2. SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of brparation These financial statements of Firstsource Solutions Limited are brpared on accrual basis in accordance with Indian Generally Accepted Accounting Principles (GAAP), under the historical cost convention, except for certain financial instruments which are measured at fair values, and Accounting Standards brscribed under Section 133 of the Companies Act, 2013 ('the Act'), read with Rule 7 of the Companies (Accounts) Rules, 2014 and other relevant provisions of the Act, to the extent applicable. Additionally, the Company early adopted Accounting Standard 30 -'Financial Instruments: Recognition and Measurement' ('AS 30') read with Accounting Standard 31 - 'Financial Instruments: Presentation' ('AS 31') issued by the Institute of Chartered Accountants of India, effective 1 April 2008. Accounting policies have been consistently applied except where a newly issued accounting standard is initially adopted or a revision to an existing Accounting Standard requires a change in the accounting policy hitherto in use. The financial statements are brsented in Indian rupees rounded off to the nearest millions except per share data. In the opinion of the management, all the adjustments which are necessary for a fair brsentation have been included. All assets and liabilities have been classified as current or non-current as per the Company's normal operating cycle (12 months) and other criteria set out under the Act. 2.2 Use of estimates The brparation of the financial statements in conformity with Generally Accepted Accounting Principles ('GAAP') in India requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities on the date of the financial statements and the reported amount of income and expenses for the period. Management believes that the estimates made in the brparation of financial statements are prudent and reasonable. Actual results could differ from those estimates. Any revisions to accounting estimates are recognised prospectively in current and future periods. 2.3 Revenue recognition Revenue from contact centre and transaction processing services comprises from both time / unit price and fixed fee based service contracts. Revenue from time / unit price based contracts is recognised as services are rendered and is billed in accordance with the contractual terms specified in the customer contracts. Revenue from fixed fee based service contracts is recognised on achievement of performance milestones specified in the customer contracts. Unbilled receivables rebrsent costs incurred and revenues recognised on contracts to be billed in subsequent periods as per the terms of the contract. Dividend income is recognised when the right to receive dividend is established. Interest income is recognised using the time proportion method, based on the underlying interest rates. Fixed assets and debrciation Fixed assets are stated at cost less accumulated debrciation and impairment, if any. Cost includes freight, duties, taxes and incidental expenses related to acquisition and installation of the fixed assets. Debrciation on fixed assets is provided pro rata to the period of use based on management's best estimate of useful lives of the assets as summarized below: For these class of assets, based on internal assessment and independent technical evaluation carried out by external valuers, the management believes that the useful lives as given above best rebrsent the period over which management expects to use these assets. Hence the useful lives for these assets are different from the useful lives as brscribed under Part C of Schedule II to the Companies Act, 2013. Software purchased together with the related hardware is capitalised and debrciated at the rates applicable to related assets. Intangible assets other than above mentioned software are amortised over the best estimate of the useful life from the date the assets are available for use. Further, the useful life is reviewed at the end of each reporting period for any changes in the estimates of useful life and, accordingly, the asset is amortised over the remaining useful life. Software product development costs are expensed as incurred during the research phase until technological feasibility is established. Software development costs incurred subsequent to the achievement of technological feasibility are capitalised and amortised over the estimated useful life of the products as determined by the management. This capitalisation is done only if there is an intention and ability to complete the product, the product is likely to generate future economic benefits, adequate resources to complete the product are available and such expenses can be accurately measured. Such software development costs comprise expenditure that can be directly attributed, or allocated on a reasonable and consistent basis, to the development of the product. The amortisation of software development costs is allocated on a systematic basis over the best estimate of its useful life after the product is ready for use. The factors considered for identifying the basis include obsolescence, product life cycle and actions of competitors. The amortisation period and the amortisation method are reviewed at the end of each reporting period. If the expected useful life of the product is shorter from brvious estimates, the amortisation period is changed accordingly. Borrowing costs are interest and other costs (including exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs) incurred by the Company in connection with the borrowing of funds. Borrowing costs directly attributable to acquisition or construction of those fixed assets which necessarily take a substantial period of time to get ready for their intended use are capitalised. Other borrowing costs are recognised as an expense in the period in which they are incurred. 2.5 Impairment of assets a. Financial assets The Company assesses at each balance sheet date whether (Currency: In millions of Indian Rs.) there is any objective evidence that a financial asset or group of financial assets is impaired. If any such indication exists, the Company estimates the amount of impairment loss. The amount of loss for short-term receivables is measured as the difference between the asset's carrying amount and undiscounted amount of future cash flows. Reduction, if any, is recognised in the statement of profit and loss. If at the balance sheet date there is any indication that a brviously assessed impairment loss no longer exists, the recognised impairment loss is reversed, subject to maximum of initial carrying amount of the short-term receivable. b. Non-financial assets The Company assesses at each balance sheet date whether there is any indication that a non-financial asset may be impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. If such recoverable amount of the asset or the recoverable amount of the cash generating unit to which the asset belongs is less than its carrying amount, the carrying amount is reduced to its recoverable amount. The reduction is treated as an impairment loss and is recognised in the statement of profit and loss. If at the balance sheet date there is an indication that a brviously assessed impairment loss no longer exists, the recoverable amount is reassessed and the asset is reflected at the recoverable amount subject to a maximum of debrciated historical cost. 2.6 Employee Benefits a. Post employment benefits Gratuity The Company's gratuity scheme is a defined benefit plan. The Company's net obligation in respect of the gratuity benefit scheme is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its brsent value, and the fair value of any plan assets is deducted. The brsent value of the obligation under such defined benefit plan is determined based on actuarial valuation by an independent actuary using the Projected Unit Credit Method, which recognises each period of service as giving rise to additional unit of employee benefit entitlement and measures each unit separately to build up the final obligation. The obligation is measured at the brsent value of the estimated future cash flows. The discount rates used for determining the brsent value of the obligation under defined benefit plan are based on the market yields on Government securities as at the balance sheet date. When the calculation results in a benefit to the Company, the recognised asset is limited to the net total of any unrecognised actuarial losses and past service costs and the brsent value of any future refunds from the plan or reductions in future contributions to the plan. Actuarial gains and losses are recognised immediately in the statement of profit and loss. Defined contribution plans In accordance with Indian regulation, all employees of the Company receive benefits from a Government administered provident fund scheme. This is a defined contribution retirement plan in which both, the Company and the employee contribute at a determined rate. Monthly contributions payable to the provident fund are charged to the statement of profit and loss as incurred. b. Other long term employee benefits Compensated absences Provision for compensated absences cost has been made based on actuarial valuation by an independent actuary at the balance sheet date. Where employees of the Company are entitled to compensated absences, the employees can carryforward a portion of the unutilized accrued compensated absence and utilise it in future periods or receive cash compensation at termination of employment for the unutilised accrued compensated absence. The Company records an obligation for compensated absences in the period in which the employee renders the services that increase this entitlement. The Company measures the expected cost of compensated absences as the additional amount that the Company expects to pay as a result of the unused entitlement that has accumulated as at the balance sheet date. 2.7 Investments Non-current investments are carried at cost and provision is made when in the management's opinion there is a decline, other than temporary, in the carrying value of such investments. Current investments are valued at the lower of cost and market value. 2.8 Taxation Income tax expense comprises current tax expense and deferred tax expense or credit. (Currency: In millions of Indian Rs.) Current taxes Provision for current income-tax is recognised in accordance with the provisions of Indian Income-tax Act, 1961 and is made annually based on the tax liability after taking credit for tax allowances and exemptions. In case of matter under appeal, full provision is made in the financial statements when the Company accepts liability. Deferred taxes Deferred tax assets and liabilities are recognised for the future tax consequences attributable to timing differences that result from differences between the profits offered for income taxes and the profits as per the financial statements. Deferred tax assets and liabilities and the corresponding deferred tax credit or charge are measured using the tax rates and the tax laws that have been enacted or substantively enacted at the balance sheet date. The effect of a change in tax rates on deferred tax assets and liabilities is recognised in the period that includes the enactment date. Deferred tax assets are recognised only to the extent there is reasonable certainty that the assets can be realized in the future; however, where there is unabsorbed debrciation or carried forward loss under taxation laws, deferred tax assets are recognised only if there is virtual certainty of realisation of such assets. Deferred tax assets are reassessed for the appropriateness of their respective carrying values at each balance sheet date. The Company has operations in Special Economic Zones (SEZ). Income from SEZ is eligible for 100% deduction for the first five years, 50% deduction for next five years and 50% deduction for another five years, subject to fulfilling certain conditions. In this regard, the Company recognises deferred taxes in respect of those originating timing differences which reverse after the tax holiday period resulting in tax consequences. Timing differences which originate and reverse within the tax holiday period do not result in tax consequence and, therefore, no deferred taxes are recognised in respect of the same. 2.9 Leases Finance lease Assets acquired on finance leases, including assets acquired under sale and lease back transactions, have been recognised as an asset and a liability at the inception of the lease and have been recorded at an amount equal to the lower of the fair value of the leased asset and the brsent value of the future minimum lease payments. Such leased assets are debrciated over the lease term or its estimated useful life, whichever is shorter. Further, the installments of minimum lease payments have been apportioned between finance charge / expense and principal repayment. Assets given out on finance lease are shown as amounts recoverable from the lessee. The rentals received on such leases are apportioned between the finance charge / (income) and principal amount using the implicit rate of return. The finance charge / (income) is recognised as income, and principal received is reduced from the amount receivable. All initial direct costs incurred are included in the cost of the asset. Operating lease Lease rentals in respect of assets acquired under operating lease are charged off to the statement of profit and loss as incurred on a straight line basis. 2.10 Foreign currency transactions, derivative instruments and hedge accounting a. Foreign currency transactions Transactions in foreign currency are recorded at the exchange rate brvailing on the date of the transaction. Net exchange gain or loss resulting in respect of foreign exchange transactions settled during the period is recognised in the statement of profit and loss for the period. Foreign currency denominated assets and liabilities other than fixed assets are translated at the period end exchange rates and the resulting net gain or loss is recognised in the statement of profit and loss. b. Derivative instruments and hedge accounting The Company is exposed to foreign currency fluctuations on net investments in foreign operations and forecasted cash flows denominated in foreign currencies. The Company limits the effects of foreign exchange rate fluctuations by following established risk management policies including the use of derivatives. The Company enters into derivative financial instruments, where the counterparty is a bank. The use of foreign currency forward contracts is governed by the Company's policies approved by the Board of Directors, which provides written principles on the use of such financial derivatives consistent with the Company's risk management strategy. The Company does not use derivative financial instruments for speculative purposes The Company uses foreign currency forward contracts and currency options to hedge its risks associated with foreign currency fluctuations relating to certain forecasted transactions. The Company designates these as cash flow hedges. Foreign currency derivative instruments are initially measured at fair value, and are re-measured at subsequent reporting dates. Changes in the fair value of these derivatives that are designated and effective as hedges of future cash flows are recognized directly in shareholder's funds and the ineffective portion is recognised immediately in the statement of profit and loss. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the statement of profit and loss as they arise. 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 shareholders' funds is transferred to the statement of profit and loss for the period. A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets of the Company include cash and bank balances, trade receivables, unbilled revenues, finance lease receivables, employee travel and other advances, other loans and advances and derivative financial instruments with a positive fair value. Financial liabilities of the Company comprise secured and unsecured loans, trade payables, accrued expenses and derivative financial instruments with a negative fair value. Financial assets / liabilities are recognised on the balance sheet when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when all of risks and rewards of the ownership have been transferred. The transfer of risks and rewards is evaluated by comparing the exposure, before and after the transfer with the variability in the amounts and timing of the net cash flows of the transferred assets. Short-term receivables with no stated interest rates are measured at original invoice amount, if the effect of discounting is immaterial. Non-interest-bearing deposits are discounted to their brsent value. The Company also designates financial instruments as hedges of net investments in non-integral foreign operations. The portion of changes in fair value of financial instrument that is determined to be an effective hedge is recognised in statement of profit and loss together with the translation of the related investment. Changes in fair value relating to the ineffective portion of hedges are recognised in the statement of profit and loss as they arise. The Company measures the financial liabilities, except for derivative financial liabilities, at amortised cost using the effective interest method. The Company measures the short-term payables with no stated rate of interest at original invoice amount, if the effect of discounting is immaterial. 2.11 Foreign currency translation The financial statements are reported in Indian rupees. The translation of the local currency of each integral foreign obrrations into Indian rupees is performed in respect of assets and liabilities other than fixed assets, using the exchange rate in effect at the balance sheet date and for revenue and expense items other than the debrciation costs, using average exchange rate during the reporting period. Fixed assets of integral foreign operations are translated at exchange rates on the date of the transaction and debrciation on fixed assets is translated at exchange rates used for translation of the underlying fixed assets. In respect of non-integral operations, assets and liabilities including fixed assets are translated at exchange rates brvailing at the date of the balance sheet. The items in the statement of profit and loss are translated at the average exchange rate during the period. The difference arising out of the translations on consolidation of non-integral operations are transferred to exchange difference under reserves and surplus 2.12 Earnings per share The basic earnings per equity share are computed by dividing the net profit or loss for the period attributable to the equity shareholders for the period by the weighted average number of equity shares outstanding during the period. The number of shares used in computing diluted earnings per share comprises the weighted average number of shares considered for deriving basic earnings per share, and also the weighted average number of equity shares which may be issued on the conversion of all dilutive potential shares, unless the results would be anti-dilutive. 2.13 Provisions and contingencies The Company creates a provision when there is a brsent obligation as a result of a past event that probably requires an outflow of resources and a reliable estimate can be made of the amount of the obligation. A disclosure for a contingent liability is made when there is a possible obligation or a brsent obligation that may, but probably will not, require an outflow of resources. When there is a possible obligation or a brsent obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources would be required to settle the obligation, the provision is reversed. Contingent assets are not recognised in the financial statements. However, contingent assets are assessed continually and if it is virtually certain that an economic benefit will arise, the asset and related income are recognised in the period in which the change occurs. 2.14 Onerous contracts Provisions for onerous contracts are recognised when the expected benefits to be derived by the Company from a contract are lower than the unavoidable costs of meeting the future obligations under the contract. The provision is measured at lower of the expected cost of terminating the contract and the expected net cost of fulfilling the contract 27. EMPLOYEE STOCK OPTION PLAN Stock option scheme 2002 ('Scheme 2002') In September 2002, the Board of the Company had approved the Scheme 2002, which covers the employees and directors of the Company and its subsidiaries. The Scheme was administered and supervised by the members of the Nomination and Remuneration Committee (then called the Compensation cum Board Governance Committee) (the 'Committee'). Scheme 2002 was revoked during the financial year 2015-16 as all the options granted under it had been vested and exercised and remaining options had been cancelled. There was no activity under the Scheme 2002 during the year and in the brvious year. Employee stock option scheme 2003 ('Scheme 2003') In September 2003, the Board and the members of Firstsource approved the ICICI OneSource Stock Option Scheme 2003 ('Scheme 2003') effective 11 October 2003. The Scheme would be administered and supervised by the members of the Compensation committee. The key terms and conditions were included in Scheme 2003 in line with Securities and Exchange Board of India (Employees Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 (as amended by SEBI (Share Based Employee Benefits) Regulations 2014). The Company amended the Scheme 2003 in line with the SEBI (Share Based Employee Benefits) Regulations, 2014. Key changes effected in Scheme 2003 were as follows: • Change in the definition of employee to exclude Independent Director, any employee who is a promoter or belonging to promoter group or a director who himself or through his relative or any body corporate, holds more than 10% of the equity capital of the Company. • Change in definition of exercise period to specifically mention about exercise period of 10 years from the date of grant. • Definition of relevant date has been included which means- (i) in the case of grant, the date of the meeting of the compensation committee on which the grant is made; or (ii) in the case of exercise, the date on which the notice of exercise is given to the Company. • Change in the name of Compensation Committee to Nomination and Remuneration Committee (herein after referred as 'Committee' 3. SEGMENTAL REPORTING In accordance with paragraph 4 of Accounting Standard 17 'Segment Reporting' brscribed under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014, the Company has brsented segmental information only on the basis of the consolidated financial statements (refer Note 30 of the consolidated financial statements). 4. ADOPTION OF AS 30 In December 2007, ICAI issued AS 30, Financials Instruments: Recognition and Measurement which was recommendatory in respect of accounting periods commencing on or after 1 April 2009 and was to be mandatory in respect of accounting periods commencing on or after 1 April 2011. In March 2008, ICAI announced that earlier adoption of AS 30 is encouraged. However, AS 30, along with limited revision to other accounting standards, has not been notified under the Companies (Accounts) Rules, 2014. On 1 October, 2008, the Company had early adopted AS 30 in its entirety, read with AS 31, effective 1 April, 2008 and the limited revisions to other Accounting Standards. AS 30 states that particular sections of other Accounting Standards; AS 4, Contingencies and Events Occurring after Balance sheet date, to the extent it deals with contingencies, AS 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates, to the extent it deals with the 'forward exchange contracts' and AS 13, Accounting for Investments, except to the extent it relates to accounting for investment properties, would stand withdrawn only from the date AS 30 becomes mandatory. In view of the Company, on early adoption of AS 30, accounting treatment made on the basis of the relevant sections of Accounting Standards referred above viz. AS 4, AS 11 and AS 13 stands withdrawn as it believes that principles of AS 30 more appropriately reflect the nature of these transactions. Pursuant to the early adoption of AS 30, the Company has discounted Non-interest-bearing deposits to their brsent value and the difference between original amount of deposit and the discounted brsent value has been disclosed as "Unamortised cost" under other current and non-current assets. This unamortised cost is charged to the statement of profit and loss over the period of related lease. Correspondingly, interest income is accrued on these Non-interest bearing deposits using the implicit rate of return over the period of lease and is recognised under "Interest income". In accordance with the transition provisions of AS 30, impact on first time adoption was accounted in General Reserve. The Company has also designated forward contracts and payable on asset acquisition to hedge highly probable forecasted transactions on the principles as set out in AS 30. Consequent to the early adoption of AS 30 as stated above, the profit after taxation for the year ended and reserves and surplus as at the Balance sheet date is higher by X 177.29 (31 March 2015: higher by X 31) and higher by X 3,169.83 (31 March 2015: higher by X 2,817) respectively. The increase in Reserve and surplus includes translation gain on the investment in non-integral foreign operation, used as hedging against translation loss on ECB, , and would be realised upon disposal of non-integral foreign operation. 5B. DERIVATIVES As at 31 March 2016, the Company has derivative financial instruments to sell USD 36.95 million (31 March 2015: USD 41.99 million) having fair value gain of Rs. 34.17 million (31 March 2015: gain of Rs. 50.72), GBP 57.17 million (31 March 2015: GBP 62.95 million) having fair value gain of Rs.493.26 (31 March 2015: gain of Rs. 677.15) relating to highly probable forecasted transactions. Foreign currency exposures on loans and receivables that are not hedged by derivative instruments or otherwise are Rs. 786.46 (equivalent to USD 4.46 million, AUD 6.56 million and GBP 1.74 million) (31 March 2015: Rs. 373.64 (equivalent to USD 3.05 million, AUD 0.74 million and GBP 1.66 million)). 6. CORPORATE SOCIAL RESPONSIBILITY (CSR) As per Section 135 of the Companies Act, 2013, a CSR trust has been formed by the Ultimate Holding Company along with other group companies including the Company. The areas identified by the CSR trust includes activities for promoting healthcare, art / culture, sports and education as the four priority areas to be pursued in phases and in a manner aligned with the CSR rules and regulations. The funds have been contributed to the trust and will be utilized on these activities which are specified in Schedule VII to the Companies Act, 2013. 7. LONG-TERM CONTRACTS The Company has a process whereby periodically all long term contracts (including derivative contracts) are assessed for material foreseeable losses. At the year end, the Company has reviewed and ensured that adequate provision as required under any law / Accounting Standards for material foreseeable losses on such long term contracts (including derivative contracts) has been made in the books of account. As per our report of even date attached. For B S R & Co. LLP Chartered Accountants Firm's Registration No: 101248W/W-100022 Rajesh Mehra Partner Membership No: 103145 For and on behalf of the Board of Directors of First source Solutions Limited Shashwat Goenka Director V.K. Sharma Director Grace Koshie Director Sanjiv Goenka Chairman Y. H. Malegam Director Pradip Roy Director Dinesh Jain President and CFO Rajesh Subramaniam Managing Director and CEO Charles Miller Smith Director Subrata Talukdar Director Sanjay Gupta Company Secretary Place : Kolkata date : May 12, 2016 |