Dr Reddys Laboratories

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
 Indian Generally Accepted Accounting Principles (GAAP) under the
 historical cost convention on the accrual basis. GAAP comprises
 accounting standards notified by the Central Government of India under
 Section 211 (3C) of the Companies Act, 1956, other pronouncements of
 Institute of Chartered Accountants of India, the provisions of
 Companies Act, 1956 and guidelines issued by Securities and Exchange
 Board of India. The financial statements are rounded off to the nearest
 million.
 
 b) Use of estimates
 
 The preparation of the financial statements in conformity with GAAP
 requires 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.  Actual results could
 differ from these estimates. Any revision to accounting estimates is
 recognised prospectively in the current and future periods.
 
 c) 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.
 Borrowing costs directly attributable to acquisition or construction of
 those fxed assets which necessarily take a substantial period of time
 to get ready for their intended use are capitalised.
 
 Advances paid towards the acquisition of ifixed assets outstanding at
 each balance sheet date and the cost of fixed assets not ready for
 their intended use before such date are disclosed under capital
 work-in-progress.
 
 Depreciation on fixed assets is provided using the straight-line method
 at the rates specified in Schedule XIV to the Companies Act, 1956 or
 based on the useful life of the assets as estimated by Management,
 whichever is higher. Depreciation is calculated on a pro-rata basis
 from the date of installation till the date the assets are sold or
 disposed. Individual assets costing less than Rs. 5,000/- are
 depreciated in full in the year of acquisition. Vehicles acquired on
 fnance leases are depreciated over the period of the lease agreement or
 the useful life, whichever is shorter.
 
 The Managements estimates of the useful lives for various categories
 of fixed assets are given below:
                                                      Years
 Buildings
 Factory and administrative buildings                20 to 30
 Ancillary structures                                 3 to 10
 Plant and machinery                                  3 to 15
 Electrical equipment                                 5 to 15
 Laboratory equipment                                 5 to 15
 Furniture, fixtures and office equipment 
 (other than computer equipment)                       4 to 8
 Computer equipment                                         3
 Vehicles                                              4 to 5
 Library                                                    2
 Leasehold vehicles                                         3
 
 d) Intangible assets and amortisation
 
 Intangible assets are recorded at the consideration paid for
 acquisition. Intangible assets are amortised over their estimated
 useful lives on a straight-line basis, commencing from the date the
 asset is available to the Company for its use. The management estimates
 the useful lives for the various intangible assets as follows:
 
                                                       Years
 Customer contracts                                   2 to 5
 Technical know-how                                       10
 Non-compete fees                                  1.5 to 10
 Patents, trademarks, etc.                           3 to 10
 (including marketing / distribution rights)
 
 e) Investments
 
 Long-term investments are carried at cost less any other-than-temporary
 diminution in value, determined separately for each individual
 investment.  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 category of investment.
 
 f) Inventories
 
 Inventories are valued at the lower of cost and net realisable value.
 Cost of inventories comprises all cost of purchase, cost of conversion
 and other costs incurred in bringing the inventories to their present
 location and condition.
 
 The methods of determining cost of various categories of inventories
 are as follows:
 
 Raw materials First-in-frst-out (FIFO)
 
 Stores and spares and packing materials Weighted average method
 
 Work-in-process and finished goods (manufactured) FIFO and including an
 appropriate share of production overheads
 
 Finished goods (traded) Specific identification method
 
 g) Research and development
 
 Revenue expenditure on research and development is expensed as
 incurred. Capital expenditure incurred on research and development is
 capitalised as fixed assets and depreciated in accordance with the
 depreciation policy of the Company.
 
 h) Employee benefits
 
 Contributions payable to an approved gratuity fund (a defined benefit
 plan), determined by an independent actuary at the balance sheet date,
 are charged to the Profit and Loss Account. Provision for compensated
 absences is made on the basis of actuarial valuation at the balance
 sheet date, carried out by an independent actuary. Contributions
 payable to the recognised provident fund and approved superannuation
 scheme, which are defined contribution schemes, are charged to the
 Profit and Loss Account. All actuarial gains and losses arising during
 the year are recognized in the Profit and Loss Account of the year.
 
 i) 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 Profit and Loss Account.
 
 Monetary assets and liabilities denominated in foreign currencies as at
 the balance sheet date, not covered by forward exchange contracts, are
 translated at year- end rates. The resultant exchange differences are
 recognised in the Profit and Loss Account. Non-monetary assets are
 recorded at the rates prevailing on the date of the transaction.
 
 Income and expenditure items at representative offices are translated
 at the respective monthly average rates. Monetary assets at
 representative offices at the balance sheet date are translated using
 the year-end rates. Non-monetary assets are recorded at the rates
 prevailing on the date of the transaction.
 
 Forward contracts are entered into to hedge the foreign currency risk
 of the underlying outstanding at the balance sheet date. The premium or
 discount on all such contracts is amortized as income or expense over
 the life of the contract. Any profit or loss arising on the
 cancellation or renewal of forward contracts is recognised as income or
 expense for the period.
 
 In relation to the forward contracts entered into to hedge the foreign
 currency risk of the underlying outstanding at the balance sheet date,
 the exchange difference is calculated and recorded in accordance with
 AS-11 (revised). The exchange difference on such a forward exchange
 contract is calculated as the difference of the foreign currency amount
 of the contract translated at the exchange rate at the reporting date,
 or the settlement date where the transaction is settled during the
 reporting period and the corresponding foreign currency amount
 translated at the later of the date of inception of the forward
 exchange contract and the last reporting date. Such exchange
 differences are recognized in the Proft and Loss Account in the
 reporting period in which the exchange rates change.
 
 Exchange differences arising on a monetary item that, in substance,
 forms part of an enterprise’s net investment in a non-integral foreign
 operation has been accumulated in a foreign currency translation
 reserve in the enterprise’s fnancial statements until the disposal of
 the net investment, at which time they should be recognised as income
 or as expense.
 
 j) Derivative instruments and hedge accounting
 
 The Company uses foreign exchange forward contracts and options to
 hedge its movements in foreign exchange rates and does not use the
 foreign exchange forward contracts and options for trading or
 speculative purposes.
 
 Pursuant to ICAI Announcement “Accounting for Derivatives” on the early
 adoption of Accounting Standard AS-30 “Financial Instruments:
 Recognition and Measurement”, the Company earlier adopted the Standard
 in the year ended 31 March 2008, to the extent that the adoption does
 not confict with existing mandatory accounting standards and other
 authoritative pronouncements, Company law and other regulatory
 requirements.
 
 The Company classifes foreign currency options in respect of the
 forecasted transactions at the inception of each contract meeting the
 hedging criterion, as cash fow hedges. Changes in the fair value of
 options classifed as cash fow hedges are recognised directly in
 shareholders’ funds (under the head “Hedging Reserves”) and are
 reclassifed into the Proft and Loss Account upon the occurrence of the
 hedged transaction. The gains / losses on options designated as cash
 fow hedges are included along with the underlying hedged forecasted
 transactions. The exchange differences relating to options not
 designated as cash fow hedges are recognised in the Proft and Loss
 Account as they arise. Further, the changes in fair value relating to
 the ineffective portion of the cash fow hedges are recognised in the
 Proft and Loss Account as they arise.
 
 k) Revenue recognition
 
 Revenue from sale of goods is recognised when signifcant risks and
 rewards in respect of ownership of products are transferred to
 customers. Revenue from domestic sales of generic products is
 recognized upon delivery of products to stockists by clearing and
 forwarding agents of the Company. Revenue from domestic sales of active
 pharmaceutical ingredients and intermediates is recognized on delivery
 of products to customers, from the factories of the Company. Revenue
 from export sales is recognized when the signifcant risks and rewards
 of ownership of products are transferred to the customers, which is
 based upon the terms of the applicable contract.
 
 Revenue from product sales is stated exclusive of returns, sales tax
 and applicable trade discounts and allowances.
 
 Service income is recognised as per the terms of contracts with
 customers when the related services are performed, or the agreed
 milestones are achieved.
 
 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 the time proportionate
 method.
 
 Export entitlements are recognised as income 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 signifcant uncertainty regarding the
 ultimate collection of the relevant export proceeds.
 
 The Company enters into certain dossier sales, licensing and supply
 arrangements with certain third parties. 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.
 
 l) Income-tax expense
 
 Income tax expense comprises current tax and deferred tax charge or
 credit.
 
 Current tax
 
 The current charge for income taxes is calculated in accordance with
 the relevant tax regulations applicable to the Company.
 
 Deferred tax
 
 Deferred tax charge or credit refects 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 is written-down or written-up
 to refect the amount that is reasonably / virtually certain (as the
 case may be) to be realised. The break-up of the major components of
 the deferred tax assets and liabilities as at balance sheet date has
 been arrived at after setting off deferred tax assets and liabilities
 where the Company has a legally enforceable right to set-off assets
 against liabilities and where such assets and liabilities relate to
 taxes on income levied by the same governing taxation laws.
 
 m) Earnings per share
 
 The basic earnings per share (“EPS”) is computed by dividing the net
 proft 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, net proft 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).
 
 n) Employees stock option schemes
 
 In accordance with the Securities and Exchange Board of India
 guidelines, the excess of the market price of shares, at the date of
 grant of options under the Employees stock option schemes, over the
 exercise price is treated as employee compensation and amortised over
 the vesting period.
 
 o) Provisions and contingent liabilities
 
 The Company creates a provision when there is a present obligation as a
 result of a past event that probably requires an outfow of resources
 and a reliable estimate can be made of the amount of the obligation. 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 outfow of resources. Where there is possible obligation or a
 present obligation in respect of which the likelihood of outfow of
 resources is remote, no provision or disclosure is made.
 
 p) 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. If
 such recoverable amount of the asset or the recoverable amount of the
 cash generating unit 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 Proft and Loss Account. 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
 refected at the recoverable amount subject to a maximum of depreciated
 historical cost.
 
 q) Leases
 
 Assets taken on lease where the company acquires substantially the
 entire risks and rewards incidental to ownership are classifed as
 fnance leases. The amount recorded is the lesser of the present value
 of minimum lease rental and other incidental expenses during the lease
 term or the fair value of the assets taken on lease. The rental
 obligations, net of interest charges, are refected as secured loans.
 Leases that do not transfer substantially all the risks and rewards of
 ownership are classifed as operating leases and recorded as expense as
 and when the payments are made over the lease term.