i. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in India requires the management to make
estimates and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities at the date of the financial statement
and notes thereto and the reported amounts of revenues and expenses
during the accounting period. Any revision to the accounting estimates
is recognized prospectively in the current and future periods. Examples
of such estimates include provision for doubtful debts, economic useful
lives of fixed assets, etc. Actual results could differ from those
ii. Fixed assets and depreciation Tangible Fixed assets
Fixed assets, tangible are stated at cost less accumulated depreciation
and impairment losses if any. Cost comprises the purchase price and any
attributable cost of bringing the asset to its working condition for
its intended use. Borrowing costs relating to acquisition of qualifying
fixed assets which takes substantial period of time to get ready for
its intended use are also included to the extent they relate to the
period till such assets are ready to be put to use.
Depreciation is provided using the Straight Line Method as per the
useful lives of the assets estimated by the management, or at the rates
prescribed under schedule XIV of the companies Act, 1956 whichever is
higher. The rates currently applied as follows:
Capital work-in-progress includes the cost of fixed assets that are not
ready for their intended use and advances paid to acquire the fixed
iii. Intangible assets
Intangible assets acquired separately are measured on initial
recognition at cost. Following initial recognition, intangible assets
are carried at cost less accumulated amortization and accumulated
impairment losses, if any.
Intangible assets are amortized on a straight line basis over the
estimated useful economic life. The amortization period and
amortization 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 amortization period is changed
accordingly. Gain or losses arising from derecognition of an intangible
asset are measured as the difference between the net disposal proceeds
and the carrying amount of the asset and are recognized in the
statement of Profit and loss, when the asset is derecognized.
a. The carrying amounts of assets are reviewed at each balance sheet
date to see if there is any indication of impairment based on
internal/external factors. An impairment loss is recognized wherever
the carrying amount of an asset exceeds its recoverable amount. The
recoverable amount is the greater of the asset''s net selling price and
value in use. In assessing value in use, the estimated future cash
flows are discounted to their present value at the weighted average
cost of capital.
b. After impairment, depreciation is provided on the revised carrying
amount of the asset over its remaining useful life.
Investments that are readily realizable and intended to be held for not
more than a year are classified as current investments. All other
investments are classified as long-term investments. Current
investments are carried at lower of cost and fair value determined on
an individual investment basis. Long-term investments are carried at
cost. However, any decline, other than temporary, in the value of the
investments is charged to the profit and loss account.
vi. Revenue recognition Software service income
a. Revenue from software testing on software testing and allied
services comprises revenue from time and material contracts and fixed
b. Revenue from time-and-materials contracts is recognized based on
time/efforts spent on software tested and billed to clients as per the
terms of specific contracts.
c. On fixed-price contracts, revenue is recognized on the
proportionate completion method on the basis of the work completed.
d. Revenue from software testing includes reimbursement of expenses
billed as per the terms of contracts.
Interest on deployment of surplus funds is recognized using the
Government grant is recognized upon confirmation of the entitlement of
vii. Retirement and other employee benefits
a. Retirement benefits in the form of Provident Fund / Social Security
payments is defined contribution schemes and the contributions are
charged to the Profit and Loss Account of the year when the
contributions are made to the concerned authorities. The Company has no
further obligations under the plan beyond its periodic contributions.
b. Gratuity liability is a defined benefit obligation and is provided
for on the basis of an actuarial valuation made at the end of each
financial year under the projected unit credit method. Actuarial
Gains/Losses comprise experience adjustments and the effect of changes
in actuarial assumptions and are recognized immediately in Profit &
Loss Account as Income/Expense.
c. The company does not allow leave encashment on retirement. However,
appropriate provision has been made based on estimates for the accrued
and unaveiled leave entitlements which are short-term in nature.
Tax expense comprises current tax, deferred tax charge or credit and
Minimum Alternate Tax credit. Current income tax is measured at the
amount expected to be paid to the tax authorities in accordance with
the relevant tax laws of each country. Deferred income taxes reflect
the impact of current year timing differences between taxable income
and accounting income for the year and reversal of timing differences
of earlier years.
Deferred tax is measured based on the tax rates and the tax laws
enacted or substantively enacted at the balance sheet date. Deferred
tax assets are recognised only to the extent that there is reasonable
certainty that sufficient future taxable income will be available
against which such deferred tax assets can be realised. In situations
where the company has unabsorbed depreciation or carry forward tax
losses, deferred tax assets are recognised only if there is virtual
certainty supported by convincing evidence that such deferred tax
assets can be realised against future taxable profits.
The company has got two 100% Export Oriented Unit (EOU)
registered with the Software Technology Parks of India (STPI) one
in Chennai and another in Bengaluru. The Company has operations in
Special Economic Zone (SEZ) - MEPZ Tambaram, also from the financial
year 2009-10. The Company enjoyed tax holiday for Export earnings
relating to its EOU in Chennai under Section 10A of the Income Tax
Act,1961 till the financial year 2009-10. Such tax holiday is available
for the financial year 2010-11 also in respect of export earnings
relating to its EOU in Bengaluru. Income from MEPZ''s is fully tax
exempt for the first five years, 50% exempt for the next five years and
50% exempt for another five years subject to fulfilling certain
MAT Credit is measured at the amounts of Minimum Alternative Tax
payable for the year, which is adjustable against regular tax payable
in subsequent years and is recognized to the extent considered probable
of such adjustment.
ix. Earnings per share
Basic earnings per share are calculated by dividing the net profit or
loss for the period attributable to equity shareholders by the weighted
average number of equity shares outstanding during the period.
For the purpose of calculating diluted earnings per share, the net
profit or loss for the period attributable to equity shareholders and
the weighted average number of shares outstanding during the period are
adjusted for the effects of all dilutive potential equity shares.
x. Foreign currency transactions and translations
a. Initial recognition
Foreign currency transactions are recorded in the reporting currency,
by applying to the foreign currency amount the exchange rate between
the reporting currency and the foreign currency at the date of the
transaction. Income and expenditure transactions of the foreign
operations are recognized at the rate on transaction date / average
rate applicable for the year.
Foreign currency monetary items are reported using the closing rate.
Non-monetary items which are carried in terms of historical cost
denominated in a foreign currency are reported using the exchange rate
at the date of the transaction.
c. Exchange differences
Exchange differences arising on the settlement of monetary items at
rates different from those at which they were initially recorded during
the year, or reported in previous financial statements, are recognised
as income or as expenses in the year in which they arise. Exchange
differences on account of conversion of foreign operations are also
recognized as income or as expenses in the year in which they arise.
d. Forward contracts in foreign currency
The Company uses, to a limited extent, foreign exchange forward
contracts to hedge its exposure to movements in foreign exchange rates.
The company does not use the foreign currency forward contracts for
trading or speculation purposes. Realized/unrealized gains and losses
on forward contracts are accounted in the profit and loss account for
the period. Premium/Discount on forward contracts are accounted over
the contract period.
e. Transalation of integral and non-integral foreign operation
The company classifies all its foreign operation as either integral
foreign operations. The financial statements of an integral foreign
operation are translated as if the transactions of the foreign
operation have been those of the company itself.
A provision is recognised when an enterprise has a present obligation
as a result of past event and it is probable that an outflow of
resources will be required to settle the obligation, in respect of
which a reliable estimate can be made. Provisions are not discounted to
its present value and are determined based on best estimate required to
settle the obligation at the balance sheet date. These are reviewed at
each balance sheet date and adjusted to reflect the current best
Where the company is lessee
Leases where the lessor effectively retains substantially all the risks
and benefits of ownership of the leased term, are classified as
operating leases. Operating lease payments are recognized as an expense
in the Profit and Loss account as per the terms of the agreements over
the lease term.
Where the company is lessor
Operating lease receipts are recognized as Other Income in the Profit
and Loss account as per the terms of the agreements over the sub lease
xiii. Employee stock compensation cost
Measurement and disclosure of the employee share-based payment plans is
done in accordance with the Guidance Note on Accounting for Employee
Share-based Payments, issued by the Institute of Chartered Accountants
of India. The Company measures compensation cost relating to employee
stock options using the intrinsic value method. Compensation expense is
amortized over the vesting period of the option on a straight line
xiv. Segment information Business segments
The group''s operations predominantly relate to software validation and
verification services relating to banking and financial services
industry and, accordingly, this is the only primary reportable segment.
The segmental information is provided on geographical basis classified
as India and Rest of the World.
xv. Cash flows
Cash flows are reported using indirect method, whereby net profit
before tax is adjusted for the effects of transactions of a non-cash
nature and any deferrals or accruals of past or future cash receipts or
payments. The cash flows from regular revenue generating, investing and
financing activities are segregated.
Cash and cash equivalents: Cash and cash equivalents, in the statement
of cash flow, comprise cash at bank and in hand and fixed deposits with
original maturity of maximum 90 days.
xvi. Contingent liabilities
A contingent liability is a possible obligation that arises due to past
events whose existence will be confirmed by the occurrence or
non-occurrence of one or more uncertain future events beyond the
control of the company or a present obligation that is not recognized
because it is not probable that an outflow of resources will be
required to settle the obligation. A contingent liability also arises
in extremely rare cases where there is a liability that cannot be
recognized because it cannot be measured reliably. The company does not
recognize a contingent liability but discloses its existence in the
b. Terms/rights attached to equity shares
The company has only one class of equity shares having a par value of
Rs.10 per share. Each holder of equity share is entitled to one vote
per share. The company declares and pays dividend in Indian rupees. The
dividend proposed by Board of Directors is subject to approval of the
shareholders in the ensuing Annual General Meeting