Independent Auditor's Report

Independent Auditors' Report

To the Members of Tata Motors Limited

Report on the Audit of Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of Tata Motors Limited (hereinafter referred to as the ‘Holding Company”) and its subsidiaries (Holding Company and its subsidiaries together referred to as “the Group”), its associates and its joint ventures and joint operations, which comprise the consolidated balance sheet as at 31 March 2019, and the consolidated statement of Profit and Loss (including other comprehensive income), consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information (hereinafter referred to as “the consolidated financial statements”).

In our opinion and to the best of our information and according to the explanations given to us, and based on the consideration of reports of other auditors on separate financial statements of such subsidiaries, associates, joint ventures and joint operations as were audited by the other auditors, the aforesaid consolidated financial statements give the information required by the Companies Act, 2013 (“Act”) in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the consolidated state of affairs of the Group, its associates, joint ventures and joint operations as at 31 March 2019, of its consolidated loss and other comprehensive income, consolidated changes in equity and consolidated cash flows for the year then ended.

Basis for Opinion

We conducted our audit in accordance with the Standards on Auditing (SAs) specified under section 143(10) of the Act. Our responsibilities under those SAs are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India, and we have fulfilled our other ethical responsibilities in accordance with the provisions of the Act. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment and based on the consideration of reports of other auditors on separate financial statements of components audited by them, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Description of Key Audit Matter

1. The impact of uncertainties due to the United Kingdom exiting the European Union (Brexit), reported by the component auditor of Jaguar Land Rover Automotive Plc (hereinafter referred to as JLR Group)
   

   All audits assess and challenge the reasonableness of estimates, in particular as described in the key audit matters on the valuation of long-life intangible assets and capitalisation of product engineering costs (together referred to as “the key audit matters affected” and explained in section 4 and 5 below) and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see section 7 below). All of these depend on assessments of the future economic environment and the JLR Group’s future prospects and performance.

   Brexit is one of the most significant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown.

   How the matter was addressed in the audit
   

   The component auditor developed a standardised approach to the consideration of the uncertainties arising from Brexit in planning and performing the audit. Their procedures included:

   • Brexit knowledge: The component auditor considered the JLR Group’s directors’ assessment of Brexit-related sources of risk for the JLR Group’s business and financial resources compared with their own understanding of the risks. They considered the directors’ plans to take action to mitigate the risks;
   • Sensitivity analysis: When addressing the key audit matters affected and other areas that depend on forecasts, they compared the directors’ analysis to their assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty;
   • Assessing transparency: Other than assessing individual disclosures as part of their procedures on the key audit matters affected, the component auditor considered all of the Brexit related disclosures together, comparing the overall picture against their understanding of the risks.

   However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.

   Description of Key Audit Matter

2. Impairment testing of long-life property, plant and equipment and intangible assets of passenger vehicles cash generating unit
   

   The Holding Company has identified passenger vehicle segment as a separate cash generating unit (‘CGU’). The history of losses in the passenger vehicle business led the Holding Company to perform an impairment assessment as at 31 March 2019.

   The annual impairment testing of passenger vehicle CGU involves significant judgements and estimates in assessing the recoverable value. The recoverable value is considered to be the higher of the Holding Company’s assessment of the value in use (VIU) and fair value less cost of disposal (FVLCD).

   There is a risk over the Holding Company’s assessment and measurement of impairment due to:

   • VIU: uncertainties involved in forecasting of cash flows, including key assumptions such as future sales volumes, prices, margins, overheads, growth rates and weighted average cost of capital.
   • FVLCD: uncertainties involved in identifying appropriate comparable companies, estimating their market multiple and estimating the depreciated replacement cost of fixed assets.

   (Refer note 2{r} of the consolidated financial statements)
   How the matter was addressed in the audit
   The audit procedures included:

   • Identification: Obtained an understanding of Holding Company’s evaluation of identification of passenger vehicles segment as a cash generating unit;
   • Controls: Tested management review controls on the assumptions including underlying cash flow forecasts and impact of macro-economic factors on the forecasts. Tested management’s review of the discounted cash flow calculations performed to support the impairment assessment including benchmarking of key assumptions (discount rates, growth rate) and assessment of sensitivities;
   • Completeness and accuracy of the VIU model: Obtained valuation computation performed by the Holding Company for its impairment assessment and agreed the mathematical accuracy of the VIU by recalculating the cash flow build up;
   • Cash flow forecast assumptions: Involved independent valuation specialists to assist in the evaluation of the assumptions (discount rate which included comparing the weighted average cost of capital with sector averages for the relevant markets in which the CGU operates and long-term growth rate) and challenged the key assumptions and judgements within the build - up of the cash flow forecast (such as future sales volumes and prices, margins, overheads etc.) and methodologies used by the Holding Company and its experts;
   • Sensitivity analysis: Assessed the sensitivity of the outcome of impairment assessment to changes in key assumptions such as volumes and margins;
   • FVLCD assumptions: Compared the market multiple used in the FVLCD to comparative companies and to market data sources with the assistance of specialists.

   Description of Key Audit Matter

3. Capitalisation of product development cost by the Holding Company
   

   Product development costs incurred on new vehicle platforms, engines, transaxles and new vehicles are recognised as intangible assets only when technical feasibility has been established, the Holding Company has committed technical and commercial resources to complete the development and use the intangible asset and it is probable that the asset will generate future economic benefits.

   The costs capitalised during the year include the cost of technical know-how expenses, materials, direct labour, inspecting and testing charges, designing cost, software expenses and directly attributable overhead expenditure incurred up to the date the intangible asset is available for use including interest capitalised.

   The capitalisation of product development cost is considered to be a key audit matter given that the assessment of the capitalisation criteria set out in Ind AS 38 ‘Intangible Assets’ is made at an early stage of product development and there are inherent challenges with accurately predicting the future economic benefit, which must be assessed as ‘probable’ for capitalisation to commence. There is a risk therefore that development cost may get capitalised where the relevant criteria has not been met.

   (Refer note 2{p} and note 6 of the consolidated financial statements)
   How the matter was addressed in the audit
   The audit procedures included:

   • Controls: Tested the Holding Company’s design and implementation and operating effectiveness of controls around initiation of capitalisation of the product development cost including:
     • management review controls over calculations of the future economic benefit of the projects;
     • observed management’s validation of relevant data elements and benchmarking the assumptions;
     • evaluating management’s assessment of whether costs recorded meet the capitalisation criteria;
     • observed management’s assessment of sensitivity of the impact of the changes in key assumptions;
     • discussed with senior management and challenged management assumptions including key inputs such as volumes, expected revenues and associated costs on projects which have lower headroom.
   • Test of details: On selected sample of amounts capitalised, we tested:
     • costs incurred towards projects;
     • inspected the technical team’s approvals for initiation of capitalisation;
     • reviewed the central cost allocation for the year and determined costs capitalised are ‘directly attributable’ including the interest capitalised.

   Description of Key audit matter

4. Impairment testing of long-life intangible assets, reported by the component auditor of JLR Group

   The JLR Group holds a significant amount of long-life intangible assets in a separate cash generating unit. The weak trading performance in China and the falling market capitalisation of the Holding Company, led JLR Group to perform an impairment assessment at both 31 December 2018 and 31 March 2019.

   The JLR Group recognised an impairment of Rs.27,837.91 crores during the year ended 31 March 2019 in connection with the aforesaid CGU.

   The recoverable value is considered to be the higher of the JLR Group’s assessment of the value in use (“VIU”) methodology and fair value less costs of disposal (“FVLCD”) methodology. There is a risk over the JLR Group’s assessment and measurement of impairment and therefore the impairment of long-life intangible assets due to:

   • VIU Model using optimistic expectations of key assumptions such as future sales volumes, gross margins, overheads and capital expenditure.
   • FVLCD Model using optimistic adjustments to those cashflows used within the VIU model to reflect a market valuation of the JLR Group.

   (Refer note 2{r} and note 7 of the consolidated financial statements)
   How the matter was addressed in the audit
   The audit procedures applied by the auditor of the component (JLR Group) included:

   • Historical accuracy: Evaluated historical forecasting accuracy of key inputs, including cash forecasts by comparing the historical forecasts to the actual results;
   • Historical comparisons: Assessed appropriateness of JLR Group’s assumptions used in the cash flow projections by comparing those, where appropriate, to historical trends in volumes and margins.
   • Benchmarking assumptions: Assessed appropriateness of the JLR Group’s assumptions used in the cash flow projections by comparing to externally derived data in relation to key inputs such as sales volumes and cost inflation and where appropriate taking into consideration historical trends in volumes and margins.
   • Benchmarking assumptions: Compared the JLR Group’s discount rate and long-term growth rate calculation to external benchmark data and comparative companies’ rates and reperformed the discount rate calculation using the Capital Asset Pricing Model with the assistance of their valuation specialists;
   • Sensitivity analysis: Performed a sensitivity analysis over the reasonably possible combination of changes in the forecasts including the impact of potential downside scenarios including a hard Brexit, US tariffs and a slower-than-expected resurgence in the China market;
   • Comparing valuations: Assessed the JLR Group’s reconciliation between the estimated share of the Holding Company’s market valuation and its VIU and FVLCD;
   • Benchmarking assumptions: Compared the earnings multiple used in the FVLCD to comparative companies and to market data sources with the assistance of specialists;
   • Assessing transparency: Assessed the completeness and accuracy of the disclosures in the consolidated financial statements and ensured that the disclosure reflects the impact of reasonably possible downside assumptions on the amount of impairment.

   Description of Key audit matter

5. Capitalisation of product engineering costs, reported by the component auditor of JLR Group
   

   The application of the capitalisation criteria set out in IAS 38 by the JLR Group involves key judgements around the date capitalisation commences.

   As a result of noting that the JLR Group capitalises a high proportion of costs related to its product development spend compared to its peers and the JLR group recognising an impairment charge of Rs.27,837.91 crores over long-life assets during the year, the component auditor assessed that there is a risk of material misstatement.

   The application of the capitalisation criteria set out in IAS 38 by the JLR Group involves key judgements whether the nature of costs capitalised are directly attributable.

   (Refer note 2{p} and note 6 of the consolidated financial statements)
   How the matter was addressed in the audit
   The audit procedures applied by the auditor of the component (JLR Group) included:

   • Controls: Tested the control over the JLR Group’s retrospective review of historically forecast material production costs at the point capitalisation commenced against actual costs observed in manufacture, being a key input to management’s assessment of whether future economic benefit of development projects is probable; and the control over the JLR Group’s judgements as to whether indirect personnel and overhead costs are considered directly attributable.
   • Benchmarking assumptions: Compared the assumptions applied in JLR Group’s assessment of economic viability to externally derived data in relation to key inputs such as projected volume sales;
   • Assessing forecasts: Assessed the JLR Group’s economic viability calculation by comparing relevant factors to source documentation, application of downside sensitivities to stress test assumptions; and work over the JLR Group’s overall forecasts;
   • Historical comparison: Performed a retrospective review to compare and assess previous economic viability assumptions against the actual outturn;
   • Comparing valuations: Compared the volumes used in the economic viability forecast produced by the JLR Group to the value in use model used in the impairment of long-life assets’ assessment for consistency;