Mohsin Annual Report-Final 1-91:Layout 1.qxd - Siemens Pakistan

104Notes to the Financial Statements3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CHANGES THEREINThe significant accounting policies adopted in the preparation of these financial statements are set out below:3.1 Employees' retirement benefitsDefined Benefit PlanThe Company operates a funded gratuity scheme for its regular permanent employees except expatriates. Provisions are made in the financialstatements to cover obligations on the basis of actuarial valuation carried out annually under the Projected Unit Credit method. Actuarial gains /losses are amortised over the expected future service of the employees. The Company also operates a gratuity scheme for the employees of CTI.Defined Contribution PlanThe Company also operates a provident fund scheme for all its regular permanent employees except expatriates. Equal monthly contributions aremade to the fund, both by the Company and the employees at the rate of 10 percent of basic salary and cost of living allowance whereverapplicable.3.2 ProvisionsA provision is recognised in the balance sheet when the Company has legal or constructive obligation as a result of past event and it is probablethat an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of theamount of obligation.The Company accounts for its obligations towards long service bonus payable to its employees who are expected to complete twenty five / fortyyears of service when the employees render service.The Company accounts for its warranty obligations when the underlying products or services are sold. The provision is based on historical warrantydata and a weighting of all possible outcomes against their associated probabilities.Various contracts entered into by the Company include provisions whereby liquidated damages may be imposed in case of delay in completion ofthe project. These damages are generally levied in case the delay is considered to be on account of factors under Company’s control. The Companymakes provision for these liquidated damages based on an analysis of various factors resulting in delays / estimated delays. The imposition ofactual liquidated damages is subject to negotiations and, in certain cases, based on fresh analysis of the factors affecting the delay, these damagesmay not be imposed or may be higher than the amount provided. On final acceptance and release of retention money, the provisions which areno longer required are released to the profit and loss account.3.3 Borrowing costsBorrowing costs are recognised as an expense in the period in which they are incurred.3.4 Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciation and impairment losses, if any. Cost in relation to self manufacturedassets includes direct cost of materials, labour and applicable manufacturing overheads. Capital work-in-progress is stated at cost.Depreciation is charged to profit and loss account applying the straight line method whereby the cost of an asset is written off over its estimatedservice life. Depreciation on additions is charged from the month in which asset is put to use and on disposals upto the month of deletion.Maintenance and normal repairs are charged to income as and when incurred.Renewals and improvements are capitalised and the assets so replaced, if any, are retired. Gains or losses on sale or retirement of fixed assets areincluded in income currently.3.5 Intangible assets3.5.1 SoftwareSoftware is stated at cost less accumulated amortisation. These are amortised using the straight line method over the estimated useful lives ofsoftware.3.5.2 GoodwillGoodwill represents the excess of the cost of business combination over the acquirer's interest in the net fair value of the identifiable assets,liabilities and contingent liabilities of the acquiree. This is stated at cost less any accumulated impairment losses, if any.Previously, goodwill arising on purchase of a subsidiary was being amortised over the period of its economic use. Following adoption of IFRS - 3,such amortisation was discontinued and the goodwill is now stated at cost less impairment losses. This change in accounting policy does not havea material impact on these financial statements.