1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i) Basis of Accounting
The financial statements have been prepared under the historical cost
convention in accordance with generally accepted accounting principles
in India, the accounting standards issued by the Institute of Chartered
Accountants of India and the provisions of the Companies Act, 1956, as
adopted consistently by the Company.
The Company follows the mercantile system of accounting and recognises
items of income and expenditure on an accrual basis.
ii) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses for the years presented. Actual results could differ from
iii) Revenue Recognition
Revenue from software development contracts priced on a time and
material basis is recognised as services are performed on the basis of
billable time spent by employees working on the project, priced at the
contracted rate. A provision is made for future warranty costs based on
management's estimates of such future costs.
In certain contracts the price at which the company provides product
development services includes royalties that would become receivable in
the future upon successful sale of products by the customers of the
company. Such royalties are recognised only when such future sales
occur. Revenue from software development on fixed price contracts is
recognised on the proportionate completion method and where no
significant uncertainty exists regarding the amount of consideration
that will be derived on completion of the contract. Where the outcome
of the contract cannot be reliably estimated, revenue is recognised
only to the extent of cost incurred. A provision for anticipated loss
is recognised where it is probable that the estimated contract costs
are likely to exceed the total contract revenue.
Revenue from sale of software user license/products with a conditional
clause on acceptance but without any obligation for warranty, is
recognised on acceptance of the software. Where such a sale also has an
obligation for warranty, revenue is adjusted for the fair value of
warranty and recognised on acceptance of the software and the portion
of revenue represented by the fair value of warranty is recognised over
the period of warranty. Where the sale is not conditional on acceptance
but has an obligation for warranty, revenue is adjusted for the fair
value of warranty and recognised on delivery of the software and the
portion of revenue represented by the fair value of warranty is
recognised over the period of warranty.
Revenue from sale of goods is recognised as goods are despatched to the
customers. Sales are recorded at invoice value, net of sales tax.
Revenue from business process outsourcing services is recognised on the
basis of billable time spent by employees, as per the terms of specific
Revenue from maintenance services is recognised pro-rata over the
period in which the services are rendered. Revenue from lease rent,
commission and interest on bank deposits is recognised on accrual
iv) Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Cost
includes original cost of acquisition, including incidental expenses
related to such acquisition and installation. The company does not
capitalise the cost of equipment acquired specifically for client
projects, for which the client has borne the cost and where there is no
enduring benefit to the company following conclusion of the project.
Such equipment is included in the project cost.
Depreciation on all fixed assets is provided on the straight-line
method over the estimated useful life of the assets at rates which are
equal to or higher than the rates specified in Schedule XIV to the
Companies Act, 1956. The depreciation rates used by the Company are as
Category of Fixed Assets Rate of Depreciation
Factory Building 3.34%
Plant & Machinery
Air Conditioners 20.00%
Motor Vehicles 33.33%
Furniture & Fixtures 20.00%
Office Equipment 20.00%
Depreciation on addition to fixed assets is provided on pro-rata basis
from the date the assets are put to use. Depreciation on
sale/deduction from fixed assets is provided for upto the date of sale,
deduction and discardment as the case may be.
All assets costing Rs.5,000 or below are depreciated in full by way of
a one-time depreciation charge.
Leasehold improvements are amortised over the period of lease,
including the optional period of lease,
Inventories are valued at lower of cost and net realisable value, cost
being determined on FIFO basis. Cost includes all expenses incurred in
bringing the goods to their present location and condition.
vii) Impairment of Assets
Whenever events indicate that assets may be impaired, the assets are
subject to a test of recoverability based on estimates of future cash
flows arising from continuing use of such assets and from its ultimate
disposal. A provision for impairment loss is recognised where it is
probable that the carrying value of an asset exceeds the amount to be
recovered through use or sale of the asset.
Long term investments are stated at cost, less provision for diminution
in value of investments, which is considered to be permanent. Current
investments are stated at lower of cost or fair market value. Cost
includes original cost of acquisition, including brokerage and stamp
ix) Foreign Currency Transactions
Transactions denominated in foreign currencies with respect to purchase
of fixed assets are recorded at the exchange rates prevailing on the
date of the purchase order and all other transactions denominated in
foreign currencies are recorded at the exchange rates prevailing on the
date of the transaction. The financial statements of foreign branches
of the company are translated and recorded in the functional currency
of the company.
Monetary items denominated in foreign currencies at the year-end are
translated at the exchange rates prevailing on the date of the Balance
Sheet. Non-monetary items denominated in foreign currencies are carried
Any income or expense on account of exchange differences either on
settlement or on translation of transactions other than those relating
to fixed assets acquired from sources outside India is recognised in
the Profit and Loss Account. Gain or loss on translation of long-term
liabilities incurred to acquire fixed assets from sources outside India
is treated, as an adjustment to the carrying cost of related fixed
assets. In respect of forward exchange contracts, the difference
between the forward rate and the rate at the inception of a forward
contract is recognised as income or expense over the life of the
contract. Any income or expense on account of exchange differences
either on settlement of the contract or on translation of the unmatured
foreign currency contract at the rate prevailing on the date of the
Balance Sheet date is recognised in the Profit and Loss Account.
x) Retirement Benefits
In accordance with the provisions of the Employees Provident Funds and
Miscellaneous Provisions Act, 1952, eligible employees of the company
are entitled to receive benefits with respect to provident fund, a
defined contribution plan in which both the company and the employee
contribute monthly at a determined rate (currently 12% of employee's
basic salary). These contributions are made to a fund set up by the
company and administered by a board of trustees. The company has no
liability for future provident fund benefits other than its monthly
contribution, and recognises such contribution as an expense in the
Benefits payable to eligible employees of the company with respect to
gratuity, a defined benefit plan is accounted for on the basis of an
actuarial valuation as at the balance sheet date. In accordance with
the Payment of Gratuity Act, 1972, the plan provides for lump sum
payments to vested employees on retirement, death while in service or
on termination of employment in an amount equivalent to 15 days basic
salary for each completed year of service. Vesting occurs upon
completion of one to five years of service. The company contributes all
the ascertained liabilities to a fund set up by the company and
administered by a board of trustees. The present value of such
obligation is determined by the projected unit credit method and
adjusted for past service cost and fair value of plan assets as at the
balance sheet date through which the obligations are to be settled. The
resultant actuarial gain or loss on change in present value of the
defined benefit obligation or change in return of the plan assets is
recognised as an income or expense in the Profit and Loss Account. The
expected return on plan assets is based on the assumed rate of return
of such assets.
Leave encashment benefits payable to employees with respect to
accumulated leaves outstanding at the year end are accounted for on the
basis of basic salary drawn by the employees as at the balance sheet
The Company maintains a defined benefit pension plan in respect of
employees transferred from Lucent Technologies GmbH (`Lucent') in terms
of an agreement executed on February 18, 2003 whereby certain pension
benefit • obligations were transferred to the company. The annual
contribution to the plan is based on an actuarial valuation and is
charged to the Profit & Loss Account.
xi) Income Taxes
Income taxes consist of current taxes and changes in deferred tax
liabilities and assets.
Income taxes are accounted for on the basis of estimated taxes payable
and adjusted for timing differences between the taxable income and
accounting income as reported in the financial statements. Current
income tax has been provided at the enacted tax rates on income not
exempt under the tax holiday, rental income, interest on deposits,
investment income, capital gains and income taxes payable in foreign
Deferred tax assets or liabilities in respect of timing differences
which originate during the tax holiday period but reverse after the tax
holiday are recognised in the year in which the timing differences
originate if they result in taxable Amounts. Deferred tax assets or
liabilities are established at the enacted tax rates. Changes in the
enacted rates are recognised in the period of enactment.
Deferred tax assets are recognised only if there is a reasonable
certainty that they will be realised and are reviewed for the
appropriateness of their respective carrying values at each balance
Lease rentals are expensed with reference to lease terms.
xiii) Earnings per Share
Basic earnings per share are calculated by dividing the net profit or
loss for the year attributable to equity shareholders by the weighted
average number of equity shares outstanding during the year.
For calculating diluted earnings per share, the net profit or loss for
the year attributable to equity shareholders and the weighted average
number of shares outstanding during the year are adjusted for the
effects of all dilutive potential equity shares.
xiv) Miscellaneous Expenditure
Costs incurred for the development of computer software are deferred
when technological feasibility has been established. Technological
feasibility is based upon completion of a detailed program design.
Thereafter, all software production costs are deferred and subsequently
reported at the lower of unamortised cost and net realisable value.
The company also incurs costs to develop new custom software modules
that are generally included as components of larger systems developed
by customers. Technological feasibility of the sub-system is largely
dependent on the feasibility of the larger system, into which it is
incorporated, over which the company has little control. Deferral of
costs incurred to develop such software intended for sale is thus
inappropriate and such amounts are expensed as they are incurred.
Software development cost is amortised on a product-by-product basis.
The periodic amortisation is the greater of the ratio of the current
estimated revenues for each product over their estimated lifetime
revenues and the straight-line amortisation over the remaining useful
xv) Material Events
Material events occurring after the Balance Sheet date are taken into