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
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. Estimates and underlying assumptions are
reviewed on an ongoing basis. 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 fixed assets which necessarily take a substantial period of time
to get ready for their intended use are capitalised.
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. Assets acquired on finance leases
are depreciated over the period of the lease agreement or the useful
life whichever is shorter.
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:
Non-current investments are carried at cost less any
other-than-temporary diminution in value, determined separately for
each individual investment. The reduction in the carrying amount is
reversed when there is a rise in the value of the investment or if the
reasons for the reduction no longer exist.
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.
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.
Effective as of 1 April 2011, the Company has changed its policy on
valuation of inventory from the first-in first-out method (FIFO) to the
weighted average cost method (WAC). Under the prior policy, the cost of
all categories of inventories, except stores and spares, had been based
on the first-in first-out method. Stores and spares consists of packing
materials, engineering spares (such as machinery spare parts) and
consumables (such as lubricants, cotton waste and oils), which are used
in operating machines or consumed as indirect materials in the
manufacturing process, had been valued at cost based on a weighted
average method. Effective as of 1 April 2011, the cost of all
categories of inventory is based on a weighted average cost method.
Using the weighted average method will produce more accurate,
reasonable and relevant information on the amounts of inventory
reported in the balance sheet and, in turn, more accurate material
consumption reported in the statement of profit and loss. The effect of
this change in the methodology of valuation of inventory is immaterial
and, accordingly, no further disclosures have been made in these
g) Research and development
Expenditures on research activities undertaken with the prospect of
gaining new scientific or technical knowledge and understanding are
recognized as expense in the statement of profit and loss when
Development activities involve a plan or design for the production of
new or substantially improved products and processes. Development
expenditures are capitalized only if:
- development costs can be measured reliably,
- the product or process is technically and commercially feasible,
- future economic benefits are probable and ascertainable, and
- the Company intends to and has sufficient resources to complete
development and has the ability to use or sell the asset.
Expenditure incurred on fixed assets used for research and development
is capitalised and depreciated in accordance with the depreciation
policy of the Company.
h) Employee benefits Defined contribution plan
A defined contribution plan is a post-employment benefit plan under
which an entity pays fixed contributions into a separate entity and
will have no legal or constructive obligation to pay further amounts.
Obligations for contributions to recognized provident funds and
approved superannuation schemes which are defined contribution plans
are recognized as an employee benefit expense in the statement of
profit and loss as and when the services are received from the
Defined benefit plans
A defined benefit plan is a post-employment benefit plan other than a
defined contribution plan. The Company''s net obligation in respect of
an approved gratuity plan, which is a defined benefit plan, and certain
other defined benefit plans is calculated separately for each plan by
estimating the amount of future benefit that employees have earned in
return for their service in the current and prior periods; that benefit
is discounted to determine its present value. Any unrecognized past
service costs and the fair value of any plan assets are deducted. The
discount rate is the yield at the reporting date on risk free
government bonds that have maturity dates approximating the terms of
the Company''s obligations and that are denominated in the same currency
in which the benefits are expected to be paid. The calculation is
performed annually by a qualified actuary using the projected unit
Contributions payable to an approved gratuity fund determined by an
independent actuary at the balance sheet date are charged to the
statement of profit and loss. All actuarial gains and losses arising
during the year are recognized in the statement of profit and loss.
Provision for compensated absences is made on the basis of actuarial
valuation at the balance sheet date.
Employee 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 Employee stock option schemes, over the
exercise price is treated as employee compensation and amortised over
the vesting period.
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 statement of profit and loss.
Monetary assets and liabilities denominated in foreign currencies as at
the balance sheet date are translated using the foreign exchange rates
as at the balance sheet date. The resultant exchange differences are
recognised in the statement of profit and loss. Non-monetary assets and
liabilities are not translated.
Exchange differences arising on a monetary item that, in substance,
forms part of an enterprise''s net investment in a non-integral foreign
operation are accumulated in a foreign currency translation reserve in
the enterprise''s financial statements. Such exchange differences are
recognized in the statement of profit and loss in the event of disposal
of the net investment.
j) Derivative instruments and hedge accounting
The Company uses foreign exchange forward contracts and option
contracts (derivatives) to mitigate its risk of changes in foreign
currency exchange rates and does not use them for trading or
The premium or discount on foreign exchange forward contracts is
amortized as income or expense over the life of the contract. 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
statement of profit and loss in the reporting period in which the
exchange rates change. The changes in the fair value of foreign
currency option contracts are recognised in the statement of profit and
loss as they arise. Fair value of such option contracts is determined
based on the appropriate valuation techniques considering the terms of
Pursuant to ICAI Announcement Accounting for Derivatives on the
early adoption of Accounting Standard AS-30 Financial Instruments:
Recognition and Measurement, the Company has adopted the Standard,
to the extent that the adoption does not conflict with existing
mandatory accounting standards and other authoritative pronouncements,
Company law and other regulatory requirements.
The Company classifies its option and forward contracts that hedge
highly probable forecasted transactions as cash flow hedges and
measures them at fair value. The effective portion of such cash flow
hedges is recorded as part of reserves and surplus within the Company''s
hedging reserve, and re-classified in the statement of profit and
loss as revenue in the period corresponding to the occurrence of the
forecasted transactions. The ineffective portion is immediately
recorded in the statement of profit and loss.
The Company also designates certain non-derivative financial
liabilities, such as foreign currency borrowings from banks, as hedging
instruments for the hedge of foreign currency risk associated with
highly probable forecasted transactions and, accordingly, applies cash
flow hedge accounting for such relationships. Re-measurement gain /
loss on such non-derivative financial liabilities is recorded as a part
of reserves and surplus within the Company''s hedging reserve, and
re-classified in the statement of profit and loss as revenue in the
period corresponding to the occurrence of the forecasted transactions.
If the hedging instrument no longer meets the criteria for hedge
accounting, gets expired or is sold, terminated or exercised before the
occurrence of the forecasted transaction, the hedge accounting on such
transaction is discontinued prospectively. The cumulative gain or loss
previously recognized in hedging reserve continues to remain there
until the forecasted transaction occurs. If the forecasted transaction
is no longer expected to occur, the balance in hedging reserve is
recognized immediately in the statement of profit and loss.
Fair value hedges
The Company uses derivative financial instruments to hedge its exposure
to changes in the fair value of firm commitment contracts and measures
them at fair value. Any amount representing changes in the fair value
of such derivative financial instruments is recorded in the statement
of profit and loss. The corresponding gain / loss representing the
changes in the fair value of the hedged item attributable to hedged
risk is also recognized in the statement of profit and loss.
k) Revenue recognition Sale of goods
Revenue from sale of goods is recognised when significant 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 significant 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.
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.
Dividend and interest income
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
Export entitlements are recognised as reduction from material
consumption 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 significant uncertainty regarding the ultimate collection of the
relevant export proceeds.
l) Income tax expense
Income tax expense comprises current tax and deferred tax charge or
The current charge for income taxes is calculated in accordance with
the relevant tax regulations applicable to the Company.
Deferred tax charge or credit reflects 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 reflect 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
profit 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 profit 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) 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 outflow 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 outflow of resources. Where there is possible obligation or
a present obligation in respect of which the likelihood of outflow of
resources is remote, no provision or disclosure is made.
o) 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 statement of profit and loss. 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 reflected at the recoverable amount subject to a maximum of
amortised historical cost.
The lease arrangement is classified as either a finance lease or an
operating lease, at the inception of the lease, based on the substance
of the lease arrangement. Finance leases
A finance lease is recognized as an asset and a liability at the
commencement of the lease, at the lower of the fair value of the asset
and the present value of the minimum lease payments. Initial direct
costs, if any, are also capitalized and, subsequent to initial
recognition, the asset is accounted for in accordance with the
accounting policy applicable to that asset. Minimum lease payments made
under finance leases are apportioned between the finance expense and
the reduction of the outstanding liability. The finance expense is
allocated to each period during the lease term so as to produce a
constant periodic rate of interest on the remaining balance of the
Other leases are operating leases, and the leased assets are not
recognized on the Company''s balance sheet. Payments made under
operating leases are recognized in statement of profit and loss on a
straight-line basis over the term of the lease.