Schedules to the balance sheet and profit and loss account

13. Significant Accounting Policies and Notes on Accounts

13.1 Significant accounting policies

13.1.1 Basis of preparation of financial statements

The financial statements are prepared under the historical cost convention, in accordance with Indian Generally Accepted Accounting Principles ("GAAP"), the accounting standards issued by the Institute of Chartered Accountants of India and the provisions of the Companies Act, 1956, as adopted consistently by the company. All income and expenditure having a material bearing on the financial statements are recognized on the accrual basis.

The preparation of the financial statements in conformity with GAAP requires that the management make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Examples of such estimates include expected contract costs to be incurred to complete software development, provision for doubtful debts, future obligations under employee retirement benefit plans and the useful lives of fixed assets. Actual results could differ from those estimates.

13.1.2 Revenue recognition

Revenue from software development on the time-and-material basis is recognized based on software developed and billed to clients as per the terms of specific contracts. In the case of fixed-price contracts, revenue is recognized based on milestones achieved as specified in the contracts, on the percentage of completion basis. Revenue from the sale of software products is recognized with the passing of title of the user license. Revenue from Annual Technical Services ("ATS") is recognized on a pro-rata basis over the period in which such services are rendered. Interest on deployment of surplus funds is recognized using the time-proportion method, based on interest rates implicit in the transactions. Dividend income is recognized when the right to receive dividend is established. Revenue from the sale of special import licences is recognized when the licences are actually sold.

13.1.3 Expenditure

Expenses are accounted on the accrual basis and provisions are made for all known losses and liabilities. The cost of software purchased for use in software development and services is charged to revenue in the same year. Costs in the nature of salaries, travel and other project related expenses, where milestones are yet to be reached, incurred on contracts are carried in the balance sheet as "Costs in excess of billings". Provisions are made for future unforeseeable factors that may affect the profit on fixed-price software development contracts. The leave encashment liability of the company is provided on the basis of an actuarial valuation. Provisions are made towards likely expenses on providing post-sales client support for fixed-price contracts.

13.1.4 Fixed assets

Fixed assets are stated at the cost of acquisition, less accumulated depreciation. Direct costs are capitalized till the assets are ready to be put to use. These costs include financing costs relating to specific borrowing(s) attributable to fixed assets.

13.1.5 Capital work-in-progress

Advances paid towards the acquisition of fixed assets, and the cost of assets not put to use before the period-end, are disclosed under capital work-in-progress.

13.1.6 Depreciation

Depreciation on fixed assets is provided using the straight-line method, based on useful lives of assets as estimated by the management. Depreciation is charged on a pro-rata basis for assets purchased / sold during the period. Individual assets costing less than Rs. 5,000 are depreciated in full in the year of purchase. The management's estimate of useful lives for the various fixed assets is given below.

Buildings 15 years
Plant and machinery 5 years
Computer equipment 2-5 years
Furniture and fixtures 5 years
Vehicles 5 years

13.1.7 Retirement benefits to employees

13.1.7a Gratuity

The company has established the Infosys Technologies Limited Employees' Gratuity Fund Trust (the "Trust"). Liabilities with regard to the Gratuity Plan are determined by actuarial valuation, based upon which, the company makes contributions to the Trust. Trustees administer the contributions made to the Trust. The funds contributed to the Trust are invested in specific designated securities as mandated by law and generally comprise central and state government bonds, and debt instruments of government-owned corporations.

13.1.7b Superannuation

Apart from being covered under the Gratuity Plan described above, the senior officers of the company are also participants of a defined contribution plan. The plan is termed the superannuation plan (the "plan") to which the company makes monthly contributions, based on a specified percentage of each covered employee's salary. The company has no further obligations under the plan beyond its monthly contributions.

13.1.7c Provident fund

In addition to the above benefits, all employees receive benefits from a provident fund, which is a defined contribution plan. Both the employee and the employer make monthly contributions to this provident fund plan equal to 12% of the covered employee's salary. The company has established a Provident Fund Trust to which a part of the contributions are made each month. The remainders of the contributions are made to the Government's provident fund. The company has no further obligations under the provident fund plan beyond its monthly contributions.

13.1.8 Research and development

Revenue expenditure incurred on research and development are charged off in the same year in which such expenditure is incurred. Capital expenditure incurred on research and development is depreciated over the estimated useful lives of the related assets.

13.1.9 Foreign currency transactions

Sales made to clients outside India and realizations deposited into foreign currency bank accounts are accounted for on the basis of the exchange rate as on the date of the transaction. Adjustments are made for any variations in the sale proceeds on conversion into Indian currency upon actual receipt. Expenditure in foreign currency is accounted at the exchange rate prevalent when such expenditure is incurred. Disbursements made out of foreign currency bank accounts are reported at a rate that approximates the actual monthly rate. Fixed assets purchased at overseas offices are accounted for on the basis of the actual cost incurred at the exchange rate prevalent at the time of purchase. Depreciation is charged as per company policy. Exchange differences arising on foreign currency transactions are recognized as income or expense in the period in which they arise.

Current assets and current liabilities denominated in foreign currency are translated at the exchange rate prevalent at the date of the balance sheet. The resulting difference is accounted for in the profit and loss account. In the case of forward contracts, the difference between the forward rate and the exchange rate on the date of the transaction is recognized as income or expense over the life of the contract.

13.1.10 Investments

Investments are classified into current investments and long-term investments. Current investments are carried at the lower of the cost and the fair value, and provision is made to recognize any decline in the carrying value. Long-term investments are carried at cost, and provision is made to recognize any decline, other than temporary, in the value of such investment. Overseas investments are carried at their original rupee cost less provision as described above.

13.1.11 Investment in subsidiary

The investment in the subsidiary is accounted on the cost method, whereby, the company recognizes only dividends received from the subsidiary as income. In case of losses made by the subsidiary, other than temporary, adequate provision is made to recognize any decline in the value of the investment.

13.1.12 Income tax

Provision is made for income tax on an annual basis, under the tax-payable method, based on the tax liability as computed after taking credit for allowances and exemptions. In case of matters under appeal, due to disallowances or otherwise, full provision is made when the said liabilities are accepted by the company.

13.2 Notes on accounts

The previous period's figures have been recast / restated, wherever necessary, to conform to the current period's classification.

13.2.1 Contingent liabilities

The estimated amount of contracts remaining to be executed on capital account, and not provided for (net of advance) is Rs. 118,86,56,390 as at June 30, 2000. The amount of such contracts as at June 30, 1999 was Rs. 34,26,03,611 and as at March 31, 2000 was Rs. 80,31,29,007. The company has outstanding counter guarantees of Rs. 5,71,30,000 as at June 30, 2000, to various banks, in respect of guarantees given by the banks in favour of various government authorities. The counter guarantees outstanding, as at June 30, 1999 were Rs. 2,82,65,263 and as at March 31, 2000 were Rs. 5,26,30,000. Claims against the company, not acknowledged as debts, amounted to Rs. 73,78,977 as at June 30, 2000. Such claims, as at June 30, 1999 were Rs. 17,91,814 and as at March 31, 2000 were Rs. 32,89,661.

13.2.2 Quantitative details

The company is engaged in the development and maintenance of computer software. The production and sale of such software cannot be expressed in any generic unit. Hence, it is not possible to give the quantitative details of sales and certain information as required under paragraphs 3, 4C and 4D of part II of Schedule VI to the Companies Act, 1956.

13.2.3 Managerial remuneration paid to the chairman, managing director and whole-time directors

in Rs.
Quarter ended June 30, 2000* Quarter ended June 30, 1999 Year ended March 31, 2000
Salary 22,64,968 9,73,800 38,00,059
Contribution to provident fund and other funds 3,83,405 3,09,780 12,08,855
Perquisites 7,39,873 9,45,399 37,32,482

*includes the remuneration paid to three new directors who were co-opted into the board on May 27, 2000.

13.2.4 Managerial remuneration paid to non-whole-time directors

in Rs.
Quarter ended June 30, 2000 Quarter ended June 30, 1999 Year ended March 31, 2000
Salary - - 48,17,800
Sitting fees 1,12,000 40,000 92,000
Reimbursement of expenses 2,04,161 2,30,714 10,13,703

13.2.5 Imports on CIF basis

in Rs.
Quarter ended June 30, 2000 Quarter ended June 30, 1999 Year March 31, 2000
Capital goods 16,76,46,420 7,63,84,991 37,47,31,691
Software packages 61,84,284 40,96,977 2,54,95,652

13.2.6 Expenditure in foreign currency

in Rs.
Quarter ended June 30, 2000 Quarter ended June 30, 1999 Year ended March 31, 2000
Travel expenses 17,70,40,100 17,17,34,260 70,29,13,532
Professional charges 72,06,920 61,83,106 4,51,95,637
Other expenditure incurred overseas for software development 80,78,78,995 34,15,81,916 221,74,57,133

13.2.7 Earnings in foreign exchange

in Rs.
Quarter ended June 30, 2000 Quarter ended June 30, 1999 Year ended March 31, 2000
Income from software development services and products on a receipt basis 304,28,30,950 7,63,84,991 37,47,31,691
Interest received on deposits with banks 61,84,284 40,96,977 2,54,95,652

13.2.8 Depreciation on assets costing less than Rs. 5,000 each

During the quarter, the company charged depreciation at 100% in respect of assets costing less than Rs. 5,000 each, amounting to Rs. 3,40,36,128. The corresponding amount for the previous period was Rs. 76,15,031 and the previous year was Rs. 13,21,59,074.

13.2.9 Exchange differences

During the quarter, realised and unrealised exchange gains amounted to Rs. 15,05,47,349 including Rs. 7,41,75,980 arising out of exchange differences on the translation of foreign currency deposits maintained abroad. The corresponding amounts for the same quarter in previous year were Rs. 13,62,59,335 and Rs. 8,13,02,378, respectively and the corresponding amounts for the previous year were Rs. 18,69,58,099 and Rs. 9,93,27,075 respectively. Exchange difference on translation of foreign currency deposits maintained abroad is disclosed separately under "Other income" in the financial statements. The balance of realised and unrealised exchange gains amounting to Rs. 7,63,71,369 (corresponding previous period Rs. 5,49,56,957 and previous year Rs. 8,76,31,024) is included as a component of "Income from software development services and products-overseas" in the financial statements.

13.2.10 Research and development expenditure

Research and development expenses charged to the Profit and Loss Account on both capital and revenue accounts amounts to Rs. 3,35,84,540 (corresponding previous period Rs. 1,62,34,400 and previous year Rs. 8,22,63,440). This includes Rs. 20,02,050 being the depreciation charged at 100% in respect of R & D assets acquired during the quarter (corresponding previous period Rs. Nil and previous year Rs. 15,27,500).

13.2.11 Provision for contingencies

The company had instituted a contingency plan effective October 1, 1998 and made a total provision of Rs. 9,99,00,000 to meet any possible disruption in client support due to the Year 2000 impact on the technology and communication infrastructure provided to the company by its vendors. For the year ended March 31, 2000, Rs. 2,42,29,154 was spent towards the Year 2000 transition effort, which was set off against the provision and the balance of Rs. 7,56,70,846 was written back to the profit and loss account.

13.2.12 Provision for e-inventing the company

The company made a provision of Rs. 3,50,00,000 for the quarter ended September 30, 1999 towards e-inventing the company. As on March 31, 2000, Rs. 3,10,99,023 was incurred towards e-inventing the company, which was set-off against the provision made earlier. The balance of Rs. 39,00,977 was incurred and set-off against this provision during the quarter ended June 30, 2000.

13.2.13 Unearned revenue

Unearned revenue as of June 30, 2000 amounting to Rs. 64,25,65,243 (corresponding previous period Rs. 22,54,44,217 and previous year Rs. 17,56,71,963) primarily consists of client billings on fixed-price, fixed-time-frame contracts for which the related costs have not yet been incurred.

13.2.14 Dues to Small-Scale Industrial undertakings

As of June 30, 2000, the company had no outstanding dues to small-scale industrial undertakings.

13.2.15 Balance of unutilized money raised by issue of ADS

During the year ended March 31, 1999, the company made an Initial Public Offering ("IPO") of American Depositary Shares ("ADS"), of USD 70,380,000 equivalent to Rs 296,86,00,000. The issue expenses amounted to Rs. 19,68,00,000 and the amount utilised for capital investment is Rs. 211,05,00,000. The balance of unutilised money as on June 30, 2000 amounting to Rs. 66,13,00,000 (corresponding previous period Rs. 289,56,00,000 and previous year Rs. 140,99,00,000) is maintained in foreign currency deposit accounts with various banks outside India.

13.2.16 Stock options

The company currently has three stock option plans. These are summarized below.

1994 Stock Option Plan ("the 1994 Plan") As of June 30, 2000, 3,36,000 options to acquire 3,36,000 shares were outstanding with the employees under the 1994 Plan. These options were granted at an exercise price of Rs. 100 per option. In addition to the above shares earlier issued to employees subject to lock-in is 17,32,600 shares. 1998 Stock Option Plan ("the 1998 Plan")

The company's 1998 Stock Option Plan ("the 1998 Plan") provides for the grant of non-statutory stock options and incentive stock options to employees. The establishment of the 1998 Plan was approved by the Board of Directors in December 1997 and by the company's shareholders in January 1998. The Government of India approved the 1998 Plan, subject to a limit of 14,70,000 equity shares representing 29,40,000 ADSs to be issued under the plan. A total of 16,00,000 equity shares corresponding to 32,00,000 ADSs are currently reserved for issuance pursuant to the 1998 Plan. These options may be issued at an exercise price that is not less than 90% of the fair market value of the underlying equity share on the date of the grant. The 1998 Plan will terminate in January 2008, unless terminated earlier. All options under the 1998 Plan are exercisable for ADSs representing equity shares. A committee of the Board of Directors administers the 1998 Plan.

Number of options granted, exercised and forfeited Quarter ended June 30, 2000 Quarter ended June 30, 1999 Year ended March 31, 2000
Options outstanding, beginning of period/year 6,89,500 4,19,000 4,19,000
Granted 1,46,700 - 2,94,300
Exercised 1,334 - 23,800
Forfeited 11,500 - 7,700
Options outstanding, end of period/year 8,23,366 4,19,000 6,89,500
Weighted average exercise price US$ 77.06
(Rs. 3,440)
US$ 17.00
(Rs. 737)
US$ 58.53
(Rs. 2,552)
1999 Stock Option Plan ("the 1999 Plan")

In fiscal 2000, the company instituted the 1999 Plan. The 1999 Plan was approved by the shareholders and the Board of Directors in June 1999. The 1999 Plan provides for the issue of 66,00,000 equity shares to the employees. The 1999 Plan is administered by a Compensation Committee comprising a maximum of seven members, the majority of whom are independent directors on the Board of Directors. Under the 1999 Plan, options will be issued to employees at an exercise price, which shall not be less than the Fair Market Value. Fair Market Value is the closing price of the company's shares in the stock exchange where there is the highest trading volume on a given date and if the shares are not traded on that day, the closing price on the next trading day. Under the 1999 Plan, options may be issued to employees at exercise prices that are less than Fair Market Value only if specifically approved by the members of the company in a general meeting.

Number of options granted, exercised and forfeited Quarter ended June 30, 2000 Quarter ended June 30, 1999 Year ended March 31, 2000
Options outstanding, beginning of period/year 10,06,800 - -
Granted 6,58,650 - 10,14,500
Exercised - - -
Forfeited 23,600 - 7,700
Options outstanding, end of period/year 16,41,850 - 10,06,800
Weighted average exercise price Rs. 4,931 - Rs. 4,268

13.2.17 Employee Stock Option Plan ("ESOP")

The Securities and Exchange Board of India (SEBI) recently issued the (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 which is effective for all stock option schemes established after June 19, 1999. In accordance with these guidelines, the excess of the market price of the underlying equity shares as of the date of the grant of the options over the exercise price of the options, including up-front payments, if any is to be recognized and amortized on a straight line basis over the vesting period.

The company's 1994 stock option plan was established prior to the SEBI guidelines on stock options.

Had the stock compensation costs for this stock option plan been determined as per the guidelines issued by SEBI, the company's reported net profit would have been reduced to the proforma amounts indicated below.

in Rs.
Quarter ended June 30, 2000 Quarter ended June 30, 1999 Year ended March 31, 2000
Net profit :
- As reported 126,79,62,749 60,60,81,838 293,51,56,665
- Adjusted pro forma 121,14,70,502 55,19,02,504 271,34,60,717

13.2.18 Provision for taxation

The company's profits from export activities are deductible from taxable income. Further, most of the company's operations are conducted through 100% Export Oriented Units, which are entitled to a tax holiday for a period of ten years from the date of commencement of operations. The provision for taxation includes taxes payable in respect of domestic income and income arising from the company's overseas operations, primarily in the United States, Europe, Far East and South East Asia.

13.2.19 Cash and bank balances

The cash and bank balances include interest accrued but not due on fixed deposits amounting to Rs. 27,33,684 for the quarter ended June 30, 2000 (corresponding previous period Rs. 5,99,173 and previous year Rs. 94,92,514).

13.2.20 Loans and advances

Advances recoverable in cash or kind or for value to be received mainly comprise of prepaid travel and per-diem expenses and advance paid to vendors towards current assets.

Deposits with financial institutions consist of Rs. 10,41,44,577 (corresponding previous period Rs. 25,44,80,556 and previous year Rs. 25,50,19,994) and Rs. 10,20,30,140 (corresponding previous period Rs. 4,00,21,918 and previous year Rs. 25,75,52,742) deposited with Housing Development Finance Corporation Limited, and ICICI Limited, respectively. Mr. Deepak M. Satwalekar, director of the company, is also the Managing Director in Housing Development Finance Corporation Limited. Mr. N. R. Narayana Murthy, Chairman and CEO of the company and Prof. Marti G. Subrahmanyam, director of the company are also directors in ICICI Limited. Except as directors in these financial institutions, they have no direct interest in these transactions. "Deposit with a body corporate" consists of Rs. 25,31,55,167 (corresponding previous period Rs. 25,27,89,590 and previous year Rs. 25,32,29,129) deposited with GE Capital Services India Limited. All these financial institutions and the body corporate have AAA rating from Credit Rating and Information Services of India Limited (CRISIL). These amounts include interest accrued but not due amounting to Rs. 92,97,693 (corresponding previous period Rs. 72,83,022 and previous year Rs. 1,58,01,863).

13.2.21 Current liabilities

Sundry creditors for other liabilities represent mainly the retention amount payable to the vendors, and amounts accrued for various other operational expenses.

13.2.22 Fixed assets

The company has entered into lease-cum-sale agreements to acquire certain properties. In accordance with the terms of these agreements, the company has the option to purchase the properties outright at the expiry of the lease period. The company has already paid 99% of the value of the properties at the time of entering into the lease-cum-sale agreements. These amounts are disclosed as "Land - leasehold" under "Fixed assets" in the financial statements.

13.2.23 Transfer of Intellectual Property Rights

During the quarter ended June 30, 2000, the company transferred its intellectual property rights in Onscan - a web-focussed wireless-enabled notification product, to Onscan Inc., USA, a company incubated by Infosys as part of its ongoing effort to encourage and promote budding entrepreneurs among its employees. The product was transferred for a gross consideration of Rs. 8,93,40,000 (US$ 2 million), received as equity, preferred voting and preferred non-voting securities in Onscan Inc. The income arising out of the transfer of Rs. 5,49,44,000 (net of tax) is disclosed as an extraordinary item.

13.2.24 Investment in CiDRA Corporation

During the quarter the company made a strategic investment of Rs. 13,40,08,660, (33,333 Series D Convertible Preferred Stock, par value of US$ 0.01 each, at US$ 90 each fully paid up) in CiDRA Corporation, USA. CiDRA Corporation is a developer of photonic devices for high-precision wavelength management and control for next generation optical networks.