2 Material accounting policies
2.1 Statement of compliance
The financial statements (herein referred as 'financial
statements') of Firstsource Solutions Limited ('the
Company') are prepared in accordance with Ind AS
as per the provisions of the Act (to the extent notified).
The Ind AS are prescribed under Section 133 of the Act
read with Rule 3 of the Companies (Indian Accounting
Standards) Rules, 2015 and relevant amendment rules
issued thereunder.
2.2 Use of estimates
The preparation of the financial statements in conformity
with Ind AS requires management to make estimates
and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent
liabilities on the date of the financial statements and
the reported amount of income and expenses for the
period. Management believes that the estimates made
in the preparation of financial statements are prudent
and reasonable. Actual results could differ from those
estimates. Any revisions to accounting estimates are
recognized prospectively in current and future periods.
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 2.2.1.
2.2.1 Critical accounting estimates
a) Income taxes
The Company's major tax jurisdiction is India.
Significant judgments are involved in determining the
provision for income taxes, including amount expected
to be paid / recovered for uncertain tax positions. Also
refer to Note 2.9.
b) Property, plant and equipment
The charge in respect of periodic depreciation is
derived after determining an estimate of an asset's
expected useful life and the expected residual value at
the end of its life. The useful lives and residual values of
the Company's assets are determined by management
at the time the asset is acquired, and are reviewed
periodically, including at each financial year end. The
lives are based on historical experience with similar
assets as well as anticipation of future events, which
may impact their life, such as changes in technology.
c) Leases
The Company evaluates if an arrangement qualifies to
be a lease as per the requirements of Ind AS 116 and
identification of lease requires significant judgment.
Ind AS 116 additionally requires lessees to determine
the lease term as the non-cancellable period of lease
adjusted with any option to extend or terminate the lease,
if the use of such option is reasonably certain. The
Company makes an assessment on the expected lease
term on a lease-by-lease basis and thereby assesses
whether it is reasonably certain that any options to
extend or terminate the contract will be exercised. In
evaluating the lease term, the Company considers
factors such as any significant leasehold improvements
undertaken over the lease term, costs relating to the
termination of the lease and the importance of the
underlying asset to the Company's operations taking
into account the location of the underlying asset and
the availability of suitable alternatives. The lease term
in the future periods is reassessed to ensure the lease
term reflects the current economic circumstances.
2.3 Revenue recognition
The Company, in its contracts with customers,
promises to transfer distinct services rendered. Each
distinct service, results in a simultaneous benefit to
the corresponding customer. Also, the Company has
an enforeable right to payment from the customer for
the performance completed to date. Revenue from unit
price based contracts is measured by multiplying the
units of output delivered with the agreed transaction
price per unit while in the case of time and material
based contracts, revenue is the product of the efforts
expended and the agreed transaction price per unit.
The Company continually reassesses the estimated
discounts, rebates, price concessions, refunds, credits,
incentives, performance bonuses, etc. (variable
consideration) against each performance obligation
each reporting period and recognises changes to
estimated variable consideration as changes to the
transaction price (i.e. revenue) of the applicable
performance obligation.
Dividend income is recognized when the right to receive
dividend is established.
For all instruments measured either at amortized cost
or at fair value through other comprehensive income,
interest income is recorded using the effective interest
rate (EIR). EIR is the rate that exactly discounts the
estimated future cash payments or receipts over the
expected life of the financial instrument or a shorter
period, where appropriate, to the gross carrying
amount of the financial asset or to the amortised cost
of a financial liability. When calculating the effective
interest rate, the Company estimates the expected
cash flows by considering all the contractual terms
of the financial instrument but does not consider the
expected credit losses.
2.4 Goodwill
Goodwill represents the cost of business acquisition in
excess of the Company'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 Other Comprehensive
Income. Goodwill is measured at cost less accumulated
impairment losses.
2.5 Property, plant and equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and impairment, if any. Cost
includes freight, duties, taxes and incidental expenses
related to acquisition and installation of the property,
plant and equipment. Depreciation on property, plant
and equipment is provided pro-rata to the period of use
based on management's best estimate of useful lives of
the assets as summarized below:
* For these class of assets, based on internal assessment and
independent technical evaluation carried out by external valuers,
the management believes that the useful lives as given above
best represent the period over which management expects to use
these assets. Hence the useful lives for these assets is different
from the useful lives as prescribed under Part C of Schedule II to
the Act.
Depreciation methods, useful lives and residual
values are reviewed periodically at the end of each
financial year.
Borrowing costs are interest and other costs (including
exchange differences arising from foreign currency
borrowings to the extent that they are regarded
as an adjustment to interest costs) incurred by the
Company in connection with the borrowing of funds.
Borrowing costs directly attributable to acquisition or
construction of those property, plant and equipment
which necessarily take a substantial period of time to
get ready for their intended use are capitalized. Other
borrowing costs are recognized as an expense in the
period in which they are incurred.
2.6 Exceptional Items
Exceptional items refer to items of income or expense
within the statement of profit and loss from ordinary
activities which are non-recurring and are of such size,
nature or incidence that their separate disclosure is
considered necessary to explain the performance of
the Company.
2.7 Other intangible assets
I ntangible assets are stated at cost less accumulated
amortization and impairment. 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. Amortization methods and useful lives
are reviewed periodically including at each financial
year end.
* For these class of assets, based on internal assessment and
independent technical evaluation carried out by external valuers,
the management believes that the useful lives as given above
best represent the period over which management expects to use
these assets. Hence the useful lives for these assets is different
from the useful lives as prescribed under Part C of Schedule II to
the Act.
Software purchased is capitalised together with the
related hardware and amortised over the best estimate
of useful life from the date the asset is available for use.
Software product development costs are expensed as
incurred during the research phase until technological
feasibility is established. Software development
costs incurred subsequent to the achievement of
technological feasibility are capitalised and amortised
over the estimated useful life of the products as
determined by the management. This capitalization is
done only if there is an intention and ability to complete
the product, the product is likely to generate future
economic benefits, adequate resources to complete
the product are available and such expenses can be
accurately measured. Such software development costs
comprise expenditure that can be directly attributed,
or allocated on a reasonable and consistent basis, to
the development of the product. The amortization of
software development costs is allocated on a systematic
basis over the best estimate of its useful life after the
product is ready for use. The factors considered for
identifying the basis include obsolescence, product life
cycle and actions of competitors.
The amortisation period and the amortisation method
are reviewed at the end of each reporting period. If
the expected useful life of the product is shorter
from previous estimates, the amortisation period is
changed accordingly.
2.8 Impairment
a) Financial assets
The Company recognizes loss allowances using the
expected credit loss (ECL) model for the financial
assets which are not fair valued through profit and loss.
Loss allowance for trade receivables with no significant
financing component is measured at an amount equal
to lifetime ECL. For all other financial assets, expected
credit losses are measured at an amount equal to the
12 month expected credit losses or at an amount equal
to the life time expected credit losses if the credit risk
on the financial asset has increased significantly since
initial recognition.
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
Company's cash generating units ('CGU') or groups of
CGU's 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
the statement of profit and loss and is not reversed in
the subsequent period.
ii. Intangible assets and property, plant and
equipment
I ntangible 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 the statement of profit
and loss is measured by the amount by which the
carrying value of the assets exceeds the estimated
recoverable amount of the asset. An impairment loss
is reversed in the statement of profit and loss if there
has been a change in the estimates used to determine
the recoverable amount. The carrying amount of the
asset 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.
2.9 Employee benefits
a) Post employment benefits
Gratuity
The Gratuity scheme is a defined benefit plan. The
Company's net obligation in respect of the gratuity
benefit scheme is calculated by estimating the amount
of future benefit that employees have earned in return
for their service in the current and prior periods; that
benefit is discounted to determine its present value,
and the fair value of any plan assets is deducted. The
present value of the obligation under such defined
benefit plan is determined based on actuarial valuation
by an independent actuary using the Projected Unit
Credit Method, which recognises each period of service
as giving rise to additional unit of employee benefit
entitlement and measures each unit separately to build
up the final obligation.
The obligation is measured at the present value of the
estimated future cash flows. The discount rates used
for determining the present value of the obligation
under defined benefit plan are based on the market
yields on Government securities as at the balance
sheet date. The Company recognises the net obligation
of a defined benefit plan in its balance sheet as an asset
or liability. Gains or losses through re-measurement of
the net defined benefit liability / (asset) are recognized
in other comprehensive income and other components
are recognise in the statement of profit and loss. The
actual return of portfolio of plan assets in excess of
yields computed by applying the discount rate used to
measure the defined benefit obligation are recognized
in other comprehensive income. The effects of any
plan amendments are recognized in statement of profit
and loss.
Defined contribution plans
I n accordance with Indian regulations, all employees
receive benefits from a Government administered
provident fund scheme. This is a defined contribution
retirement plan in which both, the Company and the
employee contribute at a determined rate. Monthly
contributions payable to the provident fund are charged
to the statement of profit and loss as incurred.
b) Short-term employee benefits
Short-term employee benefit obligations are measured
on an undiscounted basis and are expensed as the
related service is provided. A liability is recognized for
the amount expected to be paid e.g., under short-term
cash bonus, if the Company has a present legal or
constructive obligation to pay this amount as a result of
past service provided by the employee, and the amount
of obligation can be estimated reliably.
c) Other long-term employee benefits
Compensated absences
Provision for compensated absences cost is made
based on actuarial valuation by an independent actuary.
Where employees of the Company are entitled to
compensated absences, the employees can carry¬
forward a portion of the unutilized accrued compensated
absence and utilize it in future periods or receive
cash compensation at termination of employment for
the unutilised accrued compensated absence. The
Company records an obligation for compensated
absences in the period in which the employee renders
the services that increases this entitlement.
The Company measures the expected cost of
compensated absences as the additional amount that
the Company expects to pay as a result of the unused
entitlement that has accumulated at the balance
sheet date.
d) Share-based compensation
The Company operates equity-settled, share-based
compensation plans. The fair value of the employee
services received in exchange for the granting of
the options and the discount on the shares granted
are recognized as an expense, together with a
corresponding increase in equity, over the period in
which the performance and / or service conditions
are fulfilled, ending on the date on which the relevant
employees become fully entitled to the award (i.e.
the vesting date). Non-market vesting conditions are
included in assumptions about the number of options
that are expected to become exercisable. On each
balance sheet date, the Group revises its estimates
of the number of options that are expected to become
exercisable. The impact of the revision of original
estimates, if any, is recognized immediately in the
Statement of Profit and Loss, with a corresponding
adjustment to equity.
2.10 Income taxes
I ncome tax expense comprises current tax expense
and the net change in the deferred tax asset or
liability during the period. Current tax and deferred
tax are recognized in the statement of profit and loss,
except when they relate to items that are recognized
in other comprehensive income or directly in equity,
in which case, the current and deferred tax are also
recognized in other comprehensive income or directly
in equity, respectively.
Current income taxes
The current income tax expense includes income taxes
payable by the Company and its overseas branch. The
current tax payable is after taking credit for tax relief
available for export operations in Special Economic
Zones (SEZs).
Advance taxes and provisions for current income taxes
are presented in the balance sheet after off-setting
advance tax paid and income tax provision arising in
the same tax jurisdiction and where the relevant tax
paying units intend to settle the asset and liability on a
net basis.
Deferred income taxes
Deferred income tax is recognized using the balance
sheet approach. Deferred income tax assets and
liabilities are recognized for deductible and taxable
temporary differences arising between the tax base
of assets and liabilities and their carrying amount,
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 income tax assets are recognized to the extent
that it is probable that taxable profit will be available
against which the deductible temporary differences and
the carry forward of unused tax credits and unused tax
losses can be recognized.
The carrying amount of deferred income tax assets
is reviewed at each reporting date and reduced to
the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the
deferred income tax asset to be recognized. Deferred
income tax liabilities are recognized for all taxable
temporary differences except in respect of taxable
temporary differences associated with investments
in subsidiaries where the timing of the reversal of
the temporary difference can be controlled and it is
probable that the temporary difference will not reverse
in the foreseeable future.
The carrying amount of deferred income tax assets is
reviewed at each reporting date and reduced to the
extent that it is no longer probable that sufficient taxable
profit will be available to allow all or part of the deferred
income tax asset to be recognized.
Deferred tax assets and liabilities are measured using
substantively enacted tax rates expected to apply to
taxable income in the years in which the temporary
differences are expected to be settled.
For operations carried out in SEZs, deferred tax
assets or liabilities, if any, have been established for
the tax consequences of those temporary differences
between the carrying values of assets and liabilities
and their respective tax bases that reverse after the tax
holiday ends.
Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation
authority and the relevant entity intends to settle its
current tax assets and liabilities on a net basis.
Deferred tax assets include Minimum Alternative Tax
(MAT) paid in accordance with the tax laws in India,
which is likely to give future economic benefits in the
form of availability of set-off against future income tax
liability. Accordingly, MAT is recognized as deferred
tax asset in the balance sheet when the asset can
be measured reliably and it is probable that the
future economic benefit associated with the asset will
be recognized.
Tax benefits acquired as part of business combination,
but not satisfying the criteria for separate recognition
at that date, are recognized subsequently if new
information about facts and circumstances change.
Acquired deferred tax benefits recognized within
the measurement period reduce goodwill related to
that acquisition if they result from new information
obtained about facts and circumstances existing at the
acquisition date. All other acquired tax benefits realized
are recognized in the statement of profit and loss.
2.11 Leases
The Company enters into contract as a lessee for
assets taken on lease. The Company at the inception
of a contract assesses whether the contract contains
a lease by conveying the right to control the use of
an identified asset for a period of time in exchange
for consideration. A Right-of-use asset is recognized
representing its Right-of-use the underlying asset for
the lease term at the lease commencement date except
in case of short-term leases with a term of twelve months
or less and low value leases which are accounted as
an operating expense on a straight-line basis over the
lease term. The cost of the right-of-use asset measured
at inception shall comprise of the amount of the initial
measurement of the lease liability adjusted for any
lease payments made at or before the commencement
date less any lease incentives received, plus any initial
direct costs incurred. Whenever the Company incurs
an obligation for costs to dismantle and remove a
leased asset, restore the site on which it is located or
restore the underlying asset to the conditions required
by the terms and conditions of the lease, a provision
for costs are included in the related Right-of-use asset.
The Right-of-use assets is subsequently measured at
cost less any accumulated depreciation, accumulated
impairment losses, if any and adjusted for any
remeasurement of the lease liability. The Right-of-use
assets is depreciated using the straight-line method
from the commencement date over the shorter of lease
term or useful life of right-of-use asset. Right-of-use
assets are tested for impairment whenever there is
any indication that their carrying amounts may not be
recoverable. Impairment loss, if any, is recognized in
the statement of profit and loss.
The Company measures the lease liability at the present
value of the lease payments that are not paid at the
commencement date of the lease. The lease payments
are discounted using the interest rate implicit in the
lease and if that rate cannot be readily determined the
Company uses the incremental borrowing rate in the
country of domicile of the leases. The lease payments
shall include fixed payments, variable lease payments,
where the Company is reasonably certain to exercise
that option and payments of penalties for terminating
the lease, if the lease term reflects the lessee exercising
an option to terminate the lease. Obligation under
finance lease are secured by way of hypothecation
of underlying fixed assets taken on lease. Lease
payments have been disclosed under cash flow from
financing activities.
Certain lease arrangements includes the option to
extend or terminate the lease before the end of the lease
term. Right-of-use assets and lease liabilities includes
these options when it is reasonably certain that they will
be exercised. The lease liabilities are remeasured with
a corresponding adjustment to the related Right-of-use
asset if the Company changes its assessment whether
it will exercise an extension or a termination option.
2.12 Foreign currency
Functional currency and peresentation
currency
The financial statements of the Company are presented
in the Indian Rupee ('INR') which is also the functional
currency of the Company (excluding its foreign branch)
whereas the functional currency of the foreign branch is
the currency of their country of domicile.. The numbers
are rounded off to millions: one million equals to
ten lakhs.
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 profit and loss. 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.
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.
Gains or losses on Revenue from operations including
gains or losses on derivative transactions are accounted
in other operating income and gains or losses other
than on Revenue from operations are accounted in
Other Income.
The translation of financial statements of the foreign
branch to the presentation currency 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.
2.13 Earnings per equity share
The basic earnings per equity share is computed by
dividing the net profit or loss for the period attributable
to the equity shareholders by the weighted average
number of equity shares outstanding during the
reporting period. The number of shares used in
computing diluted earnings per share comprises the
weighted average number of shares considered for
deriving basic earnings per share, and also the weighted
average number of equity shares which may be issued
on the conversion of all dilutive potential shares, unless
the results would be anti-dilutive.
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