were determined by multiplying the existing grant price of the options granted by IDFC Limited to its employees under the IDFC Limited Employee Stock Option Scheme by the proportion that the net worth of the Financing Undertaking bears to the total net book value of IDFC Limited, immediately prior to the effectiveness of the Scheme of Arrangement. L. EMPLOYEE BENEFITS ¦ Defined contribution plans The Company's contribution to provident fund, superannuation fund and pension fund are considered as defined contribution plans and are charged to the Statement of Profit and Loss as they fall due, based on the amount of contribution required to be made and when services are rendered by the employees. ¦ Defined benefit plan The net brsent value of the Company's obligation towards gratuity to employees is funded and actuarially determined as at the Balance Sheet date based on the projected unit credit method. Actuarial gains and losses are recognised in the Statement of Profit and Loss for the year. ¦ Compensated absences Based on the leave rules of the Company, employees are not permitted to accumulate leave. Any unavailed privilege leave to the extent encashable is paid to the employees and charged to the Statement of Profit and Loss for the year. M. BORROWING COSTS Borrowing costs include interest, amortisation of ancillary costs incurred and exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to the interest cost. Interest cost in connection with the borrowing of funds to the extent not directly related to the acquisition of qualifying assets are charged to the Statement of Profit and Loss over the tenure of the loan. Ancillary costs in connection with long-term external commercial borrowings are amortised to the Statement of Profit and Loss over the tenure of the loan. N. REVENUE RECOGNITION Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. In addition, the following criteria must also be met before revenue is recognised: ¦ Interest is accounted on accrual basis except in the case of non-performing loans and identified advances*, where it is recognised upon realization, as per the income recognition and asset classification norms brscribed by the RBI. ¦ Income on discounted instruments is recognised over the tenure of the instrument on a straight-line method. ¦ Dividend is accounted when the right to receive is established. ¦ Front end fees on processing of loans are recognised upfront as income. ¦ Underwriting commission earned to the extent not reduced from the cost of acquisition of securities is recognised as fees on closure of issue. ¦ All other fees and charges are recognised when reasonable right of recovery is established, revenue can be reliably measured and as and when they become due except guarantee commission which is recognised pro-rata over the period of the guarantee. ¦ Premium on interest rate reduction is accounted on accrual basis over the residual life of the loan. ¦ Profit / loss on sale of investments is recognised on trade date basis. Profit / loss on sale of investments is determined based on the 'first in first out' cost for current investments and weighted average cost for long-term investments. ¦ Profit on sale of loan assets through direct assignment / securitisation is recognised over the residual life of the loan / pass through certificate in terms of the RBI guidelines. Loss arising on account of direct assignment / securitisation is recognised upfront on sale in the Statement of Profit and Loss. ¦ Revenue from power supply is recognised when reasonable right of recovery is established. ¦ Income from trading in derivatives is recognised on final settlement or squaring up of the contracts. "Identified advances are specific advances in infrastructure sector that are not NPAs which has possible risk of slippage. O. SEGMENT REPORTING The Company's primary business segments are reflected based on the principal business carried out, i.e. financing up-to September 30, 2015 w.e.f. October 1, 2015 post demerger of Financing Undertaking into IDFC Bank Limited, the Company's principal business is investing. The risk and returns of the business of the Company is not associated with geographical segmentation, hence there is no secondary segment reporting based on geographical segment. P. LEASES Where the Company is lessee Leases under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Amount due under the operating leases are charged to the Statement of Profit and Loss, on a straight - line method over the lease term in accordance with Accounting Standard 19 on 'Leases' as specified under section 133 of the Companies Act, 2013 ("the 2013 Act"). Initial direct costs incurred specifically for operating leases are recognised as expense in the year in which they are incurred. Where the Company is lessor Leases under which the Company does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Assets subject to operating leases are included in fixed assets. Lease income in respect of operating leases is recognised in the Statement of Profit and Loss on a straight-line method over the lease term in accordance with Accounting Standard 19 on 'Leases' as specified under section 133 of the Companies Act, 2013 ("the 2013 Act"). Maintenance costs including debrciation are recognised as an expense in the Statement of Profit and Loss. Q. EARNINGS PER SHARE Basic earnings per share is computed by dividing the profit after tax by the weighted average number of equity shares outstanding during the year. Diluted earnings per share is computed by dividing the profit after tax as adjusted for dividend, interest and other charges to expense or income relating to the dilutive potential equity shares, by the weighted average number of equity shares considered for deriving basic earnings per share and the weighted average number of equity shares which could have been issued on the conversion of all dilutive potential equity shares. Potential equity shares are deemed to be dilutive only if their conversion to equity shares would decrease the net profit per share from continuing ordinary operations. Potential dilutive equity shares are deemed to be converted as at the beginning of the year, unless they have been issued at a later date. The dilutive potential equity shares are adjusted for the proceeds receivable had the shares been actually issued at fair value (i.e. average market value of the outstanding shares). Dilutive potential equity shares are determined independently for each year. R. TAXES ON INCOME Current tax is the amount of tax payable on the taxable income for the year as determined in accordance with the provisions of the Income - tax Act, 1961. Deferred tax is recognised on timing differences, being the differences between the taxable income and the accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax is measured using the tax rates and the tax laws enacted or substantially enacted as at the Balance Sheet date. Deferred tax liabilities are recognised for all timing differences. Deferred tax assets in respect of unabsorbed debrciation and carry forward of losses are recognised only if there is virtual certainty that there will be sufficient future taxable income available to realise such assets. Deferred tax assets are recognised for timing differences of other items only to the extent that reasonable certainty exists that sufficient future taxable income will be available against which these can be realised. Deferred tax assets and liabilities are offset if such items relate to taxes on income levied by the same governing tax laws and the Company has a legally enforceable right for such set off. Deferred tax assets are reviewed at each Balance Sheet date for their realisability. Current and deferred tax relating to items directly recognised in reserves are recognised in reserves and not in the Statement of Profit and Loss. Since the Company has passed a Board resolution that it has no intention to make withdrawal from the Special Reserve created and maintained under section 36(1)(viii) of the Income-tax Act, 1961, the special reserve created and maintained is not capable of being reversed and thus a permanent difference. Accordingly, no deferred tax liability has been created in books of account, towards the same. DERIVATIVE CONTRACTS Interest rate swaps Interest rate swaps are booked with the objective of managing the interest rate risk on liabilities. Interest rate swaps in the nature of hedge are recorded on accrual basis and these transactions are not marked-to-market. Any resultant profit or loss on termination of the hedge swaps is amortised over the life of the swap or underlying liability, whichever is shorter. Currency Interest rate swaps Currency interest rate swaps in the nature of hedge, booked with the objective of managing the currency and interest rate risk on foreign currency liabilities are recorded on accrual basis and these transactions are not marked-to-market. Any resultant profit or loss on termination of hedge swaps is amortised over the life of swap or underlying liability, whichever is shorter. The foreign currency balances on account of principal of currency interest rate swaps outstanding as at the Balance Sheet date are revalued using the closing rate. Stock Futures ¦ Stock Futures are marked-to-market on a daily basis. The debit or credit balance in the 'Mark-to-market margin - stock futures account' disclosed under loans and advances or current liabilities rebrsents the net amount paid or received on the basis of the movement in the prices of stock futures till the Balance Sheet date. ¦ Credit balance in the 'Mark-to-market margin - stock futures account' in the nature of anticipated profit is ignored and no credit is taken to the Statement of Profit and Loss. However, the debit balance in the 'Mark-to-market margin - stock futures account' in the nature of anticipated loss is recognised in the Statement of Profit and Loss. ¦ On final settlement or squaring-up of contracts for stock futures, the profit or loss is calculated as the difference between the settlement / squaring-up price and the contract price. Accordingly, debit or credit balance pertaining to the settled / squared-up contract in 'Mark-to-market margin - stock futures account' is recognised in the Statement of Profit and Loss upon expiry of the contracts. When more than one contract in respect of the relevant series of stock futures contract, to which the squared-up contract pertains is outstanding at the time of the squaring-up of the contract, the contract price of such contract is determined using the weighted average method for calculating profit/loss on squaring-up. ¦ 'Initial margin account - stock futures' rebrsenting initial margin paid is disclosed under loans and advances. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATIONS Foreign currency transactions are accounted at the exchange rate brvailing on the date of the transaction. Foreign currency monetary items outstanding as at the Balance Sheet date are reported using the closing rate. Gain or loss resulting from the settlement of such transactions and translation of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Profit and Loss. Premium in respect of forward contracts is accounted over the period of the contract. Forward contracts outstanding as at the Balance Sheet date are revalued at the closing rate. PROVISIONS AND CONTINGENCIES Provision against loans and advances ¦ Contingent provision against standard assets is made at 0.40% of the outstanding standard assets in accordance with the RBI guidelines. ¦ In addition to above, the Company maintains a general provision as Provision for Contingencies in accordance with the provisioning policy of the Company and additional provision based on the assessment of portfolio including provision against identified advances that qualifies for deduction under Section 36(1)(viia) of the Income-tax Act, 1961. ¦ In addition to the minimum provisioning level brscribed by the RBI, IDFC Limited on a prudent basis made provisions on specific advances that are not NPAs ('Identified advances') but had reason to believe risk of possible slippages on the basis of the extant environment or specific information or current pattern of servicing. These provisions being specific in nature are netted off from gross advances. ¦ In January 2014, the RBI has issued guidelines on Restructuring of Advances applicable to Non Banking Finance Companies. As per the guidelines, a provision is required on standard accounts restructured prior to January 24, 2014 at 2.75 % from March 31, 2014, and would further increase to 3.50% from March 31, 2015, 4.25% from March 31, 2016 and 5.00% from March 31, 2017. Restructuring of standard accounts subsequent to January 23, 2014 would attract a provision at 5.00%. The Company has complied with the aforesaid guidelines and on prudent basis a provision at 5.00% has been made on all outstanding restructured accounts in addition to the provision against diminution in fair value of restructured advances. Unrealised income rebrsented by Funded Interest Term Loan ('FITL') on standard accounts restructured after January 23, 2014 are fully provided and such provision against FITL will be reversed on repayment of FITL. Other provisions ¦ A provision is recognised when the Company has a brsent obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation in respect of which a reliable estimate can be made. Provisions (excluding retirement benefits) are not discounted to their brsent value and are determined based on the best estimate required to settle the obligation as at the Balance Sheet date. These are reviewed at each Balance Sheet date and adjusted to reflect the current best estimates. Contingent liabilities are disclosed separately. Contingent assets are not recognised in the financial statements. SECURITIES ISSUE EXPENSES Issue expenses of certain securities and redemption brmium are adjusted against the securities brmium account as permissible under Section 52 of the Companies Act, 2013, to the extent balance is available for utilisation in the securities brmium account. SERVICE TAX INPUT CREDIT Service tax input credit is accounted in the period in which the underlying services are received and when there is no uncertainty in availing / utilising the credit. OPERATING CYCLE Based on the nature of products / activities of the Company and the normal time between acquisition of assets and their realisation in cash or cash equivalents, the Company has determined its operating cycle as 12 months for the purpose of classification of its assets and liabilities as current and non-current. 1 The figures for the brvious year have been reclassified, wherever necessary to conform with the current year's classification / disclosure. 2 The figures of Rs. 50,000 or less have been denoted by B. For and on behalf of the Board of Directors of IDFC Limited Vinod Rai Non-Executive Chairman Vikram Limaye Managing Director & CEO Bipin Gemani Chief Financial Officer Ketan Kulkarni Company Secretary Place : Mumbai date : April 29, 2016 |