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Tata Consultancy Services

BSE: 532540|NSE: TCS|ISIN: INE467B01029|SECTOR: Computers - Software
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Mar 16
Notes to Accounts Year End : Mar '17

1) MERGER OF CMC LIMITED

a) Nature of business

CMC Limited is engaged in the design, development and implementation of software technologies and applications, providing professional services in India and overseas and procurement, installation, commissioning, warranty and maintenance of imported / indigenous computer and networking systems, and in education and training. The Company holds 51.12% of the voting power of CMC Limited.

b) CMC Limited has been amalgamated with the Company with effect from April 1, 2015 (''appointed date’) in terms of the scheme of amalgamation (''the Scheme’) sanctioned by the High Court of Judicature at Bombay vide its Order dated August 14, 2015 and the High Court of Judicature at Hyderabad vide its Order dated July 20, 2015. The Scheme came into effect on April 1, 2015 and pursuant thereto all assets, unbilled revenue, debts, outstanding, credits, liabilities, benefits under income tax, service tax, excise, value added tax, sales tax (including deferment of sales tax), benefits for and under Software Technology Parks of India (''STPI’) and Special Economic Zone (''SEZ’), duties and obligations of the CMC Limited, have been transferred to and vested in the Company retrospectively with effect from April 1, 2015.

Pursuant to the Scheme coming into effect, all the equity shares held by the Company in CMC Limited shall stand automatically cancelled and remaining shareholders of CMC Limited holding fully paid equity shares shall be allotted 79 shares of Rs, 1 each in the Company, credited as fully paid-up, for every 100 shares of Rs, 10 each fully paid-up held in the share capital of CMC Limited by adjusting the General reserve.

c) The assets, liabilities and reserves of CMC Limited as at April 1, 2015 have been taken over at their carrying values since the entities are under common control.

2) FINANCIAL INSTRUMENTS

The significant accounting policies, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognized, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2(i) to the financial statements.

Fair value hierarchy:

The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable and consists of the following three levels:

- Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

- Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

- Level 3 - Inputs are not based on observable market data (unobservable inputs). Fair values are determined in whole or in part using a valuation model based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor are they based on available market data.

The investments included in Level 2 of fair value hierarchy have been valued using quotes available for similar assets and liabilities in the active market. The investments included in Level 3 of fair value hierarchy have been valued using the cost approach to arrive at their fair value. The cost of unquoted investments approximate the fair value because there is a wide range of possible fair value measurements and the cost represents estimate of fair value within that range.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis and financial assets that are not measured at fair value on a recurring basis (but fair value disclosure are required):

(b) Derivative financial instruments and hedging activity

The Company’s revenue is denominated in foreign currency predominantly US Dollar, Sterling Pound and Euro. In addition to these currencies, the Company also does business in Australian Dollar, Singapore Dollar, Saudi Arabian Riyal, Danish Kroner and Brazilian Real. Given the nature of the business, a large portion of the costs are denominated in Indian Rupee. This exposes the Company to currency fluctuations.

The Company monitors and manages the financial risks relating to its operations by analyzing its foreign exchange exposures by the level and extent of currency risks.

The Company use various derivative financial instruments governed by policies approved by the board of directors such as foreign exchange forward, option and future contracts to manage and mitigate its exposure to foreign exchange rates. The counterparty is generally a bank. The Company can enter into contracts for a period between one day and eight years.

The Company report quarterly to its risk management committee, an independent body that monitors foreign exchange risks and policies implemented to manage its foreign exchange exposures.

The following are outstanding currency option contracts, which have been designated as cash flow hedges as at:

Net gain on derivative instruments of Rs, 88 crores recognized in Hedging Reserve as at March 31, 2017, is expected to be transferred to the statement of profit and loss by March 31, 2018. The maximum period over which the exposure of cash flow variability has been hedged is through calendar year of 2017.

In addition to the above cash flow hedges, the Company has outstanding foreign exchange forwards, options and future contracts with notional amount aggregating Rs, 19,159 crores, Rs, 22,144 crores and Rs, 19,949 crores whose fair value showed a net gain of Rs, 412 crores, Rs, 284 crores and Rs, 159 crores as at March 31, 2017, March 31, 2016 and April 1, 2015 respectively. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting.

Exchange gain of Rs, 1,522 crores (March 31, 2016: Exchange gain of Rs, 181 crores) on foreign exchange forwards, options and future contracts for the year ended March 31, 2017 have been recognized in the statement of profit and loss.

Following table summarizes approximate gain / (loss) on the Company’s other comprehensive income on account of appreciation / depreciation of the underlying foreign currencies.

(c) Financial risk management

The Company is exposed primarily to fluctuations in foreign currency exchange rates, credit, liquidity and interest rate risks, which may adversely impact the fair value of its financial instruments. The Company has a risk management policy which covers risks associated with the financial assets and liabilities. The risk management policy is approved by the Board of Directors. The focus of the risk management committee is to assess the unpredictability of the financial environment and to mitigate potential adverse effects on the financial performance of the Company.

(i) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Such changes in the values of financial instruments may result from changes in the foreign currency exchange rates, interest rates, credit, liquidity and other market changes. The Company’s exposure to market risk is primarily on account of foreign currency exchange rate risk.

(a) Foreign currency exchange rate risk

The fluctuation in foreign currency exchange rates may have potential impact on the statement of profit and loss and other comprehensive income and equity, where any transaction references more than one currency or where assets / liabilities are denominated in a currency other than the functional currency of the Company.

Considering the countries and economic environment in which the Company operates, its operations are subject to risks arising from fluctuations in exchange rates in those countries. The risks primarily relate to fluctuations in US Dollar, Great Britain Pound and Euro against the functional currency of the Company.

The Company, as per its risk management policy, uses derivative instruments primarily to hedge foreign exchange. Further, any movement in the functional currency of the various operations of the Company against major foreign currencies may impact the Company’s revenue in international business.

The Company evaluates the impact of foreign exchange rate fluctuations by assessing its exposure to exchange rate risks. It hedges a part of these risks by using derivative financial instruments in line with its risk management policies.

The foreign exchange rate sensitivity is calculated by aggregation of the net foreign exchange rate exposure and a simultaneous parallel foreign exchange rates shift of all the currencies by 10% against the functional currency of the Company.

The following analysis has been worked out based on the net exposures of the Company as of the date of Balance sheet which could affect the statements of profit and loss and other comprehensive income and equity. Further the exposure as indicated below is mitigated by some of the derivative contracts entered into by the Company as disclosed in note 28(b).

10% appreciation / depreciation of the respective foreign currencies with respect to functional currency of the Company would result in decrease / increase in the Company’s profit before tax by approximately '' 155 crores as on April 1, 2015.

*Others include Australian Dollar, Saudi Arabian Riyal, Danish Kroner, Brazilian Real, Mexican Peso, United Arab Emirates Dirham, Swedish Kroner, South African Rand, Swiss Franc, Norwegian Kroner etc.

(b) Interest rate risk

The Company’s investments are primarily in fixed rate interest bearing investments. Hence the Company is not significantly exposed to interest rate risk.

(ii) Credit risk

Credit risk is the risk of financial loss arising from counterparty failure to repay or service debt according to the contractual terms or obligations. Credit risk encompasses of both, the direct risk of default and the risk of deterioration of creditworthiness as well as concentration of risks. Credit risk is controlled by analyzing credit limits and creditworthiness of customers on a continuous basis to whom the credit has been granted after obtaining necessary approvals for credit.

Financial instruments that are subject to concentrations of credit risk principally consist of trade receivables, unbilled revenue, investments, derivative financial instruments, cash and cash equivalents, bank deposits and other financial assets. Inter-corporate deposits of Rs, 2,425 crores are with a financial institution having a high credit-rating assigned by credit-rating agencies. Bank deposits include an amount of Rs, 415 crores held with an Indian bank having high quality credit rating which are individually in excess of 10% or more of the Company’s total bank deposits for the year ended March 31, 2017. None of the other financial instruments of the Company result in material concentration of credit risk.

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk was Rs, 67,749 crores, Rs, 55,563 crores and Rs, 42,423 crores as at March 31, 2017, March 31, 2016 and April 1, 2015, respectively, being the total of the carrying amount of balances with banks, bank deposits, investments excluding equity and preference investments, trade receivables, unbilled revenue and other financial assets.

The Company’s exposure to customers is diversified and no single customer contributes to more than 10% of outstanding accounts receivable and unbilled revenue as at March 31, 2017 and March 31, 2016.

Geographic concentration of credit risk

TCS Limited also has a geographic concentration of trade receivables, net of allowances and unbilled revenue is given below:

(in %)

(iii) Liquidity risk

Liquidity risk refers to the risk that the Company cannot meet its financial obligations. The objective of liquidity risk management is to maintain sufficient liquidity and ensure that funds are available for use as per requirements.

The Company consistently generated sufficient cash flows from operations to meet its financial obligations as and when they fall due.

The tables below provide details regarding the contractual maturities of significant financial liabilities as at:

3) SEGMENT REPORTING

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker, in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer and Managing Director.

The Company has identified business segments (industry practice) as reportable segments. The business segments comprise: 1) Banking, Financial Services and Insurance, 2) Manufacturing, 3) Retail and Consumer Business, 4) Communication, Media and Technology and 5) Others such as energy, resources and utilities, life science and healthcare, s-Governance and products.

Revenue and expenses directly attributable to segments are reported under each reportable segment. Expenses which are not directly identifiable to each reporting segment have been allocated on the basis of associated revenue of the segment and manpower efforts. All other expenses which are not attributable or allocable to segments have been disclosed as unallowable expenses.

Assets and liabilities that are directly attributable or allocable to segments are disclosed under each reportable segment. All other assets and liabilities are disclosed as unallowable. Property, plant and equipment that are used interchangeably among segments are not allocated to reportable segments.

4) COMMITMENTS AND CONTINGENCIES

(i) Commitments

Estimated amount of contracts remaining to be executed on capital account and not provided for (net of advances) Rs, 1,493 crores

(ii) Contingencies

Direct tax matters Refer Note 9 Indirect tax matters

The Company has ongoing disputes with tax authorities mainly relating to treatment of characterization and classification of certain items. As at March 31, 2017, the Company has demands on appeal amounting to Rs, 253 crores from various indirect tax authorities, which are being contested by the Company. In respect of indirect tax contingencies of Rs, 9 crores, not include above, the Company is entitled to an indemnification from the seller of TCS e-Serve Limited.

Other claims

The Company has examined the social security and tax aspects of contracts with legal entities which provide services to an overseas subsidiary and, based on legal opinion, concludes that the subsidiary is in compliance with the related statutory requirements.

As at March 31, 2017, claims aggregating Rs, 6,276 crores against the Company have not been acknowledged as debts.

In October 2014, Epic Systems Corporation (referred to as Epic) filed a legal claim against the Company in the Court of Western District Madison, Wisconsin for alleged infringement of Epic’s intellectual property. In April 2016, the Company received an unfavorable jury verdict awarding damages totaling Rs, 6,101 crores (US 1 million) to Epic which the trial judge has indicated his intent to reduce. On the basis of legal opinion and legal precedence, the Company expects to defend itself against the claim and believes that the claim will not sustain.

Bank guarantees and letters of comfort

The Company has given letter of comfort to various banks for credit facilities availed by its subsidiaries (a) Tata America International Corporation and

(b) Tata Consultancy Services Asia Pacific Pte Ltd. As per the terms of letter of comfort, the Company undertakes not to divest its ownership interest directly or indirectly in the subsidiaries and provide such managerial, technical and financial assistance to ensure continued successful operations of the subsidiaries.

The Company has provided guarantees to third parties on behalf of its subsidiaries aggregating '' 2,127 crores. The Company does not expect any outflow of resources in respect of the above.

The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends.

5. DIVIDENDS

Dividends paid during the year ended March 31, 2017 include an amount of '' 27 per equity share towards final dividend for the year ended March 31, 2016 and an amount of Rs, 19.50 per equity share towards interim dividend for the year ended March 31, 2017. Dividends paid during the year ended March 31, 2016 include an amount of Rs, 24 per equity share towards final dividend for the year ended March 31, 2015 and an amount of Rs, 16.50 per equity share towards interim dividend for the year ended March 31, 2016.

The dividends declared by the Company are based on the profits available for distribution as reported in the financial statements of the Company. Accordingly, the retained earnings reported in these financial statements may not be fully distributable. As at March 31, 2017, income (net of dividend tax) available for distribution were Rs, 62,383 crores. On April 18, 2017, the Board of Directors of the Company have proposed a final dividend of Rs, 27.50 per share in respect of the year ended March 31, 2017 subject to the approval of shareholders at the Annual General Meeting. If approved, the dividend would result in a cash outflow of Rs, 6,522 crores inclusive of dividend distribution tax of Rs, 1,103 crores.

Analytics In the enterprise context, this is the discovery, interpretation, and communication of meaningful patterns in business data to predict and improve business performance

Application Programming APIs are a set of easily accessible protocols for communication between various software components Interface (API)

Pacification The process of exposing a discrete business function or data within an enterprise''s systems through APIs

Application Development Design, development, and deployment of custom software; ongoing support, upkeep, and enhancement of such software on behalf of the client and Maintenance

Artificial Intelligence (AI) AI is technology that appears to emulate human performance typically by learning, arriving at its own conclusions, appearing to understand complex content, engaging in natural dialogs with people, enhancing human cognitive performance (cognitive computing) or replacing people on execution of non-routine tasks Asset Leveraged Solutions Software solutions delivered by leveraging TCS'' IP / frameworks or software products

Assurance Services Quality Assurance and Engineering Services encompassing business requirements validation, static and functional testing, non-functional testing including performance engineering, user experience, security and test automation

Attrition This measures what portion of the workforce left the organization (voluntarily or involuntarily) in a certain period. Attrition looks at employee departures over the last 12 months (LTM). The formula is: Total number of departures in the LTM / closing headcount

Augmented Reality (AR) Augmented Reality is a technology that superimposes a computer-generated image on a user''s view of the real world to enrich the interaction

Automation Automation is the execution of work by machines in accordance with rules that have either been explicitly coded by a human or ''learned'' by the machine through pattern recognition of data

Basis Point A basis point is one hundredth of a percentage point, that is, 0.01%

Big Data Big Data is high volume, high velocity, and/or high variety information assets that require new forms of processing to enable enhanced decision making, insight

discovery, and process optimization

Book Value The value at which an asset or a liability is carried on a balance sheet or the value of intial outlay for an investment.

Block chain Block chain is a distributed database that maintains a continuously growing list of records, called blocks, secured from tampering and revision

Business Process Designing, enabling, and executing business operations including data management, analytics, interactions and experience management

Services (BPS)

Chatbots Chatbots are computer programs designed to simulate conversation with human users, especially over the internet. They are typically used in dialog systems for various practical purposes like customer service or information acquisition

Cognitive Computing Cognitive computing is the simulation of human thought processes in a computerized model. It involves self-learning systems that use data mining, pattern recognition, and natural language processing to mimic the way the human brain works

Constant Currency Restating the current period''s revenue or profit after eliminating the impact of currency movement in the intervening period gives the constant currency revenue or profit

At TCS, this is done by recalculating the current period''s revenue using the average currency conversion rates from the prior period

Cross-currency impact When a company derives revenues in multiple currencies, the change in conversion rates of those currencies to the reporting currency (for example, INR) in the current period, vis-a-vis the conversion rates of the prior period affects the reported revenue. This revenue impact due to shifts in the value of currencies relative to the reporting currency is called cross-currency impact

For example, if 50% of the revenue is denominated in USD, and the USD has depreciated against the INR by 5% in a period, even if the company earns the same amount of dollars as in the prior period, it still translates into fewer rupees this period. The cross-currency impact on revenue will be 50% x 5% = 2.5%

Cyber Security Cyber Security is the body of technologies, processes, and practices designed to protect networks, computers, programs, and data from attack, damage, or unauthorized access. In a computing context, security includes both cyber security and physical security

Days'' Sales Outstanding Days'' Sales Outstanding is a popular way of depicting the Accounts Receivable relative to the company''s revenue over the last twelve months (DSO = Accounts (DSO) Receivable * 365 / Revenue)

Digital Technologies Digital technologies represent the nexus of new age services such as Social Media, Mobility, Analytics, Big Data, Cloud, Artificial Intelligence and Internet of Things

Discretionary Spend Discretionary spend, also known as Change the Business (CTB) spend, is that portion of the IT budget that''s outside of the basic minimum IT activities required to keep the business running. Projects that transform the manner in which business operates are considered discretionary

In uncertain economic times, t may be necessary for businesses to cut spend in response to decline in income and discretionary spend is often the first one to be scrutinized Discretionary spend is subjective, and may differ considerably among business

Dividend Payout Ratio Dividend Payout Ratio is the ratio of the annual dividend paid (including dividend distribution tax) to the Net Income, usually expressed as a percentage

Earnings per Share (EPS) EPS for any period is the amount of that period''s Net Income attributable to a single share after deducting any preference dividend and related taxes

EPS = [Net profit - Preference dividend if any] / Weighted average number of shares outstanding during the period

Effective Tax Rate (ETR) ETR is the proportion of the Profit Before Taxes that is provided for payment of income taxes

ETR = Provision for Taxes / Profit Before Taxes

Engineering and Next Generation Product Engineering, Manufacturing Operations Transformation, Services Transformation, Embedded software and Internet of Things Industrial Services

Enterprise Solutions and Business and technology consulting, design, architecture, implementation, and support services on Enterprise Application platforms covering the front, middle,

Consulting and back-office applications such as ERP CRM, Supply Chain, Content Management etc., on-premise, cloud and other digital platforms

Fair Value The fair value of a financial asset or liability is the price that would be received on selling an asset or paid on transferring a liability in an orderly transaction between market participants at the measurement date

Forward Contract A Forward Contract is a hedging instrument wherein two parties agree to buy or sell a particular currency at a pre-determined rate (OR Forward Currency rate ) on a specific future date.

For e.g. TCS enters into a forward contract to sell USD 1mn after 3 months @ '' 68. Irrespective of the prevailing USD spot rate, TCS will be obliged to sell USD 1mn @ '' 68 at the end of 3 months.

Ramification Ramification is the process of adding games or game-like elements to any activity in order to enrich experiences and encourage user participation

IT Infrastructure Services Technical consulting, remote infrastructure management, hosting, process and tools optimization, and technical transformation of the enterprise IT infrastructure

(IT IS) to a future proof hybrid cloud model

Internet of Things (IoT) IoT is a network of interconnected machines or devices which are embedded with sensors, software, network connectivity, and necessary electronics to generate and share run-time data that can be studied and used to monitor or control remotely, predict failure, and optimize the design of those machines / devices

Invested Funds Invested funds are funds that are highly liquid in nature, and can be readily converted into cash

Invested Funds = Cash and Bank Balances Investments Deposits with Banks Inter corporate Deposits

Key Managerial KMP in relation to our Company means the Chief Executive Officer and Managing Director, Chief Financial Officer, all Executive Directors, Global Head for Human

Personnel (KMP) Resource and the Company Secretary. Please refer to the Company''s policy on KMP: http://www.tcs.com/ir-corporate-governance

Machine Learning Machine learning is a type of artificial intelligence (AI) that provides computers with the ability to learn without being explicitly programmed

Market Capitalization Total market value of all of a company''s outstanding equity shares

Market Cap = Last Trading Price * Total number of outstanding shares

Non controlling Interest Minority Interest is the share of the consolidated profits attributable to interests of the non-controlling ownership in the subsidiaries.

Non-discretionary Spend Non-Discretionary spend, also known as Run the Business (RTB) spend, is that portion of the IT budget that covers the basic IT activities required to keep a business running

Even in tough economic times, non-discretionary spend remains relatively unaffected

Offshore leverage This is the proportion of our international revenues derived from services that are delivered out of centers in India. A service delivered out of an offshore delivery center is billed at a lower rate compared to what would be applicable if delivered out of the customer''s location. So higher offshore leverage depresses the revenue growth relative to the volume growth but expands the gross margin

Pricing This is the price charged to the customer per unit of effort. In contracts, pricing is the billing rate for a unit of effort (usually measured in person-hours). In Fixed Price contracts, pricing is the total sum the customer is expected to pay for the turnkey solution delivered. Some use this term interchangeably (and somewhat inaccurately) with the average revenue realized by the company per unit of effort. See Realization

Realization This is the revenue received by the company per unit of effort expended. TCS reports the quarter on quarter change in realization (in percentage terms) after removing any impact of changes in currency exchange rates and also any impact of change in offshore leverage between the two periods Billing rates vary depending on what service is offered, and in which part of the world, so it is important to note that increases or decreases in realization could be because of changes in the underlying business or geographic mix and not necessarily because of a change in the pricing of a service. Also, realization doesn''t take into account the costs and therefore higher realization is not necessarily more profitable

Related Party Any transaction between a company and its related party involving transfer of services, resources or any obligation, regardless of whether a price is charged.

Transactions Please refer the Company''s policy on Related Party Transactions : http://www.tcs.com/ir-corporate-governance

Simplification Simplification is the term used to describe the rationalization of IT architectures through consolidation of systems and elimination of redundant systems and layers.

The primary purpose is to shrink the IT footprint and make operations leaner and more efficient

Unbilled Revenue (UBR) UBR is revenue that is yet to be invoiced for services already delivered. The budgeted effort has been expended (and therefore the revenue has been recognized) and yet, no invoice has been raised. While this could happen due to several reasons, the most common one is the customer delay in acceptance of a project deliverable. This is the opposite of Unearned Revenue

Unearned Revenue (UER) UER is money received in advance for services yet to be delivered. In other words, it is revenue that has been invoiced and collected from the client although the underlying effort is yet to be expended. Unearned revenue is the opposite of Unbilled Revenue

Virtual Reality (VR) VR is an artificial, computer-generated simulation or recreation of a real life environment or situation. It engages users by offering simulated reality experiences firsthand, primarily by stimulating their vision and hearing

Volume Volume in any period is the Billed Effort and the quantum of hardware equipment and software licenses sold in that period

Disclaimer: This glossary is intended to help understand commonly used terms and phrases in TCS'' Annual Report. The explanations are not intended to be technical definitions. If explanations provided here are found to be different from what is described in the Company''s periodic financial statements (not limited to Notes to Accounts), then the definition provided in the certified financial statements will prevail.

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