Derivative financial instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is exposed to the risk of rate fluctuations on its foreign currency assets and liabilities and on foreign currency denominated forecasted cash flows and interest rates. The Company has established risk management policies, including the use of derivative financial instruments to hedge foreign currency assets and liabilities, foreign currency denominated forecasted cash flows and interest rate risk. These derivative financial instruments consist of deliverable and non-deliverable forward foreign exchange contracts, treasury rate locks and interest rate swaps. The Company enters into these contracts with counterparties that are banks or other financial institutions, and the Company considers the risk of non-performance by such counterparties not to be material. The forward foreign exchange contracts and interest rate swaps mature during a period of up to 45 months and the forecasted transactions are expected to occur during the same period.

The following table presents the aggregate notional principal amounts of outstanding derivative financial instruments together with the related balance sheet exposure:


	Notional principal amounts (Note a)				Balance sheet exposure asset (liability) (Note b)
	As of December 31, 2022		As of March 31, 2023		As of December 31, 2022		As of March 31, 2023
Foreign exchange forward contracts denominated in:
United States Dollars (sell) Indian Rupees (buy)	$	1,587,500	$	1,489,500	$	(25,581)	$	(1,524)
United States Dollars (sell) Mexican Peso (buy)	24,000		29,250		1,079		3,194
United States Dollars (sell) Philippines Peso (buy)	79,200		78,900		(828)		1,220
Euro (sell) United States Dollars (buy)	182,163		173,384		480		(1,793)
Singapore Dollars (buy) United States Dollars (sell)	50,956		50,956		166		763
Euro (sell) Romanian Leu (buy)	51,115		39,254		848		1,312
Japanese Yen (sell) Chinese Renminbi (buy)	8,185		27,385		(327)		248
United States Dollars (sell) Chinese Renminbi (buy)	41,000		31,500		605		473
Pound Sterling (sell) United States Dollars (buy)	32,594		26,342		1,113		581
United States Dollars (sell) Hungarian Font (buy)	12,000		15,000		828		1,980
Australian Dollars (sell) Indian Rupees (buy)	87,513		85,495		(452)		2,458
United States Dollars (Sell) Polish Zloty (buy)	24,000		21,000		1,372		1,416
Japanese Yen (sell) United States Dollars (buy)	10,000		10,000		(1,134)		(202)
Israeli Shekel (sell) United States Dollars (buy)	3,000		3,000		3		164
South African Rand (sell) United States Dollars (buy)	21,000		21,000		(1,652)		1,177
United States Dollars (Sell) Brazilian Real (buy)	—		4,000		—		38
United States Dollars (Sell) Costa Rica Colon (buy)	—		4,000		—		69
Interest rate swaps (floating to fixed)	432,248		425,276		6,350		4,679
					$	(17,130)	$	16,253

(a)Notional amounts are key elements of derivative financial instrument agreements but do not represent the amount exchanged by counterparties and do not measure the Company’s exposure to credit, foreign exchange, interest rate or market risks. However, the amounts exchanged are based on the notional amounts and other provisions of the underlying derivative financial instrument agreements. Notional amounts are denominated in U.S. dollars.

(b)Balance sheet exposure is denominated in U.S. dollars and denotes the mark-to-market impact of the derivative financial instruments on the reporting date.

6. Derivative financial instruments (Continued)

FASB guidance on derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. In accordance with the FASB guidance on derivatives and hedging, the Company designates foreign exchange forward contracts, interest rate swaps and treasury rate locks as cash flow hedges. Foreign exchange forward contracts are entered into to cover the effects of future exchange rate variability on forecasted revenues and purchases of services, and interest rate swaps and treasury rate locks are entered into to cover interest rate fluctuation risk. In addition to this program, the Company uses derivative instruments that are not accounted for as hedges under the FASB guidance in order to hedge foreign exchange risks related to balance sheet items, such as receivables and intercompany borrowings, that are denominated in currencies other than the Company’s underlying functional currency.

The fair value of the Company’s derivative instruments and their location in the Company’s financial statements are summarized in the table below:


	Cash flow hedges				Non-designated
	As of December 31, 2022		As of March 31, 2023		As of December 31, 2022		As of March 31, 2023
Assets
Prepaid expenses and other current assets	$	17,531	$	20,041	$	2,151	$	8,476
Other assets	$	2,005	$	3,059	$	—	$	—

Liabilities
Accrued expenses and other current liabilities	$	23,662	$	12,157	$	11,495	$	1,110
Other liabilities	$	3,660	$	2,056	$	—	$	—

Cash flow hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain (loss) on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is recognized in the consolidated statements of income. Gains (losses) on the derivatives, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in earnings as incurred.

The Company executed a treasury rate lock agreement for $350,000 in connection with future interest payments to be made on its senior notes issued by Genpact Luxembourg S.à r.l. (“Genpact Luxembourg”) and Genpact USA, Inc. (“Genpact USA”), both wholly-owned subsidiaries of the Company, in March 2021 (the “2021 Senior Notes”), and the treasury rate lock was designated as a cash flow hedge. The treasury rate lock agreement was terminated on March 23, 2021 and a deferred gain was recorded in accumulated other comprehensive income and is being amortized to interest expense over the life of the 2021 Senior Notes. The remaining gain to be amortized related to the treasury rate lock agreement as of March 31, 2023 was $490.

6. Derivative financial instruments (Continued)

In connection with cash flow hedges, the gains (losses) recorded as a component of other comprehensive income (loss) (“OCI”), and the related tax effects are summarized below:


	Three months ended March 31,
	2022						2023
	Before tax Amount		Tax (Expense) or Benefit		Net of tax Amount		Before tax Amount		Tax (Expense) or Benefit		Net of tax Amount
Opening balance	$	17,468	$	(3,404)	$	14,064	$	(7,255)	$	1,543	$	(5,712)
Net gains (losses) reclassified into statement of income on completion of hedged transactions	648		(151)		497		2,191		(538)		1,653
Changes in fair value of effective portion of outstanding derivatives, net	4,239		(869)		3,370		18,824		(4,079)		14,744
Gain (loss) on cash flow hedging derivatives, net	3,591		(718)		2,873		16,633		(3,541)		13,091
Closing balance	$	21,059	$	(4,122)	$	16,937	$	9,378	$	(1,998)	$	7,379

The gains or losses recognized in other comprehensive income (loss) and their effects on financial performance are summarized below:


Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) recognized in OCI on Derivatives (Effective Portion)				Location of Gain (Loss) reclassified from OCI into Statement of Income (Effective Portion)	Amount of Gain (Loss) reclassified from OCI into Statement of Income (Effective Portion)
	Three months ended March 31,					Three months ended March 31,
	2022		2023			2022		2023
Forward foreign exchange contracts	$	(2,592)	$	17,375	Revenue	$	296	$	635
Interest rate swaps	$	6,831	$	1,449	Cost of revenue	1,654		(1,413)
					Selling, general and administrative expenses	551		(191)
					Interest expense	(1,853)		3,160
	$	4,239	$	18,824		$	648	$	2,191

There were no gains (losses) recognized in the statement of income on the ineffective portion of derivatives and excluded from effectiveness testing for the three months ended March 31, 2022 and 2023, respectively.

Non-designated Hedges


		Amount of Gain (Loss) recognized in Statement of Income on Derivatives
		Three months ended March 31,
Derivatives not designated as hedging instruments	Location of Gain (Loss) recognized in Statement of Income on Derivatives	2022		2023
Forward foreign exchange contracts (Note a)	Foreign exchange gains (losses), net	$	(3,522)	$	7,851
		$	(3,522)	$	7,851

6. Derivative financial instruments (Continued)

(a)These forward foreign exchange contracts were entered into to hedge fluctuations in foreign exchange rates for recognized balance sheet items such as receivables and intercompany borrowings, and were not originally designated as hedges under FASB guidance on derivatives and hedging. Realized gains (losses) and changes in the fair value of these derivatives are recorded in foreign exchange gains (losses), net in the consolidated statements of income.