By Himanshu V. Kishnadwala, Chartered Accountant
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Section B: Disclosure on Financial Information in Management Discussion and Analysis
Compiler’s Note Management Discussion and Analysis (MD&A) is a very important element of an annual report. Most companies as part of MD&A give adequate disclosures on the company’s overall performance, future prospects, SWOT analysis, etc. However, very few companies give a detailed item-wise analysis of the financial performance in a easily readable language. Given below is an extract the disclosure on various items of the Balance Sheet given in the Financial Condition section MD&A of Infosys Ltd for 31st March 2013. The full disclosures are available in the MD&A section of the annual report for 2012-13.
Infosys Ltd (Year ended 31-03-2013)
Financial Condition
Sources of Funds
1. Share Capital
At present, we have only one class of share – equity shares of par value Rs. 5/- each. Our authorized share capital is Rs. 300 crore, divided into 60 crore equity shares of Rs. 5/- each. The issued, subscribed and paid up capital stood at Rs. 287 crore as at 31st March, 2013 (same as the previous year).
During the year, employees exercised 6,165 equity shares issued under the 1999 Stock Option Plan. Consequently, the issued, subscribed and outstanding shares increased by 6,165. The details of options granted, outstanding and vested as at 31st March, 2013, are provided in the Notes to the consolidated financial statements section in the Annual Reports.
2. Reserves and Surplus
Capital Reserve
The balance as at 31st March, 2013 amounted to Rs. 54 crore, same as the previous year.
Securities Premium
The addition to the securities premium account of Rs. 1 crore during the year is on account of premium received on issue of 6,165 equity shares, on exercise of options under the 1999 Stock Option Plan.
General Reserves
An amount of Rs. 911 crore representing 0 of the net profit for the year ended 31st March, 2013 (previous year Rs. 847 crore) was transferred to the general reserves account from the Statement of Profit and Loss.
Statement of Profit and Loss
The balance retained in the Statement of Profit and Loss as at 31st March, 2013 is Rs. 25,383 crore, after providing the interim and final dividend for the year of Rs. 862 crore and Rs. 1,550 crore, respectively; and dividend tax of Rs. 403 crore thereon. He total amount of profits appropriated to dividend including dividend tax was Rs. 2,815 crore, as compared to Rs. 3,137 crore in the previous year.
On 7th October, 2011, the Board of Directors of Infosys Consulting Inc., approved the termination and winding down of the entity, entered into a scheme of amalgamation and initiated its merger with Infosys Limited. The termination of Infosys Consulting Inc., became effective on 12th January, 2012. Consequent to this, there was a reduction of Rs. 84 crore in the Statement of Profit and Loss of the previous year.
Shareholders Funds
The total shareholders funds increased to Rs. 36,059 crore as at 31st March, 2013 from Rs. 29,757 crore as at 31st March, 2012.
The book value per share increased to Rs. 627.95 as at 31st March, 213 compared to Rs. 518.21 as at 31st March, 2012.
Application of Funds
3. Fixed Assets
Capital Expenditure
We incurred a capital expenditure of Rs. 1,847 crore (Rs. 1,296 crore in the previous year) comprising additions to gross block of Rs. 1,422 crore for the year ended 31st March, 2013. The entire capital expenditure was funded out of internal accruals.
Additions to gross block
During the year, we capitalised Rs. 1,422 crore to our gross block comprising Rs. 640 crore for investment in computer equipment, Rs. 30 crore on Intellectual Property Rights, Rs. 1 crore on vehicles and the balance of Rs. 751 crore on infrastructure investments. We invested Rs. 145 crore to acquire 119.35 acres of land in Bangalore, Mysore, Thiruvananthapuram and Hubli. The expenditure on buildings, plant and machinery, office equipments and furniture and fixtures, were Rs. 326 crore, Rs. 114 crore, Rs. 58 crore and Rs. 108 crore, respectively for the year.
During the previous year, we capitalised Rs. 807 crore to our gross block, including investment in computer equipment of Rs. 245 crore (includes computer equipment having gross book value of Rs. 10 crore transferred from Infosys Consulting Inc. on its termination), Rs. 17 crore on Intellectual Property Rights, Rs. 543 crore on infrastructure investments and Rs. 2 crore on vehicles. We invested Rs. 158 crore to acquire 371 acres of land in Bangalore, Bhubhaneshwar, Mangalore, Nagpur and Indore.
Deductions to gross block
During the year, we deducted Rs. 521 crore (net book value of Rs. Nil) from the gross block on retirement of assets and Rs. 14 crore on disposal of various assets. During the previous year, we retired/ transferred various assets with a gross block of Rs. 559 crore (net book value of Rs. Nil) and Rs. 9 crore on disposal of various assets.
Capital expenditure commitments
We have a capital expenditure commitment of Rs. 1,139 crore, as at 31st March, 2013 as compared to Rs. 949 crore as at 31st March, 2012.
4. Investments
We made several strategic investments during the past years aimed at procuring business benefits and operational efficiency.
Majority-owned subsidiary
Infosys BPO Limited as a majority-owned and controlled subsidiary on 3rd April, 2002. To provide BPM services. Infosys BPO seeks to leverage the benefits of service delivery globalisation, process redesign and technology to drive efficiency and cost effectiveness in customer business processes.
On 4th January, 2012, Infosys BPO acquired 100% voting interest in Portland Group Pty. Limited, a leading strategic sourcing and category management service provider based in Sydney, Australia for a cash consideration of Rs. 200 crore.
Lodestone Holding AG
On 22nd October, 2012, Infosys acquired 100% of outstanding share capital of Lodestone Holding AG. A global management consultancy firm headquartered in in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of Rs. 1,187 crore and a deferred consideration of Rs. 608 crore.
Wholly-owned subsidiaries
During the year, we invested in our subsidiaries, for the purpose of operations and expansion, as follows:
Please refer statement pursuant to Section 212 of the Companies Act. 1956 for the summary financial performance of our subsidiaries. The audited financial statements and related information of subsidiaries will be available on our website, www. infosys.com.
During the year the assets and liabilities of Infosys Australia were transferred to the company.
5. Deferred tax assets / liabilities
We recorded deferred tax assets of Rs. 640 crore as at 31st March, 2013 (Rs. 459 crore as at 31st March, 2012) and deferred tax liability of Rs. 318 crore as at 31st March, 2013 (Rs. 270 crore as at 31st March, 2012).
Deferred tax assets primarily comprises of deferred taxes on fixed assets, unavailed leave, trade receivables, and other provisions which are not tax deductible in the current year.
The movement in deferred tax liabilities is on account of the increase in provision for branch profit tax for our overseas branches.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income. We believe it is more likely than not that we will realize the benefits of these deductible differences.
6. Trade receivables
Trade receivables amounted to Rs. 6,365 crore (net of provision for doubtful debts amounting to Rs. 85 crore) as at 31st March, 2013, compared to Rs. 5,404 crore (net of provision for doubtful debts amounting to Rs. 80 crore) as at 31st March, 2012. These debts are considered good and realisable. Debtors are at 17.3% of revenues for the year ended 31st March, 2013, same as the previous year, representing a Days Sales Outstanding of 63 days, same as in the previous year. The age profile of debtors is as follows:
Provisions are generally made of all debtors’ outstanding for more than 180 days as also for others, depending on the Management’s perception of the risk. The need for provision is assessed based on various factors, including collectability of specific dues, risk perceptions of the industry in which the customer operates and general economic factors that could affect the customer’s ability to settle. The movement in provisions for doubtful debts during the year is as follows:
Provision for bad and doubtful debts as a percentage of revenue is 0.08% for the year ended 31st March, 2013, as against 0.19% for the year ended 31st March, 2012. The unbilled revenues as at 31st March, 2013 and 31st March, 2012, amounted to Rs. 2,217 crore and Rs. 1,766 crore, respectively.
7. Cash and cash equivalents
The bank balances in India include both rupee accounts and foreign currency accounts. The bank balances in overseas current accounts are maintained to meet the expenditure of the overseas branches and project related expenditure overseas.
Deposits with financial institutions and corporate bodies represent surplus money deployed in the form of short- term deposits.
Our treasury policy calls for investing cash surplus in a combination of instruments. (a) Deposits in highly-rated scheduled banks and financial institutions (b) Debt mutual funds (c) Tax free bonds in highly-rated and Government-backed entities (d) Certificate of deposits, Commercial paper or any other similar instrument issued by highly-rated banks and financial institutions.
8. Loans and Advances
An amount of Rs. 724 crore (Rs. 461 crore as at 31st March, 2012) deposited with the Life Insurance Corporation of India to settle leave obligations as and when they arise during the normal course of business. The amount is considered as restricted cash and hence not considered as ‘cash and cash equivalents’.
Loans to subsidiaries comprised of Rs. 116 crore to Lodestone Holding AG and Rs. 68 crore to Infosys Public Services Inc.
The withholding and other taxes receivable represents transaction taxes paid in various domestic and overseas jurisdictions which are recoverable.
Unbilled revenues consist primarily of costs and earnings in excess of billings to the client on fixed-price, fixed time-frame, and time-and-material contracts.
Capital advances represent amount paid in advance on capital expenditure.
The details of advance income tax are as follows:
Our loan schemes provide for personal loans and salary advances that are provided primarily to employees in India who are not executive officers or directors. The loans and advances are recoverable in 24 months.
Electricity and other deposits represent electricity deposits, telephone deposits, insurance deposits and advances of similar nature. Rent deposits are for buildings taken on lease by us for our software development centers and marketing offices located across the world.
9. Liabilities
Liabilities for accrued salaries and benefits include the provision for bonus and incentive payable to staff. Provision for expenses represent amounts accrued for other operational expenses. Retention monies represent monies withheld on contractor payments pending final acceptance of their work. Withholding and other taxes payable represent local taxes payable in various countries in which we operate and the same will be paid in due course.
Effective 1st July, 2007, we revised the employee death benefits provided under the gratuity plan, and included all eligible employees under consolidated term insurance cover. Accordingly, the obligations under gratuity plan reduced by Rs. 37 crore, which is being amortised on straight line basis to the Statement of Profit and Loss over 10 years representing the average future service period of employees. An amount of Rs. 3 crore was amortised during the year. The unamortised balance as at 31st March, 2013 was Rs. 15 crore.
Payable for acquisition of business represents deferred consideration, payable to shareholders of Lodestone at the end of three years of acqui-sition, contingent upon employment for a period of three years and is recognised proportionately.
Advances received from clients represent monies received for the delivery of future services. Unearned revenue consists primarily of advanced client billing on fixed-price, and fixed-time frame contracts for which related costs were not yet incurred. Unclaimed dividends represent dividends paid, but not encashed by shareholders, and are represented by bank balance of an equivalent amount.
10. Provisions
Proposed dividend includes the final dividend recommended. On approval by our shareholders, this will be paid after the Annual General Meeting.
Provision for taxation represent estimated income tax liabilities, both in India and overseas. Provisions for taxations as at 31st March, 2013 is Rs. 1,274 crore compared to Rs. 967 crore as at 31st March, 2012.
Provisions for unavailed leave is towards our liability for leave encashment valued on an actuarial basis. The provisions for post-sales-client support and warranties is towards likely expenses for providing post-sales-client support on fixed-price contracts.
