Varroc Engineering Limited
Report on the Audit of the Standalone Financial Statements
Opinion
We have audited the accompanying standalone financial statements of Varroc Engineering Limited ("the Company"), which comprise the Balance Sheet as at March 31,2024, the Statement of Profit and Loss, including the Statement of Other Comprehensive Income, the Cash Flow Statement and the Statement of Changes in Equity for the year then ended and notes to the standalone financial statements, including a summary of material accounting policies and other explanatory information.
In our opinion and to the best of our information and according to the explanations given to us, the aforesaid standalone financial statements give the information required by the Companies Act, 2013, as amended ("the Act") in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at March 31,2024, its profit including other comprehensive income, its cash flows and the changes in equity for the year ended on that date.
Basis for Opinion
We conducted our audit of the standalone financial statements in accordance with the Standards on Auditing (SAs), as specified under section 143(10) of the Act. Our responsibilities under those Standards are further described in the ‘Auditor's Responsibilities for the Audit of the Standalone Financial Statements' section of our report. We are independent of the Company in accordance with
the ‘Code of Ethics' issued by the Institute of Chartered Accountants of India together with the ethical requirements that are relevant to our audit of the financial statements under the provisions of the Act and the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion on the standalone financial statements.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the standalone financial statements for the financial year ended March 31, 2024. These matters were addressed in the context of our audit of the standalone financial statements as a whole and in forming our opinion thereon and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.
We have determined the matters described below to be the key audit matters to be communicated in our report. We have fulfilled the responsibilities described in the Auditor's responsibilities for the audit of the standalone financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the standalone financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying standalone financial statements.
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Key audit matters
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How our audit addressed the key audit matter
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Recoverability of investment in VarrocCorp Holding BV, Netherlands (as described in note 7(a) of the standalone financial
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statements)
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The Company has equity investment of H7,771.23 Million
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The audit procedures performed by us included the
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(net of impairment provision of H 1,894.35 Million) in its wholly
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following:
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owned subsidiary VarrocCorp Holding BV Netherlands (‘VCHBV') as at March 31,2024.
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Obtained an understanding, evaluated the design and tested the operating effectiveness of controls the
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As required by Ind AS 36 "Impairment of assets", at each
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Company has in relation to impairment assessment
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reporting period end, management assesses the existence
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process;
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of impairment indicators for investments in subsidiaries. In case of existence of impairment indicators, the investment balances are subjected to impairment test.
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Evaluated the competence and objectivity of Company's external specialist involved in the process;
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VCHBV holds equity investments in overseas subsidiaries -primarily in Italy, Vietnam, Romania and in China JV. Hence for impairment testing, the management has assessed the recoverability of the aforesaid underlying investments in
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1 nvolved valuation specialist where necessary to assist in assessing the appropriateness of the valuation model including the independent assessment of the underlying key assumptions;
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overseas subsidiaries as at March 31,2024.
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Performed sensitivity testing of key assumptions used;
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The recoverable amount of investment in each of these
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Tested the arithmetical accuracy of the models;
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overseas subsidiaries is determined based on the discounted cash flow model which has sensitivity around key assumptions such as revenue growth, operating margins, discount rate, terminal growth rate and also involves significant judgements and estimates.
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Assessed the adequacy of disclosures in the standalone financial statements.
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We identified this as a key audit matter in our audit of the standalone financial statements considering the complexity in determining the recoverable amounts and the quantum of such equity investments as at March 31,2024.
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Allowability of deduction on write-off of loans to subsidiary under the Income Tax Act, 1961 (as described in note 24 of the
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standalone financial statements)
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During the year, the Company has derecognised (written-
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The audit procedures performed by us included the
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off) loans given to VCHBV and interest accrued on such
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following:
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loans aggregating to H 11,796.44 million.
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Read the tax opinions obtained by the Company from
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These loans pertained to funding of Varroc Lighting Systems
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two senior tax counsels supporting the allowability of
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(‘VLS') entities (erstwhile subsidiaries of VCHBV) and were
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tax deduction on write-off of the said loans;
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fully provided for during the period ended Sep 30, 2022 when the VLS business was sold to Compagnie Plastic Omnium.
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Involved tax experts to assist in evaluating the allowability of deduction on write-off of loans to
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During the current year, the management has considered
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subsidiary;
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the aforesaid write-off as an allowable business loss for computation of current tax provision, as it believes that these loans extended to VCHBV were in the nature of trade investments to advance the Company's business.
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Assessed the forecast of future taxable income prepared by the management to test the recoverability of deferred tax asset as at March 31,2024;
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Accordingly, the same has been considered as deduction
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Assessed the adequacy of disclosures in the standalone
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for computation of current tax provision for the year ended March 31, 2024 and consequently a deferred tax asset of H 2,448.03 million (after adjusting other taxable income pertaining to current financial year) has been recognized as at March 31,2024.
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financial statements.
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Key audit matters
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How our audit addressed the key audit matter
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We identified this as a key audit matter in our audit of the standalone financial statements considering quantum of the deduction and the significant judgement involved with respect to deductibility of such expenditure under Income tax Act, 1961.
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Derecognition of trade receivables under factoring standalone financial statements)
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arrangements (as described in Note 2A of the
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The Company enters into non-recourse factoring
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The audit procedures performed by us included the
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arrangements for its trade receivables with various banks/
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following:
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financial institutions.
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• Evaluated the assessment made by management in
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As at March 31, 2024, the Company derecognised trade
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respect of transfer of substantially all risks and rewards
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receivables amounting to H 3,972.91 million. The Company
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of ownership of the financial assets under the factoring
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derecognizes the receivables from its books if it transfers
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contracts;
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substantially all the risks and rewards of ownership of the financial asset (i.e. receivables).
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• Read samples of factoring contracts to understand the terms and assessed if they qualify as non-recourse
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The assessment of derecognition of trade receivables
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agreements and further assessed the accounting
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under the factoring arrangements is complex and requires
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treatment as per the requirements of Ind AS 109,
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judgement.
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"Financial Instruments";
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Accordingly, this has been identified as a key audit matter
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• Assessed the adequacy of disclosures in the standalone
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in our audit of the standalone financial statements.
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financial statements for compliance with the relevant accounting standard requirements.
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Testing of compliance with Debt covenants (as described in note 21 of the standalone financial statements)
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The total borrowings of the Company as at March 31,2024
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The audit procedures performed by us included the
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was H 12,469.47 million.
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following:
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The Company has availed various long-term borrowings.
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• Evaluated the Company's assessment and workings
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These borrowings have loan covenants with respect to
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for compliance with the relevant debt covenants as
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debt-equity, debt service coverage, etc. non-compliance
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applicable to various borrowings of the Company;
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of which gives right to the lender to demand immediate repayment of the loan and/or penal interest.
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• Tested the underlying calculations used in the Company's assessment of debt covenants for a
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We identified this as a key audit matter in our audit of the
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sample of loan contracts;
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standalone financial statements considering the quantum of borrowings and the significant implications in case of non-compliance with debt covenants.
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• In case of non-compliance with any of the debt covenants, we read the covenant waiver letters from lenders where available. In the absence of waiver
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letters, we assessed the consequent reclassification of the respective borrowing from non-current to current.
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• Assessed the adequacy of disclosures in the standalone
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financial statements for compliance with the relevant accounting standard requirements.
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Other Information
The Company's Board of Directors is responsible for the other information. The other information comprises the information included in the Annual report but does not include the standalone financial statements and our auditor's report thereon. The Annual report is expected to be made available to us after the date of this auditor's report.
Our opinion on the standalone financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether such other information is materially inconsistent with the standalone financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
When we read the Annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.
Responsibilities of Management for the Standalone Financial Statements
The Company's Board of Directors is responsible for the matters stated in section 134(5) of the Act with respect to the preparation of these standalone financial statements that give a true and fair view of the financial position, financial performance including other comprehensive income, cash flows and changes in equity of the Company in accordance with the accounting principles generally accepted in India, including the Indian Accounting Standards (Ind AS) specified under section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015, as amended. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and the design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness
of the accounting records, relevant to the preparation and presentation of the standalone financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.
In preparing the standalone financial statements, management is responsible for assessing the Company' s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
The Board of Directors is also responsible for overseeing the Company's financial reporting process.
Auditor's Responsibilities for the Audit of the Standalone Financial Statements
Our objectives are to obtain reasonable assurance about whether the standalone financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these standalone financial statements.
As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
• I dentify and assess the risks of material misstatement of the standalone financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances. Under section
143(3) (i) of the Act, we are also responsible for expressing our opinion on whether the Company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the standalone financial statements, including the disclosures, and whether the standalone financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the standalone financial statements for the financial year ended March 31, 2024 and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Report on Other Legal and Regulatory Requirements
1. As required by the Companies (Auditor's Report) Order, 2020 ("the Order"), issued by the Central Government of India in terms of sub-section (11) of section 143 of the Act, we give in the "Annexure 1" a statement on the matters specified in paragraphs 3 and 4 of the Order.
2. As required by Section 143(3) of the Act, we report that:
(a) We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;
(b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except for the matter stated in the paragraph (i)(vi) below on reporting under Rule 11(g);
(c) The Balance Sheet, the Statement of Profit and Loss including the Statement of Other Comprehensive Income, the Cash Flow Statement and Statement of Changes in Equity dealt with by this Report are in agreement with the books of account;
(d) In our opinion, the aforesaid standalone financial statements comply with the Accounting Standards specified under Section 133 of the Act, read with Companies (Indian Accounting Standards) Rules, 2015, as amended;
(e) On the basis of the written representations received from the directors as on March 31,2024 taken on record by the Board of Directors, none of the directors is disqualified as on March 31, 2024 from being appointed as a director in terms of Section 164 (2) of the Act;
(f) The modification relating to the maintenance of accounts and other matters connected therewith are as stated in the paragraph (b) above on reporting under Section 143(3)(b) and paragraph (i)(vi) below on reporting under Rule 11(g);
(g) With respect to the adequacy of the internal financial controls with reference to these standalone financial statements and the operating effectiveness of such controls, refer to our separate Report in "Annexure 2" to this report;
(h) In our opinion, the managerial remuneration for the year ended March 31, 2024 has been paid / provided by the Company to its directors in accordance with the provisions of section 197 read with Schedule V to the Act;
(i) With respect to the other matters to be included in the Auditor's Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, as amended in our opinion and to the best of our information and according to the explanations given to us:
i. The Company has disclosed the impact of pending litigations on its financial position in its standalone financial statements - Refer Note 51 to the standalone financial statements;
ii. The Company has made provision, as required under the applicable law or
accounting standards, for material foreseeable losses, if any, on long-term contracts including derivative contracts - Refer Note 7 and 16 to the standalone financial statements;
iii. There were no amounts which were required to be transferred to the Investor Education and Protection Fund by the Company.
iv. a) The management has represented
that, to the best of its knowledge and belief, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Company to or in any other person(s) or entity(ies), including foreign entities ("Intermediaries"), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Company ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;
b) The management has represented that, to the best of its knowledge and belief, no funds have been received by the Company from any person(s) or entity(ies), including foreign entities ("Funding Parties"), with the understanding, whether recorded in writing or otherwise, that the Company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
c) Based on such audit procedures performed that have been considered reasonable and appropriate in the circumstances, nothing has come to our notice that has caused us to believe that the representations under sub-clause (a) and (b) contain any material misstatement.
v. No dividend has been declared or paid during the year by the Company.
vi. Based on our examination which included test checks, the Company has used SAP accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility in respect of the application and the same has operated throughout the year for all relevant transactions. We did not come across any instance of the audit trail feature being tampered with in respect of this accounting software. Normal/Regular users are not granted direct database or super user level access. However, changes to the database by a super user specifically does not carry the feature of a concurrent real time audit trail.
Further, in the absence of Service Organization Controls report in respect of payroll processing software which is operated by a third party service provider, we are unable to comment whether the audit trail feature was enabled and operated throughout the year for all relevant transactions recorded in the payroll processing software or whether there were any instances of the audit trail feature being tampered with.
For S R B C & CO LLP
Chartered Accountants ICAI Firm Registration Number: 324982E/E300003
per Paul Alvares
Partner
Membership Number: 105754 UDIN: 24105754BKBZNK3214
Place of Signature: Pune Date: May 17, 2024
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