Asset accounting

Assets in HPCL are broadly classified under 3 categories:

I. Assets at HPCL premises

II. Assets at Customer premises
III. Assets at Employee premises

i) Asset at HPCL premises: This includes all the physical assets of the company
located at its headquarters, regional offices, terminals and depots. They are in form of
Land - Freehold, Roads and Culverts, Leasehold Property, Railway Siding and
Office Building, Furniture, Fixtures & Office/Laboratory Equipment etc. It also
includes oil pipelines constructed by the company. These assets are directly used in
the daily operational or administrative activities of the company.
ii) Assets at customer premises: Certain assets of the company are also built up at the
customer’s i.e. dealer’s premises. The assets are located at the retail outlets. At any
retail outlet the tanks and the pumps are compulsorily provided by company but
ownership of assets such as land and building etc varies from outlet to outlet
depending upon the category of the outlet. Assets owned by the company are
capitalized in company books. These assets are also maintained by the company.
iii) Assets at employee premises: This includes the assets that are provided to the
employees by the company for office use. For example, if the company provides
laptop to its employees for official purpose, the asset is in the custody of employee,
but it is capitalized and maintained by company.

All the assets of HPCL fall under one of the above categories. Every asset is given a tag number
for identification. The asset accounting process starts from the request by the user department
stating its need to procure the asset and ends at the generation of ERP tag number of the asset.
Various steps involved in the purchasing and capitalization of an asset are:
Steps for procedural activities:
I. When an asset is required the first thing that is to be done is making of Local Purchase
Requisition (LPR). User department experiences its need for procurement of the asset to
the purchase department. They do the complete market research and clearly lay done the
entire specification of the asset. terms and conditions for the vendor and an estimation of
the cost in the LPR.
II. After that tender is invited by the purchase department from the enlisted vendors.
Sometimes if the cost of the asset is less than a minimum required value, tender is not
necessary. In this case direct purchase method is followed.
III. The bids are then evaluated. The lowest qualified bidder always gets the tender.
IV. The Purchase Order (PO) is placed on the selected party.
V. Then the materials are delivered and a Material Receipt Report (MRR) is generated by
the user department combining receipt and a direction of payment to the vendor.
VI. After MRR if the item purchased is ready to use it’s immediately capitalized irrespective
of payment. If it is a construction project, the asset is capitalized only after the same
comes into existence and it is ready to use.

Flow chart for this process is given below:

 Generation of Local Purchase
Requisition (LPR) by user
department

Tender Invitation to enlisted

Vendor

Evaluation of Bids

PO Placement on Lowest
qualified bidder
Flow Chart
Diagram
Job completed by the vendor

Preparation of Material Receipt Payment made by

Report Finance Department

Capitalization of Asset by user

department

Generation of tag no in the ERP

system on approval of Finance
The following accounting entries take place as a result of the process:

i) The accounting part starts on PO placement. After the placing of PO capital

commitment is created against the job (known as Appropriation Request in ERP
system) to the extent of quantity ordered. Once the MRR is prepared for the receipt of
Appropriation Request (AR) account debited and Account Payable (AP) account is
credited. Assuming that the MRR is for amount Rs 50,000/- the following entries will
take place in the following manner.

Account Dr Cr
Appropriation Request 50,000

Accounts payable 50,000

ii) If the asset is usable as soon as it is delivered fixed asset is recognized in the system
after MRR preparation and Fixed asset account is debited with the asset cost (
recognized as per accounting standard) AR account is credited with the same amount.
We are assuming that the transaction amount is same here.

Account Dr Cr
Fixed Asset 50,000
Appropriation Request 50,000

iii) Once the payment is made to the vendor the AP is debited and the same amount is
credited to the balance sheet in the appropriate account. The same amount is also used
as transaction here.
 Account Dr Cr
Accounts Payable 50,000
Balance Sheet 50,000

There are many assets for which a lot of payments are made even before the asset is put to use.
In that case Accounts Payable is squared off even before capitalization of asset. This generally
happens in case of large civil projects. Daily payments are made to the workers at these
construction sites. Since this amount can’t be capitalized immediately they are part of Capital
Work in Progress account till the project is completed.
Fixed asset Master

Asset master plays a vital role in fixed asset accounting. All the necessary details are provided in
the AMCA by the user department. There are two parts in the AMCA, Header and the Details.
Header part contains the vital information for the Asset i.e. JDE AR No, SBU number, Branch
Plant No, Responsible BU No etc.
The Details part consists of the following items:

Serial No, Parent No, Description, PO No, Investment Group, JDE Journal entry No etc.

Initially the project executor will fill up the AMCA format for all the details except asset number
and the capitalization JE no which will be populated by the Finance officer after entering the
asset master and the capitalization JE. The duly filled AMCA format will be approved by the
appropriate authority and hand over to Finance for ERP punching.

In ERP, the asset capitalization consists of two activities i.e. asset creation in JDE and then
passing a JE wherein the FA account is debited and the project capitalization a/c is credited. The
Finance officer on receipt of approved AMCA form will enter the asset master and J1 voucher in
JDE.

The asset master needs to be created before the capitalization JV is entered based on the
information provided in the form to be filled by the project team. The capitalization is mainly
done by passing Journal entries.

For each new asset to be created in the location, the user department will give the AMCA based
on this JV which has to be processed by finance officer in JDE system.

LPG Cylinder Capitalization: The process of creating an asset master is the same like any
other assets but with a variation. One asset number will be created for each batch of cylinders
procured.
Spare asset: Where assets are capitalized partially or spares for a particular asset is capitalized
subsequently the original asset and the asset which are capitalized later need to be written off at
the same time. To ensure that this happens the asset which is capitalized later on needs to be
depreciated at a higher rate of depreciation and the same will be treated as a child of the original
asset.

Asset Cost Summary: Once a transaction has been posted to fixed asset system, review asset
costs can be reviewed in asset cost summery.

Assets at employee premises: Employee assets attract a different depreciation rate.

Separate ledger type has been maintained for such assets, wherein different depreciation methods
have been defined. The steps to compute depreciation are same as computing depreciation in
normal rates. Every such asset is tagged against the specific employee. Every asset at retail pump
outlets is tagged with the details of the customers.
Accounting Policies in HPCL with respect
to Fixed Asset
SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared under historical cost convention in accordance with
Generally Accepted Accounting Principles (GAAP), Accounting Standards referred to in the
Companies (Accounting Standards) Rules, 2006 issued by the Central Government and the
relevant provisions of the Companies Act, 1956.

1. FIXED ASSETS
a. Land acquired on lease for 99 years or more is treated as freehold land.
b. Technical know-how /license fee relating to plants/ facilities are capitalized as part of cost of
the underlying asset.
2. INTANGIBLE ASSETS
a. Cost of Right of Way for laying pipelines is capitalized as Intangible Asset and being
perpetual in nature, is not amortized.
b. Technical know-how /license fee relating to production process and process design are
recognized as Intangible Assets.
c. Cost of Software directly identified with hardware is capitalized along with the cost of
hardware. Application software is capitalized as Intangible Asset.
3. CONSTRUCTION PERIOD EXPENSES ON PROJECTS
a. Related expenditure (including temporary facilities and crop compensation expenses) incurred
during construction period in respect of plan projects and major non-plan projects are capitalized.
b. Financing cost incurred during the construction period on loans specifically borrowed and
utilized for projects is capitalized. Financing cost includes exchange losses in relation to
borrowings denominated in foreign currency.
c. Financing cost, if any, incurred on general borrowings used for projects during the
construction period is capitalized at the weighted average cost.
4. DEPRECIATION
a. Depreciation on Fixed Assets is provided on the Straight Line method, in the manner and at
the rates prescribed under Schedule XIV to the Companies Act, 1956 and is charged pro rata on a
monthly basis on assets, from / up to and inclusive of the month of capitalization / sale, disposal
or deletion during the year.
b. All assets costing up to Rs. 5000/-, other than LPG cylinders and pressure regulators, are fully
depreciated in the year of capitalization.
c. Premium on leasehold land is amortized over the period of lease.
d. Machinery Spares, which can be used only in connection with an item of fixed asset and the
use of which is expected to be irregular, are depreciated over a period not exceeding the useful
life of the principal item of fixed asset.
e. Intangible Assets other than application software are amortized on a straight line basis over a
period of ten years or life of the underlying plant/facility, whichever is earlier.
f. Application software are normally amortized over a period of four years, or over its useful life,
whichever is earlier.
5. IMPAIRMENT OF ASSETS
At each balance sheet date, an assessment is made of whether there is any indication of
impairment. An impairment loss is recognized whenever the carrying amount of assets of cash
generating units (CGU) exceeds their recoverable amount.

Indian Accounting Standard 10

Definitions
The following terms are used in this Statement with the meanings specified:
i) Fixed asset is an asset held with the intention of being used for the purpose of
producing or providing goods or services and is not held for sale in the normal course
of business.
 ii) Fair market value is the price that would be agreed to in an open and unrestricted
market between knowledgeable and willing parties dealing at arm’s length who are
fully informed and are not under any compulsion to transact.
iii) Gross book value of a fixed asset is its historical cost or other amount substituted for
historical cost in the books of account or financial statements. When this amount is
shown net of accumulated depreciation, it is termed as net book value.

Judgment is required in applying the criteria to specific circumstances or specific types of

enterprises.

Stand-by equipment and servicing equipment are normally capitalized. Machinery spares are
usually charged to the profit and loss statement as and when consumed.

In certain circumstances, the accounting for an item of fixed asset may be improved if the total
expenditure thereon is allocated to its component parts, provided they are in practice separable,
and estimates are made of the useful lives of these components.

Components of Cost
The cost of an item of fixed asset comprises its purchase price, including import duties and other
non-refundable taxes or levies and any directly attributable cost of bringing the asset to its
working condition for its intended use; any trade discounts and rebates are deducted in arriving
at the purchase price.

The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on
account of exchange fluctuations, price adjustments, and changes in duties or similar factors.

Administration and other general overhead expenses are usually excluded from the cost of fixed
assets because they do not relate to a specific fixed asset.

The expenditure incurred on start-up and commissioning of the project, including the
expenditure incurred on test runs and experimental production, is usually capitalized as an
indirect element of the construction cost.
If the interval between the date a project is ready to commence commercial production and the
date at which commercial production actually begins is prolonged, all expenses incurred during
this period are charged to the profit and loss statement.

International Accounting Standard 16

Definitions
The following terms are used in this Standard with the meanings specified:

Carrying amount is the amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction or, where applicable, the
amount attributed to that asset when initially recognised in accordance with the specific
requirements of other IFRSs, eg IFRS 2 Share-based Payment.

Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual
value.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful
life.

Entity-specific value is the present value of the cash flows an entity expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life or expects to incur
when settling a liability.

Fair value is the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm’s length transaction.

An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.

Property, plant and equipment are tangible items that:

(a) Are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and

(b) Are expected to be used during more than one period.

Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.
The residual value of an asset is the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of
the age and in the condition expected at the end of its useful life.

Useful life is:

(a) The period over which an asset is expected to be available for use by an entity; or

(b) The number of production or similar units expected to be obtained from the asset by an
entity.

Recognition
The cost of an item of property, plant and equipment shall be recognized as an asset if, and only
if:

(a) It is probable that future economic benefits associated with the item will flow to the entity;

(b) The cost of the item can be measured reliably.

Measurement at recognition
An item of property, plant and equipment that qualifies for recognition as an asset shall be
measured at its cost.

The cost of an item of property, plant and equipment comprises:

(a) Its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates.

(b) Any costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management.
(c) The initial estimate of the costs of dismantling and removing the item and restoring the site
on which it is located, the obligation for which an entity incurs either when the item is acquired
or as a consequence of having used the item during a particular period for purposes other than to
produce inventories during that period.

Measurement after recognition

An entity shall choose either the cost model in paragraph 30 or the revaluation model in
paragraph as its accounting policy and shall apply that policy to an entire class of property, plant
and equipment.

 Cost model
After recognition as an asset, an item of property, plant and equipment shall be carried at
its cost less any accumulated depreciation and any accumulated impairment losses.

 Revaluation model
After recognition as an asset, an item of property, plant and equipment whose fair value
can be measured reliably shall be carried at a revalued amount, being its fair value at the
date of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations shall be made with sufficient regularity to
ensure that the carrying amount does not differ materially from that which would be
determined using fair value at the end of the reporting period.

Depreciation
Each part of an item of property, plant and equipment with a cost that is significant in relation to
the total cost of the item shall be depreciated separately.

Depreciable amount and depreciation period

The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.
The residual value and the useful life of an asset shall be reviewed at least at each financial year-
end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a
change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors.
Depreciation method
The depreciation method used shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity.

The depreciation method applied to an asset shall be reviewed at least at each financial year-end
and, if there has been a significant change in the expected pattern of consumption of the future
economic benefits embodied in the asset, the method shall be changed to reflect the changed
pattern. Such a change shall be accounted for as a change in an accounting estimate in
accordance with IAS 8.

Compensation for impairment

Compensation from third parties for items of property, plant and equipment that were impaired,
lost or given up shall be included in profit or loss when the compensation becomes receivable.

De-recognition
The carrying amount of an item of property, plant and equipment shall be derecognized:

(a) On disposal; or

(b) When no future economic benefits are expected from its use or disposal.

The gain or loss arising from the de-recognition of an item of property, plant and equipment
shall be included in profit or loss when the item is derecognized (unless IAS 17 requires
otherwise on a sale and leaseback). Gains shall not be classified as revenue.

The gain or loss arising from the de-recognition of an item of property, plant and equipment shall
be determined as the difference between the net disposal proceeds, if any, and the carrying
amount of the item.
 IFRS and Indian GAAP – A Comparison
i) For cost recognition Indian GAAP is similar to IFRS except the following:
 No general guidance is given for capitalization of dismantling and site restoration cost.
However, the guidance note on accounting for Oil & Gas producing activities states that
entities involved in those activities should capitalize the dismantling and site restoration
cost.
 There is no guidance under AS10 specifying treatment of fixed assets acquired on
deferred settlement terms. Generally financing element is not separated from the total
price paid even if payment is deferred beyond normal credit terms.
 There is no specific guidance on capitalization of fair value gains and losses on
qualifying cash flow hedge relating to purchase of PPE in foreign currency.
ii) IAS 16 of IFRS mandates component account which requires each major part of an item
of property plant and equipment, with a cost that is significant in relation to the total cost
of the item, to be depreciated separately but Indian GAAP does not require full adoption
of the component approach. It merely recognizes the approach, by stating that accounting
for a tangible fixed asset may be improved if total cost, thereof, is allocated to its various
parts.
iii) IFRS requires the subsequent expenditure on an asset to be evaluated on the same
recognition principles as the initial cost, to determine whether it should be expensed or
recognized as an item of property plant and equipment. By applying this principle,
routine maintenance expenditure and costs of day-to-day servicing are expensed as
incurred.

An entity recognizes, in the carrying amount of an item of property, plant and equipment,
the cost of replacing a part or cost of any major inspection if the recognition criteria are
met. The carrying amount of those parts that are replaced is derecognized simultaneously.

However, According to Indian GAAP subsequent routine and non-routine maintenance

expenditure, including the replacement of parts and major inspection or overhaul, are
normally expensed immediately. Only expenditure that increases the future benefits from
 the existing asset beyond its previously assesses standard of performance is included in
the gross book value. There is no requirement as such for de-capitalizing the carrying
amount of the replaced part under AS10.

iv) IFRS requires an entity to choose either the cost model or the revaluation model as its
accounting policy. If an item of property, plant and equipment is revalued, the entire class
of property, plant and equipment to which that asset belongs shall be revalued.
Although Indian GAAP recognizes revaluation of fixed assets the revaluation approach
adopted therein is ad-hoc in nature.
v) Depreciation on revalued portion cannot be recouped out of revaluation reserve (forming
part of other comprehensive income in statement of comprehensive income).
For Indian GAAP depreciation on revalued portion can be recouped out of revaluation
reserve.
vi) The revaluations must be kept sufficiently up to date, so that the carrying amount does
not differ materially from fair value.
But in case of Indian GAAP there is no such requirement to perform revaluation at
regular intervals
vii) An item of property, plant and equipment should be depreciated over its estimated useful
life, and the depreciation charge must be recognized as an expense, unless it has to be
included in the carrying amount of another asset.
But in case of Indian GAAP the amount to be depreciated of each asset should be
allocated on a systematic basis over its useful life. Further, top-up depreciation should be
charged to comply with AS6 requirements, in case the useful life of an asset is shorter
than that envisaged in schedule XIV.
viii) A significant part of an item of PPE may have a useful life and a depreciation method
that is same as the useful life and the depreciation methods of another significant part of
that same item. Such parts maybe grouped in determining the depreciation charge.
Though not required, an entity may choose to deprecate separately the parts of an item
that do not have a cost that is significant in relation to the total cost of the item.
There is no requirement under Indian GAAP for separate depreciation on significant parts
of an asset.
ix) The residual value and the useful life of an asset shall be reviewed at least at each
financial year-end, and if expectations differ from previous estimates, the changes shall
be accounted for as a change in an accounting estimate. But for Indian GAAP there is no
need for an annual review of estimates of useful life and residual value. An entity may
review the same, periodically.
x) IFRS permits a variety of depreciation methods to be used to allocate the depreciable
amount of an asset on a systematic basis over its useful life. These methods include the
straight-line method, the diminishing balance method and the units of production method.
But in Indian GAAP permitted methods of depreciation are straight line method and
written down method.
xi) In IFRS a periodic review of depreciation method is required. But in case of Indian
GAAP the depreciation method selected should be applied consistently from period to
period.
xii) In IFRS system a change in depreciation method is treated as change in accounting
estimate and accounted for prospectively.
For Indian GAAP a change in depreciation method is treated as change in accounting
policy and when such a change in the method of depreciation is made, depreciation is a
recalculated retrospectively.
xiii) IFRS requires that spare parts be usually carried as inventory and recognized in profit or
loss as consumed. However, major spare parts qualify as property, plant and equipment
(PPE) when as entity expects to use them during more than one period. Similarly, if the
spare parts can be used only in connection with an item of PPE, they are accounted for as
PPE.
But according to Indian GAAP machinery spares are usually charged to the P&L account,
as and when consumed. However if such spares can be used only in connection with an
item of fixed asset and their use is expected to be irregular, it may be appropriate to
allocate the total cost on a systematic basis over a period not exceeding the useful life of
the principle item.
xiv) According to IFRS servicing equipments is usually carried as inventory and recognized
in P& L account as consumed but according to Indian GAAP servicing equipment in
normally capitalized.
 xv) According to the IFRS, To the extent decommissioning and restoration relates to the
fixed asset, the changes are added or deducted from asset. However the amount deducted
is restricted to the carrying value of the relevant asset. The unwinding of discount, is
taken to the profit and loss as a finance charge but there is no guidance under Indian
GAAP. The note on Accounting for oil and gas activities contains more specific
provision relating to such costs, to the extent it relates to oil and gas producing entities.
xvi) For Retirement and Disposal, IFRS prohibits gains or losses arising from de-recognition
of an item of PPE to be classified as revenue. However, when an entity routinely sells
items of PPE held for rental in the course of its ordinary activities, it shall transfer such
assets to inventories at their carrying amount, when they cease to be rented and become
held for sale. The proceeds from sale of such assets shall be recognizes as revenue.
But according to Indian GAAP, Gains are losses arising from disposal of assets are
recognized in profit or loss for the period. There is no specific requirement to
include/exclude such gains/ losses from revenue.
xvii) IFRS states that compensation from third parties from impairment or losses of items of
PPE are included in profit or loss account when compensation becomes receivable.
But there is no guidance under Indian GAAP.

Impact on HPCL

i) IFRS clearly states that the cost of dismantling, removing and restoring the item has to be
included as part of the cost. Hence every asset purchased in future will have to include
those costs.
Although Indian GAAP does not provide any guidelines on capitalization of fair value
gains or losses related to purchase of PPE in foreign currency, HPCL does recognize the
realized gain or loss in respect of commodity hedging contracts, the pricing period of
which has expired during the year, in the Profit & Loss Account along with the
underlying transaction. It will become mandatory after adoption of IFRS.
ii) After the adoption of IFRS, HPCL will have to do component accounting and depreciate
different parts separately. This will help in assigning a different lifetime to different
 components. So, the depreciation schedule will be more in line with the actual usage of
the component.
iii) Indian GAAP does not de-capitalize the replaced part but IFRS requires that the carrying
amount of parts that are replaced be derecognized simultaneously. So in future when any
part will be replaced their carrying amount would be de-recognized. Also under IFRS,
costs of major inspection are recognized in the carrying amount but under GAAP it is
expensed. So adoption of IFRS will increase the value of assets that undergo major
inspections.
iv) Since IFRS mandates regular revaluation of assets, values reported in the balance sheet
will be closer to the fair value of the assets. AS10 does not require regular revaluation so
some of the assets like land maybe undervalued while others like computers may be
overvalued. Adoption of IFRS will thus help in the fair valuation of the company’s assets.
v) IFRS permits other depreciation techniques like Diminishing Balance Method and the
units of production method. Diminishing Balance method allows the company to
depreciate a larger portion of the asset in the initial years thereby increasing the
depreciation benefit received.
vi) Although there is no guidance under Indian GAAP, HPCL does carry out a regular
assessment on each balance sheet date and an impairment loss is recognized whenever
the carrying amount of assets of cash generating units (CGU) exceeds their recoverable
amount. After the adoption of IFRS, it will be mandatory.