Manual-formatted

Annexure – 1.5 Sample Format of Balance Sheet Main Accounts INDEX Page 42

Main Accounts Page 43

Sample Format of Statement of Profit and Loss Main Accounts Page 44

Main Accounts Page 45

Sample Format of Statement of Changes in Equity (SOCIE) Main Accounts Page 46

Main Accounts Page 47

Main Accounts Page 48

Main Accounts Page 49

Fixed Assets Page 50

CHAPTER 2 : FIXED ASSETS 2A. PROPERTY, PLANT AND EQUIPMENT 2.1 BACKGROUND This chapter deals with the recognition principles, depreciation requirements, measurement criteria and disclosure requirements of tangible assets. Following is a brief summary of various assets, IOCL has invested in: a. Land- freehold b. Buildings, Roads etc. c. Plant and equipment d. Office Equipment e. Transport equipment f. Railway sidings g. Drainage, Sewage and Water supply system h. Furniture and fixtures i. ROU Assets 2.2 REFERENCES TO AUTHORITATIVE LITERATURE Indian Accounting Standards issued by the Central government in consultation with National Advisory Committee on Accounting Standards (‘NACAS’) a. Ind AS - 16 Property, plant and equipment b. Ind AS – 21 The Effect of Changes in Foreign Exchange Rates c. Ind AS – 23 Borrowing Costs d. Ind AS – 36 Impairment of Assets e. Ind AS – 105 Non-current assets held for sale f. Ind AS - 116 Leases Ind- AS Compliant Schedule II and III to Companies Act 2013 2.3 RECOGNITION AND MEASUREMENT OF PROPERTY, PLANT AND EQUIPMENT This part explains the following areas: a. Recognition Criteria b. Initial Measurement c. Modalities of Capitalization- Standalone assets v/s Plant & Machinery d. Capitalization guidelines for different types of projects e. Construction Work in Progress and Capital Advances f. Commissioning Fuel and Unit Hold Up g. Capital Goods in Transit h. Accounting of Enabling Assets i. Accounting for Spares j. Subsequent Expenditure k. The effect of changes in Foreign Exchange rates l. Borrowing Costs Fixed Assets INDEX Page 51

m. Recovery n. Accounting treatment of left-over materials, mandatory spares & Scrap 2.3.1 Recognition Criteria The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: a. it is probable that future economic benefits associated with the item will flow to the entity; and b. the cost of the item can be measured reliably. (Para 7 of Ind AS 16) Items such as spare parts, stand-by equipment and servicing equipment are recognized in accordance with this Ind AS when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. (Para 8 of Ind AS 16) The Standard does not prescribe the unit of measure for recognition, i.e. what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as molds, tools and dies, and to apply the criteria to the aggregate value. (Para 9 of Ind AS 16) An entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. (Para 10 of Ind AS 16) Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets. Such items of property, plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired. For example, a chemical manufacturer may install new chemical handling processes to comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognized as an asset because without them the entity is unable to manufacture and sell chemicals. However, the resulting carrying amount of such an asset and related assets is reviewed for impairment in accordance with Ind AS 36, Impairment of Assets. (Para 11 of Ind AS 16) 2.3.2 Initial Measurement An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost. 2.3.3 Elements of Cost The cost of an item of property, plant and equipment comprises: a. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. Fixed Assets Page 52

b. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. c. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. (Para 16 of Ind AS 16) 2.3.3.1 Examples of directly attributable costs are: a. costs of employee benefits (as defined in Ind AS 19, Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment; b. costs of site preparation; c. initial delivery and handling costs; d. installation and assembly costs; e. costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and f. professional fees. (Para 17 of Ind AS 16) 2.3.3.2 Examples of costs that are not costs of an item of property, plant and equipment are: a. costs of opening a new facility; b. costs of introducing a new product or service (including costs of advertising and promotional activities); c. costs of conducting business in a new location or with a new class of customer (including costs of staff training); and d. administration and other general overhead costs. (Para 19 of Ind AS 16) • However, any trade discount/ rebate, GST & Input Tax credit should be excluded from cost. Thus, Cost of acquisition of asset shall include all expenses incurred for bringing the asset into existence and up to the stage asset is ready for commissioning. • For movable items of assets like transport equipment, workshop equipment, movable items of plant & machinery, equipment & appliances, furniture & fixtures and other sundry assets, the acquisition cost would mean the purchase cost plus transportation and other direct incidental expenses. No overhead is to be allocated to such items. Any differences arising due to variations between PO conditions and actual expenses considered at the time of MIRO needs to be accounted for at the time of capitalization. 2.3.4 Modalities of Capitalization This is divided into two sections namely: - • Capitalization of standalone assets like Land, Buildings, Furniture & Fixtures, Office Equipment, Transportation Equipment and Drainage/ Sewage etc. • Capitalization of Plant & Equipment and other allied assets inter linked with Plant & Equipment The modalities for capitalization in respect of each of the category of the assets are as under: Fixed Assets Page 53

2.3.5 Capitalization of Land, Buildings, Furniture & Fixtures, Office Equipment, Transportation Equipment and Drainage/ Sewage etc. Capitalization in respect of the following facilities/ assets will normally not depend on the type of the project to which it belongs. Capitalization is to be done as per following guiding factors: • Cost of Freehold Land is to be independently capitalized on acquiring possession of the same. Land leases are now covered as part of Ind-AS-116. Accordingly, for its accounting treatment, please refer chapter-3 on ‘Leases’. In case of land or building pending for registration, provision for Stamp duty / registration charges payable should also be made and capitalized at the prevailing rate on the date of Balance Sheet. Subsequent updation of the provision of stamp duty should be made when the liability is frozen either through the demand letter from the authority with whom the title / lease deeds is to be executed or payment made whichever is earlier. Cost of Buildings, Roads, etc are to be independently capitalized as and when they are ready for use. Boundary wall is to be independently capitalized on completion of the same. • Cost of Furniture & Fixtures, Office Equipment & Appliances and Transportation Equipment are to be capitalized when they are installed/ ready for use. • Capitalization of Drainage/ Sewage etc. is to be done on the date when the construction work is completed and ready for use. • Where several fixed assets are purchased for a consolidated price consideration, the same should be apportioned to various assets on a fair basis as determined by Engineering Department. Capitalisation process involved in case of Land, Building & Roads is described below: a. Perpetual lease cases and leases where ownership is going to be transferred to IOCL needs to be considered as freehold land. If required, this may be substantiated based on legal opinion. Other leases to be accounted for based on the lease principles prescribed in Ind- AS-116. b. Other direct incidental expenses incurred in connection with the purchase/acquisition of the land viz. Legal costs, stamp duties and fees etc. and other direct expenses incurred in acquiring the land should form part of the land cost. c. Land development expenditure which is incurred to provide advantage of enduring benefit to the business is a capital expenditure. Other expenditure incurred on land i.e. the expenditure which is not expected to generate future benefit should not be capitalised and should be written off in the year in which it is determined for example subsequent expenditure incurred on landscaping, horticulture etc. The following principles emerging from ICAI EAC opinion on accounting treatment of expenditure incurred on development of leasehold land can also be referred: “As regards the expenditure on levelling and grading the land, it is submitted that this can be treated as an indirect cost of construction rather than as an additional cost relating to the land itself, having regard to the primary purpose for which this expenditure is incurred. Wherever possible, the expenditure on levelling, clearing and grading the land should be Fixed Assets Page 54

related with, and added to, the cost of the particular buildings or other structures which stand on each particular piece of land. Where this is not practicable, the total expenditure on levelling, clearing and grading the land may be apportioned among the different buildings and structures standing on the land in the ratio of the respective areas occupied by each such building or structure, or in any other suitable ratio. What is stated above in this context is not intended to imply that only that portion of the expenditure on levelling, clearing and grading the land can be capitalised, as an indirect cost of construction, which relates to the area of the land actually occupied by a building or other structure. It is recognised that, in practice, it may not be possible to occupy the entire land area by constructing a building or other structure thereon. If the entire land is reasonably occupied by buildings and other structures and if the expenditure on levelling, clearing and grading the land is reasonably incurred for the purpose of the construction, such expenditure can be treated entirely as an indirect cost of construction and capitalised as part of the cost of the buildings or other structures. However, any part of the expenditure on levelling, clearing and grading the land which is incurred for purposes of landscaping or for any other purposes, not connected with the construction of the project, should be treated as part of the cost of land. Dredging and reclamation cost should be capitalised as Land Cost if the benefit is of enduring nature and is necessary for making the land suitable for intended use.” d. The expenditure incurred on alternative land, as a pre-condition for obtaining the relevant piece of land shall be considered as a part of the cost of acquisition of the land. e. In case where the buildings have been purchased along with land and a lump sum price for both the items has been paid, then the total cost should be bifurcated between land and building and accounted for under the relevant heads of fixed assets. If the bifurcation of the cost between land and building is available in purchase documents, then the same should be adopted for bifurcation of the cost of land and building. In case where separate bifurcation of cost between land and building is not available, Engineering Department/ approved valuer should be requested to make a realistic assessment in this regard and should also take into consideration the prevailing market price of similar land in the neighborhoods. However, when any flat/ office space is procured for lump sum price there is no need for bifurcation between land and building and the same should be capitalised as part of the building. Wherever land/building is to be specifically registered in the name of IOC, Stamp Duty/ Registration Charges etc. paid/ payable to acquire a legal title to such assets should be added to the cost of fixed assets. f. Value of Shares in Co-operative Housing Societies towards membership of such Societies for purchase of flats should be reckoned as a part of the cost of the flat. g. In certain cases where the flats are purchased from the builders, maintenance charges of the complex are paid/payable to the builder/Society. Following accounting treatment should be given for such expenditure: - Fixed Assets Page 55

• Where the onetime lumpsum maintenance charges which are not giving exemption from the payment of monthly maintenance charges are paid to the builder alongwith the cost of flats, the same should be capitalised alongwith the cost of flat. • Where monthly maintenance charges are paid to the builder separately, who is required to maintain the complex till the time flats are finally handed over to the Society, such expenditure should be charged to revenue. • In case, the maintenance charges are paid as a lumpsum amount in advance based on the monthly maintenance charges payable to the builder/Society, such expenditure should be treated as prepaid expenses and necessary accounting treatment should be given as in the case of other prepaid expenses. h. As per Para 6 of Ind AS 16, Property, plant and equipment are held for use in the production or supply of goods or services, for rentals to others or for administrative purposes and are expected to be used during more than one period. Therefore, where a property (Land or building) is purchased, the same becomes an integral part of the existing asset or gross block even if the title deeds are not executed. Such asset in substance is owned by the company and, therefore, should be capitalized. However necessary disclosure with regard to land where title deeds have not been executed in favor of the company or are pending for renewal needs to be made. In accordance with the opinion obtained from Attorney General of India (AGI), the following three type of documents may be considered sufficient to establish valid title of the property. • Land acquired under Land Acquisition Act: In relation to land acquired under the Land Acquisition Act, the awards themselves mention that the acquired property will vest in the name of IOC free from all encumbrances. Handing over / taking over of reports should be complete. All amount payable in respect of possession etc. should be duly paid. With these actions, the vesting of the property and delivery of possession constitute complete title. • Residential flats backed by Share Certificates issued by Cooperative Housing Societies (CHS): The following qualifying facts are significant with regard to residential flats purchased from CHS where IOC is recognised as the shareholder (and member) by the CHS: - IOC is in quiet, peaceful, uninterrupted and continuous possession of flat. - IOC’s name has been duly recorded in the book of transfer of CHS. - IOC has paid consideration to the vendor. - IOC is regularly paying taxes, maintenance etc. - IOC has capitalised the purchase price in its books. - IOC has executed deed of conveyance with the vendor. - Necessary stamp duty and registration charges have been made; however, the registration is pending but IOC is having the Lodgment receipts. If the above conditions are fulfilled and IOC is having Lodgment Receipts issued by the Registering Authorities and Share Certificates issued by the CHS where the flat is situated, such documents may be considered adequate to establish the valid title to such properties. Fixed Assets Page 56

• Offer/allotment letter with possession where land is taken from or allotted by Government or Government like Bodies: If the conditions of the allotment letter have been fulfilled and complied with, the execution of lease deed is a mere formality. However, following important features should be examined in such cases: - - IOC is in quiet, peaceful, uninterrupted and continuous possession of flat and enjoying the same. - IOC has developed the allotted land for purpose it was allotted. - IOC has complied with all terms and conditions subject to which the allotment was made. - IOC has the copies of allotment letter along with handing over possession reports. - IOC’s name has been mutated in land records. - Premium has been paid to the competent authority. - Taxes and rent charges are regularly paid to the competent authority. - All necessary statutory clearances / permissions for enjoying of land have been obtained. - Premium / attributable expenses have been capitalised, wherever applicable. If IOC is in possession of any of the above documents, the properties backed by such documents may not be considered as properties in respect of which Title Deeds are pending execution for the purpose of disclosure. i. Cost of Buildings, Roads, etc. are to be independently capitalized as and when they are ready for intended use. Boundary wall for instance in case of a project site is to be independently capitalized on completion of the same. j. For the purposes of Capitalisation assets may be grouped category wise e.g. each dwelling unit shall be taken as one Unit and quarters belonging to one uniform category and design shall be capitalised together giving the total number of such quarters in the asset description. 2.3.6 Capitalization of Plant & Equipment The following factors need to be analyzed before deciding the date of capitalization of each asset: a. Whether the asset to be capitalized is completed and ready for intended use. Ready for intended use in case of production units means ready for commercial production. The term commercial production refers to commercial production in commercially feasible quantity and commercially feasible manner. The word intended use is of prime importance. For example, if a plant is designed to produce two main products and only one product is meeting the specifications as desired then the plant cannot be capitalised because the plant is not ready for intended use i.e. to produce two products. Similarly, some facilities are intended to meet environmental norms, they should be capitalised only when the facility achieves the desired emission norms. Fixed Assets Page 57

b. Whether the usage of the asset is dependent on the completion/ commissioning of linked assets or the usage of the asset is independent. Where the usage of any asset is directly linked with other facilities without which the former technically/ mechanically or otherwise cannot be put to use, such assets should not be deemed to be ready for use and hence not reckoned for capitalisation till the associated facilities are capitalised and connected with these facilities for rendering the same as usable. c. Whether the trial run is required before commissioning. If trial run is required, whether the same has to be conducted and whether satisfactory completion of trial run needs to be achieved. Successful completion of trial run is must before considering any facility to be ready for commissioning. If optimum capacity utilization or designed parameters with regard to temperature, pressure etc. are not met during trial runs due to non-availability of desired inputs/ utilities then readiness of the plant has to be assessed in consultation with the technical department. 2.3.7 Capitalisation guidelines for different types of projects: There are three categories of projects in IOCL viz. Grassroot projects, expansion of existing units or revamp/ modification of existing Assets and independent assets: 2.3.7.1 Grassroot Projects Grassroots projects like Refineries and Petrochemicals generally comprise of the following Units and Associated Facilities Main Process Units-Refinery- AVU which consists of CDU and VDU, connecting treating units for LPG, ATF, Kerosene, Naphtha, HSD, etc. on the commissioning of which major refinery products like HSD, SKO, LPG, Naphtha, ATF and LSHS can be produced and sold. Main Processing Units-Petrochemicals- LAB, PX/PTA and Naphtha Cracker Plant which consists C4 Hydrogenation Unit, Pyrolysis Hydrogenation unit, Benzene Extraction Unit, Butadiene Extraction Unit Secondary Processing Units (Refinery) like FCCU, Hydrocracker Unit, DCU etc., which is used for further processing to obtain middle and lighter distillates. Secondary Processing Units (Petrochemicals) like LLDPE, HDPE, PP Unit, MEG unit Associated Facilities like Crude Oil Tanks, Power Plants (Utility Boilers, GT's STG's), Flare, Utilities- Compressed Air. N2/O2/H2, ETP, Raw Water treatment, Cooling Tower, DM Water etc. Pipeline System for bringing the crude to the Refinery and movement of products to various up- country locations Product Storage Tanks and Distribution System including LPG plant, Lube Plants etc. and other infrastructure for marketing of the finished products. The methodology for capitalization in respect of Grassroots projects like Refineries is given below: a. Facilities like SBM, Storage Tanks and Crude Oil Pipeline are to be capitalized when they are ready for use after completion of necessary testing and commissioning formalities Fixed Assets Page 58

b. Refinery Crude Tanks are to be capitalized when they are ready to receive the crude oil in the tanks and no further testing is required in respect of these assets. Also, it is to be ensured that necessary statutory clearances are in place. Similarly, Crude Oil Pipeline should be capitalized when they are Ready for use after testing and commissioning c. The Main Processing Unit is to be capitalized when the same is stabilized for achieving commercial production in commercially feasible quantities and commercial feasible manner after successful completion of all trial runs as the major products produced from the Main Unit are intended to be sold directly in the market. d. The Secondary Processing Units are to be independently capitalized after they have stabilized for achieving commercial production in commercially feasible quantities and commercial feasible manner after completion of all trial runs. e. Power Plants are to be capitalized when they are ready for use after completion of trial runs of the respective Power Plants. Other Utilities connected to the power plants are to be capitalized when they are ready for intended use in the respective Power Plants. For example, DM water is mainly getting utilized in Power Plant Utility Boiler & HRSG for generation of steam hence DM plant should be capitalized when it is ready to provide DM water to power plant. f. Utilities connected to the Main Units are to be capitalized when they are ready for intended use in the Main Units. Similarly, Utilities connected to the Secondary Processing Units are to be capitalized when they are ready for intended use in the Secondary Processing Units. g. Product tank are to be capitalized when they are ready to receive the product into the tanks as no further testing is required in respect of these assets. The dispatch facilities are to be capitalized when they are ready for use. Further, if the facilities can be utilized independent of the commissioning of the Refinery, the same should be capitalized as and when they are ready for use independently and should not be linked to the Refinery. h. Dependent facilities should be capitalized along with the main asset while independent facilities should be capitalized when they are ready for intended use irrespective of Main Asset. i. Shore tanks should be capitalized when they are ready to receive the crude/ product either directly from shore vessel or from SBM as the case may be for use after completion of all formalities j. Product Pipeline should be capitalized when they are ready for discharging the product at the receiving end k. Construction period expenses are allocated on all construction jobs including factory erection, water supply and sewage network and township quarters etc. However, the temporary assets in the nature of construction site requirement shall be excluded from such allocation. In case of phase-wise Capitalisation of a project, whenever a particular phase of the project, is to be capitalised and the remaining phase is still under construction, the construction period expenses upto the date of Capitalisation of a particular phase shall be worked out and allocated to capitalised assets and under construction assets on the basis of total direct cost incurred on the 'capitalised assets' and 'under construction assets'. The construction period expenses incurred after the date of Capitalisation of a particular phase of the project, shall be allocated only to the remaining phases of the project under construction along with the share of the expenditure allocated to the project under construction at the time of last phase of Capitalisation. Fixed Assets Page 59

The table below provides a summarized view on various expenses incurred on project and its treatment: Expenses relating Treatment to Project Project Consultancy charges payable to PMC is to be allocated to respective Management units on the basis of original Contract value of the jobs under consultant (PMC). respective PMC’s. In case of change orders, the allocation of incremental cost should be done according to the revision in the scope of PMC's job. Utilities (like Consumption done till the date of capitalisation of utility/Unit shall be capitalized & there after it shall be expensed. Common utilities Nitrogen, Oxygen consumed shall be allocated among the various units/utilities in the ratio designed parameters for utilities consumption. etc.) & Consumables Construction Specific Power consumed during construction shall be capitalized Power, along with the individual unit. Commissioning General construction power shall be allocated amongst the facilities Fuel and fuel used in the ratio of their designed parameters for power consumption. during Trial run Fuel consumed during commissioning/ trial run is capitalised directly operation in the cost of the unit/facility in which it is used. Fuel consumed during commissioning/ trial run beyond specified Royalty & Engg period is charged to profit & loss account Fees Any revenue generated during trial run should be netted off against the trail run expenses and accordingly capitalized. Per diem charges Technical knowhow/ license fees relating to plants and facilities and specific software that are integral part of the related hardware are Technical capitalized as part of cost of the underlying asset Assistance fees The same is to be capitalized as & when such process plant is CPE Recoveries capitalized. The same shall be apportioned between Process unit if it is of general nature. CPE expenses net of recoveries should be allocated/ capitalized to individual facilities 2.3.8 Expansion of existing units The methodology to be followed is same as for Grassroot except for capitalization of assets as under- In case, the new Main Unit being constructed is not yet ready for use but the Secondary Processing Units is complete and necessary trial runs have been carried out by linking the Secondary Processing Units with the Main Units of existing refinery, then the capitalization of the Secondary Processing Units should be done on achieving commercial production in a commercially feasible quantities/ manner without waiting for the completion of the new Main Unit. Fixed Assets Page 60

In case Utilities & Facilities like Power Plant etc. are linked with the existing refinery system/pool and production from the utility plant is ready for utilization in the existing refinery irrespective of the readiness of the Units under expansion for which these utilities are required, such utilities should be capitalized on the date when the same is ready for use in the existing refinery. 2.3.9 CGD Projects S.No. Asset Point of Capitalization 1 City Gate Station (CGS) CGS is to be capitalized after mechanical completion & 2 obtaining all mandatory statutory clearances and readiness to 3 Pipeline Infrastructure (Steel receive the gas for supplying to downstream network. & MDPE Pipelines) 4 Steel & MDPE Pipeline can be capitalized section-wise when 5 CNG Infrastructure It is mechanically completed and hydro tested, all mandatory statutory clearances have been obtained and Industrial/Commercial it is ready for transmission of gas Connections PNG Infrastructure CNG Infrastructure like Civil Structure, Custody Transfer Metering, , Supervisory Control & Data Acquisition System, Compressor, Generators, Dispensers, fire extinguishers, etc. are to be capitalised when these are mechanically completed / installed, successfully tested, all mandatory statutory clearances have been obtained (wherever required) and when these are available for intended use. Industrial/Commercial connections to be capitalized after mechanical completion, receipt of all mandatory statutory clearances and its readiness to supply/ receive gas. PNG facilities (DRS, MDPE pipe, Meters, etc.) will be capitalised on installation and successful calibration. Consumables like GI pipes, copper pipes, connectors etc. will be charged to revenue. 2.3.10 Independent assets Independent Plant & Machinery items like Generators, pump sets, Fire Extinguishers, etc. are to be capitalized on the date of installation/ successful testing of the same or when they are ready for use as the case may be. 2.3.11 Construction Work in Progress & Capital Advances 2.3.12 Construction Work in Progress a. The progress reports of CWIP should be obtained from Engineering Department/ Project Office in respect of all works under construction and the same should be reviewed so as to ensure that all completed works are capitalised and transferred to assets. b. At the end of the year, Units should review the account balances of “Work-in-Progress or Construction Period Expenses pending allocation”. Any scheme appearing in “Work-in- progress” without any addition in the expenditure on that scheme during the year should Fixed Assets Page 61

be reviewed in detail and necessary adjustments carried out in the books of accounts. Justification should be obtained in respect of old items appearing in “Work-in-progress”. In respect of all old items appearing in the work-in-progress account and capital stores account, full justification should be obtained by the Units indicating therein the reasons as to why these old items still continue to appear in the work-in-progress account (Work in Progress report can be generated in SAP by T-code AR01 and selecting Asset class as A*, sort version Z003 and clicking listing asset button). c. Work done on behalf of the other Unit/ Division shall be first capitalised and shown in Note- 2 under the column transfer from CWIP. And there after it shall be transferred from Note- 2 to the concerned Unit/ Division by reflecting under the column Inter-Unit/ Division transfer. d. Work on capital account started during the year and completed during the same year shall also be routed through work-in-progress and shown as ‘Transfer from Construction Work- in-Progress’ in Note-2. e. Liability is to be provided for works completed upto the date of Balance Sheet. All the amount paid to the contractors as well as provisional liability shall be shown under Note- 2.1 – Capital Work in Progress. f. Preliminary expenditure incurred for development of projects shall be kept as Unallocated Capital Expenditure in work in progress till its approval and shall be written off and charged to revenue in the year the project is dropped. Similarly, the preliminary expenses incurred in Joint Venture projects for our share of expenditure shall be shown under Advances till the JV Company is formed or shall be written off in the year the project is dropped. Expenditure incurred on initial studies shall, however, be charged to Revenue. At the time of dropping of project, approval is required from same authority which has approved the pre-feasibility expenditure for said project. g. At the time of closing of accounts, liability provision should not be made in respect of those bills for which service entry sheets have been released but the bills are pending for MIRO. It should also be ensured that while preparing service entry sheet for the value of work done up to balance sheet date, the posting date at the time of service entry sheet creation (ML81N) should be the balance sheet date and it should be ensured that such service entry sheets are also released on the Balance Sheet date. By doing so, no separate action needs to be taken for creation of provisional liability. If however, the service entry sheet has been created for the value of work done prior to balance sheet date, only then provisional liability has to be manually considered for the remaining days up to balance sheet date. Efforts to be made to clear GRIR items within the closing date for appropriate compliance. Balance uncleared items should be transferred to appropriate GLs such as 2120970000 (other liabilities-revenue exp disallowed under IT), 2112205100 (-sundry creditors-provisional cred-revenue), 2112205200 (-sundry creditors-provisional cred-A/F), etc. Fixed Assets Page 62

h. Liability for foreign credit (vendor liability) shall be provided on the basis of Bank Selling rates of the transaction date at the time of capitalisation of Assets acquired against such credits. All exchange fluctuations shall be charged to revenue. i. All items lying in Work-in-Progress account as at the end of quarter/financial year should be scrutinised and reviewed. Wherever it is established that the work has already been completed and the asset concerned is ready for use, immediate action should be taken to transfer the same from Work-in-Progress account to Fixed Assets Account. Quarterly report should be obtained from functional departments in this regard. j. The movement of CWIP needs to be prepared as on the balance sheet date to be shown under Note - and necessary entries to be passed under the following GL’s using T-code YFCWIP Node GL GL Description F.1.1 3411701510 Ind-AS-Construction Work in Progress - Tangible As F.1.1.1 3411701520 Ind-AS-Additions CWIP - Tangible Assets F.1.1.2 3411701530 Ind-AS-Deletions CWIP - Tangible Assets F.1.1.3 3411701680 Tangible CWIP - Transfer to Fixed Assets (Note2) F.1.1.4 3411701690 Tangible CWIP -Transfer to P&L 2.3.13 Capital Stores a. The Capital Stores would include the Corporation’s stores lying with the contractors, which would be indicated in the accounts separately by way of a note. As such, necessary confirmation from the contractors should be obtained in respect of all stores lying with them as at the end of the financial year. Items of capital stores lying with the contractors should be reviewed periodically and as on 31st March so as to ensure that materials issued to the contractors and installed by them in the work should be transferred to work-in- progress and should not find place in capital stores lying with the contractors. b. The capital stores are to be valued at Cost. c. Whenever the goods have been received at site (other than Inter-Unit/ Inter-Divisional transfer) but not taken under inventories for want of Invoices/ Debit Notes from HO, a provision for liabilities should be made in the books of accounts based on relevant Purchase Order. d. It should be ensured that all the tally sheets made for the materials received at stock piles are duly reconciled with the GRVs to ascertain that the liability in respect of all the goods supplied, has been provided for in the books of accounts whether invoice has been received or not and whether GRV has been made or not. e. It should be ensured that on completion of the project the left out/ surplus materials are transferred to inventory from work in progress pending its disposal/ transfer to another project Fixed Assets Page 63

f. The account balances of Capital stores can be viewed under T-Code FBL3N with GL account 3143*. Relevant GL cods are as under: - GL Code GL Description 3143010140 Capital stores-others 3143020100 Capital stores at site (AF) indigenous 3143020200 Capital stores at site (AF) imported 3143030100 Capital stores at site(project) indigenous 3143030200 Capital stores at site(project) imported 3143040100 Capital stores-issued to contractor chargeable 3143040110 Capital stores-issued to contractor recoverable 3143990100 Prov for obsolescence/ losses of capital stores-AF 3143990200 Prov for obsolescence/ losses of capital stores-Project Note: Balance in GL code 5991000000 represents the material procured under capital head but not yet issued to contractor for erection. The balance of same is transferred to capital stores g. The list of capital stores project wise can be generated through T-code ‘MB5L’ and selecting valuation class as 5000 and selecting WBS element from variant list. The list can be generated for the current period, previous period or for previous year. Further the detailed report of Capital stores can be viewed from MM module T-Code MC.1/ MB1B. h. The movement of CWIP needs to be prepared as on the balance sheet date to be shown under Note - and necessary entries to be passed under the following GL’s using T-code YFCWIP Node GL GL Description F.3.1 3411701540 Ind-AS-Capital stores F.3.1.1 3411701550 Ind-AS-Additions - Capital stores F.3.1.2 3411701560 Ind-AS-Deletions - Capital stores F.3.1.3 3411701580 Transfer to Fixed Assets (Note 2) i. The physical verification of capital stores should be done on perpetual basis similar to the physical verification of inventory items and the same should be reconciled with book balances. Wherever the capital stores are lying with the project coordinating agencies, the responsibility for verification of the capital stores would lie with such coordinating agency. However, on completion of the project/ scheme, the full reconciliation of the material received, consumed and lying in stock should be obtained from the coordinating agency/ contractor and accounted for in the books of accounts accordingly. It should be ensured that inventory in FI and MM module in SAP is reconciled. Fixed Assets Page 64

j. In case of difference between the physical inventory balance and the book balance, necessary adjustments will have to be carried out after obtaining the appropriate approval by debiting to “Asset/ Stores Sold, Lost or Written, Off”. 2.3.13.1 Capital Advances a. The advances for capital expenditure should be grouped and accounted for under Note 8 (OTHER ASSETS-Advance for Capital Expenditure). The advances and liabilities lying in the name of same party should be paired off at the time of preparation of Balance Sheet. It is clarified that the pairing off is to be done on party to party basis for the same contract. The advances should be paid using Special GL codes created. b. In the case of land, the same should be capitalised on possession of land or transfer of title in the name of the Corporation, whichever is earlier. Advances/ Deposits paid towards acquisition of land should not be capitalised till the possession of land is taken over by the Corporation. Such advances should be accounted for under Capital Advances. c. All advances given to officers for purchase of furniture at their residence (as per the scheme of the Corporation) for which necessary documents have not been submitted should be shown as capital advance. However, all out efforts should be made to clear and adjust all such advances. d. Care should, however, be taken to ensure that on completion of work, if there are any amounts recoverable from contractors, the same should be accounted for under Note 6 (Other financial assets). e. In case where the jobs have been completed/ materials have been supplied in full or in part, the advance amount should be suitably adjusted. f. Confirmation should be obtained from the concerned contractors/ parties in respect of advances for capital/ revenue expenditure outstanding at the end of the financial year. g. All uncleared advances lying in Capital Advances account should be reviewed periodically and action taken to transfer the same to Work-in-Progress account or Fixed Assets account as the case may be, if such advances have already been utilised for construction or acquisition of fixed assets. Quarterly report should be obtained from functional departments in this regard. h. In case of Jobs executed by outside parties like Public Works Department (Buildings and Roads), Irrigation department, Port Trusts, Electricity Distribution board etc. on deposit basis, the value of the work done should be adjusted against the deposit given and capitalised based on certification received from such outside parties duly verified and approved by the EIC of IOCL for said job. Fixed Assets Page 65

2.3.14 Construction Period Expenses on Projects Identification of costs a. Revenue expenses (Including Administration and Supervision expenses) exclusively attributable to projects incurred during construction period are capitalised. However, such expenses in respect of capital facilities being executed along with the production/ operations simultaneously and where the expenses are not attributable exclusively are charged to revenue. b. All expenses of the site office are exclusively attributable to a project and hence should be capitalised. Wherever some officers have been nominated to look after the administration and supervision of a particular project, expenditure on such officers shall be taken as exclusively attributable to project and thus capitalised. c. After commissioning of the first phase of any project/ facility, the construction expenses and the operational expenses should be booked separately in such a way that all such expenses which are exclusively incurred for construction activity are booked/ capitalized to the Project. d. The expenditure incurred on mementos distributed to the employees would be capitalised only if it is part of a formal plan/informal practice of the organisation to provide incentives to the employees for achieving certain construction activity ahead of schedule, or it directly or indirectly benefits the construction activity. In case it is to be so capitalised, it should be capitalised only to the extent such expenditure is related to the employees engaged in the construction/expansion activity\". In case these conditions are not satisfied the expenditure on mementos should be charged to revenue. For example, the Gold coins distributed to all the employees when IOCL completed its 50 years were charged to revenue as they were not related to achievement of specific project target and were distributed to all the employees. In case of Facilities covered under BOO & BOOT contracts, testing of lease should be carried out because in such cases the beneficiary ownership lies with IOCL. Reasons for treatment in such cases should be recorded in capitalisation note. e. O&M expenses should be treated as revenue expenses except when the said facility is used during the construction/commissioning of Main/ Secondary/ Off sites and Utility Plants. f. In case any interest-bearing advances are given to contractors then its needs to be evaluated whether the amount so given to contractors’ forms part of the specific borrowings taken for the projects or the advance is simply a financial asset. In case of the former (i.e. specific borrowings), the interest recovered should be netted against construction period expenses and where the advances is simply financial assets, such income should be taken to other income in P&L. g. Following expenses/ income although incurred during the construction phase of project should not be transferred to CPE but to be treated as revenue: - • CSR (corporate social responsibility) Expenses Fixed Assets Page 66

• Soft furniture purchased by employees • Exchange fluctuation on a/c of payments to foreign vendors and contractors • Write off Assets and Stores • Interest payment for legal cases under dispute/ arbitration. • Interest income on Fixed Deposit with Bank • Unclaimed and unspent liability written back h. It shall be ensured that the construction period expenses are methodically allocated on all construction jobs including factory erection, water supply and sewage network and township quarters etc. However, the temporary assets in the nature of construction site requirement shall be excluded from such allocation. i. Project cell expenses: Projects Department expenses at HO are allocated to units in the combined ratio of approved cost and physical progress in the ongoing projects at different units. Allocation Methodology All construction period expenses should be directly booked in Note 2.1 under the following heads: Construction Period Expenses pending allocation: Balance as at beginning of the year Less: Opening Balance Adjustment Add: Net expenditure during the year Less: Allocated to Assets during the year a. Opening balance i.e. Balance as at beginning of the year shown under construction period expenses should be the same as the closing balance of the last year. GL 3145100000 is to be used for opening balance of CPE except for Forex Fluctuation and Borrowing Cost for which GL 3145110000 and 3145120000 respectively are to be used b. Opening Balance Adjustment: Opening Balance Adjustment account (GL 3145210000) to be used only for adjustment made at Divisional HO/ CO during finalisation of accounts during previous year, debit/ credit note for which has been received during the year. At corporate level balance in this GL should be Zero. Other adjustments should not be routed through this GL. c. Allocated to Assets during the year: Any amount of CPE (from any account head of CPE including recoveries, opening balance) which is being allocated to assets is taken out and shown under this head. Allocation of CPE to assets is to be done through GL Code 3145401000 (allocated to assets/ CWIP during the year) except for allocation of Forex Fluctuation and Borrowing Cost for which GL 3145402000 and 3145403000 respectively are to be used. The details of expenses during the year should be given as per Note 2.2 under the following heads: Fixed Assets Page 67

Payments to and Provision for Employees Repairs and Maintenance Consumption of Stores and Spares Power & Fuel Rent Insurance Rates and Taxes Travelling Expenses Communication Expenses Printing and Stationery Electricity and Water Charges Bank Charges Technical Assistance Fees Exchange Fluctuation Finance cost Depreciation and Amortization on Tangible Assets Intangible Assets Start Up/ Trial Run Expenses (Net) Others Total Expenses Less: Recoveries Net Expenditure during the year a. Payment to and Provision for Employees: Establishment cost to be apportioned into the various EPCC & Conventional contacts on the basis of indices (to indicate the employee nos.) engaged in each of the EPCC and conventional contracts. Then establishment cost per EPCC/Conventional Contract is to be further allocated to the facilities coming under the said contract on cost basis. Establishment cost for EPCC Contract A (on the basis of indices of employees) Total Cost of Assets (As per Contract) 100 Assets getting capitalized (Cost as per Contract) 15 Establishment Cost allocated A * 15/100 b. Insurance Cost: Insurance cost is to be allocated in the ratio of sum insured (SI) of individual facilities commissioned vis a vis total SI under Marine cum EAR policy taken for the said Project. c. Depreciation: If products/ utilities produced by the assets (utility plants & Other Assets) are being further used in the Construction and/or pre-commissioning, Start Up & Commissioning activities of other plants, the depreciation on such assets is proposed to be charged to CPE. However, if any tank/Product Warehouse or other offsite facility is capitalized on the ground that the same is in state of readiness to receive product or ready Fixed Assets Page 68

to function/operate, the depreciation shall be charged as expense since the readiness of such facility is not contributing to further construction or commissioning of other assets. In case offsite facilities too are getting utilized in construction/ Pre-commissioning/ commissioning activities like Fire Water Network (the reason being the readiness of fire water network is a prerequisite for starting up & commissioning of main plant) then the depreciation on them should be taken to CPE till the time main plant is capitalized. For facilities like Buildings’ same principle hold good (Depreciation on Buildings like Product Ware house, Township facilities etc. should be expensed whereas the depreciation on buildings like Project Building, Porta Cabins, Sub Station Buildings, Control Room Building, Satellite rack room etc. should be booked under CPE till the time main units are capitalized. The depreciation so charged in CPE is reduced from the Gross value of the utility assets, so that the effect of double depreciation is avoided. d. CPE-Recoveries: CPE Recoveries consist of recoveries on account of electricity, WaterPenalties etc. The same are affected from individual contracts & hence should be allocated to individual facilities falling under the same contract. e. Start Up/ Trial Run Expenses: Treatment of Construction Power, Commissioning Fuel and fuel used during Trial run operation • Construction Power and fuel consumed on the newly commissioned plant during trial run should be considered as a part of CPE and capitalised along with the concerned plant. Similarly, indirect fuel consumed in the commissioning of the project should be capitalised. However, the direct and indirect fuel consumption should be based on standard norms to be fixed in consultation with Project Dept. • After the plant has been constructed and the project has been completed in all respects, it is usually tested and adjusted for commercial production before it is finally commissioned. The expenditure incurred in connection with the process of start-up and commissioning of the plant would be capitalised in the same way as other indirect construction expenditure. • The fuel consumed during trial run includes – Startup fuel –Unit Specific & Fuel used during trial runs. - During the period of trial run, the income earned through sale of products should be set off against the expenditure incurred and net expenditure/ income should be accounted in project cost. - Period of trial run may be different for different units and utilities. Normally trial run ranges from one month to three months. If some corrective engineering is required, the trial run period may be prolonged. - Intermediate products utilized during trial run as a feed should be valued based on corresponding related product or based on technical assessment. - Sometimes guarantee test may be completed several months after commencement of commercial production. It is not correct to postpone the capitalization of the plant till the guarantee tests are over. f. General overhead expenses which cannot be directly or indirectly apportioned shall not be capitalised. g. Financing cost incurred during construction period on loans specifically borrowed and utilized for projects is capitalised on quarterly basis up to the date of capitalisation. Financing cost, if any, incurred on General Borrowings used for projects is capitalised at the Fixed Assets Page 69

weighted average cost. The amount of such borrowings is determined on quarterly basis after setting off the amount of internal accruals. 2.3.15 Commissioning fuel and Unit hold up Power and fuel consumed on the newly commissioned/ revamped plant for trial operation should be considered as part of the trial run expenses and the same should be capitalized at its actual cost. Commissioning fuel has two parts, • Start-up fuel which is unit specific • Second fuel consumed during trial runs Unit-wise details of both these fuels should be worked out and capitalised to the units to which relates. The value of direct fuel and indirect fuel consumed in the commissioning of the project including revamp shall be capitalized at cost. The Unit Hold-up quantity shall be treated as a part of inventories. Following points need to be adhered to:  Crude oil in pipeline from crude oil tanks to CDU shall be considered as a part of raw material inventory. • Semi-finished products in the various interconnected pipelines in the unit area including heat exchangers, etc. shall be considered as “Inventory of semi-finished products” • Finished products from unit exit control valve to refinery product tanks shall be considered as “Inventory of finished products” • Unit hold up in the battery area needs to be bifurcated under following three categories for all the units- - Feed - tankages to Unit - ISD-Unit to Unit - Products-Unit to Finished Product tankages 2.3.16 Capital goods in transit Capital goods-in-transit should be valued at cost. The material-in-transit from one location to another or from one Unit to another should be accounted for by the receiving location/ Unit as stores. Inter-Unit transfer of goods should not be shown in transit even though GR notes are not received, or material is actually in transit. Unit should ensure that liability is provided in the accounts in respect of all items in transit. Wherever any item is appearing as the stores-in-transit for more than 6 months, the same should be reviewed thoroughly by the Units and adjusted accordingly in the books of accounts. The guidelines for material-in-transit are as under: Type of Contract Conditions under which Elements to be considered for creation of liability material-in-transit will be Full cost of materials including those accounted taxes and duties for which credit is not availed/available. A. Indigenous purchases Ex-works/ ex- When materials have been Godown dispatched before balance sheet date and intimation received to that effect. Fixed Assets Page 70

Type of Contract Conditions under which Elements to be considered for material-in-transit will be creation of liability FOR Destination accounted C&F Contract When the materials have Full cost of materials including those CIF Contract arrived at destination point i.e. taxes and duties for which credit is not Railway station/ Warehouse availed/available. The question of etc. on or before balance sheet freight will not arise as the contract is date and the MRN has not been for destination. raised pending inspection and acceptance of materials. B. Imported When materials have not Full provision for the cost of materials FOB Contract arrived at the destination. including taxes and duties for which credit is not availed/available, is C&F/ CIF Contract When bill of lading is dated on required to be made. Freight to be Turnkey contract or before balance sheet date provided in case the carriers are under COA (Charter Party Agreement). Insurance cover Otherwise no freights required to be taken by the provided. Insurance provision is also Corporation required to be made. Custom duty is required to be provided if the ship has already arrived at the port or bill of entry has been filed on or before balance sheet date As above. However, freight is inclusive as per contract terms. Provision for insurance is to be made in case of C&F contracts. It would not be accounted even if the payment is made. As it is the responsibility of contractor/ supplier to perform on turnkey basis, no provision for material-in-transit is required. Above guidelines as per A to C are required to be followed even if insurance cover is taken by IOC. Insurance can be taken when we have insurable interest, which is not synonymous to ownership. The movement of CWIP needs to be prepared as on the balance sheet date to be shown under Note - and necessary entries to be passed under the following GL’s using T-code YFCWIP Fixed Assets Page 71

Node GL GL Description F.4.1 3411701720 Ind-AS-Capital Goods in Transit F.4.3 3411701730 F.4.4 3411701740 Additions - Capital Goods in Transit F.4.5 3411701750 Deletions - Capital Goods in Transit- Transfer to Fixed Assets as Additions (Note 2) F.4.6 3411701760 Deletions - Capital Goods in Transit- Transfer to P&L (Note 2) Deletions - Capital Goods in Transit - Other Allocation/ Adjustment during the year (Note 2) 2.3.17 Accounting of Enabling assets Expenditure on the items, ownership of which is not with the Company- As per Ind AS 16, expenditure on items, ownership of which is not with the Company may also be capitalized, once it is established that the expenditure is necessary for commissioning/functioning of the main asset and such expenditure is not in the nature of CSR. Under Ind AS, the Company needs to capitalize such assets and useful life of Enabling Asset is lower of “Useful life provided under Schedule II” and “Useful life as per agreement” Some of the scenarios in IOCL where such expenditure has been capitalized are as follows: Illustration 1: Control is with the Company- Construction of South Oil Jetty for Paradip Refinery, Orissa: IOCL has entered into an agreement with Paradip Port Trust (PPT) wherein IOCL shall construct and operate the South Oil Jetty and other facilities for conveying petroleum/ petrochemical products and crude in connection with operation of Paradip refinery (15 million tons per annum capacity). The legal ownership of such infrastructure belongs to PPT. Factors determining control over South Oil Jetty • Entire capacity of the South Oil Jetty can be used exclusively by IOCL for the first five years. • Spare capacity of South Oil Jetty can be utilised by PPT if 70% berth occupancy is not attained by IOCL after 5 years of commissioning. The south oil jetty has been constructed for the captive use of IOCL only and IOCL intends to utilize the entire capacity of the south oil jetty. • The south oil jetty will be used only for designated products. • In case of spare capacity, as per the agreement, the first right of utilization of berth shall lie with IOCL. • Any hook up/additional facility required for usage of Oil Jetty facilities by other users will be installed by them with due permission from PPT & IOCL. This will ensure isolation of IOCL’s back-up facilities. • The oil jetty operation for utilization of spare capacity by other users will be done by IOCL or an operator appointed by IOCL. However, handling of products at common user’s facility/ storage will be done by other users. Fixed Assets Page 72

• This agreement shall remain in force for the period of 20 years from the date of agreement which shall automatically be extended for consecutive period of another 20 years. • The life of refinery assets considered by IOCL is 25 years. Accordingly, under Ind AS, such amount incurred needs to be capitalised. Illustration 2: Capitalisation not as a separate unit of measurement - Amount incurred on dedicated feeders for electricity supply taken from CESU: IOCL had undertaken Paradip-Raipur-Ranchi pipeline project. To meet the throughput requirement of the said project and for operating the pipelines and marketing facilities, a common power supply connection from Central Electricity Supply Utility (CESU) of Orissa was required. CESU accordingly distributed the power to IOCL Jatni through dedicated Feeder / circuit. However, CESU can tap electrical power for general public use from the circuit / feeder on Jatni Depot and hence IOCL has no control over it. Para 7 of Ind AS 16, the cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: • it is probable that future economic benefits associated with the item will flow to the entity; and • the cost of the item can be measured reliably. Further as per para 9 of Ind AS 16, standard does not prescribe the unit of measure for recognition, i.e., what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to specific circumstances of an enterprise. The expenditure incurred on dedicated feeders would bring future economic benefits as it is required for operating the pipelines in Paradip-Raipur-Ranchi project. Accordingly, expenditure incurred shall be considered for capitalisation as part of the above- mentioned project under Ind AS. Illustration 3: Enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired- Construction of Approach Roads (Connected Lanes) at CODO/COCO retail outlets IOCL incurs expenditure on the construction of Approach Roads, etc. at CODO/COCO retail outlets. The construction of such items enables the Company to increase the economic benefits derived from the other assets located at the retail outlet. As per Para 11 of Ind AS 16, items of PPE may be acquired for safety or environmental reasons. The acquisition of such PPE, although not directly increasing future economic benefits of any particular existing item of PPE, may be necessary for an entity to obtain future economic benefits from its other assets. Such items of PPE qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired. Accordingly, expenditure incurred on or after 1 April 2015 (Ind AS Transition date) on enabling assets where there is no control shall be considered for capitalisation under Ind AS provided conditions as per para 11 of Ind AS 16 are satisfied. Illustration 4: Control is with the Company - Asset subsidy given to Retail Outlets (RO): As a part of sales promotion activity, IOCL grants subsidy to RO towards- Fixed Assets Page 73

• Purchase of assets such as Generator, Water Purifier, Computer, CCTV, Tube well, Water Cooler, Voltage Stabilizer, etc. which are kept for use at the RO • Construction of driveway Legal ownership of such assets is with RO. IOCL exercises control over such assets by way of quarterly inspections by the field officers. In case of any discrepancy being observed by the officer, IOCL recovers the full amount of subsidy from the RO. Further in case of termination of dealership, IOCL has right to recover the derived WDV of such assets. IOCL is getting future economic benefits (in the form of increase in sales on account of use of these assets) till the time control is with IOCL. Under Ind AS, the Company needs to capitalize such assets since the control is with IOCL and the same needs to be depreciated over the period IOCL will be getting future economic benefits as per the agreement or life as per Schedule II, whichever is lower. 2.3.18 Accounting for spares Items such as spare parts, stand-by equipment and servicing equipment are recognised when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. (Para 8 of Ind AS 16) Further paragraph 6 of Ind AS 16 provides that, property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. It may also be noted that accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. The term ‘more than one period’ is not defined in Ind AS. Ordinarily, the accounting policies are determined for preparing and presenting financial statements on annual basis. Accordingly, the term ‘period’, should ordinarily be construed to be the annual period. Paragraph 9 of Ind AS 16 states that, “this Standard does not prescribe the unit of measure for recognition, i.e. what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as molds, tools and dyes, and to apply the criteria to the aggregate value.” The Standard does not distinguish between different types of spares. In the given case, the spares are not individually significant compared to the overall asset. The nature and purpose of such spares need to be carefully evaluated. If it is probable that future economic benefits associated with the item would flow to the company and cost of the item can be measured reliably then these items should be recognised as property, plant and equipment. Considering the above provisions, the company has applied the provisions in the following manner: • IOCL is having over one lakh of spares items. • Practically difficult to keep track of each item of spares (review, usage, identification, physical verification etc) Fixed Assets Page 74

• In order to comply with the Ind-AS-16 requirement, on practical basis, spares having cost of Rs. 5 lakh per unit or more are analysed with the help of technical department • Spare Items are bifurcated in the following two categories: - Items in the nature of consumables and spares having useful life of less than 12 months - Items having useful life of over 12 months and eligible for capitalization Going forward, these identified spares to be capitalized irrespective of any value The list of items of spares considered for capitalization may be reviewed after a reasonable interval (say 3 years). Subsequently, the limit for capitalization of spares was revised to Rs. 10 lakh per unit w.e.f 1/04/2018. Further paragraph 55 of Ind AS 16 inter alia states that, depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated or the same is classified as non-current assets held for sale. Accordingly, depreciation on the spares recognised as item of property, plant and equipment shall begin from the date of its purchase. Issue 6 of ITFG 5 revised: The depreciation on such an item of spare part will begin when the asset is available for use i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. In case of a spare part, as it may be readily available for use, it may be depreciated from the date of purchase of the spare part. In determination of the useful life of the spare part, the life of the machine in respect of which it can be used can be one of the determining factors. 2.3.19 Subsequent expenditure including replacement and major inspection costs 2.3.19.1 Subsequent costs- Repairs and maintenance Under the recognition principle in paragraph 7 (refer section recognition), an entity does not recognise in the carrying amount of an item of property, plant and equipment the costs of the day to-day servicing of the item. Rather, these costs are recognised in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and consumables and may include the cost of small parts. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the item of property, plant and equipment. (Para 12 of Ind AS 16) 2.3.19.2 Subsequent costs- Replacement Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a nonrecurring replacement. Under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of Fixed Assets Page 75

replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the de- recognition provisions of this Standard. (Para 13 of Ind AS 16) On first replacement, the cost of replaced item should be derecognized from the main asset. Subsequent procurements shall be capitalised main asset as separate asset. In nutshell, spare replacement should be derecognized from the main asset only once. Thereafter, de-recognition should be carried out against the Assets created for the spare. Replacement cost This can be categorized in the following two categories: • Replacement of assets or part of assets • Replacements of components (separately covered in this chapter) The carrying value of the replaced part is derecognized regardless of whether the replaced part had been depreciated separately. If it is not practicable to determine the carrying amount of the replaced part, cost of the replacement with suitable adjustment may be used as an indication of what the cost of the replaced part was at the time it was acquired or constructed. 2.3.19.3 Major inspection and overhaul costs A condition of continuing to operate an item of property, plant and equipment (for example, an aircraft) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is derecognised. This occurs regardless of whether the cost of the previous inspection was identified in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. (Para 14 of Ind AS 16) Examples of major overhaul expenses meeting the capitalization criteria at IOCL are: • Major overhauling expenses required at regular intervals at refineries and LPG bottling plant may be evaluated for capitalization. • Major inspection of SPM equipment carried out at regular intervals may need to be capitalised. • Major inspection of storage tanks carried out at regular intervals may need to be capitalized The thresholds and related guidelines are covered elsewhere in this chapter. 2.3.20 The effect of changes in Foreign Exchange rates – Para 46 A of AS 11 (D13AA of Ind-AS-101) 2.3.20.1 Loans obtained/re-financed after 1 April 2016 The exchange differences pertaining to long term foreign currency loans obtained or re- financed on or after 1 April 2016 to acquire the depreciable assets shall be charged off or credited to profit & loss account, as the case may be, and not to be adjusted in cost of property, plant and equipment under Ind AS. Fixed Assets Page 76

The exchange differences pertaining to long term foreign currency working capital loans obtained or re-financed on or after 1 April 2016 shall also be charged off or credited to profit & loss account under Ind AS. 2.3.20.2 Loans obtained/re-financed before 1 April 2016 The exchange difference on long term foreign currency monetary items relating to the acquisition of depreciable assets can be adjusted to the carrying cost of the assets and depreciated over the balance life of the assets which is in line with para 46A of Accounting Standard 11. Similarly, the exchange differences pertaining to long term foreign currency working capital loans shall continue to be carried in foreign currency monetary item translation different account and amortized over the applicable period. 2.3.21 Borrowing Costs Borrowing costs that are attributable to the acquisition and construction of the qualifying asset are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are charged to revenue. In line with Ind AS 23 on borrowing costs, the accounting treatment of Borrowing costs shall be as under: 2.3.21.1 Specific Borrowing Financing cost incurred during construction period on loans specifically borrowed and utilized for projects is capitalised on quarterly basis up to the date of capitalisation. While allocating specific borrowing costs following important aspects to be considered: a. Capitalisation of Interest towards project borrowings as per Ind AS 23 should be done only to the extent of funds actually utilized towards the project. The allocation of specific borrowings to various projects shall be done on a quarterly basis based on the expenditure incurred on respective projects during a particular quarter. The commencement date for capitalization is the date when the entity first meets all of the following conditions: • it incurs expenditures for the asset; • it incurs borrowing costs; and • it undertakes activities necessary to prepare the asset for its intended use or sale. b. In case, a part of specific/long term borrowing remains unallocated during the relevant quarter, such unallocated portion of specific/long term borrowing shall be assumed to be temporarily used for working capital purposes. Hence, the interest on that part of the specific/long term borrowing for the subject quarter shall be treated as ‘Revenue Expenditure’ and charged to Profit & Loss Account. In case of foreign borrowings (ECB), there may be stipulations by RBI or regulators against usage thereof and may not be available for use other than for specified purposes. Due care needs to be taken while accounting for the same. c. Where for a particular project, funds have been allocated from various specific borrowings raised, the interest should be computed considering the actual rate of interest for each of the specific borrowing and amount allocated from such borrowings. Fixed Assets Page 77

d. No interest should be capitalised on projects, which have been deferred during a period, even when some residual expenditure has been incurred on such deferred project during that period. e. Where construction of qualifying asset is completed in parts and in respect of a particular part, substantially all the activities necessary to prepare that part for its intended use or sale have been completed and construction continues for the other parts, the capitalisation of borrowing costs in relation to such part should cease on its capitalisation. The borrowing costs on the specific borrowings allocated to the said part should, henceforth, be charged to P&L Account. f. Interest is allocated to all the facilities coming under the projects, which fulfills the definition of Qualifying asset as set out in Ind AS 16 (i.e. Process Plants, Utility Plants, offsite facilities and other facilities including township but excluding bought out items). g. The post capitalization interest on Utility plants shall not form part of the capital cost of the utility plant in line with Ind AS-23 and shall be charged to revenue after the capitalisation of the said Utility Plant. h. Similarly, the post capitalization interest on offsite facilities & other facilities shall not form part of the capital cost of the offsite facility and shall be charged to revenue after capitalisation of the same. i. The post capitalization interest on mother unit shall be charged to revenue after capitalisation of the same j. However, if any utility plant is completed after the capitalization of Mother unit then only borrowing attributable to such utility plant may be capitalized as cost of that utility plant till the time the utility is capitalized 2.3.21.2 General Borrowing a. In case the funds are utilized for capital projects out of general borrowings, the interest on the funds utilized shall be capitalised at the weighted average borrowing rate for the year as intimated by Corporate Office. The amount of such borrowings is determined on quarterly basis after setting off the amount of internal accruals. Presently for allocation of interest on general borrowing a threshold limit of Rs. 50 crore of annual expenditure is fixed. The allocation of interest on general borrowings shall be intimated on quarterly basis. b. The funds utilized for projects other than specific borrowings shall be considered after adjusting for Internal Resources. 2.3.21.3 Foreign currency borrowing As per para 6 of Ind AS 23, Borrowing costs include- (e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. In line with para 6A of Ind AS 23, With regard to exchange difference required to be treated as borrowing costs, the manner of arriving at the adjustments stated therein shall be as follows: (i) the adjustment should be of an amount which is equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing in functional currency when compared to the cost of borrowing in a foreign currency. (ii) where there is an unrealised exchange loss which is treated as an adjustment to interest and subsequently there is a realised or unrealised gain in respect of the settlement or translation of Fixed Assets Page 78

the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be recognised as an adjustment to interest. Accordingly, • In case exchange loss in an accounting period, exchange loss to the extent of difference between cost of borrowing in functional currency and cost of borrowing in a foreign currency for the relevant period, may be treated as borrowing cost. • In case of exchange gain on a borrowing in an accounting period, unrealised exchange loss which was earlier treated as an adjustment to interest (including the amounts considered in the previous accounting periods) limited to the extent of the gain, needs to be reversed from borrowing cost. 2.3.22 Recovery Price reduction/ Price discount (PD) a. In almost all the contracts for supply of material and works contracts including Lump Sum Turnkey (LSTK) Contracts a clause for Price Reduction is provided. The payment is made for the supply of equipment, after adjustment in respect of Price Reduction clause. In some cases, the invoice is submitted by the suppliers after making adjustment for Price Reduction clause and in other cases the amount is deducted by IOC and the same is kept in liability till final adjustment is made on completion of total supply. For delay in works contracts, the Price discount is deducted from the running bills and kept in liability account till final adjustment is made on completion of the contract. Sometimes, the final adjustments are made after considerable time from the completion of the supply/ work. b. The provisional PD deducted from bills and kept in liability should not affect the capitalization and the same should be at the gross value. Suitable adjustment should be made to the project cost retrospectively, once final PD is arrived. c. The recovery of PD should be linked with the project and the amount shall be deducted from the project cost. Similarly amount payable under the Bonus Clause, if any, should be capitalised. Any subsequent adjustment after capitalisation shall be made retrospectively. d. The deemed cost exemption was exercised by the company as on 01.04.2015 under which the WDV of the assets as on 31.03.2015 were taken as the gross block of the assets as on 01.04.2015 and the opening accumulated depreciation block was zero. In case of any subsequent adjustment after capitalisation: • De-capitalisation (full/ partial) – Since IOCL has availed the transition exemption under Ind-AS and adopted WDV as per previous GAAP as on 31.03.2015 as gross block as on 01.04.2015, any de-capitalisation from the gross block pertaining to the period before 01.04.2015 should be at the net value (i.e. WDV as on 01.04.2015). • Post capitalisation – Post capitalisation generally happens due to circumstances emerging in current period and there were no error as regards to the accounting for past periods, therefore deemed cost exemption available at the time of transition cannot be taken for new assets or post capitalisation amount of existing assets. Hence, in case of post capitalisation, the full amount should be capitalised as gross block and total depreciation upto current period should be shown as accumulated depreciation. e. Price adjustment discount received from vendors/contractors in respect of revenue Items should be reduced from natural expense head. Fixed Assets Page 79

2.3.23 Accounting treatment of left-over materials, mandatory spares & Scrap Generally, there are following three types of project leftover materials: - 2.3.23.1 Category-1: Scrap (off-cut, damaged, defective materials) a. Scrap (off-cut, damaged, defective materials) includes cut pieces of pipes, sheets, structures less than their standard size of supplies, cables less than 100 meters including empty cement bags and drums etc. Materials like refractory paints, rubber-sheets, chemicals etc. with expired shelf life will also be treated as scrap. b. Scrap quantity is finalized by the PMC/ Engineer-in-charge and the materials department. The same should be disposed of by the contractor to the satisfaction of IOCL and the money received against such disposal shall be passed on to IOCL. c. If the scrap generated from project activities are identified and disposed off as separate lot then the same should be credited to project cost. However, if the scrap cannot be segregated and forms part of the general scrap of the operating plant and facilities then the same may be booked as miscellaneous income in P&L. 2.3.23.2 Category-2: Mandatory Spares & items to be handed over as per contract As per the contract, LSTK contractors are supposed to handover mandatory spares as appearing in the contract document and modifications made thereafter and for same, they charge a fixed lump sum amount as appearing in the billing schedule. As mandatory spares are handed over at the last phase of the job thus it is seen that contractors do front loading of the billing schedules and keep a very small amount against the supply of mandatory spares. Thus, the pricing of mandatory spares becomes an important activity so that the value recorded in SAP is at correct cost. Following methodology should be followed for valuing Mandatory spares: - a. For all projects on LSTK mode of execution, the LSTK contractor shall declare the price for all the mandatory spares item-wise. b. In case of LSTK projects, where book value of items has not been provided by the contractor, the book value of similar items will be considered adequate. If the rate of same size or schedule is not available, the rate can be interpolated/ extrapolated. c. Technical Committee shall review the pricing done by LSTK bidders and also review the same which shall be considered for valuation. d. For items already codified and available in the existing inventory, Moving Average Price (MAP) is to be considered while uploading the stock in the inventory. e. For the new items/ spares, the price mentioned in the PO placed by LSTK contractor is to be considered. Efforts should be made to enter the realistic price into the SAP data base. f. Under Ind-AS, the cost of the main plant /facilities as well as cost of mandatory spares needs to be capitalized if the spares meets the criteria set out in Para 6 &8 of Ind-AS-16 and D.9 of this chapter. However, both the items i.e. main plant facilities and mandatory spares needs to be capitalized separately. The mandatory spares may be replaced subsequently and there is a requirement to value them correctly as per process defined above so that subsequent de-capitalization and capitalization on replacement of spares are in correctly reflected. Mandatory spares which does not meet the capitalization criteria needs to be transferred to revenue inventory with suitable adjustment with the total capitalized cost of the main plant/ facility. Fixed Assets Page 80

2.3.23.3 Category-3: Workable, useful & serviceable left-over material a. Project leftover (other than spares & items to be handed over as per contract) shall be considered if their need for future requirement (revenue or capital) is identified within a timeframe by a committee consisting of representatives from Projects, Maintenance and Engineering services. b. Same pricing methodology as mentioned for category 2 is to be followed for workable, useful and serviceable left-over materials. c. Leftover material handed over by the LSTK contractors shall be taken to inventory or capitalized (as spares or independent assets) and reduced from the capital cost of the main plant/ facility. d. Remaining leftover material, which is not required, may be circulated to IOCL units for their potential use without waiting for its declaration as surplus and thereafter for disposal. A time period of 30-days shall be given for response. If no response is received from other units, the likely realizable value on disposal of such left-over material should be adjusted with the cost of asset or facility and the action for material disposal can be initiated. Taking over left-over material from LSTK Contactor, identification of Project left over material regarding its future use and surplus should be decided within six months after completion of the project. Declared surplus material should be disposed off within six months. Approval of ED of unit/ region should be taken for any time extension in the above cases. Fixed Assets Page 81

2.4 DEPRECIATION PROVISIONS (MEASUREMENT AFTER RECOGNITION) After recognition of an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. On transition to Ind AS, the Company has elected to continue with the carrying value of all of its property, plant and equipment recognised as at 1st April 2015 measured as per the previous GAAP and use that carrying value as the deemed cost of the property, plant and equipment. Accordingly, net block as on 01.04.2015 has become new gross block as on 01.04.2015. The gross block, accumulated depreciation and net block as on 01.04.2015 is also disclosed by IOCL in its first Ind-AS balance sheet of FY 2016-17. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. (Para 43 of Ind AS 16) An entity allocates the amount initially recognised in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part. For example, it may be appropriate to depreciate separately the airframe and engines of an aircraft, whether owned or subject to a finance lease. Similarly, if an entity acquires property, plant and equipment subject to an operating lease in which it is the lessor, it may be appropriate to depreciate separately amounts reflected in the cost of that item that are attributable to favourable or unfavourable lease terms relative to market terms. (Para 44 of Ind AS 16) A significant part of an item of property, plant and equipment may have a useful life and a depreciation method that are the same as the useful life and the depreciation method of another significant part of that same item. Such parts may be grouped in determining the depreciation charge. (Para 45 of Ind AS 16) To the extent that an entity depreciates separately some parts of an item of property, plant and equipment, it also depreciates separately the remainder of the item. The remainder consists of the parts of the item that are individually not significant. If an entity has varying expectations for these parts, approximation techniques may be necessary to depreciate the remainder in a manner that faithfully represents the consumption pattern and/or useful life of its parts. (Para 46 of Ind AS 16) Broad guidelines for componentization are mentioned in Annexure – 2.3 Estimation of useful lives, depreciation method and residual values to be reviewed at end of each financial year Ind AS 16 requires estimates of useful lives, depreciation method and residual values to be reviewed at least at the end of each financial year. (Para 60, 61 of Ind AS 16). In the event where there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an accounting estimate in accordance with Ind AS 8. (Para 61 of Ind AS 16) Schedule II of Companies Act provides the life of the various assets. Cost of tangible fixed assets (net of residual value) is depreciated on straight-line method as per the useful life prescribed in Schedule II to the Companies Act, 2013 except in case of following assets: Fixed Assets INDEX Page 82

a. Useful life of 15 years for Plant and Equipment relating to Retail Outlets (other than storage tanks and related equipment) and LPG cylinders & pressure regulators considered based on technical assessment b. Useful life of 25 years for solar power plant considered based on technical assessment c. In case of specific agreements e.g. enabling assets etc., useful life as per agreement or Schedule II, whichever is Lower d. In case of certain assets of R&D center, useful life is considered based on technical assessment e. In case of immovable assets constructed on leasehold land, useful life as per Schedule-II or lease period of land (including renewable period), whichever is lower The guidance for application of Schedule-II useful life is enclosed in Annexure – 2.2. 2.5 DE-RECOGNITION OF ASSETS 2.5.1 Transfer and disposal of assets When the asset is transferred from one unit to another during the financial year, depreciation for the whole year shall be borne by the unit at the receiving end regardless of the period for which the asset is utilized by the receiving unit. In respect of loss of LPG Equipment (Cylinders and PRs) not recoverable, the asset (determined on FIFO basis) should be removed from the books of accounts by taking the approval of competent authority as per the limits laid down in their Delegation of Authority. TCRV (Tariff Cost Recovery Voucher) document is prepared by the distributor every time he makes recovery for loss or damages of Corporation equipment from the customers. State offices should ensure de-capitalisation of assets from asset ledger for TCRV quantity recovered by the distributors No depreciation shall be charged on assets declared unserviceable during the year as the same is to be classified as assets held for sale. After the asset is sold off, the Asset Accounting Section shall be required to make adjustment between the written-down value of the asset and the sale price. The written-down value of the asset shall be determined on the basis of the particulars furnished by the custodian department in the Material Return Voucher. In case of loss, the amount will be debited to the account \"loss on assets sold, discarded or written off\". In case the sale price is more than the written-down value of the asset, the profit will be credited to the account \"profit on sale of fixed asset\". Dismantling of Assets shall be undertaken only after furnishing a justification and obtaining the approval of competent authority. Salvage materials recovered from the dismantling shall be returned to the Stores under a Material Return Voucher giving the description of the asset so dismantled. The loss or gain on dismantling shall be determined after making adjustment for the value of the salvaged materials and the cost of dismantling. In case of dismantling of temporary structures where 100% depreciation has been charged in the year in which such structure was brought into existence, the credit for the value of salvaged materials shall be taken to Misc. Income. After completing all adjustments by eliminating the original cost and the cumulative provision for depreciation from the books of account, the value of such asset shall be removed from the Asset Ledger. Details of amount under the accounts \"Profit/Loss on assets sold or written off\" shall be provided along with the Balance Sheet giving the amount for each item of asset, and the reasons Fixed Assets INDEX Page 83

for write-off. The specific items requiring Board's approval for write-off shall be separately mentioned with a detailed note on each of such items. 2.5.2 Idle fixed assets The items which are abandoned for the time being and are meant for re-use in future shall not be classified as “Non-current assets held for sale”. The Company shall continue charging depreciation on such items and the same shall be classified as part of normal PPE and treated accordingly. 2.6 ASSET RETIREMENT OBLIGATION 2.6.1 Back-ground Many entities have obligations to dismantle, remove and restore items of property, plant and equipment. Such obligations are referred to as ‘decommissioning, restoration and similar liabilities. Under Ind AS 16, the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. 2.6.2 Recognition Provision for decommissioning liability is required if- • there is any legal obligation as per the agreements in relation to leasehold property or • Constructive obligation. These provisions are applicable to IOC for its E&P assets. The initial estimate of the costs of decommissioning and restoration costs needs to be capitalized (as per Ind AS 16) under the head “Exploration Assets” by discounting the provision amount to its current value by applying principles of Ind AS 37. For this purpose, E&P blocks can be categorized under the below categories: 2.6.2.1 E&P blocks under exploration Phase In the case of exploration phase, the field life of particular well is unascertainable. Linking of well with license date is also not possible, as the block having hydrocarbon discovery, generally not relinquished after expiry of license date. Due to the aforesaid reasons, share of decommissioning liability provided by the Operator's Statement of Expenditure for a block, will be booked in IOC book without any adjustment/ discounting of decommissioning liability. 2.6.2.2 E&P blocks under development Phase E&P wells falling under development phase, discounting of decommissioning liability shall be applied. Where decommissioning liability is not provided by Operator, IOCL will estimate the liability for its share and treatment will be given as per Activity phase mentioned above. For discount rate, corporate guidelines on discount rate to be used shall be considered. Fixed Assets Page 84

2.7 NON-CURRENT ASSETS HELD FOR SALE An entity shall classify a non-current asset as held for sale if it’s carrying amount will be recovered principally through a sale transaction rather than through continuing use. (para 6 of Ind AS 105) For this to be the case, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable.(para 7 of Ind AS 105) An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell. (para 15 of Ind AS 105) Ind AS 105 requires separate disclosure of Non-Current Assets held for sale in the Balance Sheet. Liabilities (if any) of a disposal group classified as held for sale, shall be presented separately from other liabilities in the Balance sheet. The major classes of assets and liabilities (if any) classified as held for sale shall be separately disclosed either in the balance sheet or in the notes. An entity shall not reclassify the prior period amounts reflected for non-current assets classified as held for sale in the balance sheets. 2.8 JOINTLY OWNED FIXED ASSETS In the case of fixed assets owned by IOCL jointly with others, the extent of IOCL’s share in such assets and the proportion of the original cost, accumulated depreciation and written down value should be accounted for in our books of accounts. 2.9 DISCLOSURES 2.9.1 Ind AS 16 related Disclosures The financial statements shall disclose, for each class of property, plant and equipment: (Para 73 of Ind AS 16) a. the measurement bases used for determining the gross carrying amount; b. the depreciation methods used; c. the useful lives or the depreciation rates used; d. the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and e. a reconciliation of the carrying amount at the beginning and end of the period showing: (i) additions; (ii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with Ind AS 105 and other disposals; (iii) acquisitions through business combinations; (iv) increases or decreases resulting from revaluations under paragraphs 31, 39 and 40 and from impairment losses recognised or reversed in other comprehensive income in accordance with Ind AS 36; (v) impairment losses recognised in profit or loss in accordance with Ind AS 36; (vi) impairment losses reversed in profit or loss in accordance with Ind AS 36; (vii) depreciation; Fixed Assets INDEX Page 85

(viii) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and (ix) other changes. The financial statements shall also disclose: (Para 74 of Ind AS 16) a. the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities; b. the amount of expenditures recognised in the carrying amount of an item of property, plant and equipment in the course of its construction; c. the amount of contractual commitments for the acquisition of property, plant and equipment; and d. if it is not disclosed separately in the statement of profit and loss, the amount of compensation from third parties for items of property, plant and equipment that were impaired, lost or given up that is included in profit or loss. 2.9.2 Capital advances Under Ind AS, capital advances need to be grouped under advances for capital expenditure under Note-8. 2.9.3 Non-current assets held for sale An entity shall disclose the following information in the notes in the period in which a non- current asset (or disposal group) has been either classified as held for sale or sold: a. a description of the non-current asset (or disposal group); b. a description of the facts and circumstances of the sale, or leading to the expected disposal, and the expected manner and timing of that disposal; c. the gain or loss recognised in accordance with paragraphs 20–22 and, if not separately presented in the statement of profit and loss, the caption in the statement of profit and loss that includes that gain or loss; d. if applicable, the reportable segment in which the non-current asset (or disposal group) is presented in accordance with Ind AS 108, Operating Segments. 2.9.4 Deemed cost 2.9.5 In cases where the deemed cost exemption has been utilised, such exemption shall be disclosed 2.9.6 in accounts till the time asset is fully depreciated. Assets given on lease and taken on lease Details of assets under lease are required to be disclosed as per format given in Annexure – 2.4. Capitalised borrowing costs An entity shall disclose: e. the amount of borrowing costs capitalised during the period; and f. the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation. Illustrative disclosures are given in Annexure – 2.4 Fixed Assets Page 86

2B. PHYSICAL VERIFICATION OF ASSETS 2.10 PHYSICAL VERIFICATION 2.10.1 Legal Requirements: a. As per clause 3(i) (b) of CARO’2016, auditors are required to comment on the following: Whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account b. As per Guidance note on CARO, the auditor is required to report that the management has verified the fixed assets at reasonable intervals. What constitutes “reasonable intervals” depends upon the circumstances of each case. The factors to be taken into consideration in this regard include the number of assets, the nature of assets, the relative value of assets, difficulty in verification, situation and geographical spread of the location of the assets, etc. The management may decide about the periodicity of physical verification of fixed assets considering the above factors. While an annual verification may be reasonable, it may be impracticable to carry out the same in some cases. Even in such cases, the verification program should be such that all assets are verified at least once in every three years. Accordingly, our management, considering the size of the Company and the nature of its assets has formed a regular program of physical verification of all fixed assets over a period of three years, other than LPG cylinders and pressure regulators with customers. 2.10.2 The objective of the Physical verification of assets is to ensure that the book balances are in agreement with the physical existence of the assets. This involves periodical checking by actual count of the assets and accounting of the shortages and excesses brought in light by such physical verification. 2.10.3 As per Para 3 (i) (a) & (b) of CARO 2016, the Auditors are required to comment as to whether the Units are maintaining proper records showing full particulars, including quantitative details and situation of the fixed assets and also whether fixed assets have been physically verified and reconciled with the book balance at reasonable intervals. In view of above, it is absolutely necessary that the units/ offices should reconcile the book balance with the physical balance and ensure that proper adjustments are made for the differences. Finance Department will facilitate custodian departments by providing the relevant list of the assets by generating the reports from SAP based on the cost centres like Production, Power & Utilities, Continuous Process Plants, Quality Control etc. 2.10.4 Alternatively the custodian departments, which are controlling the assets i.e. where such assets physically exist can download the report in SAP using T-CODE ART0 Asset Portfolio--- Asset List- --Asset Balance by cost centre and physically carry out the verification as per the verification cycle defined below. However, for better internal control measure, employees independent of the custodian of the assets should carry out the Physical verification of the fixed assets with the books. Fixed Assets INDEX Page 87

As per the following phased program of physical verification, all Property, Plant and Equipment of a given date based on approval taken have to be physically verified and reconciled with the book balance: 1st YEAR 2nd YEAR 3rd YEAR All Buildings – (Plant & Non- Furniture & Fixtures Plant & Equipment including Plant including Township (Asset Class – F* in Spares Buildings)/ Roads/ Drainage SAP) (Asset Class – P* in SAP) & & Sewage (Including ETP’s) Continuous Process Plants – (Asset Class B* & CP35 in Jointly owned assets (Asset Class CP* in SAP) SAP) (Asset Class – J* in SAP) Office Equipment (Asset Class Land (Asset Class – L* in SAP) – E* in SAP) Intangible Assets – All Transport Equipment (Asset Class – IA*, RO* (Asset Class – T* in SAP) etc. in SAP) Railway Siding (Asset Class – ROs and consumer RS* in SAP) pumps Tank ages at installations, depot and AFS LPG cylinders and PRs * 2017-18 is the first year in the current cycle and wherever title or other ownership entitlement are more relevant for verification, the same may be considered. 2.10.5 It should be ensured that Title deeds are available for all immovable properties with administration/law department. The requirement of maintaining the asset register is fulfilled by Asset Module in SAP, which is directly linked to Finance Module. Under SAP the asset register can be generated under T-Code S_ALR_87012004 with sort version Z003, choosing option of list asset and using AVL grid. The asset class can be selected from B* to Z* for asset register excluding AUC items. 2.10.6 The requirement of having an Asset History Card is fulfilled in SAP in the asset Master where details like Asset Class, Description, Serial No., Inventory No., Int. Order No. WBS element, Quantity, Cost Center, Plant, location, Order No., Personnel No (in case of employee assets on hire ), Political State, Business Area ,Asset Value Date, Vendor from whom procured etc. are available. The Asset Master gives the exact situation/ location of the Property, plant and Equipment which is as good as the Asset History Card. However adequate care should be taken while preparing the said Asset Master so that the assets are grouped under the correct asset class and maximum information is available subsequently. 2.10.7 Details of jointly owned Assets (Asset Class – J* in SAP) will also be recorded in the register. Fixed Assets Page 88

2.10.8 Assets costing up to Rs.5000/- each may be excluded from physical verification. 2.10.9 Stocks lying under material codes pertaining to spares capitalised should be verified along with Physical verification of Stores. Upon issue, physical verification of the same will be carried out along with the cycle of Plant and Equipment. 2.10.10 For furniture provided to employees on Hire at their residence scheme Furniture/Mobile/PC on Hire, Office at residence of Sr. Executive and Mobile for Non-Officers scheme, it will be sufficient to obtain a certificate to that extent from the concerned employee. For this purpose, the certification obtained at the time of claim for furniture maintenance is sufficient. It may be categorically clarified that in case of Furniture Maintenance Claim through ESS, claim itself will be treated as certification and no further certification is required. 2.10.11 In case of Intangible Assets grouped under the head “Computer Software”, certificate from the user under whose custody the software is available is to be obtained. 2.10.12 In case of Intangible Assets grouped under category “Licenses”, certificate from the Technical Services/ Production department may be obtained that the Unit to which License fee relates exists. Certification of the department shall be considered as physical verification of Intangible Assets- License Fees. 2.10.13 The items appearing under the category of dismantled assets (DAS Type Materials in SAP) that have been removed from “Property, plant and Equipment” can also be listed by a report in SAP under MM Module for Physical verification purpose. 2.10.14 Physical verification of Property, plant and Equipment can be conducted by external agencies appointed by unit. Selection criteria for the same are to be decided by unit. 2.10.15 During the course of verification, if any asset is found in unserviceable condition, such instances shall be brought to the notice of the controlling department for such action as may be deemed fit. The cases shall be brought in the physical verification report. 2.10.16 Necessary adjustment should be carried out in the books of account for the difference between the physical existence of the Property, plant and Equipment and book inventory of each asset after obtaining proper approval of the competent authority. Units are required to confirm the completion of physical verification exercise every year. Fixed Assets Page 89

2C. INTANGIBLE ASSETS 2.11 BACKGROUND In Note-3 Intangible assets are classified under three categories • Right of way • Licenses/ Technical Know how • Computer software These intangible assets pertain to Type of Intangible Asset Pertaining to Licenses/ Technical Know How Basic Design engineering (P & ID) for process/ production, Process Design obtained from Right of Way Licensors Expenditure on Computer Software ROW’s obtained at the time of Laying of Pipelines Purchased as well as in house developed software's Under SAP Intangible assets should be created under Asset Class IA series with GL reconciliation account 3111100000, 3110300000 & & 3110300200. Intangible assets can be viewed under T- code AR01 with Asset class as IA*. References to Authoritative Literature Ind-AS-38- Intangible assets Ind AS Compliant Schedule III to Companies Act 2013 Accounting policy of IOCL Refer Chapter-26 for recent accounting policies. 2.12 DEFINITION AND RECOGNITION 2.13 a. An intangible asset is an identifiable non-monetary asset, without physical substance, held 2.13.1 for use in the production or supply of goods or services, for rental to others, or for administrative purposes. b. Intangible Asset Should be recognized if, and only if: • It is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and • The cost of the asset can be measured reliably • SPECIFIC GUIDELINES Expenses incurred on Technical Know-how/ License Fee - Treatment of various elements falling under Licensor agreements. a. The Treatment of various elements under Licensors agreement should be as under - b. Accounting treatment of expenditure incurred after commissioning of the plant on technical know/how, license, engineering fees, royalty, per diem charges paid to licensors (i.e. expenditure in relation to existing production facilities and processes) - Charged To revenue Fixed Assets INDEX Page 90

c. Expenditure on detailed engineering and process design including FEED- Front End Engineering Design, per diem charges -Capitalized along with cost of the plant and Machinery (Tangible PPE) d. Expenditure on Basic Design engineering (P & ID) for process/ production, Process Design - Capitalized as Intangible asset at the time of capitalization of related process unit. e. As and when Process design, Technical Know How (BDE-Basic Design and Engineering) is acquired from the licensor on payment of fees company is free to use that know how for the purpose of construction of its Process Units irrespective of the commissioning of the asset for which it is acquired. But the economic benefit of such Technical Know How is available only when the plant is commissioned. Accordingly, the intangible asset is recognised when process unit (to which such intangible asset pertains) is commissioned. f. Expenditure on production related Technical knowhow- Capitalized at the time of capitalization of related process unit. This knowhow can be used once the plant becomes operational. Thus, this type of expenditure should be capitalized at the time of capitalization of the main process unit as its economic benefit is available after the commencement of the related process unit. g. Expenditure incurred on technical know-how/ license/ engineering fee relating to process design/ plants/ facilities during the year shall be reflected as Work in Progress - Intangible Asset “grouped under Note -3.1 \"Intangible assets under development\" till such time the Plant/ Facility have not been capitalised. In case the plant/facility have been capitalised during the year, the expenditure on technical know-how/license fee shall be accounted as Intangible Asset under Note-3 and the same shall be amortised over the life of the said plant/ facility. h. It is further clarified that where an intangible asset is capitalised during a particular quarter, the amortization should be provided for the whole quarter irrespective of the date of capitalisation. Further, the period over which the said intangible asset is to be amortised should be reckoned from the quarter in which the said asset has been capitalised. The same is in line with accounting policy for tangible as well as intangible assets. 2.13.2 Perpetual Right of Way on laying of Pipelines a. Cost of right-of-way for laying pipelines is to be capitalised to the extent of actual cost of consideration paid to the landowners for the use of right-of-way. Compensation for damages for crop, trees and other structures etc. paid thereon during construction period is to be accounted as CWIP under AUC and capitalised along with mainline. Subsequent payment of crop compensation, when mainline is in operation, if any, shall be charged to revenue. b. Right of Way for laying of Pipelines shall be recognized as Intangible Assets in Note-3. c. Right of ways with indefinite useful lives are not amortised but are tested for impairment annually at the cash-generating unit level. 2.13.3 Expenditure on Computer Software a. Any expenditure incurred on Computer software, which is an integral part of the related hardware i.e. without which the hardware cannot operate, shall be capitalised as Fixed Asset along with the Hardware. This shall also include application software acquired along with the hardware. Where the software is not an integral part of the related hardware, the Fixed Assets Page 91