to the date of determination of income u/s 143(1) and where regular assessment is made, to the date of such regular assessment, on an amount equal to assessed tax, on the amount by which advance tax paid falls short of the assessed tax. 23.3.1.5 Interest for deferment of advance tax: As per section 234C of the Income Tax Act, if the Advance tax paid by the company on its current income on or before 15th day of June is less than 15% of the tax due on returned income or the amount of advance tax paid on or before 15th day of September is less than 45% of tax due on returned income or the amount of advance tax paid on or before 15th day of December is less than 75% of tax due on returned income then, the company shall be liable to pay simple interest at applicable rate per month for a period of three months on the amount of shortfall from 15% or 45% or 75%, as the case may be, of the tax due on returned income. Provided that if the advance tax paid by the assessee on the current income, on or before the 15th day of June or the 15th day of September, is not less than twelve per cent or, as the case may be, thirty-six per cent of the tax due on the returned income, then, the assessee shall not be liable to pay any interest on the amount of the shortfall on those dates. Advance tax paid by the company on its current income on or before 15th day of March is less than the tax due on the returned income, then the company shall be liable to pay simple interest at applicable rate on the amount of shortfall from the tax due on the returned income. 23.3.2 Provision for Tax: 23.3.2.1 Deferred Tax Calculation: 23.3.2.2 Accounting for deferred tax –a five step approach: • Calculate tax base. • Calculate temporary difference. • Identify the temporary differences that give rise to deferred tax assets or liabilities. • Calculate deferred tax balances using appropriate tax rate. • Recognize deferred tax in income, equity or as an adjustment to goodwill as the case may be. Income Taxes Page 574
23.3.2.3 Format for working of Deferred Tax Asset (DTA)/ Deferred Tax Liability (DTL) and corresponding Deferred Tax Expense/ Income: Opening Balance as at Closing Balance at the Profit beginning of year end of the Year & Loss /OCI Temporary Differences Tax Carryi Differ DTA Tax Carryi Differe DTA (Charg Base ng ence / Bas ng nce / e) amou (DTL e amou (DTL /Credi nt ) nt )t 1 2 3 4 5 6 7 8 9=8-4 Difference in W.D.V due to depreciation Voluntary Retirement expenses Provision on Inventory, Debtors, Loans & Adv, Investment Foreign currency exchange gain on long term monetary item Capital Grants Provision for probable contingencies Others (Disallowance u/s.43B) Fair valuation of Equity instruments-OCI Fair valuation of debt instruments-GOI Bonds Fair valuation of debt instruments-Others Impact of ICDS Disallowance u/s 40(a)(ia) MTM Gain/loss 23.3.2.4 Accounting of Tax Expense (Current tax and Deferred tax): At the end of each quarter, provision for current tax is debited to GL 5701000000 PROVISION FOR INCOME TAX CURRENT YEAR and credited to GL 2320100000 PROVISION FOR TAXATION. Provision for deferred tax is debited to GL 5703000000 PROVISION FOR DEFERRED TAX and credited to GL 2120900000 OTHER LIABILITIES-DEFERRED TAX LIABILITY. 23.3.2.5 Accounting entry in respect of MAT credit entitlement: Income Taxes Page 575
MAT credit entitlement shall be debited to GL 3441320570 LOANS & ADVANCES-UCG-MAT CREDIT RECEIVABLE and credited to GL 5707000000 MAT CREDIT-ENTITLEMENT/UTILISATION where tax under MAT is more than tax under normal provision. In case tax under normal provisions is more than tax under MAT provisions, there is utilization of MAT credit. In such cases the amount of utilization is debited to GL 2320100000 PROVISION FOR TAXATION and credited to GL 3441320570 LOANS & ADVANCES-UCG-MAT CREDIT RECEIVABLE. MAT Credit available to the company at the end of the year is shown in a separate head under Deferred Tax Asset/ Liability of the company. 23.3.3 Tax Audit: As per section 44AB of Income Tax Act, the company has to get its accounts audited for the financial year in the prescribed form i.e. Form 3CD duly signed and verified by such accountant and setting forth such particulars as may be prescribed through Income Tax Act. This Form is to be uploaded by the Tax Auditor, before filing of Annual Return of Income Tax. The details for Tax Audit are to be sent by each Division/Regions to Registered office along with Form 3CD duly audited enclosing all relevant schedules required for consolidation of corporate tax audit report at RO. 23.3.4 Income computation and disclosure standard (ICDS): The Central Board of Direct Taxes (CBDT) has notified ten Income Computation and Disclosure Standards (ICDS) through its notification no 87/2016 dated 29th September 2016 applicable from FY 2016-17. Ten ICDS have been notified which are tabulated below: ICDS Name Relevant Relevant Ind AS AS I Accounting Policies II Valuation of Inventories 1 1&8 2 2 III Construction Contracts 7 11 IV Revenue Recognition 9 18 V Tangible Fixed Assets 10 16 VI Effects of changes in foreign exchange rates 11 21 VII Government Grants 12 20 32 VIII Securities 30 23 IX Borrowing Costs 16 37 X Provisions, contingent liabilities and contingent 29 assets Income Taxes Page 576
The above ICDS are applicable w.e.f. 01-04-2016 and hence provision for taxation needs to be computed based on ICDS (Income Computation and Disclosure Standards). 23.4 DISCLOSURES 23.4.1 Current tax and deferred tax relating to profit and loss is recognised in the statement of profit and loss. Taxes on items recognised outside profit or loss, in the same or a different period, are recognised outside statement of profit or loss. Therefore, current tax and deferred tax that relates to items that are recognised, in the same or a different period: 23.4.2 • Other comprehensive income is recognised in other comprehensive income. • Directly in equity, is recognised directly in equity. Disclosure of deferred tax in respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits is made for: 23.4.3 • the amount of the deferred tax assets and liabilities recognised in the balance sheet for each period presented; • the amount of the deferred tax income or expense recognised in profit or loss, if this is not apparent from the changes in the amounts recognised in the balance sheet; Sample disclosure of deferred tax in respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits is provided below: Income Taxes INDEX Page 577
Income Taxes Page 578
CHAPTER 24 : CONSOLIDATED FINANCIAL STATEMENTS A. BACKGROUND This chapter deals with the accounting treatment and formats of presenting the financial position of the entire Group as if they were a single Company through the preparation of Consolidated Financial Statements (CFS) of the Group. CFS of the Group includes the financial information of the parent Company and its subsidiaries as a single economic entity that reflects the economic resources controlled by the Group, the obligations of the Group and results that the Group achieves with its resources. IOCL is having investment in subsidiaries, associates and joint ventures. These investments are carried at cost in the standalone financial statements of IOCL. Some of the key investments in these group companies are as follows: Indian Subsidiaries • Chennai Petroleum Corporation Limited • Indian Catalyst Private Limited Foreign Subsidiaries • Indian Oil (Mauritius) Ltd., Mauritius (Discussed in detail in section D) • Lanka IOC PLC, Sri Lanka (Discussed in detail in section D) • IOC Middle East FZE, UAE (Discussed in detail in section D) • IOC Sweden AB, Sweden (Discussed in detail in section D) • IOCL (USA) Inc., USA (Discussed in detail in section D) • IndOil Global B.V., The Netherlands (Discussed in detail in section D) • IOCL Singapore Pte. Ltd. (Discussed in detail in section D) Joint ventures • Indian Oil tanking Limited • Lubrizol India Private Limited • Indian Oil Petronas Private Limited • Green Gas Limited • Indian Oil Panipat Power Consortium Limited • Petronet CI Limited • Indian Oil LNG Private Limited • Indian Oil Sky Tanking Private Limited • Suntera Nigeria 205 Limited • Delhi Aviation Fuel Facility Private Limited • Indian Synthetic Rubber Private Limited Consolidated Financial Statement INDEX Page 579
• NPCIL- Indian Oil Nuclear Energy Corporation Limited • GSPL India Transco Limited • GSPL India Gasnet Limited • Indian Oil - Adani Gas Private Limited • Mumbai Aviation Fuel Farm Facility Private Limited • Kochi Salem Pipeline Private Limited • Hindustan Urvarak and Rasayan Limited • Ratnagiri Refinery & Petrochemicals Limited • Indradhanush Gas Grid Limited Associates • Avi-Oil India Private Limited • Petronet LNG Limited • Petronet India Limited • Petronet VK Limited Interest in joint operations a. E&P Blocks (As on 31.03.2020) • AA-ONN-2001/2 • GK-OSN-2009/1 • GK-OSN-2009/2 • CB-ONN-2010/6 • AAP-ON-94/1 • AA/ONDSF/UMATARA/2018 • BK-CBM-2001/1 • NK-CBM-2001/1 • FARSI BLOCK IRAN • LIBYA BLOCK 86 • LIBYA BLOCK 102/4 • SHAKTHI GABON • AREA 95-96 • RJ-ONHP-2017/8 • AA-ONHP-2017/12 • BLOCK-32 b. Others • Petroleum India International Consolidated Financial Statement Page 580
B. REFERENCES TO AUTHORITATIVE LITERATURE Indian Accounting Standards issued by the Central government in consultation with National Advisory Committee on Accounting Standards (‘NACAS’) • Ind AS – 110 Consolidated Financial Statements • Ind AS – 111 Joint Arrangements • Ind AS – 28 Investments in Associates and Joint Ventures Ind AS Compliant Schedule III to Companies Act 2013 C. ACCOUNTING UNDER IND AS 24.1 CONSOLIDATION PROCEDURE: CONSOLIDATION OF SUBSIDIARIES When preparing consolidated financial statements, an entity combines the financial statements of the parent and its subsidiaries on a 'line-by-line' basis by adding together like items of assets, liabilities, equity, income, expenses and cash flows. 24.1.1 Uniform accounting policies A parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances (Para 19 of Ind AS 110). 24.1.2 Date of commencement of consolidation of subsidiaries Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee (Para 20 of Ind AS 110). 24.1.3 Principles of line-by-line consolidation Consolidated financial statements (Para B86 of Ind AS 110): • Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries. • Offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary (Ind AS 103 explains how to account for any related goodwill). • eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full). Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statements. Ind AS12, Income Taxes, applies to temporary differences that arise from the elimination of profits and losses resulting from intragroup transactions With reference to clause “c”, following is the example of deferred tax on inter-group transactions: Consolidated Financial Statement INDEX Page 581
Issue: Entity S (subsidiary) sells goods costing 60,000 to its parent Entity P for 70,000. Such goods are still held in inventory at the year end. Case I - Both entities are in the same jurisdiction and applicable tax rate is 30%. Case II – Entity S and Entity P are in different jurisdictions. Tax rate applicable for Entity S is 30% and for Entity P is 40%. Solution Consolidation adjustment would result in elimination of profit of 10,000. However, sale of inventory between 2 companies is a taxable event which changes the tax base of the inventory (from 60,000 to 70,000). The difference between the carrying amount of inventory in CFS (60,000) and its tax base (70,000) gives rise to a temporary difference of 10,000. Particulars Case I Case II Temporary Difference 10,000 10,000 Applicable tax rate for Deferred tax 30% 40% Deferred tax asset 3,000 4,000 In this case, during the process of consolidation, profit of Rs. 10000 towards unrealized income was eliminated. However, tax provision on the same has already been created in the subsidiary books which need adjustment to make it equitable. As per Ind-AS provisions, deferred tax needs to be accounted using tax rate of the receiving company which is 40% in this case. 24.1.4 Reporting date The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall have the same reporting date. When the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for consolidation purposes, additional financial information as of the same date as the financial statements of the parent to enable the parent to consolidate the financial information of the subsidiary, unless it is impracticable to do so (Para B92 of Ind AS 110) If it is impracticable to do so, the parent shall consolidate the financial information of the subsidiary using the most recent financial statements of the subsidiary adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements. In any case, the difference between the date of the subsidiary’s financial statements and that of the consolidated financial statements shall be not more than three months, and the length of the reporting periods and any difference between the dates of the financial statements shall be the same from period to period (Para B93 of Ind AS 110). 24.1.5 D1.5 Non-controlling interest An entity shall attribute the profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling interests. The entity shall also attribute total comprehensive income to the owners of the parent and to the non-controlling Consolidated Financial Statement Page 582
interests even if this results in the non-controlling interests having a deficit balance (Para B94 of Ind AS 110). A parent shall present non-controlling interests in the consolidated balance sheet within equity, separately from the equity of the owners of the parent (Para 22 of Ind AS 110). Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners) (Para 23 of Ind AS 110). 24.1.6 D1.6 Loss of control If a parent loses control of a subsidiary, the parent shall (Para 25 of Ind AS 110): a. De-recognize the assets and liabilities of the former subsidiary from the consolidated balance sheet. b. Recognizes any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant Ind ASs. That fair value shall be regarded as the fair value on initial recognition of a financial asset in accordance with Ind AS 109 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture c. Recognize the gain or loss associated with the loss of control attributable to the former controlling interest. 24.1.7 D1.7 Deferred income tax implications An entity shall recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, except to the extent that both of the following conditions are satisfied: • the parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and • It is probable that the temporary difference will not reverse in the foreseeable future. (Para 39 of Ind AS 12) Temporary differences arise when the carrying amount of investments in subsidiaries, associates or interests in joint arrangements becomes different from the tax base of the investment or interest. Such differences may arise in a number of different circumstances, for example: • the existence of undistributed profits of associates; • changes in foreign exchange rates when a parent and its subsidiary are based in different countries; and • A reduction in the carrying amount of an investment in an associate to its recoverable amount. As a parent controls the dividend policy of its subsidiary, it is able to control the timing of the reversal of temporary differences associated with that investment (including the temporary Consolidated Financial Statement Page 583
differences arising not only from undistributed profits but also from any foreign exchange translation differences). Furthermore, it would often be impracticable to determine the amount of income taxes that would be payable when the temporary difference reverses. Therefore, when the parent has determined that those profits will not be distributed in the foreseeable future the parent does not recognise a deferred tax liability. (Para 40 of Ind AS 12) 24.2 CONSOLIDATION PROCEDURE: CONSOLIDATION OF ASSOCIATES AND JOINT VENTURES An entity with joint control of, or significant influence over, an investee shall account for its investment in an associate or a joint venture using the equity method (Para 16 of Ind AS 28). 24.2.1 Equity method accounting Equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income (Para 3 of Ind AS 28). Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the investee’s profit or loss is recognised in the investor’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. The investor’s share of those changes is recognised in the investor’s other comprehensive income (see Ind AS 1, Presentation of Financial Statements) (Para 10 of Ind AS 28). Illustration of application of equity method of accounting Entity A acquired a 30% interest in entity C and achieved significant influence. The cost of the investment was INR 250,000. The associate has net assets of INR 500,000 at the date of acquisition. The fair value of those net assets is INR 600,000, because the fair value of property, plant and equipment is INR 100,000 higher than its book value. This property, plant and equipment has a remaining useful life of 10 years. After acquisition, entity C recognised profit after tax of INR 100,000 and paid a dividend of INR 9,000 out of these profits. Entity C also recognised exchange losses of INR 20,000 directly in other comprehensive income. Entity A's interest in entity C at the end of the year is calculated as follows: Particulars Amount Consolidated Financial Statement Page 584 INDEX
Balance on acquisition under the equity method (including goodwill of INR 250,000 70,000 (C250,000 – (30% × INR 600,000)) Entity A's share of entity C's after-tax profit (30% × INR 100,000) 30,000 Elimination of dividend received by entity A from entity C (30% × INR 9,000) (2,700) Entity A's share of entity C's exchange differences (30% × INR 20,000) (6,000) Entity A’s share of amortisation of the fair value uplift (30% × INR 10,000) (3,000) Entity A's interest in entity C at the end of the year under the equity method 268,300 (including goodwill) Entity C has net assets at the end of the year of INR 571,000 (that is, net assets at the start of the year of INR 500,000, plus profit during the year of INR 100,000, less dividends of INR 9,000, less foreign exchange losses of INR 20,000). Entity A's interest in entity C at the end of the year is made up of: Particulars Amount Entity A's share of entity C's net assets (30% × INR 571,000) 171,300 Goodwill 70,000 Entity A's share of entity C's fair value adjustments (the initial fair value 27,000 difference of C100,000 has been reduced by INR 10,000, due to depreciation in the year) (30% × INR 90,000) 268,300 Entity A's interest in entity C 24.2.2 Uniform accounting policies The entity’s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances unless, in case of an associate, it is impracticable to do so (Para 35 of Ind AS 28). 24.2.3 Reporting date The most recent available financial statements of the associate or joint venture are used by the entity in applying the equity method. When the end of the reporting period of the entity is different from that of the associate or joint venture, the associate or joint venture prepares, for the use of the entity, financial statements as of the same date as the financial statements of the entity unless it is impracticable to do so (Para 33 of Ind AS 28). When, in accordance with paragraph 33, the financial statements of an associate or a joint venture used in applying the equity method are prepared as of a date different from that used by the entity, adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the entity’s financial statements. In any case, the difference between the end of the reporting period of the associate or joint venture and that of the entity shall be no more than three months. The length of the reporting periods and any difference between the ends of the reporting periods shall be the same from period to period (Para 34 of Ind AS 28). Consolidated Financial Statement Page 585
24.2.4 Inter-Company elimination Gains and losses resulting from ‘upstream’ and ‘downstream’ transactions between an entity (including its consolidated subsidiaries) and its associate or joint venture are recognised in the entity’s financial statements only to the extent of unrelated investors’ interests in the associate or joint venture. ‘Upstream’ transactions are, for example, sales of assets from an associate or a joint venture to the investor. ‘Downstream’ transactions are, for example, sales or contributions of assets from the investor to its associate or its joint venture. The investor’s share in the associate’s or joint venture’s gains or losses resulting from these transactions is eliminated (Para 28 of Ind AS 28). Example of elimination of upstream transactions An entity has a 20% interest in an associate. The associate sells inventory costing INR 300 to the entity for cash of INR 500. The inventory has not been sold to third parties at the balance sheet date. The profit attributable to the entity is required to be eliminated from the consolidated financial statements. The associate recorded a profit of INR 200 on this transaction. The entity's share of this profit is INR 40 (C200 × 20%). The entity eliminates its share of the profit against the carrying amount of the associate. The entity’s interest in its associate is not increased by the profits that it generates from selling upstream until the transaction has been crystallised by an onward sale to a third party. This is consistent with the requirements of paragraph 10 of IAS 28, because the associate is carried at an amount equal to cost plus share of profits. The accounting entries are to debit the share of profit of the associate (INR 40) and to credit the investment in the associate (INR 40). Assuming that the entity sells the inventory to a third party in the following year for INR 500, it is necessary to reverse the profit elimination entry made on consolidation in the prior year, because the unrealised profit has now been crystallised by an onward sale. The accounting that results is consistent with the accounting for realised transactions. Overall, there is a profit on the transaction of INR 200, and the group's share of this profit is taken up in the share of its associate's result. Any additional profit made by the entity by selling the inventory would be recorded as part of operating profit in the normal way. Example of elimination of downstream transactions The elimination of unrealised profits is against the carrying value of the associate or joint venture, because the asset considered has been transferred to the associate or joint venture. Unrealised losses should not be eliminated to the extent that the transaction provides evidence of an impairment of the asset transferred. An entity has a 20% interest in a joint venture. The entity sells inventory to the joint venture for INR 500. The original cost of the inventory was INR 300. The inventory has not been sold to a third party at the balance sheet date. The entity records a profit of INR 200. However, because the sale was to a joint venture, an element of this profit is unrealised and should be eliminated. The unrealised profit is INR 40 (20% × INR 200). The adjustments required to be made in the entity's books are to debit revenue of INR 100 (INR 500 × 20%), to credit cost of sales of INR 60 (INR 300 × 20%) (Or the entity could debit the share of profit of the joint venture by INR 40), and to credit the investment in the joint venture of INR 40. Consolidated Financial Statement Page 586
The adjustments will be reversed by the entity when the joint venture sells the inventory on to a third party. 24.2.5 Entity increases stake in associate but does not gain control A group made an investment of 20% in an associate in 20X1. The investment cost INR 12 million and the book value (also fair value) of the associate's net assets at that date was INR 50 million. In 20X3, it makes a further investment of 20% in the company, to bring its total investment to 40%. The fair value of the consideration given for the additional 20% is INR 16 million. The net assets of the associate stand in its books at INR 68 million on the date of the increase in stake. The fair value exercise shows that the company's net assets are worth INR 75 million. The goodwill arising on acquisition and the balance sheet treatment in the group would be as follows: Particulars Amount (MN) Original investment 12 Share of the fair value of net assets (20% × INR 50m) (10) Goodwill arising on first tranche 2 Particulars Amount (MN) Second investment 16 Share of the fair value of net assets (20% × INR 75m) (15) Goodwill arising on second tranche 1 Total goodwill is 3 MN. The goodwill figure that emerges is instinctively correct, because it reflects the fact that a premium of INR 1 million (that is, INR 16m − (INR 75m × 20%)) arises on the acquisition of the additional 20%. The amount included in the consolidated balance sheet comprises cost of INR 28 million (of which INR 3 million is goodwill) and the equity-accounted profits, after acquisition of the first tranche, of INR 3.6 million ((INR 68m – INR 50m) × 20%). 24.2.6 Partial disposal of an associate retaining significant influence If an entity’s ownership interest in an associate or a joint venture is reduced, but the entity continues to apply the equity method, the entity shall reclassify to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be required to be reclassified to profit or loss on the disposal of the related assets or liabilities (Para 25 of Ind AS 28) If an entity’s ownership interest in an associate is reduced, but the investment continues to be an associate, the following steps should be performed: Consolidated Financial Statement Page 587
• De-recognise the carrying value of the associate proportionate to the percentage reduced. • Recognise the fair value of the consideration received. • Recognise the resulting gain or loss in profit or loss. • Measure the remaining investment in accordance with Ind AS 28. This is illustrated in the example below- Entity A has a 40% stake in entity B. Entity B is an associate of entity A. During the period, entity A sells a quarter of its stake (10%) in entity B for consideration of INR 80 million. From the date of the partial disposal, entity A will continue to recognise its remaining 30% interest in entity B as an associate. Entity B's net asset carrying value at the date of the partial disposal is INR 300 million. Goodwill was calculated at INR 30 million at the date of acquiring the associate and there has been no impairment recognised. At the date of the partial disposal, the associate's carrying values in entity A's consolidated financial statements are as follows: Particulars Amount (MN) Investment in associate (including goodwill) (40% × INR 300m) + INR 150 30m) Cumulative share of associate's other comprehensive income (for 20 example, an AFS reserve) The accounting entry for the partial disposal is as follows: Cash Dr 80 MN Investment in associate (25% × INR 150m) 37.5 MN Gain on partial disposal 42.5 MN Equity (reclassification adjustment) 5 MN Profit or loss (presented as part of the gain on partial disposal) 5 MN The remaining investment in the associate will continue to be accounted for using the equity method for the remaining 30% interest. 24.2.7 Deferred income tax implications An entity shall recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, except to the extent that both of the following conditions are satisfied: • the parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and • It is probable that the temporary difference will not reverse in the foreseeable future. (Para 39 of Ind AS 12) Consolidated Financial Statement Page 588
Temporary differences arise when the carrying amount of investments in subsidiaries, associates or interests in joint arrangements becomes different from the tax base of the investment or interest. Such differences may arise in a number of different circumstances, for example: • the existence of undistributed profits of subsidiaries, associates and joint arrangements; • changes in foreign exchange rates when a parent and its subsidiary are based in different countries; and • A reduction in the carrying amount of an investment in an associate to its recoverable amount. An investor in an associate does not control that entity and is usually not in a position to determine its dividend policy. Therefore, in the absence of an agreement requiring that the profits of the associate will not be distributed in the foreseeable future, an investor recognises a deferred tax liability arising from taxable temporary differences associated with its investment in the associate. The arrangement between the parties to a joint arrangement usually deals with the distribution of the profits and identifies whether decisions on such matters require the consent of all the parties or a group of the parties. When the joint venturer or joint operator can control the timing of the distribution of its share of the profits of the joint arrangement and it is probable that its share of the profits will not be distributed in the foreseeable future, a deferred tax liability is not recognised. 24.3 CONSOLIDATION PROCEDURE: CONSOLIDATION OF JOINT OPERATIONS A joint operator shall recognise in relation to its interest in a joint operation (para 20 of Ind AS 111): • its assets, including its share of any assets held jointly; • its liabilities, including its share of any liabilities incurred jointly; • its revenue from the sale of its share of the output arising from the joint operation; • its share of the revenue from the sale of the output by the joint operation; and • Its expenses, including its share of any expenses incurred jointly. A joint operator shall account for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the Ind ASs applicable to the particular assets, liabilities, revenues and expenses (para 21 of Ind AS 111). The above accounting is being done in the books of joint operator in the standalone financial statements. While preparing the consolidated financial statements, no additional adjustments in relation to joint operation are required to be made. Consolidated Financial Statement INDEX Page 589
24.4 GAAP ADJUSTMENTS In respect of following group foreign entities listed below, the entities are following IFRS / US GAAP under their local GAAP. Entity Legal name Reporting under Local Relationship with GAAP parent IOCL (USA) Inc. US GAAP Subsidiary IndOil Global B.V. Netherlands IFRS Subsidiary Suntera Nigeria 205 Limited IFRS Joint venture IOC Sweden AB IFRS Subsidiary IOC Middle East FZE IFRS Subsidiary Lanka IOC PLC SLFRS Subsidiary Indian Oil (Mauritius) Limited (IOML) IFRS Subsidiary IOCL Singapore Pte. Ltd. SFRS Subsidiary 24.4.1 GAAP adjustments and consolidation adjustments During the process of preparation of consolidated financial statements for IOCL at group level for the year ended 31 March 201, the following were the key adjustments being passed for the purpose of consolidation: # Applicable Ind AS IOCL Indoil Suntera IOC IOC Lank IOML IOC a IOC Singap USA Global Nigeria Swed ME ore B.V. 205 en AB 1 Revenue Recognition Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Point of recognition of Yes sales Yes Royalty- Presentation 2 Financial Instruments Financial assets –Equity shares (other than subsidiaries, JVs and Associates) Financial Instrument – Yes New Impairment Model Consolidated Financial Statement INDEX Page 590
# Applicable Ind AS IOCL Indoil Suntera IOC IOC Lank IOML IOC a IOC Singap USA Global Nigeria Swed ME ore B.V. 205 en AB 3 Property, Plant & Yes Yes Yes Equipment - Yes Decommissioning Yes Liability 4 Upfront fee on borrowings 5 Borrowing Costs Yes 6 Prior period items Yes 7 Exploration for and Yes Evaluation of Mineral Resources - Exploration & Evaluation assets 8 Exploration for and Evaluation of Mineral Resources - Depletion method 9 Exploration for and Yes Evaluation of Mineral Resources - Impairment assessment 10 Business combinations 11 Goodwill Yes 24.4.1.1 Point of Revenue Recognition (applicable for IOCL USA) Background: The crude produced is sold in the domestic market only. In case of such sales, the operator undertakes the sale on ex-well head or on F.O.R basis. Accounting policy being followed in local GAAP: Revenue is recognized on dispatch basis. Key Implications under Ind AS on financial reporting In accordance with the requirements of Ind AS 18, in cases where risks and rewards are transferred upon delivery (F.O.R basis), the revenue should also be recognised by IOCL when the goods are delivered and accepted by the dealer/customer. Consolidated Financial Statement Page 591
As at the period end in relation to dispatch of goods which are not yet reached to the customers i.e. stock-n-transit: • Revenue recognised for stock in transit to the corporation, should be reversed with corresponding decrease in debtors. • Cost of goods pertaining to stock in transit should be reversed with corresponding increase in inventory of finished goods. 24.4.1.2 Royalty- Presentation (applicable for IndOil Global) Background: The Company pays royalty to the government. Royalty is a tax on production and is basically a liability on Company’s account. It is not the consideration payable to the customer. Accounting policy being followed in local GAAP: Royalty expenses are presented net of revenue i.e. Gross revenue less Royalty. As per management, this is consistent with industry practice in North America. Key Implications under Ind AS on financial reporting Royalties should be presented as a part of expense by grossing up the revenue. 24.4.1.3 Financial assets –Equity shares (other than subsidiaries/ associates or joint ventures) Background: The following are the investments made by foreign group entities in the unquoted equity of other entities: Investor Investee IOC Sweden AB Petrocarabobo S.A. Venezuela IOC Sweden AB Carabobo Ingenieria S.A. Venezuela- (CICSA) IOC Sweden AB Phinery Ltd IOCL Singapore Pte Ltd Lanzatech New Zealand Limited Lanka IOC Ceylon Petroleum Storage Terminal Limited (33.33% shareholding) In spite of having 33.33% shareholding, the management has concluded that due to Government influence and sensitivity of industry towards national economy, Lanka IOC Plc do not have significant influence over decisions of the investee. IOML Mer Rouge Oil Storage Terminal (MOST) The Company is carrying its interest in joint venture at cost. It has not accounted for its joint venture under the equity method since the investee has not started its operating activities and the management believes that the amounts involved are immaterial. Post change in shareholding during 2016-2017, management has concluded it to be a normal investment in equity shares. In 2016-17 financials, this Consolidated Financial Statement Page 592
investment is shown under ‘available for sale’ category and is being carried at cost under Local GAAP. Accounting policy being followed in local GAAP: Under IAS 39, all the above unquoted equity investments are stated at cost. Key Implications under Ind AS on financial reporting Under Ind AS, for investments in equity shares which are not held for trading purposes, management has irrevocable option to classify and measure at fair value through Other Comprehensive Income (OCI). Otherwise, company may record such investment at fair value through profit and loss. Further, fair value disclosures need to be given under Ind AS 107 These investments need to be fair valued and the changes in fair value needs to be taken to PL/ OCI. In case of investment by IOML in MOST, the Company can continue the accounting carried out under Local GAAP on the grounds of materiality. 24.4.1.4 Financial instruments – New impairment model (applicable for all group foreign entities) Accounting policy being followed in local GAAP: Presently, the Company does not follow the expected credit loss model in respect of financial assets. Moreover, there is no provision matrix in respect of the receivables. Key Implications under Ind AS on financial reporting Expected credit loss model is applicable for impairment of all financial assets (including trade receivable) Refer D1.6 of Chapter 5- Financial Instruments for Expected credit loss model. 24.4.1.5 Property, plant and equipment (applicable for IOCL USA and IndOil Global) Background: Accounting policy being followed in local GAAP: Decommissioning liabilities are determined by discounting expected future cash flows using credit adjusted risk free rate, with a corresponding increase to carrying amount of related asset. The periodic unwinding of the discount is recognised in profit or loss as finance cost as it occurs. Changes in decommissioning liability is added / deducted from the cost of the asset. The adjusted depreciable asset is then depreciated prospectively over the remaining useful life. Key Implications under Ind AS on financial reporting Accounting carried out local GAAP can be continued. 24.4.1.6 Upfront fee on borrowings (applicable for IndOil Global) Background: Consolidated Financial Statement Page 593
In IndOil Global, the Company has taken a facility from bank amounting to USD 600 million of which the total drawn amount as at 31 March 2016 is USD 283 million. The arrangement fee on the said facility is USD 12.4 million. The interest terms are CDOR plus 1.05% p.a. and its repayment terms: are 5 years after the amount drawn. It is general purpose loan. Accounting policy being followed in local GAAP: Upfront fees paid on borrowings are initially recognized in the carrying amount of the loan and considered in the effective interest rate on the borrowings. Key Implications under Ind AS on financial reporting Accounting carried out local GAAP is to be continued. 24.4.1.7 Borrowing costs (applicable for Lanka IOC) Background: As per Ind AS 23, borrowing cost includes exchange difference arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. The Company has taken short term loans in foreign currency. Accounting policy being followed in local GAAP: In respect of IOCL Lanka, no adjustment is being made for exchange difference to the extent of interest differential on account of foreign currency borrowing. Total exchange loss during the year along with interest expense on loans is shown under finance expenses. Key Implications under Ind AS on financial reporting Borrowing cost includes exchange difference arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. 24.4.1.8 Prior period items (applicable for IOCL USA) Background: In the foreign entity IOCL (USA), during the year ended 31 March 2016, management discovered that certain unproved oil and natural gas leases had expired in prior reporting periods and had not been recorded as abandonment of expired leases in the correct reporting periods under Local GAAP. Accounting policy being followed in local GAAP: While preparing the financials for 2015-16, the Company restated its financial statements and the impact of the error was taken in 2014-2015. Key Implications under Ind AS on financial reporting The treatment of prior period error under Ind AS is similar to US GAAP. 24.4.1.9 Exploration for and Evaluation of Mineral Resources Exploration & Evaluation assets (applicable for Suntera Nigeria) Background: Consolidated Financial Statement Page 594
In the foreign entity Suntera Nigeria 205, the Company has a participating interest in OML 142. The Company is in the exploration and production of oil and gas. The block has not yet reached the appraisal stage. Accounting policy being followed in local GAAP: Under IFRS, the Company is following full cost method for accounting of acquisition, exploration and development costs. Further, following costs are included in the initial measurement of exploration and evaluation assets: • Technical services and studies • Seismic acquisition • Exploratory drilling and testing • Abandonment costs • General and administrative expenses Key Implications under Ind AS on financial reporting General and administrative costs are included in exploration and evaluation cost only to the extent that those costs can be directly attributable to related exploration and evaluation assets. In all other cases, these costs are expensed as incurred. For the purposes of IOCL CFS, the Company should follow successful cost method instead of full cost method in respect of accounting of acquisition, exploration and development cost. 24.4.1.10 Exploration for and Evaluation of Mineral Resources - Depletion method (applicable for IndOil Global) Background: In IndOil Global, the Company is following \"Successful Efforts Method\" of accounting for Oil & Gas exploration and production activities. As informed by the management, the Company has interest in North Montney joint venture as contributor. The Company accounts for its share in the oil field. Accounting policy being followed in local GAAP: The producing properties are being depleted using a unit-of-production method based on the commercial proved and probable reserves allocated to the area. Key Implications under Ind AS on financial reporting Ind AS 106 does not prescribe method of depletion for producing properties. Guidance Note on Accounting for Oil and Gas Producing Activities prescribes depreciation of acquisition cost using Proved Reserves The guidance note is applicable from 1 April 2017, however early application is permitted. For the purposes of IOCL Consolidated FS, the producing properties needs to be depleted using unit of production method based on proved reserves. 24.4.1.11 Exploration for and Evaluation of Mineral Resources - Impairment assessment (applicable for IOCL USA) Background: Consolidated Financial Statement Page 595
Exploration and evaluation assets shall be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. Accounting policy being followed in local GAAP: In IOCL (USA), review of impairment indicators is performed whenever events or circumstances indicate that the carrying amounts may not be recoverable. Two-step approach for determining impairment Recoverability test: It requires comparison of carrying amount of the asset to the sum of its future undiscounted cash flows generated through asset’s use and eventual disposition. If the asset is not recoverable, an impairment loss calculation is required Impairment loss calculation: Impairment loss is recognized in income for the amount by which the carrying amount of the assets exceeds its fair value Key Implications under Ind AS on financial reporting Review of impairment indicators at each reporting date. One step approach for determining impairment: Impairment loss calculation to be done if impairment indicators exists. Impairment loss calculation: An impairment loss is recognized in income for the amount by which the carrying amount of the long-lived asset exceeds its recoverable amount. Recoverable amount is the higher of (1) fair value less costs to sell, and (2) value in use 24.4.1.12 Business combinations – Contingent consideration (applicable for IndOil Global) Background: In March 2014, IndOil Global through its subsidiary Indoil Montney Ltd acquired certain producing properties, reserves, facilities, undeveloped land and a 9.999% interest in Pacific Northwest LNG Limited Partnership (the \"Partnership\" or \"PNW LNG LP\") for a consideration of $1.17 billion and a contingent consideration of $100 million. Accounting policy being followed in local GAAP: As per management, the transaction was accounted for as business combination. In March 2014, when the producing properties were acquired, the contingent consideration was fair valued and a liability was recorded with a corresponding debit to tangible/ Intangible under development based on PPA study. In March 2015, the amount of contingent consideration was revised to account the change in fair value with a corresponding debit to PL. Key Implications under Ind AS on financial reporting The accounting for contingent consideration under Ind AS is same as under IFRS (local GAAP). 24.4.1.13 Goodwill (applicable for Lanka IOC) Background: Consolidated Financial Statement Page 596
In Lanka IOC, Goodwill represents the excess of purchase consideration paid in 2003 to the Government of Sri Lanka over the net assets value representing applicable shares allotted in the acquisition of the retail outlets from Independent Petroleum Marketers Limited (IPML). Accounting policy being followed in local GAAP: Goodwill is carried as an intangible asset and tested for impairment annually. No impairment recorded till 31 March 2016. Key Implications under Ind AS on financial reporting For the Ind AS reporting for the periods ending 31 March 2017, these past adjustments in relation to Goodwill and retained earnings needs to be rolled forward. These past adjustments need to be accounted for all future reporting periods till the time Goodwill is appearing in the IFRS financial statements. 24.4.2 Additional key disclosures in respect of foreign entities upon consolidation # Applicable Ind AS IOCL Indoil Sunt IOC IOC Lank IOML IOC USA Glob era Swed ME al Niger en AB a IOC Singapore B.V. ia Yes 1 Financial Instruments – Yes 205 Yes Yes Yes Yes Yes Yes Disclosures (Risk Management and Fair Value Disclosures) 2 Guidance note on oil Yes Yes and gas producing properties: Disclosures 24.4.2.1 Financial instruments – Disclosures (applicable for all group foreign entities) The additional disclosures under Ind AS 107 and under Ind AS 113 primarily relates to disclosures in relation to risk management and fair value. Refer details refer to topic E1 of Chapter 5 on financial instruments. 24.4.2.2 Guidance note on oil and gas producing properties: Disclosures (applicable for IOCL USA and IndOil Global) Background: The Guidance note requires E&P entity to give certain additional disclosures in respect of the reserves and impairment assessment. Accounting policy being followed in local GAAP: Guidance note is not applicable for local reporting requirements Consolidated Financial Statement Page 597
Key Implications under Ind AS on financial reporting As per the Guidance note, following additional disclosures needs to be given: In respect of reserves: • Disclosures in respect of proved reserves and proved developed reserves has to be given separately • Frequency of reserve evaluation, principal assumptions used and involvement of any external expert(s), if used In respect of impairment: • Description and net quantities of an entity’s interest in reserves used as a basis for impairment assessment. • Basis of determination of cash generating unit used for impairment assessment purposes. 24.4.2.3 Disclosures in pursuance of Ind AS 112 a. Information about subsidiaries Name Principal activities Country of % equity incorporation interest Chennai Petroleum Refining of petroleum products India 51.89% Corporation Limited Indian Catalyst Private Manufacturing of FCC catalyst / additive India 100.00% Limited IndianOil (Mauritius) Terminalling, Retailing & Aviation Mauritius 100.00% Ltd. refuelling Lanka IOC PLC Retailing, Terminalling & Bunkering Sri Lanka 75.12% IOC Middle East FZE Lube blending & marketing of lubricants UAE 100.00% IOC Sweden AB Investment company for E&P Project in Sweden 100.00% Venezuela and Israel IOCL (USA) Inc. Participation in Shale Gas Asset Project USA 100.00% IndOil Global B.V. Investment company for E&P Project in Netherlands 100.00% Canada and Abu Dhabi IOCL Singapore PTE Investment company for E&P Project in Singapore 100.00% Limited Russia, Oman and Abu Dhabi b. Disclosure in relation to material partly owned subsidiaries An entity shall disclose for each of its subsidiaries that have non-controlling interests that are material to the reporting entity (Para 12 of Ind AS 112): • Name of the subsidiary. • Principal place of business (and country of incorporation if different from the principal place of business) of the subsidiary. • Proportion of ownership interests held by non-controlling interests. Consolidated Financial Statement Page 598
• Proportion of voting rights held by non-controlling interests, if different from the proportion of ownership interests held. • Profit or loss allocated to non-controlling interests of the subsidiary during the reporting period. • Accumulated non-controlling interests of the subsidiary at the end of the reporting period. • Summarised financial information about the subsidiary The disclosures made are given below: Consolidated Financial Statement Page 599
Consolidated Financial Statement Page 600
Consolidated Financial Statement Page 601
c. Disclosure in relation to Interests in joint arrangements and associates Nature, extent and financial effects of an entity's interests in joint arrangements and associates An entity shall disclose (para 21 of Ind AS 112): • for each joint arrangement and associate that is material to the reporting entity: - the name of the joint arrangement or associate - the nature of the entity’s relationship with the joint arrangement or associate - the principal place of business - the proportion of ownership interest or participating share held by the entity and, if different, the proportion of voting rights held • for each joint venture and associate that is material to the reporting entity - Whether the investment in the joint venture or associate is measured using the equity method or at fair value. - summarised financial information about the joint venture or associate - If the joint venture or associate is accounted for using the equity method, the fair value of its investment in the joint venture or associate, if there is a quoted market price for the investment. • financial information as specified above about the entity's investments in joint ventures and associates that are not individually material: - in aggregate for all individually immaterial joint ventures and, separately, - in aggregate for all individually immaterial associates. Risks associated with an entity's interests in joint ventures and associates An entity shall disclose (para 23 of Ind AS 112): Consolidated Financial Statement Page 602
• commitments that it has relating to its joint ventures separately from the amount of other commitments. • in accordance with Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets, unless the probability of loss is remote, contingent liabilities incurred relating to its interests in joint ventures or associates (including its share of contingent liabilities incurred jointly with other investors with joint control of, or significant influence over, the joint ventures or associates), separately from the amount of other contingent liabilities. The disclosures made are given below: Consolidated Financial Statement Page 603
Consolidated Financial Statement Page 604
Consolidated Financial Statement Page 605
d. Disclosure in relation to significant judgements and assumptions An entity shall disclose information about significant judgements and assumptions it has made (and changes to those judgements and assumptions) in determining (para 7 of Ind AS 112): • that it has control of another entity, i.e. an investee as described in paragraphs 5 and 6 of Ind AS 110, Consolidated Financial Statements; • that it has joint control of an arrangement or significant influence over another entity; and • the type of joint arrangement (i.e. joint operation or joint venture) when the arrangement has been structured through a separate vehicle. e. Disclosure format in pursuance of requirement in Ind AS compliant Schedule III to Companies Act 2013 Consolidated Financial Statement Page 606
Consolidated Financial Statement Page 607
Consolidated Financial Statement Page 608
CHAPTER 25 : PACE 25A. PREPARATION OF STANDALONE/ CONSOLIDATED FINANCIAL STATEMENTS, DISCLOSURES, FINANCIAL REVIEW AND OTHER MIS THROUGH PACE PACE (Planning Analysis and Consolidation Thru ERP) is an internal platform for reporting/ analysis based on SAP's software 'Business Planning and Consolidation'. Masters are being directly fetched from SAP in PACE and hierarchies are maintained in PACE. Reporting formats have been developed to draw the financial statements through PACE. Inputs for reporting in PACE can be SAP data as well as direct input saved in PACE server/ platform. Financial Year 2016-17 was the first year for which full- fledged Financial Statements (Standalone as well as Consolidated) were drawn from PACE and is being continued thereafter. With moving to SAP New GL functionality w.e.f November’ 2018, dimensions such as Profit Centre, Business Area are now available in PACE for more extensive and flexible reporting and analysis. New GL provides an extension to the existing functionality and having technology superior to Classic GL. New GL extended data structure provides flexibility as multiple data tables in classic GL has been consolidated into a single data table in New GL. One summary table provides flexibility and faster response time for reporting. SAP BW on HANA is another changeover which has also taken place from January’2019 and has enhance the performance/ response time of the present system. It involves changes in the ETL process including data sources, DSO, transformations, conversions, cubes to adapt for HANA. All existing business rules, script logics, calculations, reports and input templates have also been migrated. The front-end of the PACE platform is MS-Excel which works through an Add-in on the Excel interface meaning thereby, users need not to login to any other platform for working in PACE. User can directly login through MS-Excel and use all the functionalities of PACE. For login through MS-Excel, user has to create the connection using Server URL http://pace:8001/sap/bpc/ and choose the Model IOCL_LEGAL for Legal model or FIN_REVIEW for FR model. Additionally, PACE also provides a web interface which can be reached on http://pace:8001/sap/epm/bpc/web/. The web interface provides features like document library, list of activities to be performed by end user in 'My Activities tab', process monitor for activity owners, administration of various master data maintained in PACE, system reports w.r.t. audit trails of master/ transaction data changes etc. At present login IDs have been given to 150 users across Corporation which covers all users in State Offices/ Refinery Units, Regions, Divisional HOs and Corporate Office (Finance & IS). All relevant PACE INDEX Page 609
closing guidelines (quarterly and annual), user manuals, report writing tools/ guidance etc. are also hosted on the PACE server and can be accessed in the document library. 25B. PREPARATION OF FINANCIAL STATEMENTS A complete set of utility (Template for financial statements, forms for disclosures and other reporting) has been developed for preparing accounts thru PACE and the same is available to users in the common folder at PACE server. However, the transactions and accounting shall continue to be in SAP and Divisions shall confirm closure of Accounting Period in SAP once all entries are completed. Further, after completion of all activities including necessary inputs, drawing financials in/ from PACE, periods shall be closed in PACE also. 25.1 BALANCE SHEET, STATEMENT OF PROFIT & LOSS AND NOTE NO. 2 TO 30 25.1.1 Activities are being floated for accounts closing through Business Process Flow (BPF) in PACE to Divisional HOs. The activity is available in \"My Activities\" tab after user login into PACE web interface. Users are available with the direct link of PACE Templates for accounts closing beginning from FY 2016-17 onwards. 25.1.2 PACE templates are common to all users and user has to select the relevant company code/ Region/ Division or IOC within the excel template itself along with the time period and just run the report. Unlike earlier, there is no need to go to SAP interface and run customised T- PACE INDEX Page 610
Codes specific for Divisions, Regions etc. and download the SAP dump for preparing financials. A long prevailing issue of not having a three-column utility for financial statements has been addressed in PACE templates. Moreover, system is capable of creating reports for any number of periods, entities and level of detailing depending upon the requirement of the user. In PACE, financials can be drawn even for a quarter say 3rd Quarter of FY 2016-17 which again was a challenge in the previous system. Now system is fully equipped to cater the requirement of specific trails of manual adjustments (if any) say w.r.t. regrouping, rounding offs, GAAP adjustments (in CFS) etc. Another major change brought in by PACE platform is that it has enabled the users to make maximum analysis within the same template using \"Drill Down\" facility. For example, in case Marketing HO user wants to analyse the cause of variation in a certain expense line item, he can very well drill down the same from Division to Regions and then to State Offices or on other hand from Con-Code to all GLs within the same MS excel template on PACE. 25.1.3 Further, in PACE templates, users have been provided detailed instruction sheets which facilitates even a new user to proceed by following the instructions/ cautions mentioned therein. PACE Page 611
25.1.4 To ensure the arithmetical accuracy of Financial Statements, various reporting entities such as CO, Divisions, Regions, Refinery Units used to maintain different control checks with-in their own excel files. An initiative has been taken to consolidate all such control checks and has been incorporated in PACE template for drawing financial statements (Quarterly or Annual). This will certainly remove the possibility of having primary arithmetical mistakes which earlier used to be checked manually or corrected upon intimation from the higher Offices or Auditors. Total 45 checks till All checks in a If a checks fails, red now . . . single sheet color indication 25.1.5 The list of templates available on the server is as below: • Reports - Standalone Financial Template (with detailed Instructions for users) - Financials Template in RECO mode i.e. Reclassified I-GAAP, IndAs Adjustments and IndAs (used by users in the transition phase from previous IGAAP to IndAs financials) - GL wise Trial Balance - Fixed Assets (Tangible & Intangible) report - Investment Schedule • Input Templates - Input form for Investments related detailed information PACE Page 612
- Input template for Regrouping and Rounding-off adjustments - Input template for entering asset class wise movements in IndAs GLs - Segment input form 25.1.6 Similarly, the complete process of Legal Consolidation of Financial Statements is done in PACE. The process involves use of various model like Legal Consolidation, Exchange Rates and Ownership models. Further, various rules and logic has been written in PACE for calculating minority interest along with interface for posting for journal vouchers in PACE. Various reports for the purpose of consolidation has been built under this model like; • Output Reports - Consolidation Reports-Subsidiary for LC vs INR subsidiary’s trial balance - FCTR reconciliation report - Intercompany Transaction Mismatch report for matching intercompany transaction/ balance elimination - JV Recon report for total net worth of JV/Associate, share in Pre-post net worth, Cost of Control, Net worth vs. Investment in JV/Associate and carrying value of Investment in JV/Associate - Trial Elimination Report for eliminations at different trails • Input Templates - Trial for consolidation for uploading Trial balance of Subsidiary - IOCL JV Reserves report for uploading trial balance of Joint Venture and Associates - IOCL_SUBSY_PRE_POST for Subsidiary’s Cost of Control calculation - Unrealized Margin template for elimination of unrealized margin on stock - Subsidiary Transaction Inputs for saving Intercompany transactions/ Balance 25.2 DISCLOSURES (NOTE NO. 31 ONWARDS) 25.2.1 Users are available with the direct link of PACE Templates for accounts closing beginning from FY 2016-17 onwards. The list of templates available on the server is as below: - Foot notes for note 2-30- to be input and should be published along with main notes. - Inputs for disclosures related to distributions, EPS, Interest in Subsidiaries/JVs/JCOs, E&P, employee benefits, related party, fair values etc. (Notes 31 to 49). 25.2.2 The output templates are also being shared for assisting users to finalize the annual accounts with standard disclosures. These templates will take inputs from input reports. However, text and descriptions need to be suitably modified by the users based on applicability. PACE INDEX Page 613
25C. REVENUE BUDGET The exercise of annual Revenue Budget has also been brought in PACE from Budget 2017-18. The major activities involved in the process have been summarised as under: Automatic Budget Board Budget Adjustments at approved budget upload Consolidation Divisional HOs/ CO in SAP ● Automatic roll- ● Provision ● Auto up – no manual of budget Allocation compilation cuts by of higher approved ● Simple excel office budget interface keeping over cost original centres ● Detailed break- demande up of regular, ● Auto one time and User Manuals on PACE Server: A detailed user manual on how to use PACE templates and functionalities have already been uploaded on PACE server under documents tab and users can refer the manuals by accessing PACE platform. Some of the documents available in PACE server are; • SFS User Manual • Revenue Budget User Manual • EPM Installation Guide • How to Create, Access, & Edit Reports in EPM-Excel 25D. FINANCIAL REVIEW/ APPRAISAL Calculation of function/segment wise Margins e.g. refining, petrochemical, gas margins etc. and corresponding profits for the purpose of reporting in Financial Review/Appraisal has been incorporated in PACE. A separate hierarchy has been created in PACE which uniformly calculates margins across all Units/State Offices/ Regions/Divisions. Margins as calculated in this report are being considered final and used for Board Presentation. PACE INDEX Page 614
Also, for calculation of segment wise margins and profit, an input form is created in PACE. Divisions are required to input data for Petrochemical and Other Segments as provided in the input form. System calculations have been configured which automatically calculates petroleum segment after deducting user inputs for petrochemical/other segments. Divisions are required to ensure that segment wise margins, revenue expenditure and profit are appearing correctly in the FR report shared along with input form. FR Input form and FR report are available in PACE server and has been floated through a separate Business Process Flow which shall thereafter be available to users in 'My Activities' Tab of PACE web login. Apart from margin calculations and related reports, a set of input templates have already been floated to divisions in which specific information shall be consolidated in PACE automatically. PACE Page 615
CHAPTER 26 : APPENDIX 1. Significant accounting policies 2. Guidelines for use of discount rate 3. Hurdle rate 4. Accounts Manual- Chapter Owners and Major Contributors Appendix-1 26A. SIGNIFICANT ACCOUNTING POLICIES 1. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE 1.1 The financial statements have been prepared in accordance with the applicable Indian Accounting Standards (Ind AS) prescribed under Section 133 of the Companies Act, 2013 (“the Act”) read with the Companies (Indian Accounting Standards) Rules and other relevant provisions of the Act and Rules thereunder, as amended from time to time. 1.2 The financial statements have been prepared on a historical cost basis, except for the following assets and liabilities which have been measured at fair value: • Derivative financial instruments, • Certain financial assets and liabilities measured at fair value (refer serial no. 17 of accounting policies regarding financial instruments) and • Plan assets related to employee benefits (refer serial no. 12 of accounting policies regarding employee benefits) 1.3 The financial statements are presented in Indian Rupees which is Company’s presentation and functional currency and all values are rounded to the nearest Crores (up to two decimals) except when otherwise indicated 2. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS 2.1 Property, Plant and Equipment (PPE) 2.1.1 Property, Plant & Equipment (PPE) comprises of tangible assets and capital work in progress. PPE are stated in the Balance Sheet at cost, less any accumulated depreciation and accumulated impairment losses (if any), except freehold land which are carried at historical cost. The cost of an item of PPE comprises its purchase price/construction cost including Significant Accounting Practices INDEX Page 616
applicable taxes (net of credits) after deducting any discounts and rebates, any directly attributable costs of bringing the assets to its working condition and location for its intended use and present value of any estimated cost of dismantling and removing the item and restoring the site on which it is located. These costs are capitalized until the asset is ready for use and includes borrowing cost capitalized in accordance with the Company’s accounting policy. 2.1.2 The cost of an item of PPE is 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. In accordance with the above criteria, subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate. 2.1.3 Technical know-how / license fee relating to plants/facilities and specific software that are integral part of the related hardware are capitalised as part of cost of the underlying asset. 2.1.4 Spare Parts are capitalized when they meet the definition of PPE, i.e., when the Company intends to use these during more than a period of 12 months. 2.1.5 The acquisition of some items of PPE although not directly increasing the future economic benefits of any particular existing item of PPE, may be necessary for the Company to obtain the future economic benefits from its other assets. Such items of PPE are recognized as assets. 2.1.6 On transition to Ind AS, the Company has elected to continue with the carrying value of all of its PPE recognised as at April 1, 2015 measured as per the previous GAAP and use that carrying value as the deemed cost of the PPE. 2.2 Capital Work in Progress (CWIP) A Construction Period Expenses 2.2.1. Revenue expenses exclusively attributable to projects incurred during construction period are capitalized. 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. 2.2.2 Financing cost incurred during construction period on loans specifically borrowed and utilized for projects is capitalized on quarterly basis up to the date of capitalization. Significant Accounting Practices Page 617
2.2.3 Financing cost, if any, incurred on General Borrowings used for projects is capitalized at the weighted average cost. The amount of such borrowings is determined on quarterly basis after setting off the amount of internal accruals. B Capital Stores 2.2.4 Capital Stores are valued at cost. Specific provision is made for likely diminution in value, wherever required. 2.3 Intangible Assets 2.3.1 Technical know-how / license fee relating to production process and process design are recognized as Intangible Assets and amortized on a straight-line basis over the life of the underlying plant/ facility. 2.3.2 Expenditure incurred on Research & Development, other than on capital account, is charged to revenue. 2.3.3 Cost incurred on computer software/licenses purchased/developed resulting in future economic benefits, other than specific software that are integral part of the related hardware, are capitalised as Intangible Asset and amortised over a period of three years beginning from the quarter in which such software/ licenses are capitalised. However, where such computer software/ license is under development or is not yet ready for use, , accumulated cost incurred on such items are accounted as “Intangible Assets Under Development”. 2.3.4 Right of ways with indefinite useful lives are not amortised but tested for impairment annually at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. 2.3.5 Intangible Assets acquired separately are measured on initial recognition at cost. The cost of Intangible Assets acquired in a business combination is based on their fair value at the date of acquisition. Following initial recognition, Intangible Assets are carried at cost less any accumulated amortisation and accumulated impairment losses. In case of Internally generated intangibles, development cost is recognized as an asset when all the recognition criteria are met. However, all other internally generated intangibles including research cost are not capitalized and the related expenditure is recognized in the statement of profit and loss in the period in which the expenditure is incurred. 2.3.6 The useful lives of Intangible Assets are assessed as either finite or indefinite. Intangible Assets with finite lives are amortised over the useful life on straight line basis and assessed for impairment whenever there is an indication that the Intangible Asset may be impaired. The amortisation period and the amortisation method for an Intangible Asset with a finite useful life are reviewed at the end of each reporting period. Changes in the expected useful life or Significant Accounting Practices Page 618
the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the Statement of Profit and Loss unless such expenditure forms part of carrying value of another asset. 2.3.7 On transition to Ind AS, the Company has elected to continue with the carrying value of all of its Intangible Assets recognized as at April 1, 2015 measured as per the previous GAAP and use that carrying value as the deemed cost of the Intangible Assets. 2.4 Depreciation/Amortization 2.4.1 Cost of PPE (net of residual value) excluding freehold land is depreciated on straight-line method as per the useful life prescribed in Schedule II to the Act except in case of the following assets: a) Useful life of 15 years for Plant and Equipment relating to Retail Outlets (other than storage tanks and related equipments), LPG cylinders and 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 to the Act, whichever is earlier, d) In case of certain assets of R&D Centre useful life (15-25 years) is considered based on technical assessment, e) In case of immovable assets constructed on leasehold land, useful life as per Schedule-II to the Act or lease period of land (including renewable/ likely renewable period), whichever is earlier and f) In other cases Spare Parts etc. useful life (2-30 years) is considered based on the technical assessment Depreciation/ Amortization is charged pro-rata on quarterly basis on assets, from/upto the quarter of capitalization/ sale, disposal/ or earmarked for disposal. Residual value is determined considering past experience and generally the same is between 0 to 5% of cost of assets based on the class of assets except a. In case of LPG cylinder and pressure regulator, residual value is considered maximum at 15% b. in case of catalyst with noble metal content, residual value is considered based on the cost of metal content and Significant Accounting Practices Page 619
c. In few cases residual value is considered based on transfer value agreed in respective agreement. The Company depreciates components of the main asset that are significant in value and have different useful lives as compared to the main asset separately. The Company depreciates spares over the life of the spare from the date it is available for use. 2.4.2 PPE, other than LPG Cylinders and Pressure Regulators, costing upto ` 5,000/- per item are depreciated fully in the year of capitalization. Further, spares, components like catalyst excluding noble metal content and major overhaul/ inspection are also depreciated fully over their respective useful life. 2.4.3 The residual values, useful lives and methods of depreciation of PPE are reviewed at each financial year end and adjusted prospectively, if appropriate. 2.5 Derecognition 2.5.1 PPE and Intangible Assets are derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of PPE or Intangible Asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in the Statement of Profit and Loss. 3. LEASES The Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. 3.1 Leases as Lessee (Assets taken on lease) The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. 3.1.1 Lease Liabilities At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected Significant Accounting Practices Page 620
to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. The Company accounts for each lease component within the contract as a lease separately from non-lease components of the contract and allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components, except for leases where the company has elected to use practical expedient not to separate non-lease payments from the calculation of the lease liability and ROU asset where the entire consideration is treated as lease component. 3.1.2 Right-of-use Assets The Company recognises right-of-use (ROU) assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of use assets are subject to impairment. If ownership of the leased asset transfers to the Company at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset as per 2.4 above. 3.1.3 Modifications to a lease agreement beyond the original terms and conditions are generally accounted for as a re-measurement of the lease liability with a corresponding adjustment to the ROU asset. Any gain or loss on modification is recognized in the Statement of Profit and Loss. However, the modifications that increase the scope of the lease by adding the right to use one or more underlying assets at a price commensurate with the stand-alone selling price are accounted for as a separate new lease. In case of lease modifications, discounting rates used for measurement of lease liability and ROU assets is also suitably adjusted. Significant Accounting Practices Page 621
3.1.4 Short-term leases and leases of low-value assets The Company applies the short-term lease recognition exemption to its short-term leases of Property, Plant and Equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term or another systematic basis if that basis is more representative of the pattern of the lessee’s benefit. 3.2 Leases as Lessor (assets given on lease) 3.2.1 When the company acts as lessor, it determines at the commencement of the lease whether it is a finance lease or an operating lease. 3.2.2 Rental income from operating lease is recognised on a straight-line basis over the term of the relevant lease except where another systematic basis is more representative of the time pattern of the benefit derived from the asset given on lease. 3.2.3 All assets given on finance lease are shown as receivables at an amount equal to net investment in the lease. Principal component of the lease receipts is adjusted against outstanding receivables and interest income is accounted by applying the interest rate implicit in the lease to the net investment. If an arrangement contains lease and non-lease components, the Company applies Ind AS 115 Revenue to allocate the consideration in the contract. 3.2.4 When the Company is an intermediate lessor it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the ROU asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the Company applies the short-term lease exemption described above, then it classifies the sub-lease as an operating lease. 4. IMPAIRMENT OF NON-FINANCIAL ASSETS (also refer para 14 for impairment of E&P Assets) The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less cost of disposal and its value in use. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Impairment loss is recognized when the carrying amount of an asset exceeds recoverable amount. Significant Accounting Practices Page 622
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less cost of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company's CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of 15 years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows after the fifteenth year. To estimate cash flow projections beyond periods covered by the most recent budgets/forecasts, the Company extrapolates cash flow projections in the budget using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. 5. BORROWING COSTS Borrowing costs that are attributable to the acquisition or construction of the qualifying asset are capitalized as part of the cost of such asset. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. Capitalisation of borrowing costs is suspended when active development activity on the qualifying assets is interrupted other than on temporary basis and charged to the Statement of Profit and Loss during such extended periods. All other borrowing costs are recognised in the Statement of Profit and Loss in the period in which the same are incurred. 6. FOREIGN CURRENCY TRANSACTIONS 6.1 The Company’s financial statements are presented in Indian Rupee (`), which is also it’s functional currency. Significant Accounting Practices Page 623
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