By Himanshu V. Kishnadwala, Chartered Accountant
New Page 1TATA
CONSULTING SERVICES LTD.
— (31-3-2008) (Consolidated)
From Accounting Policies :
Foreign currency transactions :
Income and expenses in foreign currencies are converted at
exchange rates prevailing on the date of the transaction. Foreign currency
monetary assets and liabilities other than net investments in non-integral
foreign operations are translated at the exchange rate prevailing on the balance
sheet date. Exchange difference arising on a monetary item that, in substance,
forms part of an enterprise’s net investments in a non-integral foreign
operation are accumulated in a foreign currency translation reserve.
Premium or discount on forward contracts and currency options
are amortised and recognised in the profit and loss account over the period of
the contract. Forward contracts and currency options outstanding at the balance
sheet date, other than designated cash flow hedges, are stated at fair values
And any gains or losses are recognised in the profit and loss account.
For the purpose of consolidation, income and expenses are
translated at average rates and the assets and liabilities are stated at closing
rate. The net impact of such change is disclosed under Foreign exchange
translation reserve.
Derivative instruments and hedge accounting :
The Company uses foreign currency forward contracts and
currency options to hedge its risks associated with foreign currency
fluctuations relating to certain firm commitments and forecasted transactions.
The Company designates these hedging instruments as cash flow hedges applying
the recognition and measurement principles set out in the Accounting Standard 30
‘Financial Instruments : Recognition and Measurement’ (AS-30).
The use of hedging instruments is governed by the Company’s
policies approved by the board of directors, which provide written principles on
the use of such financial derivatives consistent with the Company’s risk
management strategy.
Hedging instruments are initially measured at fair value, and
are re-measured at subsequent reporting dates. Changes in the fair value of
these derivatives that are designated and effective as hedges of future cash
flows are recognised directly in shareholders’ funds and the ineffective portion
is recognised immediately in profit and loss account.
Changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognised in profit and loss
account as they arise.
Hedge accounting is discontinued when the hedging instrument
expires or is sold, terminated, or exercised, or no longer qualifies for hedge
accounting. At that time for forecasted transactions, any cumulative gain or
loss on the hedging instrument recognised in shareholder’s funds is retained
there until the forecasted transaction occurs. If a hedged transaction is no
longer expected to occur, the net cumulative gain or loss recognised in
shareholders’ funds is transferred to profit and loss account for the period.
From Notes to Accounts :
Derivative financial instruments :
TCS Limited, in accordance with its risk management policies
and procedures, enters into foreign currency forward contracts to mange its
exposure in foreign exchange rates. The counter party is generally a bank. These
contracts are for a period between one day and eight years.
During the year ended March 31, 2008, TCS Limited has
re-evaluated its risk management program and hedging strategies in respect of
forecasted transactions. Upon completion of the formal documentation and testing
for effectiveness, TCS Limited has designated certain foreign currency options
in respect of forecasted transactions, which meet the hedging criteria, as Cash
Flow Hedges:
TCS Limited has following outstanding derivative instruments
as on March 31, 2008 :
(i) The following are outstanding Foreign Exchange Forward
contracts, which have been designated as Cash Flow Hedges, as on :
The following are outstanding Currency Option contracts, which have been designated as Cash Flow Hedges, as on :
Net loss on derivative instruments of Rs.21.83 crores recognised in Hedging Reserve as on March 31, 2008 is expected to be reclassified to the Profit and loss account by March 31, 2009.
The movement in Hedging Reserve during period ended March 2008, for derivatives designated as Cash Flow Hedges is as follows:
In addition to the above cash flow hedges, the Company has outstanding foreign exchange forward contracts and currency option contracts aggregating Rs.2,141.90 crores (previous year: Rs.2062.61 crores), whose fair value showed a loss of Rs.4.46 crores as on March 31, 2008 (previous year: gain of Rs.9.22 crores) to hedge the future cash flows. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting and accordingly these are accounted as derivatives instruments at fair value with changes in fair value recorded in the Profit and Loss Account.
Exchange gain of Rs.283.96 crores (previous year gain of Rs.45.13 crores) on foreign currency forward exchange contracts have been recognised in the period ended March 31, 2008.
