Mandatory Accounting Standards and

their application in financial statements

A Case study of Bharat Petroleum (BPCL)

Submitted By,
Shanker Kundnani
Shweta Joshi
Subodh Ghosalkar
Vinith Poojary
Zinal Shah

Under the guidance of

L.N.Chopde

MET Institute of Management

Preface

1
The objective of this project is to study the application of
the mandatory accounting standards issued by ICAI in
Companies.
For this purpose, we have taken a case study of Bharat
Petroleum.
Bharat Petroleum Corporation Limited (BPCL) (BSE:
500547|NSE: BPCL) is one of the largest state-owned oil
and gas company in India, with Fortune Global 500 rank
of 287 (2008). Its corporate office is located at Ballard
Estate, Mumbai. As the name suggests, its interests are in
downstream petroleum sector. It is involved in the
refining and retailing of petroleum products.
Bharat Petroleum is considered to be a pioneer in Indian
petroleum industry with various path-breaking initiatives
such as Pure for Sure campaign, Petro card, Fleet card
etc.
BPCL's growth post-nationalisation (in 1976) has been
phenomenal. One of the single digit Indian
representatives in the Fortune 500 & Forbes 2000
listings, BPCL is often referred to as an “MNC in PSU
garb”. It is considered a pioneer in marketing initiatives,
and employs “Best in Class” practices.
Being a pioneer in its field and a big PSU, it becomes the
responsibility of the company to set high standards in
regards to compliance of accounting rules and
regulations.

2
For the study we have taken into consideration two
Accounting standards namely;
AS 1(Disclosure of Accounting Policies) and AS
6(Depreciation Accounting)

Acknowledgement

3
 Executive Summary

In this project we have studied how does BPCL account

for its fixed assets and investments and the system it has
in place for the same, keeping in mind the compliance of
the mandatory Accounting Standards issued by the ICAI
(Institute of Chartered Accountants of India).

4
 AS 1(Disclosure of Accounting Policies)
Accounting Standard
1) All significant accounting policies adopted in the
preparation and presentation of financial statements
should be disclosed.
2) The disclosure of the significant accounting policies as
such should form part of the financial statements and
the significant accounting policies should normally be
disclosed in one place.
3) Any change in the accounting policies which has a
material effect in the current period or which is
reasonably expected to have a material effect in later
periods should be disclosed. In the case of a change in
accounting policies which has a material effect in the
current period, the amount by which any item in the
financial statements is affected by such change should
also be disclosed to the extent ascertainable. Where
such amount is not ascertainable, wholly or in part, the
fact should be indicated.
4) If the fundamental accounting assumptions, viz. Going
Concern, Consistency and Accrual are followed in
financial statements, specific disclosure is not required.
If a fundamental accounting assumption is not
followed, the fact should be disclosed.

5
Explanation:
Fundamental Accounting Assumptions
Certain fundamental accounting assumptions underlie the
preparation and presentation of financial statements.
They are usually not specifically stated because their
acceptance and use are assumed. Disclosure is necessary
if they are not followed.
The following have been generally accepted as
fundamental accounting
assumptions:—
a. Going Concern
The enterprise is normally viewed as a going concern,
that is, as continuing in operation for the foreseeable
future. It is assumed that the enterprise has neither the
intention nor the necessity of liquidation or of curtailing
materially the scale of the operations.
b. Consistency
It is assumed that accounting policies are consistent from
one period to another.
c. Accrual
Revenues and costs are accrued, that is, recognised as
they are earned or incurred (and not as money is
received or paid) and recorded in the financial statements
of the periods to which they relate.
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Disclosure of Accounting Policies
1) To ensure proper understanding of financial
statements, it is necessary that all significant
accounting policies adopted in the preparation and
presentation of financial statements should be
disclosed.
2) Such disclosure should form part of the financial
statements.
3) It would be helpful to the reader of financial
statements if they are all disclosed as such in one
place instead of being scattered over several
statements, schedules and notes.
4) Examples of matters in respect of which disclosure
of accounting policies adopted will be required are
contained in paragraph 14. This list of examples is
not, however, intended to be exhaustive.
5) Any change in an accounting policy which has a
material effect should be disclosed. The amount by
which any item in the financial statements is affected
by such change should also be disclosed to the
extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be
indicated. If a change is made in the accounting
policies which has no material effect on the financial
statements for the current period but which
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 reasonably expected to have a material effect in
later periods, the fact of such change should be
appropriately disclosed in the period in which the
change is adopted.
6) Disclosure of accounting policies or of changes
therein cannot remedy a wrong or inappropriate
treatment of the item in the accounts.

BPCL’s Compliance of AS 1

BPCL thoroughly complies with AS 1 by way of disclosing

significant accounting policies in Schedule ‘X’ as part of
its annual reports.
Following is the disclosures as per Schedule ‘X’ for year
2009-2010

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A. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS FOR PREPARATION
The financial statements are prepared under historical
cost convention to comply in all material aspects with the
mandatory Accounting Standards notified by the
Companies (Accounting Standards) Rules 2006 and the
provisions of the Companies Act, 1956, adopting accrual
system of accounting unless otherwise stated.

2. USE OF ESTIMATES
The preparation of financial statements requires
management to make certain estimates and assumptions
that affect the amounts reported in the financial
statements and notes thereto. Differences between
actual amounts and estimates are recognised in the
period in which they materialise.

3. FIXED ASSETS
3.1 LAND
Land acquired on lease where period of lease exceeds 99
years is treated as freehold.
3.2. FIXED ASSETS OTHER THAN LAND

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3.2.1. Fixed Assets are stated at cost of acquisition
(including incidental expenses) less accumulated
depreciation.
3.2.2. Expenditure on assets, other than plant and
machinery, LPG cylinders and pressure regulators, not
exceeding Rs.1,000 per item is charged to revenue.
3.2.3. Machinery spares that are specific to a fixed asset
are capitalised along with the fixed asset.
Replacement of such spares is charged to revenue.
3.3. EXPENDITURE DURING CONSTRUCTION PERIOD
Direct expenses including borrowing cost incurred during
construction period on capital projects are capitalised.
Indirect expenses of the project group which are
allocated to projects costing Rs. 5 crores and
above are also capitalised. Crop compensation expenses
incurred in the process of laying pipelines are capitalised.
3.4. INTANGIBLE ASSETS
3.4.1. Cost of right of way that is perennial in nature is
not amortised.
3.4.2. Expenditure incurred for creating/acquiring other
intangible assets of Rs. 0.50 crores and above, from
which future economic benefits will flow over a period of
time, is amortised over the estimated

10
useful life of the asset or five years, whichever is lower,
from the time the intangible asset starts providing the
economic benefit.
3.4.3. In other cases, the expenditure is charged to
revenue in the year the expenditure is incurred.

4. IMPAIRMENT OF ASSETS
The values of fixed assets in respect of Cash Generating
Units are reviewed by the management for impairment at
each Balance Sheet date if events or circumstances
indicate that the carrying values may not be recoverable.
If the carrying value is more than the net selling price of
the asset or present value, the difference is recognized as
an
impairment loss.

5. BORROWING COSTS
Borrowing costs attributable to acquisition, construction
or production of qualifying asset are capitalised as part of
the cost of that asset, till the month in which the asset is
ready for use. Other borrowing costs are recognised as an
expense in the period in which these are incurred.

6. DEPRECIATION

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6.1. Depreciation on fixed assets is provided under the
straight line method, at rates prescribed under Schedule
XIV to the Companies Act, 1956, except in following
cases:
6.1.1. Premium paid for acquiring leasehold land for lease
period not exceeding 99 years, is amortised over the
period of lease.
6.1.2. LPG cylinders, pressure regulators and other fixed
assets costing not more than Rs 5,000 each are
depreciated @ 100 percent in the year of capitalisation.
6.1.3. Assets not owned by the Corporation are amortised
over a period of five years from the year of capitalisation.
6.1.4. Computer equipments and peripherals, and mobile
phones are depreciated over a period of four years.
Furniture provided at the residence of management staff
is depreciated over a period of seven years.
6.2. Depreciation is charged on addition / deletion on pro-
rata monthly basis including the month of addition /
deletion.

7. INVESTMENTS
7.1. Current investments are valued at lower of cost or
fair market value.
7.2. Long-term investments are valued at cost. Provision
for diminution is made to recognise a decline, other than
of temporary nature, in the value of such investments.
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8. INVENTORY
8.1. Raw material and Intermediates are valued at cost or
net realisable value whichever is lower. Cost is
determined as follows:
8.1.1. Raw materials on weighted average cost.
Purchased raw materials in transit are carried at cost.
8.1.2. Intermediate Stocks at raw material cost plus cost
of conversion.
8.2. Finished products are valued at weighted average
cost or at net realisable value, whichever is lower.
8.3. Stores are valued at weighted average cost. Obsolete
stores are valued at Re. Nil. Slow moving stores/ other
materials identified as surplus and no longer usable are
valued at Re. Nil.
8.4. Packages are valued at weighted average cost or at
net realisable value, whichever is lower.

9. REVENUE RECOGNITION
9.1. Sales are net of trade discounts and include, inter
alia, excise / customs duties / claim from Petroleum
Planning and Analysis Cell, Government of India and
other elements allowed by the Government from time to
time

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9.2. Claims/Surrenders including subsidy on LPG and SKO
on/to Petroleum Planning and Analysis Cell, Government
of India are booked on `in principle acceptance’ thereof
on the basis of available instructions/clarifications subject
to final adjustments after necessary audit, as stipulated.
Adjustments if any, on completion of audit
are recognised.
9.3. Other claims are booked when there is a reasonable
certainty of recovery. Claims are reviewed on a periodical
basis and if recovery is uncertain, provision is made in
the accounts.
9.4. Income from sale of scrap is accounted for on
realisation.

10. CLASSIFICATION OF INCOME/EXPENSES

10.1. Expenditure on Research, other than capital
expenditure, is charged to revenue in the year in which
the
expenditure is incurred.
10.2. Income/expenditure upto Rs. 0.05 crore in each
case pertaining to prior years is charged to the current
year.
10.3. Prepaid expenses upto Rs. 0.05 crore in each case,
are charged to revenue as and when incurred.

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10.4. Deposits placed with Government agencies/ local
authorities which are perennial in nature are charged to
revenue in the year of payment.

11. EMPLOYEE BENEFITS

11.1. Contributions to Provident Fund for the year are
recognised in the Profit & Loss Account.
11.2. The liability towards gratuity, leave encashment,
post retirement benefits and other long term benefits are
provided for in the accounts based on actuarial valuation
as at the end of the year. To determine the present value
of the defined benefit obligations and the current and
past service costs, the Projected Unit Credit Method is
used. Actuarial gains and losses are recognised in the
Profit & Loss Account as income or expense.

12. DUTIES ON BONDED STOCKS

12.1. Customs duty on Raw materials/Finished goods
lying in bond are provided for at the applicable rates
except where liability to pay duty is transferred to
consignee.
12.2. Excise duty on finished stocks lying in bond is
provided for, at the assessable value applicable at each
of the locations at maximum rates based on end use.

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13. FOREIGN CURRENCY & DERIVATIVE TRANSACTIONS
13.1. Transactions in foreign currency are accounted at
the exchange rate prevailing on the date of transaction.
13.2. Monetary items denominated in foreign currency
are converted at exchange rates prevailing on the date of
Balance Sheet.
13.3. Foreign Exchange differences arising at the time of
translation or settlement are recognised as income or
expense in the Profit & Loss Account either under foreign
exchange fluctuations or interest as the case may be.
Premium/discount arising at the inception of the forward
exchange contracts entered into to hedge foreign
currency risks are amortised as expense or income over
the life of the contract. Exchange differences on such
contracts are recognised in the Profit & Loss Account.
13.4. Gains / losses arising on settlement of Derivative
transactions entered into by the Corporation to manage
the commodity price risk and exposures on account of
fluctuations in interest rates and foreign exchange are
recognised in the Profit & Loss Account. Provision for
losses in respect of outstanding contracts as on balance
sheet date is made based on mark to market valuations
of such contracts.

14. GOVERNMENT GRANTS

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14.1. In case of depreciable assets, the cost of the asset
is shown at gross value and grant thereon is taken to
Capital Reserve as deferred income, which is recognised
in the Profit & Loss Account over the useful life of the
asset.
14.2. Government grants of the nature of promoters’
contributions are credited to Capital Reserve and treated
as part of Shareholders’ Funds.

15. PROVISIONS, CONTINGENT LIABILITIES AND

CAPITALCOMMITMENTS
15.1. Provision is recognised when there is a present
obligation as a result of a past event and it is probable
that an outflow of resources will be required to settle the
obligation in respect of which a reliable estimate can be
made.
15.2. Contingent liabilities are disclosed in respect of
possible obligations that arise from past events but their
existence is confirmed by the occurrence or non-
occurrence of one or more uncertain future events not
wholly within the control of the Corporation.
15.3. Capital commitments and Contingent liabilities
disclosed are in respect of items which exceed Rs.0.05
crores in each case.
15.4. Contingent liabilities are considered only on
conversion of show cause notices issued by various
Government authorities into demand.
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16. TAXES ON INCOME
16.1. Provision for current tax is made in accordance with
the provisions of the Income Tax Act, 1961.
16.2. Deferred tax on account of timing difference
between taxable and accounting income is provided
using the tax rates and tax laws enacted or substantively
enacted by the Balance Sheet date.
16.3. Deferred tax assets are not recognised unless, in
the management judgement there is a virtual certainty
supported by convincing evidence that sufficient future
taxable income will be available against which such
deferred tax assets can be realised.

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 AS 6 (Depreciation Accounting)

Accounting Standard
1) The depreciable amount of a depreciable asset
should be allocated on a systematic basis to each
accounting period during the useful life of
the asset.
2) The depreciation method selected should be applied
consistently from period to period. 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

19
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.
In case the change in the method results in deficiency in
depreciation in respect of
past years, the deficiency should be charged in the
statement of profit and loss. In case the change in the
method results in surplus, the surplus should be credited
to the statement of profit and loss. Such a change should
be treated as a change in accounting policy and its effect
should be quantified and disclosed.
3) The useful life of a depreciable asset should be
estimated after considering the following factors:
(i) expected physical wear and tear;
(ii) obsolescence;
(iii) legal or other limits on the use of the asset.
4) 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 unamortised depreciable

20
amount should be charged over the revised remaining
useful life.
5) 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.
6) Where the historical cost of a depreciable asset has
undergone a change due to increase or decrease in long
term liability on account of
exchange fluctuations, price adjustments, changes in
duties or similar
factors, the depreciation on the revised unamortised
depreciable amount should be provided prospectively
over the residual useful life of the asset.
7) 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
21
 material effect on the amount of depreciation, the same
should be disclosed separately in the year in which
revaluation is carried out.
8) If any depreciable asset is disposed of, discarded,
demolished or destroyed, the net surplus or deficiency, if
material, should be disclosed
separately.
9) The following information should be disclosed in the
financial statements:
(i) the historical cost or other amount substituted for
historical
cost of each class of depreciable assets;
(ii) total depreciation for the period for each class of
assets; and
(iii) the related accumulated depreciation.
10) The following information should also be disclosed in the
financial statements along with the disclosure of other
accounting policies:
(i) depreciation methods used; and
(ii) depreciation rates or the useful lives of the assets, if
they are
different from the principal rates specified in the
statute
governing the enterprise.

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Explanation:
Depreciation has a significant effect in determining and
presenting the
financial position and results of operations of an
enterprise. Depreciation is charged in each accounting
period by reference to the extent of the depreciable
amount, irrespective of an increase in the market value of
the assets.
1) Assessment of depreciation and the amount to be
charged in respect thereof in an accounting period are
usually based on the following three factors:
(i) historical cost or other amount substituted for the
historical cost
of the depreciable asset when the asset has been
revalued;
(ii) expected useful life of the depreciable asset; and
(iii) estimated residual value of the depreciable asset.
2) Historical cost of a depreciable asset represents its
money outlay or its equivalent in connection with its
acquisition, installation and commissioning as well as for
additions to or improvement thereof. The historical cost
of a depreciable asset may undergo subsequent changes
arising as a result of increase or decrease in long term

23
liability on account of exchange fluctuations, price
adjustments, changes in duties or similar factors.
3) The useful life of a depreciable asset is shorter than
its physical life and is:
(i) pre-determined by legal or contractual limits, such as
the expiry
dates of related leases;
(ii) directly governed by extraction or consumption;
(iii) dependent on the extent of use and physical
deterioration on
account of wear and tear which again depends on
operational
factors, such as, the number of shifts for which the
asset is to be
used, repair and maintenance policy of the enterprise
etc.; and
(iv) reduced by obsolescence arising from such factors as:
(a) technological changes;
(b) improvement in production methods;
(c) change in market demand for the product or service
output
of the asset; or
(d) legal or other restrictions.

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4) Determination of the useful life of a depreciable asset is
a matter of
estimation and is normally based on various factors
including experience with similar types of assets. Such
estimation is more difficult for an asset using new
technology or used in the production of a new product or
in the provision of a new service but is nevertheless
required on some reasonable basis.
5) Any addition or extension to an existing asset which is of
a capital nature and which becomes an integral part of
the existing asset is depreciated over the remaining
useful life of that asset. As a practical measure, however,
depreciation is sometimes provided on such addition or
extension at the rate which is applied to an existing
asset. Any addition or extension which retains a separate
identity and is capable of being used after the existing
asset is disposed of, is depreciated independently on the
basis of an estimate of its own useful life.
6) Determination of residual value of an asset is normally a
difficultmatter.
If such value is considered as insignificant, it is normally
regarded as nil. On the contrary, if the residual value is
likely to be significant, it is estimated at the time of
acquisition/installation, or at the time of subsequent
revaluation of the asset. One of the bases for determining
the residual value would be the realisable value of similar
assets which have reached the end of their useful lives

25
 and have operated under conditions similar to those in
which the asset will be used.
7) The quantum of depreciation to be provided in an
accounting period
involves the exercise of judgement by management in
the light of technical, commercial, accounting and legal
requirements and accordingly may need periodical
review. If it is considered that the original estimate of
useful life of an asset requires any revision, the
unamortised depreciable amount of the asset is charged
to revenue over the revised remaining useful life.
8) There are several methods of allocating depreciation
over the useful
life of the assets. Those most commonly employed in
industrial and
commercial enterprises are the straightline method and
the reducing balance method. The management of a
business selects the most appropriate method(s) based
on various important factors e.g., (i) type of asset, (ii) the
nature of the use of such asset and (iii) circumstances
prevailing in the business. A combination of more than
one method is sometimes used. In respect of depreciable
assets which do not have material value, depreciation is
often allocated fully in the accounting period in which
they are acquired.
9) The statute governing an enterprise may provide the
basis for computation of the depreciation. For example,

26
 the Companies Act, 1956 lays down the rates of
depreciation in respect of various assets. Where the
management’s estimate of the useful life of an asset of
the enterprise is shorter than that envisaged under the
provisions of the relevant statute, the depreciation
provision is appropriately computed by applying a higher
rate. If the management’s estimate of the useful life of
the asset is longer than that envisaged under the statute,
depreciation rate lower than that envisaged by the
statute can be
applied only in accordance with requirements of the
statute.
10) Where depreciable assets are disposed of, discarded,
demolished or
destroyed, the net surplus or deficiency, if material, is
disclosed separately.
11) The method of depreciation is applied consistently to
provide
comparability of the results of the operations of the
enterprise fromperiod to period. A change from one
method of providing depreciation to another is 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 is
recalculated in accordance with the new method from the
27
 date of the asset coming into use. The deficiency or
surplus arising from retrospective recomputation of
depreciation in accordance with the new method is
adjusted in the accounts in the year in which the method
of depreciation is changed. In case the change in the
method results in deficiency in depreciation in respect of
past years, the deficiency is charged in the statement of
profit and loss. In case the change in the method results
in surplus, the surplus is credited to the statement of
profit and loss. Such a change is treated as a change in
accounting policy and its effect is quantified and
disclosed.

Disclosure
1) The depreciation methods used, the total
depreciation for the period for each class of assets, the
gross amount of each class of depreciable assets and the
related accumulated depreciation are disclosed in the
financial statements alongwith the disclosure of other
accounting policies. 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.
2) In case the depreciable assets are revalued, the
provision for depreciation is based on the revalued
amount on the estimate of the remaining useful life of
such assets. In case the revaluation has a material effect

28
 on the amount of depreciation, the same is disclosed
separately in the year in which revaluation is carried out.
3) A change in the method of depreciation is treated as a
change in an
accounting policy and is disclosed accordingly.

BPCL’s Compliance of AS 6

BPCL has fairly large number of fixed assets. As such

depreciation accounting is an important part of the whole
accounting process and its compliance with the
Accounting standard is very important.
The disclosures regarding depreciation is done as per the
Accounting standard in Schedule ‘D’ (Fixed Assets) and
Schedule ‘X’ (Disclosures)

29
Disclosures in Schedule ‘X’
DEPRECIATION
1) Depreciation on fixed assets is provided under the
straight line method, at rates prescribed under
Schedule XIV to the Companies Act, 1956, except in
following cases:
2) Premium paid for acquiring leasehold land for lease
period not exceeding 99 years, is amortised over the
period of lease.

30
3) LPG cylinders, pressure regulators and other fixed
assets costing not more than Rs 5,000 each are
depreciated @ 100 percent in the year of capitalisation.
4) Assets not owned by the Corporation are amortised
over a period of five years from the year of
capitalisation.
5) Computer equipments and peripherals, and mobile
phones are depreciated over a period of four years.
Furniture provided at the residence of management
staff is depreciated over a period of seven years.
6) Depreciation is charged on addition / deletion on pro-
rata monthly basis including the month of addition /
deletion.

31