Page 232 - Hitachi IR 2025

NOTES TO THE FINANCIAL STATEMENTS
e. Provision
Significant estimates are involved in the determination of provisions related to liquidated damages,
onerous contracts and warranty provision. The Company records a provision for onerous sales contracts
when current estimates of total contract costs exceed expected contract revenue. Warranty provision is
determined based on the historical trend of warranty expense for the same types of goods for which the
warranty is currently being determined, after adjusting for unusual factors related to the goods that were
sold or based on specific warranty clause in an agreement. Such estimates are reviewed annually for
any material changes in assumptions and likelihood of occurrence. The provision for warranty, liquidated
damages and onerous contracts is based on the best estimate required to settle the present obligation
at the end of reporting period.
f. Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit (CGU) exceeds its
recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The
fair value less costs of disposal calculation is based on available data from binding sales transactions,
conducted at arm’s length, for similar assets or observable market prices less incremental costs for
disposing of the asset. The value in use calculation is based on a Discounted Cash Flow (DCF) model.
The cash flows are derived from the budget and do not include restructuring activities that the Company
is not yet committed to or significant future investments that will enhance the asset’s performance of the
CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as
well as the expected future cash-inflows and the growth rate used for extrapolation purposes.
g. Fair value measurement of financial instruments
When the fair values of financial assets and financial liabilities recorded in the balance sheet cannot
be measured based on quoted prices in active markets, their fair value is measured using appropriate
valuation techniques. The inputs for these valuations are taken from observable sources where possible,
but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements
include considerations of various inputs including liquidity risk, credit risk, volatility etc. Changes in
assumptions/ judgements about these factors could effect the reported fair value of financial instruments.
h. Taxes
The Company uses estimates and judgements based on the relevant rulings in the areas of allocation
of revenue, costs, allowances and disallowances which is exercised while determining the provision for
income tax. Uncertainties exist with respect to the interpretation of tax regulations, changes in tax laws,
and the amount and timing of future taxable income. Given the wide range of business relationships
differences arising between the actual results and the assumptions made, or future changes to such
assumptions, could necessitate future adjustments to tax income and expense already recorded. The
Company establishes provisions, based on reasonable estimates. The amount of such provisions is based
on various factors, such as experience of previous assessments and interpretations of tax regulations by
the Company.
i. Impairment allowance for trade receivables
The Company uses a provision matrix to calculate Expected Credit Losses ('ECL') for trade receivables.
The provision rates are based on days past due for groupings of various customer segments that have
similar loss patterns (i.e., by geography, customer type, rating and coverage by letters of credit and other
forms of credit insurance). The provision matrix is initially based on the Company’s historical observed
default rates. At every reporting date, the historical observed default rates are updated and changes in
the forward-looking estimates are analysed. The amount of ECLs is sensitive to changes in circumstances
and of forecast economic conditions.
j. Leases: whether an arrangement contains a lease
The Company determines the lease term as the agreed tenure of the lease, together with any periods
covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered
by an option to terminate the lease, if it is reasonably certain not to be exercised. After the commencement
date, the Company reassesses the lease term if there is a significant event or change in circumstances
that is within its control and affects its ability to exercise or not to exercise the option to renew or to
terminate (e.g., construction of significant leasehold improvements or significant customisation to the
leased asset).
230 Hitachi Energy India Limited