Form 6-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 under the Securities Exchange Act of 1934
For the quarter ended September 30, 2011
Commission File Number 000-25383
Infosys Limited
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Electronics City, Hosur Road, Bangalore – 560 100, Karnataka, India. +91-80-2852-0261
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F
Form 20-F þ Form 40-F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1) : o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7) : o
Currency of presentation and certain defined terms
In this Quarterly Report, references to "U.S." or "United States" are to the United States of America, its territories and its possessions. References to "India" are to the Republic of India. References to "$" or "dollars" or "U.S. dollars" are to the legal currency of the United States and references to "
" or "rupees" or "Indian rupees" are to the legal currency of India. Our financial statements are presented in U.S. dollars and are prepared in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board, or IFRS. References to "Indian GAAP" are to Indian Generally Accepted Accounting Principles. References to a particular "fiscal" year are to our fiscal year ended March 31 of such year.
" or "rupees" or "Indian rupees" are to the legal currency of India. Our financial statements are presented in U.S. dollars and are prepared in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board, or IFRS. References to "Indian GAAP" are to Indian Generally Accepted Accounting Principles. References to a particular "fiscal" year are to our fiscal year ended March 31 of such year.All references to "we", "us", "our", "Infosys" or the "Company" shall mean Infosys Limited, and, unless specifically indicated otherwise or the context indicates otherwise, our consolidated subsidiaries. "Infosys" is a registered trademark of Infosys Limited in the United States and India. All other trademarks or trade names used in this Quarterly Report are the property of their respective owners.
Except as otherwise stated in this Quarterly Report, all translations from Indian rupees to U.S. dollars effected are based on the fixing rate in the City of Mumbai on September 30, 2011 for cable transfers in Indian rupees as published by the Foreign Exchange Dealers’ Association of India, or FEDAI, which was 48.98 per $1.00. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
48.98 per $1.00. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.TABLE OF CONTENTS
Infosys Limited and subsidiaries (formerly Infosys Technologies Limited and subsidiaries)
(Dollars in millions except share data)
|
Note
|
September 30, 2011
|
March 31, 2011
|
|
|
ASSETS
|
|||
|
Current assets
|
|||
|
Cash and cash equivalents
|
2.1
|
$3,784
|
$3,737
|
|
Available-for-sale financial assets
|
2.2
|
8
|
5
|
|
Investment in certificates of deposit
|
5
|
27
|
|
|
Trade receivables
|
1,109
|
1,043
|
|
|
Unbilled revenue
|
299
|
279
|
|
|
Derivative financial instruments
|
2.7
|
–
|
15
|
|
Prepayments and other current assets
|
2.4
|
204
|
206
|
|
Total current assets
|
5,409
|
5,312
|
|
|
Non-current assets
|
|||
|
Property, plant and equipment
|
2.5
|
1,026
|
1,086
|
|
Goodwill
|
2.6
|
171
|
185
|
|
Intangible assets
|
2.6
|
24
|
11
|
|
Available-for-sale financial assets
|
2.2
|
2
|
5
|
|
Deferred income tax assets
|
2.17
|
83
|
85
|
|
Income tax assets
|
2.17
|
211
|
223
|
|
Other non-current assets
|
2.4
|
120
|
103
|
|
Total non-current assets
|
1,637
|
1,698
|
|
|
Total assets
|
$7,046
|
$7,010
|
|
|
LIABILITIES AND EQUITY
|
|||
|
Current liabilities
|
|||
|
Derivative financial instruments
|
2.7
|
$36
|
–
|
|
Trade payables
|
5
|
10
|
|
|
Current income tax liabilities
|
2.17
|
230
|
183
|
|
Client deposits
|
2
|
5
|
|
|
Unearned revenue
|
121
|
116
|
|
|
Employee benefit obligations
|
2.8
|
25
|
31
|
|
Provisions
|
2.9
|
20
|
20
|
|
Other current liabilities
|
2.10
|
455
|
451
|
|
Total current liabilities
|
894
|
816
|
|
|
Non-current liabilities
|
|||
|
Employee benefit obligations
|
2.8
|
80
|
58
|
|
Other non-current liabilities
|
2.10
|
15
|
14
|
|
Total liabilities
|
989
|
888
|
|
|
Equity
|
|||
|
Share capital
5 ($0.16) par value 600,000,000 equity shares authorized, issued and outstanding 571,369,482 and 571,317,959, net of 2,833,600 treasury shares each as of September 30, 2011 and March 31, 2011, respectively |
64
|
64
|
|
|
Share premium
|
703
|
702
|
|
|
Retained earnings
|
5,792
|
5,294
|
|
|
Other components of equity
|
(502)
|
62
|
|
|
Total equity attributable to equity holders of the company
|
6,057
|
6,122
|
|
|
Total liabilities and equity
|
$7,046
|
$7,010
|
|
| Commitments and contingent liabilities | 2.5 and 2.22 |
The accompanying notes form an integral part of the unaudited consolidated interim financial statements
Infosys Limited and subsidiaries (formerly Infosys Technologies Limited and subsidiaries)
(Dollars in millions except share and per equity share data)
|
Note
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
||
|
Revenues
|
$1,746
|
$1,496
|
$3,417
|
$2,854
|
|
|
Cost of sales
|
1,025
|
855
|
2,047
|
1,655
|
|
|
Gross profit
|
721
|
641
|
1,370
|
1,199
|
|
|
Operating expenses:
|
|||||
|
Selling and marketing expenses
|
98
|
82
|
187
|
156
|
|
|
Administrative expenses
|
133
|
107
|
258
|
207
|
|
|
Total operating expenses
|
231
|
189
|
445
|
363
|
|
|
Operating profit
|
490
|
452
|
925
|
836
|
|
|
Other income, net
|
2.14
|
85
|
57
|
184
|
110
|
|
Profit before income taxes
|
575
|
509
|
1,109
|
946
|
|
|
Income tax expense
|
2.17
|
164
|
135
|
314
|
246
|
|
Net profit
|
$411
|
$374
|
$795
|
$700
|
|
|
Other comprehensive income
|
|||||
|
Fair value changes on available-for-sale financial asset, net of tax effect (refer note 2.2 and 2.17)
|
$(2)
|
–
|
$(2)
|
$(1)
|
|
|
Exchange differences on translating foreign operations
|
(555)
|
199
|
(562)
|
11
|
|
|
Total other comprehensive income
|
$(557)
|
$199
|
$(564)
|
$10
|
|
|
Total comprehensive income
|
$(146)
|
$573
|
$231
|
$710
|
|
|
Profit attributable to:
|
|||||
|
Owners of the company
|
$411
|
$374
|
$795
|
$700
|
|
|
Non-controlling interest
|
–
|
–
|
–
|
–
|
|
|
$411
|
$374
|
$795
|
$700
|
||
|
Total comprehensive income attributable to:
|
|||||
|
Owners of the company
|
$(146)
|
$573
|
$231
|
$710
|
|
|
Non-controlling interest
|
–
|
–
|
–
|
–
|
|
|
$(146)
|
$573
|
$231
|
$710
|
||
|
Earnings per equity share
|
|||||
|
Basic ($)
|
0.72
|
0.65
|
1.39
|
1.23
|
|
|
Diluted ($)
|
0.72
|
0.65
|
1.39
|
1.23
|
|
|
Weighted average equity shares used in computing earnings per equity share
|
2.18
|
||||
|
Basic
|
571,359,222
|
571,131,367
|
571,346,361
|
571,083,717
|
|
|
Diluted
|
571,392,924
|
571,358,817
|
571,394,391
|
571,345,695
|
|
The accompanying notes form an integral part of the unaudited consolidated interim financial statements
Infosys Limited and subsidiaries (formerly Infosys Technologies Limited and subsidiaries)
(Dollars in millions except share data)
|
Shares(*)
|
Share capital
|
Share premium
|
Retained earnings
|
Other components
of equity |
Total equity attributable
to equity holders of the company |
|
|
Balance as of April 1, 2010
|
570,991,592
|
$64
|
$694
|
$4,611
|
$(8)
|
$5,361
|
|
Changes in equity for the six months ended September 30, 2010
|
||||||
|
Shares issued on exercise of employee stock options
|
209,482
|
–
|
3
|
–
|
–
|
3
|
|
Dividends (including corporate dividend tax)
|
–
|
–
|
–
|
(215)
|
–
|
(215)
|
|
Fair value changes on available-for-sale financial assets, net of tax effect (Refer Note 2.2 and 2.17)
|
–
|
–
|
–
|
–
|
(1)
|
(1)
|
|
Net profit
|
–
|
–
|
–
|
700
|
–
|
700
|
|
Exchange differences on translating foreign operations
|
–
|
–
|
–
|
–
|
11
|
11
|
|
Balance as of September 30, 2010
|
571,201,074
|
$64
|
$697
|
$5,096
|
$2
|
$5,859
|
|
Balance as of April 1, 2011
|
571,317,959
|
$64
|
$702
|
$5,294
|
$62
|
$6,122
|
|
Changes in equity for the six months ended September 30, 2011
|
||||||
|
Shares issued on exercise of employee stock options
|
51,523
|
–
|
1
|
–
|
–
|
1
|
|
Dividends (including corporate dividend tax)
|
–
|
–
|
–
|
(297)
|
–
|
(297)
|
|
Fair value changes on available-for-sale financial assets, net of tax effect (Refer Note 2.2 and 2.5)
|
–
|
–
|
–
|
–
|
(2)
|
(2)
|
|
Net profit
|
–
|
–
|
–
|
795
|
–
|
795
|
|
Exchange differences on translating foreign operations
|
–
|
–
|
–
|
–
|
(562)
|
(562)
|
|
Balance as of September 30, 2011
|
571,369,482
|
$64
|
$703
|
$5,792
|
$(502)
|
$6,057
|
*excludes treasury shares of 2,833,600 held by consolidated trust
The accompanying notes form an integral part of the unaudited consolidated interim financial statements
Infosys Limited and subsidiaries (formerly Infosys Technologies Limited and subsidiaries)
(Dollars in millions)
|
Note
|
Six months ended September 30,
|
||
|
2011
|
2010
|
||
|
Operating activities:
|
|||
|
Net profit
|
$795
|
$700
|
|
|
Adjustments to reconcile net profit to net cash provided by operating activities:
|
|||
|
Depreciation and amortization
|
2.5 and 2.6
|
101
|
92
|
|
Income on investments
|
(3)
|
(16)
|
|
|
Income tax expense
|
2.17
|
314
|
246
|
|
Changes in working capital
|
|||
|
Trade receivables
|
(171)
|
(147)
|
|
|
Prepayments and other assets
|
26
|
(18)
|
|
|
Unbilled revenue
|
(48)
|
(46)
|
|
|
Trade payables
|
(5)
|
6
|
|
|
Client deposits
|
(2)
|
–
|
|
|
Unearned revenue
|
16
|
14
|
|
|
Other liabilities and provisions
|
69
|
65
|
|
|
Cash generated from operations
|
1,092
|
896
|
|
|
Income taxes paid
|
2.17
|
(261)
|
(217)
|
|
Net cash provided by operating activities
|
831
|
679
|
|
|
Investing activities:
|
|||
|
Expenditure on property, plant and equipment, including changes in retention money
|
2.5 and 2.10
|
(136)
|
(118)
|
|
Payment on acquisition of intangible assets
|
2.6
|
(15)
|
–
|
|
Loans to employees
|
(3)
|
(1)
|
|
|
Non-current deposits placed with corporation
|
(10)
|
(33)
|
|
|
Income on available-for-sale financial assets
|
3
|
5
|
|
|
Investment in certificates of deposit
|
(5)
|
(157)
|
|
|
Redemption of certificates of deposit
|
27
|
2
|
|
|
Investment in available-for-sale financial assets
|
(618)
|
(331)
|
|
|
Redemption of available-for-sale financial assets
|
614
|
877
|
|
|
Net cash used in investing activities
|
(143)
|
244
|
|
|
Financing activities:
|
|||
|
Proceeds from issuance of common stock on exercise of employee stock options
|
1
|
3
|
|
|
Payment of dividends
|
(254)
|
(184)
|
|
|
Payment of corporate dividend tax
|
(42)
|
(31)
|
|
|
Net cash used in financing activities
|
(295)
|
(212)
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(346)
|
18
|
|
|
Net increase in cash and cash equivalents
|
393
|
711
|
|
|
Cash and cash equivalents at the beginning
|
2.1
|
3,737
|
2,698
|
|
Cash and cash equivalents at the end
|
2.1
|
3,784
|
$3,427
|
|
Supplementary information:
|
|||
|
Restricted cash balance
|
2.1
|
$52
|
$24
|
The accompanying notes form an integral part of the unaudited consolidated interim financial statements
1. Company Overview and Significant Accounting Policies
1.1 Company overview
Infosys Limited (Infosys or the company) along with its controlled trusts, majority owned and controlled subsidiary, Infosys BPO Limited (Infosys BPO) and wholly owned and controlled subsidiaries, Infosys Technologies (Australia) Pty. Limited (Infosys Australia), Infosys Technologies (China) Co. Limited (Infosys China), Infosys Consulting, Inc. (Infosys Consulting), Infosys Technologies S. DE R.L. de C.V. (Infosys Mexico), Infosys Technologies (Sweden) AB (Infosys Sweden), Infosys Tecnologia DO Brasil LTDA (Infosys Brasil), Infosys Public Services, Inc., (Infosys Public Services), and Infosys Technologies (Shanghai) Company Limited (Infosys Shanghai) is a leading global technology services company. The Infosys group of companies (the Group) provides business consulting, technology, engineering and outsourcing services. In addition, the Group offers software products for the banking industry.
In June 2011, the name of the company was changed from “Infosys Technologies Limited” to “Infosys Limited,” following approval of the name change by the company’s board of directors, shareholders and the Indian regulatory authorities.
The company is a public limited company incorporated and domiciled in India and has its registered office at Bangalore, Karnataka, India. The company has its primary listings on the Bombay Stock Exchange and National Stock Exchange in India. The company’s American Depositary Shares representing equity shares are also listed on the NASDAQ Global Select Market. The company’s consolidated interim financial statements were authorized for issue by the company’s Board of Directors on October 25, 2011.
1.2 Basis of preparation of financial statements
These consolidated interim financial statements as at and for the six months ended September 30, 2011 have been prepared in compliance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), under the historical cost convention on the accrual basis except for certain financial instruments and prepaid gratuity benefits which have been measured at fair values. These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company's Annual Report on Form 20-F for the fiscal year ended March 31, 2011. Accounting policies have been applied consistently to all periods presented in these financial statements.
1.3 Basis of consolidation
Infosys consolidates entities which it owns or controls. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable are also taken into account. Subsidiaries are consolidated from the date control commences until the date control ceases.
The financial statements of the Group companies are consolidated on a line-by-line basis and intra-group balances and transactions including unrealized gain / loss from such transactions are eliminated upon consolidation. These financial statements are prepared by applying uniform accounting policies in use at the Group. Non-controlling interests which represent part of the net profit or loss and net assets of subsidiaries that are not, directly or indirectly, owned or controlled by the company, are excluded.
1.4 Use of estimates
The preparation of the financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions. These estimates, judgments and assumptions affect the application of accounting policies and the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the period. Application of accounting policies that require critical accounting estimates involving complex and subjective judgments and the use of assumptions in these financial statements have been disclosed in Note 1.5. Accounting estimates could change from period to period. Actual results could differ from those estimates. Appropriate changes in estimates are made as management becomes aware of changes in circumstances surrounding the estimates. Changes in estimates are reflected in the financial statements in the period in which changes are made and, if material, their effects are disclosed in the notes to the unaudited consolidated interim financial statements.
1.5 Critical accounting estimates
a. Revenue recognition
The company uses the percentage-of-completion method in accounting for its fixed-price contracts. Use of the percentage-of-completion method requires the company to estimate the efforts expended to date as a proportion of the total efforts to be expended. Efforts expended have been used to measure progress towards completion as there is a direct relationship between input and productivity. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on the expected contract estimates at the reporting date.
b. Income taxes
The company's two major tax jurisdictions are India and the U.S., though the company also files tax returns in other foreign jurisdictions. Significant judgments are involved in determining the provision for income taxes, including the amount expected to be paid or recovered in connection with uncertain tax positions. Also refer to Note 2.17.
c. Business combinations and Intangible assets
Business combinations are accounted for using IFRS 3 (Revised), Business Combinations. IFRS 3 requires the identifiable intangible assets and contingent consideration to be fair valued in order to ascertain the net fair value of identifiable assets, liabilities and contingent liabilities of the acquiree. Significant estimates are required to be made in determining the value of contingent consideration and intangible assets. These valuations are conducted by independent valuation experts.
1.6 Revenue recognition
The company derives revenues primarily from software related services and from the licensing of software products. Arrangements with customers for software related services are either on a fixed-price, fixed-timeframe or on a time-and-material basis.
Revenue on time-and-material contracts are recognized as the related services are performed and revenue from the end of the last billing to the balance sheet date is recognized as unbilled revenues. Revenue from fixed-price, fixed-timeframe contracts, where there is no uncertainty as to measurement or collectability of consideration, is recognized as per the percentage-of-completion method. When there is uncertainty as to measurement or ultimate collectability, revenue recognition is postponed until such uncertainty is resolved. Efforts expended have been used to measure progress towards completion as there is a direct relationship between input and productivity. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on the current contract estimates. Costs and earnings in excess of billings are classified as unbilled revenue while billings in excess of costs and earnings are classified as unearned revenue. Maintenance revenue is recognized ratably over the term of the underlying maintenance arrangement.
In arrangements for software development and related services and maintenance services, the company has applied the guidance in IAS 18, Revenue, by applying the revenue recognition criteria for each separately identifiable component of a single transaction. The arrangements generally meet the criteria for considering software development and related services as separately identifiable components. For allocating the consideration, the company has measured the revenue in respect of each separable component of a transaction at its fair value, in accordance with principles given in IAS 18. The price that is regularly charged for an item when sold separately is the best evidence of its fair value. In cases where the company is unable to establish objective and reliable evidence of fair value for the software development and related services, the company has used a residual method to allocate the arrangement consideration. In these cases the balance of the consideration, after allocating the fair values of undelivered components of a transaction has been allocated to the delivered components for which specific fair values do not exist.
License fee revenues are recognized when the general revenue recognition criteria given in IAS 18 are met. Arrangements to deliver software products generally have three components: license, implementation and Annual Technical Services (ATS). The company has applied the principles given in IAS 18 to account for revenues from these multiple element arrangements. Objective and reliable evidence of fair value has been established for ATS. Objective and reliable evidence of fair value is the price charged when the element is sold separately. When other services are provided in conjunction with the licensing arrangement and objective and reliable evidence of their fair values have been established, the revenue from such contracts are allocated to each component of the contract in a manner, whereby revenue is deferred for the undelivered services and the residual amounts are recognized as revenue for delivered components. In the absence of objective and reliable evidence of fair value for implementation, the entire arrangement fee for license and implementation is recognized using the percentage-of-completion method as the implementation is performed. Revenue from client training, support and other services arising due to the sale of software products is recognized as the services are performed. ATS revenue is recognized ratably over the period in which the services are rendered.
Advances received for services and products are reported as client deposits until all conditions for revenue recognition are met.
The company accounts for volume discounts and pricing incentives to customers as a reduction of revenue based on the ratable allocation of the discounts / incentives amount to each of the underlying revenue transaction that results in progress by the customer towards earning the discount / incentive. Also, when the level of discount varies with increases in levels of revenue transactions, the company recognizes the liability based on its estimate of the customer's future purchases. If it is probable that the criteria for the discount will not be met, or if the amount thereof cannot be estimated reliably, then discount is not recognized until the payment is probable and the amount can be estimated reliably. The company recognizes changes in the estimated amount of obligations for discounts in the period in which the change occurs. The discounts are passed on to the customer either as direct payments or as a reduction of payments due from the customer.
The company presents revenues net of value-added taxes in its statement of comprehensive income.
1.7 Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and impairments, if any. The direct costs are capitalized until the property, plant and equipment are ready for use, as intended by management. The company depreciates property, plant and equipment over their estimated useful lives using the straight-line method. The estimated useful lives of assets for current and comparative periods are as follows:
|
Buildings
|
15 years
|
|
Plant and machinery
|
5 years
|
|
Computer equipment
|
2-5 years
|
|
Furniture and fixtures
|
5 years
|
|
Vehicles
|
5 years
|
Depreciation methods, useful lives and residual values are reviewed at each reporting date.
Advances paid towards the acquisition of property, plant and equipment outstanding at each balance sheet date and the cost of assets not put to use before such date are disclosed under ‘Capital work-in-progress’. Subsequent expenditures relating to property, plant and equipment is capitalized only when it is probable that future economic benefits associated with these will flow to the Group and the cost of the item can be measured reliably. Repairs and maintenance costs are recognized in net profit in the statement of comprehensive income when incurred. The cost and related accumulated depreciation are eliminated from the financial statements upon sale or retirement of the asset and the resultant gains or losses are recognized in net profit in the statement of comprehensive income. Assets to be disposed off are reported at the lower of the carrying value or the fair value less cost to sell.
1.8 Business combinations
Business combinations have been accounted for using the acquisition method under the provisions of IFRS 3 (Revised), Business Combinations.
The cost of an acquisition is measured at the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the date of acquisition. The cost of acquisition also includes the fair value of any contingent consideration. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value on the date of acquisition.
Transaction costs that the Group incurs in connection with a business combination such as finders’ fees, legal fees, due diligence fees, and other professional and consulting fees are expensed as incurred.
1.9 Goodwill
Goodwill represents the cost of business acquisition in excess of the Group's interest in the net fair value of identifiable assets, liabilities and contingent liabilities of the acquiree. When the net fair value of the identifiable assets, liabilities and contingent liabilities acquired exceeds the cost of business acquisition, a gain is recognized immediately in net profit in the statement of comprehensive income. Goodwill is measured at cost less accumulated impairment losses.
1.10 Intangible assets
Intangible assets are stated at cost less accumulated amortization and impairments. Intangible assets are amortized over their respective individual estimated useful lives on a straight-line basis, from the date that they are available for use. The estimated useful life of an identifiable intangible asset is based on a number of factors including the effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, and known technological advances), and the level of maintenance expenditures required to obtain the expected future cash flows from the asset.
Research costs are expensed as incurred. Software product development costs are expensed as incurred unless technical and commercial feasibility of the project is demonstrated, future economic benefits are probable, the company has an intention and ability to complete and use or sell the software and the costs can be measured reliably. The costs which can be capitalized include the cost of material, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use. Research and development costs and software development costs incurred under contractual arrangements with customers are accounted as cost of sales.
1.11 Financial instruments
Financial instruments of the Group are classified in the following categories: non-derivative financial instruments comprising of loans and receivables, available-for-sale financial assets and trade and other payables; derivative financial instruments under the category of financial assets or financial liabilities at fair value through profit or loss; share capital and treasury shares. The classification of financial instruments depends on the purpose for which those were acquired. Management determines the classification of its financial instruments at initial recognition.
a. Non-derivative financial instruments
(i) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are presented as current assets, except for those maturing later than 12 months after the balance sheet date which are presented as non-current assets. Loans and receivables are measured initially at fair value plus transaction costs and subsequently carried at amortized cost using the effective interest method, less any impairment loss or provisions for doubtful accounts. Loans and receivables are represented by trade receivables, net of allowances for impairment, unbilled revenue, cash and cash equivalents, prepayments, certificates of deposit and other assets. Cash and cash equivalents comprise cash and bank deposits and deposits with corporations. The company considers all highly liquid investments with a remaining maturity at the date of purchase of three months or less and that are readily convertible to known amounts of cash to be cash equivalents. Certificates of deposit is a negotiable money market instrument for funds deposited at a bank or other eligible financial institution for a specified time period. For these financial instruments the carrying amounts approximate fair value due to the short maturity of these instruments.
(ii) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or are not classified in any of the other categories. Available-for-sale financial assets are recognized initially at fair value plus transactions costs. Subsequent to initial recognition, these are measured at fair value and changes therein, other than impairment losses and foreign exchange gains and losses on available-for-sale monetary items are recognized directly in other comprehensive income. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to net profit in the statement of comprehensive income. These are presented as current assets unless management intends to dispose off the assets after 12 months from the balance sheet date.
(iii) Trade and other payables
Trade and other payables are initially recognized at fair value, and subsequently carried at amortized cost using the effective interest method. For these financial instruments the carrying amounts approximate fair value due to the short maturity of these instruments.
b. Derivative financial instruments
Financial assets or financial liabilities, at fair value through profit or loss
This category has two sub-categories wherein, financial assets or financial liabilities are held for trading or are designated as such upon initial recognition. A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the short term. Derivatives are categorized as held for trading unless they are designated as hedges.
The company holds derivative financial instruments such as foreign exchange forward and option contracts to mitigate the risk of changes in foreign exchange rates on trade receivables and forecasted cash flows denominated in certain foreign currencies. The counterparty for these contracts is generally a bank or a financial institution. Although the company believes that these financial instruments constitute hedges from an economic perspective, they do not qualify for hedge accounting under IAS 39, Financial Instruments: Recognition and Measurement. Any derivative that is either not designated a hedge, or is so designated but is ineffective as per IAS 39, is categorized as a financial asset, at fair value through profit or loss.
Derivatives are recognized initially at fair value and attributable transaction costs are recognized in net profit in the statement of comprehensive income when incurred. Subsequent to initial recognition, derivatives are measured at fair value through profit or loss and the resulting exchange gains or losses are included in other income in the statement of comprehensive income. Assets / liabilities in this category are presented as current assets / current liabilities if they are either held for trading or are expected to be realized within 12 months after the balance sheet date.
c. Share capital and treasury shares
Ordinary Shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of new ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.
Treasury Shares
When any entity within the Group purchases the company's ordinary shares, the consideration paid including any directly attributable incremental cost is presented as a deduction from total equity, until they are cancelled, sold or reissued. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to / from retained earnings.
1.12 Impairment
a. Financial assets
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset is considered impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
(i) Loans and receivables
Impairment loss in respect of loans and receivables measured at amortized cost are calculated as the difference between their carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Such impairment loss is recognized in net profit in the statement of comprehensive income.
(ii) Available-for-sale financial assets
Significant or prolonged decline in the fair value of the security below its cost and the disappearance of an active trading market for the security are objective evidence that the security is impaired. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value and is recognized in net profit in the statement of comprehensive income. The cumulative loss that was recognized in other comprehensive income is transferred to net profit in the statement of comprehensive income upon impairment.
b. Non-financial assets
(i) Goodwill
Goodwill is tested for impairment on an annual basis and whenever there is an indication that goodwill may be impaired, relying on a number of factors including operating results, business plans and future cash flows. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to the Group's cash generating units (CGU) expected to benefit from the synergies arising from the business combination. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. Impairment occurs when the carrying amount of a CGU including the goodwill, exceeds the estimated recoverable amount of the CGU. The recoverable amount of a CGU is the higher of its fair value less cost to sell and its value-in-use. Value-in-use is the present value of future cash flows expected to be derived from the CGU.
Total impairment loss of a CGU is allocated first to reduce the carrying amount of goodwill allocated to the CGU and then to the other assets of the CGU pro-rata on the basis of the carrying amount of each asset in the CGU. An impairment loss on goodwill is recognized in net profit in the statement of comprehensive income and is not reversed in the subsequent period.
(ii) Intangible assets and property, plant and equipment
Intangible assets and property, plant and equipment are evaluated for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For the purpose of impairment testing, the recoverable amount (i.e. the higher of the fair value less cost to sell and the value-in-use) is determined on an individual asset basis unless the asset does not generate cash flows that are largely independent of those from other assets. In such cases, the recoverable amount is determined for the CGU to which the asset belongs.
If such assets are considered to be impaired, the impairment to be recognized in net profit in the statement of comprehensive income is measured by the amount by which the carrying value of the assets exceeds the estimated recoverable amount of the asset.
c. Reversal of impairment loss
An impairment loss for financial assets is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. The carrying amount of an asset other than goodwill is increased to its revised recoverable amount, provided that this amount does not exceed the carrying amount that would have been determined (net of any accumulated amortization or depreciation) had no impairment loss been recognized for the asset in prior years. A reversal of impairment loss for an asset other than goodwill and available- for-sale financial assets that are equity securities is recognized in net profit in the statement of comprehensive income. For available-for-sale financial assets that are equity securities, the reversal is recognized in other comprehensive income.
1.13 Fair value of financial instruments
In determining the fair value of its financial instruments, the company uses a variety of methods and assumptions that are based on market conditions and risks existing at each reporting date. The methods used to determine fair value include discounted cash flow analysis, available quoted market prices and dealer quotes. All methods of assessing fair value result in general approximation of value, and such value may never actually be realized. The fair value of securities, which do not have an active market and where it is not practicable to determine the fair values with sufficient reliability, are carried at cost less impairment.
1.14 Provisions
A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.
a. Post sales client support
The company provides its clients with a fixed-period post sales support for corrections of errors and telephone support on all its fixed-price, fixed-timeframe contracts. Costs associated with such support services are accrued at the time related revenues are recorded and included in cost of sales. The company estimates such costs based on historical experience and estimates are reviewed on a periodic basis for any material changes in assumptions and likelihood of occurrence.
b. Onerous contracts
Provisions for onerous contracts are recognized when the expected benefits to be derived by the Group from a contract are lower than the unavoidable costs of meeting the future obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established the Group recognizes any impairment loss on the assets associated with that contract.
1.15 Foreign currency
Functional and presentation currency
The functional currency of Infosys and Infosys BPO is the Indian rupee. The functional currencies for Infosys Australia, Infosys China, Infosys Consulting, Infosys Mexico, Infosys Sweden, Infosys Brasil, Infosys Public Services and Infosys Shanghai are the respective local currencies. These financial statements are presented in U.S. dollars (rounded off to the nearest million) to facilitate global comparability.
Transactions and translations
Foreign-currency denominated monetary assets and liabilities are translated into the relevant functional currency at exchange rates in effect at the balance sheet date. The gains or losses resulting from such translations are included in net profit in the statement of comprehensive income. Non-monetary assets and non-monetary liabilities denominated in a foreign currency and measured at fair value are translated at the exchange rate prevalent at the date when the fair value was determined. Non-monetary assets and non-monetary liabilities denominated in a foreign currency and measured at historical cost are translated at the exchange rate prevalent at the date of transaction.
Transaction gains or losses realized upon settlement of foreign currency transactions are included in determining net profit for the period in which the transaction is settled. Revenue, expense and cash-flow items denominated in foreign currencies are translated into the relevant functional currencies using the exchange rate in effect on the date of the transaction.
The translation of financial statements of the foreign subsidiaries to the functional currency of the company is performed for assets and liabilities using the exchange rate in effect at the balance sheet date and for revenue, expense and cash-flow items using the average exchange rate for the respective periods. The gains or losses resulting from such translation are included in currency translation reserves under other components of equity. When a subsidiary is disposed off, in part or in full, the relevant amount is transferred to net profit in the statement of comprehensive income.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the exchange rate in effect at the balance sheet date.
1.16 Earnings per equity share
Basic earnings per equity share is computed by dividing the net profit attributable to the equity holders of the company by the weighted average number of equity shares outstanding during the period. Diluted earnings per equity share is computed by dividing the net profit attributable to the equity holders of the company by the weighted average number of equity shares considered for deriving basic earnings per equity share and also the weighted average number of equity shares that could have been issued upon conversion of all dilutive potential equity shares. The diluted potential equity shares are adjusted for the proceeds receivable had the equity shares been actually issued at fair value (i.e. the average market value of the outstanding equity shares). Dilutive potential equity shares are deemed converted as of the beginning of the period, unless issued at a later date. Dilutive potential equity shares are determined independently for each period presented.
The number of equity shares and potentially dilutive equity shares are adjusted retrospectively for all periods presented for any share splits and bonus shares issues including for changes effected prior to the approval of the financial statements by the Board of Directors.
1.17 Income taxes
Income tax expense comprises current and deferred income tax. Income tax expense is recognized in net profit in the statement of comprehensive income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in other comprehensive income. Current income tax for current and prior periods is recognized at the amount expected to be paid to or recovered from the tax authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred income tax assets and liabilities are recognized for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements except when the deferred income tax arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and affects neither accounting nor taxable profit or loss at the time of the transaction. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred income tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of changes in tax rates on deferred income tax assets and liabilities is recognized as income or expense in the period that includes the enactment or the substantive enactment date. A deferred income tax asset is recognized to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences and tax losses can be utilized. Deferred income taxes are not provided on the undistributed earnings of subsidiaries and branches where it is expected that the earnings of the subsidiary or branch will not be distributed in the foreseeable future. The income tax provision for the interim period is made based on the best estimate of the annual average tax rate expected to be applicable for the full fiscal year. The company offsets current tax assets and current tax liabilities, where it has a legally enforceable right to set off the recognized amounts and where it intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. Deferred tax assets and deferred tax liabilities have been offset wherever the company has a legally enforceable right to set off current tax assets against current tax liabilities and where the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority. Tax benefits of deductions earned on exercise of employee share options in excess of compensation charged to income are credited to share premium.
1.18 Employee benefits
1.18.1 Gratuity
In accordance with the Payment of Gratuity Act, 1972, Infosys and Infosys BPO provides for gratuity, a defined benefit retirement plan (the Gratuity Plan) covering eligible employees. The Gratuity Plan provides a lump-sum payment to vested employees at retirement, death, incapacitation or termination of employment, of an amount based on the respective employee's salary and the tenure of employment.
Liabilities with regard to the Gratuity Plan are determined by actuarial valuation, performed by an independent actuary, at each balance sheet date using the projected unit credit method. The company fully contributes all ascertained liabilities to the Infosys Limited Employees' Gratuity Fund Trust (the Trust). In case of Infosys BPO, contributions are made to the Infosys BPO's Employees' Gratuity Fund Trust. Trustees administer contributions made to the Trusts and contributions are invested in specific designated instruments as permitted by law and investments are also made in mutual funds that invest in the specific designated instruments.
The Group recognizes the net obligation of a defined benefit plan in its balance sheet as an asset or liability, respectively in accordance with IAS 19, Employee benefits. The discount rate is based on the Government securities yield. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to net profit in the statement of comprehensive income in the period in which they arise. When the computation results in a benefit to the Group, the recognized asset is limited to the net total of any unrecognized past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.
1.18.2 Superannuation
Certain employees of Infosys are also participants in a defined contribution plan. The company has no further obligations to the Plan beyond its monthly contributions.
Certain employees of Infosys BPO are also eligible for superannuation benefit. Infosys BPO has no further obligations to the superannuation plan beyond its monthly contribution which are periodically contributed to a trust fund, the corpus of which is invested with the Life Insurance Corporation of India.
Certain employees of Infosys Australia are also eligible for superannuation benefit. Infosys Australia has no further obligations to the superannuation plan beyond its monthly contribution.
1.18.3 Provident fund
Eligible employees of Infosys receive benefits from a provident fund, which is a defined benefit plan. Both the employee and the company make monthly contributions to the provident fund plan equal to a specified percentage of the covered employee's salary. The company contributes a part of the contributions to the Infosys Limited Employees' Provident Fund Trust. The remaining portion is contributed to the government administered pension fund. The rate at which the annual interest is payable to the beneficiaries by the trust is being administered by the government. The company has an obligation to make good the shortfall, if any, between the return from the investments of the Trust and the notified interest rate.
In respect of Infosys BPO, eligible employees receive benefits from a provident fund, which is a defined contribution plan. Both the employee and Infosys BPO make monthly contributions to this provident fund plan equal to a specified percentage of the covered employee's salary. Amounts collected under the provident fund plan are deposited in a government administered provident fund. The company has no further obligation to the plan beyond its monthly contributions.
1.18.4 Compensated absences
The Group has a policy on compensated absences which are both accumulating and non-accumulating in nature. The expected cost of accumulating compensated absences is measured based on the additional amount expected to be paid / availed as a result of the unused entitlement that has accumulated at the balance sheet date. Expense on non-accumulating compensated absences is recognized in the period in which the absences occur.
1.19 Share-based compensation
The Group recognizes compensation expense relating to share-based payments in net profit using a fair-value measurement method in accordance with IFRS 2, Share-Based Payment. Under the fair value method, the estimated fair value of awards is charged to income on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was in-substance, multiple awards. The Group includes a forfeiture estimate in the amount of compensation expense being recognized.
The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton valuation model. The expected term of an option is estimated based on the vesting term and contractual term of the option, as well as expected exercise behaviour of the employee who receives the option. Expected volatility during the expected term of the option is based on historical volatility, during a period equivalent to the expected term of the option, of the observed market prices of the company's publicly traded equity shares. Expected dividends during the expected term of the option are based on recent dividend activity. Risk-free interest rates are based on the government securities yield in effect at the time of the grant over the expected term.
1.20 Dividends
Final dividends on shares are recorded as a liability on the date of approval by the shareholders and interim dividends are recorded as a liability on the date of declaration by the company's Board of Directors.
1.21 Operating profit
Operating profit for the Group is computed considering the revenues, net of cost of sales, selling and marketing expenses and administrative expenses.
1.22 Other income
Other income is comprised primarily of interest income and dividend income. Interest income is recognized using the effective interest method. Dividend income is recognized when the right to receive payment is established.
1.23 Leases
Leases under which the company assumes substantially all the risks and rewards of ownership are classified as finance leases. When acquired, such assets are capitalized at fair value or present value of the minimum lease payments at the inception of the lease, whichever is lower. Lease payments under operating leases are recognised as an expense on a straight line basis in net profit in the statement of comprehensive income over the lease term.
1.24 Government grants
The Group recognizes government grants only when there is reasonable assurance that the conditions attached to them shall be complied with, and the grants will be received. Government grants related to depreciable fixed assets are treated as deferred income and are recognized in net profit in the statement of comprehensive income on a systematic and rational basis over the useful life of the asset. Government grants related to revenue are recognized on a systematic basis in net profit in the statement of comprehensive income over the periods necessary to match them with the related costs which they are intended to compensate.
1.25 Recent accounting pronouncements
1.25.1 Standards issued but not yet effective
IFRS 9 Financial Instruments: In November 2009, the International Accounting Standards Board issued IFRS 9, Financial Instruments: Recognition and Measurement, to reduce the complexity of the current rules on financial instruments as mandated in IAS 39. The effective date for IFRS 9 is annual periods beginning on or after January 1, 2013 with early adoption permitted. IFRS 9 has fewer classification and measurement categories as compared to IAS 39 and has eliminated the categories of held to maturity, available for sale and loans and receivables. Further it eliminates the rule-based requirement of segregating embedded derivatives and tainting rules pertaining to held to maturity investments. For an investment in an equity instrument which is not held for trading, IFRS 9 permits an irrevocable election, on initial recognition, on an individual share-by-share basis, to present all fair value changes from the investment in other comprehensive income. No amount recognized in other comprehensive income would ever be reclassified to profit or loss. IFRS 9, was further amended in October 2010, and such amendment introduced requirements on accounting for financial liabilities. This amendment addresses the issue of volatility in the profit or loss due to changes in the fair value of an entity’s own debt. It requires the entity, which chooses to measure a liability at fair value, to present the portion of the fair value change attributable to the entity’s own credit risk in the other comprehensive income. The company is required to adopt IFRS 9 by accounting year commencing April 1, 2013. The company is currently evaluating the requirements of IFRS 9, and has not yet determined the impact on the consolidated financial statements.
IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements and IFRS 12, Disclosure of Interests in Other Entities: In May 2011, the International Accounting Standards Board issued IFRS 10, IFRS 11 and IFRS 12. The effective date for IFRS 10, IFRS 11 and IFRS 12 is annual periods beginning on or after January 1, 2013 with early adoption permitted.
IFRS 10 Consolidated Financial Statements builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. IFRS 10 replaces the consolidation requirements in SIC-12 Consolidation of Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. The standard provides additional guidance for determining of control in cases of ambiguity for instance in case of franchisor franchisee relationship, de facto agent, silos and potential voting rights.
IFRS 11 Joint Arrangements determines the nature of an arrangement by focusing on the rights and obligations of the arrangement, rather than its legal form. IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities-Non-monetary Contributions by Venturers. IFRS 11 addresses only forms of joint arrangements (joint operations and joint ventures) where there is joint control whereas IAS 31 had identified three forms of joint ventures, namely jointly controlled operations, jointly controlled assets and jointly controlled entities. The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities, which is the equity method.
IFRS 12 Disclosure of Interests in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. One major requirement of IFRS 12 is that an entity needs to disclose the significant judgments and assumptions it has made in determining:
a. whether it has control, joint control or significant influence over another entity; and
b. the type of joint arrangement when the joint arrangement is structured through a separate vehicle.
IFRS 12 also expands the disclosure requirements for subsidiaries with non-controlling interest, joint arrangements and associates that are individually material. IFRS 12 introduces the term “structured entity” by replacing Special Purpose entities and requires enhanced disclosures by way of nature and extent of, and changes in, the risks associated with its interests in both its consolidated and unconsolidated structured entities.
The company will be adopting IFRS 10, IFRS 11 and IFRS 12 effective April 1, 2013. The company is currently evaluating the requirements of IFRS 10, IFRS 11 and IFRS 12, and has not yet determined the impact on the consolidated financial statements.
IFRS 13 Fair Value Measurement: In May 2011, the International Accounting Standards Board issued IFRS 13, Fair Value Measurement to provide specific guidance on fair value measurement and requires enhanced disclosures for all assets and liabilities measured at fair value, and not restricted to financial assets and liabilities. The standard introduces a precise definition of fair value and a consistent measure for fair valuation across assets and liabilities, with a few specified exceptions. The effective date for IFRS 13 is annual periods beginning on or after January 1, 2013 with early adoption permitted. The company is required to adopt IFRS 13 by accounting year commencing April1, 2013 and is currently evaluating the requirements of IFRS 13, and has not yet determined the impact on the consolidated financial statements.
IAS 1 (Amended) Presentation of Financial Statements: In June 2011, the International Accounting Standard Board published amendments to IAS 1 Presentation of Financial Statements. The amendments to IAS 1 Presentation of Financial Statements require companies preparing financial statements in accordance with IFRS to group items within other comprehensive income that may be reclassified to the profit or loss separately from those items which would not be recyclable in the profit or loss section of the income statement. It also requires the tax associated with items presented before tax to be shown separately for each of the two groups of other comprehensive income items (without changing the option to present items of other comprehensive income either before tax or net of tax).
The amendments also reaffirm existing requirements that items in other comprehensive income and profit or loss should be presented as either a single statement or two consecutive statements. This amendment is applicable to annual periods beginning on or after July 1, 2012, with early adoption permitted. The company is required to adopt IAS 1 (Amended) by accounting year commencing April 1, 2013. The company has evaluated the requirements of IAS 1 (Amended) and the company does not believe that the adoption of IAS 1 (Amended) will have a material effect on its consolidated financial statements.
IAS 19 (Amended) Employee Benefits: In June 2011, International Accounting Standards Board issued IAS 19 (Amended), Employee Benefits. The effective date for adoption of IAS 19(Amended) is annual periods beginning on or after January 1, 2013, though early adoption is permitted.
IAS 19 (Amended) has eliminated an option to defer the recognition of gains and losses through re-measurements and requires such gain or loss to be recognized through other comprehensive income in the year of occurrence to reduce volatility. The amended standard requires immediate recognition of effects of any plan amendments. Further it also requires assets in profit or loss to be restricted to government bond yields or corporate bond yields, considered for valuation of Projected Benefit Obligation, irrespective of actual portfolio allocations. The actual return from the portfolio in excess of or less than such yields is recognized through other comprehensive income.
These amendments enhance the disclosure requirements for defined benefit plans by requiring information about the characteristics of defined benefit plans and risks that entities are exposed to through participation in those plans.
The amendments need to be adopted retrospectively. The company is required to adopt IAS 19 (Amended) by accounting year commencing April 1, 2013. The company is currently evaluating the requirements of IAS 19 (Amended) and has not yet determined the impact on the consolidated financial statements.
2 Notes to the condensed consolidated interim financial statements
2.1 Cash and cash equivalents
Cash and cash equivalents consist of the following:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Cash and bank deposits
|
$3,459
|
$3,385
|
|
Deposits with corporations
|
325
|
352
|
|
$3,784
|
$3,737
|
|
Cash and cash equivalents as of September 30, 2011 and March 31, 2011 include restricted cash and bank balances of $52 million and $24 million, respectively. The restrictions are primarily on account of cash and bank balances held by irrevocable trusts controlled by the company, bank balances held as margin money deposits against guarantees and balances held in unclaimed dividend bank accounts.
The deposits maintained by the Group with banks and corporations comprise of time deposits, which can be withdrawn by the Group at any point without prior notice or penalty on the principal.
The table below provides details of cash and cash equivalents:
(Dollars in millions)
|
As of
|
|||
|
September 30, 2011
|
March 31, 2011
|
||
|
Current accounts
|
|||
|
ABN Amro Bank, China
|
$6
|
$4
|
|
|
ABN Amro Bank, China (U.S. dollar account)
|
2
|
5
|
|
|
ABN Amro Bank, Taiwan
|
1
|
1
|
|
|
Bank of America, USA
|
74
|
67
|
|
|
Bank of America, Mexico
|
–
|
1
|
|
|
Citibank N.A., Australia
|
17
|
14
|
|
|
Citibank N.A., Brazil
|
1
|
1
|
|
|
Citibank N.A, China (U.S. dollar account)
|
4
|
3
|
|
|
Citibank N.A., Japan
|
3
|
4
|
|
|
Citibank N.A., Thailand
|
–
|
1
|
|
|
Deutsche Bank, Belgium
|
2
|
1
|
|
|
Deutsche Bank, Czech Republic (US dollar account)
|
1
|
–
|
|
|
Deutsche Bank, France
|
1
|
1
|
|
|
Deutsche Bank, Germany
|
2
|
1
|
|
|
Deutsche Bank, India
|
2
|
3
|
|
|
Deutsche Bank, Netherlands
|
1
|
1
|
|
|
Deutsche Bank, Singapore
|
–
|
1
|
|
|
Deutsche Bank, Phillipines
|
1
|
–
|
|
|
Deutsche Bank, Poland
|
1
|
–
|
|
|
Deutsche Bank, Poland (Euro account)
|
3
|
–
|
|
|
Deutsche Bank, Spain
|
1
|
–
|
|
|
Deutsche Bank, United Kingdom
|
12
|
9
|
|
|
Deutsche Bank-EEFC, India (Euro account)
|
1
|
2
|
|
|
Deutsche Bank-EEFC, India (U.S. dollar account)
|
3
|
32
|
|
|
Deutsche Bank-EEFC, India (Swiss Franc account)
|
1
|
1
|
|
|
HSBC Bank, United Kingdom
|
1
|
2
|
|
|
ICICI Bank, India
|
13
|
7
|
|
|
ICICI Bank-EEFC, India (U.S. dollar account)
|
2
|
5
|
|
|
Nordbanken, Sweden
|
–
|
1
|
|
|
Royal Bank of Canada, Canada
|
2
|
5
|
|
|
Shanghai Pudong Development Bank, China
|
–
|
1
|
|
|
$158
|
$174
|
||
|
Deposit accounts
|
|||
|
Andhra Bank, India
|
$76
|
$90
|
|
|
ABN Amro Bank, China
|
–
|
3
|
|
|
Allahabad Bank, India
|
136
|
126
|
|
|
Axis Bank, India
|
154
|
120
|
|
|
Bank of America, USA
|
8
|
19
|
|
|
Bank of America, Mexico
|
1
|
4
|
|
|
Bank of Baroda, India
|
306
|
247
|
|
|
Bank of India, India
|
203
|
268
|
|
|
Bank of Maharashtra, India
|
–
|
114
|
|
|
Canara Bank, India
|
267
|
298
|
|
|
Central Bank of India, India
|
52
|
79
|
|
|
Citibank N.A, Brazil
|
–
|
1
|
|
|
Citibank N.A., Czech Republic
|
1
|
1
|
|
|
Corporation Bank, India
|
102
|
66
|
|
|
DBS Bank, India
|
11
|
–
|
|
|
Deutsche Bank, Poland
|
2
|
5
|
|
|
HDFC Bank, India
|
203
|
145
|
|
|
HSBC Bank, United Kingdom
|
4
|
4
|
|
|
ICICI Bank, India
|
340
|
177
|
|
|
IDBI Bank, India
|
215
|
173
|
|
|
ING Vysya Bank, India
|
20
|
–
|
|
|
Indian Overseas Bank, India
|
98
|
116
|
|
|
Jammu and Kashmir Bank, India
|
5
|
3
|
|
|
Kotak Mahindra Bank, India
|
11
|
6
|
|
|
National Australia Bank Limited, Australia
|
118
|
122
|
|
|
Oriental Bank of Commerce, India
|
137
|
146
|
|
|
Punjab National Bank, India
|
317
|
335
|
|
|
State Bank of Hyderabad, India
|
33
|
57
|
|
|
State Bank of India, India
|
93
|
102
|
|
|
State Bank of Mysore, India
|
74
|
79
|
|
|
South Indian Bank, India
|
10
|
11
|
|
|
Syndicate Bank, India
|
112
|
113
|
|
|
Union Bank of India, India
|
138
|
142
|
|
|
Vijaya Bank, India
|
41
|
32
|
|
|
Yes Bank, India
|
13
|
7
|
|
|
$3,301
|
$3,211
|
||
|
Deposits with corporations
|
|||
|
HDFC Limited, India
|
$325
|
$352
|
|
|
$325
|
$352
|
||
|
Total
|
$3,784
|
$3,737
|
|
2.2 Available-for-sale financial assets
Investments in liquid mutual fund units and unlisted equity securities are classified as available-for-sale financial assets.
Cost and fair value of investments in liquid mutual fund units and unlisted equity securities are as follows:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Current
|
||
|
Liquid mutual fund units:
|
||
|
Cost and fair value
|
$8
|
$5
|
|
Non Current
|
||
|
Unlisted equity securities:
|
||
|
Cost
|
–
|
–
|
|
Gross unrealised holding gains
|
2
|
5
|
|
Fair value
|
2
|
5
|
|
Total available-for-sale financial assets
|
$10
|
$10
|
During fiscal 2010, Infosys sold 3,231,151 shares of OnMobile Systems Inc, U.S.A, at a price of $3.64 per share (166.58 per share), derived from quoted prices of the underlying marketable equity securities. The total consideration amounted to $12 million, net of taxes and transaction costs. Additionally, the remaining 2,154,100 shares had a fair value of $8 million as at March 31, 2010. As of March 31, 2011, these 2,154,100 shares were fair valued at $5 million.
166.58 per share), derived from quoted prices of the underlying marketable equity securities. The total consideration amounted to $12 million, net of taxes and transaction costs. Additionally, the remaining 2,154,100 shares had a fair value of $8 million as at March 31, 2010. As of March 31, 2011, these 2,154,100 shares were fair valued at $5 million.As of September 30, 2011 the 2,154,100 shares were fair valued at $2 million and the resultant unrealized loss of $2 million, net of taxes of $1 million has been recognized in other comprehensive income for the six months ended September 30, 2011. The fair value of $2 million has been derived based on an agreed upon exchange ratio between these unlisted equity securities and quoted prices of the underlying marketable equity securities.
2.3 Business combinations
During fiscal 2010, Infosys BPO acquired 100% of the voting interests in McCamish Systems LLC (McCamish), a business process solutions provider based in Atlanta, Georgia, in the United States. The business acquisition was conducted by entering into a Membership Interest Purchase Agreement for a cash consideration of $37 million and a contingent consideration of up to $20 million. The fair values of the contingent consideration and its undiscounted value on the date of acquisition were $9 million and $15 million, respectively.
The payment of the contingent consideration is dependent upon the achievement of certain revenue targets and net margin targets by McCamish over a period of 4 years ending March 31, 2014. Further, in the event that McCamish signs a deal with a customer with total revenues of $100 million or more, the aforesaid period will be extended by 2 years. The total contingent consideration can range between $14 million and $20 million.
During the six months ended September 30, 2011, the liability related to the contingent consideration increased by $1 million due to passage of time.
The fair value of the contingent consideration is determined by discounting the estimated amount payable to the previous owners of McCamish on achievement of certain financial targets. The key inputs used for the determination of fair value of contingent consideration are the discount rate of 13.9% and the probabilities of achievement of the net margin and the revenue targets ranging from 50% to 100%.
2.4 Prepayments and other assets
Prepayments and other assets consist of the following:
(Dollars in millions)
|
|
As of
|
|
|
September 30, 2011
|
March 31, 2011
|
|
|
Current
|
||
|
Rental deposits
|
$3
|
$10
|
|
Security deposits with service providers
|
8
|
14
|
|
Loans to employees
|
30
|
31
|
|
Prepaid expenses (1)
|
10
|
10
|
|
Interest accrued and not due
|
11
|
5
|
|
Withholding taxes (1)
|
128
|
123
|
|
Advance payments to vendors for supply of goods (1)
|
8
|
8
|
|
Other assets
|
6
|
5
|
|
$204
|
$206
|
|
|
Non-current
|
||
|
Loans to employees
|
$1
|
$1
|
|
Security deposits with service providers
|
5
|
–
|
|
Deposit with corporation
|
99
|
98
|
|
Prepaid gratuity and other benefits (1)
|
4
|
–
|
|
Prepaid expenses (1)
|
4
|
4
|
|
Rental Deposits
|
7
|
–
|
|
$120
|
$103
|
|
|
$324
|
$309
|
|
|
Financial assets in prepayments and other assets
|
$170
|
$164
|
(1) Non financial assets
Withholding taxes primarily consist of input tax credits. Other assets primarily represent travel advances and other recoverable from customers. Security deposits with service providers relate principally to leased telephone lines and electricity supplies.
Deposit with corporation represents amounts deposited to settle certain employee-related obligations as and when they arise during the normal course of business.
2.5 Property, plant and equipment
Following are the changes in the carrying value of property, plant and equipment for the three months ended September 30, 2011:
(Dollars in millions)
|
Land
|
Buildings
|
Plant and machinery
|
Computer equipment
|
Furniture and fixtures
|
Vehicles
|
Capital
work-in-progress |
Total
|
|
|
Gross Carrying value as of July 1, 2011
|
$124
|
$824
|
$295
|
$311
|
$177
|
$2
|
$139
|
$1,872
|
|
Additions
|
5
|
6
|
7
|
14
|
9
|
–
|
38
|
79
|
|
Deletions
|
–
|
–
|
–
|
(3)
|
–
|
–
|
–
|
(3)
|
|
Translation difference
|
(11)
|
(72)
|
(26)
|
(25)
|
(16)
|
–
|
(15)
|
(165)
|
|
Gross Carrying value as of September 30, 2011
|
118
|
758
|
276
|
297
|
170
|
2
|
162
|
1,783
|
|
Accumulated depreciation as of July 1, 2011
|
–
|
(232)
|
(179)
|
(253)
|
(114)
|
(1)
|
–
|
(779)
|
|
Depreciation
|
–
|
(14)
|
(14)
|
(14)
|
(8)
|
(1)
|
–
|
(51)
|
|
Accumulated depreciation on deletions
|
–
|
–
|
–
|
3
|
–
|
–
|
–
|
3
|
|
Translation difference
|
–
|
21
|
17
|
21
|
10
|
1
|
–
|
70
|
|
Accumulated depreciation as of September 30, 2011
|
–
|
(225)
|
(176)
|
(243)
|
(112)
|
(1)
|
–
|
(757)
|
|
Carrying value as of July 1, 2011
|
124
|
592
|
116
|
58
|
63
|
1
|
139
|
1,093
|
|
Carrying value as of September 30, 2011
|
$118
|
$533
|
$100
|
$54
|
$58
|
$1
|
$162
|
$1,026
|
Following are the changes in the carrying value of property, plant and equipment for the three months ended September 30, 2010:
(Dollars in millions)
|
Land
|
Buildings
|
Plant and machinery
|
Computer equipment
|
Furniture and fixtures
|
Vehicles
|
Capital
work-in-progress |
Total
|
|
|
Gross carrying value as of July 1, 2010
|
$89
|
$732
|
$281
|
$277
|
$174
|
$1
|
$64
|
$1,618
|
|
Additions
|
–
|
24
|
11
|
15
|
5
|
–
|
11
|
66
|
|
Deletions
|
–
|
–
|
–
|
–
|
(2)
|
–
|
–
|
(2)
|
|
Translation difference
|
3
|
25
|
9
|
10
|
6
|
–
|
2
|
55
|
|
Gross carrying value as of September 30, 2010
|
92
|
781
|
301
|
302
|
183
|
1
|
77
|
1,737
|
|
Accumulated depreciation as of July 1, 2010
|
–
|
(172)
|
(153)
|
(236)
|
(102)
|
–
|
–
|
(663)
|
|
Depreciation
|
–
|
(13)
|
(13)
|
(13)
|
(7)
|
–
|
–
|
(46)
|
|
Accumulated depreciation on deletions
|
–
|
–
|
–
|
–
|
2
|
–
|
–
|
2
|
|
Translation difference
|
–
|
(5)
|
(4)
|
(8)
|
(5)
|
–
|
–
|
(22)
|
|
Accumulated depreciation as of September 30, 2010
|
–
|
(190)
|
(170)
|
(257)
|
(112)
|
–
|
–
|
(729)
|
|
Carrying value as of July 1, 2010
|
89
|
560
|
128
|
41
|
72
|
1
|
64
|
955
|
|
Carrying value as of September 30, 2010
|
$92
|
$591
|
$131
|
$45
|
$71
|
$1
|
$77
|
$1,008
|
Following are the changes in the carrying value of property, plant and equipment for the six months ended September 30, 2011:
(Dollars in millions)
|
Land
|
Buildings
|
Plant and machinery
|
Computer equipment
|
Furniture and fixtures
|
Vehicles
|
Capital
work-in-progress |
Total
|
|
|
Gross Carrying value as of April 1, 2011
|
$124
|
$813
|
$288
|
$299
|
$173
|
$1
|
$118
|
$1,816
|
|
Additions
|
6
|
19
|
14
|
27
|
12
|
–
|
59
|
137
|
|
Deletions
|
–
|
–
|
–
|
(3)
|
–
|
–
|
–
|
(3)
|
|
Translation difference
|
(12)
|
(74)
|
(26)
|
(26)
|
(15)
|
1
|
(15)
|
(167)
|
|
Gross Carrying value as of September 30, 2011
|
118
|
758
|
276
|
297
|
170
|
2
|
162
|
1,783
|
|
Accumulated depreciation as of April 1, 2011
|
–
|
(219)
|
(166)
|
(240)
|
(105)
|
–
|
–
|
(730)
|
|
Depreciation
|
–
|
(27)
|
(27)
|
(28)
|
(17)
|
(1)
|
–
|
(100)
|
|
Accumulated depreciation on deletions
|
–
|
–
|
–
|
3
|
–
|
–
|
–
|
3
|
|
Translation difference
|
–
|
21
|
17
|
22
|
10
|
–
|
–
|
70
|
|
Accumulated depreciation as of September 30, 2011
|
–
|
(225)
|
(176)
|
(243)
|
(112)
|
(1)
|
–
|
(757)
|
|
Carrying value as of April 1, 2011
|
124
|
594
|
122
|
59
|
68
|
1
|
118
|
1,086
|
|
Carrying value as of September 30, 2011
|
$118
|
$533
|
$100
|
$54
|
$58
|
$1
|
$162
|
$1,026
|
Following are the changes in the carrying value of property, plant and equipment for the six months ended September 30, 2010:
(Dollars in millions)
|
Land
|
Buildings
|
Plant and machinery
|
Computer equipment
|
Furniture and fixtures
|
Vehicles
|
Capital
work-in-progress |
Total
|
|
|
Gross carrying value as of April 1, 2010
|
$73
|
$735
|
$281
|
$279
|
$170
|
$1
|
$91
|
$1,630
|
|
Additions
|
19
|
46
|
20
|
24
|
15
|
–
|
(14)
|
110
|
|
Deletions
|
–
|
–
|
–
|
(2)
|
(2)
|
–
|
–
|
(4)
|
|
Translation difference
|
–
|
–
|
–
|
1
|
–
|
–
|
–
|
1
|
|
Gross carrying value as of September 30, 2010
|
92
|
781
|
301
|
302
|
183
|
1
|
77
|
1,737
|
|
Accumulated depreciation as of April 1, 2010
|
–
|
(166)
|
(144)
|
(233)
|
(98)
|
–
|
–
|
(641)
|
|
Depreciation
|
–
|
(25)
|
(26)
|
(25)
|
(15)
|
–
|
–
|
(91)
|
|
Accumulated depreciation on deletions
|
–
|
–
|
–
|
2
|
2
|
–
|
–
|
4
|
|
Translation difference
|
–
|
1
|
–
|
(1)
|
(1)
|
–
|
–
|
(1)
|
|
Accumulated depreciation as of September 30, 2010
|
–
|
(190)
|
(170)
|
(257)
|
(112)
|
–
|
–
|
(729)
|
|
Carrying value as of April 1, 2010
|
73
|
569
|
137
|
46
|
72
|
1
|
91
|
989
|
|
Carrying value as of September 30, 2010
|
$92
|
$591
|
$131
|
$45
|
$71
|
$1
|
$77
|
$1,008
|
During fiscal 2011, certain assets which were not in use and had an aggregate gross book value of $107 million (carrying value nil) were retired.
The depreciation expense for the three months and six months ended September 30, 2011 and September 30, 2010 is included in cost of sales in the statement of comprehensive income.
Carrying value of land includes $34 million and $33 million as of September 30, 2011 and March 31, 2011, respectively, towards deposits paid under certain lease-cum-sale agreements to acquire land, including agreements where the company has an option to purchase the properties on expiry of the lease period. The company has already paid 99% of the market value of the properties prevailing at the time of entering into the lease-cum-sale agreements with the balance payable at the time of purchase.
The contractual commitments for capital expenditure were $186 million and $183 million as of September 30, 2011 and March 31, 2011, respectively.
2.6 Goodwill and intangible assets
Following is a summary of changes in the carrying amount of goodwill:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Carrying value at the beginning
|
$185
|
$183
|
|
Translation differences
|
(14)
|
2
|
|
Carrying value at the end
|
$171
|
$185
|
During the quarter ended June 30, 2011, the company internally reorganized its business to increase its client focus. Consequent to the internal reorganization there were changes effected in the reportable segments based on the “management approach” as defined in IFRS 8, Operating Segments. (Refer Note 2.20). Accordingly the goodwill has been allocated to the new operating segments as at September 30, 2011 and as at March 31, 2011.
Goodwill has been allocated to the cash generating units (CGU), identified to be the operating segments as follows:
(Dollars in millions)
|
Segment
|
As of
|
|
|
September 30, 2011
|
March 31, 2011
|
|
|
Financial services and insurance (FSI)
|
$84
|
$90
|
|
Manufacturing enterprises (MFG)
|
19
|
21
|
|
Energy, utilities and telecommunication services (ECS)
|
20
|
21
|
|
Retail, logistics, consumer product group, life sciences enterprises (RCL)
|
48
|
53
|
|
Total
|
$171
|
$185
|
The entire goodwill relating to Infosys BPO’s acquisition of McCamish has been allocated to the ‘Financial services and insurance’ segment.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to the CGU which are operating segments regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. The recoverable amount of a CGU is the higher of its fair value less cost to sell and its value-in-use. The fair value of a CGU is determined based on the market capitalization. The value-in-use is determined based on specific calculations. These calculations use pre-tax cash flow projections over a period of five years, based on financial budgets approved by management and an average of the range of each assumption mentioned below. As of March 31, 2011, the estimated recoverable amount of the CGU exceeded its carrying amount. The recoverable amount was computed based on the fair value being higher than value-in-use and the carrying amount of the CGU was computed by allocating the net assets to operating segments for the purpose of impairment testing. The key assumptions used for the calculations are as follows:
|
In %
|
|
|
Long term growth rate
|
8-10
|
|
Operating margins
|
17-20
|
|
Discount rate
|
12.7
|
The above discount rate is based on the Weighted Average Cost of Capital (WACC) of the company. These estimates are likely to differ from future actual results of operations and cash flows.
Following is a summary of changes in the carrying amount of acquired intangible assets:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Gross carrying value at the beginning
|
$25
|
$24
|
|
Additions
|
15
|
–
|
|
Translation differences
|
(1)
|
1
|
|
Gross carrying value at the end
|
$39
|
$25
|
|
Accumulated amortization at the beginning
|
$14
|
$12
|
|
Amortization expense
|
1
|
2
|
|
Accumulated amortization at the end
|
$15
|
$14
|
|
Net carrying value
|
$24
|
$11
|
During the quarter ended June 30, 2011, Infosys Australia entered into an agreement with Telecom New Zealand Limited (Telecom) to purchase assets primarily pertaining to the rights to mutual subcontracting agreement for the existing customer contracts of Telecom’s Gen-I division. Consequent to the transaction, Infosys Australia recognized the subcontracting rights amounting to $4 million as intangible assets and is amortizing the same over a period of three years, being the management’s estimate of useful life of such intangible assets.
During the quarter ended September 30, 2011 Infosys Shanghai paid $11 million towards the acquisition of land use rights. The land use rights are being amortized over the initial term of 50 years.
The intangible customer contracts recognized at the time of Philips acquisition are being amortized over a period of seven years, being management's estimate of the useful life of the respective assets, based on the life over which economic benefits are expected to be realized. However, during fiscal 2010 the amortization of this intangible asset has been accelerated based on the usage pattern of the asset. As of September 30, 2011, the customer contracts have a remaining amortization period of approximately three years.
The intangible customer contracts and relationships recognized at the time of the McCamish acquisition are being amortized over a period of nine years, being management’s estimate of the useful life of the respective assets, based on the life over which economic benefits are expected to be realized. As of September 30, 2011, the customer contracts and relationships have a remaining amortization period of approximately seven years.
The intangible computer software platform recognized at the time of the McCamish acquisition having a useful life of four months, being management’s estimate of the useful life of the asset, based on the life over which economic benefits were expected to be realized, was fully amortized in fiscal 2010.
The aggregate amortization expense included in cost of sales, for the three months ended September 30, 2011 and September 30, 2010 was Nil and $1 million, respectively, and $1 million each for the six months ended September 30, 2011 and September 30, 2010.
Research and development expense recognized in net profit in the statement of comprehensive income, for the three months ended September 30, 2011 and September 30, 2010 was $36 million and $30 million, respectively, and $70 million and $56 million for the six months ended September 30, 2011 and September 30, 2010, respectively.
2.7 Financial instruments
Financial instruments by category
The carrying value and fair value of financial instruments by categories as of September 30, 2011 were as follows:
(Dollars in millions)
|
Loans and receivables
|
Financial assets /
liabilities at fair value through profit and loss
|
Available
for sale |
Trade and other payables
|
Total carrying
value / fair value |
|
|
Assets:
|
|||||
|
Cash and cash equivalents (Refer Note 2.1)
|
$3,784
|
–
|
–
|
–
|
$3,784
|
|
Available-for-sale financial assets (Refer Note 2.2)
|
–
|
–
|
10
|
–
|
10
|
|
Investment in certificates of deposit
|
5
|
–
|
–
|
–
|
5
|
|
Trade receivables
|
1,109
|
–
|
–
|
–
|
1,109
|
|
Unbilled revenue
|
299
|
–
|
–
|
–
|
299
|
|
Prepayments and other assets (Refer Note 2.4)
|
170
|
–
|
–
|
–
|
170
|
|
Total
|
$5,367
|
–
|
$10
|
–
|
$5,377
|
|
Liabilities:
|
|||||
|
Derivative financial instruments
|
–
|
$36
|
–
|
–
|
$36
|
|
Trade payables
|
–
|
–
|
–
|
5
|
5
|
|
Client deposits
|
–
|
–
|
–
|
2
|
2
|
|
Employee benefit obligations (Refer Note 2.8)
|
–
|
–
|
–
|
105
|
105
|
|
Other liabilities (Refer Note 2.10)
|
–
|
–
|
–
|
357
|
357
|
|
Liability towards acquisition of business on a discounted basis (Refer Note 2.10)
|
–
|
–
|
–
|
11
|
11
|
|
Total
|
–
|
$36
|
–
|
$480
|
$516
|
The carrying value and fair value of financial instruments by categories as of March 31, 2011 were as follows:
(Dollars in millions)
|
Loans and receivables
|
Financial assets /
liabilities at fair value through profit and loss
|
Available
for sale |
Trade and
other payables |
Total carrying
value / fair value |
|
|
Assets:
|
|||||
|
Cash and cash equivalents (Refer Note 2.1)
|
$3,737
|
–
|
–
|
–
|
$3,737
|
|
Available-for-sale financial assets (Refer Note 2.2)
|
–
|
–
|
10
|
–
|
10
|
|
Investment in certificates of deposit
|
27
|
–
|
–
|
–
|
27
|
|
Trade receivables
|
1,043
|
–
|
–
|
–
|
1,043
|
|
Unbilled revenue
|
279
|
–
|
–
|
–
|
279
|
|
Derivative financial instruments
|
–
|
15
|
–
|
–
|
15
|
|
Prepayments and other assets (Refer Note 2.4)
|
164
|
–
|
–
|
–
|
164
|
|
Total
|
$5,250
|
$15
|
$10
|
–
|
$5,275
|
|
Liabilities:
|
|||||
|
Trade payables
|
–
|
–
|
–
|
$10
|
$10
|
|
Client deposits
|
–
|
–
|
–
|
5
|
5
|
|
Employee benefit obligations (Refer Note 2.8)
|
–
|
–
|
–
|
89
|
89
|
|
Other liabilities (Refer Note 2.10)
|
–
|
–
|
–
|
376
|
376
|
|
Liability towards acquisition of business on a discounted basis (Refer Note 2.10)
|
–
|
–
|
–
|
10
|
10
|
|
Total
|
–
|
–
|
–
|
$490
|
$490
|
Fair value hierarchy
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 – Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).
The following table presents fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of September 30, 2011:
(Dollars in millions)
|
As of September 30, 2011
|
Fair value measurement at
end of the reporting period using |
|||
|
Level 1
|
Level 2
|
Level 3
|
||
|
Assets
|
||||
|
Available- for- sale financial asset- Investments in liquid mutual fund units (Refer Note 2.2)
|
$8
|
$8
|
–
|
–
|
|
Available- for- sale financial asset- Investments in unlisted equity securities (Refer Note 2.2)
|
$2
|
–
|
$2
|
–
|
|
Derivative financial instruments- loss on outstanding foreign exchange forward and option contracts
|
$36
|
–
|
$36
|
–
|
The following table presents fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of March 31, 2011:
(Dollars in millions)
|
As of March 31, 2011
|
Fair value measurement at
end of the reporting period using |
|||
|
Level 1
|
Level 2
|
Level 3
|
||
|
Assets
|
||||
|
Available- for- sale financial asset- Investments in liquid mutual fund units (Refer Note 2.2)
|
$5
|
$5
|
–
|
–
|
|
Available- for- sale financial asset- Investments in unlisted equity securities (Refer Note 2.2)
|
$5
|
–
|
$5
|
–
|
|
Derivative financial instruments- gains on outstanding foreign exchange forward and option contracts
|
$15
|
–
|
$15
|
–
|
Income from financial assets or liabilities that are not at fair value through profit or loss is as follows:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Interest income on deposits and certificates of deposit (Refer Note 2.14)
|
$88
|
$55
|
$175
|
$107
|
|
Income from available-for-sale financial assets (Refer Note 2.14)
|
2
|
–
|
3
|
5
|
|
$90
|
$55
|
$178
|
$112
|
|
Derivative financial instruments
The company uses derivative financial instruments such as foreign exchange forward and option contracts to mitigate the risk of changes in foreign exchange rates on trade receivables and forecasted cash flows denominated in certain foreign currencies. The counterparty for these contracts is generally a bank or a financial institution. These derivative financial instruments are valued based on quoted prices for similar assets and liabilities in active markets or inputs that are directly or indirectly observable in the marketplace. The following table gives details in respect of outstanding foreign exchange forward and option contracts:
(In millions)
|
|
As of
|
|
|
|
September 30, 2011
|
March 31, 2011
|
|
Forward contracts
|
||
|
In U.S. dollars
|
688
|
546
|
|
In Euro
|
14
|
28
|
|
In United Kingdom Pound Sterling
|
17
|
15
|
|
In Australian dollars
|
10
|
10
|
|
Option contracts
|
||
|
In U.S. dollars
|
–
|
–
|
The company recognized a loss on derivative financial instruments of $58 million and $49 million for the three months and six months ended September 30, 2011 as against a gain on derivative financial instruments of $11 million and a loss on derivative financial instruments of $6 million for the three months and six months ended September 30, 2010, respectively, which are included under other income.
The foreign exchange forward and option contracts mature between 1 to 12 months. The table below analyzes the derivative financial instruments into relevant maturity groupings based on the remaining period as of the balance sheet date:
(Dollars in millions)
|
|
As of
|
|
|
|
September 30, 2011
|
March 31, 2011
|
|
Not later than one month
|
$133
|
$97
|
|
Later than one month and not later than three months
|
230
|
146
|
|
Later than three months and not later than one year
|
379
|
377
|
|
$742
|
$620
|
|
Financial risk management
Financial risk factors
The company's activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The company's primary focus is to foresee the unpredictability of financial markets and seek to minimize potential adverse effects on its financial performance. The primary market risk to the company is foreign exchange risk. The company uses derivative financial instruments to mitigate foreign exchange related risk exposures. The company's exposure to credit risk is influenced mainly by the individual characteristic of each customer and the concentration of risk from the top few customers. The demographics of the customer including the default risk of the industry and country in which the customer operates also has an influence on credit risk assessment.
Market risk
The company operates internationally and a major portion of the business is transacted in several currencies and consequently the company is exposed to foreign exchange risk through its sales and services in the United States and elsewhere, and purchases from overseas suppliers in various foreign currencies. The company uses derivative financial instruments such as foreign exchange forward and option contracts to mitigate the risk of changes in foreign exchange rates on trade receivables and forecasted cash flows denominated in certain foreign currencies. The exchange rate between the rupee and foreign currencies has changed substantially in recent years and may fluctuate substantially in the future. Consequently, the results of the company’s operations are adversely affected as the rupee appreciates / depreciates against these currencies.
The following table gives details in respect of the outstanding foreign exchange forward and option contracts:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Aggregate amount of outstanding forward and option contracts
|
$742
|
$620
|
|
Gains / (losses) on outstanding forward and option contracts
|
$(36)
|
$15
|
The outstanding foreign exchange forward and option contracts as of September 30, 2011 and March 31, 2011, mature between one to twelve months.
The following table analyzes foreign currency risk from financial instruments as of September 30, 2011:
(Dollars in millions)
|
U.S. dollars
|
Euro
|
United Kingdom
Pound Sterling |
Australian dollars
|
Other currencies
|
Total
|
|
|
Cash and cash equivalents
|
$94
|
$11
|
$17
|
$117
|
$20
|
$259
|
|
Trade receivables
|
754
|
100
|
101
|
65
|
56
|
1,076
|
|
Unbilled revenue
|
163
|
42
|
21
|
10
|
27
|
263
|
|
Other assets
|
182
|
5
|
6
|
–
|
19
|
212
|
|
Trade payables
|
–
|
–
|
–
|
–
|
(2)
|
(2)
|
|
Client deposits
|
(2)
|
–
|
–
|
–
|
–
|
(2)
|
|
Accrued expenses
|
(87)
|
(6)
|
3
|
–
|
(11)
|
(101)
|
|
Employee benefit obligations
|
(34)
|
–
|
(6)
|
–
|
(16)
|
(56)
|
|
Other liabilities
|
(377)
|
(44)
|
(4)
|
(1)
|
(9)
|
(435)
|
|
Net assets / (liabilities)
|
$693
|
$108
|
$138
|
$191
|
$84
|
$1,214
|
The following table analyzes foreign currency risk from financial instruments as of March 31, 2011:
(Dollars in millions)
|
U.S. dollars
|
Euro
|
United Kingdom
Pound Sterling |
Australian dollars
|
Other currencies
|
Total
|
|
|
Cash and cash equivalents
|
$132
|
$9
|
$16
|
$119
|
$31
|
$307
|
|
Trade receivables
|
694
|
91
|
106
|
66
|
49
|
1,006
|
|
Unbilled revenue
|
164
|
40
|
22
|
15
|
16
|
257
|
|
Other assets
|
132
|
3
|
13
|
–
|
9
|
157
|
|
Trade payables
|
–
|
–
|
–
|
–
|
(2)
|
(2)
|
|
Client deposits
|
(5)
|
–
|
–
|
–
|
–
|
(5)
|
|
Accrued expenses
|
(52)
|
(4)
|
3
|
–
|
(8)
|
(61)
|
|
Employee benefit obligations
|
(30)
|
–
|
(3)
|
–
|
(14)
|
(47)
|
|
Other liabilities
|
(329)
|
(40)
|
(6)
|
(1)
|
(15)
|
(391)
|
|
Net assets / (liabilities)
|
$706
|
$99
|
$151
|
$199
|
$66
|
$1,221
|
For the three months ended September 30, 2011 and September 30, 2010, every percentage point depreciation / appreciation in the exchange rate between the Indian rupee and the U.S. dollar, has affected the company's operating margins by approximately 0.5%.
For the six months ended September 30, 2011 and September 30, 2010, every percentage point depreciation / appreciation in the exchange rate between the Indian rupee and the U.S. dollar, has affected the company's operating margins by approximately 0.5%.
Sensitivity analysis is computed based on the changes in the income and expenses in foreign currency upon conversion into functional currency, due to exchange rate fluctuations between the previous reporting period and the current reporting period.
Credit risk
Credit risk refers to the risk of default on its obligation by the counterparty resulting in a financial loss. The maximum exposure to the credit risk at the reporting date is primarily from trade receivables amounting to $1,109 million and $1,043 million as of September 30, 2011 and March 31, 2011, respectively and unbilled revenue amounting to $299 million and $279 million as of September 30, 2011 and March 31, 2011, respectively. Trade receivables are typically unsecured and are derived from revenue earned from customers primarily located in the United States. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the company grants credit terms in the normal course of business.
The following table gives details in respect of percentage of revenues generated from top customer and top five customers:
(In %)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Revenue from top customer
|
4.6
|
4.7
|
4.6
|
4.8
|
|
Revenue from top five customers
|
15.9
|
15.8
|
16.0
|
15.5
|
Financial assets that are neither past due nor impaired
Cash and cash equivalents, available-for-sale financial assets and investment in certificates of deposit are neither past due nor impaired. Cash and cash equivalents include deposits with banks and corporations with high credit-ratings assigned by international and domestic credit-rating agencies. Available-for-sale financial assets include investment in liquid mutual fund units and unlisted equity instruments. Certificates of deposit represent funds deposited at a bank or other eligible financial institution for a specified time period. Of the total trade receivables, $793 million and $751 million as of September 30, 2011 and March 31, 2011, respectively, were neither past due nor impaired.
Financial assets that are past due but not impaired
There is no other class of financial assets that is not past due but impaired except for trade receivables of Nil and $1 million as of September 30, 2011 and March 31, 2011, respectively.
The company’s credit period generally ranges from 30-45 days. The age analysis of the trade receivables have been considered from the due date. The age wise break up of trade receivables, net of allowances of $21 million and $19 million as of September 30, 2011 and March 31, 2011, respectively, that are past due, is given below:
(Dollars in millions)
| Period (in days) |
As of
|
|
|
September 30, 2011
|
March 31, 2011
|
|
|
Less than 30
|
$221
|
$208
|
|
31 – 60
|
52
|
43
|
|
61 – 90
|
26
|
14
|
|
More than 90
|
17
|
26
|
|
$316
|
$291
|
|
The provisions for doubtful accounts receivable for the three months and six months ended September 30, 2011 and September 30, 2010 was $3 million and $3 million and $9 million and $6 million, respectively.
The movement in the provisions for doubtful accounts receivable is as follows:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
Year ended March 31,
|
|||
|
2011
|
2010
|
2011
|
2010
|
2011
|
|
|
Balance at the beginning
|
$24
|
$24
|
$19
|
$23
|
$23
|
|
Translation differences
|
(3)
|
1
|
(3)
|
(1)
|
(1)
|
|
Provisions for doubtful accounts receivable
|
3
|
3
|
9
|
6
|
–
|
|
Trade receivables written off
|
(3)
|
(2)
|
(4)
|
(2)
|
(3)
|
|
Balance at the end
|
$21
|
$26
|
$21
|
$26
|
$19
|
Liquidity risk
As of September 30, 2011, the company had a working capital of $4,515 million including cash and cash equivalents of $3,784 million, available-for-sale financial assets of $8 million and investments in certificates of deposit of $5 million. As of March 31, 2011, the company had a working capital of $4,496 million including cash and cash equivalents of $3,737 million, available-for-sale financial assets of $5 million and investments in certificates of deposit of $27 million.
As of September 30, 2011 and March 31, 2011, the outstanding employee benefit obligations were $105 million and $89 million, respectively, which have been fully funded. Further, as of September 30, 2011 and March 31, 2011, the company had no outstanding bank borrowings. Accordingly, no liquidity risk is perceived.
The table below provides details regarding the contractual maturities of significant financial liabilities as of September 30, 2011:
(Dollars in millions)
|
Particulars
|
Less than 1 year
|
1-2 years
|
2-4 years
|
4-7 years
|
Total
|
|
Trade payables
|
$5
|
–
|
–
|
–
|
$5
|
|
Client deposits
|
$2
|
–
|
–
|
–
|
$2
|
|
Other liabilities (Refer Note 2.10)
|
$355
|
$2
|
–
|
–
|
$357
|
|
Liability towards acquisition of business on an undiscounted basis (Refer Note 2.10)
|
$1
|
$2
|
$10
|
$2
|
$15
|
The table below provides details regarding the contractual maturities of significant financial liabilities as of March 31, 2011:
(Dollars in millions)
|
Particulars
|
Less than 1 year
|
1-2 years
|
2-4 years
|
4-7 years
|
Total
|
|
Trade payables
|
$10
|
–
|
–
|
–
|
$10
|
|
Client deposits
|
$5
|
–
|
–
|
–
|
$5
|
|
Other liabilities (Refer Note 2.10)
|
$371
|
$5
|
–
|
–
|
$376
|
|
Liability towards acquisition of business on an undiscounted basis (Refer Note 2.10)
|
$1
|
$2
|
$10
|
$2
|
$15
|
As of September 30, 2011 and March 31, 2011, the company had outstanding financial guarantees of $5 million each, towards leased premises. These financial guarantees can be invoked upon breach of any term of the lease agreement. To the company’s knowledge there has been no breach of any term of the lease agreement as of September 30, 2011 and March 31, 2011.
2.8 Employee benefit obligations
Employee benefit obligations comprise the following:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Current
|
||
|
Compensated absence
|
$25
|
$31
|
|
$25
|
$31
|
|
|
Non-current
|
||
|
Compensated absence
|
$80
|
$58
|
|
$80
|
$58
|
|
|
$105
|
$89
|
|
2.9 Provisions
Provisions comprise the following:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Provision for post sales client support
|
$20
|
$20
|
Provision for post sales client support represent cost associated with providing sales support services which are accrued at the time of recognition of revenues and are expected to be utilized over a period of 6 months to 1 year. The movement in the provision for post sales client support is as follows:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
Year ended March 31,
|
|||
|
2011
|
2010
|
2011
|
2010
|
2011
|
|
|
Balance at the beginning
|
$27
|
$18
|
$20
|
$18
|
$18
|
|
Translation differences
|
(2)
|
1
|
(3)
|
1
|
1
|
|
Provision recognized / (reversed)
|
(3)
|
(1)
|
5
|
(1)
|
1
|
|
Provision utilized
|
(2)
|
–
|
(2)
|
–
|
–
|
|
Balance at the end
|
$20
|
$18
|
$20
|
$18
|
$20
|
Provision for post sales client support for the three months and six months ended September 30, 2011 and September 30, 2010 is included in cost of sales in the statement of comprehensive income.
2.10 Other liabilities
Other liabilities comprise the following:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Current
|
||
|
Accrued compensation to employees
|
$127
|
$164
|
|
Accrued expenses
|
190
|
173
|
|
Withholding taxes payable (1)
|
98
|
74
|
|
Retainage
|
7
|
6
|
|
Unamortized negative past service cost (Refer Note 2.12.1) (1)
|
1
|
5
|
|
Liabilities of controlled trusts
|
30
|
27
|
|
Liability towards acquisition of business (Refer Note 2.3)
|
1
|
1
|
|
Accrued gratuity
|
–
|
–
|
|
Others
|
1
|
1
|
|
$455
|
$451
|
|
|
Non-current
|
||
|
Liability towards acquisition of business (Refer Note 2.3)
|
$10
|
$9
|
|
Accrued expenses
|
2
|
5
|
|
Unamortized negative past service cost (Refer Note 2.12.1) (1)
|
3
|
–
|
|
$15
|
$14
|
|
|
$470
|
$465
|
|
|
Financial liabilities included in other liabilities (excluding liability towards acquisition of business)
|
$357
|
$376
|
|
Financial liability towards acquisition of business on a discounted basis (Refer Note 2.3)
|
$11
|
$10
|
|
Financial liability towards acquisition of business on an undiscounted basis (Refer Note 2.3)
|
$15
|
$15
|
(1) Non financial liabilities
Accrued expenses primarily relates to cost of technical sub-contractors, telecommunication charges, legal and professional charges, brand building expenses, overseas travel expenses and office maintenance. Others include unclaimed dividend balances.
2.11 Expenses by nature
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Employee benefit costs (Refer Note 2.12.4)
|
$966
|
$791
|
$1,914
|
$1,534
|
|
Depreciation and amortization charges (Refer Note 2.5 and 2.6)
|
51
|
47
|
101
|
92
|
|
Travelling costs
|
65
|
56
|
122
|
112
|
|
Consultancy and professional charges
|
28
|
17
|
46
|
32
|
|
Rates and taxes
|
3
|
2
|
6
|
4
|
|
Cost of software packages
|
22
|
22
|
44
|
38
|
|
Third party items bought for service delivery to clients
|
9
|
3
|
21
|
7
|
|
Communication costs
|
13
|
13
|
27
|
26
|
|
Cost of technical sub-contractors
|
35
|
38
|
71
|
65
|
|
Consumables
|
1
|
2
|
2
|
3
|
|
Power and fuel
|
10
|
10
|
20
|
19
|
|
Repairs and maintenance
|
23
|
19
|
47
|
36
|
|
Commission
|
2
|
1
|
3
|
1
|
|
Branding and marketing expenses
|
7
|
5
|
13
|
10
|
|
Provision for post-sales client support (Refer Note 2.9)
|
(3)
|
(1)
|
5
|
(1)
|
|
Provisions for doubtful accounts receivable (Refer Note 2.7)
|
3
|
3
|
9
|
6
|
|
Operating lease payments (Refer Note 2.15)
|
10
|
8
|
19
|
15
|
|
Postage and courier
|
1
|
–
|
2
|
1
|
|
Printing and stationery
|
1
|
–
|
2
|
1
|
|
Insurance charges
|
2
|
2
|
4
|
4
|
|
Donations
|
3
|
–
|
3
|
–
|
|
Others
|
4
|
6
|
11
|
13
|
|
Total cost of sales, selling and marketing expenses and administrative expenses
|
$1,256
|
$1,044
|
$2,492
|
$2,018
|
2.12 Employee benefits
2.12.1 Gratuity
The following tables set out the funded status of the gratuity plans and the amounts recognized in the company's financial statements as of September 30, 2011, March 31, 2011, March 31, 2010, March 31, 2009 and March 31, 2008:
(Dollars in millions)
|
As of
|
|||||
|
September 30, 2011
|
March 31, 2011
|
March 31, 2010
|
March 31, 2009
|
March 31, 2008
|
|
|
Change in benefit obligations
|
|||||
|
Benefit obligations at the beginning
|
$108
|
$72
|
$52
|
$56
|
$51
|
|
Service cost
|
21
|
39
|
17
|
11
|
14
|
|
Interest cost
|
4
|
5
|
4
|
3
|
4
|
|
Actuarial losses / (gains)
|
–
|
4
|
(1)
|
–
|
(2)
|
|
Benefits paid
|
(9)
|
(14)
|
(8)
|
(5)
|
(6)
|
|
Plan amendments
|
–
|
–
|
–
|
–
|
(9)
|
|
Translation differences
|
(11)
|
2
|
8
|
(13)
|
4
|
|
Benefit obligations at the end
|
$113
|
$108
|
$72
|
$52
|
$56
|
|
Change in plan assets
|
|||||
|
Fair value of plan assets at the beginning
|
$108
|
$73
|
$52
|
$59
|
$51
|
|
Expected return on plan assets
|
5
|
8
|
5
|
4
|
4
|
|
Actuarial (losses) / gains
|
1
|
–
|
–
|
–
|
1
|
|
Employer contributions
|
24
|
40
|
14
|
7
|
4
|
|
Benefits paid
|
(9)
|
(14)
|
(8)
|
(5)
|
(6)
|
|
Translation differences
|
(12)
|
1
|
10
|
(13)
|
5
|
|
Fair value of plan assets at the end
|
$117
|
$108
|
$73
|
$52
|
$59
|
|
Funded status
|
$4
|
–
|
$1
|
–
|
$3
|
|
Prepaid benefit
|
$4
|
–
|
$1
|
–
|
$3
|
Net gratuity cost for the three months and six months ended September 30, 2011 and September 30, 2010 comprises the following components:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Service cost
|
$5
|
$12
|
$21
|
$17
|
|
Interest cost
|
2
|
–
|
4
|
1
|
|
Expected return on plan assets
|
(2)
|
(1)
|
(5)
|
(3)
|
|
Actuarial (gains) / loss
|
1
|
3
|
(1)
|
3
|
|
Plan amendments
|
–
|
–
|
–
|
–
|
|
Net gratuity cost
|
$6
|
$14
|
$19
|
$18
|
The net gratuity cost has been apportioned between cost of sales, selling and marketing expenses and administrative expenses on the basis of direct employee cost as follows:
(Dollars in millions)
|
Three months ended September 30,
|
Three months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Cost of sales
|
$5
|
$12
|
$17
|
$16
|
|
Selling and marketing expenses
|
–
|
1
|
1
|
1
|
|
Administrative expenses
|
1
|
1
|
1
|
1
|
|
$6
|
$14
|
$19
|
$18
|
|
Effective July 1, 2007, the company amended its Gratuity Plan, to suspend the voluntary defined death benefit component of the Gratuity Plan. This amendment resulted in a negative past service cost amounting to $9 million, which is being amortized on a straight-line basis over the average remaining service period of employees which is 10 years. The unamortized negative past service cost of $4 million and $5 million as of September 30, 2011 and March 31, 2011, respectively, has been included under other current and other non-current liabilities.
The weighted-average assumptions used to determine benefit obligations as of September 30, 2011, March 31, 2011, March 31, 2010, March 31, 2009 and March 31, 2008 are set out below:
|
As of
|
|||||
|
September 30, 2011
|
March 31, 2011
|
March 31, 2010
|
March 31, 2009
|
March 31, 2008
|
|
|
Discount rate
|
8.4%
|
8.0%
|
7.8%
|
7.0%
|
7.9%
|
|
Weighted average rate of increase in compensation levels
|
7.3%
|
7.3%
|
7.3%
|
5.1%
|
5.1%
|
The weighted-average assumptions used to determine net periodic benefit cost for the three months and six months ended September 30, 2011 and September 30, 2010 are set out below:
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Discount rate
|
8.0%
|
7.8%
|
8.0%
|
7.8%
|
|
Weighted average rate of increase in compensation levels
|
7.3%
|
7.3%
|
7.3%
|
7.3%
|
|
Rate of return on plan assets
|
9.5%
|
9.4%
|
9.5%
|
9.4%
|
The company contributes all ascertained liabilities towards gratuity to the Infosys Limited Employees' Gratuity Fund Trust. In case of Infosys BPO, contributions are made to the Infosys BPO Employees' Gratuity Fund Trust. Trustees administer contributions made to the trust and contributions are invested in specific designated instruments as permitted by Indian law and investments are also made in mutual funds that invest in the specific designated instruments. As of September 30, 2011 and March 31, 2011, the plan assets have been primarily invested in government securities.
Actual return on assets for the three months ended September 30, 2011 and September 30, 2010 was $1 million each and $6 million and $3 million for the six months ended September 30, 2011 and September 30, 2010, respectively.
The company assesses these assumptions with its projected long-term plans of growth and prevalent industry standards. The company's overall expected long-term rate-of-return on assets has been determined based on consideration of available market information, current provisions of Indian law specifying the instruments in which investments can be made, and historical returns. Historical returns during the three months and six months ended September 30, 2011 and September 30, 2010 have not been lower than the expected rate of return on plan assets estimated for those years. The discount rate is based on the government securities yield.
Assumptions regarding future mortality experience are set in accordance with the published statistics by the Life Insurance Corporation of India.
The company expects to contribute $28 million to the gratuity trusts during the remainder of fiscal 2012.
2.12.2 Superannuation
The company contributed $8 million and $5 million to the superannuation plan during the three months ended September 30, 2011 and September 30, 2010, respectively, and $15 million and $11 million to the superannuation plan during the six months ended September 30, 2011 and September 30, 2010, respectively.
Superannuation contributions have been apportioned between cost of sales, selling and marketing expenses and administrative expenses on the basis of direct employee cost as follows:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Cost of sales
|
$7
|
$5
|
$13
|
$10
|
|
Selling and marketing expenses
|
–
|
–
|
1
|
1
|
|
Administrative expenses
|
1
|
–
|
1
|
–
|
|
$8
|
$5
|
$15
|
$11
|
|
2.12.3 Provident fund
The company has an obligation to fund any shortfall on the yield of the trust’s investments over the administered interest rates on an annual basis. These administered rates are determined annually predominantly considering the social rather than economic factors and in most cases the actual return earned by the company has been higher in the past years. In the absence of reliable measures for future administered rates and due to the lack of measurement guidance, the company’s actuary has expressed its inability to determine the actuarial valuation for such provident fund liabilities. Accordingly, the company is unable to exhibit the related information.
The company contributed $13 million and $11 million to the provident fund during the three months ended September 30, 2011 and September 30, 2010, respectively, and $25 million and $21 million to the provident fund during the six months ended September 30, 2011 and September 30, 2010, respectively.
Provident fund contributions have been apportioned between cost of sales, selling and marketing expenses and administrative expenses on the basis of direct employee cost as follows:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Cost of sales
|
$11
|
$9
|
$22
|
$18
|
|
Selling and marketing expenses
|
1
|
1
|
2
|
2
|
|
Administrative expenses
|
1
|
1
|
1
|
1
|
|
$13
|
$11
|
$25
|
$21
|
|
2.12.4 Employee benefit costs include:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Salaries and bonus
|
$940
|
$761
|
$1,855
|
$1,484
|
|
Defined contribution plans
|
8
|
6
|
17
|
13
|
|
Defined benefit plans
|
18
|
24
|
42
|
37
|
|
Share-based compensation
|
–
|
–
|
–
|
–
|
|
$966
|
$791
|
$1,914
|
$1,534
|
|
The employee benefit cost is recognized in the following line items in the statement of comprehensive income:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Cost of sales
|
$849
|
$688
|
$1,685
|
$1,338
|
|
Selling and marketing expenses
|
74
|
66
|
145
|
125
|
|
Administrative expenses
|
43
|
37
|
84
|
71
|
|
$966
|
$791
|
$1,914
|
$1,534
|
|
2.13 Equity
Share capital and share premium
The company has only one class of shares referred to as equity shares having a par value of $0.16. The amount received in excess of the par value has been classified as share premium. Additionally, share-based compensation recognized in net profit in the statement of comprehensive income is credited to share premium. 2,833,600 shares were held by controlled trusts, each as of September 30, 2011 and March 31, 2011.
Retained earnings
Retained earnings represent the amount of accumulated earnings of the company.
Other components of equity
Other components of equity consist of currency translation and fair value changes on available-for-sale financial assets.
The company’s objective when managing capital is to safeguard its ability to continue as a going concern and to maintain an optimal capital structure so as to maximize shareholder value. In order to maintain or achieve an optimal capital structure, the company may adjust the amount of dividend payment, return capital to shareholders, issue new shares or buy back issued shares. As of September 30, 2011, the company had only one class of equity shares and had no debt. Consequent to the above capital structure there are no externally imposed capital requirements.
The rights of equity shareholders are set out below.
2.13.1 Voting
Each holder of equity shares is entitled to one vote per share. The equity shares represented by American Depositary Shares (ADS) carry similar rights to voting and dividends as the other equity shares. Each ADS represents one underlying equity share.
2.13.2 Dividends
The company declares and pays dividends in Indian rupees. Indian law mandates that any dividend be declared out of accumulated distributable profits only after the transfer to a general reserve of a specified percentage of net profit computed in accordance with current regulations. The remittance of dividends outside India is governed by Indian law on foreign exchange and is subject to applicable taxes.
The amount of per share dividend recognized as distributions to equity shareholders for the six months ended September 30, 2011 and September 30, 2010 was $0.45 (20.00) and $0.33 (15.00), respectively.
20.00) and $0.33 (15.00), respectively.The company’s board of directors, in its meeting on October 12, 2011, declared an interim dividend of approximately $0.31 (15.00) per equity share which will result in a cash outflow of approximately $204 million, inclusive of corporate dividend tax of $29 million.
15.00) per equity share which will result in a cash outflow of approximately $204 million, inclusive of corporate dividend tax of $29 million.2.13.3 Liquidation
In the event of liquidation of the company, the holders of shares shall be entitled to receive any of the remaining assets of the company, after distribution of all preferential amounts. However, no such preferential amounts exist currently, other than the amounts held by irrevocable controlled trusts. The amount that would be distributed to the shareholders in the event of liquidation of the company would be in proportion to the number of equity shares held by the shareholders. For irrevocable controlled trusts, the corpus would be settled in favor of the beneficiaries.
2.13.4 Share options
There are no voting, dividend or liquidation rights to the holders of options issued under the company's share option plans.
As at September 30, 2011 and March 31, 2011, the Company had 40,203 and 98,790 number of shares reserved for issue under the 1998 and 1999 employee stock option plans, respectively.
2.14 Other income
Other income consists of the following:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
||||
|
2011
|
2010
|
2011
|
2010
|
||
|
Interest income on deposits and certificates of deposit
|
$88
|
$55
|
$175
|
$107
|
|
|
Exchange gains / (losses) on forward and options contracts
|
(58)
|
11
|
(49)
|
(6)
|
|
|
Exchange gains / (losses) on translation of other assets and liabilities
|
52
|
(10)
|
53
|
3
|
|
|
Income from available-for-sale financial assets / investments
|
2
|
–
|
3
|
5
|
|
|
Others
|
1
|
1
|
2
|
1
|
|
|
$85
|
$57
|
$184
|
$110
|
||
2.15 Operating leases
The company has various operating leases, mainly for office buildings, that are renewable on a periodic basis. Rental expense for operating leases was $10 million and $8 million for the three months ended September 30, 2011 and September 30, 2010, respectively, and $19 million and $15 million for the six months ended September 30, 2011 and September 30, 2010, respectively.
The schedule of future minimum rental payments in respect of non-cancellable operating leases is set out below:
(Dollars in millions)
|
As of
|
||
|
September 30, 2011
|
March 31, 2011
|
|
|
Within one year of the balance sheet date
|
$28
|
$25
|
|
Due in a period between one year and five years
|
$53
|
$56
|
|
Due after five years
|
$16
|
$16
|
The operating lease arrangements extend up to a maximum of ten years from their respective dates of inception and relate to rented overseas premises. Some of these lease agreements have price escalation clauses.
2.16 Employees' Stock Option Plans (ESOP)
1998 Employees Stock Option Plan (the 1998 Plan): The company’s 1998 Plan provides for the grant of non-statutory share options and incentive share options to employees of the company. The establishment of the 1998 Plan was approved by the Board of Directors in December 1997 and by the shareholders in January 1998. The Government of India has approved the 1998 Plan, subject to a limit of 11,760,000 equity shares representing 11,760,000 ADS to be issued under the 1998 Plan. All options granted under the 1998 Plan are exercisable for equity shares represented by ADSs. The options under the 1998 Plan vest over a period of one through four years and expire five years from the date of completion of vesting. The 1998 Plan is administered by a compensation committee comprising four members, all of whom are independent members of the Board of Directors. The term of the 1998 Plan ended on January 6, 2008, and consequently no further shares will be issued to employees under this plan.
1999 Employees Stock Option Plan (the 1999 Plan): In fiscal 2000, the company instituted the 1999 Plan. The Board of Directors and shareholders approved the 1999 Plan in June 1999. The 1999 Plan provides for the issue of 52,800,000 equity shares to employees. The 1999 Plan is administered by a compensation committee comprising four members, all of whom are independent members of the Board of Directors. Under the 1999 Plan, options will be issued to employees at an exercise price, which shall not be less than the fair market value (FMV) of the underlying equity shares on the date of grant. Under the 1999 Plan, options may also be issued to employees at exercise prices that are less than FMV only if specifically approved by the shareholders of the company in a general meeting. All options under the 1999 Plan are exercisable for equity shares. The options under the 1999 Plan vest over a period of one through six years, although accelerated vesting based on performance conditions is provided in certain instances and expire over a period of 6 months through five years from the date of completion of vesting. The term of the 1999 plan ended on June 11, 2009, and consequently no further shares will be issued to employees under this plan.
The activity in the 1998 Plan and 1999 Plan during the six months ended September 30, 2011 and September 30, 2010 are set out below.
|
Six months ended September 30, 2011
|
Six months ended September 30, 2010
|
|||
|
Shares arising
out of options
|
Weighted average
exercise price
|
Shares arising
out of options
|
Weighted average
exercise price
|
|
|
1998 Plan:
|
||||
|
Outstanding at the beginning
|
50,070
|
$15
|
242,264
|
$14
|
|
Forfeited and expired
|
–
|
–
|
(2,406)
|
$17
|
|
Exercised
|
(36,510)
|
$16
|
(116,319)
|
$12
|
|
Outstanding at the end
|
13,560
|
$14
|
123,539
|
$15
|
|
Exercisable at the end
|
13,560
|
$14
|
123,539
|
$15
|
|
1999 Plan:
|
||||
|
Outstanding at the beginning
|
48,720
|
$22
|
204,464
|
$19
|
|
Forfeited and expired
|
(7,064)
|
$10
|
(11,425)
|
$10
|
|
Exercised
|
(15,013)
|
$12
|
(93,163)
|
$13
|
|
Outstanding at the end
|
26,643
|
$28
|
99,876
|
$26
|
|
Exercisable at the end
|
22,388
|
$25
|
91,388
|
$24
|
The weighted average share price of options exercised under the 1998 Plan during the six months ended September 30, 2011 and September 30, 2010 were $59.84 and $61.46, respectively. The weighted average share price of options exercised under the 1999 Plan during the six months ended September 30, 2011 and September 30, 2010 were $57.47 and $60.72, respectively.
The cash expected to be received upon the exercise of vested options for the 1998 Plan and 1999 Plan is less than $1 million and $1 million, respectively.
The following table summarizes information about share options outstanding and exercisable as of September 30, 2011:
|
|
Options outstanding
|
Options exercisable
|
||||
|
Range of exercise prices
per share ($)
|
No. of shares arising
out of options
|
Weighted average
remaining contractual life |
Weighted average
exercise price |
No. of shares arising
out of options |
Weighted average
remaining contractual life |
Weighted average
exercise price |
|
1998 Plan:
|
||||||
|
4-15
|
6,310
|
0.45
|
$11
|
6,310
|
0.45
|
$11
|
|
16-30
|
7,250
|
0.24
|
$18
|
7,250
|
0.24
|
$18
|
|
13,560
|
0.34
|
$14
|
13,560
|
0.34
|
$14
|
|
|
1999 Plan:
|
||||||
|
5-15
|
12,384
|
0.39
|
$9
|
12,384
|
0.39
|
$9
|
|
16-53
|
14,259
|
1.21
|
$43
|
10,004
|
1.21
|
$43
|
|
26,643
|
0.83
|
$28
|
22,388
|
0.76
|
$25
|
|
The following table summarizes information about share options outstanding and exercisable as of March 31, 2011:
|
|
Options outstanding
|
Options exercisable
|
||||
|
Range of exercise prices
per share ($)
|
No. of shares arising
out of options |
Weighted average
remaining contractual life |
Weighted average
exercise price |
No. of shares arising
out of options |
Weighted average
remaining contractual life |
Weighted average
exercise price |
|
1998 Plan:
|
||||||
|
4-15
|
24,680
|
0.73
|
$13
|
24,680
|
0.73
|
$13
|
|
16-30
|
25,390
|
0.56
|
$17
|
25,390
|
0.56
|
$17
|
|
50,070
|
0.65
|
$15
|
50,070
|
0.65
|
$15
|
|
|
1999 Plan:
|
||||||
|
5-15
|
33,759
|
0.65
|
$10
|
33,759
|
0.65
|
$10
|
|
16-53
|
14,961
|
1.71
|
$48
|
6,473
|
1.71
|
$48
|
|
48,720
|
0.97
|
$22
|
40,232
|
0.82
|
$16
|
|
The share-based compensation recorded for each of the three months and six months ended September 30, 2011 and September 30, 2010 was nil.
2.17 Income taxes
Income tax expense in the statement of comprehensive income comprises:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
||||
|
2011
|
2010
|
2011
|
2010
|
||
|
Current taxes
|
|||||
|
Domestic taxes
|
$123
|
$103
|
$231
|
$197
|
|
|
Foreign taxes
|
49
|
37
|
91
|
64
|
|
|
172
|
140
|
322
|
261
|
||
|
Deferred taxes
|
|||||
|
Domestic taxes
|
(5)
|
(8)
|
(5)
|
(9)
|
|
|
Foreign taxes
|
(3)
|
3
|
(3)
|
(6)
|
|
|
(8)
|
(5)
|
(8)
|
(15)
|
||
|
Income tax expense
|
$164
|
$135
|
$314
|
$246
|
|
Entire deferred income tax for the three months and six months ended September 30, 2011 and September 30, 2010 relates to origination and reversal of temporary differences.
A reversal of deferred tax liability of $1 million each during the three months and six months ended September 30, 2011 relating to an available-for-sale financial asset has been recognized in other comprehensive income. For the three months ended September 30, 2010 a deferred tax liability of $1 million has been recognized in other comprehensive income (Refer Note 2.2).
A reconciliation of the income tax provision to the amount computed by applying the statutory income tax rate to the income before income taxes is summarized below:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Profit before income taxes
|
$575
|
$509
|
$1,109
|
$946
|
|
Enacted tax rates in India
|
32.45%
|
33.22%
|
32.45%
|
33.22%
|
|
Computed expected tax expense
|
187
|
169
|
360
|
314
|
|
Tax effect due to non-taxable income for Indian tax purposes
|
(49)
|
(59)
|
(98)
|
(108)
|
|
Overseas taxes
|
26
|
20
|
50
|
40
|
|
Tax reversals
|
–
|
–
|
–
|
(3)
|
|
Effect of exempt income
|
(1)
|
–
|
(1)
|
(1)
|
|
Effect of unrecognized deferred tax assets
|
2
|
–
|
3
|
1
|
|
Effect of differential overseas tax rates
|
(1)
|
–
|
(1)
|
–
|
|
Effect of non-deductible expenses
|
2
|
1
|
2
|
2
|
|
Others
|
(2)
|
4
|
(1)
|
1
|
|
Income tax expense
|
$164
|
$135
|
$314
|
$246
|
The applicable Indian statutory tax rate for fiscal 2012 and fiscal 2011 is 32.45% and 33.22%, respectively. The decrease in the applicable statutory tax rate is consequent to changes made in the Finance Act 2011.
The foreign tax expense is due to income taxes payable overseas, principally in the United States of America. The company benefits from certain significant tax incentives provided to software firms under Indian tax laws. These incentives include those for facilities set up under the Special Economic Zones Act, 2005 and software development facilities designated as "Software Technology Parks" (the STP Tax Holiday). The STP Tax Holiday was available for ten consecutive years, beginning from the financial year when the unit started producing computer software or April 1, 1999, whichever is earlier. The Indian Government, through the Finance Act, 2009, had extended the tax holiday for the STP units until fiscal 2011. The tax holiday for all of our STP units expired as of March 31, 2011. Under the Special Economic Zones Act, 2005 scheme, units in designated special economic zones which begin providing services on or after April 1, 2005 are eligible for a deduction of 100 percent of profits or gains derived from the export of services for the first five years from commencement of provision of services and 50 percent of such profits or gains for a further five years. Certain tax benefits are also available for a further period of five years subject to the unit meeting defined conditions.
As a result of these tax incentives, a portion of the company’s pre-tax income has not been subject to tax in recent years. These tax incentives resulted in a decrease in income tax expense of $49 million and $59 million for the three months ended September 30, 2011 and September 30, 2010, respectively, and $98 million and $108 million, for the six months ended September 30, 2011 and September 30, 2010, respectively. The per share effect of these tax incentives is $0.09 and $0.10 for the three months ended September 30, 2011 and September 30, 2010, respectively, and $0.17 and $0.19 for the six months ended September 30, 2011 and September 30, 2010, respectively.
Infosys is subject to a 15% Branch Profit Tax (BPT) in the U.S. to the extent its U.S. branch's net profit during the year is greater than the increase in the net assets of the U.S. branch during the fiscal year, computed in accordance with the Internal Revenue Code. As of March 31, 2011, Infosys' U.S. branch net assets amounted to approximately $594 million. As of September 30, 2011, the company has provided for branch profit tax of $40 million for its U.S branch, as the company estimates that these branch profits are expected to be distributed in the foreseeable future.
Deferred income tax liabilities have not been recognized on temporary differences amounting to $262 million and $308 million as of September 30, 2011 and March 31, 2011, respectively, associated with investments in subsidiaries and branches as it is probable that the temporary differences will not reverse in the foreseeable future.
The gross movement in the current income tax asset / (liability) for the three months and six months ended September 30, 2011 and September 30, 2010 is as follows:
(Dollars in millions)
|
Three months ended September 30,
|
Six months ended September 30,
|
|||
|
2011
|
2010
|
2011
|
2010
|
|
|
Net current income tax asset / (liability) at the beginning
|
$(12)
|
$(85)
|
$40
|
$(13)
|
|
Translation differences
|
4
|
(2)
|
2
|
(1)
|
|
Income tax paid
|
161
|
169
|
261
|
217
|
|
Current income tax expense (Refer Note 2.17)
|
(172)
|
|||