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Bharat Electronics

BSE: 500049|NSE: BEL|ISIN: INE263A01024|SECTOR: Electricals
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Mar 18
Notes to Accounts Year End : Mar '19

Notes to Accounts

NOTE 34

Financial risk management

i) Risk Management framework and policies

The Company is broadly exposed to credit risk, liquidity risk and market risk (fluctuations in exchange rates, interest rates and price risk) as a result of financial instruments.

Board of Directors has the overall responsibility for the establishment, monitoring and supervision of the Company''s risk management framework. The Board has set up a Risk Management Committee, for this purpose, which is responsible for developing and monitoring the risk management policies. The Company has an established Risk Management Policy that outlines risk management structure and provides a comprehensive frame work for identification, evaluation, prioritization, treatment of various risks associated with different areas of finance and operations.

The company has a centralized Treasury function which is responsible to undertake appropriate measures to mitigate financial risk in accordance with the policies and procedures formulated by the Board. Hedging transactions are undertaken by a team with appropriate skills and experience in consultation with an external expert. The Company does not trade in derivatives for speculation.

ii) Market Risk

Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates will affect the Company''s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

The Company''s activities expose it primarily to the financial risks of changes in foreign exchange rates and interest rate movements (refer to notes below on currency risk and interest risk).

iii) Currency Risk

BEL is exposed to foreign exchange risk arising from foreign currency transactions primarily relating to purchases and sales made in foreign currencies such as US Dollar, Euro, Great Britain Pound and Swiss Franc. Foreign exchange risk arises from existing and future commercial transactions and recognised assets and liabilities denominated in a currency that is not the Company''s functional currency (INR).

The Company has a Board approved currency risk management policy implemented by a Risk Management Committee that reviews the Company''s exposure to this risk on a regular basis. The Risk Management Policy recommends hedging upto 50% of the open foreign currency exposure. However the decision to enter into a hedging arrangement is made by the Risk Management Committee based on the relevant data inputs and the advice of the external specialist consultant retained for this purpose.

The Company''s export proceeds are realized mostly by remittance into an Export Earners Foreign Currency account (EEFC) which is then utilised for payments to be made in foreign currency, thereby mitigating the currency risk on exports. Imports to the extent of around 10% (25%) of annual foreign exchange outgo are not covered by the Exchange Rate Variation (ERV) clause in the related customer contract and hence are open to currency risk. These imports are benchmarked as per the policy and appropriate decision on covering the risk is taken on a case to case basis. The Company''s currency risk policy advocates forward contract hedging for mitigating risk wherever required.

As on 31 March 2019, there are no outstanding forwards contracts.

The company''s exposure to foreign currency risk in respect of major currencies is given below :

Particulars

As at 31 March 2019

As at 31 March 2018

USD

EURO

GBP

CHF

USD

EURO

GBP

CHF

Trade Payable

659

154

23

41

807

141

21

55

Trade Receivable / Contract Asset

52

3

-

-

33

12

-

-

Net Exposure

607

151

23

41

774

129

21

55

iv) Foreign Currency Sensitivity

The sensitivity of profit or loss to changes in the exchange rate arises mainly from foreign currency denominated financial instruments. The sensitivity to variations in respect of major currencies is given below. This analysis assumes that all other variables remain constant.

Particulars

Impact on Profit

As at 31 March 2019

As at 31 March 2018

USD - Increase by 5%

2,127

2,530

USD - Decrease by 5%

(2,127)

(2,530)

EURO -Increase by 5%

600

516

EURO - Decrease by 5%

(600)

(516)

GBP- Increase by 5%

105

95

GBP- Decrease by 5%

(105)

(95)

CHF- Increase by 5%

146

191

CHF- Decrease by 5%

(146)

(191)

v) Interest rate risk

Interest rate risk can be either fair value interest rate risk or cash flow interest rate risk. Fair value interest rate risk is the risk of changes in fairvalues of fixed interest bearing investments because of fluctuations in the interest rates. Cash flow interest rate risk is the risk that the future cash flows of floating interest bearing instruments will fluctuate because of fluctuations in market interest rates.

vi) Variable Rate Borrowing:

The company has been sanctioned a Term Loan of Rs. 10,000 on 31.03.2017 [Outstanding as on 31 March 2019 is Rs. 3,334 (Rs. 6,666)]. Interest payable on this loan is based on SBI''s Minimum Commercial Lending Rate - MCLR [SBI is eligible to reset the interest charged on yearly basis]. There would be an additional outflow of cash of Rs. 33 if the interest rate goes up by 1 % and saving of s. 33 in cash flow if interest rate goes down by 1 %. There would however be no impact on profit as the interest component is capitalized since the borrowing is towards capital expenditure.

In addition the company has been sanctioned a working capital limit of Rs. 4,00,000. The sanctioned limit includes fund based limit of Rs. 50,000 and non fund based limit of Rs. 3,50,000. The fund based limit of Rs. 50,000 has not been utilised during the year [Outstanding as on 31 March 2019 is nil (31 March 2018 is nil)]. The outstanding balance as on 31.03.2019 with respect to non fund based limit is Rs. 1,88,007 (Rs 1,75,565). The interest is payable based on SBI''s 1 year MCLR rate. As the borrowing is nil there is no impact on likely change in interest rates.

vii) Equity Price Risk

The company''s exposure to equity price risk is negligible as its equity investment (other than in subsidiaries and Associate) is negligible.

viii) Liquidity Risk

Liquidity Risk is the risk that a Company could encounter if it faces difficulty in meeting the obligations associated with financial liabilities by delivering cash and other financial asset or the risk that the Company will face difficulty in raising financial resources required to fulfill its commitments. The Company''s exposure to liquidity risk is very minimal as it has a prudent liquidity risk management process in place which ensures maintaining adequate cash and marketable securities to pay its liabilities when they are due. To ensure continuity of funding, the Company has access to short-term bank facilities in the nature of bank overdraft facility, cash credit facility and short-term borrowings to fund its ongoing working capital requirements and growth needs when necessary.

The Company meets its liquidity requirement mainly through internally generated cash flows which is monitored centrally by treasury. There is an established process of rolling cash forecasts from various operating units which form the basis for mapping expected cash inflows, to meet the liabilities.

The table below analyses the company''s financial liabilities based on their contractual maturities. The amounts disclosed are contractual un-discounted cash flows.

As at 31 March 2019

Particulars

Less than 3 months

3 months to 6 months

6 months to 1 year

Between 1 & 2 year

Between 2 & 5 year

Total

Borrowings

-

-

-

-

-

-

Trade Payables

1,36,081

5,113

2,307

26

-

1,43,527

Current Maturities of Long Term Debts

833

834

1,667

-

-

3,334

Interest accrued and due on Trade Payables

1

-

2

-

-

3

Other Financial Liabilities

88,565

1,651

10,078

3,029

-

1,03,323

As at 31 March 2018

Particulars

Less than 3 months

3 months to 6 months

6 months to 1 year

Between 1 & 2 year

Between 2 & 5 year

Total

Borrowings

-

-

-

3,333

-

3,333

Trade Payables

1,19,138

7,509

13,460

-

5

1,40,112

Current Maturities of Long Term Debts

833

834

1,666

-

-

3,333

Interest accrued and due on Trade Payables

8

-

2

-

-

10

Other Financial Liabilities

72,195

2,141

6,898

216

-

81,450

The company does not have any outstanding derivatives as on 31 March 2019.

ix) Credit Risk

Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in financial loss to the Company. Credit risk arises from credit exposures from customers, cash and cash equivalent with banks, security deposits and loans.

The credit risk of the Company is managed at a corporate level by the risk management committee which has established the credit policy norms for its customers and other receivables. Significant amount of trade receivables are due from Government/Government Departments, Public Sector Companies (PSUs) consequent to which the Company does not have a credit risk associated with such receivables. In case of non Government trade receivables, sales are generally carried out based on Letter of Credit established by the customer thereby reducing the credit risk.

In a few cases credit is extended to customers based on market conditions after assessing the solvency of the customer and the necessary due diligence to determine credit worthiness. Advance payments are made against bank guarantee which safeguards the credit risk associated with such payments. Impairment losses on financial assets (representing mainly liquidated damages leviable for delayed deliveries and other disallowances) have been made after factoring contractual terms, etc. and other indicators.

The cash and cash equivalent with banks are in the form of short term deposits with maturity period of upto 1 year. The Company has a well structured Risk Mitigation Policy whereby there are preset limits for each bank based on its net worth and earning capacity which is reviewed on a periodic basis. The Company has not incurred any losses on account of default from banks on deposits.

The credit risk in respect of other financial assets is negligible as they are mostly due from government department / parties.

Loan of Rs. 2,987 (Rs. 3,420) is outstanding [as on 31.03.2019] from BELOP [100% subsidiary company]. The subsidiary company has been regular in repayment of its dues (Interest and Principal) and no credit risk is expected in terms of repayment of the loan amount.

x) Capital Management

The Company''s Capital Management objective is to maintain a strong capital base to provide adequate returns to the shareholders and ensure the ability of the company to continue as a going concern. The Company has a conservative approach for raising capital through debt but reserves the right to leverage this alternative at an appropriate time to fuel growth and maintain optimal capital structure.

As part of this overall objective, the company has expanded capital base by issuing bonus shares in financial year 2015-16 & 2017-18 and bought back shares in financial year 2016-17 & 2017-18 [Refer Note 16]. The Company has a well defined Dividend Distribution Policy which lays the framework for payments of dividend and retention of surplus for future growth and enhancing shareholders wealth. The company has borrowed an amount Rs. 10,000 from Bank for construction of quarters. [Outstanding as on 31 March 2019 is Rs. 3,334 (Rs. 6,666)] [Refer Note 18 & 20]. The Company has been sanctioned borrowing limits with banks to the tune of Rs. 4,00,000.

Gearing Ratio:

Particulars

As at 31 March 2019

As at 31 March 2018

Net Debt

3,334

6,666

Total Equity

9,01,891

7,76,101

Net Debt to Equity Ratio

0.004:1

0.009:1

NOTE 35

Assets pledged as security

The carrying amounts of assets pledged as security for Term Loan and Working Capital borrowings are:

Particulars

As at 31 March 2019

As at 31 March 2018

(i) Inventories

4,41,365

4,55,132

(ii) Trade Receivables

5,36,921

5,04,950

(iii) Cash & Cash Equivalents

72,190

73,820

(iv) Bank Balances [Other than (iii) above]

9,100

-

(v) Loans

3,282

2,724

(vi) Other Financial Assets

3,567

5,577

(vii) Other Current Assets

4,67,945

3,42,329

Total assets pledged as security

15,34,370

13,84,532

Refer Note 18 & 20 for the details of borrowings.

NOTE 36

Critical estimates and judgments

While preparing the financial statements, management has made certain judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively.

Judgments made in applying accounting policies that have the most significant effects on the amounts recognised in the financial statements and Estimates that have a significant risk of resulting in a material adjustment are as under:

i) Research and Development Expenditure - Accounting Policy No. 10 - (Refer Note 5 and 12)

Developmental expenditure incurred with respect to No Cost No Commitment (NCNC) Projects and Joint developmental projects which are not fully compensated by the development partner are carried forward till the completion of project.

ii) Estimation of defined benefit obligation - Key actuarial assumptions - (Refer Note 21) iii) Estimation of provision for warranty claims - (Refer Note 21)

Warranty provision computation involves estimation of average warranty cost based on trend based analysis. If the estimations made varies, the same will impact the expense recognised. iv) Recognition of Revenue - (Refer Note 23)

Input methods towards performance obligations over time involves estimation of Stage of completion based on actual costs incurred to the estimated total costs expected to complete the contract. If the estimations made varies, the same will impact the Revenue recognised. v) Intangible assets - (Refer Note 4 and 5)

Amount carried forward as other intangible assets and intangible assets under development are tested for impairment annually with respect to certainty of future economic benefits.

NOTE 37

Recent accounting pronouncements

Ind AS 116-Leases:

On 30 March, 2019, the Ministry of Corporate Affairs has notified Ind AS 116 - Leases. Ind AS 116 will replace the existing leases standard, Ind AS 17 - Leases, and related interpretations. This standard is applicable for accounting period beginning on or after 1 April, 2019. Ind AS 116 introduces a single lessee accounting model and requires the lessee to recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. Currently, operating lease expenses are charged to the Statement of Profit and Loss. Ind AS 116 substantially carries forward the lessor accounting requirements in Ind AS 17.

The standard permits two possible methods of transition :

• Full retrospective - Retrospectively to each prior period presented applying Ind AS 8 - Accounting Policies, Changes in Accounting Estimates and Errors.

• Modified retrospective - Retrospectively, with the cumulative effect of initially applying the standard recognized at the date of initial application.

The company proposes to adopt the Modified retrospective approach for transitioning to Ind AS 116 and take the cumulative adjustment to retained earnings, on the date of initial application (1 April, 2019). Accordingly, comparatives for the year ended 31 March, 2019 will not be retrospectively adjusted.

The company is in the process of evaluating the effect of this amendment on the financial statements. Ind AS 12, Appendix C, Uncertainty over Income Tax Treatments:

• On 30 March, 2019, the Ministry of Corporate Affairs has notified Ind AS 12, Appendix C, Uncertainty over Income Tax Treatments which is to be applied while performing the determination of taxable profit (or loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under Ind AS 12.

• The effective date for adoption of Ind AS 12 Appendix C is annual periods beginning on or after 1 April, 2019.

• According to the appendix, companies need to determine the probability of the relevant tax authority accepting each tax treatment, or group of tax treatments, that the companies have used or plan to use in their income tax filing which has to be considered to compute the most likely amount or the expected value of the tax treatment when determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates.

The standard permits two possible methods of transition:

• Full retrospective approach - Under this approach. Appendix C will be applied retrospectively to each prior reporting period presented in accordance with Ind AS 8 - Accounting Policies, Changes in Accounting Estimates and Errors, without using hindsight, and

• Retrospectively with cumulative effect of initially applying Appendix C recognized by adjusting equity on initial application, without adjusting comparatives.

The Company will adopt the standard on 1 April, 2019 and has decided to adjust the cumulative effect in equity on the date of initial application i.e. 1 April, 2019 without adjusting comparatives.

The effect on adoption of Ind AS 12 Appendix C, on the financial statements, is being evaluated. Amendment to Ind AS 12 - Income taxes:

On 30 March, 2019, the Ministry of Corporate Affairs issued amendments to the guidance in Ind AS 12 - Income Taxes, in connection with accounting for dividend distribution taxes.

Effective date for application of this amendment is annual period beginning on or after 1 April, 2019.

The amendment clarifies that an entity shall recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events.

The effect of application of this amendment on the financial statements is being evaluated. Amendment to Ind AS 19 - Employee Benefits:

On 30 March, 2019, the Ministry of Corporate Affairs issued amendments to Ind AS 19- Employee Benefits, in connection with accounting for plan amendments, curtailments and settlements.

The amendments require an entity:

• To use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment or settlement; and

• To recognize in profit or loss as part of past service cost, or a gain or loss on settlement, any reduction in a surplus, even if that surplus was not previously recognized because of the impact of the asset ceiling.

Effective date for application of this amendment is annual period beginning on or after 1 April, 2019. The Company does not have any impact on account of this amendment.

Source : Dion Global Solutions Limited
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