Page 231 - Hitachi IR 2025

2.3 Critical accounting estimates, assumptions and judgements
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimate is revised and future periods affected. The Company based
its assumptions and estimates on parameters available when the financial statements were prepared. Existing
circumstances and assumptions about future developments, however, may change due to market changes
or circumstances arising that are beyond the control of the Company. Such changes are reflected in the
assumptions when they occur.
Significant judgements and estimates relating to the carrying values of assets and liabilities include, determination
of estimated projected cost and revenue in long term contracts, determination of term of lease contracts, fair
value measurement, impairment of goodwill, provision for employee benefits and other provisions, recoverability
of deferred tax assets and commitments and contingencies.
2.3.1 Estimates and assumptions
a. Property, plant and equipment
Property, plant and equipment represent a significant proportion of the asset base of the Company. The
charge in respect of periodic depreciation is derived after determining an estimate of an asset’s expected
useful life and the expected residual value at the end of its life. The useful lives and residual values
of Company's assets are determined by management at the time the asset is acquired and reviewed
periodically, including at each financial year end. The lives are based on historical experience with similar
assets as well as anticipation of future events, which may impact their life, such as changes in technology.
b. Provision for employee benefits
The cost of the defined benefit gratuity plan and the present value of the gratuity obligation are determined
using actuarial valuations. An actuarial valuation involves making various assumptions that may differ
from actual developments in the future. These include the determination of the discount rate, future
salary increases and mortality rates. Due to the complexities involved in the valuation and its long-term
nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions
are reviewed at each reporting date. The parameter most subject to change is the discount rate. In
determining the appropriate discount rate for plans operated in India, the management considers the
interest rates of government bonds in currencies consistent with the currencies of the post-employment
benefit obligation. The mortality rate is based on publicly available mortality tables. Those mortality
tables tend to change only at interval in response to demographic changes. Future salary increases and
gratuity increases are based on expected future inflation rate and past trends. Further details about
gratuity obligations are given in Note 32.
c. Provision for litigations and contingencies
The provision for litigations and contingencies are determined based on evaluation made by the
management of the present obligation arising from past events the settlement of which is expected
to result in outflow of resources embodying economic benefits, which involves judgements around
estimating the ultimate outcome of such past events and measurement of the obligation amount. Due
to the judgements involved in such estimations the provisions are sensitive to the actual outcome in
future periods.
d. Project revenue and costs
The Company uses the percentage-of-completion method in accounting for its fixed-price contracts. Use
of the percentage-of-completion method requires the Company to estimate the efforts or costs expended
to date as a proportion of the total efforts or costs to be expended. Efforts or costs expended have
been used to measure progress towards completion as there is a direct relationship between input and
productivity. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period
in which such losses become probable based on the expected contract estimates at the reporting date.
Further, the percentage-of-completion method places considerable importance on accurate estimates
to the extent of progress towards completion and may involve estimates on the scope of deliveries and
services required for fulfilling the contractually defined obligations. These significant estimates include
total contract costs, total contract revenues, contract risks, including technical, political and regulatory
risks, and other judgments. This requires the Company to estimate various costs to capture such risks,
including liquidated damages and warranties. The Company re-assesses these estimates on periodic
basis and makes appropriate revisions accordingly.
Integrated Annual Report 2024-25
229