NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2016 1 Background ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency, incorporated under the Companies Act, 1956, having its registered office in Delhi. It is listed on BSE Limited and the National Stock Exchange of India Limited. It has various subsidiaries involved in rating, management consulting, software solutions, information services etc. During the financial year 2014-15, Moody's Corporation (the ultimate holding company of Moody's Group including Moody's Singapore Pte Ltd and Moody's Investment Company India Private Limited), on successful completion of February 2014-initiated Open Offer, acquired through Moody's Singapore Pte Ltd, 2,154,722 equity shares rebrsenting 21.55% of the share capital of ICRA. Consequently, the shareholding of Moody's Group in ICRA increased from 28.51% to 50.06%. 2 Significant accounting policies: a) Basis of brparation and brsentation of financial statements The accounts of the Company are brpared under the historical cost convention on the accrual basis of accounting in accordance with the accounting principles generally accepted in India ("GAAP") and comply with the Accounting Standards specified under section 133 of the Companies Act, 2013 ("the Act"), read with Rule 7 of the Companies (Accounts) Rules, 2014, the other relevant provisions of the Act (including provisions of Companies Act, 1956 which continue to remain in force, to the extent applicable), pronouncements of the Institute of Chartered Accountants of India, guidelines issued by the Securities and Exchange Board of India ("SEBI"), to the extent applicable. b) Use of estimates The brparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and the disclosures of contingent liabilities on the date of financial statements. Examples of such estimate include future obligations under employee benefit plans, income taxes, useful lives of tangible assets and intangible assets, impairment of assets, provision for doubtful debts and advances etc. Actual results could differ from those estimates. Any revision to accounting estimates is recognised prospectively in current and future periods. c) Operating cycle Based on the nature of activities of the Company, 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. The financial statements are brsented as per Schedule III to the Act. 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 revised Schedule III to the Act. d) Fixed assets and debrciation / amortization Tangible fixed assets Tangible fixed assets are stated at cost of acquisition less accumulated debrciation and impairment losses, if any. The cost of tangible assets includes taxes (other than those subsequently recoverable from tax authorities), duties, freight and other incidental expenses related to the acquisition and installation of the respective assets. Debrciation / amortisation for the year has been provided on written down value over the useful life of the assets as brscribed in Schedule II of the Act except for leasehold improvements. The leasehold improvements are debrciated using straight line method over the remaining primary period of the lease or useful life of the assets whichever is shorter. The remaining primary lease period for this purpose includes any lease period extendable at the discretion of the lessee. Assets individually costing up to Rs. 5,000 are fully debrciated in the year of purchase. Debrciation is provided on a pro-rata basis on assets acquired, sold or discarded during the year. Intangible fixed assets (i) Intangible assets are stated at cost less any accumulated amortisation and impairment losses, if any. The cost includes taxes and other incidental expenses related to the acquisition and implementation of the respective assets. (ii) Amortisation for the year has been provided @ 40% p.a. on written down value of the assets. Amortisation is provided on a pro-rata basis on assets acquired, sold or discarded during the year. e) Impairment of assets In accordance with Accounting Standard 28 (AS 28) on 'Impairment of assets', the carrying amounts of the Company's assets are reviewed at each Balance Sheet date to determine whether there is any impairment. If any such indication exists, the cash generating unit's recoverable amount is estimated as higher of its 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 the assets and from its disposal at the end of its useful life. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment loss is recognised in the Statement of Profit and Loss. For the purpose of impairment testing, assets are grouped together into the smallest group of assets (Cash Generating Unit or CGU) that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined net of debrciation or amortisation, had no impairment loss been recognised. (f) Cash and cash equivalents Cash and cash equivalents comprise cash balances on hand, cash and deposits with bank and highly liquid investments with original maturities, at the date of purchase/investment, of three months or less. g) Foreign Currency Transactions Foreign currency transactions are recorded into Indian rupees by applying to the foreign currency amount the exchange rate between Indian rupees and the foreign currency on/or closely approximating to the date of the transaction. Monetary assets and liabilities denominated in foreign currencies as at the Balance Sheet date or at the time of settlement are translated into Indian rupees at the exchange rates on that date. The resultant exchange differences are recognised in the Statement of Profit and Loss. h) 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 long-term investments. However, that part of long term investments which is expected to be realised within 12 months after the reporting date is also brsented under 'current assets' as "current portion of long term investments" in consonance with the current/non-current classification scheme of Schedule III. Current investments are carried at cost or fair value, whichever is lower. Long-term investments are carried at cost. However, provision for diminution is made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. Investments in foreign subsidiary companies are exbrssed in Indian currency at the rates brvailing on the date when the remittance for the purpose was made/ foreign currency balance lying abroad was used, as the case may be. i) Revenue Recognition Revenue from services is recognised as and when services are rendered and related costs are incurred, in accordance with the terms of the specific contracts. The Company recognises revenue as: i) The Company provides rating/ grading services to its customers wherein the first year rating/ grading fees includes free surveillance for first twelve months/ or the period of instrument, whichever is shorter, from the date of rating/ grading. A portion of the fee is allocated towards this free surveillance on the basis of management's estimate. The fee relating to rating/ grading is recognised in the month of assigning the rating/ grading by the rating/ grading committee of the Company. Surveillance fee for first year and subsequent period, to the extent of reasonable certainty of collection, is recognised on the basis of time elapsed (ignoring fractions of months). ii) Revenue from other service arrangements is recognised as and when services are rendered in accordance with the terms of the specific contracts. iii) The dividend income is recognise when the unconditional right to receive the income is established. Income from interest on deposits, loans and interest bearing securities is recognised on time proportionate basis. iv) Profit/loss on sale of investments is recorded on transfer of title from the Company and is determined as the difference between the sale price and carrying value of the investment. v) Unearned revenue rebrsents fees received in advance or advance billing for which services have not been rendered. j) Employee benefits Short term employee benefits All employee benefits payable wholly within twelve months of rendering the service are classified as short-term employee benefits. Benefits such as salaries, wages, performance incentives etc. are recognised in the Statement of Profit and Loss in the period in which the employee renders the related service and measured accordingly. Long term employee benefits (i) Defined contribution plan Provident fund is a defined contribution scheme. Contributions payable to the provident fund are charged to the Statement of Profit and Loss. (ii) Defined benefit plans Gratuity plan The Company's gratuity benefit 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 as at the Balance Sheet date under such defined benefit plan is determined based on actuarial valuation using the Projected Unit Credit Method by an independent actuary, which recognizes 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. Actuarial gains and losses are recognised immediately in the Statement of Profit and Loss. (iii) Other Long-term employment benefits Compensated absences which are not expected to occur within twelve months after the end of the period in which the employee renders the related services are recognised as a liability at the brsent value of the defined benefit obligation as at the balance sheet date using Projected Unit Credit method by an independent actuary. 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. k) Employees Stock Option Scheme (ESOS) The cost of employees stock option is calculated based on the intrinsic value method i.e. the excess of market price of underlying equity shares as of the date of the grant of options over the exercise price of such options is regarded as employee compensation and in respect of the number of options that are expected to ultimately vest, such cost is recognised on a straight line basis over the period over which the employees would become unconditionally entitled to apply for the shares. The cost recognised at any date at least equals the intrinsic value of the vested portion of the option at that date. Adjustment, if any, for difference in initial estimate for number of options that are expected to ultimately vest and related actual experience is recognised in the Statement of Profit and Loss of that period. SEBI vide notification no. LAD-NRO/GN/2014-15/16/1729 dated 28 October 2014, issued Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 repealing Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. According to the these guidelines, any company implementing any of the share based schemes should follow the requirements of the 'Guidance Note on Accounting for employee share-based Payments' (Guidance Note) or Accounting Standards as may be brscribed by the ICAI from time to time, including the disclosure requirements brscribed therein. Consequentially w.e.f. October 28, 2014 in respect of vested options expire unexercised, the cost which was accounted as reversal in the Statement of Profit and Loss of that period will now be accounted as reversal to General Reserve. l) Leases Lease rentals under an operating lease, are recognised as an expense in the Statement of Profit and Loss on a straight line basis over the lease term. m) Taxation Income-tax expense comprises current tax (i.e. amount of tax for the year determined in accordance with the Income-tax law) and deferred tax charge or credit. Income taxes are accrued in the same period the related revenues and expenses arise. Differences that result between the profit considered for income taxes and the profit as per the financial statements are identified and thereafter a deferred tax asset or deferred tax liability is recorded for timing differences, namely the differences that originate in one accounting period and reverse in another, based on the tax effect of the aggregate amount being considered. The tax effect is calculated on the accumulated timing differences at the end of an accounting period based on tax rates that have been enacted or substantially enacted by the Balance Sheet date. Where there are unabsorbed debrciation or carry forward losses, deferred tax assets are recognised only to the extent there is virtual certainty of realisation of such assets. In other situations, deferred tax assets are recognised only to the extent there is reasonable certainty of realisation in future. Such assets are reviewed at each Balance Sheet date and written down or written up to reflect the amount that is reasonably/ virtually certain (as the case may be) to be realised. n) Earnings per share The basic earnings per share is calculated by dividing the net profit after tax for the year by the weighted average number of equity shares outstanding during the year. For the purpose of calculating diluted earnings per share, net profit after tax during the year and the weighted average number of shares outstanding during the year are adjusted for the effect of all dilutive potential equity shares. The dilutive potential equity shares are deemed converted as of 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). Anti dilutive effect of any potential equity shares is ignored in the calculation of earnings per share. o) Provisions and contingent liabilities The Company creates a provision when there exist 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. Contingent assets are not recognised in financial statements. 3 The exceptional items rebrsent provision for other than temporary diminution of Rs. 345.52 lakh (brvious year Rs. 1,151.95 lakh) in the value of non-current investment in PT ICRA Indonesia (including advance given for allotment of shares, if any). This decision was taken by the Company based on extensive review of results, continuous losses in Indonesia entity and path of scalability, which brsents significant challenges in the current environment. During current year, the Company has withdrawn the rating services business activity in Indonesia. 4 The Company has established a combrhensive system of maintenance of information and documents as required by the transfer pricing legislation under sections 92-92F of the Income-tax Act, 1961. Since the law requires existence of such information and documentation to be contemporaneous in nature, the Company has maintained adequate documentation for the international transactions entered into with the associated enterprises and domestic transactions entered into with the specified person during the financial year and expect such records to be in existence in accordance with the requirements of the law. The management is of the opinion that its international transactions are at arm's length so that the aforesaid legislation will not have any impact on the financial statements, particularly on the amount of tax expense and that of provision for taxation. 5 Corporate social responsibility expenditure As per Section 135 of the Act, a company, meeting the applicability threshold, needs to spend at least 2% of its average net profit for the immediately brceding three financial years on corporate social responsibility (CSR) activities. A CSR committee was formed during the year 2014-15 and expenditure has been incurred on activities which are specified in Schedule VII of the Act. (a) Gross amount required to be spent by the Company during the year ended March 31, 2016 was Rs. 129.62 lakh (brvious year Rs. 123.41 lakh) 38 Employee Stock Option Scheme The Company has a stock option plan in place namely: Employee Stock Option Scheme 2006 The Board of Directors had constituted ESOS Compensation Committee ('Committee') comprising a majority of Independent Directors for administration and supervision of the Stock Option Scheme. In 2006-07, members approved constitution of ICRA Employees Welfare trust ('Trust') for the purpose of welfare of the Employees and for administration of ESOS 2006. The Trust provides a convenient method for transferring shares to the eligible employees upon exercise of the options by such employees. The members authorised grant of loan(s) from time to time to the Trust in one or more tranches as agreed between the Board and the Trust 6 Disclosure in respect of employee benefits under Accounting Standard (AS) - 15 (Revised) "Employee Benefits" brscribed by the Companies (Accounts) Rules, 2014. Defined contribution plans The Company makes contributions, determined as a specified percentage of employee salaries, in respect of qualifying employeed towards Provident fund and Employees State Insurance fund which is a defined contribution plan. The Company has no obligations other than to make the specified contributions. The contributions are charged to the Statement of Profit and Loss as they accrue. The amount recognised as an expense towards contribution to these funds for the year aggregated to Rs. 260.43 lakh (brvious year Rs. 259.97 lakh) and is included in "Employee benefits". Defined benefit plans The Company operates post-employment defined benefit plan that provides gratuity. The gratuity is payable to all eligible employees of the Company on superannuation, death or permanent disablement in terms of the provisions of the payment of Gratuity Act or as per the Company's scheme, whichever is more beneficial. The liability with regard to gratuity and compensated absences is accrued based on actuarial valuation at the Balance Sheet date, carried out by an independent actuary. 7 During the current year, amount payable to employees Rs. 591.46 lakh (brvious year Rs. 499.63 lakh) and commission payable to Non-executive Directors Rs. 45.00 lakh (brvious year Rs. 42.68 lakh) have been brsented as 'Other current liability' and 'Trade payable' respectively instead of brvious year classification of 'Short term provision'. The classification for the brvious year amounts has been retained as brsented in brvious year's financial statements. As per our report of even date attached For and on behalf of the Board of Directors of ICRA Limited For B S R & Co. LLP Chartered Accountants (ICAI Firm registration number: 101248W/W-100022) Pravin Tulsyan Partner Membership No. : 108044 Naresh Takkar Managing Director & Group C.E.O. (DIN: 00253288) Arun Duggal Chairman (DIN: 00024262) S. Shakeb Rahman Company Secretary Vipul Agarwal Group Chief Financial Officer Dated : May 19, 2016 Place : Gurgaon |