a) Basis of preparation
The financial statements of Dr. Reddy''s Laboratories Limited (DRL or
the Company) have been prepared and presented in accordance with the
accounting principles generally accepted in India (Indian GAAP). Indian
GAAP comprises Accounting Standards specified under Section 133 of the
Companies Act, 2013, read with Rule 7 of Companies (Accounts) Rules,
2014, other pronouncements of the Institute of Chartered Accountants of
India, the relevant provisions of the Companies Act, 2013 and
guidelines issued by the Securities and Exchange Board of India (SEBI)
(Collectively referred to as IGAAP). The financial statements are
presented in Indian Rupees rounded off to the nearest million.
b) Use of estimates
The preparation of the financial statements in conformity with IGAAP
requires the Company''s management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities on the date of the financial
statements and reported amounts of revenues and expenses for the year.
Examples of such estimates include estimation of useful lives of
tangible and intangible assets, valuation of inventories, assessment of
recoverable amounts of deferred tax assets and cash generating units,
provision for sales returns, provision for obligations relating to
employees, provisions against litigations and contingencies. Actual
results could differ from these estimates. Estimates and underlying
assumptions are reviewed on an ongoing basis. Any revision to
accounting estimates is recognised prospectively in the current and
c) Current and non current classification
All the assets and liabilities have been classified as current or non
current as per the Company''s normal operating cycle and other criteria
set out in the Schedule III to the Companies Act, 2013.
An asset is classified as current when it satisfies any of the
a) it is expected to be realised in, or is intended for sale or
consumption in, the Company''s normal operating cycle;
b) it is held primarily for the purpose of being traded;
c) it is expected to be realised within twelve months after the
reporting date; or
d) it is cash or cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve months
after the reporting date.
A liability is classified as current when it satisfies any of the
a) it is expected to be settled in the Company''s normal operating
b) it is held primarily for the purpose of being traded;
c) it is due to be settled within twelve months after the reporting
d) the Company does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting date.
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.
Current assets / liabilities include the current portion of non current
assets / liabilities respectively. All other assets / liabilities are
classified as non current.
d) Tangible fixed assets and depreciation
Fixed assets are carried at the cost of acquisition or construction
less accumulated depreciation. The cost of fixed assets includes non
refundable taxes, duties, freight and other incidental expenses related
to the acquisition and installation of the respective assets.
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 related to an item of tangible fixed asset is
capitalised only if it increases the future benefits from the existing
assets beyond its previously assessed standards of performance.
Depreciation on tangible fixed assets is provided using the
straight-line method based on the useful life of the assets as
estimated by the Company''s management. Depreciation is calculated on a
pro-rata basis from the date of installation till the date the assets
are sold or disposed. Assets acquired on finance leases and lease hold
improvements are depreciated over the period of the lease agreement or
the useful life whichever is shorter.
Gains or losses from disposal of tangible fixed assets are recognised
in the statement of profit and loss.
Schedule II to the Companies Act, 2013 (Schedule) prescribes the
useful lives for various classes of tangible assets. For certain class
of assets, based on the technical evaluation and assessment, the
Company believes that the useful lives adopted by it best represent the
period over which an asset is expected to be available for use.
Accordingly, for these assets, the useful lives estimated by the
Company are different from those prescribed in the Schedule.
Advances paid towards acquisition of tangible fixed assets outstanding
at each balance sheet date are shown under long term loans and
advances. Cost of assets not ready for intended use, as on the balance
sheet date, is shown as capital work-in-progress.
e) Borrowing costs
General and specific borrowing costs directly attributable to
acquisition or construction of those fixed assets which necessarily
take a substantial period of time to get ready for their intended use
are capitalised. Borrowing costs are interest and other costs incurred
by the Company in connection with the borrowing of funds. All other
borrowing costs are recognised in the statement of profit and loss in
the period in which they are incurred.
f) Intangible assets and amortisation
Intangible assets are recorded at the consideration paid for
acquisition including any import duties and other taxes (other than
those subsequently recoverable by the enterprise from the taxing
authorities), and any directly attributable expenditure in making the
asset ready for its intended use.
Intangible assets are amortised on a systematic basis over the best
estimate of their useful lives, commencing from the date the asset is
available to the Company for its use.
The Management''s estimates of the useful lives for various categories
of intangible assets are given below:
The amortisation period and the amortisation method are reviewed at
least at each financial year end. If the expected useful life of the
asset is significantly different from previous estimates, the
amortisation period is changed accordingly.
An intangible asset is derecognised on disposal or when no future
economic benefits are expected from its use and disposal. Gains or
losses arising from the disposal of intangible assets are recognised in
the statement of profit and loss.
Investments that are readily realisable and are intended to be held for
not more than 12 months from the date, on which such investments are
made, are classified as current investments. All other investments are
classified as non current investments.
Current investments are carried at the lower of cost and fair value.
The comparison of cost and fair value is done separately in respect of
each individual investment.
Non current investments are carried at cost less any
other-than-temporary diminution in value, determined separately for
each individual investment. The reduction in the carrying amount is
reversed when there is a rise in the value of the investment or if the
reasons for the reduction no longer exist. Any reduction in the
carrying amount and any reversal in such reductions are charged or
credited to the statement of profit and loss.
Inventories are valued at the lower of cost and net realisable value
(NRV). Cost of inventories comprises all cost of purchase, production
or conversion costs and other costs incurred in bringing the
inventories to their present location and condition. In the case of
finished goods and work-in-progress, cost includes an appropriate share
of overheads based on normal operating capacity. The cost of all
categories of inventory is determined using weighted average cost
method. NRV is the estimated selling price in the ordinary course of
the business, less the estimated costs of completion and the estimated
costs necessary to make the sale.
i) Research and development
Expenditure on research activities undertaken with the prospect of
gaining new scientific or technical knowledge and understanding is
recognized as expense in the statement of profit and loss when
Development activities involve a plan or design for the production of
new or substantially improved products and processes. Development
expenditure is capitalized only if:
a) the product or the process is technically and commercially feasible;
b) future economic benefits are probable and ascertainable;
c) the Company intends to and has sufficient resources, technical and
financial, to complete development of the product and has the ability
to use or sell the asset; and
d) development costs can be measured reliably.
j) Employee benefits Defined benefit plans
The liability in respect of defined benefit plans and other
post-employment benefits is calculated using the projected unit credit
method and spread over the period during which the benefit is expected
to be derived from employees'' services, consistent with the advice of
qualified actuaries. The long term obligations are measured at present
value of estimated future cash flows discounted at rates reflecting the
yields on risk free government bonds that have maturity dates
approximating the terms of the Company''s obligations. Short term
employee benefit obligations are measured on an undiscounted basis and
are expensed as the related service is provided.
All actuarial gains and losses arising during the year are recognized
in the statement of profit and loss.
Other long term employee benefits
The Company''s net obligation in respect of other long term employee
benefits is the amount of future benefit that employees have earned in
return for their service in the current and previous periods. That
benefit is discounted to determine its present value. Re-measurements
are recognized in the statement of profit and loss in the period in
which they arise.
Defined contribution plans
The Company''s contributions to defined contribution plans are
recognized in the statement of profit and loss as and when the services
are received from the employees.
Compensated leave of absence
The Company provides for accumulation of compensated absences by
certain categories of its employees. These employees can carry forward
a portion of the unutilized compensated absences and utilize it in
future periods or receive cash in lieu thereof as per Company policy.
The Company records an obligation for compensated absences in the
period in which the employee renders the services that increases this
entitlement. The measurement of such obligation is based on actuarial
valuation as at the balance sheet date carried out by a qualified
Employee stock option schemes
In accordance with the SEBI guidelines, the cost calculated based on
intrinsic value method i.e., the excess of the market price of shares,
at the date prior to the day of grant of options under the Employee
stock option schemes, over the exercise price is treated as employee
compensation and amortised over the vesting period.
k) Foreign currency transactions and balances
Foreign currency transactions are recorded using the exchange rates
prevailing on the dates of the respective transactions. Exchange
differences arising on foreign currency transactions settled during the
year are recognised in the statement of profit and loss.
Monetary assets and liabilities denominated in foreign currencies as at
the balance sheet date are reported using the foreign exchange rates as
at the balance sheet date. The resultant exchange differences are
recognised in the statement of profit and loss. Non monetary assets and
liabilities are carried at the rates prevailing on the date of
Exchange differences arising on a monetary item that, in substance,
forms part of the Company''s net investment in a non integral foreign
operation are accumulated in a foreign currency translation reserve in
the Company''s financial statements. Such exchange differences are
recognized in the statement of profit and loss in the event of disposal
of the net investment.
l) Derivative instruments and hedge accounting
The Company uses forward contracts, option contracts and swap contracts
(derivatives) to mitigate its risk of changes in foreign currency
exchange rates and interest rates. The Company does not use derivatives
for trading or speculative purposes.
The premium or discount on foreign exchange forward contracts is
amortized as income or expense over the life of the contract. The
exchange difference is calculated and recorded in accordance with AS 11
(revised) The Effect of Changes in Foreign Exchange Rates in the
statement of profit and loss. The changes in the fair value of foreign
currency option contracts and swap contracts are recognised in the
statement of profit and loss as they arise. Fair value of such option
and swap contracts is determined based on the appropriate valuation
techniques considering the terms of the contract.
Pursuant to ICAI Announcement Accounting for Derivatives on the early
adoption of AS 30 Financial Instruments: Recognition and Measurement,
the Company has adopted the Standard, to the extent that the adoption
does not conflict with existing mandatory accounting standards and
other authoritative pronouncements, Company law and other regulatory
The Company classifies its derivative contracts that hedge foreign
currency risk associated with highly probable forecasted transactions
as cash flow hedges and measures them at fair value. The effective
portion of such cash flow hedges is recorded as part of reserves and
surplus within the Company''s hedging reserve, and re-classified into
the statement of profit and loss as revenue in the period corresponding
to the occurrence of the forecasted transactions. The ineffective
portion is immediately recorded in the statement of profit and loss.
The Company also designates certain non derivative financial
liabilities, such as foreign currency borrowings from banks, as hedging
instruments for the hedge of foreign currency risk associated with
highly probable forecasted transactions and, accordingly, applies cash
flow hedge accounting for such relationships. Re-measurement gain/loss
on such non derivative financial liabilities is recorded as part of
reserves and surplus within the Company''s hedging reserve, and
re-classified in the statement of profit and loss as revenue in the
period corresponding to the occurrence of the forecasted transactions.
If the hedging instrument no longer meets the criteria for hedge
accounting, gets expired or is sold, terminated or exercised before the
occurrence of the forecasted transaction, the hedge accounting on such
transaction is discontinued prospectively. The cumulative gain or loss
previously recognized in hedging reserve continues to remain there
until the forecasted transaction occurs. If the forecasted transaction
is no longer expected to occur, the balance in hedging reserve is
recognized immediately in the statement of profit and loss.
m) Revenue recognition Sale of goods
Revenue is recognized when the significant risks and rewards of
ownership have been transferred to the buyer, recovery of the
consideration is reasonably certain, the associated costs and possible
return of goods can be estimated reliably, there is no continuing
management involvement with the goods and the amount of revenue can be
Revenue from the sale of goods includes excise duty and is net of
returns, sales tax and applicable trade discounts and allowances.
Revenue includes shipping and handling costs billed to the customer.
The Company accounts for sales returns by recording an allowance for
sales returns concurrent with the recognition of revenue at the time of
a product sale. This allowance is based on the Company''s estimate of
expected sales returns. The estimate of sales returns is determined
primarily by the Company''s historical experience in the markets in
which the Company operates.
Profit share revenues
The Company from time to time enters into marketing arrangements with
certain business partners for the sale of its products in certain
markets. Under such arrangements, the Company sells its products to
the business partners at a non-refundable base purchase price agreed
upon in the arrangement and is also entitled to a profit share which is
over and above the base purchase price.
Revenue in an amount equal to the base purchase price is recognized in
these transactions upon delivery of products to the business partners.
An additional amount representing the profit share component is
recognized as revenue in the period which corresponds to the ultimate
sales of the products made by business partners only when the
collectability of the profit share becomes probable and a reliable
measurement of the profit share is available.
Service income is recognised as per the terms of contracts with
customers when the related services are performed, or the agreed
milestones are achieved.
The Company enters into certain dossier sales, licensing and supply
arrangements with various parties. Income from licensing arrangements
is generally recognised over the term of the contract. Some of these
arrangements include certain performance obligations by the Company.
Revenue from such arrangements is recognized in the period in which the
Company completes all its performance obligations.
Dividend and interest income
Dividend income is recognised when the unconditional right to receive
the income is established. Income from interest on deposits, loans and
interest bearing securities is recognised on a time proportion basis.
Export entitlements are recognised as reduction from cost of material
consumed when the right to receive credit as per the terms of the
scheme is established in respect of the exports made and where there is
no significant uncertainty regarding the ultimate collection of the
relevant export proceeds.
n) Income tax expense
Income tax expense comprises current tax and deferred tax charge or
The current charge for income taxes is calculated in accordance with
the relevant tax regulations applicable to the Company.
Deferred tax charge or credit reflects the tax effects of timing
differences between accounting income and taxable income for the
period. The deferred tax charge or credit and the corresponding
deferred tax liabilities or assets are recognised using the tax rates
that have been enacted or substantially enacted by the balance sheet
date. Deferred tax assets are recognised only to the extent there is
reasonable certainty that the assets can be realised in future;
however, where there is unabsorbed depreciation or carry forward of
losses, deferred tax assets are recognised only if there is a virtual
certainty of realisation of such assets.
Deferred tax assets are reviewed at each balance sheet date and are
written-down or written-up to reflect the amount that is
reasonably/virtually certain (as the case may be) to be realised.
Minimum Alternate Tax
Minimum Alternate Tax (MAT) credit is recognized as an asset only
when and to the extent there is convincing evidence that the Company
will pay normal income tax during the specified period. Such asset is
reviewed at each balance sheet date and the carrying amount of the MAT
credit asset is written down to the extent there is no longer
convincing evidence to the effect that the Company will pay normal
income tax during the specified period.
o) Earnings per share
The basic earnings per share (EPS) is computed by dividing the profit
after tax for the year by the weighted average number of equity shares
outstanding during the year. For the purpose of calculating diluted
earnings per share, profit after tax for the year and the weighted
average number of shares outstanding during the year are adjusted for
the effects of all dilutive potential equity shares. The dilutive
potential equity shares are deemed converted as of the beginning of the
period, unless they have been issued at a later date. The diluted
potential equity shares have been adjusted for the proceeds receivable
had the shares been actually issued at fair value (i.e., the average
market value of the outstanding shares).
p) Provisions, contingent liabilities and contingent assets
A provision is recognised when the Company has a present obligation as
a result of past events and it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation.
Provisions are measured at the best estimate of the expenditure
required to settle the present obligation at the balance sheet date.
A disclosure for a contingent liability is made when there is a
possible obligation or a present obligation that may, but probably will
not, require an outflow of resources. Where there is a possible
obligation or a present obligation in respect of which the likelihood
of outflow of resources is remote, no provision or disclosure is made.
Contingent assets are not recognised in the financial statements.
However, contingent assets are assessed continually and if it is
virtually certain that an inflow of economic benefits will arise, the
asset and related income are recognised in the period in which the
q) Impairment of assets
The Company assesses at each balance sheet date whether there is any
indication that an asset may be impaired. If any such indication
exists, the Company estimates the recoverable amount of the asset.
For the purpose of impairment testing, assets are grouped together into
the smallest group of assets (Cash Generating Unit or CGU) that
generates cash inflows from continuing use that are largely independent
of the cash inflows of other assets or CGUs.
The recoverable amount of an asset or CGU is the greater of its value
in use and its net selling price. Value in use is the present value of
the estimated future cash flows expected to arise from the continuing
use of an asset and from its disposal at the end of its useful life.
If such recoverable amount of the asset or the recoverable amount of
the CGU to which the asset belongs is less than its carrying amount,
the carrying amount is reduced to its recoverable amount. The reduction
is treated as an impairment loss and is recognised in the statement of
profit and loss. If at the balance sheet date there is an indication
that if a previously assessed impairment loss no longer exists, the
recoverable amount is reassessed and the asset is reflected at the
recoverable amount subject to a maximum of amortised historical cost.
At the inception of the lease, a lease arrangement is classified as
either a finance lease or an operating lease, based on the substance of
the lease arrangement.
A finance lease is a lease that transfers substantially all the risks
and rewards incident to ownership of an asset. A finance lease is
recognized as an asset and a liability at the commencement of the
lease, at the lower of the fair value of the asset and the present
value of the minimum lease payments. Initial direct costs, if any, are
also capitalized and, subsequent to initial recognition, the asset is
accounted for in accordance with the accounting policy applicable to
that asset. Minimum lease payments made under finance leases are
apportioned between the finance expense and the reduction of the
outstanding liability. The finance expense is allocated to each period
during the lease term so as to produce a constant periodic rate of
interest on the remaining balance of the liability.
Other leases are operating leases, and the leased assets are not
recognized on the Company''s balance sheet. Payments made under
operating leases are recognized in the statement of profit and loss on
a straight-line basis over the term of the lease.
s) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits and
short term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to insignificant risk of
changes in value. For this purpose, short term means investments
having maturity of three months or less from the date of investment.