Q3.

Accounting standard adopted by Infosys

The annual report Infosys states that the company has adopted the Indian Accounting

standards for preparing the financial report (Sharma et al. 2017). The Indian AS has replaced

the Indian GAAP system from 2016 as per the companies act under section 133 (rule 7)

(Narayanaswamy, 2017). The board has described that the Indian AS has impacted several

sections of the accounts due to transition to new accounting standards such as recording of

intangibles, deferred taxes, fair valuation of financial instruments, employees’ accrual

liabilities, share-based payments and benefits to the employees. The accounting statements

are prepared on basis of accrual basis maintaining the historical cost convention except for

the foreign exchange instruments. The foreign exchange rates are used to measure the fair

values of foreign assets and foreign transactions for maintaining the rule 3 of the Companies

Rules, 2015 (Shette et al. 2016). The board has also confirmed that financial statements are

prepared in accordance with International Financial Reporting Standards (IFRS) wherever it

is applicable. According to the auditor’s report, the company has maintained the standard

compliance of Sections 177 and 188 for disclosing the transactions with related parties. The

Rule 7, which is Indian GAAP, is used throughout the preparation of financial statements of

Infosys. It is required to maintain India AS101 for maintaining the GAAP to adopt the new

presentation of accounting statements. Further, the report has revealed that statement of cash

flows (Indian AS 7) and share-based payment (India AS102), which are in accordance with

IAS7 (published by International Accounting Standard Board), Statement of Cash Flows, and

IFRS 2 for share-based payment, will be applicable from 1st April 2017 in practice (Francis,

Huang and Khurana, 2016). The financial standards are fully complying with the new Indian

GAAP, which is issued in Company Rule 7 (De George, Li and Shivakumar, 2016).

Additionally, this company has maintained the accounting rules of listing its shares in India
(under NSE and BSE) and American Depository (ADRS) in NYSE, EURO NXT (London

and Paris).

The preparation of Income statement shows that the company has fully complied with India

AS 18 for recognising revenue for software development and maintenance services by

segregating each service separately with identifiable component of single transaction. The

company has justified the sales price of software development for presenting the revenue at

fair value. However, in some cases the residual method is used when the standard fair value

practice is not possible []. According to India AS18, this company has not recognised any

advance from a client as revenue. Further, income from license is also recognised as revenue

for maintaining India AS18. The derivative instruments such as foreign exchange forward

and option contracts are maintained as current assets and liabilities through counterparty like

banks. Such current assets and liabilities are not recognised as hedge (India AS109). These

balance sheet items are recognised at fair value with attributing the transaction cost as either

profit or loss. Infosys has presented its derivatives held for hedging as instrument in

comprehensive income to accumulate in the cash flow hedging reserve. This company has

derecognised equity share options for the employees by deducting from equity in accordance

with India AS109. The company has availed the exemption from AS101 for applying it for

first time. In such way, it has valued the share-based payment at fair rate (Bedia and Patodi,

2016). It is an application of India AS 102 where the companies are granted to exempt to

provide intrinsic value of share-based payment (Banerjee and Das, 2017). Further, the

company has availed the exemption of recognising the investment in equity instruments at

intrinsic value. This company has presented such previous equity investment in other

comprehensive income in accordance with India AS109 (Wilford, 2016). In addition to this,

the actuarial gains and losses are recognised in other comprehensive income as per India

AS19 (Bhasin, 2016).

1
Q4. Management of foreign currency risk

The management of Infosys has revealed in the annual report that it uses derivative financial

instruments for mitigating the foreign exchange related risk exposure. The derivative

financial instruments like foreign currency forward and option contracts are valued based on

quoted price of in the active market (Bedia and Patodi, 2016). All the forward and options

contract in foreign exchange derivatives are going to be matured within 12 months. The

forward contracts are applied for hedging purpose of cash flows from foreign currencies. The

management uses the hedging effectively by ensuring economic relationship between hedged

item and hedging instrument (Wilford, 2016). For optimal hedge ratio along with the same

risk management, the company has rebalanced hedge relationship by regulating either volume

of hedged instrument or the item. Both the hedge effectiveness and ineffectiveness are

calculated for accounting in profit and loss statement.

2
3