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PRINCIPLES OF CONSOLIDATION AND ORGANIZATION (Policies)
12 Months Ended
Dec. 31, 2017
Principles of consolidation and organization

PRINCIPLES OF CONSOLIDATION AND ORGANIZATION

The condensed consolidated financial statements include the accounts of Syntel, its wholly owned subsidiaries, and a joint venture and its subsidiary. All significant inter-company balances and transactions have been eliminated.

The wholly owned subsidiaries of Syntel, Inc. are:

 

    Syntel (Australia) Pty. Ltd., an Australian limited liability company;

 

    Syntel Canada Inc., an Ontario limited liability company;

 

    Syntel Delaware, LLC, a Delaware limited liability company (“Syntel Delaware”);

 

    Syntel Deutschland GmbH, a German limited liability company;

 

    Syntel Europe Limited, a United Kingdom limited liability company;

 

    Syntel Holding (Mauritius) Limited, a Mauritius limited liability company;

 

    Syntel (Hong Kong) Limited, a Hong Kong limited liability company;

 

    Syntel (Mauritius) Limited, a Mauritius limited liability company;

 

    Syntel Private Limited, an Indian limited liability company (“Syntel India”);

 

    Syntel Solutions Mexico, S. de R.L. de C.V., a Mexican limited liability company;

 

    Syntel SPC, Inc., a Michigan corporation; and

 

    Syntel Worldwide (Mauritius) Limited, a Mauritius limited liability company.

The wholly owned subsidiaries of Syntel Europe Limited are:

 

    Intellisourcing, SARL, a French limited liability company;

 

    Syntel Poland, sp. z o.o., a Polish limited liability company (“Syntel Poland”);

 

    Syntel Solutions BV, a Netherlands limited liability company; and

 

    Syntel Switzerland GmbH, a Switzerland limited liability company.

The partially owned joint venture of Syntel Delaware is:

 

    State Street Syntel Services (Mauritius) Limited, a Mauritius limited liability company (“SSSSML”).

The wholly owned subsidiary of SSSSML is:

 

    State Street Syntel Services Private Limited, an Indian limited liability company

The wholly owned subsidiaries of Syntel (Mauritius) Limited are:

 

    Syntel Global Private Limited, an Indian limited liability company;

 

    Syntel International Private Limited, an Indian limited liability company; and

 

    Syntel Technologies (Mauritius) Limited, a Mauritius limited liability company.

 

The wholly owned subsidiaries of Syntel Holding (Mauritius) Limited are:

 

    Syntel Services Private Limited, an Indian limited liability company;

 

    Syntel Software (Mauritius) Limited, a Mauritius limited liability company; and

 

    Syntel Solutions (Mauritius) Limited, a Mauritius limited liability company.

The wholly owned subsidiary of Syntel Solutions (Mauritius) Limited is:

 

    Syntel Solutions (India) Private Limited, an Indian limited liability company.

The wholly owned subsidiary of Syntel Worldwide (Mauritius) Limited is:

 

    Syntel (Singapore) PTE Limited, a Singapore limited liability company.

The wholly owned subsidiary of Syntel (Singapore) PTE Limited is:

 

    Syntel Infotech, Inc., a Philippines corporation.

The wholly owned subsidiary of Syntel Technologies (Mauritius) Limited is:

 

    Syntel Technologies LLP, an Indian limited liability partnership.

The wholly owned subsidiary of Syntel Software (Mauritius) Limited

is:

 

    Syntel Software LLP, an Indian limited liability partnership.

Through August 31, 2017, SkillBay LLC, a Michigan limited liability company (“SkillBay”), and Syntel Consulting Inc., a Michigan corporation (“Syntel Consulting”), were wholly-owned subsidiaries of Syntel. On September 1, 2017 (the “Effective Date”), SkillBay and Syntel Consulting were merged with and into Syntel and ceased to exist. Also on the Effective Date, all assets, liabilities, interests, and reserves of SkillBay and Syntel Consulting were transferred to and assumed by Syntel and all common stock issued by Syntel Consulting to Syntel as the sole shareholder and Syntel’s membership interest in SkillBay as the sole member were cancelled.

Revenue recognition

Revenue recognition

The Company recognizes revenues from time-and-materials contracts as the services are performed.

Revenue from fixed-price applications management, maintenance and support engagements is recognized as earned which generally results in straight-line revenue recognition as services are performed continuously over the term of the engagement.

Revenue on fixed-price applications development and integration projects are measured using the proportional performance method of accounting. Performance is generally measured based upon the efforts incurred to date in relation to the total estimated efforts to the completion of the contract. The Company monitors estimates of total contract revenues and costs on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the changes become known. In the event that a loss is anticipated on a particular contract, a provision is made for the estimated loss. The Company issues invoices related to fixed price contracts based on either the achievement of milestones during a project or other contractual terms. Differences between the timing of billings and the recognition of revenue based upon the proportional performance method of accounting are recorded as revenue earned in excess of billings or deferred revenue in the accompanying consolidated balance sheets.

Revenues are reported net of sales incentives to customers.

Reimbursements of out-of-pocket expenses are included in revenue.

Stock-based employee compensation plans

Stock-based employee compensation plans

The Company recognizes stock-based compensation expense in the consolidated financial statements for awards of equity instruments to employees and non-employee directors based on the grant-date fair value of those awards on a straight-line basis over the requisite service period of the award, which is generally the vesting term. If a plan is modified, the incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award. The benefits/deficiencies of tax deductions in excess/short of recognized compensation expense are reported as an operating cash flow.

Stock repurchase plans

Stock repurchase plans

The Company recognizes the cost of repurchasing common stock acquired for purposes other than retirement (formal or constructive),as a reduction from the total of capital stock, additional paid-in capital, and retained earnings. The Company has recorded the cost of repurchasing common stock, as a reduction from capital stock.

Derivative instruments

Derivative instruments

The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as “market risks.” When deemed appropriate, the Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are foreign currency exchange rate risk and interest rate risk.

Hedging transactions and derivative financial instruments

The Company uses derivative instruments such as interest rate swaps. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. We do not enter into derivative financial instruments for trading purposes.

All derivatives are carried at fair value in our consolidated balance sheets in the following line items, as applicable: other current assets; deferred income taxes and other non-current assets; accounts payable; and deferred income taxes and other non-current liabilities. The carrying values of the derivatives reflect the impact of legally enforceable master netting agreements as applicable. These master netting agreements allow the Company to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same counterparty.

The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationships. Derivatives such as interest rate swaps can be designated as cash flow hedges. The changes in the fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in “Accumulated Other Comprehensive Income (Loss)” (AOCI) and are reclassified into the line item in our consolidated statement of income in which the hedged items are recorded in the same period the hedged items affect earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in the fair values of derivatives that are not designated and/or do not qualify as hedging instruments are immediately recognized into earnings.

 

For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company formally assesses both at the inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized into earnings.

The Company determines the fair values of its derivatives based on quoted market prices or pricing models using current market rates. Fair values of interest rate swaps are measured using standard valuation models using inputs that are readily available in public markets, or can be derived from observable market transactions, including LIBOR spot and forward rates.

Credit risk associated with derivatives

The Company considers the risks of non-performance by the counterparty as not material. The Company utilizes standard counterparty master agreements containing provisions for the netting of certain foreign currency transaction and interest rate swap obligations. The Company also mitigates the credit risk of these derivatives by transacting with major banks as counterparties that are highly rated globally. The Company evaluates the credit and non-performance risks associated with its derivative counterparties, and believes that the impact of the credit risk associated with the outstanding derivatives is insignificant.

Cash flow hedging strategy

The Company uses cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in interest rates. The changes in the fair values of derivatives designated as cash flow hedges are recorded in AOCI and are reclassified into the line item in our consolidated statement of income in which the hedged items are recorded in the same period the hedged items affect earnings. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from AOCI into earnings. The maximum length of time for which the Company hedges its exposure to the variability in future cash flows is typically over the terms of hedged items.

Interest rate swaps

In connection with the Company’s Senior Credit facility with Bank of America N.A., the Company entered into an interest rate swap arrangement on November 30, 2016 to hedge interest rate risk on the entire term loan of $300 million by entering into a Pay Fixed and Receive Floating interest rate swap (the “Swap”) for the entire duration of the term loan. The Swap is designed to reduce the variability of future interest payments with respect to the term loan by effectively fixing the annual interest rate payable on the loan’s outstanding principal. The pay fixed component of interest rate swap is fixed at 3.16%.

 

A designated hedge with exposure to variability in the future interest payments of a floating rate loan is a cash flow hedge. The criteria for designating a derivative as a cash flow hedge include the assessment of the instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction including its terms, and the assessment of the probability that the underlying transaction will occur. For derivatives with cash flow hedge accounting designation, the Company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income and reclassifies it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedged transaction.

Measurement of effectiveness and ineffectiveness:

Effectiveness for interest rate swaps is generally measured by comparing the critical terms of the hedged item and the hedging instrument, whereas ineffectiveness is measured by comparing the cumulative change in fair value of the swap with the cumulative change in the fair value of the hedged item.

An interest rate swap with an aggregate amount of $300 million economically converts a portion of the Company’s variable rate debt to fixed rate debt. The effective portions of cash flow hedges are recorded in “Accumulated other comprehensive income (loss)” until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of interest expense are recognized in “Other income (expense), net” in the same period as the related expense is recognized. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges are recognized in “Other income (expense), net.”

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable that the forecasted hedged transaction will not occur in the initially identified time period. Deferred gains and losses in “Accumulated other comprehensive income (loss)” associated with such derivative instruments are reclassified immediately into “Other income (expense), net.” Any subsequent changes in fair value of such derivative instruments are reflected in “Other income (expense), net” unless they are re-designated as hedges of other transactions.

 

The following table provides information of location and fair value of derivative financial instrument included in our consolidated statement of financial positions as of December 31, 2017.

 

Particulars

   Nominal
Amount
     Fair Value of derivative and location on statement      Gain/(loss) on fair value  
      of financial position as on 31st December 2017      Effective      Ineffective  
            (In thousands)  

Cash flow Hedge

          Deferred Income
Taxes and Other
non-current assets
     Other current assets         

Pay fixed Interest rate swap

   $ 279.4 Million      $ 3,019      $ 288      $ 2,774        —    

The following table present the net gains (losses) recorded in accumulated other comprehensive (loss) income relating to the interest rate swap contract designated as cash flow hedges for the period ending December 31, 2017, 2016 and 2015.

 

Gains (losses) on derivatives                     
     2017      2016      2015  
     (In thousands)  

Gains/ (losses) recognized in other comprehensive income

   $ 2,774      $ 533      $ —    

The Company will reclassify an amount equivalent to the accrued interest on the swap contract on every reporting period, as there is a similar impact of accrued interest on the loan in the income statement.

Derivative (Non-Designated) Hedging Strategy

In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives for its foreign currency exposure. These derivatives were not designated and/or did not qualify for hedge accounting. The changes in fair value of derivatives are immediately recognized into earnings. The Company does not enter into derivative financial instruments for trading purposes.

The Company periodically enters into foreign exchange forward contracts to mitigate the risk of changes in foreign currency exchange rates, specifically changes between the Indian rupee currency and U.S. dollar currency. The contracts are adjusted to fair value at each reporting period. Gains and losses on forward contracts are generally recorded in ”Other (expense) income, net” unless they are designated as an effective hedge. Although the Company cannot predict fluctuations in foreign currency rates, the Company currently anticipates that foreign currency risk may have a significant impact on the financial statements. In order to limit the exposure to fluctuations in foreign currency rates, when the Company enters into foreign exchange forward contracts, where the counter-party is a bank, these contracts may also have a material impact on the financial statements.

The Company’s Indian subsidiaries, whose functional currency is the Indian rupee, periodically enter into foreign exchange forward contracts to buy Indian rupees and sell U.S. dollars to mitigate the risk of changes in foreign exchange rates on U.S. dollar denominated assets, primarily comprised of receivables from the parent Company (Syntel, Inc.) and other direct customers, and liabilities recorded on the books of the Indian subsidiaries. These forward contracts are denominated in U.S. dollars.

These forward contracts do not qualify for hedge accounting under ASC 815, “Derivative and Hedging.” Accordingly, these contracts are carried at a fair value with the resulting gains or losses included in the statement of comprehensive income under “Other income (expense), net.” The related cash flow impacts of all of our derivative activities are recorded in the consolidated statements of cash flows under cash flows from operating activities.

During the year ended December 31, 2017, the Company did not enter into new foreign exchange forward contracts. At December 31, 2017 and December 31, 2016, no foreign exchange forward contracts were outstanding.

Change in accumulated other comprehensive loss by component (Net of tax expense or benefit)

Change in accumulated other comprehensive income by component (Net of tax expense or benefit)

The change in balances of accumulated comprehensive loss for the year ended December 31, 2017 is as follows:

 

                       (In thousands)  
     Foreign
Currency
Translation
Adjustments
    Unrealized
Gains
(losses) on
Securities
    Defined
Benefit
Pension
Plans
    Unrealized
gain on
derivatives
designated
as cash
flow hedge
     Accumulated
Other
Comprehensive
Income
 

Beginning balance

   $ (254,210   $ 328     $ (1,345   $ 322      $ (254,905

Other comprehensive income before reclassifications

     9,814       274       1,100       2,108        13,296  

Amounts reclassified from accumulated other comprehensive (loss) income

     —         (87     55       —          (32
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net current-period other comprehensive income

   $ 9,814     $ 187     $ 1,155     $ 2,108      $ 13,264  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ (244,396   $ 515     $ (190   $ 2,430      $ (241,641
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Reclassifications out of accumulated other comprehensive income for the year ended December 31, 2017 is as follows:

 

                (In thousands)  

Details about Accumulated Other Comprehensive Income (Loss) Components

   Affected
Line Item in the
Statement
Where Net Income
Is Presented
   Before Tax
Amount
    Tax (Expense)
Benefit
    Net of Tax  

Unrealized gains on available for sale securities realized in current year

   Other income, net    $ (115   $ 28     $ (87
     

 

 

   

 

 

   

 

 

 

Amortization of prior service cost included in net periodic pension cost

   Cost of revenues    $ 76     $ (21   $ 55  
     

 

 

   

 

 

   

 

 

 

Change in accumulated other comprehensive income (loss) by component (Net of tax expense or benefit)

The change in balances of accumulated comprehensive loss for the year ended December 31, 2016 is as follows:

 

                       (In thousands)  
     Foreign
Currency
Translation
Adjustments
    Unrealized
Gains
(Losses)
on
Securities
    Defined
Benefit
Pension
Plans
   

Unrealized

gain on

derivatives

designated

as cash flow

hedge

     Accumulated
Other
Comprehensive
Loss
 

Beginning balance

   $ (235,146   $ 332     $ (795     —        $ (235,609

Other comprehensive income (loss) before reclassifications

     (19,064     161       (525     322        (19,106

Amounts reclassified from accumulated other comprehensive income (loss)

     —         (165     (25     —          (190
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

   $ (19,064   $ (4   $ (550   $ 322      $ (19,296
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ (254,210   $ 328     $ (1,345   $ 322      $ (254,905
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Reclassifications out of accumulated other comprehensive income (loss) for the year ended December 31, 2016 is as follows:

 

                (In thousands)  

Details about Accumulated Other Comprehensive Income (Loss) Components

   Affected
Line Item in the
Statement
Where Net Income
Is Presented
   Before Tax
Amount
    Tax (Expense)
Benefit
     Net of Tax  

Unrealized gains on available for sale securities realized in current year

   Other income, net    $ (248   $ 83      $ (165
     

 

 

   

 

 

    

 

 

 

Amortization of prior service cost included in net periodic pension cost

   Cost of revenues    $ (35   $ 10      $ (25
     

 

 

   

 

 

    

 

 

 

The change in balances of accumulated comprehensive loss for the year ended December 31, 2015 is as follows:

 

                 (In thousands)  
     Foreign
Currency
Translation
Adjustments
    Unrealized
Gains
(losses) on
Securities
    Defined
Benefit
Pension
Plans
    Accumulated
Other
Comprehensive
Loss
 

Beginning balance

   $ (189,410   $ 4,600     $ (1,434   $ (186,244

Other comprehensive income (loss) before reclassifications

     (45,736     50       524       (45,162

Amounts reclassified from accumulated other comprehensive income (loss)

     —         (4,318     115       (4,203
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

   $ (45,736   $ (4,268   $ 639     $ (49,365
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ (235,146   $ 332     $ (795   $ (235,609
  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications out of accumulated other comprehensive income (loss) for the year ended December 31, 2015 is as follows:    

 

                                              (In thousands)  

Details about Accumulated Other Comprehensive Income (Loss) Components

   Affected Line Item in
the Statement Where
Net Income Is
Presented
   Before
Tax
Amount
    Tax (Expense)
Benefit
    Net of Tax  

Unrealized gains on available for sale securities realized in the current year

   Other income, net    $ (6,580   $ 2,262     $ (4,318
     

 

 

   

 

 

   

 

 

 

Amortization of prior service cost included in net periodic pension cost

   Cost of revenues    $ 149     $ (34   $ 115  
     

 

 

   

 

 

   

 

 

 
Other income, net

Other income, net

Other income includes interest and dividend income, gains and losses on forward contracts, gains and losses from the sale of securities, other investments, treasury operations and interest expenses on loans and borrowing.

Other comprehensive income (loss)

Other comprehensive income (loss)

The other comprehensive income (loss) consists of foreign currency translation adjustments, gains (losses) on net investment hedge derivatives, gain (losses) on cash flow hedge reserve, unrealized gains (losses) on securities and a component of a defined benefit plan. During the years ended December 31, 2017, 2016 and 2015, the other comprehensive income (loss) amounts to $13.3 million, $(19.3) million and $(49.4) million, respectively, primarily attributable to the foreign currency translation income (loss) adjustments of $9.8 million, $(19.0) million and $(45.4) million, respectively.

Tax on other comprehensive loss

Tax on other comprehensive loss

Total tax (expense) benefit on other comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015 is as follows:

 

     2017      2016      2015  
     (In thousands)  

Tax expense on Foreign currency translation adjustments

   $ —        $ (46    $ (308

Tax expense on unrealized gains on securities

     (85      2        2,196  

Tax (expense) benefit on defined benefit pension plans

     (605      287        (312

Tax expense on cash flow hedge

        
     (666      (211      —    
  

 

 

    

 

 

    

 

 

 

Total (taxes) benefit on other comprehensive (loss) income

   $ (1,356    $ 32      $ 1,576  
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

Cash and cash equivalents

For reporting cash and cash equivalents, the Company considers all liquid investments purchased with an original maturity of three months or less to be cash equivalents.

The cash and cash equivalents as at December 31, 2017 and December 31, 2016, were $96.00 million and $78.3 million, respectively, which were held in bank and fixed deposits with various banking and financial institutions.

Fair value of financial instruments

Fair value of financial instruments

The fair values of the Company’s current assets and current liabilities approximate their carrying values because of their short maturities. Such financial instruments are classified as current and are expected to be liquidated within the next twelve months.

Concentration of credit risks

Concentration of credit risks

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash, investments and accounts receivable and certain derivative instruments (IRS) designated as hedge instruments. Cash on deposit is held with financial institutions with high credit standings. The Company has cash deposited with financial institutions that, at times, may exceed the federally insured limits.

The Company establishes an allowance for doubtful accounts for known and inherent collection risks related to its accounts receivable. The estimation of the allowance is primarily based on the Company’s assessment of the probable collection from specific customer accounts, the aging of the accounts receivable, analysis of credit data, bad debt write-offs and other known factors.

The Company considers the risks of non-performance by the counterparties to its derivative instruments as not material. The Company utilizes standard counterparty master agreements containing provisions for the netting of certain foreign currency transaction obligations. The Company also mitigates the credit risk of these derivatives by transacting with highly rated counterparties globally, which are major banks. The Company evaluates the credit and non-performance risks associated with its derivative counterparties, and believes that the impact of the credit risk associated with the outstanding derivatives was insignificant.

Investments

Investments

Short-term investments

The Company’s short-term investments consist of short-term mutual funds, which have been classified as available-for-sale and are carried at estimated fair value. Fair value is determined based on quoted market prices. Unrealized gains and losses, net of taxes, on available-for-sale securities are reported as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity. Net realized gains or losses resulting from the sale of these investments, and losses resulting from decline in fair values of these investments that are other than temporary declines, are included in other income. The cost of securities sold is determined using the weighted-average method.

Short-term investments also include term deposits with an original maturity exceeding three months and whose maturity date is within one year from the date of the balance sheet. Term deposits were $0.8 million and $6.6 million at December 31, 2017 and 2016, respectively.

Non-current term deposits with banks

Non-current term deposits with banks include deposits with maturity exceeding one year from the date of the balance sheet. As at December 31, 2017 and 2016, non-current term deposits with banks were at $0.4 million and $0.2 million, respectively. Term deposits with banks include restricted deposits of $0.54 million and $0.44 million as at December 31, 2017 and December 31, 2016, respectively, placed as security towards performance guarantees issued by the Company’s bankers on the Company’s behalf.

Property and equipment

Property and equipment

Property and equipment are stated at cost. Maintenance and repairs are charged to expense when incurred. Depreciation is computed primarily using the straight-line method over the estimated useful lives as follows:

 

     Years

Office building

   30

Residential property

   20

Computer equipment and software

   3

Furniture, fixtures and other equipment

   5-7

Vehicles

   3-5

Leasehold improvements

   Shorter of economic life or life of lease

Leasehold land

   Shorter of economic life or life of lease

Depreciation and amortization expense for the years ended December 31, 2017, 2016 and 2015 was $13.9 million, $14.7 million and $15.6 million, respectively.

Long-lived assets (other than goodwill)

Long-lived assets (other than goodwill)

In accordance with guidance on “Accounting for the Impairment or Disposal of Long-Lived Assets” in the FASB Codification, the Company reviews its long-lived assets (other than goodwill) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that such costs should be evaluated for possible impairment, the Company assesses the recoverability of the long-lived assets (other than goodwill) by comparing the estimated undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts. The amount of an impairment charge, if any, is calculated based on the excess of the carrying amount over the fair value of those assets. Management believes assets were not impaired at December 31, 2017 and 2016.

Goodwill

Goodwill

During the first quarter of 2014, as a result of the completion of organizational changes, the Company changed its basis of segmentation to vertical segments. The Company reassigned goodwill to the new reportable segment Healthcare and Life Sciences. In accordance with guidance on goodwill impairment in the FASB Codification, goodwill is evaluated for impairment at least annually. Management believes goodwill was not impaired at December 31, 2017 or 2016. The Company evaluated goodwill for impairment in the third quarter of each of 2017 and 2016.

Use of estimates

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to allowance for doubtful accounts, impairment of long-lived assets and goodwill, contingencies and litigation, the recognition of revenues and profits based on the proportional performance method, potential tax liabilities and bonus accrual. Actual results could differ from those estimates and assumptions used in the preparation of the accompanying financial statements.

Foreign currency translation

Foreign currency translation

The financial statements of the Company’s foreign subsidiaries use the currency of the primary economic environment in which they operate as its functional currency. Revenues and expenses of the foreign subsidiaries are translated to U.S. dollars at average period exchange rates. Assets and liabilities are translated to U.S. dollars at period-end exchange rates with the effects of these cumulative translation adjustments being reported as a separate component of accumulated other comprehensive loss in shareholders’ deficit/equity. Transaction gains and losses are reflected within selling, general and administrative expenses in the consolidated statements of comprehensive income. During the years ended December 31, 2017, 2016 and 2015, foreign exchange gain of $1.7 million, $8.3 million and $18.1 million were included in selling, general and administrative expenses, respectively.

Earnings per share

Earnings per share

Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of shares outstanding during the applicable period. If the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of basic and diluted earnings per share are adjusted retroactively for all periods presented to reflect that change in capital structure. If such changes occur after the close of the reporting period but before issuance of the financial statements, the per-share computations for that period and any prior-period financial statements presented are based on the new number of shares.

 

The Company has issued stock options and restricted stock, which are considered to be potentially dilutive to its basic earnings per share. Diluted earnings per share is calculated using the treasury stock method for the dilutive effect of options and restricted stock granted pursuant to the stock option and incentive plan, by dividing the net income (loss) by the weighted average number of shares outstanding during the period adjusted for these potentially dilutive options, except when the results would be anti-dilutive.

Vacation pay

Vacation pay

The accrual for unutilized leave balance is determined based on the entire leave balance available to the employees at year-end. The leave balance eligible for carry-forward is valued at gross compensation rates and eligible for compulsory encashment is valued at a lower basic compensation rates.

The gross (reversal)/charge for unutilized earned leave was $(2.2)million, $3.4 million and $5.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The gross charge (reversal) for unutilized earned leave of $(2.2)million during the year ended December 31, 2017 was primarily on account of reversal of leave cost for the differential between eligible leave encashment accrued at gross compensation rates during the year 2017 and which as a result of the change in policy during 2017 are payable at basic rate as at December 31, 2017 as per the scheme of leave encashment.

The amounts accrued for unutilized earned leave were $16.2 million and $23.1 million as of December 31, 2017 and 2016, respectively, and are included within accrued payroll and related costs.

Income taxes

Income taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, along with any related valuation allowances are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in income in the period that includes the enactment date. The Company has not provided for dividend distribution taxes on the portion of undistributed earnings of subsidiaries whose earnings are considered to be permanently reinvested outside the U.S. The Company intends to continue to reinvest these earnings in international operations. If the Company decided at a later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts.

Recently adopted accounting standards

Recently adopted accounting standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The effective date of ASU 2016-09 is for fiscal years beginning after December 15, 2016. The Company adopted the amendments in ASU 2016-09 during the first quarter of 2017. This standard simplifies or clarifies several aspects of the accounting for equity-based payment awards, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the Consolidated Statements of Cash Flows. Certain changes under the ASU are required to be applied retrospectively, while other changes are required to be applied prospectively. There were no material impacts to the Company’s results of operations or liquidity as a result of adopting ASU 2016-09. The adoption of this ASU resulted in the following:

During the three months ended March 31, 2017, the Company has accounted on a prospective basis in the income statement for the income tax expense or benefit for the tax effects of differences recognized on or after the effective date of the equity-based payment awards between the deduction for an award for tax purposes and the cumulative compensation costs of that award recognized for financial reporting purposes. The Company has also presented on a prospective basis the excess tax benefits (deficiencies) as operating cash flows in its cash flow statement. Prior period cash flow statements have not been adjusted retrospectively to take into account the transition method.

The Company recognizes share-based payment forfeitures as they occur. Prior to adoption of this ASU, forfeitures were estimated in order to arrive at current period expense. There are no cumulative effect adjustments to accumulated deficit on the Consolidated Balance Sheet as of January 1, 2017 as a result of the adoption of these amendments.

Recently issued accounting standards

Recently issued accounting standards

ASU 2014-09, Revenue from Contracts with Customers – Issued May 2014, was scheduled to be effective for Syntel beginning January 1, 2017, however on July 9, 2015, the FASB approved the proposal to defer the effective date of the ASU for public companies to January 1, 2018 with an option to elect to adopt the ASU as of the original effective date. The new standard is intended to substantially enhance the quality and consistency of how revenue is reported while also improving the comparability of the financial statements of companies using U.S. generally accepted accounting principles (GAAP) and those using International Financial Reporting Standards (IFRS). The core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also addresses the accounting for some costs to obtain or fulfill a customer contract and provides a set of disclosure requirements intended to give financial statement users comprehensive information about the nature, amount, timing, and uncertainty of revenues and cash flows arising from customer contracts.

On March 17, 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, and ASU 2016-12 Narrow Scope Improvements and Practical Expedients, which amended ASU 2014-09, Revenue from Contract from Customers (Topic 606). These amendments of this ASU provide additional clarification on criteria within Topic 606 as well as additional guidance for transition to the new revenue recognition criteria.

 

We established a cross-functional coordinated implementation team to implement the new ASU related to the recognition of revenue from contracts with customers. In addition to establishing a cross-functional coordinated implementation team, we engaged a third party expert to assist in the assessment of the impacts of the new standard. The Company performed an assessment of the impact of the ASU and developed a transition plan. Based on the outcome of that assessment, the Company expects revenue recognition across its portfolio of services to remain largely unchanged. The Company does not currently anticipate that the ASU will have a material impact on its financial statements based on the analysis completed to date but will result in significant additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and assumptions used in applying the standard.

Additionally, we have identified changes to our processes to meet the standard’s updated reporting and disclosure requirements, as well as evaluated the internal control changes, during the implementation and continued application of the new standard. The Company has elected to adopt the new ASU on January 1, 2018 using the modified retrospective transition method.

In January 2016, the FASB issued an update (ASU 2016-01) to the standard on financial instruments. The update significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after January 1, 2018. Upon adoption, entities will be required to make a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. However, the specific guidance on equity securities without readily determinable fair value will apply prospectively to all equity investments that exist as of the date of adoption. Early adoption of certain sections of this update is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued an update (ASU 2016-02) to the standard on Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for public business entities issuing financial statements for the annual periods beginning after December 15, 2018, and interim periods within those annual periods. The requirements of this ASU and its impact on the Company are currently being evaluated.

In June 2016, the FASB issued an update on Financial Instruments—Credit Losses (ASU 2016-13)Measurement of Credit Losses on Financial Instruments which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on available-for-sale (AFS) debt securities through an allowance account. The update also requires certain incremental disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The requirements of this ASU and its impact on the Company are currently being evaluated.

In August 2016, the FASB issued an update on Statement of Cash Flows (Topic 230)- Clarification of certain cash receipts and cash payments (ASU 2016-15) which requires the Company to present and classify certain cash receipts and cash payments in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This update requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized when the intra-entity transfer occurs rather than deferring recognition of income tax consequences until the transfer was made with an outside party. ASU 2016-16 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted as of the beginning of the interim or annual reporting period. A modified retrospective approach should be applied. The Company does not expect that the adoption of this guidance will have a significant impact on the Company’s Consolidated Financial Statements.

In November 2016, the FASB issued an update on Statement of Cash Flows (Topic 230) - Restricted Cash (ASU 2016-18). The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued an update (ASU 2017-04) to the standard on Intangibles—Goodwill and Other (Topic 350). To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. A public business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The requirements of this ASU are not expected to have material impact on the Company’s Consolidated Financial Statements.

 

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. We expect the adoption of the amended standard to result in the reclassification from non-service components above the subtotal of income from operations to Other (expense) income, net.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting guidance which provide clarity and reduce both (i) diversity in practice; and (ii) cost and complexity when accounting for a change in the terms or conditions of a share-based payment award. The amendments in this guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.

In February 2018, as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Act), the FASB issued new accounting guidance on the reclassification of certain tax effects from AOCI to retained earnings. The optional guidance is effective January 1, 2019, with early adoption permitted. The Company is evaluating whether it will adopt the new guidance along with any impacts on the Company’s financial position, results of operations and cash flows, none of which are expected to be material.