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NOTES TO ACCOUNTS

Foseco India Ltd.

You can view the entire text of Notes to accounts of the company for the latest year
Market Cap. (₹) 830.59 Cr. P/BV 5.32 Book Value (₹) 244.44
52 Week High/Low (₹) 1760/1139 FV/ML 10/1 P/E(X) 25.93
Bookclosure 03/08/2019 EPS (₹) 50.16 Div Yield (%) 1.92
Year End :2018-12 

Notes:

1 Refer to note 29(c) for disclosure of contractual commitments for the acquisition of property, plant and equipment.

2 Capital work-in-progress comprises of mainly Plant and Machinery.

3 Leasehold land of the Company is located at Pondicherry.

4 The Company has elected to continue with carrying value of property, plant and equipment as recognized in financial statements as per Indian GAAP and regard those values as deemed cost on the date of transition.

The disclosure relating to Specified Bank Notes* (SBNs) is not applicable to the Company for year ended December 31, 2018 and December 31, 2017.

* Specified Bank Notes (SBNs) mean the bank notes of denominations of the then existing series of the value of five hundred rupees and one thousand rupees as defined under the notification number S.O. 3407(E), dated the 8th November, 2016 issued by the Department of Economic Affairs under the Ministry of Finance, Government of India.

Amounts recognized in the statement of profit and loss

Provision for excess and obsolete inventory amounted to Rs. 28.64 lakhs (December 31, 2017 : Rs. 4.01 lakhs, January 1, 2017 : Rs. 22.36 lakhs). These were recognized as an expense during the year and included in 'Cost of materials consumed' in the statement of profit and loss. the Company is in the process of updating its documentation in respect to international transactions with Related Parties (Associated Enterprises) as required under section 92E of the Income Tax Act, 1961. The Company's Management believes that the transfer pricing legislation will not have any impact on the financial statements, particularly on the amount of tax expense and the provision for tax made as at and for the year ended 31 December 2018 and 31 December 2017.

(ii) 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 shareholder is eligible for one vote per share held. The dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting, except in case of interim dividends. In the event of liquidation, the equity shareholders are eligible to receive the remaining assets of the Company after distribution of all preferential amounts, in proportion to their shareholding.

Note :

a Long term employee benefit obligations Compensated absences

The Compensated absences of employees covers the liability for privilege leave. The classification of compensated absences into current and non-current is based on the report of independent actuary prepared for the year ended December 31, 2018.

b Post employment obligations (i) Defined Contribution Plan

The Company has certain defined contribution plans. Contributions are made to registered provident fund account of the employees at the rate of 12% of basic salary as per regulations as well as to superannuation fund. The contributions are made to registered provident fund administered by the government , superannuation trust administered through Life Insurance Corporation of India. The obligation of the Company is limited to the amount contributed and it has no further contractual nor any constructive obligation. The expense recognized during the period towards defined contribution plan is Rs. 275.60 lakhs (31 December 2017 : Rs. 272.80 lakhs).

(ii) Gratuity

The Company provides for gratuity for employees in India as per the Payment of Gratuity Act, 1972. Employees who are in continuous service for a period of 5 years are eligible for gratuity. The amount of gratuity payable on retirement/termination is the employees last drawn basic salary per month computed proportionately for 15 days salary multiplied for the number of years of service. The gratuity plan is a funded plan and the Company makes contributions to the recognized funds in India. The Company does fully fund the liability based on estimations of expected gratuity valuation provided by the Actuary.

The above sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method) has been applied as when calculating the defined benefit liability recognized in the balance sheet.

The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period.

VI Risk Exposure

Through its defined benefit plan, the Company is exposed to a number of risks, the most significant of which are detailed below:

Asset volatility

The plan liabilities are calculated using a discount rate set with reference to bond yield. If plan assets underperform this yield, this will create a deficit. All plan assets are maintained in a trust fund managed by a public sector insurer i.e., LIC of India. LIC has a sovereign guarantee and has been providing consistent and competitive returns over the years. The Company has opted for a traditional fund wherein all assets are invested primarily in risk averse markets. The Company has no control over the management of funds but this option provides a high level of safety for the total corpus. A single account is maintained for both the investment and claim settlement and hence, 100% liquidity is ensured. Also, interest rate and inflation risk are taken care of.

Changes in bond yields

A decrease in bond yield will increase plan liabilities, although this will be partially offset by an increase in yield in the value of the plans' bond holdings.

Future salary escalation and inflation risk

Since price inflation and salary growth are linked economically, they are combined for disclosure purposes. Rising salaries will often result in higher future defined benefit payments resulting in higher present value of liabilities. Further, unexpected salary increases provided at the discretion of the management may lead to uncertainties in estimating this increasing risk.

Asset-Liability mismatch risk

Risk which arises if there is a mismatch in the duration of the assets relative to the liabilities. By matching duration with the defined benefit liabilities, the Company is successfully able to neutralize valuation swings caused by interest rate movements as it has adopted asset-liability management approach.

i) Legal matters under dispute

The Company is contesting the demands and the management believes that its position is likely to be upheld in the appellate proceedings. It is not practicable to estimate the timing of cash outflows, if any in respect of legal matters, pending resolution of the proceedings with the appellate authorities.

b) The bank has given guarantees for Rs. 23.08 Lakhs (December 31, 2017 Rs. 15.71 Lakhs and January 01, 2017 Rs. 11.76 Lakhs) to third parties for supply of goods, clearance of goods from customs etc.

c) Capital commitments

Estimated amount of contracts remaining to be executed on capital account (net of advances) and not provided for is Rs.397.72 lakhs (December 31, 2017 : Rs. 11.68 lakhs, January 1, 2017 : Rs. 18.68 lakhs)

30 Related party transactions

Name of the related parties and nature of relationship

(i) Name of Related Party Where Control Exists :

1 Vesuvius Plc. United Kingdom Ultimate Holding Company

2 Foseco (U.K.) Limited., United Kingdom Parent of Immediate Holding Company

3 Foseco Overseas Limited, United Kingdom Immediate Holding Company

Notes to the Financial Statements (continued)

(All amounts in INR lakhs, unless otherwise stated)

(ii) Other Related Parties with whom transactions have taken place during the year:

(I) Fellow Subsidiaries:

1 Foseco (Thailand) Limited

2 Foseco Foundry (China) Company Limited

3 Foseco Golden Gate Company Limited, Taiwan

4 Foseco Industrial e-Commercial Ltda., Brazil

5 Foseco International Limited, United Kingdom

6 Foseco Japan Limited

7 Foseco Korea Limited

8 Foseco Nederland BV.

9 Foseco Philippines Inc.

10 PT Foseco Trading Indonesia

11 PT Foseco Indonesia

12 Vesuvius Australia Pty Ltd.

13 Vesuvius Emirates (FZE), Dubai

14 Vesuvius Foundry Technologies (Jiangsu) Company Limited, China

15 Vesuvius GmbH, Germany

16 Vesuvius Group SA, Belgium

17 Vesuvius India Limited

18 Vesuvius Italia S.P.A.

19 Vesuvius Malaysia Sdn. Bhd.

20 Vesuvius New Zealand Limited

21 Vesuvius Poland Sp. Z.o.o.

22 Vesuvius Ras Al Khaimah FZ-LLC, Dubai

23 Vesuvius UK Limited, United Kingdom

24 Vesuvius Inc., USA

25 Vesuvius Holdings Limited, United Kingdom

26 Foseco Espanola, S.A.

27 Foseco SMC Nederlands

28 Vesuvius LLC

29 Vesuvius Scandinavia AB

(II) Key Management Personnel (KMP) as per Indian Accounting Standard (Ind AS) 24 Related Party Disclosures

1 Mr. Pradeep Mallick - Director and Chairperson till April 24, 2018

2 Mr. Ajit Shah - Director

3 Mr. Indira Parikh - Director

4 Mr. Glenn Cowie - Director

IV Terms and conditions for outstanding balances

Transactions with related parties were made on normal commercial terms and conditions.

All outstanding balances are unsecured and payable in cash.

31 Segment reporting

(a) Description of segments and principal activities

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The Managing Director has been identified as the chief operating decision maker (CODM).

The Company operates in only one business segment i.e. manufacturing of metallurgical products and services. This is the principal activity for the Company. The segment revenue is measured in the same way in Statement of Profit and Loss.

The Company's revenue from geographical locations other than India are insignificant to the total revenue of the Company.

The Company does not have any customer contributing to 10% or more to the total revenue.

(b) Non-current assets

All the non-current assets are located within India.

The Company has not disclosed the fair values for above financial instruments because their carrying amounts are a reasonable approximation of fair values mainly because of their short-term nature.

Fair value hierarchy

This section explains the judgments & estimates made in determining the fair value of the financial instruments.

The fair value of financial instruments as referred to in note above have been classified into three categories depending on the inputs used in the valuation technique. The hierarchy gives the highest priority to quoted prices in active market for identical assets or liabilities (level 1 measurements) and lowest priority to unobservable inputs (level 3 measurements).

(a) Only derivative contracts are measured at fair value. These derivative contracts are categorized as Level 2 financial instruments.

(b) Assets and liabilities which are measured at amortized cost for which fair values are disclosed.

For all financial instruments referred above that have been measured at amortized cost, their carrying values are reasonable approximations of their fair values. These are classified as level 3 financial instruments. There were no transfers between Level 1, Level 2 and Level 3 during the year.

The categories used are as follows:

Level 1 : Level 1 hierarchy includes financial instruments measured using quoted prices.

Level 2 : The fair value of financial instruments that are not traded in an active market (for example, over-the counter derivatives) is determined using valuation techniques which maximize the use of observable market data and rely as little as possible on entity-specific estimates. Considering that all significant inputs required to fair value such instruments are observable, these are included in level 2.

Level 3 : If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

33 Financial risk management 1 Financial risk management

The Company's activities exposes it to market risk, liquidity risk and credit risk. This note explains the sources of risk which the entity is exposed to and how the entity manages the risk.

(A) Credit risk

The Company is exposed to credit risk from its operating activities (primarily trade receivables) and deposits with banks and other financial instruments. For banks and other financial institutions, only high rated banks/ financial institutions are accepted. The balances with banks, loans given to employees, security deposits are subject to low credit risk and the risk of default is negligible or nil. Hence, no provision has been created for expected credit loss for credit risk arising from these financial assets. The Company considers the probability of default upon initial recognition of asset and whether there has been a significant increase in the credit risk on an ongoing basis throughout each reporting period. To assess whether there is a significant increase in credit risk the company compares the risk of a default occurring on the asset as at the reporting date with the risk of default as at the date of initial recognition. It considers available reasonable and supportive

forward-looking information, for e.g., external credit rating (to the extent available), actual or expected significant adverse changes in business, financial or economic conditions that are expected to cause a significant change to borrower's ability to meet its obligations.

I Trade receivables

Credit risk arises from the possibility that customer will not be able to settle their obligations as and when agreed. To manage this, the Company periodically assesses the financial reliability of customers, taking into account the financial condition, current economic trends, analysis of historical bad debts, ageing of accounts receivable and forward looking information. Individual credit limits are set accordingly.

On account of adoption of Ind AS 109, the Company uses the Expected Credit Loss (ECL) model to assess the impairment gain or loss. As per ECL simplified approach, the Company uses a provision matrix to compute the expected credit loss allowance for trade receivables. The provision matrix takes into account a continuing credit evaluation of Company's customers' financial condition; aging of trade accounts receivable; the value and adequacy of collateral received from the customers in certain circumstances (if any); the Company's historical loss experience; and adjustment based on forward looking information. The Company defines default as an event when there is no reasonable expectation of recovery.

(B) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities to meet obligations when due and to close out market positions. To assure the solvency and financial flexibility, the Company retains a liquidity reserve through cash and cash equivalents and lines of credit.

(i) Maturities of financial liabilities

The tables below analyses the Company's financial liabilities into relevant maturity group based on their contractual maturities for :

(C) Market risk Market risk comprises of foreign currency risk and interest rate risk I) Foreign currency risk

The company is engaged in international trade and thereby exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the USD, EUR, GBP and JPY Foreign exchange risk arises from recognized assets and liabilities denominated in a currency other than company's functional currency (INR). The Company's exposure to foreign currency arises from short term receivables and payables where fluctuations in the foreign exchange rates are generally not significant and consequently limiting the company's exposure.

II) Interest rate risk

The Company's main interest rate risk arises from deposits placed over a period of time on frequent basis thereby exposing the company to interest rate risk. The Company's policy is to have fixed interest rate at the time of deal execution.

34 Capital Management a) Risk management

The Company's objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and maintain an optimal capital structure to reduce the cost of capital. For the purpose of the Company's capital management, capital includes issued equity capital and all other equity reserves attributable to the equity holders of the parent. The primary objective of the Company's capital management is to maximize the shareholders’ value. The Company manages its capital structure and makes adjustments in light of changes in economic conditions and the requirements of the financial covenants.

No changes were made in the objectives, policies or processes for managing capital during the years ended December 31, 2017 and December 31, 2018.

35 First-time adoption Transition to Ind AS

These are the Company's first financial statements prepared in accordance with Ind AS.

The accounting policies set out in Note 1 have been applied in preparing the financial statements for the year ended December 31, 2018, the comparative information presented in these financial statements for the year ended December 31, 2017 and in the preparation of an opening Ind AS Balance Sheet as at January 1, 2017 (the Company's date of transition). In preparing its opening Ind AS Balance Sheet, the Company has adjusted the amounts reported previously in financial statements prepared in accordance with the accounting standards notified under Companies (Accounting Standards) Rules, 2006 (as amended) and other relevant provisions of the Act (previous GAAP or Indian GAAP). An explanation of how the transition from previous GAAP to Ind AS has affected the Company's financial position, financial performance and cash flows is set out in the following tables and notes.

I Exemptions availed a) Government Loans

Ind AS 101 permits a first-time adopter to elect to continue with the carrying value for government loans as recognized in the financial statements as at the date of transition to Ind AS, measured as per the previous GAAP and not to recognize the benefit of the loan so availed at a below market rate of interest as a government grant. Accordingly, the Company has elected to measure all of its government loans at their previous GAAP carrying value and has not recognized a government grant for the corresponding benefit.

a) Deemed cost - Property, plant and equipment (PPE), intangible assets

Ind AS 101 permits a first-time adopter to elect to continue with the carrying value for all of its property, plant and equipment and intangible assets as recognized in the financial statements as at the date of transition to Ind AS, measured as per the previous GAAP and use that as its deemed cost as at the date of transition after making necessary adjustments for de-commissioning liabilities. Accordingly, the Company has elected to measure all of its property, plant and equipment and intangible assets at their previous GAAP carrying value.

II Exceptions applied

a) Estimates

An entity's estimates in accordance with Ind ASs at the date of transition to Ind AS shall be consistent with estimates made for the same date in accordance with previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error. Ind AS estimates as at January 1, 2017 are consistent with the estimates as at the same date made in conformity with previous GAAP.

Note:

There is no change in cash and cash equivalents on account of adoption of Ind AS. Also, there is no impact of Ind AS on the Statement of Cash Flows.

Notes to first-time adoption a) Excise duty

Under the previous GAAP, revenue from sale of products was presented exclusive of excise duty. Under Ind AS, revenue from sale of goods is presented inclusive of excise duty. The excise duty paid is presented on the face of the statement of profit and loss as a part of expenses. This change has resulted in an increase in total revenue and total expenses for the year ended 31 December 2017 by Rs. 2,109.32 lakhs. There is no impact on the total equity and profit.

b) Remeasurements of defined employee benefit plan

Under Ind AS, remeasurements i.e. actuarial gains and losses and the return on plan assets, excluding amounts included in the net interest expense on the net defined benefit liability are recognized in other comprehensive income instead of profit or loss. Under the previous GAAP, these remeasurements were forming part of the profit or loss for the year. As a result of this change, the profit for the year ended December 31, 2017 decreased by Rs. 12.90 lakhs. There is no impact on the total equity as at December 31, 2017.

c) Proposed dividend

Under the previous GAAP up to December 31, 2016, final dividend proposed by the board of directors after the balance sheet date but before the approval of the financial statements were considered as adjusting events. Accordingly, provision for proposed final dividend was recognized as a liability. Under Ind AS, such dividends are recognized after it is approved by shareholders in the general meeting. Accordingly, the liability for proposed dividend (including tax thereon) of Rs. Nil as at December 31, 2017 (January 1, 2017 : Rs. 538.06 lakhs) included under short term provisions has been reversed with corresponding adjustment to retained earnings. Consequently, the total equity increased by an equivalent amount.

d) Other comprehensive income

Under Ind AS, all items of income and expenses recognized in a period should be included in profit or loss for the period, unless a standard requires or permits otherwise. Items of income and expenses that are not recognized in profit or loss but are shown in statement of profit or loss as 'Other Comprehensive Income' includes measurements of defined benefit plans. The concept of other comprehensive income did not exist under previous GAAP.

e) Deferred tax

Deferred tax have been recognized on the adjustments made on transition to Ind AS.

3 Expenditure on research and development during the year

Revenue expenditure incurred on in-house Research and Development activities Rs. 90.61 lakhs (December 31, 2017: Rs. 69.15 lakhs).

Capital expenditure in relation to acquisition of property plant and equipment incurred on in-house research and development activities is Rs. 46.05 lakhs (December 31, 2017: Nil)

4 Previous GAAP figures have been reclassified / regrouped to conform to the presentation requirements under Ind AS and the requirements laid down in Division II to the Schedule III of the Companies Act, 2013.

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