Full adoption of Accounting Standard 30 Strides Arcolab Ltd. (31-12-2008)

From Accounting Policies

Financial Assets, Financial Liabilities, Financial Instruments, Derivatives and Hedge Accounting

1. The Company classifies its financial assets into the following categories: financial instruments at fair value through profit and loss, loans and receivables, held to maturity investments and available for sale financial assets. Financial assets of the Company mainly include cash and bank balances, sundry debtors, loans and advances and derivative financial instruments with a positive fair value.

Financial liabilities of the Company mainly comprise secured and unsecured loans, sundry creditors, accrued expenses and derivative financial instruments with a negative fair value. Financial assets/liabilities are recognised on the balance sheet when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when all of risks and rewards of the ownership have been transferred. The transfer of risks and rewards is evaluated by comparing the exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred assets.

Available for sale financial assets (not covered under other Accounting Standards) are carried at fair value, with changes in fair value being recognised in Equity, unless they are designated in a Fair value hedge relationship, where such changes are recognised in the Profit and Loss account.

Loans and receivables, considered not to be in the nature of Short-term receivables, are discounted to their present value. Short-term receivables with no stated interest rates are measured at original invoice amount, if the effect of discounting is immaterial. Non-interest bearing deposits, meeting the criteria of financial asset, are discounted to their present value.

Financial liabilities held for trading and liabilities designated at fair value, are carried at fair value through profit and loss. Other financial liabilities are carried at amortised cost using the effective interest method. The Company measures the short-term payables with no stated rate of interest at original invoice amount, if the effect of discounting is immaterial.

Financial liabilities are derecognised when extinguished.

2. Determining fair value

Where the classification of a financial instrument requires it to be stated at fair value, fair value is determined with reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using financial markets pricing models, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value.

3. Derivative financial instruments

The Company is exposed to foreign currency fluctuations on foreign currency assets and liabilities. The Company limits the effects of foreign exchange rate fluctuations by following established risk management policies including the use of derivatives. The Company enters into forward exchange financial instruments where the counterparty is a bank. Changes in fair values of these financial instruments that do not qualify as a Cash flow hedge accounting are adjusted in the Profit and Loss.

4. Hedge Accounting

Some financial instruments and derivatives are used to hedge interest rate, exchange rate, commodity and equity exposures and exposures to certain indices. Where derivatives are held for risk management purposes and when transactions meet the criteria specified in Accounting Standard 30, the Company applies fair value hedge accounting or cash flow hedge accounting as appropriate to the risks being hedged.

5. Fair value hedge accounting

Changes in the fair value of financial instruments and derivatives that qualify for and are designated as fair value hedges are recorded in the Profit and Loss Account, together with changes in the fair value attributable to the risk being hedged in the hedged assets or liability. If the hedged relationship no longer meets the criteria for hedge accounting, it is discontinued.

From Notes to Accounts

6. Adoption of Accounting Standard-30 : Financial Instruments : Recognition and Measurement, issued by Institute of Chartered Accountants of India

Arising from the Announcement of the Institute of Chartered Accountants of India (ICAI) on March 29, 2008, the Company has chosen to early adopt Accounting Standard (AS) 30 :

‘Financial Instruments : Recognition and Measurement’. Coterminous with this, in the spirit of complete adoption, the Company has also implemented the consequential limited revisions in view of AS 30 to AS 2, ‘Valuation of Inventories’, AS 11’ The Effect of Changes in Foreign Exchange Rates’, AS 21 ‘Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements’, AS 23 ‘Accounting for Investments in Associates in Consolidated Financial Statements’, AS 26 ‘Intangible Assets’, AS 27 ‘Financial Reporting of Interests in Joint Ventures’, AS 28 ‘Impairment of Assets’ and AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’ as have been announced by the ICAI.

Consequent to adoption of AS 30 and the transitional provision under the standard :

The Company has changed the designation and measurement principles for all its significant financial assets and liabilities existing as at January 1, 2008. The impact on account of the above measurement of these is as described below :

6.1 Foreign Currency Convertible Bonds (FCCBs or Bonds)

On adoption of AS 30, the FCCBs are split into two components comprising (a) option component which represents the value of the option in the hands of the FCCB-holders to convert the bonds into equity shares of the Company and (b) debt component which represents the debt to be redeemed in the absence of conversion option being exercised by FCCB-holder, net of issuance costs. The debt component is recognised and measured at amortised cost while the fair value of the option component is determined using a valuation model with the below mentioned assumptions.

Assumptions used to determine fair value of the options:

Valuation and amortisation method – The Company estimates the fair value of stock options granted using the Black Scholes Merton Model and the principles of the Roll-Geske-Whaley extension to the Black Scholes Merton model. The Black Scholes Merton model along with the extensions above requires the following inputs for valuation of options:

Stock Price as at the date of valuation – The Company’s share prices as quoted in the National Stock Exchange Limited (NSE), India have been converted into equivalent share prices in US Dollar terms by applying currency rates as at valuationates. Further, stock prices have been reduced by continuously compounded stream of dividends expected over time to expiry as per the principles of the Black-Scholes Merton model with Roll Geske Whaley extensions.

Strike price for the option – has been computed in dollar terms by computing the redemption amount in US dollars on the date of redemption (if not converted into equity shares) divided by the number of shares which shall be allotted against such FCCBs.

Expected Term – The expected term represents time to expiry, determined as number of days between the date of valuation of the option and the date of redemption.

Expected Volatility – Management establishes volatility of the stock by computing standard deviation of the simple exponential daily returns on the stock. Stock prices for this purpose have been

6.1 Foreign Currency  Convertible Bonds (FCCBs or computed by expressing daily closing prices as Bonds) quoted  on the NSE into equivalent  US dollar terms. For the purpose  of computing  volatility  of stock prices, daily prices for the last one year have been considered as on the respective valuation dates.

Risk-Free Interest Rate – The risk-free interest rate used in the Black-Scholes valuation method is assumed at 7%.

Expected Dividend – Dividends have been assumed to continue, for each valuation rate, at the rate at which dividends were earned by shareholders in the last preceding twelve months before the date of valuation.

Measurement of Amortised cost of debt component:

For the purpose of recognition and measurement of the debt component, the effective yield has been computed considering the amount of the debt component on initial recognition, origination costs of the FCCB and the redemption amount if not converted into Equity Shares. To the extent the effective yield pertains to redemption premium and the origination costs, the effective yield has been amortised to the Securities Premium Account as permitted under section 78 of the Companies Act, 1956. The balance of the effective yield is charged to the Profit and Loss Account.

Consequent to change in policy for accounting of FCCBs,

a) Rs.934.71 Million being the previously accrued Debenture Redemption Reserve out of the Securities Premium Account has been credited back to Securities Premium Account.

b) Rs.124.68 Million being the amount of FCCB issue expenses previously debited to Securities Premium Account has been reversed.

c) Rs.443.20 Million and Rs.546.41 Million has been debited to Securities Premium Account as at December 31, 2007 and during the year 2008, respectively towards the amortised interest attributable to the effective yield pertaining to the redemption premium and FCCB issue expenses.

d) Rs.202 Million being the excess of amortised interest chargeable to Profit and Loss Account as per the policy adopted by the Company over the previously recognised interest cost upto December 31, 2007 has been debited to General Reserve Account.

e) Interest expense for the year debited to Profit and Loss Account is higher by Rs.216.48 Million, and Profit Before Tax for the year is lower by the corresponding amount.

f) The difference between the fair value of the option component on the date of issue of the FCCBs and December 31, 2007 amounting to Rs.427.10 Million has been credited to the General Reserve Account.

g) Rs.452.21 Million being the difference in the carrying amount of the option component between December 31, 2008 and December 31 2007 has been credited to the Profit and Loss Account of the year.

h) Rs.63.31 Million being the incremental exchange difference upto December 31, 2007 arising out of the accounting treatment of FCCBs described above has been debited to General Reserve Account. Exchange loss on restatement of FCCBs is lower and Profit Before Tax for the year is higher by Rs.101.54 Million.

6.2 Consequent to change in policies for accounting for External commercial borrowings (another financial liability), excess of amortised interest cost of Rs.0.53 Million and Rs.0.79 Million chargeable to Profit and Loss Account as per the policy adopted by the Company over the previously recognised interest cost for the period upto December 31, 2007 and for year ended December 31, 2008, respectively, has been debited to General Reserve Account and the Profit and Loss account respectively.

6.3 The financial assets and liabilities arising out of issue of corporate financial guarantees to third parties are accounted at fair values on initial recognition. Financial assets continue to be carried at fair values. Financial liabilities are subsequently measured at the higher of the amounts determined under AS 29 or the fair values on the measurement date. At December 31,2008, the fair values of such financial assets are equal to such liabilities and have been set off in the financial statements.

6.4 As required under the Companies Act, 1956, Redeemable Preference Shares are included as part of share capital and not as debt and dividend on the preference shares will be accounted as dividend as part of appropriation of profits and have not been accrued as interest cost. Further, due to inadequate profits, the Company has not accrued dividend of Rs. 29.50 Million each for the year ended December 31, 2007 and December 31, 2008, and the related Dividend distribution taxes.

6.5 Fully convertible debentures are considered as borrowings and are not disclosed as part of shareholder funds, and interest thereon of Rs.24.73 Million is debited to the Profit and Loss Account as interest cost as required under the Companies Act, 1956 and has not been treated as dividend.

Hedge  Accounting:

The Company had prior to December 31, 2007 designated its investments in Starsmore Limited, Cyprus, Strides Africa Limited, British Virgin islands and Akorn Strides LLC, USA, whose functional currency is US dollars as hedged items in a fair value hedge and to the extent of the hedge items, designated FCCB’s availed in US dollars as hedging instruments, to hedge the risk arising from fluctuations in the foreign exchange rate between the Indian Rupee and the US dollar. The carrying values of the designa ted hedged iterns and the hedging instruments as at December 31, 2008 is USD 100.55 Million and USD 69.20 Million as at December 31, 2007.

Accordingly, applying the fair value hedge accounting principles, the exchange gains/ losses on the hedging instrument is recognised in Profit and Loss Account along with the associated exchange gains/losses on the restatement of the designated portion of the investments. The impact of exchange loss arising on restatement of designated portion of the USD investments as of December 31, 2007 amounted to Rs. 120.42 Million and has been debited to the General Reserve Account.

The exchange gains arising on restatement of designated portion of the USD investments for the year ended December 31, 2008 amounting to Rs. 923.40 Million has been treated as an effective fair value hedge since the loss arising on the dollar loans designated as hedging instruments amounted to a similar amount and such gains have been credited to the Profit and such gains have been credited to the Profit and Loss account for year ended December 31,2008.

Prior to the adoption of the AS 30 ‘Financial Instruments: Recognition and Measurement’, and the limited revisions to AS 21 ‘Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements’, investments in subsidiaries were valued at cost less diminution in value that was other than temporary as per the provisions of AS-13 ‘Accounting for Investments’ that was notified under section 21l(3C) of the Companies Act, 1956. As a result of above change in accounting policy, carrying value of investments as at December 31, 2008 is higher by Rs. 802.98 Million, profit for the year is higher by Rs. 923.40 Million and General Reserve is higher by Rs. 802.98 Million.

6.7 The Company has availed Bill Discounting facility from Banks which do not meet the de-recognition criteria for transfer of contractual rights to receive cash flows from the Debtors since they are with recourse to the Company.

Accordingly, as at December 31, 2008, Sundry Debtor balances include such amounts and the corresponding financial liability to the Banks is included as part of short term secured loans.

6.8 All the open derivative positions as on January 1, 2008 not designated as hedging instruments have been classified as held for trading and gains/losses recognised in the Profit and Loss Account. The incremental negative fair value of such derivatives over and above provision carried was Rs. 100.92 Million as at December 31,2007 which has been debited to the General Reserve Account. Incremental negative fair value of the open derivatives position as at December 31, 2008 amounting to Rs. 346.08 Million has been debited to Profi t and Loss Account for the year.

From Notes  to Accounts (con’td.)

33. Disclosures relating to Financial instruments to the extent not disclosed elsewhere in Schedule P

Breakup of Allowance for Credit Losses is as under:

Details on Derivatives Instruments & Unhedged Foreign Currency Exposures

The following derivative positions are open as at December 31, 2008. While these transactions have been undertaken to act as economic hedges for the Company’s exposures to various risks in foreign exchange markets, they have not qualified as hedging instruments in the context of the rigour of such classification under Accounting Standard 30. Theses instruments are therefore classified as held for trading and gains/losses recognised in the Profit and Loss Account.

i. The Company had entered into the following derivative instruments:

a . Forward Exchange Contracts [being a derivative instrument), which are not intended for trading or speculative purposes, but for hedge purposes, to establish the amount of reporting currency required or available at the settlement date of certain payables and receivables.

The following are the outstanding Forward Exchange Contracts entered into by the Company as on December 31, 2008.

1. b) Interest Rate Swaps to hedge against fluctuations in interest rate changes: No. of contracts: Nil (Previous year: No. of contracts: 3, Notional Principal: USD 20 Million).c) Currency Swaps (other than forward exchange contracts stated above) to hedge against fluctuations in change in exchange rate.of contracts: Nil (Previous Year: No of  contracts 6, Notional Principal: USD 80 Million).ii. The year end foreign currency exposures that have not been hedged by a derivative instrument or otherwise are given below:

iii. Derivative Instruments (causing an un-hedged foreign currency exposure) : Nil (Previous Year USD 8 Million – Sell)

iv. Losses on forward Exchange Derivate contracts (Net) included in the Profit and Loss account for year ended December 31, 2008 amount Rs.454.27 Million.

Categories of Financial Instruments

a) Loans and Receivables:

The following financial assets in the Balance Sheet have been classified as Loans and Receivables as defined in Accounting Standard 30. These are carried at amortised cost less impairment if any. The carrying amounts are as under:

In the opinion of the management, the carrying amounts above are reasonable approximations of fair values of the above financial assets.

b)  Financial Liabilities  Held at Amortised Cost

The following financial liabilities are held at amortised cost. The Carrying amount of Financial Liabilities is as under:

30. c) Financial Liabilities  Held for Trading

The option component of Foreign Currency Convertible Bonds (FCCBs) has been classified as held for trading, being a derivative under Accounting Standard 30. Refer Note B.6 of Schedule P on FCCBs. The carrying amount of the option component was Rs.134.20 Million as at December 31,2008 and Rs.586.42 Million as at December 31, 2007. The difference in carrying value between the two dates, amounting to Rs.452.21 Million is taken as gain to the Profit and Loss Account of the year in accordance with provisions of Accounting Standard 30.

The fair value  of the  option  component  has been determined using a valuation model. Refer to Note B.6 above on FCCBs for detailed disclosure on the valuation method.

d) There are no financial assets in the following categories:

o Financial assets carried at fair value through profit and loss designated at such at initial recognition.

o Held  to maturity

o Available  for sale

o Financial liabilities carried at fair value through profit and loss designated as such at initial recognition.

Financial    assets pledged

The following financial assets have been pledged:

Nature and extent of risk arising from financial instruments

The  main    financial    risks faced by  the  Company relate to fluctuations in interest and foreign exchange rates, the risk of default by counterparties to financial transactions, and the availability of funds to meet business needs. The Balance Sheet as at December 31, 2008 is representative of the position through the year. Risk management is carried out by a central treasury department under the guidance of the Management.

Interest rate  risk

Interest rate risk arises from long term borrowings. Debt issued at variable rates exposes the company to cash flow risk. Debt issued at fixed rate exposes the company to fair value risk. In the opinion of the management, interest rate risk during the year under report was not substantial enough to require intervention or hedging through derivatives or other financial instruments. For the purposes of exposure to interest risk, the company considers its net debt position evaluated as the difference between financial assets and financial liabilities held at fixed rates and floating rates respectively as the measure of exposure of notional amounts to interest rate risk. This net debt position is quantified as under:

Credit risk

Credit risk arises from cash and cash equivalents, financial instruments and deposits with banks and financial institutions. Credit risk also arises from trade receivable and other financial assets.

The credit risk arising from receivable is subject to concentration risk in that the receivable are predominantly denominated in USD and any appreciation in the INR will affect the credit risk. Further, the Company is not significantly exposed to geographical distribution risk as the counter-parties operate across various countries across the Globe.

Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to Company’s reputation. liquidity risk is managed using short term and long term cash flow forecasts.

The following is an analysis of undiscounted contractual cash flows payable under financial liabilities and derivatives as at December 31, 2008 :

For the purposes of the above table, undiscounted cash flows have been applied. Undiscounted cash flows will differ from fair values. Foreign currency liabilities have been computed applying spot rates on the Balance Sheet date.

Foreign exchange risk
The Company is exposed to foreign exchange risk principally via:

o Debt availed in foreign currency

o Net investments in subsidiaries and joint ventures that are made in foreign currencies.

o Exposure arising from transactions relating to purchases, revenues, expenses etc to be settled in currencies other than Indian Rupees, the functional currency of the respective entities.

The Company had designated its investments in certain subsidiaries whose functional currency is US dollars as hedged items in a fair value hedge and certain loans availed in US dollars as hedging instruments to hedge the risk arising from fluctuations in the foreign exchange rate between the Indian Rupee and the US dollar. The carrying values of the financial liabilities designated as hedging instruments as at December 31, 2008 is Rs.4,897.97 Million.

The loss arising on the dollar loans designated as hedging instruments recognised in the Profit and Loss Account for the year ended December 31, 2008 is Rs.923.40 Million. The gain arising from investments in certain subsidiaries designated as hedged items as much as is attributable to the hedged foreign exchange risk recognised in the Profit and Loss Account for the year ended December 31, 2008 is Rs.923.40 Million.

Sensitivity analysis as at December 31, 2008

Financial instruments affected by interest rate changes include Secured Long term loans from banks, Secured Long term loans from others, Secured Short term loans from banks and Secured Short term loans from banks. The impact of a 1% change in interest rates on the profit of an annual period will be Rs.108.29 Million assuming the loans as of December 31, 2008 continue to be constant during the annual period. This computation does not involve a revaluation of the fair value of loans as a consequence of changes in interest rates. The computation also assumes that an increase in interest rates on floating rate liabilities will not necessarily involve an increase in interest rates on floating rate financial assets.

Financial instruments affected by changes in foreign exchange rates include FCCBs, External Commercial Borrowings (ECBs), investments in subsidiaries, loans in foreign currencies to erstwhile subsidiaries and loans to subsidiaries and joint ventures. The company considers US Dollar and the Euro to be principal currencies which require monitoring and risk mitigation. The Company is exposed to volatility in other currencies including the Great Britain Pounds (GBP) and the Australian Dollar (AUD).

For the purposes of the above table, it is assumed that the carrying value of the financial assets and liabilities as at the end of the respective financial years remains constant thereafter. The exchange rate considered for the sensitivity analysis is the Exchange Rate prevalent as a December 31, 2008.

In the opinion of the management, impact arising from changes in the values of trading assets (including derivative contracts, trade receivable, trade payables, other current assets and liabilities) is temporary and short term in nature and would vary depending on the levels of these current assets and liabilities substantially from time to time and even on day to day basis and hence are not useful in an analysis of the long term risks which the Company is exposed to.

This is the first year of adoption of Accounting Standard 3D, consequently comparative figures relating to 2007 in respect of disclosures under Accounting Standard 30 have been provided only where such information is available.

From Auditors’ Report

d) The Company has early adopted Accounting Standard 30 ‘Financial Instruments: Recognition and Measurement’, along with the limited revision to Accounting Standard 2 ‘Valuation of Inventories’, Accounting Standard 11 ‘The Effect of Changes in Foreign Exchange Rates’, Accounting Standard 21 ‘Consolidated Financial Statements and Accounting for Investment in Subsidiaries in Separate Financial Statements’, Accounting Standard 23 ‘Accounting for Investments in Associates in Consolidated Financial Statements’, Accounting Standard 26 ‘Intangible Assets’, Accounting Standard 27 ‘Financial Reporting of Interest in Joint Ventures’, Accounting Standard 28 ‘Impairment of Assets’, and Accounting Standard 29 ‘Provisions, Contingent Assets and Contingent Liabilities, arising from the announcement of the Institute of Chartered Accountants of India on 29 March 2008, as stated in Note B.6 of Schedule P to the financial statements. Pursuant to the above, as detailed in note B.6.6 of Schedule P to the financial statements, certain US Dollar investments in subsidiaries and joint ventures have been designated as hedged items in a fair value hedge for changes in spot rates and have been restated at the closing exchange rate at December 31, 2008 and a credit of Rs. 923.40 Million has been recognised in the Profit and Loss Account, as compared to the earlier policy of valuing these investments at cost less diminution that is other than temporary, as required under Accounting Standard 13 ‘Accounting for Investments’, notified under section 211 (3C) of the Companies Act, 1956.

e) read with our comments in paragraph (d) above, in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to in sub-Section (3C) of Section 211 of the Companies Act, 1956.

From Management Discussions and Analysis

Early adoption of Accounting Standard 30 and IFRS convergence

The Company has early adopted Accounting Standard 30 : Financial Instruments: Recognition and Measurement and the consequential limited revisions to other applicable Accounting Standards as have been announced by the ICAI. Accordingly, the Company has changed the designation and measurement principles for all its significant financial assets and liabilities including FCCBs and ECBs. In case where there are conflicts between provisions of AS 30 and Companies Act, 1956, provisions of Companies Act, 1956 have been followed.

Detailed disclosures in this regard have been made in Note 1.11 of Part A, Note 6 and 33 of Part B of Schedule – ‘P’ to the financial statements forming part of the Annual Report.

Accounting Standards 30, 31 and 32 are new accounting Standards, to be made mandatory from April 01, 2011. These are global standards in line with IAS 39, as a prelude to IFRS Convergence. By adopting Accounting Standard 30 the company is progressing towards IFRS convergence.