Goodwill and CGU's impairment testing
The Company tests whether goodwill has suffered any impairment on an annual basis as at 31 December. The recoverable amount of a Cash Generating Unit ('CGU') is determined based on value-in-use calculations which require the use of assumptions. The calculations use pre-tax cash flow projections based on financial budgets approved by the management. An average of the range of each assumption used is mentioned below.
The above discount rate is based on the Weighted Average Cost of Capital (WACC) which represents the weighted average return attributable to all the assets of the CGU. These estimates are likely to differ from future actual results of operations and cash flows.
Based on the above assessment, there has been no impairment of goodwill.
Terms/rights attached to equity shares
The Company has only one class of equity shares having a par value of ?2/- per share. Each holder of equity shares is entitled to one vote per share. The Company declares and pays dividends in Indian Rupees (?).
The Board of directors have recommended dividend of ?23.80 per equity share for the year ended December 31, 2023. The dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting.
Dividend paid during the year ended December 31, 2023 includes an amount of ?5.50 per equity share towards the final dividend for the year ended December 31, 2022 and an amount of ?5.50 per equity share towards special dividend for the year ended December 31, 2023.
In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders.
a) Securities premium
Securities premium is used to record the premium on issue of shares. The reserve is utilised in accordance with the provisions of the Companies Act, 2013.
b) Retained earnings
Retained earnings are the profits of the Company earned till date net of appropriations/distributions and other adjustments permitted as per the applicable regulations and accounting standards.
c) Employee stock option reserve
The share options outstanding account is used to recognise the grant date fair value of the options issued to employees under Employee Share Acquisition Plan schemes.
d) Capital reserve
Capital reserve pertains to acquisitions in the earlier years.
e) Capital Redemption reserve
The Company had transferred to Capital Redemption reserve, a sum equal to the nominal amount of preference shares that were redeemed in the past. The reserve will be utilized as per the provisions of the Companies Act, 2013.
f) General Reserve
General reserve is a free reserve which can be utilised for any purpose after fulfilling certain conditions in accordance with the provisions of the Companies Act, 2013.
i) Warranties: The Company provides warranties for its products, systems and services, undertaking to repair or replace the items that fail to perform satisfactorily during the warranty period. Provision made as at December 31, 2023 represents the amount of the expected cost based on technical evaluation and past experience of meeting such obligations. It is expected that this expenditure will be incurred over the contractual warranty period.
ii) Loss orders: A provision for expected loss on construction contracts is recognised when it is probable that the contract costs will exceed total contract revenue. For all other contracts loss order provisions are made when the full costs of meeting the obligation under the contract exceed the currently estimated economic benefits.
iii) Provision for litigation represents claims against the Company not acknowledged as debts that are expected to materialise in respect of matters in litigation. The outflow would depend on the cessation of the respective events.
iv) Provision for sales tax represents mainly the differential sales tax liability on account of non - collection of declaration forms. The outflow would depend on the cessation of the respective events.
34 Discontinued operations
On December 5, 2019, the Board of Directors of Company approved the Scheme of Arrangement amongst the Company and Hitachi Energy India Limited (‘HEIL’) (formerly ABB Power Products and Systems India Limited) for Demerger of Company’s Power Grids business to HEIL ("Demerger”) and the Appointed date for the Demerger was April 1, 2019. The Demerger was approved by National Company Law Tribunal (‘NCLT’) and the NCLT approval was filed with the Registrar of Companies on December 1, 2019 (Effective date).
During the current year, the Company received show cause notices pertaining to the Export promotion capital goods ("EPCG”) licenses and advance licenses received from the Department of Customs, Government of India ("Customs Department”) for the Power Grid ("PG”) business in the earlier years. While these licenses continue to be in the name of the Company, upon completion of sale of PG business under the scheme, the benefit and the corresponding export obligations relating to such licenses were transferred to HEIL. As at December 31, 2023, HEIL is in the process of completing the compliance and documentation in relation to the licenses having duty value of ? 163.22 crores. As per the management and according to the scheme of demerger the obligation to comply with the regulations and consequences thereon belongs to HEIL which is also supported by an expert opinion.
35 During the previous year, the Company sold its turbocharger business (which was part of Process Automation segment) to a wholly owned subsidiary Turbocharging Industries and Services India Private Limited (TISIPL), on a slump sale basis for a consideration of ?310 Crores determined based on independent valuation. This was in line with ABB Group’s ongoing systematic portfolio restructuring to focus on higher growth segments. In this regard, a gain on sale of the business amounting to ?293.35 Crores was recognised as income and was presented as an exceptional item in the financial statements.
Further, the Company had sold the investment in TISIPL to Turbo Systems Switzerland Limited, a fellow subsidiary on the date of sale for a consideration of ?355 Crores determined based on independent valuation. The gain on sale amounting to '40 Crores was recognised as income and presented as an exceptional item.
Further, the Company also sold certain Property Plant and Equipment to TISIPL and the profit thereon amounting to '5.91 Crores was presented as an exceptional item.
37 Gratuity and other post-employment benefit plans
The Company has defined benefit gratuity plan and provident fund plan managed by trusts.
Gratuity Plan :
Gratuity is payable to all eligible employees of the Company as per the provisions of the Payment of Gratuity Act, 1972 or as per the Company's scheme, whichever is higher.
Provident Fund Plan :
The Company manages provident fund plan through a provident fund trust for its employees which is permitted under the Provident Fund and Miscellaneous Provisions Act, 1952. The Contribution by employee and employer together with interest are payable at the time of separation from service or retirement, whichever is earlier.
Assumptions relating to future salary increases, attrition, interest rate for discount and overall expected rate of return on assets have been considered based on relevant economic factors such as inflation, market growth and other factors applicable to the period over which the obligation is expected to be settled.
Valuation techniques and significant unobservable inputs
This section explains the judgements and estimates made in determining the fair values of the financial instruments that are (a) recognised and measured at fair value and (b) measured at amortised cost and for which fair values are disclosed in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Company has classified its financial instruments into the three levels prescribed under the accounting standard. An explanation of each level follows underneath the table.
There were no transfers between Level 1, Level 2 and Level 3 during the year.
The carrying value of trade receivables, loans receivable, trade payables, other financial assets and liabilities, cash and cash equivalents and bank balance other than cash and cash equivalents are considered to be the same as their fair value, due to their short term nature.
The fair value of financial assets and liabilities is included at the amount at which the instruments could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values:
The Company enters into derivative financial instruments with banks/financial institutions. Foreign currency forward contracts are valued using valuation techniques which employ the use of market observable inputs using present value calculations. The model incorporates various inputs including the deal specific fundamental, market conditions, maturity period, transaction size, comparable trades, foreign currency spot and forward rates.
39 Financial risk management objectives and policies
The Company’s principal financial liabilities comprise lease liabilities, trade and other payables. The main purpose of these financial liabilities is to support its operations. The Company’s principal financial assets include trade and other receivables, cash and cash equivalents and bank balance other than cash and cash equivalents that derive directly from its operations.
The Company is exposed to market risk, liquidity risk and credit risk. The Company’s senior management oversees the management of these risks. The Company’s senior management is supported by a risk management committee that advises on financial risks and the appropriate financial risk governance framework for the Company. The risk management committee provides assurance to the Company’s senior management that the Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Company’s policies and risk objectives. All derivative activities for risk management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision. It is the Company’s policy that no trading in derivatives for speculative purposes may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.
i. Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments affected by market risk include trade payables, trade receivables and deposits.
ii. Foreign Currency Risk
The Company operates internationally and is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the CHF, USD, SEK and EUR. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not Company's functional currency (INR).
iii Credit risk
Credit risk arises from cash held with banks and financial institutions, as well as credit exposure to clients, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors.
(i) Trade receivables
Trade receivables consists of a large number of customers spread across diverse industries.
The Company follows 'simplified approach' for recognition of impairment loss allowance on trade receivable. Under the simplified approach, the Company does not track changes in credit risk. Rather, it recognizes impairment loss allowance based on lifetime ECLs at each reporting date, right from initial recognition.
The Company uses a provision matrix to determine impairment loss allowance on the portfolio of trade receivables. The provision matrix is based on its historically observed default rates over the expected life of the trade receivable and is adjusted for forward looking estimates. At year end, the historical observed default rates are updated and changes in the forward-looking estimates are analysed.
Individual receivables which are known to be uncollectible are written off by reducing the carrying amount of trade receivable and the amount of the loss is recognised in the statement of profit and loss within other expenses.
Specific allowance for loss has also been provided by the management based on expected recovery on individual customers.
The provision provided in books for trade receivables overdue:
Management does not expect any significant loss from non-performance by counterparties on credit granted during the financial year that has not been provided for.
(ii) Other than trade receivables
Management believes that the parties from which the receivables are due have strong capacity to meet the obligations and risk of default is negligible or nil and accordingly no provision for expected credit loss has been provided for.
iv. Liquidity risk
The Company's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and debentures. 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. Due to the dynamic nature of the underlying businesses, Company maintains flexibility in funding by maintaining availability under committed credit lines.
The table below summarises the maturity profile of the Company's financial liabilities based on contractual undiscounted payments.
40 Capital management
For the purpose of the Company's capital management, capital includes issued equity capital, securities premium and all other equity reserves attributable to the equity holders of the parent. The primary objective of the Company's capital management is to maximise the shareholder value.
The Company manages its capital structure and makes adjustments in light of changes in economic conditions and the requirements of the financial covenants. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Company monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt.
41 Share based payments
Long Term Incentive Plan ('LTIP')
ABB Ltd, Zurich (Ultimate Holding Company) offers Performance Share Units (PSUs) and Restricted Share Units (RSUs) to the eligible employees of the Company for no consideration. The LTIP has a 2-3 year vesting period, after which the employee has the right to exercise and receive the consideration based on the fair market value of the shares on the date of exercise. This is charged to the Company in the month of delivery along with the administration fees, on a pro rata basis. The fair value of each option is based on the market value of listed shares of ABB Ltd, Zurich.
The Company accounts for the services as they are rendered by the employees during the vesting period, with a corresponding increase in liability. Until the liability is settled, the Company remeasures the fair value of the liability at the end of each reporting period with any changes in fair value recognised in the statement of profit and loss for the period.
The Company does not have any contingent assets at the balance sheet date.
The Company is contesting the demands and the management believes that its position will likely be upheld in the various appellate authorities/courts. The management believes that the ultimate outcome of this proceeding will not have a material adverse effect on the Company's financial position.
The amounts assessed as contingent liability do not include interest and/or penalty (if any) that could be claimed by counter parties.
The Company has outstanding performance bank guarantees as at December 31, 2023 aggregating to ¥ 38.84 Crores (December 31, 2022 ¥60.11 Crores), issued to the customers of Marici Solar India Private Limited, Linxon India Engineering Private Limited, Dodge Industrial India Private Limited and Turbocharging Industries and Services India Private Limited before the sale of business on slump sale basis to the respective companies. The commission on such bank guarantees has been reimbursed by the respective companies. The Company is also entitled for indemnification by the respective companies against any claims from the customers of these companies on such performance bank guarantees. Additionally, refer note 46(b)(xii).
The Company during the year incurred ¥7.04 Crores (December 31, 2022 ¥10.45 Crores) towards expenses relating to lease of low-value assets and short termed leases.
The total cash outflow for leases during the year is ¥35.66 Crores (including interest of ¥4.93 Crores) [December 31, 2022: ¥29.12 Crores (including interest of ¥1.82 Crores)], including cash outflow of short-term leases and leases of low-value assets.
45 Segment disclosures
45(a) Segment information
The Chief Operating Decision Maker (CODM) evaluates the Company's performance and allocates resources based on an analysis of various performance indicators by operating segments. Managing Director is the CODM of the Company. For management purposes, CODM organises the company into business units based on its products and services and has five reportable segments, as follows
i) Composition of business segments
The Company's business segments are organized around products and system solutions provided to its customers, which include utilities, industries, channel partners and original equipment manufacturers.
Motion segment (MO) provides products, solutions and related services that increase industrial productivity and energy efficiency. Its motors, generators and drives provide power, motion and control for a wide range of automation applications.
Robotics and Discrete Automation segment (RA) provides value-added solutions in robotics, machine and factory automation.
Electrification segment (EL) provides technology across the full electrical value chain from substation to the point of consumption, enabling safer and more reliable power. A range of digital and connected innovations for low- and medium-voltage, including EV infrastructure, solar inverters, modular substations, distribution automation, power protection, wiring accessories, switchgear, enclosures, cabling, sensing and control.
Process Automation segment (PA) provides products, systems and services designed to optimize the productivity of industrial processes. Solutions include turnkey engineering, control systems, measurement products, life cycle services, outsourced maintenance and industry specific products. The industries served include oil and gas, power, chemicals and pharmaceuticals, pulp and paper, metals and minerals, marine and turbocharging.
Power Grids segment (PG) (Discontinued) offers power and automation products, systems, service and software solutions across the generation, transmission and distribution value chain. Its portfolio includes grid integration, transmission, distribution and automation solutions and a complete range of high voltage products and transformers.
ii) The accounting policies used in the preparation of the financial statements of the Company are also applied for segment reporting.
iii) Segment revenues, expenses, assets and liabilities are those, which are directly attributable to the segment or are allocated on an appropriate basis. Corporate and other revenues, expenses, assets and liabilities to the extent not allocable to segments are disclosed in the reconciliation of reportable segments with the financial statements.
iv) Inter segment transfer pricing
Inter segment prices are normally negotiated amongst the segments with reference to the costs, market prices and business risks, within an overall optimization objective for the Company.
v) Power Grids segment (PG) was considered as discontinued operation and held for sale. Information about the discontinued operation is provided in Note. 34
xii) Pursuant to demerger of Power Grid business to Hitachi Energy India Limited (“HEIL”) with effect from April 1, 2019 and based on court approved demerger scheme, the Company has raised invoices to the customers of HEIL and received invoices from the vendors of HEIL for the period up to June 30, 2023 amounting to ?14.21 Crores (December 31, 2022 ?47.06 Crores) and ?0.53 Crores (December 31, 2022 ?16.15 Crores) respectively, towards the contracts yet to be novated by HEIL customers and vendors. The aforesaid invoices raised and invoices received have not been considered in the revenue from operations and cost of sales of the Company. The receivables and payables as at December 31, 2023 towards the aforesaid non novated contracts amounting to ?99 Crores (December 31, 2022 ?176.2 Crores) and ?63.48 Crores (December 31, 2022 ?139.5 Crores) have been disclosed as other receivables and other payables. The Company has outstanding performance bank guarantees as at December 31, 2023 aggregating to ?66.19 Crores (December 31, 2022 ?123.68 Crores), issued to the customers of HEIL prior to the said demerger. The commission on such bank guarantees has been reimbursed by HEIL. The Company is also entitled for indemnification against any claims on such performance bank guarantees from the customers of HEIL. (Refer note 8, 21 and 42).
Terms and conditions of transactions with related parties
The sales to and purchases from related parties are made on terms equivalent to those that prevail in arm's length transactions. Outstanding balances at the year-end are unsecured and interest free and settlement occurs in cash.
There have been no guarantees provided or received for any related party receivables or payables.
Out of the total revenue recognised under Ind AS 115 during the period, ?1,884.59 crores (December 31, 2022 ?1164.85 crores) is recognised over a period of time and ?8,561.93 crores (December 31, 2022 ?7,402.68 crores) is recognised at a point in time.
A contract asset is an entity's right to consideration in exchange for goods or services that the entity has transferred to a customer and hence is not a financial instrument. In Company's contracts with customers, since the contractual right to payment arises only upon achievement of milestones specified in the contract, it is believed that the performance completed until the achievement of a particular milestone should be recorded as a contract asset under non-financial assets.
During the year, ?123.16 crores (December 31, 2022 - ?39.81 crores) from opening balance of contract assets has been reclassified to trade receivables upon billing to customers on completion of milestones.
Revenue recognized during the year from opening balance of contract liabilities amounts to ?164.72 Crores (December 31, 2022 -?135.06 Crores).
c) There is no revenue recognised during the year from the performance obligation that is satisfied in previous year (arising out of contract modifications).
d) Performance obligation on fixed price contracts
The fixed price contracts are ordinarily presumed to consist of combined obligations which are not distinct in the context of the contract (i.e., single performance obligation). This is highly attributed to the long-term construction nature of the projects, whereby deliverables are typically highly interrelated and combined. The typical scope of turnkey contracts arrangements includes engineering, manufacturing, shipment, delivery installation, testing, erection and commissioning and civil works. Although there are several components to the overall scope of the contract, the turnkey contracts are generally considered one performance obligation.
e) Remaining performance obligations
The remaining performance obligation disclosure provides the aggregate amount of the transaction price yet to be recognized as at the end of the reporting period and an explanation as to when the Company expects to recognize these amounts in revenue.
The aggregate value of performance obligations that are completely or partially unsatisfied as at December 31, 2023 is ?8,404.15 Crores (December 31, 2022 ?6,468.71 Crores). The conversion to revenue is highly dependent on meeting the delivery schedules, contractual terms and conditions with customers, availability of customer sites, changes/ variation in scope/ prices etc. In view of these, it is not practical to define the accurate timing of conversion to revenue. However, it will be in a range of 1 to 3 years.
49 No transactions to report against the following disclosure requirements as notified by MCA pursuant to amended Schedule III:
(a) Crypto Currency or Virtual Currency
(b) Benami Property held under Prohibition of Benami Property Transactions Act, 1988 and rules made thereunder
(c) Registration of charges or satisfaction with Registrar of Companies
(d) Relating to borrowed funds:
i. Wilful defaulter
ii. Utilisation of borrowed funds & share premium
iii. Borrowings obtained on the basis of security of current assets
iv. Discrepancy in utilisation of borrowings
v. Current maturity of long term borrowings
(e) 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 or entity, 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.
There are no funds received by the company from any person or entity, including foreign entities (“Funding Party”) 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
(f) The Company does not have any material transactions with struck off companies.
50 The Board of directors in their meeting held on February 20, 2024 have proposed a final dividend of ?23.80 per equity share for the year ended December 31, 2023. The dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting.
|