Final Project Rucha Asset Management

CONTENTS:

#PAGE

. Preface………………………………………………………………………………………………...02 . Acknowledgement………………………………………………………………………………...…..04 01. Necessary Background Information 1.1 Oil Industry Analysis………………………………………………………………………05 1.2 Institutional Arrangements In India………………………………………………………..09 1.3 About IOCL ……………………………………………………………………………….10 1.4 About Gujarat Refinery……………………………………………………………………16 02. Fundamentals 2.1Objective…………………………………………………………………………………...21 2.2 Scope of study......................................................................................................................21 2.3 Rationale…..……………………………………………………………………………….22 2.4 Limitations …..…………………………………………………………………………….23 Asset management Practices & Accounting Policies in Indian Oil Corp. Ltd. (Gujarat Refinery) 03. Significant Accounting Policies in IOCL & its contemporaries…………………………………....24 04. Asset management ………………………………………………………………………………….32 05. Accounting of Depreciation in IOCL …………………………………………………...………….34 06. Existing classification of assets under SAP………………………………………………………....41 07. Inter-linkages between accounting standards and their effect on the Valuation of Assets ………...47 08. International Financial Reporting Standards (A peek into transition process)….………………......52 09. Conclusion…………………………………………………………………………………………..55 List of figures……………………………………………………………………………………………56 List of tables…………………………………………………………………………………………….56 List of Annexures……………………………………………………………………………………….56 Bibliography…………………………………………………………………………………………….56

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References……………………………………………………………………………………………….57

Preface
In a dynamic business environment, it is very important to focus on growth. In order to maintain a pace of growth an organization must act sustainably. It has to face, external environment changes viz. competition, technology, political changes, macro-economic changes, etc. and internally it may have to deal with change in management or change in business policy. In order to gear for a sustainable future, an organization must have systems in place. These systems ensure continuity which helps in the achievement of long term objectives. The process to improvise any such systems is perpetual in nature. Here, we discuss a part of such system, Asset management module and asset classification under SAP. Globalization and diversification today force structural changes in organizations world-wide, making economic processes more complex. These processes are also made more dynamic through product and process innovation and use of the information highway. All of this requires more coordination and control with increasingly shorter response times. Timely decisions must be based on a continuous supply of current information. By interrelating the various aspects of accounting and integrating them with logistics and human resources applications, they become a management tool for all company departments. Asset management includes Financial Accounting which is further divided as follows: • • • • • General ledger Accounting Accounts payable & accounts receivable Asset accounting Legal Consolidation Special Statistical Accounting Units

In this report we retain our focus on Asset Accounting component.

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Further, we explore the effects of depreciation in the Asset Accounting module followed by analysis and comparison of four Accounting Standards (AS-6, 10, 11, 16). These Accounting standards were suggested by my guide as they have a direct impact on each quarter. This exercise helped me gain clarity on how Accounting Standards are at work collectively. Our focus rests on only few aspects The entire system of financial accounting has been based on certain basic presuppositions, conventions, policies and Generally Accepted accounting Principles (GAAP). It has in the process generated a lot of differences of opinion among the accountants themselves, while no two accountants are common in their assumptions; the management’s proposition is different from the owners of a business entity, the perspective of tax authority is different from that of management, the workers’ contention is at variance with the management. This type of divergence in assumptions and principles have resulted in the difference in value and measure of assets, liabilities, income and expense; besides it leads to several alternative accounting treatments. After having realized the gravity of difference, a number of organizations at international level have come forward with the task of standardizing accounting practices followed by various types of business entities. Acceptance and adherence to and compliance with such standard practice would ensure materiality, objectivity, reliability, comparability, predictability of financial information disclosed through corporate financial statements. Consequently a number of standard setting bodies in several countries have come up including India. Besides an International Accounting Standard Committee (IASC) has been set up in 1973 with headquarter in London, to formulate Accounting Standards for its member nations. A brief write up for the same concludes the report. What follows in the pages ahead is a gist of the work that I took responsibility for, during my internship and my personal interpretation of it.

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Acknowldegement
The following lines are an ode to all the people who made this entire effort turn into a result. My warmest and most sincere thanks go to my guide Mr. R.K. Agrawala, whose immaculate knowledge helped me channel my thoughts towards a focused outcome. Without his sheer ability to make amends for anything at all, this project would not be possible. His unending optimism and patience was a source of immense learning. I am grateful to Prof. Dr. G.C. Maheshwari, for accepting to review my work and for his much needed advice on it. I thank him for being a patient listener to my naïve interpretations and helping me grow through it. I would also like to thank the cooperative staff, especially, Accounts officer Mr. Vijay Sethiya & Mr. Satish Gabriel for supporting me and availing to me each and every matter that I requested for the project. I must also thank the entire Finance Department for having accepted me for the period of two months in their culture. I am indebted to Mr. Vaibhav Gade, without whom I may never be able to get this opportunity. The support that he grant me, by enabling me to get an internship with IOCL, has led to add to the most important learning experiences in my life. I would like to extend my best wishes to the IOCL family to have taught me the essence of an organizational culture and for providing me with a conducive environment for professional and personal growth.

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Words of gratitude may sound shallow but the learning experience that I gained during my internship was memorable by all means.

Oil Industry Analysis
The oil and gas industry has been instrumental in fuelling the rapid growth of the Indian economy. It contributes about 45 per cent of the total energy consumption of the country, which is the fifth largest energy consumer in the world. Petroleum exports have also emerged as the single largest foreign exchange earner, accounting for 11 per cent and 15 per cent of the total exports in 2005-06 and 2006-07, and growing at the rate of 67 per cent and 58 per cent, respectively. The growth continues in the new fiscal with the export of petroleum products touching US$ 19.7 billion during April-December 2007. Simultaneously, domestic production of crude oil has been increasing steadily. While production grew by 5.6 per cent in 2006-07 to 33.98 million tonne (mt) from 32.19 mt in 2005-06, it has increased to 34.11 mt during 2007-08.

Global Refining Hub Strategically located en route of Middle East crude for East Asian and Pacific-rim markets, India is emerging as the global hub for oil refining. It also enjoys competitive cost advantage, with capital costs lower by as much as 25 to 50 per cent over other Asian countries. Already, the fifth largest country in the world in terms of refining capacity (up from 19thin 1995), with a share of 3 per cent of the global capacity, India is well placed to take advantage of the expected global refining capacity deficit of around 112 mtpa by 2010 with its planned expansion plans. Indian companies plan to increase their refining capacity to 242 mtpa by 2011-12 from about 149 mtpa in 2007. This is well above the projected domestic demand of 196 million tones, leaving the rest to be exported.
•

Indian Oil Corp (IOC) plans to increase its refining capacity from 60.2 mtpa to 76.7 mtpa.

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ONGC plans to scale up its refining capacity up to 45.5 million tonnes by 2009-10 from about 12 mtpa.

• •

Bharat Petroleum Corporation is setting up a 6 mtpa at Bina in Madhya Pradesh. Reliance Industries Ltd is constructing a new refinery in the Jamnagar SEZ with a capacity of 29 mtpa.

• •

Nagarjuna Oil Corp is planning a new refinery at Cuddalore with a capacity of 6 mtpa. Hindustan Petroleum is setting up a 9 mtpa refinery along with the LN Mittal group at Bhatinda in Punjab.

• •

Essar plans to more than triple capacity at its refinery to 34 mtpa from the current 10.5 mtpa. Hindustan Petroleum Corporation plans to invest US$ 2.5 billion in expanding its Visakhapatnam refinery capacity to 16 million tones.

In fact, Reliance's new refinery (which will be the world's only full-export-oriented refinery) will be the world's sixth-largest. And with the existing refinery of RIL, the combined capacity (RPL along with RIL) will turn the Jamnagar complex into the world's largest single-location refinery.

Overseas Investments Indian companies have been making investments in oil and gas fields to meet the spiraling energy demand of both domestic and foreign markets. Investments have been made in as diverse countries as Russia, Sudan, Iraq, Libya, Egypt, Qatar, Ivory Coast, Australia, Vietnam and Myanmar among others.
•

ONGC Videsh Limited (OVL) has presence in 15 countries including. Russia, Sudan, Vietnam, Iran and Brazil among others. GAIL India, the country's largest transporter and marketer of gas, has acquired stake in an offshore block in Myanmar and plans to set up a mega US$ 2.3 billion petrochemical plant in Iran.

•

•

A consortium of BPCL and Videocon Industries has acquired a stake in Brazilian oil exploration company EnCan Brasil Petroleo Limitada for US$ 165 million.

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OIL-IOC consortia have acquired blocks in Libya and have signed farm-in agreements for share in blocks in Gabon, Yemen and Nigeria.

•

Reliance has acquired majority stake and management control of Gulf Africa Petroleum Corporation (GAPCO), which has significant presence in East Africa's downstream sector.

•

Indian Oil Corporation (IOC), plans to set up a refinery of about 12-15 mtpa with an integrated petrochemical complex in Egypt

•

Essar Oil is keen on buying a 50 per cent stake in a 4 mtpa refinery in Kenya.

Retail The surge in automobile sales has led to significant investments being made to develop and expand the petroleum retail market. According to US-based consultancy Keystone, automobile sales which number about a million vehicles is likely to grow to about 20 million a year by 2030, making India, the third largest automobile market in the world. Consequently, many companies have stepped up investments to expand their retail network. For example, Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) together are planning to open over 3,000 retail outlets this financial year as against 2,000 outlets opened last year. Similarly, Reliance plans to build 6000 services stations.

Gas India is one among the four countries which have the world's richest gas hydrate reserves. But, the per capita consumption of natural gas is amongst the lowest in the world at 29 cubic meters as against the world average of 538 cubic meters, leaving huge potential in this sector. Consequently, huge investments are being made into this sector, reflected in the growth of cumulative natural gas production to 32274 million cubic meters (MCM) during 2007-08, compared to 31747 MCM of production in the same period in 2006-07. And with increasing usage of natural gas as a fuel in India, the country is likely to rival both China and Japan in having the largest natural gas demand in Asia by 2025, whose individual

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demand is estimated to be in the range of 350 million standard cubic meter per day (MMSCMD). Significantly, the share of natural gas in the overall fuel mix is expected to increase from 8.8 per cent in 2007 to 22 per cent in 2031-32. Encouraged by this scenario, a number of players have evinced a keen interest in laying pipelines in the domestic market to supply gas to the consumers. For example, Gujarat State Petronet Ltd plans to connect all 25 districts of the state with 2,200-kilometre high pressure gas pipeline laid down across the state. Reliance plans to invest US$ 4 billion to lay a 1,386-kilometer pipeline from Andhra Pradesh to Gujarat.

Government Initiatives The government has been taking many progressive measures to create conducive policy and regulatory framework to attract investments into this industry.
•

The passage of the Petroleum and Natural Gas Regulatory Board (PNGRB) Bill to set up an independent regulatory for midstream and downstream activities and to promote competition.

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Allowing 100 per cent FDI in private refineries through automatic route and 26 per cent in government-owned refineries.

• • • •

Implementation of the National Exploration Licensing Policy (NELP). Abolition of the administered pricing policy. Creation of strategic crude oil storage of 5 million tones. 100 per cent FDI is also allowed in petroleum products, exploration, gas pipelines and marketing/retail through the automatic route.

Significantly, a cabinet secretary-chaired panel has cleared the first mega oil , chemical and petrochemical investment hub, slated to come up at Andhra Pradesh, and which is expected to attract a whopping investment of US$ 80.36 billion. Mittal Energy Investments, Total SA of France and oil refining and marketing major Hindustan Petroleum Corp (HPCL) would make a combined investment US$ 7.49 billion in the proposed petroleum, chemical and petrochemical investment region (PCPIR).

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An expanding economy with its concomitant increase in energy demand is likely to throw open huge investment opportunities in the oil and gas industry. According to a report by CII and KPMG, India's energy sector would provide investment avenues worth US$ 120-150 billion over the next five years. India's energy demand is estimated to increase five fold over the next twenty five years. Another report by KPMG estimates India's oil demand to grow at an average annual rate of 3.6 per cent from 119 metric million tonne (mmt) in 2004 to 196 mmt in 2011-12 and 250 mmt in 2024-25.The Government also plans to expand the exploration licensing area from 44 per cent of the Indian sedimentary basin in 2007 to 80 per cent by 2011-12 and 100 per cent by 2015.
*Data & Facts sourced by Indian Brand Equity Foundation (IBEF).

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Institutional Arrangements In India

Figure 1.1
Ministry of Petroleum & Natural Gas shelters 3 types of Industries: 1) Upstream: Exploration & Production. 2) Downstream: Refining & Marketing, 3) Others In the Downstream industry, that we are concerned with in this project, there are five players in the market namely, Hindustan Petroleum, Indian Oil, Bharat Petroleum, Gail and Reliance India Limited.
*Data & Facts sourced by Indian Brand Equity Foundation (IBEF).

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About IOCL

VISION
A major, diversified, transnational, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & public distribution

MISSION
 To achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through value of products and services, and cost reduction  To maximize creation of wealth, value and satisfaction for the stakeholders  To attain leadership in developing, adopting and assimilating stateof- the-art technology for competitive advantage  To provide technology and services through sustained Research and Development  To foster a culture of participation and innovation for employee growth and contribution  To cultivate high standards of business ethics and Total Quality Management for a strong corporate identity and brand equity  To help enrich the quality of life of the community and preserve ecological balance and heritage through a strong environment conscience

Values

Indian Oil nurtures the core values of
 Care

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 Innovation  Passion &  Trust

across the organization in order to deliver value to its stakeholders.

Objectives

 To serve the national interests in oil and related sectors in accordance and consistent with Government policies.  To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation and marketing activities and to provide appropriate assistance to consumers to conserve and use petroleum products efficiently.  To enhance the country’s self-sufficiency in crude oil refining and build expertise in laying of crude oil and petroleum product pipelines.  To further enhance marketing infrastructure and reseller network for providing assured service to customers throughout the country.  To create a strong research & development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to minimizing/eliminating imports and to have next generation products.  To optimize utilization of refining capacity and maximize distillate yield and gross refining margin.  To maximize utilization of the existing facilities for improving efficiency and increasing productivity.

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 To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in marketing operations to effect energy conservation.  To earn a reasonable rate of return on investment.  To avail of all viable opportunities, both national and global, arising out of the Government of India’s policy of liberalization and reforms.  To achieve higher growth through mergers, acquisitions, integration and diversification by harnessing new business opportunities in oil exploration & production, petrochemicals, natural gas and downstream opportunities overseas.  To inculcate strong ‘core values’ among the employees and continuously update skill sets for full exploitation of the new business opportunities.  To develop operational synergies with subsidiaries and joint ventures and continuously engage across the hydrocarbon value chain for the benefit of society at large.

Obligations
 Towards customers and dealers To provide prompt, courteous and efficient service and quality products at competitive prices.  Towards suppliers

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To ensure prompt dealings with integrity, impartiality and courtesy and help promote ancillary industries.  Towards employees To develop their capabilities and facilitate their advancement through appropriate training and career planning. To have fair dealings with recognized representatives of employees in pursuance of healthy industrial relations practices and sound personnel policies.  Towards community To develop techno-economically viable and environment-friendly products. To maintain the highest standards in respect of safety, environment protection and occupational health at all production units.  Towards Defence Services To maintain adequate supplies to Defence and other para-military services during normal as well as emergency situations.

Financial Objectives
 To ensure adequate return on the capital employed and maintain a reasonable annual dividend on equity capital.  To ensure maximum economy in expenditure.

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 To manage and operate all facilities in an efficient manner so as to generate adequate internal resources to meet revenue cost and requirements for project investment, without budgetary support.  To develop long-term corporate plans to provide for adequate growth of the Corporation’s business.  To reduce the cost of production of petroleum products by means of systematic cost control measures and thereby sustain market leadership through cost competitiveness.  To complete all planned projects within the scheduled time and approved cost.

Table: 1.1

MAJOR UNITS
Registered Office Corporate Office : : Mumbai New Delhi

REFINERIES DIVISION

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MAJOR UNITS
HEAD OFFICE       Barauni Refinery Gujarat Refinery Guwahati Refinery Haldia Refinery Mathura Refinery Panipat Refinery : New Delhi : Bihar : Gujarat : Assam : West Bengal : Uttar Pradesh : Haryana

ASSAM OIL DIVISION

:Digboi

PIPELINES DIVISION
HEAD OFFICE  Eastern Region  Western Region  Northern Region : Noida : Calcutta : Rajkot : Panipat

MARKETING DIVISION
HEAD OFFICE  Northern Region  Eastern Region  Western Region  Northern Region  R&D Centre : Mumbai : New Delhi : Kolkata : Mumbai : Chennai : Faridabad

SUBSIDIARIES Indian Oil Blending Ltd. Indian Oil Mauritius Ltd. Lanka IOC Ltd. Chennai Petroleum Corp Ltd Bongaigaon Refinery & Petrochemicals Ltd IBP Co. Ltd. : Mumbai : Mauritius : Sri Lanka : Chennai : Assam : Kolkata

Gujarat Refinery

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– where growth is the essence of life - is the largest public sector refinery in the country
and is the third of the seven refineries of Indian Oil Corporation Limited. The foundation stone of this refinery was laid by Pt. Jawaharlal Nehru on 10th May, 1963. This Refinery was set up with the technical assistance of the then USSR. The refinery is located near Koyali village of Vadodara district of Gujarat State. Dr. S. Radhakrishnan, the then President of India dedicated the refinery to the nation with the commissioning of the second Crude Distillation Unit and Catalytic Reforming Unit on 18th October 1966. The refinery was initially set up with a capacity of 2.0 million metric tonne per annum (MMTPA) for processing of Ankleshwar crude. With inhouse modifications, the capacity was further increased by 40% to a level of 4.3 MMTPA by 1974-75. In October, 1966, the Catalytic Reforming Unit (CRU) was set up. In December, 1968 Udex plant was commissioned for production of Benzene and Toluene based on feed stock available from CRU. In the year 197879, the refinery was expanded by adding another 3.0 MMTPA crude distillation unit to process imported crude. Fluidized Catalytic Cracking Unit (FCCU) of 1.0 MMTPA capacity alongwith the Feed Preparation Unit (FPU-I) of 1.7 MMTPA capacity was commissioned in December, 1982. In 1993-94, the Hydrocracker Unit of 1.2 MMTPA, the first of its kind in the country was commissioned at Gujarat Refinery. In the year 1995, Feed Grade Hexane plant was commissioned. The DHDS unit was commissioned in June 1999. A new crude distillation unit of capacity 3.0 MMTPA was commissioned in September, 1999 alongwith Methyl Tertiary Butyl Ether (MTBE). The capacity of FPU-I and FCC units have been enhanced from 1.7 to 2.4 MMTPA and from 1.0 to 1.5 MMTPA respectively in December, 1999 making it the largest PSU refinery of the country with 13.7 mmtpa capacity.
NUCLEUS OF DEVELOPMENT AND PROSPERITY

Gujarat Refinery has led to industrialization in the region. Many down stream industries like IPCL and GSFC have been set up.
WATER SUPPLY AND POWER GENERATION

The source of water supply for the refinery and its residential township is the river Mahi. Refinery is also supplying about 6 MGD of fresh water to GSFC.

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The refinery has two captive power plants located at two different locations for meeting its requirement of steam and power.
QUALITY CONTROL LABORATORY & QUALITY SYSTEM MANAGEMENT

For the regular monitoring and control of quality of products and various intermediate streams, a well-equipped modern laboratory has been provided within the Refinery complex. The corporate mission of achieving international standards of excellence in petroleum refining together with the customer satisfaction has been certified by the ISO-9002 certificate, which has been obtained in the year 1995. Gujarat Refinery is the first organisation in the country, which has obtained the DNV certificate also for such service functions such as Personnel, Finance and Medical Services.
ENERGY CONSERVATION / HYDROCARBON LOSS REDUCTION

Energy Conservation plays a vital role towards cost reduction as well as upkeep of the environment. It is directly related with the reduction in fuel consumption, thus the adverse effects of fuel burning on environment due to SO2, NOx, CO and CO2 emissions are contained. Gujarat Refinery has put maximum efforts in the area of Hydrocarbon loss reduction. Refinery achieved lowest ever-specific energy consumption of 104.0 MBTU/BBL/NRGF in the year against the previous best of 105.6 MBTU/BBL/NRGF in 2001.02. The hydrocarbon loss has been brought down to an international best level of 0.24 % weight on crude.

ENVIRONMENT PROTECTION, HEALTH AND SAFETY

Environment Protection

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Initially there were four effluent treatment plants (ETPs), but in order to create free space inside the refinery for value added projects, a state-of-the-art Central Effluent Treatment Plant (CETP) has been commissioned in June 1999 to take care of treatment of entire effluent. The treated effluent is reused in the refinery. Thus Gujarat Refinery is a zero discharge refinery. To control air pollution, low sulphur content fuels are used in boilers and process heaters. Other mitigated facilities like tall stacks for better dispersion of emission, CO boiler in FCC, floating roof tanks for volatile products and high efficiency cyclone separators have been provided. A meteorological data station has been installed to record wind speed, wind direction, ambient temperature, humidity and rain fall. A Secured Landfill site for storing the residual oil sludge after treatment has also been provided. ISO-14001 Accreditation Gujarat Refinery has got international recognition for its Environmental Management System and commitment towards environmental protection.ISO-14001 accreditation has been certified by M/s. DNV in July 1997. OHSMS and ISRS Accreditation Occupational Health and Safety Management System (OHSMS) and International Safety Rating System (ISRS) are modern safety / loss control evaluation systems. Gujarat Refinery was awarded OHSMS certificate for maintaining world class standard in regard to safety and health. It also achieved ISRS Level-7 in the scale of 0 to 10. Green Belt A 100 metre wide green belt in south and western sides and another 500 metre wide green belt in the eastern side of Hydrocracker complex have been developed. species of trees have been planted in these green belts. About 2.1 lacs special

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Health Monitoring Work environment monitoring is a regular feature at Gujarat Refinery and covers monitoring of toxic gases like SO2, H2S, CO, Cl2 and sound level. Periodical medical examination of workers are conducted at an independent occupational health centre. Fire & Safety Gujarat Refinery has two fire stations which are well equipped with the fleet of 9 nos. of fire tenders and modern accessories like fire alarms, hot lines, walkie talkies, High Volume Long Range monitors, sirens etc. Gas detectors at LPG and process unit areas and automatic water sprinkler system for critical areas have been provided. On site as well Off Site emergency management plans have been developed.

Safety Performance Gujarat Refinery owns and operates one of the best Safety and Fire Management System in the Indian refining sector. Its exemplary safety record boast of five fire free years with sixth year in running as on April 2003. It is also the first Indian refinery to achieve “International Safety Rating of Level – 8”.

Awards  Western region “Tolic” headed by Gujarat Refinery won the Hindi Rastra Bhasha Shield. (First prize).

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 Prashansha Patra award for the year 1999 from NSCI presented by Union Minister of Labour at New Delhi on 09/04/2002.  Gujarat Refinery Hospital received two Golden Peacock awards for Environment Management Monitoring and Hospital Waste Management for Bio-Medical Waste Management on 08/07/2002.  Jawaharlal Nehru Centenary rolling trophy for the best performance in energy consumption for the year 1999-00 received on 25.06.2002.  Green Tech Gold Award for the year 2001-02 for excellent safety performance for consecutive 4 years. The award was presented on 26.06.02.  For the fifty consecutive year Ministry of Labour, Govt. of India declared Gujarat Refinery a winner under Scheme-I and Scheme-II of National Safety Awards for the year 2000. The awards were presented on 17.09.2002.  Shreshtha safety award by National Safety Council of India for the year 2001.  State Safety award for the fifty consecutive year to Gujarat Refinery based on the performance during the year 1998, 1999 & 2000. o Special award/honour for completing 100 MMH. o Winner for best safety management system. o Appreciation certificate for lowest disabling injury index. o Certificate of honour for completing 3 MMH in the year 2000.  Five Star Rating by British Safety Council for safety and occupational health management system after the audit conducted during Aug 5-9, 2002.  Jawaharlal Nehru Centenary award for best performance in energy consumption for the year 2000-01. Award received on 18.10.2002.  Sword of Honour by British Safety Council for best safety practices.  Gujarat Refinery is the first Indian refinery to achieve Special Encon award for 2002 from Ministry of Power for achieving exemplary Encon standard amongst refinery sector.

Objective:
To study the accounting policies & practices in Asset Management at Indian Oil Corp. Ltd. • To study & compare significant accounting policies practiced in IOCL against that of its contemporaries

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• To ascertain interlinks between accounting standards & their effect on valuation of assets • To analyze existing asset management module and the accuracy of depreciation rates levied on the assets • To observe the existing classification of fixed assets into asset classes with respect to SAP • To measure Indian Accounting Standards with corresponding International Accounting Standards and to pave way for transition to International Financial Reporting Standards(IFRS)

Scope:
Asset management involves efficient & equitable allocation of funds towards competitive needs in the organization. It is more of an investment policy than a management tool. The scope of this project extends to the precincts of analyzing the existing accounting policies practiced in IOCL against that of its contemporaries like Hindustan Petroleum Corporation ltd., Bharat Petroleum Corporation Ltd. and Reliance Petroleum Ltd. It further probes into cross links that can impact valuation of assets as per: • Accounting standard 6- Depreciation Accounting • Accounting standard 10- Accounting for Fixed Assets • Accounting standard 11- The effects of changes in Foreign Exchange rates • Accounting standard 16- Capitalization of Borrowing costs They are measured in light of four issues. 1. 2. 3. 4. Historical cost of an asset Individual capitalization of an asset Extent of depreciation Revaluation of an asset

The scope also includes the conforming the accuracy of existing depreciation rates levied on the Assets to that as specified by the statute (Schedule XVI, The Companies Act,

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1956).In case of any defiance, the same will have an impact on the value of the asset block since the date of its capitalization, which in turn will influence the final accounts of the corporation. The assets in Gujarat refinery have been classified under Gross blocks. These blocks are exhaustive & mutually exclusive. This simplifies the organization of the assets; however, the list needs to be revamped with respect to the asset classes and the depreciation key assigned to such classes as in SAP as we shall come across some basic faults with the system. It leads to the extent of carrying it to the threshold of International Financial Reporting Standards and the application of respective provisions in the context discussed.

Rationale:
The study begins with an overview of the Oil Industry in the global scenario which trickles down to India in context of its regulations that direct this industry nationally. After having stated the necessary background required as a backdrop to start the narrative, we state the objective and scope followed by limitations that lead the report through the following pages. The study weighs the significant accounting policies in light of Management of Fixed assets in Indian Oil against that of Hindustan Petroleum, Bharat Petroleum & Reliance India Ltd. and appraises the differences amongst these. This lays the foundation of the study in terms of understanding the elementary differences that exist in the downstream Indian industry. We then begin with the introduction to the Asset management module as a part of Financial Accounting. The former then, is broken down into components and one such component is taken into consideration to form a part of our study.

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We scan the depreciation rates charged by the corporation on the numerous asset gross blocks that exist. This exercise shall help us explore the room for improvement in the present charging of depreciation to these gross blocks as well as to gather if these blocks can further by sub- classified in order to charge a separate rate of depreciation for them. We derive problems with the applications that were countered, during the project period, followed by recommendations on the current classification of these assets. Further, the inter-links drawn in the Accounting Standards (viz. 6, 10, 11 & 16), formulate an effective solution to quench many questions during the periodical audits. It handles basic conceptual issues like (i) historical cost of an asset, (ii) individual capitalization, (iii) the extent of depreciation as well as (iv) revaluation of assets. We also examine International Accounting Standards corresponding to the Indian Standards and take a comparative view of the same. We approach closure with reference to the road that Indian Oil may choose to follow in order to abide with International Financial Reporting Standards.

Limitations:
1) Asset blocks of Gujarat Refinery have been taken as representation for the assets of IOCL. 2) The list of assets that are referred to may not be included in the report due to its classified informational content.

Significant Accounting Policies
Following table summarizes the similarities as well as differences that exist in the accounting policies followed by Indian Oil Corporation Ltd. & its Indian contemporaries viz. Hindustan Petroleum Corp. Ltd., Reliance Petroleum Ltd. and Bharat Petroleum Corp. Ltd.

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This comparison shall enable us to understand the status of IOCL in the Indian Downstream Industry.
Table 3.1

Petroleum Corporation Ltd. Asset Management & Accounting Policies at IOCL Corporation Ltd. Treatment of Land acquired for 99 years No statement No Statement Leasehold land Freehold land

Heading

Indian Oil

Hindustan

Reliance Petroleum Ltd. 26 No statement

Bharat Petroleum Corporation Ltd. Leasehold land

Fixed Assets are stated at cost net of CENVAT/ Value

Fixed Assets are stated at cost of acquisition (including incidental expenses) less accumulated depreciation. Expenditure incurred for creating/acquiring other intangible assets of Rs.5 million and above, from which future economic benefits will flow over a period of time, is amortized over the

Statement of Valuation of fixed assets

Added Tax, rebates, less accumulated depreciation and impairment loss, if Capitalized as Intangible asset and amortized over a period of 10 years or life of the asset whichever is less Capitalized as Intangible assets any. Technical knowhow is amortized over the useful life of the underlying plant.

Treatment of costs related to technical knowhow

estimated useful life of the asset or five years, whichever is lower, from the time the intangible asset starts providing the economic benefit. In other cases, the expenditure is charged to revenue in the year the expenditure is

Asset Management & Accounting Policies at IOCL

27

*The source for significant policies of all the above mentioned companies is attached in Annexure -1.

What is Asset Management?
Asset management is a business process and a decision-making framework that covers an extended time horizon, draws from economics as well as engineering, and considers a broad range of assets. The asset management approach incorporates the economic assessment of tradeoffs among alternative investment options and uses this information to help make cost-effective investment decisions. Definition Asset management* is the process of guiding the acquisition, use and disposal of assets to make the most of their service delivery potential and manage the related risks and costs over their entire life. Objectives The principal objective of asset management is to enable an agency to meet its service delivery objectives efficiently and effectively. Effective asset management also:
•

makes the most of the service potential of assets by ensuring they are appropriately used and maintained; reduces the demand for new assets and saves money through demand management techniques and non-asset service delivery options;

•

•

achieves greater value for money through economic evaluation of options that take into account life cycle and full costs, value management techniques and private sector involvement;

•

reduces unnecessary acquisition of assets by making agencies aware of, and requiring them to pay for, the full costs of holding and using assets; and

Asset Management & Accounting Policies at IOCL
•

28

focuses attention on results by clearly assigning responsibility, accountability and reporting requirements.

* As per “SAP R/3 module for Asset Management”.

Figure 4.1 Key activities Asset management is a continuous process covering the whole life of the asset. An agencyís asset management program should encompass all the activities illustrated above.

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In the following pages we shall discuss a part of the above module viz. Recording, valuation and reporting activities. We shall focus on Depreciation treatment for such fixed assets and its implementation SAP.

Depreciation on assets:
In Indian Oil Corporation Limited: Depreciation/amortization is charged pro-rata on quarterly basis on assets, from/upto the quarter of capitalization/sale, disposal and dismantled during the year as under:
ACCOUNTING OF DEPRECIATION

2.5.1

Section 205 of the Companies Act stipulates that no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation on the following basis or out of the profits of the company for any previous financial year: a) On the written-down value basis as provided in Section 350 of the Companies Act or b) On the straight-line basis—the amount of depreciation in respect of each depreciable asset is arrived at by dividing 95% of the original cost thereof by a specified period in respect of each such asset; or c) On any other basis approved by the Central Government which has the effect of writing off by way of depreciation, 95% of the original cost to the Company of each such depreciable asset on the expiry of the specified period.

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2.5.2

In accordance with the provisions of sub-section 2(b) of Section 205 of the Companies Act, the Board of Directors have prescribed the rates of depreciation on straight-line method for various categories of assets keeping in view the effective life of assets. Keeping in view the life of assets as determined by the Board and rates of depreciation as prescribed in Schedule XIV of the Companies Act, 1956 schedule of rates of depreciation for various categories of Assets is given in Annexure 2.

2.5.3

The depreciation should be charged on the straight line basis as per rates approved by the Board on full value of the assets limited to 95 percent of the original cost of each asset. Here, full value is to be considered after eliminating custom duty paid/ payable or excise duty included in the purchase price against which Cenvat credit is available. As soon as the cumulative depreciation provided for each asset reaches an amount equivalent to 95 percent of the original cost no further depreciation shall be provided on such asset and the balance 5 percent shall be kept as residual value in the books of accounts.

2.5.4

Depreciation is charged pro-data in quarterly basis on assets from /to the quarter of capitalization/sale, disposal and dismantled during the year.

2.5.5

For temporary assets such as temporary building , sheds, temporary sewage drainage and water supply and temporary electric supply line etc., erected as a part of construction site requirements having only salvage value on dismantling after the completion of construction depreciation shall be charged at the rate of 100 percent in the year in which the cost is incurred . Such temporary assets however, shall be borne on the asset register and the cost and the depreciation particulars shall be shown separately in the schedule of assets. Till the assets is dismantled or discarded. The salvage value of such assets shall be credited to the project after its completion. In case of other temporary assets such as diesel generating sets, transformers and temporary building etc., which are required for construction but are not to be demolished or the assets can be still gainful used , depreciation shall be charged at normal rates as applicable.

2.5.6

Booking of assets to various account head shall be done in such manners that each account head comprises such assets only which are subject to a uniform rate of

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31

depreciation. This will facilitate the calculation of depreciation based on the balances appearing in each account code. 2.5.7 After the first Capitalization , if there is any extra payment on account of assets already capitalized arising out of acceptance of certain claims of contractors / suppliers or due to arbitration awards ,or due to any other reason, or alternatively . There is a reduction in the cost of assets due to certain reduction of customs duty etc. depreciation shall be recomputed retrospectively from the original date of commissioning of the asset under reference.

2.5.8

Accounting Standard 6 (Revised) sets the principles for (i) (ii) (iii) (iv) change in depreciation method depreciation charge on revalued assets depreciation charge on additions /Extensions and depreciation charge on changed original cost of fixed assets arising out of exchange fluctuation loss/ gain.

2.5.9

In case depreciation method is changed, depreciation should be recomputed retrospectively applying the new method from the beginning of the useful life of the asset. The resultant surplus / deficiency is charged to profit & loss Account.

2.5.10 In case estimated useful life of time assets is changed it is necessary to change depreciation on the basis of remaining useful life of the asset as per the re-estimated useful life. Here the resultant change should be given effect prospectively. 2.5.11 In case asset is revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful life of the assets. In other words when value of depreciable assets has been increase, additional depreciation there on should be charged to profit & loss prospectively.

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2.5.12 Cost of lease hold land for 99 years or less is amortized during the lease period. 2.5.13 Depreciation on fixed assets including LPG Cylinders and pressure Regulators is provided in accordance with the rates as specified in Schedule XIV to The Companies Act, 1956, on straight line method, upto 95% of the original cost of asset retaining 5% as residual value. 2.5.14 Insurance spares capitalized should be fully amortized (i.e. 100% of cost of spares capitalized) over the useful life of the main assets from 01.04.2005.100% amortization of capitalized Insurance Spares is to be made with retrospective effect and the amortization amount pertaining to prior years should be accounted as prior year depreciation under “Schedule “ P” – Income/Expenditure relating to previous years’ 2.5.15 Assets, other than LPG Cylinders and pressure regulators, costing upto Rs. 5,000/- are depreciated fully in the year of capitalization. 2.5.16 Amortization of Intangible Assets, falling under the different categories be shall be as given below : a) Right of Way is perpetual in nature and shall continue to be a non-depreciable asset. Hence, no Amortization is to be provided. b) Licenses (including the expenditure on Technical Know-how / License Fees relating to Plants/Facilities other than for production process) shall be amortized over a period of 10 years or life of the plant/facility to which it relates, whichever is lower c) Computer Software which is in the nature of intangible asset shall be amortized over a period of 3 years from the year it is put to use. d) Other Assets - As mentioned in Chapter V, where an intangible asset has been capitalized during a particular quarter, the Amortization should be provided for the whole quarter irrespective of the date of capitalization. Further, the period over which

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33

the said intangible asset is to be amortized should be reckoned from the quarter in which the said asset has been capitalized. 2.5.17 Depreciation/amortization is charged pro-rata on quarterly basis on assets, from/upto the quarter of capitalization/sale, disposal and dismantled during the year as under : Capitalized during I Qtr. II Qtr. III Qtr. IV Qtr. Pro-rata (%) 100 75 50 25 Disposals during IV Qtr. III Qtr II Qtr. I Qtr.

2.5.18 The amounts of Depreciation and Amortization charged during the year as appearing in Sch ‘E’ – Fixed Assets and Sch ‘E1’ – Intangible Assets, should be reconciled with the amount of charged in the Profit & Loss Account including the depreciation charged in respect of construction period expenses / prior year (Schedule “F” and “P”). 2.5.19 Capital expenditure on items like electricity transmission lines, railway siding, roads, culverts etc. the ownership of which is not with the Corporation are charged off to revenue. If such expenditure incurred during construction period of projects is accounted as unallocated capital expenditure and is charged to revenue in the year of capitalization of such projects. 2.5.20 After the capitalization, if there is any extra payment on account of acceptance of certain claims of contractors / suppliers or due to arbitration awards, or due to any other reasons or alternatively there is variation in the cost of assets due to any reason, depreciation has to be re-computed from the date the asset was originally put to use irrespective of the value of the variation. 2.5.21 The furniture & fixture used in hospital, schools and canteen should be shown separately in Assets Register, as higher rate of depreciation is admissible for such furniture & fixtures for income tax purpose.

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34

2.5.22 Depreciation relating to prior year should be shown in prior year adjustment account (Sch.’P’) only in case when it has arisen due to any error/omission in the prior years and the amount is exceeding Rs. 5 lakh in each case. 2.5.23 Depreciation on Idle Assets – taking into consideration the normal wear and tear on assets even though not in use, depreciation should be charged on all assets even though the same are idle.

2.5.24 In case of sale of an asset, the difference in depreciated cost and actual sale realization should be charged to loss on assets sold, lost or written off. If the actual sale value of an asset is more than the depreciated cost of the asset, the difference shall be shown as Profit on Sale of Assets in Schedule ‘N’. 2.5.25 A reconciliation should be sent to HO along with the Balance Sheet as per Annexure–4. 2.5.26 Assets should be classified under the correct asset class under SAP and it should also be ensured that proper depreciation key is used so that correct rate of depreciation is charged on the assets. A Depreciation Rate Schedule containing the indicative rates is attached as per Annexure–2. For correct rates, SAP may please be referred to. 2.5.27 The add-on asset for PC should be accounted separately with sub asset number and it should not be merged with the original asset. 2.5.28 The following points need to be considered while finalizing the Depreciation Rate to be charged on the Cranes: a. If the cranes are fixed with the plant and machinery and are not movable, then they should be depreciated at the rate at which the concerned plant & machinery to which they are attached is depreciated.

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35

b. If the cranes are purchased for construction purposes, then they should be treated as construction equipment and depreciated @ 11.31%. c. If the cranes are used for general purpose, then they should be depreciated at the rate of general plant & machinery, i.e., 4.75%.

*Data sourced by Accounts Manual 2008

Depreciation – As per Accounting Standard 6 (Depreciation accounting)
Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined. Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost2 in the financial statements, less the estimated residual value.

Depreciation – As per International Accounting Standard 16 (Property, Plant & Equipment)
Depreciation is the systematic allocation of depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less than its residual value. Each part of an item of property, plant & equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

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36

Therefore we understand the importance of depreciation method adopted by the corporation and the need to maintain continuity and consistency in the depreciation rates applied to assets/ asset classes. The depreciation rates or the useful lives of the assets are disclosed only if they are different from the principal rates specified in the statute governing the enterprise. A change in the method of depreciation is treated as a change in an accounting policy and is disclosed accordingly.

Existing classification of SAP
The current division of assets under SAP is comprehensive but it creates inconvenience as there are certain redundant components that can be done away with. The same can therefore help in saving time and lead to accurate calculations of depreciation and revaluation of assets. The total assets are first classified into Gross blocks and are depreciated respectively. This necessitates the appropriate classification. This classification is one the basis of following criteria: • • • • • • Asset class Capitalization date Class name Depreciation key Asset description Acquisition value

Illustration 6.1:

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37

Asset Class

Class Name

Cap. date

Dep Key

Asset description

Acquis. val.

Accum. dep. Book val.

The entire list of precisely 7,229 assets has been divided in various heads such as i. Buildings ii. Plant & Machinery iii. Equipments iv. Furniture v. Vehicles, etc. These assets have been reviewed on the basis of their classification under each head and their value. Following shortcomings were found in the current system of Asset management module and corresponding solutions have been suggested accordingly: 1. Asset balances showing Rs. 0 as their Acquisition value For an asset that has Rs.0 balance should be removed from the block of assets. This keeps the gross block free from unnecessary queries during audit. 2. Assets with same description but different amounts. Asset opening balance for a particular date must be singular, but there are 2 entries with different amounts, leading to confusion in terms of actual amount to be considered as balance. 3. Certain amount of assets have wrong depreciation key applied under SAP Any fault in depreciation key may lead to unfair representation of values in the accounting statements. This is a grave offense.

Asset Management & Accounting Policies at IOCL

38

4. Assets have been classified under a wrong asset class head Each Asset class has a unique code to it. This code represents the gross block that a particular asset lies in. Each block considers a uniform rate of depreciation. The same if not followed can result in the wrong valuation of such blocks and therefore final accounts statements.

5. Faulty asset subclasses Asset subclasses are arbitrary and can be improvised by consolidating some classes and also by dividing many. For instance, assets costing less than Rs. 5000/have a different class under buildings and equipments, but chairs used in the building are recorded separately, but are given the same depreciation key. Chairs have the same asset class head as that of Tables, yet they are sub classified with faulty depreciation key. 6. Asset description is not adequate for many assets This column provides clarity on the nature of an asset. When neglected, it results in the lack of adequate information during audit, thereby rendering the process of physical verification of assets even more tedious. Certain asset classes and corresponding values have no nomenclature details. They may be renamed and reclassified and treated accordingly. Illustration 6.2: The inaccuracies mentioned are cited below:
Table 6.1

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39

# 1 Asset balances with Rs.0 as their value
Bo Class Asset Class Name
Office 40002 E1000 Equip & Appl. 14.06.2000 Z004 306 011 Table 6.2

Cap. date

Dep Key Asset description
ON MOBILE CELLULER PHONE(MODEL NO A 10185S)

Acquis. val.

Accum. dep.

ok val.

0

0

0

# 2 Asset has same description for a date but different amounts
Asset
10000 003 10000 016 70001 359 70001 361 70001 362 Table 6.3

Class
L1000 000 L1000 000 CP000 023 CP000 023 CP000 023

Class Name
Free Hold Land Free Hold Land Thermal Power Plt Thermal Power Plt Thermal Power Plt

Cap. date
01.04.19 80 01.04.19 80 01.08.19 91 01.08.19 91 01.08.19 91

Dep Key
Z001 Z001 Z005 Z005 Z005

Asset description
OP.BAL AS ON 1/4/80 OP.BAL AS ON 1/4/80 CAP CAP CAP

Acquis. val.
9,150,997 .92 2,387,272 .40 8,754.00 21,967.50 5,853.96

Accum. dep.
0 0 8,316.3020,869.125,561.26-

Book val.
9,150,99 7.92 2,387,27 2.40 437.7 1,098.38 292.7

# 3 Wrong Depreciation key assigned to assets
Class Asset
300005 20 300005 38 300002

Cap. date
01.04. 2003 13.08. 2004 01.02. 1999

Dep Key Asset description
FCCU COLUMNS INTERNAL JOB (I O Z002 2400128) LAB - RCC DYKE FOR Z003 TANK 201 TO 208 TEMPARARY BUILDING Z017 FOR PROJECTS (

Acqui s.val.

Accum. dep.

Book val.

Class
B9000 027 B9000 027 B9000

Name
Other Factory Bldg Other Factory Bldg Buildings < Rs.5000

0 11,365, 617.00 2,019,4 90.00

0 1,423,543 .542,019,490 .00-

0 9,942,0 73.46

36 050 Table 6.4

0

# 4 Classification under wrong asset class head
Class Asset
400021 51

Cap. date
01.06. 1995

Dep Key Asset description

Acquis. val.

Accum. dep.

Boo k val.
2,281.

Class
E1000 011

Name
Office Equip & Appl.

Z004

USHA CELING FAN

5,972.00

3,690.02-

98

Asset Management & Accounting Policies at IOCL
300000 90 Table 6.5 B8000 002 Building Canteen 01.02. 1986 Z002 FANS WITH REGULATOR

40
24,722 40,035.20 15,312.42.78

IN NEW INDUS. CANTEEN.

# 5 Arbitrary asset subclasses
Class Asset
500035 61 500035 80 500042 12 500042 23 500038 34 500038 35 500035 79 500042 14 500033 82 500038 22

Cap. date
13.08.

Dep Key Asset description
LAB - CONFERENCE TABLE 12-SEATER Z006 (GODREJ MAKE) TABLE, F/ EXECUTIVE, Z006 GODREJ - T-261,,T-108 2400336 TABLE 12 SEATER WITH WIRE MGT SYSTEM Z006 (ES) 2400370 DINNING TABLE Z006 FOR GUEST HOUSE RJ0027 (MSQ)-COMPUTER Z017 TABLE, C3,123W-61D-77H RJ0027 (MSQ)-COMPUTER Z017 TABLE, C3,123W-61D-77H CHAIR, MODEL : K - 36100 Z006 AF NO 97.04 2400336 CHAIR, PCHZ006 7042R,GODREJ QTY15 REVOLVING CHAIRS Z017 (RJ0151) PATLINE 4001P RJ0027 (MSQ)-CHAIR, WITH CUSHION Z017 F/COMUPTER

Acquis .val.
47,417.0 0 138,939. 65 65,660.0 0 42,400.0 0 29,490.0 0

Accum . dep.
11,255.6 390,147.5 23,038.09 2,012.94 29,490.0 09,628.00

Boo k val.
36,161 .37 48,792 .13 62,621 .91 40,387 .06

Class
F1000 001 F1000 001 F1000 001 F1000 001 F1000 001 F1000 001 F1000 002 F1000 002 F1000 002 F1000 002

Name

Tables

2004 21.01.

Tables

1998 14.08.

Tables

2007 19.09.

Tables

2007 28.08.

Tables

2004 28.08.

0

Tables

2004 24.04.

9,628.00

3,787.90

0 2,196. 10 80,594 .10

Chairs

1998 14.08.

5,984.00 84,611.0 0 492,500. 00

4,016.90 492,500. 004,808.00

Chairs

2007 31.05.

Chairs

2004 26.07.

0

Chairs

2004

4,808.00

-

0

Table 6.6

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# 6 Inadequate asset description
Class Asset
40001 892 40001 893

Dep Cap. date Key

Asset description

Acquis. val.
528,496.7

Accum. dep.

Book val.
352,771.

Class
E1000 012 E1000 012

Name
Other Equip& Appl. Other Equip& Appl.

27.06.2001

Z004

CARD

6 339,067.9

175,725.60-

16 226,327.

27.06.2001

Z004

CARD

8

112,740.38-

60

Steps taken to tame the above faults can help as follows: • An entire unnecessary list of assets (with Rs. balance) can be removed thereby enabling the process of audit and verification to be done accurately. • Re- classification of assets under appropriate asset head would save us time and disorder arising due to same asset class with unnecessary sub-classes. • Appropriate & uniform depreciation should be levied as it would have an effect in the true and fair state of accounts of the corporate. • A set of code for asset description must be developed so that a single code may represent many assets with the same description. • A refresher course in SAP Asset accounting module should be arranged, for staff members that handle the responsibility to it(for entering transactions in the module).

(*The values in the above illustration are original and are quoted with permission.)

Interlinks between accounting standards:

The study of Accounting Standards gives an insight into the intricacies of its implications in the audit issues. Objective of this study was to understand the stance of four

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42

accounting standards, viz. (1) Accounting standards 6- Depreciation Accounting; (2) Accounting standard 10- Accounting for Fixed Assets; (3) Accounting standard 11- The effects of changes in Foreign Exchange rates; (4) Accounting standard 16- Capitalization of Borrowing costs , towards the following issues. The summary for the same follows with an instance that the company faced during audit and was be able to make a better financial reporting of it. Historical cost
Accounting Standard 10 - fixed asset defined as an asset held with the intention of being used for the purpose of producing or providing goods and services and is not held for sale in the normal course of business International Accounting Standard 16- Property, Plant & Equipment as tangible assets that (a) are held by an enterprise for use in the production of supply of goods or services, for rentals to others, or for administrative purposes; and (b) are expected to be used during more than one period. ACCOUNTING STANDARD 6:

•

6. The historical cost of a depreciable asset may undergo subsequent changes arising as a result of increase or decrease in long term liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors.

ACCOUNTING STANDARD 10: • 9.1 The cost of an item of fixed asset that comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. ACCOUNTING STANDARD 11: • 11. At each balance sheet date:

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(b) non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; Individual Capitalization ACCOUNTING STANDARD 6: 24. Any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that asset. The depreciation on such addition or extension may also be provided at the rate applied to the existing asset. Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed of, depreciation should be provided independently on the basis of an estimate of its own useful life. ACCOUNTING STANDARD 10: 8.3 In certain circumstances, the accounting for an item of fixed asset may be improved if the total expenditure thereon is allocated to its component parts, provided they are in practice separable, and estimates are made of the useful lives of these components. For example, rather than treat an aircraft and its engines as one unit, it may be better to treat the engines as a separate unit if it is likely that their useful life is shorter than that of the aircraft as a whole. Extent of depreciation ACCOUNTING STANDARD 6: 24. Any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that asset. The depreciation on such addition or extension may also be provided at the rate applied to the existing asset.

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Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed of, depreciation should be provided independently on the basis of an estimate of its own useful life. (Quoted as reference in the practical example) 21. A change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. ACCOUNTING STANDARD 10: 15.2 Where an enterprise owns fixed assets jointly with others (otherwise than as a partner in a firm), the extent of its share in such assets, and the proportion in the original cost, accumulated depreciation and written down value are stated in the balance sheet. Alternatively, the pro rata cost of such jointly owned assets is grouped together with similar fully owned assets. Details of such jointly owned assets are indicated separately in the fixed assets register. Revaluation According to AS 10 – para 13.3: Revalued amount of fixed assets is presented in the financial statements by restating the gross book value and accumulated depreciation. It is also recorded by restating net book value adding therein net increase on the amount of revaluation. ACCOUNTING STANDARD 6:

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23. The useful lives of major depreciable assets or classes of depreciable assets may be reviewed periodically. Where there is a revision of the estimated useful life of an asset, the unamortized depreciable amount should be charged over the revised remaining useful life. 26. Where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out. ACCOUNTING STANDARD 10: 29. When a fixed asset is revalued upwards, any accumulated depreciation existing at the date of the revaluation should not be credited to the profit and loss statement. 30. An increase in net book value arising on revaluation of fixed assets should be credited directly to owners’ interests under the head of revaluation reserve,

ACCOUNTING STANDARD 16: 13. When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realizable value, the carrying amount is written down or written off in accordance with the requirements of other Accounting Standards. In certain circumstances, the amount of the write-down or write-off is written back in accordance with those other Accounting Standards.

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Practical implications: In a corporation no single Accounting standard can dominate the working and reporting format and therefore a blend has to be created. At times we may fall prey to the situation where more than one accounting standards create confusion over a disclosure or an effect of a particular transaction in the books of accounts. At such a time, the department may fall back on its own wisdom and practice that is in the best interest of all its stakeholders. For instance: A query that rose during the presentation was that a particular XYZ plant was depreciated as per Companies Act provisions (Schedule XVI). After a period of time, an extension to the same plant was built as an up-gradation project. Now the problem was whether to provide the depreciation to the new extension at the existing depreciation rate or not. The auditors insisted on adopting an individual rate of depreciation. Here, one may take reference to the provision in AS 6, (para 24) wherein it is mentioned in the context of individual capitalization, that a separate depreciation rate may be applied to such an asset. But here such an up-gradation is an integral part of the plant, and shall not be used individually. Therefore, the same rate of depreciation as that of parent asset shall be levied on the extension. Thus understanding the implications of these Accounting standards is of utmost importance than just their individual interpretations.

International Financial Reporting Standards (IFRS):
Indian Oil’s Accounts are prepared under the historical cost convention in accordance with Generally Accepted Accounting Principles (GAAP), Accounting Standards issued by The Institute of Chartered Accountants of India (ICAI) and the relevant provisions of the Companies Act, 1956. All income and expenditure having material bearing are recognized on accrual basis, except where otherwise stated. Necessary estimates and assumptions of income and expenditure are made during the reporting period and difference between the actual and the estimates are recognized in the period in which the results materialize.

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However, by 2011 all the companies must revise their policies in accordance with International Financial Reporting Standards, the topic that we touched upon in the preface. This will be a herculean task for a giant like IOCL, considering the fact that it has yet not started to move in that direction. The Institute of Chartered Accountants of India (ICAI) has already initiated actions for capability building across the country by holding training programmes through its regional councils and branches.

A peek into transition process
Indian Oil may hire a consultancy to implement the change, this will lead to a smooth transition but in the process it may have to forego the opportunity to train its own accounting staff on IFRS. If a company plans to handle the change over internally, it should map the knowledge-gap and initiate training of accounting staff immediately. Considering the immense geographical spread of IOCL’s activities, it may require to implement a bottom-to-top approach transition. In the many cases the accounting principles stipulated in Indian GAAP are not significantly different from those stipulated in IFRS yet there may be significant gaps between the way those principles are implemented now and the implementation requirements under IFRS. The auditors’ support would prove to be of utmost importance in the adoption of revised accounting policies. It may take the responsibility to approve the transition plan and monitor the progress.

New plan must clearly state the impact of IFRS on the following issues: i. ii. accounting policies, including choices among policies permitted under IFRS, implementation decisions such as whether certain changes will be applied on a retrospective or a prospective basis, iii. iv. information technology and data systems, disclosure controls and procedures, including investor relations and external communications plans, financial reporting expertise,

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v. vi. vii.

training requirements, business activities, such as foreign currency and hedging activities, as well as matters that may be influenced by GAAP measures; say, debt covenants, capital requirements and compensation arrangements.

Initially, it must conform to IFRS 1, FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS: Certain provisions have been cited from the same6. An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRSs. 7.An entity shall use the same accounting policies in its opening IFRS balance sheet and throughout all periods presented in its first IFRS financial statements. Those accounting polices shall comply with each IFRS effective at the reporting date for its first IFRS financial statements, except as specified in para 13-34. 10. Except as in paragraphs 13-34 , an entity shall, in its opening IFRS balance-sheet: a. recognize all assets and liabilities whose recognition is requires by IFRSs; b. not recognize items as assets or liabilities if IFRSs do not permit such recognition; c. reclassify items that it recognized under previous GAAP as one type of asset, liability or component of equity under IFRSs; and d. apply IFRSs in measuring all recognized assets and liabilities.

13. Exemptions from other IFRSs: An entity may select to use one or more of the following exemptions a. business combinations (para. 15); b. fair value or revaluation as deemed cost (para 16-19); c. employee benefits (para 20); d. cumulative translation differences (para 21 & 22); e. compound financial instruments (para 23);

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f. assets and liabilities of subsidiaries, associates and joint ventures (para 24 & 25); g. designation of previously recognized financial instruments (para 25A); h. share-based payment transactions (para 25B & 25C); i. insurance contracts (para25D); j. decommission liabilities included in the cost of Property, plant & equipment (para. 25E); k. Leases (para 25F) and; l. Fair value measurement of financial assets or financial liabilities as initial recognition.(para 25G) An entity shall not apply these exemptions by analogy to other items.
*IFRS 1 is attached in the annexures.

Challenges to transition: In the process of changeover following challenges may be faced by the company. 1) The foundation of IFRS is fair value accounting; it overrules the principles of prudence, going concern and conservatism, all of which have been the basis of good accounting for Indian Accounting Standards. Further, Indian business values are different and the Indian economy is more debt-driven than equity-driven. 2) There may arise a threat of attracting tax by way of additional revaluation reserve which is a result of such a transition. Although this has never been stated, it may rbe a farfetched implication of increased reserve amounts in all the corporate by 2011. Many may give the idea of transition to IFRS a skeptical look and yet there is no way out of it.

Conclusion
I would like to conclude the report on the following note: Accounting policies play a decisive role in the stand that the organization takes for any financial situation. Therefore any deficiencies existing in the same should be removed in order to deliver a clear picture to the stakeholders. Indian Oil should improve its Accounting Policies with respect to statement of valuation of fixed assets. It must disclose the procedure undertaken to reach the value of fixed asset in the statements of final accounts. It should also find an alternative way of

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appropriating foreign exchange gains/ losses while acquisition of an asset, in the books of accounts. If assets are not valued correctly in terms of depreciation rate then it may lead to unaccounted financial losses or gains, which either way hinders the idea of true and fair representation of statement of accounts. Asset accounting module that IOCL follows is advanced in its features but there exist some gaps that are required to be filled. Suggestions provided in the 6th section (Existing Classification of Assets under SAP), may prove to be useful in the process. To render the process of asset accounting more efficient, the following must be implemented:

• Re- classification of assets under appropriate asset head • Uniform depreciation rates for each such asset class • A set of code for asset description • A refresher course in SAP Asset accounting module for the accounting staff

Clarity in terms of Indian Accounting standards must be maintained as explained in the practical implications of accounting standards. It is of utmost importance as it governs the policies that define IOCL’s current standing in the industry. Finally, the path to shift to IFRS must carefully be trodden with the consensus between Board of Directors and the Auditors so that the stakeholders’ interests are not jeopardized. Such a transition should be phased in quarter reports such that, shift in policies in all the refineries should initiate this practice (bottom to top approach), or else it will lead to erroneous values at the time of consolidation of accounts at the Head Office.

List of figures:

Figure 1.1: Institutional Arrangements in India Figure 4.1: Asset management components
List of tables:

Table 1.1: Major units of IOCL

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Table 3.1: Comparison of Significant accounting policies at IOCL, HPCL, RPL & BPCL Table 6.1: Fault with Asset Accounting (1) Table 6.2: Fault with Asset Accounting (2) Table 6.3: Fault with Asset Accounting (3) Table 6.4: Fault with Asset Accounting (4) Table 6.5: Fault with Asset Accounting (5) Table 6.6: Fault with Asset Accounting (6)

Annexures:
Annexure 1. Depreciation Key Codes Schedule XVI, Companies Act, 1956 Annexure 2. IFRS 1 FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS

Bibliography
Books:
• Direct taxes Ready Reckoner – V. K. Singhania (A.Y. 2006-07 & 2007- 08; 29 th Edition; Taxmann Publications (P.) Ltd.)

Journal:
• • • Accounts manual Refineries Division – IOCL (2008) Closing Guidelines at IOCL, finance department (2006) Asset Accounting :SAP R/3 module for Asset Management

Annual Reports:

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(For comparison of significant accounting policies; ref: table 3.1) • • • • Indian Oil Corporation Ltd. (2006-2007) Hindustan Petroleum Corporation Ltd. (2006-2007) Reliance Petroleum Ltd. (2006-2007) Bharat Petroleum Corporation Ltd. (2006-2007)

Websites:
• • • www.iocl.com www.ibef.org www.icai.org

Search Engines:
• • • www.google.com www.wikipedia.com www.rediff.com

References:
• Accounting Standards & Corporate Accounting Practices – T.P. Ghosh (7th Edition; Taxmann Allied Services Pvt. Ltd.) • International Financial Reporting Standards (IFRSs) (International Accounting Standards Board; Taxmann Publications (P.) Ltd)