Patni Computer Systems (PTI)

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iGATE Computer Systems Ltd 20-F 2008

Documents found in this filing:

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F/A

Amendment No. 2

(Mark One)

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

		OR

x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2006

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		OR

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		Date of event requiring this shell company report

		For the transition period from to

Commission File Number: 001-32692

Patni Computer Systems Limited

(Exact name of registrant as specified in its charter)

Not applicable

(Translation of registrant’s name into English)

Republic of India

(Jurisdiction of incorporation or organization)

Akruti Softech Park, MIDC Cross Road No. 21

Andheri (E), Mumbai 400 093, India

+91 22 6693 0500

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class:		Name of each exchange on which registered:
American Depositary Shares, each representing two equity shares, par value Rs. 2 per share. Equity shares, par value Rs. 2 per share*		New York Stock Exchange

* Not for trading but only in connection with Registration of the ADSs

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Not applicable

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2006 was:

Equity shares: 138,281,853

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405

of the Securities Act of 1933, or the Securities Act.

YES o NO x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

YES o NO x

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer ¨

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

Explanatory Note

This Amendment No. 2 on Form 20-F/A to our Annual Report on Form 20-F for the fiscal year ended December 31, 2006 is being filed for the purposes of supplementing or amending Note 10 of our consolidated financial statements and including the signed accountants’ report, as set forth below.

PART III

ITEM 17. FINANCIAL STATEMENTS

See Item 18.

ITEM 18. FINANCIAL STATEMENTS

The following financial statement and auditors report for fiscal 2006 are incorporated herein by reference and are included in this Item 18 of this report on Form 20-F:

· Report of Independent Registered Public Accounting Firm.

· Consolidated Balance Sheets as of December 31, 2005 and 2006.

· Consolidated Statements of Income for the years ended December 31, 2004, 2005 and 2006.

· Consolidated Statements of Stockholders Equity and Comprehensive Income for the years ended December 31, 2004, 2005 and 2006.

· Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006.

· Notes to the Consolidated Financial Statements.

ITEM 19. EXHIBITS

*1.1		Articles of Association of Patni Computer Systems Limited, as amended
*1.2		Memorandum of Association of Patni Computer Systems Limited, as amended
*1.3		Certificate of Incorporation of Patni Computer Systems Limited, as amended
*2.1		Form of Deposit Agreement
*2.2		Patni’s specimen certificate for equity shares
*2.3		Form of American Depositary Receipt
*2.4		Patni ESOP 2003-Revised 2006 #
*4.2		Registration Rights Agreement
*4.3		Purchase Agreement between Patni Computer Systems Limited and Cymbal Corporation dated November 3, 2004
*4.4		Lease Deed entered into between the Company and State Industrial Promotion Corporation of Tamil Nadu Limited (SIPCOT), dated September 30, 2004
*4.5		Service Agreement between Patni Computer Systems Inc. and Mr. Narendra K. Patni dated December 1, 2000, as amended
*4.6		Consultancy Agreement between Patni Computer Systems Limited and Patni Computer Systems Inc. (f/t/a Data Conversion Inc.) dated October 27, 2000
*4.7		Terms of employment for Mr. Gajendra K. Patni and Mr. Ashok K. Patni
*4.8		Information Technology Services Agreement between General Electric International Inc. and Patni Computer Systems Inc. dated November 12, 2003
4.9		Amendment to Information Technology Services Agreement between General Electric International Inc. and Patni Computer Systems Inc. dated August 03, 2006
##8.1		List of subsidiaries of the Registrant, see “Item 4. Information on the Company—Organizational Structure”
12.1		Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act
12.2		Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act
13.1		Certification of Chief Executive Officer under Section 906 of the Sarbanes Oxley Act
13.2		Certification of Chief Financial Officer under Section 906 of the Sarbanes Oxley Act

* Previously filed on November 17, 2005 with the SEC on Form F-1 (File Number 333-129771)

# Incorporated by reference from Form S - 8 (file number 33-137306)

## Previously filed on June 29, 2007 with the SEC on Form 20F (File Number 001-32692 07948644)

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this Amendment No. 2 on Form 20-F/A on its behalf.

	For Patni Computer Systems Limited

	By:	/s/ NARENDRA K. PATNI
		Narendra K. Patni
		Chief Executive Officer

	For Patni Computer Systems Limited

	By:	/s/ SURJEET SINGH
		Surjeet Singh
		Chief Financial Officer
Mumbai, India
Date: March 04, 2008

Patni Computer Systems Limited and subsidiaries

Consolidated financial statements

Contents

Report of Independent Registered Public Accounting Firm		F-2

Consolidated Balance Sheets as of December 31, 2005 and 2006		F-3

Consolidated Statements of Income for the years ended December 31, 2004, 2005 and 2006		F-4

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2004, 2005 and 2006		F-5 to F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006		F-7 to F-8

Notes to the Consolidated Financial Statements		F-9 to F-36

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Patni Computer Systems Limited

We have audited the accompanying consolidated balance sheets of Patni Computer Systems Limited and subsidiaries (‘the Company’) as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Patni Computer Systems Limited and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2.1.27 to the consolidated financial statements, effective January 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123(R),
Share- Based Payment.

21 February 2007

/s/ KPMG
KPMG
Mumbai, India

F-2

Patni Computer Systems Limited and subsidiaries

Consolidated Balance Sheets

As of	December 31, 2005		December 31, 2006

Assets
Current assets
Cash and cash equivalents	$	148,819,600	$	46,510,010
Investments	141,775,935		242,968,048
Accounts receivable, net	58,747,671		101,893,834
Accounts receivable from a significant shareholder, net	15,673,490		13,724,670
Costs and estimated earnings in excess of billings on uncompleted contracts	26,094,094		22,834,345
Deferred income taxes	13,722,884		10,240,528
Prepaid Expenses	2,051,035		2,155,676
Other current assets	7,498,001		9,860,763
Total current assets	414,382,710		450,187,874

Deferred income taxes	3,401,766		370,529
Investments	—		3,048,092
Other assets	9,711,827		11,457,225
Property, plant and equipment, net	88,244,547		125,757,824
Intangible assets, net	10,158,065		9,687,443
Goodwill	27,987,198		39,831,664
Total assets	$	553,886,113	$	640,340,651

Liabilities and shareholders’ equity
Current liabilities
Capital lease obligation	289,520		301,138
Trade accounts payable	5,488,043		11,010,564
Billings in excess of costs and estimated earnings on uncompleted contracts	2,350,346		3,324,581
Income taxes payable	17,994,936		23,213,916
Deferred income taxes	193,807		108,637
Accrued expenses	26,231,532		43,307,501
Other current liabilities	50,765,012		38,221,746
Total current liabilities	103,313,196		119,488,083

Capital lease obligations excluding current instalments	416,342		390,653
Other liabilities	6,368,544		8,124,060
Deferred income taxes	4,758,961		3,744,639
Total liabilities	$	114,857,043	$	131,747,435

Commitments and contingencies

Shareholders’ Equity
Common shares Rs. 2 par value; Authorized 250,000,000 shares (Issued and outstanding; 137,798,399 shares and 138,281,853 shares as of December 31, 2005 and 2006 respectively).	6,101,600		6,122,960
Additional paid-in capital	299,220,619		305,030,981
Retained earnings	132,511,943		183,197,559
Accumulated other comprehensive income	1,194,908		14,241,716
Total shareholders’ equity	$	439,029,070	$	508,593,216
Total liabilities and shareholders’ equity	$	553,886,113	$	640,340,651

See accompanying notes to the consolidated financial statemets

F-3

Patni Computer Systems Limited and subsidiaries

Consolidated Statements of Income

Year ended December 31,	2004			2005			2006

Revenues	$	223,141,113		$	350,972,760		$	494,447,726
Revenue from a significant shareholder	103,440,511			99,359,172			84,403,156
	326,581,624			450,331,932			578,850,882
Cost of revenues	202,461,490			288,480,678			370,172,936

Gross profit	124,120,134			161,851,254			208,677,946

Selling, general and administrative expenses	60,699,901			89,880,905			110,264,979
Provision for doubtful debts and advances	495,618			(151,954		)	1,191,017
Foreign exchange (gain)/loss, net	2,081,800			1,693,145			2,747,926

Operating income	60,842,815			70,429,158			94,474,024

Other income/(expense)
Interest and dividend income	4,222,853			4,189,776			10,087,916
Interest expense	(2,083,285		)	(2,044,366		)	(2,839,930		)
Gain on sale of investments, net	144,482			1,128,071			1,679,097
Other (expense)/income, net	(3,692,704		)	966,620			3,541,426

Income before income taxes	59,434,161			74,669,259			106,942,533
Income taxes	12,886,362			13,802,583			47,691,763

Net income	$	46,547,799		$	60,866,676		$	59,250,770

Earnings per share
Basic	$	0.38		$	0.48		$	0.43
Diluted	$	0.38		$	0.48		$	0.43

Weighted average number of common shares used in computing earnings per share

Basic	123,066,042			125,736,592			137,957,477
Diluted	124,084,992			127,457,632			138,904,860

See accompanying notes to the consolidated financial statements

F-4

Patni Computer Systems Limited and subsidiaries

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2004, 2005 and 2006

											(in $ except share data)
	Common shares			Additional Paid-In-		Retained			Comprehensive		Accumulated Other Comprehensive			Shareholders
	Shares	Par value		Capital		Earnings			Income		Income			Equity

Balance as of January 1, 2004	111,420,849	4,942,505		116,722,000		34,692,917					$	(1,525,344	)	$	154,832,078
Common shares issued through an Initial Public Offering, net of direct expenses	13,415,200	592,675		63,675,676										64,268,351
Issuance of equity shares on exercise of options	160,960	7,121		509,183										516,304
Cash dividend on common shares						(3,061,551		)						(3,061,551		)
Comprehensive income
Net income						46,547,799			46,547,799					46,547,799
Other comprehensive income:
Translation adjustment									9,549,971					9,549,971
Unrealised gain on investments, net of tax of $142,362									241,535					241,535
Minimum pension liability, net of tax of $153,253									332,292					332,292
Comprehensive income									56,671,597		10,123,798
Balance as of December 31, 2004	124,997,009	$	5,542,301	$	180,906,859	$	78,179,165				$	8,598,454		$	273,226,779
Common shares issued, net of direct expenses	12,312,500	537,304		116,484,548										117,021,852
Issuance of equity shares on exercise of options	488,890	21,995		1,692,396										1,714,391
Tax benefit arising on exercise of stock options				136,816										136,816
Cash dividend on common shares						(6,533,898		)						(6,533,898		)
Comprehensive income
Net income						60,866,676			60,866,676					60,866,676
Other comprehensive income:
Translation adjustment									(7,278,016	)				(7,278,016		)
Unrealised gain on investments, net of tax of $261,520									560,447					560,447
Unrealised loss on cash flow hedging derivatives, net of tax of $Nil									(1,026,624	)				(1,026,624		)
Minimum pension liability, net of tax of $194,848									340,647					340,647
Comprehensive income									53,463,130		(7,403,546		)
Balance as of December 31, 2005	137,798,399	$	6,101,600	$	299,220,619	$	132,511,943				$	1,194,908		$	439,029,070

See accompanying notes to the consolidated financial statements

F-5

										(in $ except share data)
	Common shares			Additional Paid-In-		Retained			Comprehensive	Accumulated Other Comprehensive			Shareholders
	Shares	Par value		Capital		Earnings			Income	Income			Equity

Balance as of December 31, 2005	137,798,399	6,101,600		299,220,619		132,511,943				$	1,194,908		$	439,029,070
Issuance of equity shares on exercise of options	483,454	21,360		1,802,953									1,824,313
Tax benefit arising on exercise of stock options				23,338									23,338
Compensation cost related to employee stock option plan				3,984,071									3,984,071
Cash dividend on common shares						(8,565,154		)					(8,565,154		)
Comprehensive income
Net income						59,250,770			59,250,770				59,250,770
Other comprehensive income:
Translation adjustment									9,256,054				9,256,054
Unrealised gain on investments, net of tax of $1,076,106									2,102,200				2,102,200
Unrealised gain on cash flow hedging derivatives, net of tax of $ Nil									2,531,633				2,531,633
Comprehensive income									73,140,657	13,889,887
Adjustment to initially apply FASB Statement No. 158, net of tax of $323,655										(843,079		)	(843,079		)

Balance as of December 31, 2006	138,281,853	$	6,122,960	$	305,030,981	$	183,197,559			$	14,241,716		$	508,593,216

See accompanying notes to the consolidated financial statements

F-6

Patni Computer Systems Limited and subsidiaries

Consolidated Statements of Cash Flows

Year ended December 31,	2004			2005			2006

Operating activities
Net income	$	46,547,799		$	60,866,676		$	59,250,770
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	11,543,775			15,960,705			19,573,548
Deferred taxes	(1,937,708		)	(1,889,293		)	4,344,470
Provision/(recovery) for doubtful debts and advances	495,618			(151,954		)	1,191,017
(Gain)/loss on sale of property, plant and equipment, net	597,678			(3,176,152		)	(21,977		)
(Gain) / loss on sale of investments	(144,482		)	(1,128,071		)	(1,679,097		)
Compensation cost related to employee stock option plan	—			—			3,984,071
Changes in assets and liabilities
Accounts receivable	(10,400,590		)	(3,531,903		)	(40,234,185		)
Costs and estimated earnings in excess of billings on uncompleted contracts	(5,032,911		)	(11,162,155		)	3,955,003
Other current assets	(3,445,375		)	3,431,844			(735,650		)
Other assets	(2,714,988		)	(142,962		)	(579,720		)
Trade accounts payable - others	(780,814		)	1,428,007			4,025,950
Billings in excess of costs and estimated earnings on uncompleted contracts	634,645			(456,143		)	859,218
Tax benefit arising on exercise of stock options	—			136,816			—
Taxes payable	2,377,631			(463,113		)	4,956,360
Accrued expenses	(569,178		)	6,069,364			16,246,514
Other current liabilities	9,803,420			14,815,277			(17,063,525		)
Other liabilities	817,726			(7,548,512		)	1,018,325

Net cash provided by operating activities	$	47,792,246		$	73,058,431		$	59,091,092

Investing activities
Purchase of property, plant and equipment	(21,590,640		)	(53,282,451		)	(48,620,365		)
Proceeds from sales of property, plant and equipment	509,570			4,336,910			83,097
Purchase of investments	(255,601,922		)	(542,994,281		)	(781,204,843		)
Proceeds from sale of investments	223,648,957			485,768,961			686,658,104
Payments for acquisition, net of cash acquired	(32,450,060		)	(5,578,772		)	(12,184,832		)
Payments for acquisition of technology related intangibles	—			—			(497,879		)
Tax benefit on incentive stock option of Patni Telecom	—			—			340,366
Net cash used in investing activities	$	(85,484,095	)	$	(111,749,633	)	$	(155,426,352	)

See accompanying notes to the consolidated financial statements

F-7

Year ended December 31,	2004			2005			2006

Financing activities:
Payment of capital lease obligations	(301,474		)	(329,168		)	(390,886		)
Dividend on common shares	(3,059,633		)	(6,531,628		)	(8,562,666		)
Proceeds from common shares issued, net of expenses	64,784,655			118,736,243			1,824,313
Tax benefit arising on exercise of stock options	—			—			23,338

Net cash provided by/(used in) financing activities	$	61,423,548		$	111,875,447		$	(7,105,901	)

Effect of exchange rates changes on cash and cash equivalents	5,472,249			(1,508,142		)	1,131,571
Net increase in cash and cash equivalents	23,731,699			73,184,245			(103,441,161		)
Cash and cash equivalents at the beginning of the year	47,939,550			77,143,498			148,819,600

Cash and cash equivalents at end of the year	$	77,143,498		$	148,819,600		$	46,510,010

Supplemental disclosure of cash flow information:
Interest paid	$	35,152		$	673,158		$	4,905,069
Income taxes paid	$	12,536,145		$	15,294,446		$	39,945,075

Non cash investing and financing activities:
Additions to property, plant and equipment, represented by capital lease obligations	$	393,184		$	471,644		$	361,133
Property, plant and equipment acquired on credit	$	870,073		$	2,104,773		$	4,814,076

See accompanying notes to the consolidated financial statements

F-8

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements

1	Organization and nature of business

1.1.1	Patni Computer Systems Limited (“Patni”) is a company incorporated in India under the Indian Companies Act, 1956. On September 18, 2003, Patni converted itself from a private limited company into a public limited company and changed its name from Patni Computer Systems (P) Limited to Patni Computer Systems Limited. In February 2004, Patni completed initial public offering of its equity shares in India and in December 2005, the Company completed initial public offering of American depositary shares in the US.

1.1.2	Patni Computers Systems (UK) Limited (“Patni UK”), a company incorporated in UK, Patni Computer Systems GmbH (“Patni GmbH”), a company incorporated in Germany and Patni Computer Systems, Inc. (“Patni USA”), a company incorporated in Massachusetts, USA are 100% subsidiaries of Patni. On November 3, 2004, Patni USA, acquired 100% equity in Patni Telecom (formerly known as Cymbal Corporation), a company incorporated in California, USA, together with its subsidiaries in India, UK & Thailand, for consideration in cash. Further, Patni also has foreign branch offices in USA, Japan, Sweden, Australia, Korea, Netherlands, Finland, Dubai and Canada. Cymbal Information Services (Thailand) Ltd., subsidiary of Patni Telecom has been dissolved and the liquidation has been completed in May, 2006.

1.1.3	Patni together with its subsidiaries (collectively, “Patni Group” or “the Company”) is engaged in IT consulting, software development and Business Process Outsourcing (“BPO”). The Company provides multiple service offerings to its clients across various industries comprising financial services, insurance services, manufacturing, telecommunications services and technology services (comprising independent software vendors and product engineering) and other industries such as energy and utilities, retail, logistics and transportation, and media and entertainment. The various service offerings comprise application development, application maintenance and support, packaged software implementation, infrastructure management services, product engineering services, quality assurance services and BPO services.

1.1.4	These financial statements are prepared on a consolidated basis for all the years presented.

2	Summary of significant accounting policies

	*Basis of preparation of financial statements*

2.1.1	The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

	*Principles of consolidation*

2.1.2	The consolidated financial statements include the financial statements of Patni and all of its subsidiaries, which are more than 50% owned and controlled. In addition, the Company consolidates any Variable Interest Entity (“VIE”) if it is determined to be a primary beneficiary in accordance with FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities”. The Company accounts for investments by the equity method where its investment in the voting stock gives it the ability to exercise significant influence over the investee. However, as of December 31, 2005 and 2006, the Company does not have any interest in any VIE, or any equity method investment. All inter-company accounts and transactions are eliminated on consolidation.

	*Accounting estimates*

2.1.3	The preparation of financial statements in conformity with US GAAP requires that management makes estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates used in the preparation of the consolidated financial statements are prudent and reasonable. The actual results could differ from these estimates.

F-9

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

	*Revenue and cost recognition*

2.1.4	The Company derives its revenues primarily from software services and to a lesser extent from BPO services. Revenue is recognized when there is persuasive evidence of a contractual arrangement with customers, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Software services are provided either on a fixed price, fixed time frame or on a time and material basis. The Company’s fixed price contracts include application maintenance and support services, on which revenue is recognized on a straight line basis over the term of maintenance. Revenue with respect to other fixed price contracts is recognized on a percentage of completion basis. Revenue with respect to time-and-material contracts is recognized as related services are performed. Guidance has been drawn from paragraph 95 of Statement of Position (‘‘SOP’’) 97-2, ‘‘Software Revenue Recognition’’ to account for revenue from fixed price arrangements for software development and related services in conformity with SOP-81-1 (“Accounting for Performance of Construction - Type and Certain Production - Type Contracts”). The input (cost expended) method has been used because management considers this to be the best available measure of progress on these contracts as there is a direct relationship between input and productivity.

2.1.5	The asset, “Cost and estimated earnings in excess of billings on uncompleted contracts”, represents revenues recognized in excess of amounts billed. These amounts are billed after the milestones specified in the agreement are achieved and the customer acceptance for the same is received. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess of revenues recognized.

2.1.6	Direct and incremental contract origination and set up costs incurred in connection with support/maintenance service arrangements are charged to expense as incurred. These costs are deferred only in situations where there is a contractual arrangement establishing a customer relationship for a specified period. The costs to be deferred are limited to the extent of future contractual revenues. Further, revenue attributable to set up activities is deferred and recognised systematically over the periods that the related fees are earned, as services performed during such period do not result in the culmination of a separate earnings process. Costs that are incurred for a specific anticipated contract and that will result in no future benefits unless the contract is obtained, are not included in contract costs before the receipt of the contract. However, such costs are deferred, subject to the evaluation of their probable recoverability.

2.1.7	Warranty costs on sale of services are accrued based on managements’ estimates and historical data at the time related revenues are recorded.

2.1.8	The Company grants volume discounts to certain customers, which are computed based on a pre-determined percentage of the total revenues from those customers during a specified period, as per the terms of the contract. These discounts are earned only after the customer has provided a specified cumulative level of revenues in the specified period. The discounts can be utilized by the customer in the form of free services. The Company estimates the total number of customers that will ultimately earn these discounts, based on which a portion of the revenue on the related transactions is allocated to the free services that will be delivered in the future. The amount of revenue to be allocated to the free services is based on the relative fair value of the free services. The Company reports revenues net of discounts offered to customers. In accounting for the above volume discounts, guidance has been obtained from Emerging Issues Task Force (“EITF”) 00-22 “Accounting for “Points” and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future” and EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”. Accordingly, these volume discounts have been recorded based on estimate of the total number of customers that will ultimately earn these discounts as it is believed that, based on historical experience, reliable estimates can be made of the estimated amount of revenues from a particular customer in the specified period. Reimbursement of out of pocket expenses received from customers have been included as part of revenues in accordance with EITF 01-14 “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred”.

F-10

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

2.1.9	Revenue from BPO is recognised on proportionate performance method.

	*Advertising cost*

2.1.10	Advertising costs incurred during the year have been expensed. The total amount of advertising costs expensed was $1 million, $1.5 million and $1.6 million for the years ended December, 31, 2004, 2005 and 2006 .

	*Cash and cash equivalents*

2.1.11	The Company considers investments in highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents comprise cash and cash on deposit with banks.

	*Investments*

2.1.12	Management determines the appropriate classification of investment securities at the time of purchase and re-evaluates such designation at each balance sheet date. At December 31, 2005 and 2006, investment securities were classified as available-for-sale or held to maturity. The investment securities classified as available-for-sale consisted of units of mutual funds. Held to maturity securities consist of investment in Government bonds made by the Company pursuant to tax exemption scheme under the Indian Income Tax Act, 1961. These bonds are carried at cost in the absence of market value and mature in three years.

2.1.13	Available-for-sale securities are carried at fair market value with unrealized gains and losses, net of deferred income taxes, reported as a separate component of other comprehensive income in the statement of shareholders’ equity and comprehensive income. Realized gains and losses, and decline in value judged to be other than temporary on available-for-sale securities are included in the consolidated statements of income. The cost of securities sold or disposed is determined on average cost basis.

	*Business combinations, goodwill and intangible assets*

2.1.14	Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must be recognized and reported separately from goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” all assets and liabilities of the acquired businesses including goodwill are assigned to reporting units.

2.1.15	Goodwill represents the cost of the acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased. Goodwill is not amortized but is tested for impairment at least on an annual basis, relying on a number of factors including operating results, business plans and future cash flows. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Goodwill of a reporting unit will be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

F-11

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

2.1.16	Intangible assets are amortized over their respective individual estimated useful lives in proportion to the economic benefits consumed in each period. Intangible assets comprise customer and technology related intangibles and are being amortized over a period of 5-10 years. The estimated useful life of an identifiable intangible asset is based on a number of factors including the effects of obsolescence, demand, competition and other economic factors (such as the stability of the industry, and known technological advances) and the level of maintenance expenditures required to obtain the expected future cash flows from the asset.

2.1.17	Intangible assets are evaluated for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.

	*Property, plant and equipment*

2.1.18	Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Gains and losses on disposals are included in the consolidated statements of income at amounts equal to the difference between the net book value of the disposed assets and the net proceeds received upon disposal. Expenditures for replacements and improvements are capitalized, whereas the cost of maintenance and repairs is charged to income when incurred.

2.1.19	Property, plant and equipment are depreciated over the estimated useful life of the asset using the straight-line method, once the asset is put to its intended use. The cost of software obtained for internal use is capitalized and amortized over the estimated useful life of the software. The estimated useful lives of assets are as follows:

Buildings	40 years
Leasehold premises and improvements	Over the lease period or the useful lives of the assets, whichever is shorter

Computer – Hardware and software and other service equipments	3 years
Furniture and fixtures	3-8 years
Other equipment	3-8 years
Vehicles	4-5 years

	*Impairment of long-lived assets and long-lived assets to be disposed*

2.1.20	Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever an event or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

	*Functional and Foreign currency translation*

2.1.21	The functional currency of Patni and its branches in the US, Japan, Sweden, Australia, Korea and Netherland is the Indian Rupee. The functional currencies of Patni’s subsidiaries are the applicable local currencies.

2.1.22	The accompanying consolidated financial statements are reported in US Dollars. The translation is performed for balance sheet accounts using the exchange rate in effect at the balance sheet date and for statements of income accounts using an appropriate monthly weighted average exchange rate for the respective periods. In respect of subsidiaries, the respective functional currencies are first translated into Indian Rupees and then into US Dollars. The gains or losses resulting from such translation are reported in other comprehensive income in the statement of shareholders’ equity and comprehensive income.

F-12

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

	*Foreign currency transactions*

2.1.23	Transactions in foreign currencies are translated into the functional currency at the rates of exchange prevailing at the date of the transaction. Resulting gains or losses from settlement of such foreign currency transactions are included in the consolidated statements of income. Unsettled monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rates of exchange prevailing at the balance sheet date. Transaction gain or loss arising from change in exchange rates between the date of transaction and period end exchange rates are included in the consolidated statements of income.

	*Income taxes*

2.1.24	Income taxes are accounted for under the asset and liability method. 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 and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in results of operations in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the assets will not be realised.

	*Concentration of credit risk*

2.1.25	Financial instruments that potentially subject the Company to concentration of credit risks consist principally of cash, cash equivalents, investments and accounts receivables. Cash and cash equivalents are invested with corporations, financial institutions and banks with investment grade credit ratings. To reduce credit risk, investments are made in a diversified portfolio of mutual funds, government bonds, which are periodically reviewed. To reduce its credit risk on accounts receivables, the Company performs ongoing credit evaluations of customers.

	*Retirement benefits to employees*

2.1.26	Contributions to defined contribution plans are charged to income in the period in which they accrue. Current services costs for defined benefit plans are accrued in the period to which they relate, based on actuarial valuation performed by an independent actuary in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 132R “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, both as amended by SFAS No. 158 “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans”. The Company adopted SFAS No. 158 as of December 31, 2006 which requires the net funded position of the plans to be recognized as an asset or liability in the employers’ balance sheet. The net effect of adopting this new standard was a reduction in the stockholders’ equity of $0.8 million. Refer note 18.1.18 for computation of the net effect.

	*Stock-based compensation*

2.1.27	The Company adopted SFAS No. 123R, “Share-Based Payment” (SFAS No. 123R) effective January 1, 2006. This statement requires compensation expense relating to share-based payments to be recognized in net income using a fair value measurement method. Under the fair value method, the estimated fair value of awards is charged to income on a accelerated basis over the requisite service period, which is generally the vesting period.The Company elected the modified prospective method as prescribed in SFAS No. 123R and therefore, prior periods were not restated. Under the modified prospective method, this statement was applied to new awards granted after the time of adoption, as well as to the unvested portion of previously granted equity-based awards for which the requisite service had not been rendered as of January 1, 2006. The Company granted stock options under the ‘Patni ESOP 2003’ plan (‘the plan’). See Note 16 for further discussion.

F-13

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

Share-based compensation expense in 2006 reduced the Company’s results of operations as follows:

	2006
Income before income taxes	$	3,984,071
Net Income	3,299,530
Basic earnings per share	$	0.02

The fair value of each option is estimated on the date of grant using the Black-Scholes model with the following assumptions.

Year ended		2006
Dividend yield		0.59% - 0.63%
Expected life		3.5-6.5 years
Risk free interest		6.45% - 7.85%
Volatility		30.22% - 55%

2.1.28

Prior to January 1, 2006, the company accounted for share-based employee compensation under the provisions of SFAS No. 123 using the intrinsic value method prescribed by APB No. 25 and related interpretations. Under the intrinsic value method, no compensation expense was recognized for stock options, as the exercise price of employee stock options equated the market value of the Company’s stock on the date of grant. The following pro forma net income and earnings per share information had been determined as if the Company had accounted for its share-based compensation awards issued using the fair value method in 2004 and 2005.

Year	2004			2005
Net income, as reported	$	46,547,799		$	60,866,676
Less: Stock based employee compensation expense determined under fair value based method, net of tax effects	(1,253,513		)	(3,501,531		)
Pro forma net income	$	45,294,286		$	57,365,145
Reported earnings per share
Basic	$	0.38		$	0.48
Diluted	$	0.38		$	0.48
Pro forma earnings per share
Basic	$	0.37		$	0.46
Diluted	$	0.37		$	0.45

2.1.29

The pro forma amounts and fair value of each option grant were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2004 and 2005:

Year ended December 31,	2004	2005
Dividend yield	0.34% - 0.72%	0.53% - 0.54%
Expected life	2-5 years	2-5 years
Risk free interest rates	5.16% - 6.46%	5.74% - 6.73%
Volatility	43% - 65%	28% - 50%

	The Black-Scholes model is a trading pricing model that does not reflect either the non-traded nature of employee stock options or the limited transferability of such options. This model also does not consider restrictions on trading for all employees, including certain restrictions imposed on senior management of the Company. Therefore, if the Company had used an option pricing model other than Black-Scholes, pro forma results different from those shown above may have been reported.

2.1.30	Prior to the adoption of SFAS 123R, the Company was required to record benefits associated with the tax deductions in excess of recognized compensation cost as an operating cash flow. However SFAS 123R requires that such benefits be recorded as a financing cash inflow. In the accompanying Consolidated Statements of Cash Flows for year ended December 31, 2006, tax benefit of $23,338 has been classified as financing cash flows.

F-14

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

	*Dividends*

2.1.31	Dividends on common shares are recorded as a liability on the date of declaration by the shareholders at the Annual General Meeting.

	*Derivatives and hedge accounting*

2.1.32	The Company evaluates its risk management program and hedging strategies in respect of forecasted transactions, and, upon completion of the formal documentation and testing for effectiveness, the Company designates certain forward contracts in respect of forecasted transactions, which meet the hedging criteria, as cash flow hedges. Changes in fair values of designated cash flow hedges are deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions occur and are then recognised in the consolidated statements of income. Changes in fair value for derivatives not designated as hedging instruments and ineffective portion of the hedging instruments are recognized in consolidated statements of income in the current period.

2.1.33	In respect of derivatives designated as hedges, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, the Company will, prospectively, discontinue hedge accounting with respect to that derivative.

	*Earnings per share*

2.1.34	In accordance with SFAS No. 128, “Earnings per Share”, basic earnings per share is computed using the weighted average number of common and redeemable common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and redeemable common shares and dilutive common equivalent shares outstanding during the period using the treasury stock method for options except where the result would be anti-dilutive.

	*Reclassifications*

2.1.35	Certain reclassifications have been made in the financial statements of prior years to conform to classifications used in the current year.

	*Commitments and Contingencies*

2.1.36	Liabilities for loss contingencies arising from claims, assessments, litigations, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.

	*Recently Issued Accounting Standards*

2.1.37	The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) in June 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognised in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on recognition, classification, interest, penalties, accounting in interim periods, disclosure and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. The differences, if any between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is currently evaluating the impact of this Interpretation on its financial statements.

2.1.38	The Financial Accounting Standards Board (“FASB”) issued SFAS No. 157 “Fair Value Measurements” (SFAS No. 157) in September 2006. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact that is expected to result from the adoption of this standard

F-15

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

3	Acquisition of Patni Telecom

	On November 3, 2004, Patni USA acquired 100% equity interest in Patni Telecom which is engaged in providing IT services to clients in the telecom sector. The primary purpose for the acquisition was to establish presence in the Telecom IT services sector. The consolidated financial statements include the operating results of Patni Telecom from the date of acquisition. The purchase price of $25,093,065 (including direct expenses of $1,311,150) was paid in cash. Additionally, in connection with the acquisition, the Company incurred $10,968,029 of costs relating to certain contract terminations / settlements and acquisition costs of Patni Telecom. Such costs have been recognised by the Company as liabilities assumed at the acquisition date resulting in additional goodwill.

	As per the Stock Purchase Agreement and amendments thereof, $5,578,772 and $12,184,832 was paid to the shareholders of Patni Telecom as contingent consideration based on achievement of certain revenue and margin targets for the years ended June 30, 2005 and 2006 . This additional consideration has been recognised as Goodwill arising on acquisition of Patni Telecom. The terms of the purchase also provide for payment of contingent consideration to all the selling shareholders, payable over three years, and calculated based on the achievement of specified revenue and margin targets. The contingent consideration is payable in cash and cannot exceed $33,000,000, inclusive of payments under an incentive plan for certain employees as described below. The Company has followed the consensus reached in EITF 95-8, “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination” and accordingly will record the contingent payments, other than payments to certain employees under the incentive plan, as goodwill in the periods in which the contingency is resolved.

	Further, as a part of the acquisition, the Company initiated an incentive plan linked to revenues and margins, for certain specific employees of Patni Telecom. The incentive payments under this plan will not exceed $3,400,000 till June 2007. Since, the incentive payments are linked to continuing employment, the payments under the plan are recognised as compensation for post acquisition services. Accordingly, $664,709 and $176,177 have been recorded as Cost of revenues and Selling, General and Administrative expenses in the year ended December 31, 2005 respectively and $587,001 and $756,841 have been recorded Cost of revenues and Selling, General and Administrative expenses in the year ended December 31, 2006 respectively. No such amounts were recorded for the year ended December 31, 2004.

4	Investments

4.1.1	Investment securities consist of the following:

	As of December 31, 2005
	Carrying value		Gross unrealized holding gains		Gross unrealised holding losses			Fair value
Available for sale:
Mutual fund units and other securities	$	107,568,976	$	774,895	$	(1,867	)	$	108,342,004
Other Investments	2,909,577		524,354		—			33,433,931
Amount reported as investment current								$	141,775,935

	As of December 31, 2006
	Carrying value		Gross unrealized holding gains		Gross unrealised holding losses		Fair value
Available for sale:
Mutual fund units and other securities	$	135,238,933	$	1,125,406	(9,391	)	$	136,354,948
Other Investments	103,262,905		3,350,195		—		106,613,100

Amount reported as investments current							$	242,968,048

Held to maturity:
Bonds	$	3,048,092	—		—		$	3,048,092
Amount reported as investments non current							$	3,048,092

F-16

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

4		Investments (Continued)

4.1.2		Dividends from securities available for sale, during the year ended December 31, 2004, 2005 and 2006 were $3,460,351, $2,488,691 and $5,941,888 respectively. Gross realized gains on sale of securities, available for sale was $221,562 , $1,141,015 and $1,963,728 and gross realised losses on sale of securities, available for sale was $77,080, $12,945 and $284,631 for the year ended December 31, 2004, 2005 and 2006 respectively.

4.1.3		Investments held to maturity as of December 31, 2006 mature within five years

5		Accounts receivable

5.1.1		Accounts receivable consist of the following:

As of December 31,	2005			2006
Receivables	$	76,916,380		$	118,724,268
Less: Allowances for doubtful accounts (including $136,066 (2005 - $80,000) for receivable due from a significant shareholder)	(2,495,219		)	(3,105,764		)
	$	74,421,161		$	115,618,504

5.1.2

The activity in the allowance for doubtful accounts receivable for the years ended December 31, 2005 and 2006 is as follows:

As of December 31,	2004		2005			2006
Allowance for doubtful accounts as at beginning of the year	$	3,224,494	$	3,435,320		$	2,495,219
Additions charged (net of recoveries) to provision for doubtful debts during the year	496,804		(164,464		)	1,147,109
Write-downs charged against the allowance during the year
Allowance for doubtful accounts at end of the year	$	3,435,320	$	2,495,219		$	3,105,764

Costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings on uncompleted contracts

As of December 31,	2005			2006
Cost incurred on uncompleted contracts	$	25,750,930		$	28,813,363
Estimated earnings	24,028,742			21,676,222
Less: Billings till date	49,779,672			50,489,585
	$	23,743,748		$	19,509,764
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts	26,094,094			22,834,345
Billings in excess of costs and estimated earnings on uncompleted contracts	(2,350,346		)	(3,324,581		)
	23,743,748			19,509,764

F-17

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

7		Other assets

		Other assets consist of the following:

As of December 31,		2005			2006

Advances to vendors		$	1,507,000		$	1,340,596
Prepaid gratuity costs		1,442,528			918,045
Deposits		6,447,290			6,708,622
Deferral of cost in respect of revenue arrangements		1,574,252			902,063
Due from employees		1,309,344			2,695,126
Derivative contracts		—			3,035,271
Leasehold Land		3,765,076			5,223,196
Others		1,164,338			495,069
		$	17,209,828		$	21,317,988
Less:	Current assets
	Advances to vendors	(1,507,000		)	(1,340,596		)
	Prepaid gratuity costs	(1,442,528		)	—
	Deposits	(531,329		)	(1,424,163		)
	Deferral of cost in respect of revenue arrangements	(1,574,252		)	(902,063		)
	Due from employees	(1,278,554		)	(2,663,601		)
	Derivative contracts	—			(3,035,271		)
	Others	(1,164,338		)	(495,069		)
		(7,498,001		)	(9,860,763		)
Other assets		$	9,711,827		$	11,457,225

8		Property, plant and equipment

8.1.1		Property, plant and equipment consists of the following:

As of December 31,	2005			2006

Land	$	24,053		$	24,476
Building	22,645,127			31,944,802
Leasehold improvements	4,133,345			5,814,610
Computer – Hardware and other service equipment	32,893,636			41,075,166
Computer – Software	19,021,359			23,109,772
Furniture and fixtures	14,613,120			18,092,401
Other equipment	17,522,391			27,003,946
Vehicles	2,244,283			2,295,679
Capital work-in-progress	18,359,453			26,864,096
Capital advances	8,474,405			20,537,480
	139,931,172			196,762,428
Less: Accumulated depreciation and amortization	(51,686,625		)	(71,004,604		)
	$	88,244,547		$	125,757,824

8.1.2

Depreciation and amortization expense on property, plant and equipment was $11,332,906, $15,212,682 and $18,605,047 for the years ended December 31, 2004, 2005 and 2006 respectively and include amortization for computer software of $2,586,273, $3,642,520 and $4,437,291 respectively. Unamortized computer software cost as at December 31, 2005 and 2006 amounted to $7,393,116 and $7,399,398 respectively.

F-18

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

9		Goodwill and intangible assets

9.1.1		Intangible assets as at December 31, 2005 and 2006 consists of the following:

As of December 31,	2005			2006

Customer related intangibles	$	11,176,500		$	11,176,500
Technology related intangibles	—			497,879
Less: Accumulated amortization	(1,018,435		)	(1,986,936		)

	$	10,158,065		$	9,687,443

9.1.2

Amortization for the years ended December 31, 2004, 2005 and 2006 amounted to $210,869, $748,023 and $968,501 respectively. The estimated amortization for the intangible assets, for the next five years would be as follows:

		2007		2008		2009		2010		2011
Amortization		1,092,723		1,183,638		1,231,260		1,231,260		1,173,174

9.1.3

The movement in goodwill balance is given below:

	2005			2006
Balance at beginning of the year	$	24,677,771		$	27,987,198

Add: Additional goodwill arising on account of contingent consideration for Patni Telecom	5,578,772			12,184,832
Add: Addition to goodwill as per final purchase price allocation of Patni Telecom	649,022			—
Less: Reduction of valuation allowance on deferred tax assets recognised on Patni Telecom	(2,918,367		)	—
Less: Tax benefit on incentive stock option of Patni Telecom	—			(340,366		)
Balance at end of the year	$	27,987,198		$	39,831,664

9.1.4

Goodwill as of December 31, 2005 and 2006 has been allocated to the following reportable segments:

Segment	2005		2006
Financial services	$	2,594,374	$	2,594,374
Telecom services	25,392,824		$	37,237,290
Total	$	27,987,198	$	39,831,664

10.

Change in estimate

During 2006, the Company reached a settlement with the Internal Revenue Service (the “IRS”) relating to its tax returns of its U.S. operations (Patni USA and its US branch) for fiscal years 2001 and 2002. The settlement addressed transfer pricing, branch tax matters and payroll taxes.

The Company was unable to substantiate to the IRS that returns pertaining to its U.S. branch for the years ended March 31, 2002 and 2003 were filed within 18 months from the respective due dates and hence were deemed as delinquent returns by the IRS. Accordingly, the IRS disallowed all of the deductions on the branch income tax returns and assessed additional income tax obligations of U.S. $15.2 million. Delinquent tax returns were treated as errors in computation of income taxes for the years in which such tax returns were due for filing under the IRS rules and the Company restated its 2003 and 2004 financial statements for such errors.

The Company reviewed the adequacy of the previously established tax exposure reserves with respect to prior years in July 2006 in light of certain positions taken by the IRS during the settlement for 2001 and 2002 and based on such positions, the Company revised its estimate for tax exposure relating to various income tax matters along with related adjustments to accrued interest.

F-19

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

The IRS settlement for 2001 and 2002 also covered payroll tax matters for which a provision had previously been established. The settlement resulted in a liability that was less than the amount previously provided for, in part due to the liability being offset by an increase in income tax liability during settlement. As a result, the Company reduced its accrual for payroll taxes exposure during 2006 with a consequential reversal of the related deferred tax asset. These revisions to the established tax exposure reserves represented a revision to previous reserve estimates, and accordingly, such amounts have been recorded as part of the consolidated statement of income for the Company’s fiscal year ended December 31, 2006 as a change in estimate as follows:

Reduction of accrual for payroll taxes (1)	$	(9,041,958	)

Increase in interest expense	2,600,608

Increase in other expense (2)	(3,743,032		)

Increase in income taxes – current	26,928,920

Increase in income taxes – deferred	3,421,312
	$	20,165,850

(1) Included under cost of revenues

(2) Included under other income/expense

The respective annual amounts with respect to the above amount are shown in the table provided below:

2001			2002			2003		2004		2005		Total
$	(1,248,987	)	$	(372,881	)	$	2,572,523	$	10,862,317	$	8,352,878	$	20,165,850

11		Accrued expenses

		Accrued expenses consist of the following:

As of December 31,	2005		2006
Employee costs	$	14,105,923	$	21,427,493
Subcontractor accruals	3,996,007		5,029,497
Professional fees payable	1,260,231		1,512,893
Others	6,869,371		15,337,618

	$	26,231,532	$	43,307,501

F-20

Patni Computer Systems Limited and subsidiaries

Notes to the consolidated financial statements (Continued)

12	Other liabilities

	Other liabilities consist of the following:

As of December 31,	2005		2006
Deferred revenue	$	2,027,444	$	1,095,217
Provision for leave encashment	10,092,730		12,321,032
Provision for retirement benefits	6,284,868		8,073,273
Capital expenditure payable	1,778,355		5,524,966
Payroll tax liability	22,122,868		6,481,233
Interest on corporate taxes and other related expenses	6,783,211		5,744,001
Advance from customers	1,389,957		185,968
Others	6,654,123		6,920,116

Patni Computer Systems (PTI)

Annual Reports

Other

Documents found in this filing: