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
 Company.
 
 2 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.
 
 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.
 
 3 Leases Finance Lease
 
 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
 Equalisation Account.
 
 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 / NPV 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
 price.
 
 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 is shorter.
 
 Lease payments made are apportioned between finance charges and
 reduction of outstanding liability in relation to assets taken on
 lease.
 
 Operating Lease
 
 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.
 
 4 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 monthly basis.
 
 B) a. Expenditure on research including the expenditure during the
 research phase of Research & Development Projects is charged to
 statement of profit and loss account 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
 capitalised.
 
 5 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.
 
 6 Depreciation
 
 (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.
 
 7 Investments
 
 (i) Long-term investments are carried at cost.  Decline, other than
 temporary, in the value of such investments, is recognised and provided
 for.
 
 (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 & Loss.
 
 8 Inventory Valuation
 
 (i) Inventory is valued at actual/estimated cost or net realisable
 value, whichever is lower.
 
 (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
 commenced.
 
 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 production orders but declared surplus are charged off to
 revenue retaining residual value based on technical estimates.
 
 9 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 01.04.2003 :
 
 Revenue is recognized 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 realizable 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
 recognized as revenue on completion of supplies under the contract.
 
 (ii) Income from erection and project management services is recognized
 on work done based on:Percentage of completion; or The intrinsic value,
 reckoned at 97.5% of contract value, the balance 2.5% is recognized as
 income when the contract is completed.
 
 (iii) Income from engineering services rendered is recognized at
 realizable value based on percentage of work completed.
 
 (iv) Income from supply/erection of non- BHEL equipment/systems and
 civil works is recognized based on dispatches to customer/work done at
 project site.
 
 10 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 recognized as income or expense in
 the year in which they arise.
 
 11 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
 determined.
 
 (iii) All translation variances are taken to Profit & Loss Account.
 
 12 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.
 
 13 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 similar transactions.
 
 (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.
 
 14 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
 warranty period.
 
 (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.
 
 15 Government Grants
 
 Government Grants are accounted when there is reasonable certainty of
 their realisation.
 
 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.