EASTERN SILK INDUSTRIES LTD.

SCHEDULE – 14

ACCOUNTING POLICIES AND NOTES ON ACCOUNTS

ACCOUNTING POLICIES:

1 A. Basis of Accounting

The Company adopts the mercantile system of accounting and recognizes income and expenditure on accrual basis in accordance with the applicable accounting standards. Export incentives, insurance and other claims, has been accounted for to the extent quantum thereof is ascertainable with reasonable accuracy.

B. Fixed Assets

Fixed assets are stated at original cost, if revalued at revalued amount, less depreciation. The cost of assets comprise its purchase price, direct expenses incurred including finance costs till it is put to use and the revalued amount, if any. The cost including additions, improvements, renewals, revalued amount and accumulated depreciation of assets which are sold and/or discarded, are removed from the Fixed Assets and any profit or loss resulting there from is included in the Profit & Loss Account.

C. Depreciation

Depreciation is provided for on written down value method, except for Unit 1 & Unit 3 which is provided on Straight Line Method, at the rates prescribed under Schedule XIV of the Companies Act, 1956. Depreciation on the Assets added/disposed off during the year is being provided on pro-rata basis.

Depreciation on revalued assets is calculated on straight line method over the residual life of the respective assets as estimated by the valuer. The charge for depreciation on account of revaluation is withdrawn from capital reserve.

D. Foreign Currency Transactions, Derivatives instruments and hedge accounting

Transactions in foreign currency other than those covered by forward contracts are accounted for at the prevailing conversion rates on the date of transaction and difference arising out of the settlement are dealt with in the Profit & Loss account. Outstanding export documents when covered by foreign exchange forward contracts are translated at contracted rates. Foreign currency loans availed for acquisition of fixed assets are restated at the exchange rate prevailing at year end and exchange rate difference arising on such transactions are adjusted in the Profit & Loss Account. Other foreign currency current assets and liabilities outstanding at the close of the year are valued at the year end exchange rates. The fluctuations are reflected under the appropriate revenue head.

The company uses foreign currency forward contracts and currency options to hedge its risks associated with foreign currency fluctuations relating to certain firm commitments and forecasted transactions. The company designates these hedging instruments as cash flow hedges applying the recognition and measurement principles set out in the Accounting Standard 30 ‘Financial Instruments: Recognition and Measurement’ (AS-30).

Hedging instruments are initially measured at fair value, and are re-measured at subsequent reporting dates. Changes in the fair value of these derivatives that are designated and effective as hedges of future cash flows are recognized directly in shareholders’ funds and the effective portion is recognized in profit & loss account.

Changes in the fair value of derivatives financial instruments that do not qualify for hedge accounting are recognized in profit & loss account as they arise.

Hedge accounting is discontinued when the hedging instruments expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time for forecasted transactions, any cumulative gain or loss on the hedging instrument recognized in Reserves & Surplus is retained there until the forecasted transaction occurs. If a hedge transaction is no longer expected to occur, the net cumulative gain or loss recognized in shareholder’s funds is transferred to profit & loss account for the year.

E. Expenditure during Construction Period

Expenditure during construction period is included under Capital Work-in-Progress and the same is allocated to the respective fixed assets on the completion of construction/erection/installation/production.

F. Valuation of Investments

Long-term investments are stated at cost of acquisition. Provision for diminution in the value of long-term investments is made only if such a decline is other than temporary in the opinion of the management.

G. Valuation of Inventories

Raw Materials and Finished Goods are valued at lower of cost or net realisable value.

Work-in-progress is valued at estimated cost.

Stores & spares parts, Dyes & chemicals, Packing materials are valued at cost.

Cost of inventories is ascertained at FIFO/Weighted average cost.

H. Employee Benefits

i) Short-term Employee Benefits

Short-term Employee Benefits (i.e. benefits payable within one year) are recognized in the period in which employee services are rendered.

ii) Post employment Benefits

a) Defined Contribution Plans

Contributions towards provident funds are recognized as expense. Provident fund contributions in respect of certain employees are made to Trusts administered by the Company, the interest rate payable to the members of the Trusts is not lower than the rate of interest declared annually by the Central Government under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and shortfall if any, is made good by the Company. The remaining provident fund contributions are made to employer established provident funds (other than covered employees)/government administered provident fund towards which the Company has no further obligations beyond its monthly contributions.

b) Defined Benefit Plans

Liability towards gratuity, covering eligible employees, is provided and funded on the basis of year end actuarial valuation.

Accrued liability towards Leave encashment benefits, covering eligible employees, evaluated on the basis of year-end actuarial valuation is recognized as a charge.

Contribution to Central Government administered Employees’ State Insurance Scheme for eligible employees are recognized as charge.

Actuarial gains/losses arising in Defined Benefit Plans are recognized immediately in the Profit and Loss Account as income/expense for the year in which they occur.

I. Miscellaneous Expenditure

Expenses related to issue of fresh capital are being amortized over a period of 10 years.

J. Borrowing Cost

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset. Other borrowing costs are recognized as an expense in the period in which they are incurred. Capitalisation of borrowing costs ceases when substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete.

K. Deferred Taxation

Deferred Taxation is provided using the liability method in respect of taxation effect arising from material timing difference between the accounting and tax treatment of Income & Expenditure based on tax rates prevailing at the time of Balance Sheet date. Deferred Taxation so provided is reviewed at each Balance Sheet date for necessary adjustments.

L. Earning Per Share

Basic earning per share is calculated by dividing the net Profit for the year attributable to equity shareholders (after deducting the dividend on redeemable preference share) by the weighted average number of equity shares outstanding during the year.

Diluted earning per share is calculated by dividing the net profit attributable to equity shareholders (after deducting the dividend on redeemable preference share) by the weighted average number of equity shares outstanding during the year (adjusted for the effects of dilutive options).

M. Events occurring after Balance Sheet Date

Events occurring after the balance sheet date have been considered in the preparation of financial statements.

N. Contingent Liabilities

Unprovided contingent liabilities are disclosed in the accounts by way of notes giving nature and quantum of such liabilities.

O. Cash Flow Statement

The company adopts the Indirect Method in preparation of Cash Flow Statement. For the purpose of Cash Flow Statement Cash & Cash equivalent consists of Cash in Hand, Cash at Bank & Cheques in Hand.

NOTES ON ACCOUNT

2. As per the Court order dated 7th February’ 2005 of Hon’ble Kolkata High Court and 14th December’ 2005 of Hon’ble Karnataka High Court, all the assets and liabilities of erstwhile Eastern Jingying Ltd. and Sstella Silks Ltd. automatically stand transferred in the name of the Company. Based on the Order, the Company has taken necessary steps to have the assets recorded with the relevant authorities in its name.

3. Accounting Standard - 14 states that the identity of the reserves has to be preserved as they appeared in the financial statement of the erstwhile Transferor Companies in the same form. The treatment as per AS-14 has not been followed fully as the High Court approving the Scheme of Amalgamation provided that after taking over all the assets and liabilities of the Transferor Companies as on 31st March 2004, and after accounting for the share premium of Rs.78/- per share as provided in the scheme, surplus, if any, arising after issuance of the new shares be credited to Capital Reserve of the Transferee Company and as such during 2004-05 a sum of Rs. 2,920.35 Lacs was credited in Capital Reserve.

4. Depreciation of Rs.297.35 Lacs on revalued assets has been provided during the year and such depreciation has been reduced from cost of fixed assets and also from capital reserve created on amalgamation.

5. In respect of capital goods imported under EPCG Scheme, the Company has executed bonds of Rs 5,544.52 Lacs in favour of President of India for import at a concessional rate of custom duty. The Company is under an obligation to export products for Rs 44,356.12 Lacs within a period of 8 years from the date of issue of licenses between 20th December, 2002 to 30th June, 2018. The Company has exported goods worth Rs 20,705.48 Lacs till 31st March, 2010.

6. Contingent Liabilities not provided for in respect of:

		2009-10 Rs. In Lacs		2008-09 Rs. In Lacs
(a)	Letters of Credit	8,237.90		5,903.15
(b)	Guarantees given by the Bankers	132.52		141.27
(c)	Bills receivable discounted with Bankers	18,428.22		17,958.75
(d)	Excise, Sales tax, Custom Duty, ESIC & Other Claims	184.44		184.44

7. Claims against the Company not acknowledged as debts:

i) Demand by the Department of Commercial Taxes, Government of Karnataka, levying a sum of Rs.20 lacs, as Entry Tax on Import of Plant & Machinery. The Company has obtained a Stay Order from the Hon’ble High Court of Karnataka during 1996.

ii) Demand by the Commissioner of Customs, Bangalore for Rs. 109.77 lakhs have been stayed by the Customs and Service Tax Act Appellate Tribunal, Chennai. The Company has deposited a sum of Rs. 38 lakhs with the Customs Authorities under protest.

8. Lining Fabrics valued at Rs.93.78 Lacs were imported in 2002-03 for usage in manufacturing of products for export. Due to the non-acceptance by the Customs Department of the methodology adopted by the Company for the co-relation between the material used and the material imported, an amount of Rs 148.50 Lacs was paid in protest towards Customs Duty on the said imports and shown under Advances. Since the final liability amount is unascertained and not acceptable by the Company in principle, no provision has been made in the accounts. The Adjudicating authority has passed an Order confirming the demand of the customs department. The Company’s appeal before the CESTAT was heard and an Order has been passed setting aside the Order of the adjudicating authority and remanded for fresh hearing.

9. The Company’s request for waiver of interest on loans obtained from two NBFC Companies is under consideration by the lenders. In view of the above, no further interest payable has been provided for.

10. Estimated amount of contracts remaining to be executed on Capital account and not provided for Rs. 2062.62 Lacs (Previous Year Rs. 7,087.23 Lacs).

11. There are no Micro, Small and Medium Enterprises, to whom the Company owes dues, which are outstanding for more than 45 days as at 31st March 2010.This information as required to be disclosed under the Micro, Small and Medium Enterprises Development Act, 2006 has been determined to the extent such parties have been identified on the basis of information provided by the supplier.

12. Derivative Instruments :

(a) The company has re-evaluated its risk management program in respect of forecasted transactions. Upon completion of the formal documentation and testing for effectiveness, the company has designated certain foreign currency options in respect of forecasted transactions, which meet the criteria, as Cash Flow Hedges.

(b) Pursuant to The Institute of Chartered Accountants of India’s (ICAI) announcement on the early adoption of Accounting Standard AS 30 “Financial Instruments recognition and measurements”, the company has fully adjusted for mark to market losses aggregating to Rs. 48.10 lakhs (Previous Year Rs.152.12 lakhs) during the year, towards designated Foreign currency transactions. The same has been recognized directly under Reserves & Surplus.

(c) The Company uses forward Exchange Contracts and Currency Option to hedge its exposures in foreign currency related to firm commitments and highly probable forecasted transactions. The information on Derivative Instruments is as follows:

Forward Exchange Contracts			(Figures in lakhs)
	As at 31st March, 2010
Currency Pair	Buy		Sell
EURO/ USD	12.50		5.00
	(-)		(-)
GBP/ USD	5.00		22.50
	(-)		(-)
USD/ INR	-		-
	(-)		(27.50)

13. As per Accounting Standard 15 “Employees Benefits”, the disclosures of Employee benefits as defined in the Accounting Standard are given below :

Defined Benefit Plan

The Employees’ gratuity fund Scheme managed by The Life Insurance Corporation of India (LICI) is a defined benefit plan. The present value of obligation is determined based on actuarial valuation using the Projected Unit Credit Method, which recognizes each period of service as giving rise to additional unit of employee benefit entitlement and measures each unit separately to build up the final obligation.

The obligatiThe obligation for leave encashment is recognized in the same manner as gratuity.

I		Reconciliation of opening and closing balances of Defined Benefit Obligation	(Rs. In Lacs)
			Gratuity		Leave Encashment
			(Funded)		(Unfunded)
	(a)	Defined benefit obligation at the beginning of the year	65.20		16.92
			(55.15)		(10.57)
	(b)	Current Service Cost	25.09		7.63
			(13.22)		(7.70)
	(c)	Interest Cost	6.22		1.47
			(4.81)		(1.10)
	(d)	Actuarial (Gain)/Loss	(1.25)		1.81
			(0.35)		(5.94)
	(e)	Benefits paid	(4.89)		(7.91)
			8.33		8.39
	(f)	Defined benefit obligation at the end of the year	90.37		19.92
			(65.20)		(16.92)
II.		Reconciliation of opening and closing balance of the fair value of Plan Assets
	(a)	Fair Value of Plan Assets at the beginning of the year	65.20		16.92
			(28.22)		(10.57)
	(b)	Expected Return on Plan Assets	(1.12)		-
			(2.26)		-
	(c)	Actuarial Gain / (Loss)	(1.25)		1.80
			0.35		-
	(d)	Contributions by employer	4.89		7.91
			(43.05)		(6.39)
	(e)	Benefits Paid	(4.88)
			8.33		8.39
	(f)	Fair Value of Plan Assets at the end of the year	64.08		19.92
			(65.20)		(10.57)
III.		Reconciliation of fair value of Assets and obligation
	(a)	Fair Value of plan assets	65.20		-
			(65.20)		-
	(b)	Present Value of obligation	90.37		19.92
			(65.20)		(16.92)
	(c)	Amount recognized in Balance Sheet	26.29		19.92
			-		(16.92)
IV.		Expense charged to the Profit and Loss Account
	(a)	Current Service Cost	25.09		7.63
			(13.22)		(7.70)
	(b)	Interest Cost	6.22		1.47
			(4.81)		(1.10)
	(c)	Expected Return on Plan Assets	1.12		0.00
			2.26		-
	(d)	Actuarial (Gain)/Loss	(1.25)		1.81
			(0.35)		(5.94)
	(e)	Total expense charged to the Profit and Loss Account	31.18		10.91
			(16.12)	*	(14.74)
		*   Under the head “Gratuity” on Schedule - 12
		** Under the head “Salary, Bonus & Allowances” on Schedule – 12
V.		Percentage of each Category of Plan Assets to total Fair value of Plan assets as at 31st March, 2010 - 100% with Life Insurance Corporation of India.
VI.		Actual Return on Plan Assets:	7.00%
			(7.00%)
VII.		Principal Actuarial Assumption as at 31st March, 2010
	(a)	Discount Rate (per annum)	8.00%
			(8.00%)
	(b)	Expected Rate of Return on Plan Assets (per annum)	8.00%
			(8.00%)
	(c)	Salary Escalation	5.00%
			(5.00%)
	(d)	Inflation Rate	5.00%
			(5.00%)

The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market.

The expected rate of return on plan assets is based on the portfolio of assets held, investment strategy and market scenario. In order to protect the capital and optimize returns within acceptable risk parameters, the plan assets are reasonably diversified.

14. As the Company’s business activities falls within a single primary business segment viz. Silk Textile yarn, Fabrics and Made-ups, no further reporting is necessary as per Accounting Standard – 17 issued by The Institute of Chartered Accountants of India.

15. Related Party Disclosure in-accordance with Accounting Standard - 18 issued by The Institute of Chartered Accountants of India.

(I) List of Related Parties	Name of the Person / Company
a) Associates: -	(1) Ethics Commercials Ltd. (2) Lucky Goldstar Company Ltd. (3) P.K.Textiles Ltd. (4) Tarun Fabrics Ltd. (5) Gemini Overseas Ltd.
b) Key Management Personnel: -	Shri S S Shah (Chairman & Managing Director) Shri Sundeep Shah (Executive Director) Shri G.Venkatesh (President) Shri Anil Jain (Chief Financial Officer)

(II) Transactions with Related Parties / Associates

Particulars		Ethics Commercials Ltd.		Lucky Goldstar Co. Ltd.		P.K.Textiles Ltd.		Tarun Fabrics Ltd.		Gemini Overseas Ltd.		Total		Key Management Personnel
Income & Expenditure														Rs. In Lacs
Purchase of Raw Materials & Finished Goods		2,586.81		4,415.99		5,296.86		6,294.90		4,654.44		23,249.00
		(3,849.00)		(5,382.55)		(4,721.85)		(5,776.34)		(8,564.49)		(28,294.23)
Sale of Goods		1,181.13		3,392.29		466.48		1,648.35		8.44		6,696.69
		(479.69)		(3,333.74)		(874.90)		(1,095.62)		(2,507.00)		(8,290.95)
Services Received		1,484.71		806.82		1,762.91		29.18				4,083.62
		(159.86)		(894.59)		(610.80)		(51.20)		(1,016.71)		(2,733.16)
Purchase of Fixed Assets		543.14		-		593.76		-		1,213.14		2,350.04
		( - )		( - )		( - )		( - )		( - )		( - )
Rent Received		0.08		0.07		0.00		0.01		0.01		0.17
		(0.08)		(0.07)		( - )		(0.01)		(0.01)		(0.17)
Rent Paid		-		-		-		-		-		-
		(0.72)		( - )		( - )		( - )		( - )		(0.72)
Guarantee given		-		650.00		-		-		-		650.00
		( - )		(650.00)		( - )		( - )		( - )		(650.00)
Remuneration Paid														96.48
														(102.89)
Balances as on 31st March,2010
i) Debtors/ Receivables		259.80		1,339.40		-		926.28		4.44		2,531.92
		( - )		(2,028.15)		(537.32)		(734.52)		(1,171.86)		(4,471.85)
ii) Advances		4,942.51		4,729.03		1,180.55		-		926.72		11,778.80
		(3,833.25)		(2,064.29)		(1,589.62)		(1,266.47)		(1,625.71)		(10,379.34)

16. As required under Accounting Standard – 22 issued by The Institute of Chartered Accountants of India, the Company is required to account for deferred taxation while preparing its accounts. The details of deferred tax assets / liabilities are as under : -

	As at 31.03.09		Tax effect for the year		As at 31.03.10
	Rs.in Lacs		Rs.in Lacs		Rs.in Lacs
Deferred Tax (Liability)
Difference between book and tax Depreciation	(1,276.03)		147.21		(1,128.82)
Deferred Tax Assets	-		-		-
Employees Benefits	19.46		10.14		29.60
Net Deferred Tax (Liability) / Assets	(1,256.57)		157.35		(1,099.22)

17. Managerial Remuneration:

(Remuneration to Managing Director & Executive Director)

	Managing Director		Executive Director
	2009-10 Rs. In Lacs	2008-09 Rs. In Lacs		2009-10 Rs. In Lacs	2008-09 Rs. In Lacs
Salary & Bonus	36.00	42.00		31.68	27.72
House Rent Allowance	--	4.20		--	2.52
Contribution to Provident & Other Funds	4.32	5.04		3.46	3.02
Total	40.32	51.24		35.14	33.26

Computation of Net Profit for the purpose of calculation of Managing Director’s and Executive Director’s Remuneration under Section 349 of the Companies Act, 1956 has not been given since no commission has been paid.

18. Project Development Expenditure

(In respect of Projects up to 31st March, 2010, included under Capital Work-in-progress)

Particulars	2009-10				2008-09
Opening Balance			1,357.76				291.80
Add : Original Cost of Assets	5,298.05				1,117.77
Erection Charges	85.37				14.26
Interest Capitalised	189.65				-
Exchange Rate Difference	(43.60)		5,529.47		-		1,132.03
			6,887.23				1,423.83
Less : Assets Capitalised			1,937.27				66.07
Closing Balance			4,949.96				1,357.76

19. During the Year 1,07,319.18 mtrs of Silk Fabrics valuing Rs.473.96 lacs were destroyed & burnt in pursuance of order of The Superintendent of Customs, EOU-VI, Bangalore, arising out of an Application & approval of debonding of the EOU status of Unit I at Anekal, Bangalore and the same has been accounted for in the Books. The Custom Department has also destroyed & burnt 11,426.820 Kgs of sample stock of fabrics and 9,000 Kgs of salvage /wastage /scrap which has accumulated over the years and were lying in the factory premises. These materials were accounted for in earlier years and were carried at Nil value.

20. Donation includes payment to a Political Party – Bhartiya Janta Party Rs. Nil Lacs (Previous Year – Rs 5.25 Lacs )

21. Earning Per Shares (EPS)

	2009-10		2008-09
Profit after Tax	573.77		1,921.05
Less : Dividend on Redeemable Cumulative Preference
Shares (including tax thereon).	130.60		131.03
Profit Considered for calculating EPS	443.17		1,790.02
Weighted average number of Equity Shares of Rs. 2/- each	7,89,52,620		7,89,52,620
Earning Per Share (Basic & Diluted)	Rs. 0.56		Rs. 2.27

22. Previous Year’s figures have been re-arranged, and/or re-grouped wherever necessary.