On April 1, 2008, Infosys Australia acquired 100% of the equity shares of Mainstream Software Pty Limited (MSPL) for a cash consideration of Rs. 13 crore. Consequent to this acquisition, intellectual property rights amounting to Rs. 13 crore were recorded. Considering the economic benefits expected to be obtained from the intellectual property rights, this amount has been fully amortised during the previous year.
On December 4, 2009, Infosys BPO acquired 100% of the voting interests in McCamish Systems LLC (McCamish), a business process solutions provider based in Atlanta, Georgia, in the United States. The business acquisition was conducted by entering into Membership Interest Purchase Agreement for a cash consideration of Rs.173 crore and a contingent consideration of upto Rs. 93 crore. The fair value of contingent consideration and its undiscounted value on the date of acquisition were Rs. 40 crore and Rs.67 crore, respectively.
This business acquisition is expected to enable Infosys BPO to deliver growth in platform-based services in the insurance and financial services industry and is also expected to enable McCamish to service larger portfolios of transactions for clients and expand into global markets. Consequently, the excess of the purchase consideration paid over the fair value of assets acquired has been accounted for as goodwill.
The purchase price has been allocated based on Management’s estimates and independent appraisal of fair values as follows:
Component |
Acquiree’s carrying amount |
Fair value adjustments |
Purchase price allocated |
| Property, plant and equipment | 5 | – | 5 |
| Net current assets | 9 | – | 9 |
| Intangible assets-Customer contracts and relationships | – | 48 | 48 |
| Intangible assets-Computer software platform | – | 13 | 13 |
| 14 | 61 | 75 | |
| Goodwill | 138 | ||
| Total purchase price | 213 |
The entire goodwill is deductible for tax purposes.
The amount of trade receivables acquired from the above business acquisition was Rs. 16 crore. Management expects the entire amount to be collected.
The identified intangible customer contracts and relationships are being amortized over a period of nine years whereas the identified intangible computer software platform has been amortized over a period of four months, based on management's estimate of the useful life of the assets.
The acquisition date fair value of each major class of consideration as of the acquisition date is as follows:
Particulars |
Consideration settled |
| Fair value of total consideration | |
| Cash paid | 161 |
| Liabilities settled in cash | 12 |
| Contingent consideration | 40 |
| Total | 213 |
The payment of contingent consideration is dependent upon the achievement of certain revenue targets and net margin targets by McCamish over a period of 4 years ending March 31, 2014. Further, contingent to McCamish signing any deal with a customer with total revenues of USD 100 million or more, the aforesaid period will be extended by 2 years. The total contingent consideration can range between Rs. 67 crore and Rs. 93 crore.
Contingent consideration is fair valued by discounting the estimated amount payable to the previous owners of McCamish on achievement of certain financial targets. The key inputs used for the fair valuation are the discount rate of 13.9% and the probabilities of achievement of the net margin and the revenue targets ranging from 50% to 100%.
Prepayments and other assets consist of the following:
As of March 31, |
||
| 2010 | 2009 | |
| Current | ||
| Rental deposits | 36 | 34 |
| Security deposits with service providers | 63 | 37 |
| Loans to employees | 106 | 109 |
| Prepaid expenses | 39 | 35 |
| Interest accrued and not due | 9 | 6 |
| Withholding taxes | 343 | 167 |
| Advance payments to vendors for supply of goods | 19 | 15 |
| Other assets | 26 | 8 |
| 641 | 411 | |
| Non-current | ||
| Loans to employees | 6 | 8 |
| Deposit with corporation | 337 | 253 |
| Prepaid gratuity and other benefits | 4 | 1 |
| 347 | 262 | |
| 988 | 673 | |
| Financial assets in prepayments and other assets | 557 | 447 |
Withholding taxes primarily consist of input tax credits. Other assets primarily represent advance payments to vendors for rendering of services, travel advances and other recoverable from customers. Security deposits with service providers relate principally to leased telephone lines and electricity supplies.
Deposit with corporation represents amounts deposited to settle certain employee-related obligations as and when they arise during the normal course of business.
Property, plant and equipment consist of the following as of March 31, 2010:
| Gross carrying value | Accumulated depreciation | Carrying value | |
| Land | 327 | – | 327 |
| Buildings | 3,300 | (745) | 2,555 |
| Plant and machinery | 1,263 | (648) | 615 |
| Computer equipment | 1,251 | (1,046) | 205 |
| Furniture and fixtures | 765 | (440) | 325 |
| Vehicles | 5 | (2) | 3 |
| Capital work-in-progress | 409 | – | 409 |
| 7,320 | (2,881) | 4,439 |
Property, plant and equipment consist of the following as of March 31, 2009:
| Gross carrying value | Accumulated depreciation | Carrying value | |
| Land | 285 | – | 285 |
| Buildings | 2,913 | (535) | 2,378 |
| Plant and machinery | 1,183 | (521) | 662 |
| Computer equipment | 1,233 | (960) | 273 |
| Furniture and fixtures | 774 | (387) | 387 |
| Vehicles | 4 | (1) | 3 |
| Capital work-in-progress | 677 | – | 677 |
| 7,069 | (2,404) | 4,665 |
During the year ended March 31, 2010 and 2009, certain assets which were old and not in use having gross book value of Rs. 387 crore and Rs. 344 crore, respectively, (carrying value Nil) were retired.
Following are the changes in the carrying value of property, plant and equipment for the year ended March 31, 2010:
| Land | Buildings | Plant and machinery |
Computer equipment |
Furniture and fixtures |
Vehicles | Capital work-in-progress |
Total | |
| Carrying value as of Apr 1, 2009 | 285 | 2,378 | 662 | 273 | 387 | 3 | 677 | 4,665 |
| Additions/ (deletions) | 42 | 387 | 212 | 199 | 101 | 1 | (268) | 674 |
| Acquisition through business combination | – | – | – | 5 | – | – | – | 5 |
| Depreciation | – | (210) | (259) | (272) | (163) | (1) | – | (905) |
| Carrying value as of March 31, 2010 | 327 | 2,555 | 615 | 205 | 325 | 3 | 409 | 4,439 |
Following are the changes in the carrying value of property, plant and equipment for the year ended March 31, 2009:
| Land | Buildings | Plant and machinery |
Computer equipment |
Furniture and fixtures |
Vehicles | Capital work-in-progress |
Total | |
| Carrying value as of April 1, 2008 | 230 | 1,580 | 453 | 228 | 270 | 3 | 1,324 | 4,088 |
| Additions/ (deletions) | 55 | 955 | 407 | 302 | 253 | 1 | (647) | 1,326 |
| Depreciation | – | (157) | (198) | (257) | (136) | (1) | – | (749) |
| Carrying value as of March 31, 2009 | 285 | 2,378 | 662 | 273 | 387 | 3 | 677 | 4,665 |
The depreciation expense for year ended March 31, 2010 and 2009 is included in cost of sales in the statement of comprehensive income.
Carrying value of land includes Rs. 149 crore and Rs. 113 crore as of March 31, 2010 and 2009, respectively, towards deposits paid under certain lease-cum-sale agreements to acquire land including agreements where the Company has an option to purchase the properties on expiry of the lease period. The Company has already paid 99% of the market value of the properties prevailing at the time of entering into the lease-cum-sale agreements with the balance payable at the time of purchase. The contractual commitments for capital expenditure were Rs. 301 crore and Rs. 372 crore, as of March 31, 2010 and 2009, respectively.
Following is a summary of changes in the carrying amount of goodwill:
As of March 31, |
||
| 2010 | 2009 | |
| Carrying value at the beginning | 692 | 695 |
| Goodwill recognized on acquisition (Refer Note 2.3) | 138 | – |
| Translation differences | (1) | (3) |
| Carrying value at the end | 829 | 692 |
Goodwill has been allocated to the cash generating units (CGU), identified to be the operating segments as follows:
| Segment | As of March 31, |
|
| 2010 | 2009 | |
| Financial services | 403 | 269 |
| Manufacturing | 94 | 92 |
| Telecom | 15 | 14 |
| Retail | 228 | 228 |
| Others | 89 | 89 |
| Total | 829 | 692 |
The entire goodwill relating to Infosys BPO’s acquisition of McCamish has been allocated to the ‘Financial services’ segment.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to the CGU which are operating segments regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance.
The recoverable amount of a CGU is the higher of its fair value less cost to sell and its value-in-use. The fair value of a CGU is determined based on the market capitalization. The value-in-use is determined based on specific calculations. These calculations use pre-tax cash flow projections over a period of five years, based on financial budgets approved by management and an average of the range of each assumption mentioned below. As of March 31, 2010, the estimated recoverable amount of the CGU exceeded its carrying amount. The recoverable amount was computed based on the fair value being higher than value-in-use and the carrying amount of the CGU was computed by allocating the net assets to operating segments for the purpose of impairment testing. The key assumptions used for the calculations are as follows:
| In % | |
| Long term growth rate | 8-10 |
| Operating margins | 17-20 |
| Discount rate | 12.2 |
The above discount rate is based on the Weighted Average Cost of Capital (WACC) of the Company. These estimates are likely to differ from future actual results of operations and cash flows.
Following is a summary of changes in the carrying amount of acquired intangible assets:
| As of March 31, | ||
| 2010 | 2009 | |
| Gross carrying value at the beginning | 56 | 44 |
| Intellectual property rights (Refer Note 2.3) | – | 13 |
| Customer contracts and relationships (Refer Note 2.3) | 48 | – |
| Computer software platform (Refer Note 2.3) | 13 | – |
| Translation differences | – | (1) |
| Gross carrying value at the end | 117 | 56 |
| Accumulated amortization at the beginning | 21 | 3 |
| Amortization expense | 37 | 18 |
| Translation differences | 3 | – |
| Accumulated amortization at the end | 61 | 21 |
| Net carrying value | 56 | 35 |
The intangible customer contracts recognized at the time of Philips acquisition are being amortized over a period of seven years, being management's estimate of the useful life of the respective assets, based on the life over which economic benefits are expected to be realized. However, during the year ended March 31, 2010 the amortization of this intangible asset has been accelerated based on the usage pattern of the asset. As of March 31, 2010, the customer contracts have a remaining amortization period of five years.
The intangible customer contracts and relationships recognized at the time of McCamish acquisition are being amortized over a period of nine years, being management’s estimate of the useful life of the respective assets, based on the life over which economic benefits are expected to be realized. As of March 31, 2010, the customer contracts and relationships have a remaining amortization period of nine years.
The intangible computer software platform recognized at the time of McCamish acquisition having a useful life of four months, being management’s estimate of the useful life of the respective asset, based on the life over which economic benefits were expected to be realized, has been fully amortized.
The aggregate amortization expense included in cost of sales, for the year ended March 31, 2010 and 2009 was Rs. 37 crore and Rs. 18 crore, respectively.
Research and development expense recognized in net profit in the statement of comprehensive income, for the year ended March 31, 2010 and 2009 was Rs. 435 crore and Rs. 237 crore, respectively.