2 SUMMARY OF MATERIAL ACCOUNTING POLICIES
2.1 BASIS OF PREPARATION & PRESENTATION OF STANDALONE FINANCIAL
STATEMENTS
a. Statement of compliance
These standalone financial statements have been prepared in accordance with Indian Accounting
Standards ("Ind AS") prescribed under Section 133 of the Companies Act, 2013 ('the Act') read with
Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015 and Companies (Indian Accounting
Standards) Amendment Rules, 2016 as amended from time to time and presentation requirements of
Division II of Schedule III to the Companies Act, 2013, (Ind AS compliant Schedule III), as applicable to
the financial statements and other provisions of the Act.
b. Basis of measurement
The standalone financial statements have been prepared on a historical cost convention, on a going
concern and on an accrual basis, except for certain financial instruments which are measured at fair
values or amortised cost at the end of each reporting period. Historical cost is generally based on
the fair value of the consideration given in exchange for goods and services. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Fair value for measurement and/or disclosure purpose in
these financial statements is determined on such a basis, except for share based payment transactions
that are within the scope of Ind AS 102 Share-based Payments, leasing transactions that are within the
scope of Ind AS 116 Leases, and measurements that have some similarities to fair value but are not
fair value, such as 'value in use', in Ind AS 36 Impairment of assets. Also, net defined benefit - assets /
liabilities is valued at fair value of plan assets less present value of defined benefit obligation.
All assets and liabilities have been classified as current and non-current as per the Company's normal
operating cycle. The operating cycle is the time between deployment of resources and the realization
in cash or cash equivalents of the consideration for such services rendered. The Company's normal
operating cycle is twelve months.
Current/ Non-current classification:
The Company classifies an asset as current asset when:
- it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
- it holds the asset primarily for the purpose of trading;
- it expects to realise the asset within twelve months after the reporting period; or
- the asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used
to settle a liability for at least twelve months after the reporting period.
All other assets are classified as non-current.
A liability is classified as current when -
- it expects to settle the liability in its normal operating cycle;
- it holds the liability primarily for the purpose of trading;
- the liability is due to be settled within twelve months after the reporting period; or
- it does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period. Terms of a liability that could, at the option of
the counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
All other liabilities are classified as non-current.
c. Functional and presentation currency
Items included in the standalone financial statements of the Company are measured using the currency
of the primary economic environment in which the Company operates (i.e. the "functional currency").
The standalone financial statements are presented in Indian Rupee, the national currency of India,
which is the functional currency of the Company. The functional currency of its branches is as per its
respective domicile currency.
All amounts rounded off to the nearest Rupees (?) in Lakhs except per share data and unless otherwise
indicated. Transactions and balances with value below rounding off norm adopted by the Company
have been reflected as '-' in relevant notes to the financial statements (as applicable).
d. Use of judgement, estimates and assumptions
The preparation of the standalone financial statements in conformity with Ind AS requires the
management to make judgements, estimates and assumptions considered in the reported amounts
of assets and liabilities and disclosure relating to contingent liabilities as at the date of financial
statement and the reported amounts of income and expenditure during the reported year. Estimates
and underlying assumptions are reviewed on a periodic basis. Revisions to accounting estimates are
recognized in the period in which the estimates are revised and future periods affected.
In particular, information about significant areas of estimation, uncertainty and critical judgments in
applying accounting policies that have the most significant effect on the amounts recognized in the
standalone financial statements is included in the following notes:
i) Impairment testing
Investments in goodwill are tested for impairment annually and when events occur or changes in
circumstances indicate that the recoverable amount of the asset or cash generating units to which
these pertain is less than its carrying value. The recoverable amount of cash generating units is
higher of value-in-use and fair value less cost to dispose. The calculation of value in use of a cash
generating unit involves use of significant estimates and assumptions which includes turnover and
earnings multiples, growth rates and net margins used to calculate projected future cash flows,
risk-adjusted discount rate, future economic and market conditions.
ii) Depreciation and amortisation
Depreciation and amortisation is based on management estimates of the future useful lives of
certain class of property, plant and equipment and intangible assets. Estimates may change due
to technological developments, competition, changes in market conditions and other factors
and may result in changes in the estimated useful life and in the depreciation and amortisation
charges.
iii) Revenue recognition
Refer note 2.2(I)(b)
iv) Expected credit losses on financial assets
The impairment provisions of financial assets are based on assumptions about risk of default and
expected timing of collection. The Company estimates the probability of collection of accounts
receivable by analyzing historical payment patterns, customer concentrations, customer credit
worthiness and current economic trends. If the financial condition of a customer deteriorates,
additional allowances may be required. The policy for the same has been explained under
Note-2.2(r)
v) Contingent liabilities
Refer note-2.2(t).
vi) Income taxes and deferred taxes
The primary tax jurisdiction for the Company is India. Judgments are involved in determining the
provision for income taxes including judgment on whether tax positions are probable of being
sustained in tax assessments. A tax assessment can involve complex issues, which can only be
resolved over extended time periods. Deferred tax is recorded on temporary differences between
the tax bases of assets and liabilities and their carrying amounts at the rates that have been
enacted or substantively enacted at the reporting date. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable profits during the periods in which
those temporary differences and tax loss carry forwards become deductible. The Company
considers the expected reversal of deferred tax liabilities and projected future taxable income in
making this assessment. The amount of the deferred tax assets considered realizable, however,
could be reduced in the near term if estimates of future taxable income during the carry-forward
period are reduced. The policy for the same has been explained under Note 2.2 (j)
vii) Leases
The Company assesses at the lease commencement date whether it is reasonably certain to
exercise the extension options. The Company assesses whether it is reasonable certain to exercise
the options if there is a significant event or significant changes in circumstances within the
control. The policy for the same has been explained under note 2.2(f).
viii) Other estimates
The preparation of standalone financial statements involves estimates and assumptions that affect
the reported amount of assets, liabilities, disclosure of contingent liabilities at the date of financial
statements and the reported amount of revenues and expenses for the reporting period.
The stock compensation expense is determined based on the Company's estimate of equity
instruments that will eventually vest.
Fair valuation of derivative hedging instruments designated as cash flow hedges involves
significant estimates relating to the occurrence of forecasted transaction.
2.2 SUMMARY OF MATERIAL ACCOUNTING POLICIES
a. Investment in subsidiaries
Investment in subsidiaries is measured at cost less impairment as per Ind AS 27. Dividend income from
subsidiaries is recognised when its right to receive the dividend is established.
b. Property, plant and equipment
Property, plant and equipment are measured at cost less accumulated depreciation and impairment
losses, if any. Cost includes expenditures directly attributable to the acquisition of the asset. Cost of
an item of property, plant and equipment (including capital work in progress) comprises its purchase
price, including import duties and non-refundable purchase taxes, after deducting trade discounts and
rebates, any directly attributable costs of bringing the item to it working condition for its intended use.
When parts of an item of property, plant and equipment have different useful lives, they are accounted
for as separate items (major components) of property, plant and equipment. Subsequent expenditure
relating to property, plant and equipment is capitalized only when it is probable that future economic
benefits associated with these will flow to the Company and the cost of the item can be measured
reliably. Repairs and maintenance costs are recognized in the statement of profit and loss when
incurred.
An item of property, plant and equipment is derecognized upon disposal or when no future economic
benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the
disposal or retirement of an item of property, plant and equipment is determined as the difference
between the sales proceeds and the carrying amount of the asset and is recognized in the statement
of profit and loss.
c. Capital work-in-progress
Amounts paid towards the acquisition of property, plant and equipment outstanding as of each
reporting date and the cost of property, plant and equipment not ready for intended use before such
date are disclosed under capital advances and capital work-in-progress respectively.
d. Inventories
Inventories are measured at the lower of cost and the net realizable value. Adjustments to reduce the
cost of inventory to its realisable value, if required, are made at the product level. Factors influencing
these adjustments include changes in demand, rapid technological changes, product life cycle, product
pricing, and other issues. Revisions to these adjustments would be required if these factors differ from
the estimates.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated
cost necessary to make the sale.
e. Depreciation/ Amortisation
Depreciation is calculated on the cost of property, plant and equipment less their estimated residual
values and is generally recognised in the statement of profit and loss.
Depreciation has been provided on buildings and plant and equipments on the straight line method
and on furniture and fixtures and office equipments on the written down method, as per the useful life
prescribed in Schedule II of the Companies Act, 2013. Depreciation on additions/(disposals) is provided
from/ (upto) the date on which asset is ready for use/ (disposed off).
Straight-line method
Asset class Useful life
Buildings 60 years
Plant and machinery (Hardware) 3 years
Plant and machinery (Others) 15 years
Lease hold land lease term
Lease hold improvements lease term
Written down method
Asset class Depreciation rate
Furniture and fixtures 25.88%
Office equipments 45.07%
Vehicles 31.23%
The residual values, useful lives and methods of depreciation of property, plant and equipment are
reviewed at each financial year end and adjusted prospectively, if appropriate. The Company assesses
at each balance sheet date whether there is objective evidence that a asset or a Company of assets
is impaired. An asset's carrying amount is written down immediately to its recoverable amount if the
asset's carrying amount is greater than its estimated recoverable amount.
f. Leases
The Company's lease asset classes primarily consist of leases for land and buildings. The Company,
at the inception of a contract, assesses whether the contract is a lease or not lease. A contract is, or
contains, a lease if the contract conveys the a) contract involves the use of identified asset; b) Company
has right to direct the use of the asset; c) the Company has substantially all the economic benefits from
the use of asset through period of lease.
The Company recognises a right-of-use asset and a lease liability at the lease commencement date.
The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease
liability adjusted for any lease payments made at or before the commencement date, plus any initial
direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to
restore the underlying asset or the site on which it is located, less any lease incentives received. 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 asset is subsequently depreciated using the straight-line method from the
commencement date to the end of the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid
at the commencement date, discounted using the Company's incremental borrowing rate. It is
remeasured when there is a change in future lease payments arising from a change in an index or rate,
if there is a change in the Company's estimate of the amount expected to be payable under a residual
value guarantee, or if the Company changes its assessment of whether it will exercise a purchase,
extension or termination option. When the lease liability is remeasured in this way, a corresponding
adjustment is made to the carrying amount of the right-of-use asset, or is recorded in statement of
profit and loss if the carrying amount of the right-of-use asset has been reduced to zero.
The Company has elected not to recognise right-of-use assets and lease liabilities for short-term
leases that have a lease term of 12 months or less and leases of low-value assets (assets of less than
f 500,000 in value). The Company recognises the lease payments associated with these leases as an
expense over the lease term.
g. Financial Instruments
Trade receivables are initially recognised when they are originated. All other financial assets and
financial liabilities are initially recognised when the Company becomes a party to the contractual
provisions of the instrument.
All financial instruments (unless it is a trade receivable without a significant financing component)
are recognised initially at fair value. Transaction costs that are attributable to the acquisition of the
financial asset (other than financial assets recorded at fair value through profit or loss) are included in
the fair value of the financial assets. Purchase or sale of financial assets that require delivery of assets
within a time frame established by regulation or convention in the market place (regular way trade)
are recognised on trade date. Loans and borrowings and payables are recognised net of directly
attributable transaction costs. A trade receivable without a significant financing component is initially
measured at the transaction price.
For the purpose of subsequent measurement, financial instruments of the Company are classified in
the following categories: non-derivative financial assets comprising amortised cost, debt instruments
at fair value through other comprehensive income (FVTOCI), equity instruments at FVTOCI or fair value
through profit and loss account (FVTPL), non derivative financial liabilities at amortised cost or FVTPL and
derivative financial instruments (under the category of financial assets or financial liabilities) at FVTPL.
The classification of financial instruments depends on the objective of the business model for which it
is held. Management determines the classification of its financial instruments at initial recognition.
Non-derivative financial assets
i. Financial assets at amortised cost
A financial asset shall be measured at amortised cost if both of the following conditions are met:
(a) the financial asset is held within a business model whose objective is to hold financial assets
in order to collect contractual cash flows; and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest (SPPI) on the principal amount outstanding. For the
purposes of this assessment, 'principal' is defined as the fair value of the financial asset on
initial recognition. 'Interest' is defined as consideration for the time value of money and for
the credit risk associated with the principal amount outstanding during a particular period
of time and for other basic lending risks and costs (e.g. liquidity risk and administrative
costs), as well as a profit margin. In assessing whether the contractual cash flows are solely
payments of principal and interest, the Company considers the contractual terms of the
instrument. For the purposes of this assessment, 'principal' is defined as the fair value of the
financial asset on initial recognition. 'Interest' is defined as consideration for the time value
of money and for the credit risk associated with the principal amount outstanding during a
particular period of time and for other basic lending risks and costs (e.g. liquidity risk and
administrative costs), as well as a profit margin. In assessing whether the contractual cash
flows are solely payments of principal and interest, the Company considers the contractual
terms of the instrument.
They are presented as current assets, except for those maturing later than 12 months after
the reporting date which are presented as non-current assets. Financial assets are measured
initially at fair value plus transaction costs and subsequently carried at amortized cost using
the effective interest rate method, less any impairment loss.
Financial assets at amortised cost are represented by trade receivables, security deposits,
cash and cash equivalents, employee advances and eligible current and non-current assets.
Cash and cash equivalents:
Cash and cash equivalents comprise cash on hand and in banks and demand deposits with banks
which can be withdrawn at any time without prior notice or penalty on the principal.
For the purposes of the cash flow statement, cash and cash equivalents include cash on hand and
in banks and demand deposits with banks, net of outstanding bank overdrafts that are repayable
on demand and book overdraft which are considered part of the Company's cash management
system.
ii. Financial assets at fair value through other comprehensive income (FVTOCI)
For assets, if it is held within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets and where the Company has exercised the
option to classify the equity investment as at FVTOCI, all fair value changes on the investment
are recognised in other comprehensive income (OCI). The accumulated gains or losses on such
investments are not recycled to the statement of profit and loss even on sale of such investment.
Impairment losses (and reversal of impairment losses) on equity investments measured at FVTOCI
are not reported separately from other changes in fair value. Dividends are recognised as income
in statement of profit and loss unless the dividend clearly represents a recovery of part of the cost
of the investment. Other net gains and losses are recognised in OCI and are not reclassified to
statement of profit and loss.
iii. Financial assets at fair value through profit and loss (FVTPL)
Financial assets which is not classified in any of the above category is measured at FVTPL. These
include surplus funds invested in mutual funds etc.
Financial assets included within the FVTPL category are measured at fair values at each reporting
date with all changes recorded in the statement of profit and loss.
Financial assets are not reclassified subsequently unless if there is a change in the business model
for managing those assets. Changes to the business model are expected to be infrequent. A
change in the business model occurs when the Company either begins or ceases to perform an
activity that is significant to its operations. The Company reclassifies financial assets, it applies
the reclassification prospectively from the reclassification date which is the first day of the
immediately next reporting period following the change in business model. The Company does
not restate any previously recognised gains, losses (including impairment gains or losses) or
interest.
Non-derivative financial liabilities
Financial liabilities at amortised cost
Financial liabilities at amortised cost represented by borrowings, trade and other payables are initially
recognized at fair value, and subsequently carried at amortized cost using the effective interest rate
method. For trade and other payable maturing within one year from the balance sheet date, the
carrying value approximates fair value due to short maturity.
Financial liabilities at FVTPL
Financial liabilities at FVTPL represented by contingent consideration are measured at fair value with all
changes recognised in the statement of profit and loss.
A financial liability is classified as at FVTPL if it is classified as held-for-trading, it is a derivative or it is
designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and
net gains and losses, including any interest expense, are recognised in statement of profit and loss.
Derivative financial instruments and hedging activities
A derivative is a financial instrument which changes value in response to changes in an underlying
asset and is settled at a future date. Derivatives are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently re-measured at their fair value. The method of
recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging
instrument, and if so, the nature of the item being hedged.
The Company enters into derivative contracts to hedge the risks asserted with currency fluctuations
relating to firm commitments and highly probable forecasted transactions. The Company does not use
derivative instruments for speculative purposes. The counter party to the Company's foreign currency
forward contracts is generally a bank.
The Company documents, at the inception of the transaction, the relationship between hedging
instruments and hedged items, as well as its risk management objectives and strategy for undertaking
various hedging transactions. The Company also documents its assessment, both at hedge inception
and on an on-going basis, of whether the derivatives that are used in hedging transactions are
effective in offsetting changes in cash flows of hedged items.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash
flow hedges is recognised in other comprehensive income. The ineffective portion of changes in the
fair value of the derivative is recognised in the statement of profit and loss.
Amounts accumulated in hedging reserve are reclassified to the statement of profit and loss in the
periods when the hedged item affects the statement of profit and loss.
The fair value of a hedging derivative is classified as a current/ non-current, asset or liability based on
the remaining maturity of the hedged item.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or
exercised, or no longer qualifies for hedge accounting. Cumulative gain or loss on the hedging
instrument classified as effective portion of cash flow hedges is classified to statement of profit and
loss when the forecasted transaction occurs. If a hedged transaction is no longer expected to occur,
the net cumulative gain or loss recognised in effective portion of cash flow hedges is transferred to the
statement of profit and loss for the period.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there
is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a
net basis or realize the asset and settle the liability simultaneously.
Derecognition of financial instruments
Financial assets:
The Company derecognises a financial asset when:
- the contractual rights to the cash flows from the financial asset expire; or
- it transfers the rights to receive the contractual cash flows in a transaction in which either:
• substantially all of the risks and rewards of ownership of the financial asset are transferred;
or
• the Company neither transfers nor retains substantially all of the risks and rewards of
ownership and it does not retain control of the financial asset.
Financial liabilities:
The Company derecognises a financial liability when its contractual obligations are discharged or
cancelled or expire. The Company also derecognises a financial liability when its terms are modified
and the cash flows of the modified liability are substantially different, in which case a new financial
liability based on the modified terms is recognised at fair value. On derecognition of a financial liability,
the difference between the carrying amount extinguished and the consideration paid (including any
non-cash assets transferred or liabilities assumed) is recognised in statement of profit and loss.
Fair value measurement
The Company classifies the fair value of its financial instruments in the following hierarchy, based on
the inputs used in their valuation:
i) Level 1 - The fair value of financial instruments quoted in active markets is based on their quoted
closing price at the balance sheet date.
ii) Level 2 - The fair value of financial instruments that are not traded in an active market is
determined by using valuation techniques using observable market data. Such valuation
techniques include discounted cash flows, standard valuation models based on market
parameters for interest rates, yield curves or foreign exchange rates, dealer quotes for similar
instruments and use of comparable arm's length transactions.
iii) Level 3 - The fair value of financial instruments that are measured on the basis of entity specific
valuations using inputs that are not based on observable market data (unobservable inputs).
When the fair value of unquoted instruments cannot be measured with sufficient reliability, the
Company carries such instruments at cost less impairment, if applicable.
h. Employee benefits
The Company participates in various employee benefit plans. Post-employment benefits are classified
as either defined contribution plans or defined benefit plans. Under a defined contribution plan,
the Company's only legal or constructive obligation is to pay a fixed amount towards government
administered scheme with no obligation to pay further contributions if the fund does not hold
sufficient assets to pay all employee benefits. The related actuarial and investment risks fall on the
employee. The expenditure for defined contribution plans is recognized as expense during the period
when the employee provides service. Under a defined benefit plan, it is the Company's obligation
to provide agreed benefits to the employees. The related actuarial and investment risks fall on the
Company. The present value of the defined benefit obligations is calculated using the projected unit
credit method.
Provident Fund: The employees also make periodic contributions to the government administered
provident fund scheme. Obligations for contributions to defined contribution plan are expensed as an
employee benefits expense in the statement of profit and loss in period in which the related service is
provided by the employee. Prepaid contributions are recognised as an asset to the extent that a cash
refund or a reduction in future payments is available.
Gratuity: The Company provides for gratuity, a defined benefit plan covering the eligible employees.
The gratuity plan provides a lump-sum payment to vested employees at retirement, death or
termination of employment, of an amount based on the respective employee's salary and tenure of the
employment with the Company.
Liabilities with regard to the gratuity plan are determined by actuarial valuation performed by an
independent actuary, at each balance sheet date using projected unit method. The Company fully
contributes all ascertained liabilities to a trust managed by the Trustees of Sonata Software Limited
Gratuity Fund. The Trustees administers the contributions made to the Trust. The fund's investments
are managed by certain insurance Companies as per the mandate provided to them by the trustees
and the asset allocation is within the permissible limits prescribed in the insurance regulations.
The Company recognizes the net obligation of a defined benefit plan in its balance sheet as an asset
or liability. Gains and losses through re-measurements of the net defined benefit liability/(asset) are
recognized in other comprehensive income and are not reclassified to statement of profit and loss in
subsequent periods. The actual return of the portfolio of plan assets, in excess of the yields computed
by applying the discount rate used to measure the defined benefit obligation is recognized in other
comprehensive income. When the benefits of a plan are changed or when a plan is curtailed, the
resulting change in benefit that relates to past service ('past service cost' or 'past service gain') or the
gain or loss on curtailment is recognised immediately in statement of profit and loss.
Superannuation Fund: Certain employees of the Company are participants in a defined contribution
plan of superannuation. The Company has no further obligations to the plan beyond its monthly
contributions which are periodically contributed to the Sonata Software Limited Superannuation Fund ,
the corpus of which is invested with the Life Insurance Company.
Short-term employee benefits
The undiscounted amount of short-term employee benefits expected to be paid in exchange for
the services rendered by employees are recognised during the year when the employees render the
service. These benefits include performance incentive and compensated absences which are expected
to occur within twelve months after the end of the period in which the employee renders the related
service.
The cost of short-term compensated absences is accounted as under :
(a) in case of accumulated compensated absences, when employees render the services that increase
their entitlement of future compensated absences; and
(b) in case of non-accumulating compensated absences, when the absences occur.
Long-term employee benefits
Compensated absences which are not expected to occur within twelve months after the end of the
period in which the employee renders the related service are recognised as a liability at the present
value of the defined benefit obligation as at the balance sheet date less the fair value of the plan assets
out of which the obligations are expected to be settled. The obligation is measured annually by a
qualified actuary using the projected unit credit method. Remeasurements are recognised in statement
of profit and loss in the period in which they arise.
The obligations of compensated absences are presented as current liabilities in the balance sheet of
the Company as the Company does not have an unconditional right to defer this settlement for at least
12 months from reporting date.
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