1 Basis of preparation of Financial Statements
The financial statements have been prepared as of a going concern on
historical cost convention and on accrual method of accounting in
accordance with the generally accepted accounting principles and the
provisions of the Companies Act, 1956 as adopted consistently by the
2 Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Management to make
estimates and assumptions that affect the income and expenditure during
the reporting period and the assets and liabilities including
contingent liabilities at the date of financial statements. The
differences between actual results and estimates are recognised in the
period in which results are known.
3 Fixed Assets
Fixed assets (other than land acquired free from State Government) are
carried at the cost of acquisition or construction or book value less
accumulated depreciation and impairment, if any.
Cost includes value of internal transfers for capital works, taken at
actual / estimated factory cost or market price, whichever is lower.
Effect of extraordinary events such as devaluation/ revaluation in
respect of long term liabilities/ loans utilised for acquisition of
fixed assets is added to/ reduced from the cost.
Land acquired free of cost from the State Government is valued at Rs. 1/-
except for that acquired after 16th July 1969, in which case the same
is valued at the acquisition price of the State Government concerned,
by corresponding credit to capital reserve.
A) (i) Assets Given on Lease Prior to 1st April 2001 Assets
manufactured and given on finance lease are capitalised at the normal
sale price/fair value/ contracted price and treated as sales.
Depreciation on the same is charged at the rate applicable to similar
type of fixed assets as per Accounting Policy on ''Depreciation''.
Against lease rentals, matching charge is made through Lease
Finance income is recognised over the lease period.
(ii) Assets Given on Lease on or after 1st April, 2001
Assets manufactured and given on finance lease are recognised as sales
at normal sale price / fair value/ N PV.
Finance income is recognised over the lease period.
Initial direct costs are expensed at the commencement of lease.
B) Assets Taken on Lease on or after 1st April 2001
Assets taken on lease are capitalised at fair value / NPV / contracted
Depreciation on the same is charged at the rate applicable to similar
type of fixed assets as per Accounting Policy on ''Depreciation''. If the
lease assets are returnable to the lessor on expiry of lease period,
the same is depreciated over its useful life or lease period, whichever
Lease payments made are apportioned between finance charges and
reduction of outstanding liability in relation to assets taken on
A) Assets Given on Lease:
Assets manufactured and given on operating lease are capitalised. Lease
income arising therefrom is recognised as income over the lease period.
B) Assets Taken on Lease:
Lease payments made for assets taken on operating lease are recognised
as expense over the lease period.
5 Intangible Assets
A) Intangible assets are capitalised at cost if
a. It is probable that the future economic benefits that are
attributable to the asset will flow to the company, and
b. The company will have control over the assets, and
c. The cost of these assets can be measured reliably and is more than
Rs. 10,000/-. Intangible assets are amortised over their estimated
useful lives not exceeding three years in case of software and not
exceeding ten years in case of others on a straight line pro-rata
B) a. Expenditure on research including the expenditure during the
research phase of Research & Development Projects is charged to
Statement of profit and loss in the year of incurrence.
b. Expenditure incurred on Development including the expenditure
during the development phase of Research & Development Project meeting
the criteria as per Accounting Standard on Intangible Assets, is
treated as intangible asset.
c. Fixed assets acquired for purposes of research and development are
6 Borrowing Costs
Borrowing costs that are attributable to the manufacture, acquisition
or construction of qualifying assets, are included as part of the cost
of such assets.
A qualifying asset is one that necessarily takes more than twelve
months to get ready for intended use or sale.
Other borrowing costs are recognised as expense in the period in which
they are incurred.
(i) Depreciation on fixed assets (other than
those used abroad under contract) is charged upto the total cost of the
assets on straight-line method as per the rates prescribed in Schedule
XIV of the Companies Act, 1956, except where depreciation is charged at
rates determined on the basis of the technically assessed estimated
useful lives shown hereunder:-
In respect of additions to/deductions from the fixed assets,
depreciation is charged on pro-rata monthly basis.
(ii) Fixed assets used outside India pursuant to long term contracts
are depreciated over the duration of the initial contract.
(iii) Fixed assets costing Rs. 10,000/- or less and those whose written
down value as at the beginning of the year is Rs. 10,000/- or less, are
depreciated fully. In so far as township buildings are concerned, the
cost per tenement is the basis for the limit of Rs. 10,000/-.
(iv) At erection/project sites: The cost of roads, bridges and culverts
is fully amortized over the tenure of the contract, while sheds,
railway sidings, electrical installations and other similar enabling
works (other than purely temporary erections, wooden structures) are so
depreciated after retaining 10% as residual value.
(v) Purely Temporary Erection such as wooden structures are fully
depreciated in the year of construction.
(vi) Leasehold Land and Buildings are amortised over the period of
lease. Buildings constructed on land taken on lease are depreciated
over their useful life or the lease period, whichever is earlier.
(i) Long–term investments are carried at cost. Decline, other than
temporary, in the value of such investments, is recognised and provided
(ii) Current investments are carried at cost or quoted/fair value
whichever is lower. Unquoted current investments are carried at cost.
(iii) The cost of investment includes acquisition charges such as
brokerage, fees and duties.
Any reduction in the carrying amount & any reversals of such reductions
are charged or credited to the Statement of Profit and Loss.
9 Inventory Valuation
(i) Inventory is valued at actual/estimated cost or net realisable
value, whichever is l ower.
(ii) Finished goods in Plant and work in progress involving Hydro and
Thermal sets including gas based power plants, boilers, boiler
auxiliaries, compressors and industrial turbo sets are valued at
actual/estimated factory cost or at 97.5% of the realisable value,
whichever is lower.
(iii) In respect of valuation of finished goods in plant and
work-in-progress, cost means factory cost; actual/estimated factory
cost includes excise duty payable on manufactured goods.
(iv) In respect of raw material, components, loose tools, stores and
spares cost means weighted average cost.
(v) (a) For Construction contracts entered into on or after 01.04.2003:
Where current estimates of cost and selling price of a contract
indicates loss, the anticipated loss in respect of such contract is
recognised immediately irrespective of whether or not work has
b) For all other contracts:
Where current estimates of cost and selling price of an individually
identified project forming part of a contract indicates loss, the
anticipated loss in respect of such project on which the work had
commenced, is recognised.
c) In arriving at the anticipated loss, total income including
incentives on exports/deemed exports is taken into consideration.
(vi) The components and other materials purchased / manufactured
against produc- tion orders but declared surplus are charged off to
revenue retaining residual value based on technical estimates.
10 Revenue Recognition
Sales are recorded based on significant risks and rewards of ownership
being transferred in favour of the customer. Sales include goods
dispatched to customers by partial shipment.
A. For construction contracts entered into on or after 1.4.2003
Revenue is recognised on percentage completion method based on the
percentage of actual cost incurred upto the reporting date to the total
estimated cost of the contract.
B. For all other contracts
(i) Recognition of sales revenue in respect of long production cycle
items (Hydro and Thermal sets including gas-based power plants,
boilers, boiler auxiliaries, compressors and industrial turbo sets) is
made on technical estimates. When the aggregate value of shipments
represents 30% or more of the realizable value, they are considered at
97.5% of the realisable value or in its absence, quoted price.
Otherwise, they are considered at actual/ estimated factory cost or
97.5% of the realizable value, whichever is lower. The balance 2.5% is
recognised as revenue on completion of supplies under the contract.
(ii) Income from erection and project management services is recognised
on work done based on:
Percentage of completion; or
The intrinsic value, reckoned at 97.5% of contract value, the balance
2.5% is recognised as income when the contract is completed.
(iii) Income from engineering services rendered is recognised at
realizable value based on percentage of work completed.
(iv) Income from supply/ erection of non- BHEL equipment/ systems and
civil works is recognised based on dispatches to customer/work done at
11 Accounting for Foreign Currency Transactions
Transactions in foreign currencies are recorded at the exchange rates
prevailing on the date of the transaction. Foreign currency monetary
assets and liabilities are translated at year end exchange rates.
Exchange difference arising on settlement of transactions and
translation of monetary items are recognised as income or expense in
the year in which they arise.
12 Translation of Financial Statements of Integral Foreign Operations
(i) Items of income and expenditure are translated at average rate
except depreciation, which is converted at the rates adopted for the
corresponding fixed assets.
(ii) Monetary items are translated at the closing rate; non-monetary
items carried at historical cost are translated at the rates in force
on the date of the transaction; non-monetary items carried at fair
value are translated at exchange rates that existed when the value were
(iii) All translation variances are taken to Statement of profit and
13 Employee Benefits
Provident Fund and Employees'' Family Pension Scheme contributions are
accounted for on accrual basis. Liability for Earned Leave, Half Pay
Leave, Gratuity, Travel claims on retirement and Post Retirement
Medical Benefits are accounted for in accordance with actuarial
valuation. Compensation under Voluntary Retirement Scheme is charged
off in the year of incurrence on a pro-rata monthly basis.
14 Claims by/against the Company
(i) Claims for liquidated damages against the Company are recognised in
accounts based on management''s assessment of the probable outcome with
reference to the available information supplemented by experience of
(ii) Claims for export incentives / duty drawbacks/ duty refunds and
insurance claims etc. are taken into account on accrual.
(iii) Amounts due in respect of price escalation claims and/or
variations in contract work are recognised as revenue only when there
are conditions in the contracts for such claims or variations and/or
evidence of the acceptability of the same from customers. However,
escalation is restricted to intrinsic value.
15 Provision for Warranties
(i) For construction contracts entered into on or after 01.04.2003:
The company provides warranty cost at 2.5% of the revenue progressively
as and when it recognises the revenue and maintain the same through the
(ii) For all other contracts:
Provision for contractual obligations in respect of contracts under
warranty at the year end is maintained at 2.5% of the value of
contract. In the case of contracts for supply of more than a single
product 2.5% of the value of each completed product is provided.
(iii) Warranty claims / expenses on rectification work are accounted
for against natural heads as and when incurred and charged to
provisions in the year end.
16 Government Grants
Government Grants are accounted when there is reasonable certainty of
Grants related to fixed depreciable assets are adjusted against the
gross cost of the relevant assets while those related to
non-depreciable assets are credited to capital reserve.
Grants related to revenue, unless received as compensation for expenses
/ losses, are recognised as revenue over the period to which these are
related on the principle of matching costs to revenue.
Grants in the form of non-monetary assets are accounted for at the
acquisition cost, or at nominal value if received free.
17 Taxes on Income
Current tax is determined on the basis of taxable income in accordance
with the provisions of the Income Tax Act, 1961. Deferred tax
liability/asset resulting from timing difference between accounting
income and taxable income is recognised considering the tax rate and
laws that have been enacted or substantively enacted as on the balance
sheet date. Deferred tax asset is accounted for and carried forward
only to the extent that there is reasonable certainty that sufficient
future taxable income will be available against which such deferred tax
assets can be realised. Deferred tax assets in respect of unabsorbed
depreciation and carry forward of losses are recognised only if there
is virtual certainty that there will be sufficient future taxable
income available to realise such assets.
The carrying amount of cash generating units is reviewed at each
balance sheet date where there is any indication of impairment. An
impairment loss is recognised in the Statement of Profit and Loss where
the carrying amount exceeds the recoverable amount of the cash
generating units. An impairment loss is reversed if there is change in
the recoverable amount and such loss either no longer exists or has
19 Segment Reporting
Segment reporting is in line with the accounting policies of the
company. Revenue and expenses are identified to segments on the basis
of their relationship to the operating activities of the segment.
Revenue, expenses, assets and liabilities which are not allocable to
segments on a reasonable basis, are included under Unallocated revenue
/ expenses / assets / liabilities.