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Case Study Infosys is an IT and management consulting services provider. The firm has offices and presences over 50 countries in the world. It is one of the biggest IT consulting firm in South Asia. In Pakistan it has recently encouraged by acquiring a Pakistan based IT Solution Company named Red Math. Given the quantum of Infosys operations and revenue it is going to be listed on Pakistan Stock Exchange. The Red Math company is now going to represent the Infosys international; previously it existed as a private limited company. This transformation will eventually bring out drastic changes in the reporting framework of Red Math. You are a member of the corporate regulatory body appointed to direct entities like these for incorporating the essential reporting framework clauses into their financial statement. Red Math through their auditors has requested you for the guidance in the matter stated below. Kindly state your opinion with reference to the appropriate International Financial Reporting Standard citation. a) Red Math Company has spent PKR 2.5 million in previous three years on the physical fitness of its employees and was treated as an entertainment expense that equated to their perks. Infosys' core policy is mandatory fitness of its employees. The Infosys will require this cost to be classified as a necessary core business expense. b) Red Math Company provided cabling and wiring services to the Nandi-Pur Power Project in 2008, which amounted to invoicing of PKR 7.5 million. The project due to delays was considered to be terminated, but the amount still remained in the receivables of the Red Math. The project revived by current government recently, whereby the Red Math company has again taken up the matter of the previous service rendered and the payment due from the project . The current administration is a bit hesitant to process any claim pertaining to the previous tenure due to political reasons. The amount is still appearing in receivables of the Red Math. c) Red Math operates a segment Hardware trouble shooting and problem solving (contributing 12% to the revenue). Infosys worldwide has outsourced its hardware maintenance to another company. On the same rule, Infosys has directed Red Math to outsource the said division to NCR Pakistan. The equipment existing in the inventory will be retained but will be reclassified as indirect consumables, previously classified as Tools and Equipment. d) One of the major revenue earning division of the Red Math, Software development is going to be merged with the Infosys Software development division. Infosys will share and reimburse half of the cost of software development in previous 5 years that amounts to PKR 150 million. Red Math wants to offset these amounts and carry a net figure to the accounts. e) Infosys has directed Red Math to renegotiate all the service contracts of next year on 25 % profit increase. All clients have agreed to the revised rate except for the three clients namely Tricon Builders, Ajmal Davakhana & Enem Stores. These three clients have paid advance based upon previously negotiated contract amounting to PKR 8.5 million. In lieu of reimbursement of the advanced, it has been agreed that these clients will take over the possession of Red Math equipment lying with them valuing to PKR 8 million. Since no payment is actually reimbursed Red Math does not consider any substantial need t disclose this arrangement into accounts. f) Based upon the above contracts' projection Red Math has been able to secure a credit facility of PKR 300 million. The Red Math has no intention of restating and adjusting the figures as per IAS-I and want to take departure from the standard. The contention of Red Math over here is that they have communicated this matter to Infosys who have assured support the loss of these contracts if they are in accordance with the quality assurance standards of the Infosys. g) Red Math was lead resource provider in web hosting in recent PSL matches. Matches were relayed to all over Pakistan on request of sports channel such as Ten sports, PTV Sports and Geo Sports. The main coordinator for this event was PCB. Purpose of this arrangements was to provide uninterrupted streaming of matches to audience on their hand held mobile sets, tabs and web linked devices. Unfortunately, the whole arrangements became a fiasco as there were distortions and severe interruptions during these matches which brought a bad name to Pakistan Cricket Board (PCB). PCB has sued these channels each for PKR 10 million and have filed a separate suit for Red Math of PKR 15 million in addition to this the aggrieved channels have filed a case for PKR 40 million. The PCB has also filed a separate case of restitution of damages to Red Math of PKR 5 million. Red Math's lawyer has arranged out of court settlement with both parties amounting to PKR 35 million on the condition that the deformation and court charges would not be pursued any further in the court of law. It is Red Math's managements opinion to omit this settlement from books of account on the plea that firstly there is no court proceeding against Red Math and secondly stating this fact might bring synergetic difficulties to the merger of Infosys. h) Red Math invested in derivative securities of foreign currency options and credit risk that were basically a straddle in the row and company lost $ 7 million as a result. This derivative investment is quite complex in nature and company thinks that financial statements user would not be able to comprehend the complexities of this transaction therefore, it should be omitted from books of accounts. i) The Infosys prepares its accounts from 6 April to 5th April every year whereas The Red Math company closes its books on 30th June. Can these two different reporting periods exist in the financial statements. j) Red Math in accordance with Infosys directives are renovating their offices that facilitate employees including Gymnasium, Leisure lounge, executive dining and baseball court. Does the concept of segregation apply here as the basketball court and leisure lounge are very exorbitant cost? Case Study Infosys is an IT and management consulting services provider. The firm has offices and presences over 50 countries in the world. It is one of the biggest IT consulting firm in South Asia. In Pakistan it has recently encouraged by acquiring a Pakistan based IT Solution Company named Red Math. Given the quantum of Infosys operations and revenue it is going to be listed on Pakistan Stock Exchange. The Red Math company is now going to represent the Infosys international; previously it existed as a private limited company. This transformation will eventually bring out drastic changes in the reporting framework of Red Math. You are a member of the corporate regulatory body appointed to direct entities like these for incorporating the essential reporting framework clauses into their financial statement. Red Math through their auditors has requested you for the guidance in the matter stated below. Kindly state your opinion with reference to the appropriate International Financial Reporting Standard citation. a) Red Math Company has spent PKR 2.5 million in previous three years on the physical fitness of its employees and was treated as an entertainment expense that equated to their perks. Infosys' core policy is mandatory fitness of its employees. The Infosys will require this cost to be classified as a necessary core business expense. b) Red Math Company provided cabling and wiring services to the Nandi-Pur Power Project in 2008, which amounted to invoicing of PKR 7.5 million. The project due to delays was considered to be terminated, but the amount still remained in the receivables of the Red Math. The project revived by current government recently, whereby the Red Math company has again taken up the matter of the previous service rendered and the payment due from the project . The current administration is a bit hesitant to process any claim pertaining to the previous tenure due to political reasons. The amount is still appearing in receivables of the Red Math. c) Red Math operates a segment Hardware trouble shooting and problem solving (contributing 12% to the revenue). Infosys worldwide has outsourced its hardware maintenance to another company. On the same rule, Infosys has directed Red Math to outsource the said division to NCR Pakistan. The equipment existing in the inventory will be retained but will be reclassified as indirect consumables, previously classified as Tools and Equipment. d) One of the major revenue earning division of the Red Math, Software development is going to be merged with the Infosys Software development division. Infosys will share and reimburse half of the cost of software development in previous 5 years that amounts to PKR 150 million. Red Math wants to offset these amounts and carry a net figure to the accounts. e) Infosys has directed Red Math to renegotiate all the service contracts of next year on 25 % profit increase. All clients have agreed to the revised rate except for the three clients namely Tricon Builders, Ajmal Davakhana & Enem Stores. These three clients have paid advance based upon previously negotiated contract amounting to PKR 8.5 million. In lieu of reimbursement of the advanced, it has been agreed that these clients will take over the possession of Red Math equipment lying with them valuing to PKR 8 million. Since no payment is actually reimbursed Red Math does not consider any substantial need t disclose this arrangement into accounts. f) Based upon the above contracts' projection Red Math has been able to secure a credit facility of PKR 300 million. The Red Math has no intention of restating and adjusting the figures as per IAS-I and want to take departure from the standard. The contention of Red Math over here is that they have communicated this matter to Infosys who have assured support the loss of these contracts if they are in accordance with the quality assurance standards of the Infosys. g) Red Math was lead resource provider in web hosting in recent PSL matches. Matches were relayed to all over Pakistan on request of sports channel such as Ten sports, PTV Sports and Geo Sports. The main coordinator for this event was PCB. Purpose of this arrangements was to provide uninterrupted streaming of matches to audience on their hand held mobile sets, tabs and web linked devices. Unfortunately, the whole arrangements became a fiasco as there were distortions and severe interruptions during these matches which brought a bad name to Pakistan Cricket Board (PCB). PCB has sued these channels each for PKR 10 million and have filed a separate suit for Red Math of PKR 15 million in addition to this the aggrieved channels have filed a case for PKR 40 million. The PCB has also filed a separate case of restitution of damages to Red Math of PKR 5 million. Red Math's lawyer has arranged out of court settlement with both parties amounting to PKR 35 million on the condition that the deformation and court charges would not be pursued any further in the court of law. It is Red Math's managements opinion to omit this settlement from books of account on the plea that firstly there is no court proceeding against Red Math and secondly stating this fact might bring synergetic difficulties to the merger of Infosys. h) Red Math invested in derivative securities of foreign currency options and credit risk that were basically a straddle in the row and company lost $ 7 million as a result. This derivative investment is quite complex in nature and company thinks that financial statements user would not be able to comprehend the complexities of this transaction therefore, it should be omitted from books of accounts. i) The Infosys prepares its accounts from 6 April to 5th April every year whereas The Red Math company closes its books on 30th June. Can these two different reporting periods exist in the financial statements. j) Red Math in accordance with Infosys directives are renovating their offices that facilitate employees including Gymnasium, Leisure lounge, executive dining and baseball court. Does the concept of segregation apply here as the basketball court and leisure lounge are very exorbitant cost
