Manual-formatted

• Loans to related and non-related parties • Financial guarantees, etc. What is not financial asset Example Not settled in cash Prepaid expenses/advances for capital expenses No contractual right Inventories, Fixed assets etc. What is not financial liability Example Not settled in cash Advance income, Equity Shares No contractual right Deferred tax/Income Tax 19.3.2 Classification of financial assets Financial assets shall be classified on the basis of both: • the entity’s business model for managing the financial assets and • the contractual cash flow characteristics of the financial assets. Classification and measurement model of financial assets Financial Instruments Page 424

Entity’s business model can be: • Hold to collect contractual cash flows in the form of principal and interest • Hold to collect contractual cash flows in the form of principal and interest and to sell whenever required • Hold for trading Entity can define business models portfolio-wise i.e. entity can have multiple business models. Contractual cash flow test: It refers to SPPI test i.e. Solely Principal and Interest Payments. ‘Interest’ is consideration for the time value of money and the credit risk associated with the principal amount outstanding during a particular period of time Contractual cash flow characteristic that introduces leverage do not have the characteristics of interest e.g. option, forward and swap contracts IOCL Specific Examples on Classification Example 1.2A: Financial assets – Investment in Government Securities (GOI Bonds) Since business model of the Company for such investments is to get the contractual cash flows and to sell the investment as and when required, these are classified under FVTOCI category. Example 1.2B: Financial assets – Investment by IOCL in Compulsorily Convertible Debentures (CCDs) issued by IOLPL Indian oil LNG Private Limited (IOLPL – JV of IOCL) issued 3,265 CCDs at face value of Rs.1,000,000 each on 14 January 2016. Tenure of such CCDs is 36 months from the pay in date for the first tranche (10th Business days from the execution date i.e. 14 January 2016). For each tranche interest shall be payable at coupon rate i.e. G-Sec + Spread rate. Spread rate is defined as 172 basis point. Upon expiry of term or final event of default, whichever is earlier, each CCDs shall be converted into 100,000 Equity shares of Rs. 10 each Key Implications under Ind-AS on financial reporting Issuer’s Perspective (IOLPL): CCDs have been considered as compound financial instrument from the issuer perspective; • Contractual obligation to pay interest at the coupon rate (Liability) • Mandatorily conversion of CCD into equity shares which is equity in nature (Equity) Financial Instruments Page 425

Holder’s perspective (IOCL): Ind AS 27-Separate Financial Statement is not applicable in stand-alone books of holder (IOCL) since it is not been classified as equity in its entirety from the issuer’s perspective. Accounting is governed by principles of Ind AS 109. IOCL has an investment in a convertible bond that from the issuer’s perspective has both a liability and equity component. From the holder’s perspective, as the cash flows on the convertible bond are not solely payments of principal and interest, the bond cannot be classified as a financial asset measured at amortised cost. So, as a result, convertible bonds that are compound instruments from the issuer’s perspective will always be classified at fair value through profit or loss by the holder. Example 1.2C: Financial Assets – Investment by IOCL in Non- Convertible Redeemable Preference Shares issued by CPCL In fiscal 2016 CPCL has issued 100,00,00,000 Non-convertible Cumulative Redeemable Preference shares of Rs.10/- each for cash at par on private placement preferential allotment basis which has to be redeemed at the end of 10 years. Further these shares carry a put/call option at face value. This instrument carries a coupon rate of 6.65% net of dividend distribution tax- (Post tax yield of AAA rated corporate bond i.e., prevailing 10-year G-Sec yield plus a spread of AAA rated corporate bond). The dividends are cumulative and shall be paid out of available distributable profits. Key Implications under Ind-AS on financial reporting Accounting from issuer point of view (CPCL): • Contractual obligation to redeem preference shares at par and dividend is conditional– Financial liability • Option of early redemption is a Derivative - Economic characteristics are Closely related (since the option is exercisable at the amortised cost) – No Separation required • Hybrid instrument= Financial Liability + Derivative (closely related) • Financial liability at amortised cost using effective interest method • Initial measurement needs to be done at fair value. The difference (if any) between transaction price and fair value needs to be accounted for as deemed capital contribution in stand-alone books of CPCL (subsidiary) Accounting from holder point of view (IOCL): Contractual cash flow test does not get satisfied. CPCL is going to redeem preference shares at par. CPCL is not required to pay dividend (interest) till the time it does not have profits. Accordingly, IOCL need to classify such investment as Fair value through profit and loss (FVPL) Financial Instruments Page 426

Example 1.2D: Financial Assets - Loan to Related Parties (BD) The Company has given long term loan to Suntera Nigeria 205 Limited (Joint Venture Entity - related party) for exploration activities. The repayment of loan and interest is linked to viability of the project. If Suntera is able to find substantial volume of oil reserves, then Suntera will repay loan along-with interest @ 8.75% p.a. to IOCL from retrospective effect. 8.75% p.a. is at ALP after considering the risk factor of not getting the payment. If it is economically unviable, the entire loan needs to be charged off. Currently, as informed by the management, Suntera has found oil reserves but the quantum of oil reserves is yet to be quantified based upon which economic viability of the project will be determined. Key Implications under Ind-AS on financial reporting From Suntera point of view, it is a financial liability since settlement of loan and interest payment is contingent in nature. Suntera does not have unconditional right to defer the payment if the project is proved to be economically viable. Accordingly, from IOCL point of view it is in the nature of financial asset. Since the repayment of principal and interest is linked to economic viability of the project, the criteria for solely payment of principal and interest is not being satisfied. Accordingly, the financial asset needs to be classified as FVPL. Example 1.2E: Financial assets –Investment in Equity shares (other than subsidiaries, JVs and Associates IOCL has made investments in equity shares (other than subsidiaries, JVs and Associates) as follows: Quoted Equity Instruments • Oil and Natural Gas Corporation Limited • GAIL (India) Limited • Oil India Limited Unquoted equity instruments: • International Cooperative Petroleum Association, New York • Haldia Petrochemical Limited • Woodlands Multispeciality Hospital Limited • Vadodara Enviro Channel Limited (Formerly Effluent Channel Projects Limited) • Unquoted Equity Instruments Key Implications under Ind-AS on financial reporting Under Ind AS, for the investments in equity shares which are not held for trading purposes, the management has exercised the irrevocable option to classify and measure at fair value through Other Comprehensive Income (OCI). Otherwise, company might have to record such investment at fair value through profit and loss. Example 1.2F: Others Financial Instruments Page 427

• Trade Receivables at amortised costs • Employee Loans at amortised costs (separately covered in Chapter-9) • Security deposits paid at amortised costs • Derivative assets at FVPL 19.3.3 Classification of financial liabilities Financial liabilities have been classified into two categories: Category Main use Fair value through profit or Financial liabilities that are held for trading loss (including derivatives) Financial liabilities that are designated as FVTPL on initial recognition Contingent consideration recognized by an acquirer in a business combination Amortised Cost All liabilities not in the above category IOCL Specific Examples Example 1.3A: Financial liability – Secured Loan - Non- Convertible Redeemable Bonds The Company has issued various type of Non-convertible redeemable bonds to banks and institutional customers like: • Category 1 A - 17000 Bonds of face value of Rs. 1,000,000 each issued on 06 May 2013 and coupon rate is 8.14% p.a. After 5 years with call option /put option after 18 and 36 months from the date of allotment. Such option is exercisable at face value only. Such bonds are redeemable at face value only • Category 1 B - 12950 Bonds of face value of Rs. 1,000,000 each issued on 30 April 2012 and coupon rate is 9.35% p.a. After 5 years with put option /call option after 3rd year from the date of allotment. Such option is exercisable at face value only. Such bonds are redeemable at face value only • Category 2 - Others (This category covers remaining all type of non-convertible and redeemable bonds which has been issued on various dates at face value and redeemable at face value. Such bonds carrying coupon rate and there is no call and put option. Key Implications under Ind-AS on financial reporting In the books of Issuer (IOCL): Category 1 (A and B) • Contractual obligation to redeem such bonds after a specified period at face only. – Financial liability • Call / Put option is in the nature of option of early redemption is a Derivative - Economic characteristics are closely related (since the option is exercisable at the amortised cost) – No Separation is required Financial Instruments Page 428

• Hybrid instrument= Financial Liability + Derivative (Closely related) • Financial liability shall be recorded at amortized cost using effective interest method. Category 2 • Contractual obligation to redeem such bonds after a specified period at face only – Financial liability. • Financial liability shall be recorded at amortized cost using effective interest method. Example 1.3B: Borrowings at Amortised cost-Upfront fees & Discount on Issue of Bonds (Refinery) Upfront fees on borrowings (Working capital borrowings) • USD 500 Million Syndication 1 • USD 500 Million Syndication 2 • USD 650 Million Syndicated Loan Discount on Issue of Bonds (Paradip refinery) • Discount on issue of bonds (USD 500 Million Reg S bonds) issued on 2 August 2011 Key Implications under Ind-AS on financial reporting Upfront fees paid on borrowing and discount on issue of bonds are initially recognized in the carrying amount of the loan and considered in the effective interest rate on the borrowings. • Upfront fees on borrowings: (working capital): It will be charged to profit and loss account. • Discount on issue of bonds: (Paradip Refinery) - Till commissioning of project: Cost will be recognised in CWIP. - After commissioning of project: Cost will be recognised in profit and loss account. Example 1.3C: Others • Trade payables are classified at amortised costs • Security deposits received at amortised costs • Derivative Liabilities are classified at FVPL 19.3.4 Initial measurement of financial assets and financial liabilities “The fair value of a financial instrument on initial recognition is normally the transaction price.” However, if fair value differs from transaction price, an entity shall account for that instrument as follows (Application Guidance): a. If fair value is evidenced by quoted price in an active market (i.e. Level 1 input) or based on valuation technique that uses only data from observable markets, entity shall Financial Instruments Page 429

recognise difference between fair value at initial recognition and transaction price as gain or loss (Day 1 gain or loss). b. In all other cases, difference is deferred. After initial recognition, entity shall recognise deferred difference as gain or loss only to extent that it arises from change in factor (including time) that market participants would take into account when pricing asset or liability. Example 1.4A: Financial Assets - Loan to employees (All except RO) The Company has given long term loan to its employees either at concessional interest rate or free of interest which are as follows: Loans at Concessional rate of interest: • House Building Allowance (HBA) • Vehicle loan • Children Education Loan Interest free Loans: • Furniture Advance • Computer advance Key Implication Under Ind-AS on financial reporting: IOCL will require to fair value the loans given to employees at below market interest rates or interest free. In such case the excess of principal amount over its fair value will be considered as prepaid personnel expenditure and will be amortized over the period of loan on straight line basis. On a related note, interest will be accreted on the fair value recognized on inception to bring the fair value to the principal amount that will be repaid. The detailed procedure and accounting of employee loans are covered in Chapter-9. Example 1.4B: Security Deposits Paid (Marketing) The company has paid security deposits in relation to leased premises Key Implication Under Ind-AS on financial reporting: The company has provided deposits where the period for repayment is in excess of 12 months. The company needs to recognise interest on deposits using effective interest method. Since deposits provided by the company are interest free, it needs to fair value the deposits at below market interest rates calculated over the lease term. In such case the excess of principal amount over its fair value will be considered as prepayment and will be amortised over the lease period on straight line basis. Example 1.4C: Security Deposits received (All except RO) Following are the Long-term interest free security deposits received by the Company:- Deposits from vendors/contractor (All divisions except RO): It represents security deposits taken from various vendors/contractors for different service work contracts awarded by Financial Instruments Page 430

IOCL. If the security deposits can be released against Bank Guarantee, there is no need to do the fair valuation as the deposits are already at fair value . Deposits from institutional customers (Supplies of RLNG BD Division): It represents security deposits taken from institutional customers for RLNG supplies. The same are recoverable on termination of contract which is possible only against breach of terms and conditions. As informed, the same cannot be released against Bank Guarantee. Deposits received from Transporters (Marketing): The Company takes security deposits from transporters for contracts awarded by IOCL. As informed, the transporter does not have right to terminate the contract. . As informed, the same cannot be released against Bank Guarantee. Deposits from LPG customers and Retail Outlets (Marketing) - Deposits from LPG customers and Retail Outlets - These deposits are repayable on demand and the Company does not have an unconditional right to defer the settlement of the deposit. Deposits from nominee of deceased employee (Pipeline): Under an old scheme (currently discontinued) the nominee of the deceased employee was given an option of not withdrawing the PF, Gratuity, Leave encashment and group insurance amount till the actual retirement age, of the deceased employee, had he survived. In return, the nominee would get the last drawn salary (Basic plus DA). Such deposits are interest free in nature and the estimated repayment dates vary between 2017 till 2034. The detailed guidelines for accounting of security deposits are given in Annexure – 19.1. Example 1.4D: Ujjwala scheme – Cash assistance and Loan Recoverable For the families below poverty line (BPL) to get clean cooking fuel, Pradhan Mantri Ujjwala Scheme has been introduced for release of deposit free new connection to women of BPL household. In addition, the cost of 2 burner & 1st refill will be given on loan basis by OMC to be recovered from the subsidy amount payable on each refill sale. As per the scheme, the Government will reimburse to OMC INR 1,600 per customer towards the security deposit for cylinders and PRs, hose, DGCC booklet and installation charges. Amount incurred as loan by OMC towards cost of 2 burner & 1st Refill will be considered as loan & the same will be recovered from the subsidy amount due to the customer when the cylinder will be taken by the customer until the full loan amount is recovered. The Loan does not carry interest. Regarding Stove (Burner) and 1st refill availed under PMUY loan scheme, in the application form signed by the customer an undertaking is obtained as under till the loan amount is fully repaid. “In case LPG stove is purchased on loan from OMC, I authorize my OMC to recover the loan amount from the subsidy of the refills availed by me. I am fully aware that I won’t receive the subsidy amount of the refills purchase by me in my bank a/c till the time loan amount is fully recovered by the OMC”. Key Implications under Ind AS on financial reporting: “Loan recoverable’ is a 'financial asset' within the meaning of Ind AS 109. In the present case, the right is a contractual right wherein subsidy accrued to customer can be adjusted against loan recoverable. Financial Instruments Page 431

The adjustment is not expected to occur within 12 months from reporting date. Hence, this will be a non-current asset. The discounting is required for such financial assets upon crystallization of payment cycle. The impact of discounting needs to be adjusted in the revenue at inception and subsequently unwinding will be done by recognising interest income. The discounting of the loan has not been done due to uncertainty in frequency of refill by consumers and amount of recovery as per applicable subsidy which varies from time to time. Key Implications under Ind AS on financial reporting: ‘Security deposit received’ is a ‘financial liability’. In case the customer surrenders the connection, the same will transferred to a separate account created by OMC for the purpose. This deposit will be recycled from the separate account so kept by OMC for the connection by new customer under Ujjwala scheme. It will be repayable to government until recycled for any other customer to whom connection is issued under Ujjwala scheme. Since the deposit is repayable immediately on surrender of connection, it is repayable on demand & can be classified as current. No discounting is required for such security deposits since it is payable on demand. 19.3.5 Subsequent measurement of financial assets and financial liabilities Subsequent measurement: Financial assets Subsequent measurement: Financial liabilities Financial Instruments Page 432

19.3.6 Impairment of financial assets The company has decided to follow the below approach for different category of financial assets: Scope of ECL requirements General Simplified approach approach Trade receivables that do not contain a significant - Applicable financing component Other (debt) financial assets measured at amortized cost Applicable - or at FVOCI Expected credit loss model – general approach Financial Instruments Page 433

Factors or indicators of change in the risk of a default occurring General approach - simplifications and presumptions for assessing deterioration Financial Instruments Page 434

Simplified approach: Provision matrix According to the simplified approach, for trade receivables and contract assets that do not contain a significant financing component, an entity shall always measure loss allowance at an amount equal to lifetime expected credit losses. A provision matrix could be used to estimate ECL for these financial instruments. An entity may set up the provision matrix based on its historical observed default rates, which is adjusted for forward-looking estimates. IOCL has considered 0.10% of total outstanding trade receivable as the basis of provisioning of trade receivables at the reporting date. Measurement of expected credit losses: 19.3.7 De-recognition of financial assets and financial liabilities De-recognition of Financial Asset Financial Instruments Page 435

Example 1.7A: De-recognition of financial assets (Marketing) IOCL supplies Aviation Turbine Fuel (ATF) to Air India. As Air India (AI) was unable to service the amount owed to IOCL on time, IOCL has entered into a tripartite factoring arrangement with Standard Chartered Bank & AI. As per this arrangement, the Bank will make payment to IOCL on submission of sale invoices by IOCL & AI have to make the payment to the Bank on expiry of the credit period. As per the terms of the agreement, in case of default by AI in making payments to the Bank, the Bank has a recourse to IOCL Key Implications under Ind-AS on financial reporting As per Ind AS, if an entity has not transferred the significant risks and rewards related to a financial asset, it shall not de-recognize the financial asset from its financial statements. Since IOCL has not transferred the significant risks and rewards in respect of its receivable, IOCL will not be able to de-recognize the receivable immediately on receipt of the amount from the Bank. Further, the amount received from the Bank shall be recorded as a liability by IOCL. 19.3.8 Financial guarantee A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. In line with the Corporate policy for issuance of Corporate Guarantees (CG) by IOCL for Banking (Fund/or Non-fund) Facilities to IOC Group entities, IOCL extends guarantees on Financial Instruments Page 436

behalf of group entities to fulfil the obligations, in the event subsidiary / JV fails to meet its obligations. At the issuance of financial guarantee, the corresponding financial asset or financial liabilities is required to be recognized. At initial recognition, an issuer of credit derivatives measures these derivatives (assets as well as liabilities) at fair value, which usually is equal to the value of the commission received. Subsequently, the financial assets are measured at fair value through profit or loss account and the financial liabilities are measured at the higher of: • the amount of the loss allowance determined in accordance with Ind AS 109; • the amount initially recognised less, when appropriate, the cumulative amount of income recognised in accordance with the principles of Ind AS 18. Key Implications under Ind-AS on financial reporting a. If amount charged by IOCL from its subsidiary/JV is at fair value of FG, then, the following adjustment is required- • At initial Recognition Financial Asset towards FG Dr To Financial Liability towards FG • Subsequent period Financial Liability towards FG A/c Dr To Other Income Amount Recoverable from subsidiary/JV/ Bank Dr. (Amount pertains to such period) To Financial Asset towards FG Cr b. If amount charged by IOCL from its subsidiary/JV is not at fair value of FG (say undercharged), then following adjustment is required at the time of initial recognition- Deemed Investment Dr. (Fair Value of FG – Amount charged/to be recovered) Amount Recoverable from subsy/JV Dr. (to be recovered in future) To Financial Liability towards FG (at Fair value) 19.3.9 Derivative instruments Definition of derivative Financial Instruments Page 437

Example-non financial underlying variable Non-financial variables that are not specific to one party to the contract may include an index of earthquake losses in a particular region or an index of temperatures in a particular city. Non-financial variables that are specific to one party to the contract- Linked to credit rating of the party to the contract. IOCL specific examples: Example 1.9A: Forward contracts – non project related The Company has taken Forward Contracts against Working Capital loan (both short and long term) and Forward contracts against crude imports. Key Implications under Ind AS on financial reporting: Derivative Accounting- Hedge Item - Foreign currency payable needs to be reinstated by recording corresponding gain/loss in the statement of profit or loss. Hedge Instrument – Under Ind-AS, the Company will do marked to market valuation for all outstating derivative contracts at each balance sheet date and record the impact (gain/loss) in the statement of profit or loss. Example 1.9B: Interest rate swap–project related (refinery and Co) Interest Rate Swap taken against USD 500 million syndicated loan (date of draw-down of loan - 31 Dec 2010). The swap is for converting 6-month USD LIBOR rate till maturity to 2.222% Fixed Rate. Key Implications under Ind AS on financial reporting: Derivative Accounting- Marked to Market (MTM) valuation of IRS is required at each balance sheet date and the resulting gain/loss shall be recognised in statement of profit or loss by recognising corresponding Derivate Asset/Liability. Example 1.9C: Cross currency interest rate swap –project related The Company has taken a loan from a consortium of investors including mutual funds, hedge funds, HNI’s etc. amounting to 4.1% SGD 400 million. On the same date, the Company has entered into a Currency Swap (50% with DBS Bank and 50% with HSBC Bank), wherein IOCL has fixed its foreign currency loan liability at 4.57% USD 325 million. Interest of 4.1% on SGD 400 million is paid directly by DBS & HSBC Bank to consortium of investors IOCL has a policy of obtaining loans in USD, however, the loan was initially obtained from in SGD and then a currency swap was entered to convert the loan into USD as the cost of obtaining the loan directly in USD was much higher than the cost of obtaining USD loan through the swap arrangement. Key Implications under Ind AS on financial reporting: Under Ind AS (Derivative Accounting), accounting should be done on gross basis for: • SGD loan: Amount of loan needs to be recorded in books as a SGD loan. Restatement of loan is required at each reporting date based on SGD/INR exchange rate and Financial Instruments Page 438

resulting gain/loss needs to be accounted for accordingly (i.e. shall be considered for capitalisation). • Interest paid for USD swap i.e.@ 4.57% on USD 325 million needs to be recognised. • Marked to Market (MTM) of the Cross-currency interest rate swap is required and both gain/losses need to be recognised in the Statement of Profit and Loss Example 1.9D: Commodity Derivatives Commodity derivatives mainly pertain to Margin Hedging and Crude Oil Swaps. These have been entered into Over the Counter (OTC) and not through the exchange. Crude oil swap has been entered to mitigate the price risk in relation to purchase of crude oil. Margin Hedging has been entered to mitigate the risk in relation to Crack spread (refinery margin) Key Implications under Ind AS on financial reporting: Under Ind AS (Derivative Accounting), accounting should be done as follows: For Settled contracts – The Company needs to record realised gain and losses. For Crystallised contracts – The Company needs to record realised gain and losses. For Open contracts – The Company needs to go for Marked to Market (MTM) valuation and record both gain and losses. 19.3.10 Embedded derivatives Financial Instruments Page 439

Separation of embedded derivative Separation of foreign currency embedded derivatives from non-financial instrument contract Accounting for separable embedded derivatives Financial Instruments Page 440

IOCL Specific Example: Example 1.10B: Embedded derivative: Secured Loan - Non- Convertible Redeemable Bonds The Company has issued various type of Non-convertible redeemable bonds to banks and institutional customers like: • Category 1 A - 17000 Bonds of face value of Rs. 1,000,000 each issued on 06 May 2013 and coupon rate is 8.14% p.a. After 5 years with call option /put option after 18 and 36 months from the date of allotment. Such option is exercisable at face value only. Such bonds are redeemable at face value only • Category 1 B - 12950 Bonds of face value of Rs. 1,000,000 each issued on 30 April 2012 and coupon rate is 9.35% p.a. After 5 years with put option /call option after 3rd year from the date of allotment. Such option is exercisable at face value only. Such bonds are redeemable at face value only • Category 2 - Others (This category covers remaining all type of non-convertible and redeemable bonds which has been issued on various dates at face value and redeemable at face value. Such bonds carrying coupon rate and there is no call and put option. Key Implications under Ind AS on financial reporting: In the books of Issuer (IOCL): Category 1 ( A and B) • Contractual obligation to redeem such bonds after a specified period at face only. – Financial liability Financial Instruments Page 441

• Call / Put option is in the nature of option of early redemption is a Derivative - Economic characteristics are Closely related (since the option is exercisable at the amortised cost)– No Separation is required • Hybrid instrument= Financial Liability + Derivative (Closely related) • Financial liability shall be recorded at amortized cost using effective interest method. Category 2 • Contractual obligation to redeem such bonds after a specified period at face only – Financial liability. • Financial liability shall be recorded at amortized cost using effective interest method. 19.3.11 Treasury shares Example 1.11A: Treasury Shares and Structured entities (RO) Pursuant to scheme of amalgamation, Trusts have been set up by IOCL for holding treasury shares in relation to IBP and BRPL mergers. Key Implications under Ind-AS on financial reporting Based on the principles set out under Ind AS 110, IOC Shares Trust is identified as structured entity and hence may be required to be consolidated by the Company. Since IOC Shares Trust does not have a separate legal status and the members of the Trust have unlimited liability, consolidation is required in the standalone financial statements of IOCL. In Ind AS, the shares held by trust shall be shown as deduction from share capital to the extent of face value of such shares. The difference if any needs to adjust in equity. The dividend income on own shares should not be recognised as ‘other income’ since it does not result in increase in economic benefits resulting into increase in equity. The dividend to the extent it relates to shares held by trust, should be presented as deduction from dividend appropriated. As the treasury shares will be shown as a deduction from share capital, the same shall not be considered for calculation of EPS. 19.4 PRESENTATION AND DISCLOSURES 19.4.1 Disclosures in compliance with Ind AS 107 To provide comprehensive disclosures in the financial statements that would enable the users to evaluate: • the significance of financial instruments for an entity’s financial position and performance • the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date Key disclosures: Financial Instruments INDEX Page 442

Classes of financial instruments: In determining classes, at a minimum: • distinguish instruments measured at amortised cost from those measured at fair value • treat financial instruments outside the scope of Ind-AS 107 as a separate class or classes Entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet. Balance sheet disclosures: • Disclose carrying amounts of following categories either in the balance sheet or in the notes: - Financial assets at FVTPL, showing separately:  Designated as such upon initial recognition; and  Classified as held-for-trading - Financial assets at amortised cost - Financial assets at FVTOCI - Financial liabilities carried at amortised cost - Financial liabilities at FVTPL, showing separately  Designated as such upon initial recognition; and  Classified as held-for-trading • Disclosures if a financial asset is designated as FVTPL: - Maximum exposure to credit risk - Amount by which any credit derivative or similar instrument mitigate that maximum exposure to credit risk - Change in fair value of loans and receivables that is attributable to changes in credit risk • Disclosures if financial liability is designated at FVTPL - Change in fair value of financial liability due to credit risk - Difference between carrying amount and contractual amount • Reclassification of financial assets from one class to another • Financial assets transferred/derecognised that do not qualify for de-recognition • Financial assets pledged as collateral for liabilities or contingent liabilities Profit and loss statement disclosures: • Disclose following items either in statement of profit and loss or in the notes: - Net gains / losses on:  Financial assets or liabilities at FVTPL and those that are classified as held for trading Financial Instruments Page 443

 Financial assets at FVTOCI  Financial assets at amortised cost  Financial liabilities measured at amortised cost - Total interest income and total interest expense (other than FVTPL) - Fee income and expense for financial instruments (other than FVTPL) - Interest income accrued on impaired financial assets - Impairment losses for each class of financial assets Other disclosures • Accounting policy • Fair value • Risk Management Separate chapters are created for guidance on disclosures relating to fair value and risk management. 19.5 HEDGE ACCOUNTING OF DERIVATIVES 19.5.1 Relevant Provisions Under Ind-AS-109, hedge accounting continues to be optional, and management should consider the costs and benefits when deciding whether to use it. 19.5.2 Objective Hedge accounting is a technique that modifies the normal accounting for recognising gains and losses on associated hedging instruments and hedged items, so that both are recognised in P&L (or OCI) in the same accounting period. This is a matching concept that eliminates or reduces the volatility in the statement of P&L that otherwise would arise if the hedged item and the hedging instrument were accounted for separately under Ind-AS. 19.5.3 Types of Hedges and accounting 19.5.3.1 Fair value hedge The risk being hedged in a fair value hedge is a change in the fair value of an asset or liability or an unrecognised firm commitment that is attributable to a particular risk and could affect P&L e.g. Interest rate swap from fixed to floating interest rate. The carrying value of the hedged item is adjusted for fair value changes attributable to the risk being hedged, and those fair value changes are recognised in P&L. The hedging instrument is measured at fair value, with changes in fair value also recognised in P&L. Financial Instruments INDEX Page 444

19.5.3.2 Cash flow hedge The risk being hedged in a cash flow hedge is the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability, an unrecognised firm commitment (currency risk only) or a highly probable forecast transaction, and could affect P&L. In other words, in cash flow hedge, a company wants to fix/freeze its cash inflows/outflows. Future cash flows might relate to existing assets and liabilities, such as future interest payments or receipts on floating rate debt. Future cash flows can also relate to forecast sales or purchases in a foreign currency. Volatility in future cash flows might result from changes in interest rates, exchange rates, equity prices or commodity prices. For example, interest rate swap from floating to fixed interest rate. The accounting shall be done as under: • Changes in the fair value of the hedging instrument are initially recognised in OCI provided the hedge is effective. The ineffective portion of the change in the fair value of the hedging instrument (if any) is recognised directly in P&L. • The amount recognised in OCI should be the lower of: - The cumulative gain or loss on the hedging instrument from the inception of the hedge, and - The cumulative change in the fair value (present value) of the expected cash flows on the hedged item from the inception of the hedge. • If the cumulative change in the hedging instrument exceeds the change in the hedged item (sometimes referred to as an ‘over-hedge’), ineffectiveness will be recognised. If the cumulative change in the hedging instrument is less than the change in the hedged item (sometimes referred to as an ‘under-hedge’), no ineffectiveness will be recognised. This is different from a fair value hedge, in which ineffectiveness is recognised on both over – and under-hedges. • For cash flow hedges of a forecast transaction which result in the recognition of a financial asset or liability, the accumulated gains and losses recorded in equity should be reclassified to P&L in the same period or periods during which the hedged expected future cash flows affect P&L. Where there is a cumulative loss on the hedging instrument and it is no longer expected that the loss will be recovered, it must be immediately recognised in P&L. 19.5.4 Qualifying criteria for hedge accounting/ Hedge documentation Formal designation and documentation must be in place at the inception of the hedge relationship. Under Ind-AS 109, documentation will no longer be static but must be updated from time to time. Examples of situations where modification of the hedge documentation would be required are where the hedge ratio is rebalanced (see below) or where the analysis of sources of hedge ineffectiveness is updated. There should be critical terms matching (timing, amount, nature tec.) and no general documentation shall be allowed. Financial Instruments Page 445

Formal designation and documentation of: • Risk management objective and strategy • Hedging instrument • Hedged item • Nature of risk being hedged • Hedge effectiveness (including sources of ineffectiveness and how the hedge ratio is determined) 19.5.5 Hedge effectiveness requirements (prospective): Hedge effectiveness is defined as the extent to which changes in the fair value or cash flows of the hedging instrument offset changes in the fair value or cash flows of the hedged item. Following needs to be established: • Economic relationship exists • Credit risk does not dominate value changes • Designated hedge ratio is consistent with risk management strategy. 19.5.6 IOCL derivative transactions IOCL enters is forwards contracts for hedging its currency risk and refinery margin risk. In FY 2017-18, following type of derivative contracts exist in IOCL: a. Purchase of currency forwards contracts by treasury for following: • To repay short term borrowings denominated in US$ • PCFC loans • Buyers credit b. Purchase of commodity forwards contracts by International trade for following: • GAS OIL 10 PPM SINGAPORE VS DUBAI • KERO SING VS DUBAI 19.5.7 Classification of IOCL hedges • In case of currency forward contracts, company is hedging the risk of fluctuation in exchange rates by freezing the cash outgo at the time of repayment of loans/liability. Thus, this will qualify as cash flow hedge. • In case of commodity forwards contracts, company is hedging the risk of decline in refinery margins by buying the commodity forward and thus protecting the cash flows of forecasted sale. Thus, this will qualify as cash flow hedge. 19.5.8 Hedge Documentation Draft documentation of sample cases is enclosed as Annexure – 19.2A, 2B,2C. 19.5.9 Accounting of cash flow hedge Financial Instruments Page 446

An example of cash flow hedge accounting in enclosed as Annexure – 19.3A and 3B. 19.5.10 Calculation of ASI-10 impact in case of hedge of foreign currency borrowings A question may arise that in case of hedge of FE borrowings, how the impact ASI-10 portion will be calculated. In such cases, Forex gain/loss amount on the hedged loan is to be considered after netting of the gain/loss recycled to “exchange fluctuation” on account of movement in hedging instrument. Financial Instruments Page 447

Annexure – 19.1 SECURITY DEPOSITS Security Deposits Received Applicability Provisions of Fair valuation for non-current security deposits received are applicable in all cases except the following: • Security deposits from employees (R2 cases) need to be discounted in all cases irrespective of any threshold. • In other cases, SD above Rs. 10 lakh is only required be discounted If BG is not applicable. • Security deposits which are repayable on demand (e.g. BG applicable cases) are not required to be discounted Accounting • Security deposits (where discounting is applicable) needs to be bifurcated under below four categories - Security deposit relating to projects (capital schemes) - Security deposits relating to deceased employees - Security deposit relating to cases pertaining to revenue - Security deposit cases relating to expenses (other than deceased employees) • Fair value impact on the transition date/ date of receipt of security deposits needs to be adjusted as Deferred Revenue (current and non-current) • Discounting of security deposits to be done as per the guidelines circulated • Recognition of deferred income needs to be made in P&L for the above four categories as under - Deferred income to be recognized as depreciation charge of the related assets - Deferred income to be recognized over the SD period in employee benefit expenses - Deferred income to be recognized over the SD period in other operating revenues - Deferred income to be recognized over the SD period in other operating expenses Security Deposits Paid INDEX Financial Instruments Page 448

Applicability Provisions of Fair valuation for non-current security deposits paid are applicable in all cases except the following: • Security deposits of upto Rs. 10 lakh are not required be discounted • Security deposits which are repayable on demand are not required to be discounted Accounting • Security deposits (where discounting is applicable) needs to be bifurcated under below categories - Security deposit relating to cases pertaining to revenue - Security deposit cases relating to expenses • Fair value impact on the transition date/ date of receipt of security deposits needs to be adjusted as Deferred Expenses (current and non-current) • Discounting of security deposits to be done as per the guidelines • Recognition of deferred expenses needs to be made in P&L for the above categories as under: - Deferred expenses to be recognized over the SD period in other operating revenues - Deferred expenses to be recognized over the SD period in other operating expenses Financial Instruments Page 449

Annexure-19 .2A REFINERY MARGIN HEDGE HEDGE DOCUMENTATION 1. Risk management objective and strategy On an average, the company takes around 60 days’ time to process the crude and ultimately sale of the product. Indian Oil buys crude and sells petroleum products linked to international benchmark prices, thus exposing it to the risk of variation in crack spreads i.e. the difference between the price of a refined product and the price of crude. Out of the total margins in sales, the risk of fall in crack spreads of ……. (product name) is hedged by undertaking a crack spread. Company wants to protect the realization of margins and therefore to mitigate this risk, company is taking the crack spread to hedge the margin on highly probable forecast sale in future. 2. Type of hedging relationship Cash flow hedge: Company is freezing the crack realization on highly probable forecast sale of…….(product name) 3. Nature of risk being hedged The risk of fall in refining margins due to variation in crack spreads is hedged by undertaking a crack spread. Company wants to hedge the margin realization on sale of ….(product name) on ………...(maturity date). IT to explain how the basis risk is met or not met in order to establish the hedge relationship to be effective. 4. Identification of hedged item Margin to the extent of crack spread realization on Highly probable forecast sale as detailed below: • Product name • Relevant Refinery • Sale Quantity • Sales date 5. Identification of hedging instrument Crack spared is hedged through a forward contract, the details of which are as under: Nature of derivative- ……… (SKO v/s Dubai etc.) Quantity- Financial Instruments INDEX Page 450

Date of contract- Maturity of contract- Crack at inception- Crack spread frozen- 6. Effectiveness testing i) Hedge Ratio: Hedge ratio is 1:1. The amount of hedged item and hedging instrument are closely aligned. Note- IT to explain a bit further. For example non-existence of any other risk for freezing the margin on products. ii) How effectiveness will be assessed: Effectiveness is assessed based on physical underlying exposure and pricing parameters. Any significant change in any of these shall cause a need for review of hedging effectiveness. Company will assess on an ongoing basis, whether a hedging relationship meets the hedge effectiveness requirements. At a minimum, a company will perform the assessment at each reporting date. iii) Credit risk: Risk management activities are undertaken on Over the counter i.e. these are the bilateral contracts with our registered counterparties. Counterparties are registered as per policy in place, keeping in view the financial and other criteria of the counterparties. Thus, as per company’s assessment, effect of credit risk is not dominating the value changes that result from the economic relationship. Financial Instruments Page 451

Annexure-19.2B HEDGING OF SHORT-TERM FOREIGN CURRENCY LOAN 1. Risk management objective and strategy As per Foreign Currency & Interest Rate Risk Management Policy of Indian Oil Corporation Ltd, short term foreign currency loans (having original maturity upto one year) other than FE revolving lines should be hedged. In line with the same, the below (refer point 4) forward contract has been booked. 2. Type of hedging relationship Cash flow hedge: Hedge of foreign currency risk arising out of Short-Term Foreign Currency Loan in USD. 3. Nature of risk being hedged USD/INR exchange rate risk arising out of liability to repay the Short-Term Foreign Currency Loan in USD (refer point 4). 4. Details of hedged item a. Nature : Liability to repay Short Term Foreign Currency Loan in USD availed from United Overseas Bank. b. Hedged amount : USD 15.00 Mn c. Settlement date : 24-Dec-18 5. Identification of hedging instrument The hedging instrument is a forward contract to buy USD 15.00 Mn with the following characteristics: a. Transaction number : 16F/-3M b. Type : US Dollars forward contract c. Amount purchased : USD 15 Mn d. Forward rate : 1 USD = INR 70.3590 e. Spot rate at inception : 1 USD = INR 68.9320 f. Contract date : 28-Jun-18 g. Maturity date : 24-Dec-18 6. Effectiveness testing a. Hedge Ratio : 1:1 b. How effectiveness will be assessed : Corporation has booked delivery based forward contract, where the counterparty i.e. State Bank of India will make USD 15 Mn available to Corporation on maturity. Since the hedging instrument is a delivery based forward contract therefore the hedge is 100% effective. Financial Instruments INDEX Page 452

c. Credit risk : The counterparty i.e. State Bank of India has a Long-Term Issuers Rating of \"IND AAA\" by India Rating (SEBI Registered Credit Rating Agency). Financial Instruments Page 453

Annexure 19.2C. HEDGE OF FOREIGN CURRENCY CRUDE LIABILITY 1. Risk management objective and strategy As per Foreign Currency & Interest Rate Risk Management Policy of Indian Oil Corporation Ltd, hedging activities may be undertaken for the management of currency purchase based on market conditions. In line with the same, the below (refer point 4) forward contract has been booked to spread out the currency requirement. 2. Type of hedging relationship Cash flow hedge: Hedge of foreign currency risk arising out of liability to pay for Crude bills. 3. Nature of risk being hedged USD/INR exchange rate risk arising out of liability to pay for Crude bills in USD (refer point 4). 4. Details of hedged item a. Nature : Liability to pay M/s SAUDI ARAMCO for Crude imported worth USD 69.43 Mn. Against this Corporation intend to hedge foreign exchange risk of USD 50 Mn and to cover balance USD 19.43 Mn from SPOT Market. b. Hedged amount : USD 50.00 Mn c. Settlement date : 20-Jul-18 5. Identification of hedging instrument The hedging instrument is a forward contract to buy USD 50.00 Mn with the following characteristics: a. Transaction number : 21F/-18R b. Type : US Dollars forward contract c. Amount purchased : USD 50 Mn d. Forward rate : 1 USD = INR 68.5208 e. Spot rate at inception : 1 USD = INR 68.4933 f. Contract date : 13-Jul-18 g. Maturity date : 20-Jul-18 6. Effectiveness testing a. Hedge Ratio : 1:1 b. How effectiveness will be assessed : Corporation has booked delivery based forward contract, where the counterparty i.e. State Bank of India will make USD 50 Mn available to Corporation on maturity. Since the hedging instrument is a delivery based forward contract therefore the hedge is 100% effective. Financial Instruments INDEX Page 454

c. Credit risk : The counterparty i.e. State Bank of India has a Long-Term Issuers Rating of \"IND AAA\" by India Rating (SEBI Registered Credit Rating Agency). Financial Instruments Page 455

Annexure-19.3A CASH FLOW HEDGE ACCOUNTING OF HIGHLY PROBABLE FORECAST SALES Hedge Item On 1st April’2018, IOCL has forecast future sale of 50000 bbl of HSD whose selling price is based upon the market determined prices of HSD. IOCL is concerned that the spread of HSD may be volatile and may impact the margins realization on HSD at the time of sale on 10th July’2018. Hedge Instrument The company decides to freeze the crack spared in HSD margin realizable on highly probable forecast sale of HSD which is expected on 10th July 2018 by entering into a swap contract. The details of contract are as under: Date Spot spread Forward INR to USD Fair Value of Cumulative USD/BBL spread to 10th Rate change Fair Value of 1st April’2018 July’2018 change 30th June 2018 17.00 65.00 - - 10th July 2018 12.00 16.50 66.00 1,65,00,000 1,65,00,000 Sale Price 12.50 11.50 67.00 -31,00,000 1,34,00,000 70.00 12.50 67.00 - The future sale is the designated hedge item and the forward contracts is designated at the hedging instrument. The hedge is effective and qualifies as a cash flow hedge. The accounting entries under hedge accounting shall be as follows- 1St April 2018 Derivative Asset Debit INR Credit INR Dr Cash - - Cr (To record the forward exchange contract at its initial fair value, i.e. zero.) 1,65,00,000 1,65,00,000 30Th June 2018 Derivative Asset Dr Other comprehensive income (To recognise the change in the fair value of the Cr forward contract between 1.04.2018 and 30.06.2018 in other comprehensive income) 10th July 2018 Other comprehensive income 31,00,000 Dr Derivative Asset Cr 31,00,000 Financial Instruments INDEX Page 456

(To recognise the change in the fair value of the forward contract between 30.06.2018 and 10.07.2018 in other comprehensive income) Dr. Bank/ Trade Receivables 23,45,00,000 Cr. Sales 23,45,00,000 (To recognize the actual sales on 10.07.2018) Dr Other comprehensive income 134,00,000 Cr Sales/ Derivative Gain 134,00,000 (To recycle the gain on derivative in the statement of Profit and Loss) Dr. Bank 134,00,000 Cr. Derivative Asset 134,00,000 (To settle the amount of gain on derivative with bank) Financial Instruments Page 457

Annexure-19.3B CASH FLOW HEDGE ACCOUNTING OF FOREIGN CURRENCY LIABILITIES On 1 April 2018, IOCL takes a short-term borrowings for 8 months of USD 15 million at par. IOCL functional currency is INR. As part of its risk management policy, IOCL decides to eliminate the exposure arising from movements in the US dollar/INR exchange rates on the principal amount of the borrowings. For this purpose, IOCL enters into a foreign currency forward contract to buy USD 15 million and sell INR with following details: DATE SPOT RATE SWAP/FORWARD FAIR VALUE OF SWAP/ USD 1 = INR RATE FOR 30.11.2018 FORWARD CONTRACT USD 1 = INR INR 01.04.2018 65.00 66.50 - 30.06.2018 66.00 67.00 75,00,000 30.09.2018 65.50 66.75 37,50,000 30.11.2018 67.00 67.00 75,00,000 IOCL designates and documents the forward contract as the hedging instrument in a cash flow hedge of the variability in cash flows arising from the repayment of the principal amount of borrowings due to movements in US dollar/INR exchange rates. Interest for 10 months is payable @5.00% pa at the time of maturity/ repayment. The accounting entries under hedge accounting shall be as follows- Debit INR Credit INR 01.04.2018 97,50,00,000 Bank 97,50,00,000 Borrowings (financial liability) (To recognise receipt of borrowings: USD 15 million at 65.00) No entries in profit and loss or statement of financial position required; fair value of forward contract is zero. 30.06.2018 1,50,00,000 Foreign Currency translation (profit or loss) Borrowings (financial liability) 1,50,00,000 (To recognise foreign exchange loss on borrowings) Derivative (Asset) 75,00,000 Other comprehensive Income 75,00,000 Financial Instruments INDEX Page 458

(To recognise change in fair value of forward contract) 75,00,000 Other comprehensive Income 75,00,000 Foreign Currency translation (profit or loss)/ Derivative gain (To reclassify movement in spot rate from OCI to P&L) 1,23,75,000 Finance cost 1,23,75,000 Borrowings (financial liability) (To recognize Finance Cost during the period) 75,00,000 30.09.2018 75,00,000 Borrowings (financial liability) Foreign Currency translation (profit or loss) (To recognise foreign exchange gain on borrowings) Other comprehensive Income 37,50,000 Derivative (Asset) (To recognise change in fair value of forward contract) 37,50,000 Foreign Currency translation (profit or loss)/ Derivative Loss 37,50,000 Other comprehensive Income (To reclassify movement in spot rate from OCI to P&L) 37,50,000 Finance cost 1,22,81,250 Borrowings (financial liability) (To recognize Finance Cost during the period) 1,22,81,250 30.11.2018 2,25,00,000 Foreign Currency translation (profit or loss) Borrowings (financial liability) 2,25,00,000 (To recognise foreign exchange loss on borrowings) Derivative (Asset) 37,50,000 Other comprehensive Income (To recognise change in fair value of forward contract) 37,50,000 Other comprehensive Income 37,50,000 To Foreign Currency translation (profit or loss) (reclassified to P&L) 37,50,000 Borrowings (financial liability) 100,50,00,000 Finance Cost 88,43,750 Financial Instruments Page 459

Bank 101,38,43,750 (To recognize repayment of borrowing with Interest) 75,00,000 Bank Derivative (Asset) 75,00,000 (To recognize settlement with bank for derivative gain) Financial Instruments Page 460

CHAPTER 20 : EQUITY 20.1 BACKGROUND • The requirement of equity is dealt by the following: - Ind-AS-32- Presentation - Ind-AS-1- Presentation on financial statements - Ind-AS Compliance Schedule-III and Guidance note thereon • As per Ind-AS-32, Equity is the residual interest in the assets of the entity after deducting all its liabilities. Classification of a financial instrument into equity and liability by the issuer is very important to present true and fair view of financial statements. A financial instrument classified as equity creates an ownership interest in a company, remunerated by dividends, which is accounted for as a distribution of retained profit. Liabilities, such as loan finance, on the other hand, are remunerated by interest, which is charged to profit or loss (P&L) as an expense. • Ind-AS 32 establishes principles for presenting financial instruments as liabilities or equity. Under the standard, key feature determining a financial instrument as a liability is the existence of a contractual obligation of one party (the issuer) to deliver cash or another financial assets to another party (the holder), or to exchange financial assets or liabilities under conditions that are potentially unfavourable.  A contract that will be settled by the entity receiving or delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash, or another financial asset, is an equity instrument. This has been called the ‘fixed for fixed’ requirement. However, if there is any variability in the amount of cash or own equity instruments that will be delivered or received, then such a contract is a financial asset or liability as applicable. • Equity is disclosed on the face of the Balance Sheet under the following heads: - Equity Share Capital; - Other Equity; • In addition to above, Ind-AS also requires ‘Statement of Changes in Equity’ comprising (A) Equity Share Capital and (B) Other Equity for reconciliation during a particular reporting period 20.2 TREASURY SHARES Pursuant to amalgamation with IBP and BRPL, Separate trusts were created by IOCL for holding treasury shares. • Based on the principles set out under Ind AS 110, IOC Shares Trust is identified as structured entity and hence may be required to be consolidated by the Company. Since IOC Shares Trust does not have a separate legal status and the members of the Trust have unlimited liability, consolidation is required in the standalone financial statements of IOCL. INDEX Equity Page 461

• In Ind AS, the shares held by trust shall be shown as deduction from share capital to the extent of face value of such shares. The difference if any needs to adjust in equity. • The dividend income on own shares should not be recognised as ‘other income’ since it does not result in increase in economic benefits resulting into increase inequity. • The dividend to the extent it relates to shares held by trust, should be presented as deduction from dividend appropriated. • As the treasury shares will be shown as a deduction from share capital, the same shall not be considered for calculation of EPS. IOCL accounting policy is reproduced below: TREASURY SHARES Pursuant to scheme of amalgamation, IOC Shares Trust has been set up by IOCL for holding treasury shares in relation to IBP and BRPL mergers. The shares held by IOC Shares Trust are treated as treasury shares. Own equity instruments that are reacquired (treasury shares) are recognised at cost and deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments. 20.3 TRANSACTION WITH OWNERS- TREATMENT OF TRANSACTION COST As per Para 35 of IND AS 32, “Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be recognised as income or expense in profit or loss. Distributions to holders of an equity instrument shall be recognised by the entity directly in equity. Transaction costs of an equity transaction shall be accounted for as a deduction from equity.” Since transaction cost of equity are to be recognised in equity, therefore it is necessary to identify the transaction cost incurred in relation to following Equity transaction and book the same directly in equity (i.e. General Reserve): • Issue of shares (further issue/ bonus shares issue) • Payment of Final Dividend/ Interim Dividend/ Special dividend 20.4 SHARE CAPITAL Sch-III of the Companies Act’2013 prescribes various disclosures requirement in respect of share capital. The following disclosures may be applicable to IOCL: • the number and amount of shares authorised; • the number of shares issued, subscribed and fully paid, and subscribed but not fully paid; • par value per share; • a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period; Equity INDEX Page 462

• the rights, preferences and restrictions attaching to each class of shares including restrictions on the distribution of dividends and the repayment of capital; • shares in the company held by each shareholder holding more than 5 per cent. shares specifying the number of shares held; • shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts; • for the period of five years immediately preceding the date as at which the Balance Sheet is prepared (to be incorporated at CO level): - Aggregate number and class of shares allotted as fully paid-up pursuant to contract(s) without payment being received in cash. - Aggregate number and class of shares allotted as fully paid-up by way of bonus shares. - Aggregate number and class of shares bought back. The illustrative disclosures are given below: Equity Page 463

20.5 OTHER EQUITY Other equity comprises of following reserves: a. Retained earnings – This is further divided in two parts: • General Reserve and • Surplus (i.e. for current year P&L Equity INDEX Page 464

b. Other Reserves • Bond Redemption reserve • Capital Reserve • Insurance reserve • Export Profit Reserve • CSR reserve • Foreign currency monetary item translation difference reserve account • Fair value through Other Comprehensive income - Fair value of equity instruments - Fair value of debt instruments STATEMENT OF CHANGES IN EQUITY (SOCIE) Ind AS Schedule III, Part I – Format of Balance Sheet includes not only the format of Balance Sheet but also includes a ‘Statement of Changes in Equity’ comprising (A) Equity Share Capital and (B) Other Equity. In the Statement of Changes in Equity, the portion for ‘Equity Share Capital’ attempts to reconcile: • Balance at the beginning of the reporting period; • Changes in equity share capital during the year; • Balance at the end of the reporting period. As a part of Statement of Changes in Equity, the portion for ‘Other Equity’ requires an entity to provide a reconciliation during a particular reporting period, as a part of one single statement, of all items that are attributable to the holders of equity instruments of an entity. The items included in columnar form are listed below: • Share application money pending allotment; • Equity component of compound financial instruments; • Reserves and Surplus: - Capital Reserve; - Securities Premium Reserve; - Other Reserves (specify nature); - Retained Earnings; • Debt instruments at fair value through other comprehensive income; • Equity instruments at fair value through other comprehensive income; • Effective portion of Cash Flow Hedges; • Revaluation Surplus; • Exchange differences on translating the financial statements of a foreign operation; • Other items of other comprehensive income (specify nature); • Money received against share warrants; • Non-controlling interests (for Statement of Changes in Equity of Consolidated Financial Statements) Equity Page 465

The reconciliation of above line items needs to be provided by way of the following line items: • Balance at the beginning of the reporting period; • Changes in accounting policy or prior period errors; • Restated balance at the beginning of the reporting period; • Total comprehensive income for the year; • Dividends; • Transfer to retained earnings; • Any other change (to be specified); • Balance at the end of the reporting period. Reconciliation as described in para 109 of Ind AS 1 states that, ‘changes in an entity’s equity between the beginning and the end of the reporting period reflect the increase or decrease in its net assets during the period. Except for changes resulting from transactions with owners acting in their capacity as owners (such as equity contributions, reacquisitions of the entity’s own equity instruments and dividends) and transaction costs directly related to such transactions, the overall change in equity during a period represents the total amount of income and expenses, including gains and losses, generated by the entity’s activities during that period.” Following is the format of SOCIE: Equity share capital (Part A) Other Equity (Part B) Equity Page 466

Equity Page 467

CHAPTER 21 : REVENUE (INC. GOVT. GRANT/ CONSTRUCTION CONTRACT ACCOUNTING) 21A. BACKGROUND Primarily, IOCL earns revenue from the following sources: • Sale of petroleum / petrochemical products • Sale of crude oil • Sale of gas • Sale of explosives/ cryogenics • Sale of services • Non-fuel income: - Forecourt campaign royalty - Overriding commission - Channel access fees - Revenue share from dealers • Channelizing commission revenue on high sea sale of crude oil to other Oil Marketing Companies (OMCs) • Installation and other consulting services revenue • Income from other operations/sources • Revenue from construction contracts • Sale of Wind & Solar Power The Chapter does not deal with revenue arising from the following, which are dealt with separately in other Chapters of this manual: • Lease agreements (Ind AS 116); • Changes in the fair value of financial assets and financial liabilities or their disposal (Ind AS 109); This Chapter also includes Government Grant accounting. 21B. REFERENCES TO AUTHORITATIVE LITERATURE • Ind-AS-115 Revenue from Contracts with Customers • Ind AS Compliant Schedule III to Companies Act 2013 21C. ACCOUNTING UNDER IND AS – RECOGNITION AND MEASUREMENT OF REVENUE Revenue INDEX Page 468

21.1 SALE OF GOODS Furnace Oil (FO) Naphtha 21.1.1 Background Bitumen Lubricants & Greases Types of major petroleum products Petcoke Motor Spirit (MS) High Speed Diesel (HSD) Liquefied Petroleum Gas (LPG) Superior Kerosene Oil (SKO) Aviation Turbine Fuel (ATF) Types of customers Oil Marketing Companies (OMCs) Railways Director General of Supplies and Disposals (DGS&D) Minor oil companies Non DGS&D Consignment agency sales Army Subsidiaries Navy Exports 21.1.2 Accounting for sale of goods/services The core principle of Ind-AS 115 is that revenue should be recognised when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. To achieve the core principle, the standard provides a five-step model that entities would need to apply to determine when to recognise revenue, and at what amount. The below are the five steps which focuses on transfer of control of goods and services under a contract with its customers: 21.1.2.1 Step-1 Identify the Contract with Customers INDEX Revenue Page 469

The first step in Ind AS 115 is to identify the ‘contract’, which Ind AS 115 defines as ‘an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied by an entity’s customary business practices. In addition, the general Ind AS 115 model applies only when or if: • The contract has commercial substance • The parties have approved the contract and are committed to perform their respective obligations • The entity can identify – each party’s rights – the payment terms for the goods and services to be transferred • It is probable the entity will collect the consideration. 21.1.2.2 Step-2 Identify the Performance Obligations Ind-AS-115 requires an entity to identify the performance obligations, i.e. the unit of account for revenue recognition. A promise to deliver a good or provide a service in a contract with a customer constitutes a performance obligation if the promised good or service is distinct. A promised good or service is distinct from other goods and services in the contract if meets following two criteria: • Capable of being distinct - Customer can benefit from the good or service on its own or together with other readily available resources • Separately identifiable - Promise to transfer good or service is separately identifiable from other promises in the contract If a promised good or service under the contract does not qualify to be a separate performance obligation, the entity would need to combine such good or service with other goods or services until the bundled arrangement qualifies to be a performance obligation. Identification of a performance obligation requires significant judgement and entails an assessment of the promised goods and services under the contract (including implied and customary promises). 21.1.2.3 Step-3 Determine the Transaction Price Under Ind AS 115, the ‘transaction price’ is defined as the amount of consideration an entity expects to be entitled to in exchange for the goods or services promised under a contract to a customer, excluding any amounts collected on behalf of third parties (for example, sales taxes). When determining the transaction price, an entity shall consider the effects of variable consideration, existence of a significant financing component, non-cash consideration and consideration payable to a customer. If the consideration promised in a contract includes a variable amount (volume discount etc.), an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. The promised consideration can Revenue Page 470

also vary if an entity’s entitlement to the consideration is contingent on the occurrence or non-occurrence of a future event. For example, an amount of consideration would be variable if either a product was sold with a right of return or a fixed amount is promised as a performance bonus on achievement of a specified milestone. An entity shall estimate an amount of variable consideration by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled: • The expected value—the expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics. • The most likely amount—the most likely amount is the single most likely amount in a range of possible consideration amounts (i.e. the single most likely outcome of the contract). The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not). An entity shall apply one method consistently throughout the contract when estimating the effect of an uncertainty on an amount of variable consideration to which the entity will be entitled. An entity that expects to refund a portion of the consideration to the customer would recognise a liability for the amount of consideration it reasonably expects to refund. The entity would update the refund liability each reporting period based on current facts and circumstances. 21.1.2.4 Step-4 Allocate the Transaction Price Under Ind AS 115, an entity allocates a contract’s transaction price to each separate performance obligation within that contract on a relative stand-alone selling price basis at contract inception. Ind AS 115 defines a stand-alone selling price as ‘the price at which an entity would sell a promised good or service separately to a customer.’ 21.1.2.5 Step-5 Recognize Revenue Revenue may be recognised either at a point in time (when the customer obtains control over the promised service) or over a period of time (as the customer obtains control over the promised service). An entity would have to determine at contract inception whether it satisfies the performance obligation over time or at a point in time. At the end of each reporting period, for each performance obligation satisfied over time, revenue should be recognised by measuring the progress towards complete satisfaction of that performance obligation. If a performance obligation is not satisfied over time, then an entity recognises revenue at the point in time at which it transfers control of the good or service to the customer. Revenue Page 471

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met: a. the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs b. the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced or c. the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to. Following two methods that can be used to measure an entity’s progress towards complete satisfaction of a performance obligation satisfied over time • Output method- on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. As a practical expedient, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognise revenue in the amount to which the entity has a right to invoice. • Input method- Input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to recognise revenue on a straight-line basis. 21.1.3 Revenue from Sale of Goods Revenue from sale of goods is recognized generally on dispatch of goods automatically by the SAP at the time of generation of sales invoice. However, based upon the above- mentioned recognition criteria, the revenue needs to be recognised upon delivery to the customer in the following cases: a. Marketing Division: • Sale of ATF to Air-Force Defence • Sale of motor spirit and high-speed diesel to Company owned Company operated (COCO), Company Owned Dealer Operated (A Site RO) retail outlets and Dealer Owned Dealer Operated (B Site RO) retail outlets • Sale of Kerosene Oil under the Jankalyan scheme • Sale of LPG in case of sale to domestic consumers through distributors • Sale of Lubricants by CFA to Servo Stockist Auto and Servo Stockist Institution. b. BD Division: Revenue Page 472

Sale of products like Polymer, PTA (Solid) and PX, LAB (Liquid) are transported to customers through road/rail transport by IOCL Accordingly, 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 “delivered sales” which has not reached the desired destination (stock in transit) is reversed with corresponding decrease in debtors. • Cost of goods pertaining to stock in transit is reversed with corresponding increase in inventory of finished goods. c. Pipelines/BD Division: Sale of Wind Power Solar Power Sale of wind & solar power is accounted for immediately on billing to the customers. however, revenue is netted of at the end of each quarter for expected prompt payment (cash discount) discount in the upcoming quarter for the portion of revenue booked in current quarter. in case of quarter end, provision for income from the last billing cycle date till end of quarter date is also made based upon meter readings till the end of quarter from the last billing cycle date. 21.1.4 Contract Costs When (or as) a performance obligation is satisfied, an entity shall recognise as revenue the amount of the transaction price that is allocated to that performance obligation. An entity is required to capitalise certain costs incurred in obtaining a contract if specified criteria are met. Ind AS 115 provides following guidance in respect to recognition of contract costs: • Incremental cost of obtaining a contract with a customer: Entity should recognise as an asset if the entity expects to recover those costs. These are direct incremental costs associated with obtaining the contract (e.g. sales commission). • Cost to fulfil a contract: An entity should recognise an asset for the cost incurred to fulfil a contract if those costs: - Relate directly to an existing contract or specific anticipated contract - Generate or enhance resources that will be used in satisfying the performance obligation in the future - Are expected to be recovered. Judgement would be required to assess which costs should be capitalised and for determination of the appropriate period and pattern of amortisation, e.g. whether the amortisation period should include the anticipated contracts with the same customer. 21.2 DISCOUNTS AND INCENTIVES The Company offers the following discounts and incentives to its customers: Revenue INDEX Page 473