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Essar Oil
BSE: 500134|NSE: ESSAROIL|ISIN: INE011A01019|SECTOR: Refineries
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« Mar 10
Accounting Policy Year : Mar '11
1.  Basis of accounting
 
 The fnancial statements of Essar Oil Limited (the Company) are prepared
 under historical cost convention in accordance with Generally Accepted
 Accounting Principles in India (GAAP). GAAP comprises mandatory
 accounting standards as specifed in the Companies (Accounting
 Standards) Rules, 2006, the relevant provisions of the Companies Act,
 1956 and guidelines issued by the Securities and Exchange Board of
 India.
 
 The fnancial statements are prepared on accrual basis. Attention is
 invited to note (11) (b) of part B of this schedule.
 
 2.  Use of estimates
 
 The preparation of fnancial statements requires the management of the
 Company to make estimates and assumptions that affect the reported
 balances of assets and liabilities and disclosures relating to
 contingent liabilities on the date of the fnancial statements and the
 reported amounts of revenues and expenses during the year.  Though
 management believes that the estimates used are prudent and reasonable,
 actual results could differ from these estimates. Difference between
 the actual results and estimates are recognised in the period in which
 the results are known/materialised.
 
 3.  Revenue recognition
 
 Revenue on sale of goods is recognised when property in the goods is
 transferred to the buyer for a price, or when all signifcant risks and
 rewards of ownership have been transferred to the buyer and no
 effective control is retained by the Company in respect of the goods
 transferred, to a degree usually associated with ownership, and no
 signifcant uncertainty exists regarding the amount of consideration
 that will be derived from the sale of goods.
 
 Revenue on transactions of rendering services is recognised under the
 completed service contract method. Contract is regarded as completed
 when no signifcant uncertainty exists regarding the amount of
 consideration that will be derived from rendering the services.
 
 4.  Government grants
 
 Government grants are recognised only when there is reasonable
 assurance that the conditions attached to the grants will be complied
 with, and where such benefits have been earned and it is reasonably
 certain that the ultimate collection will be made.
 
 5.  Fixed assets
 
 5.1 Fixed Assets
 
 Fixed assets are recorded at cost less accumulated depreciation and
 impairment loss, if any. Cost is inclusive of non-recoverable duties
 and taxes, cost of construction including erection, installation,
 commissioning, know how and expenditure during construction including
 borrowing costs and results of trial runs.
 
 5.2 WIP and Expenditure During Construction Period Direct expenditure
 on projects or assets under construction or development is shown under
 capital work-in-progress.
 
 The progress/milestone based payments made under the contracts for
 projects and assets under construction or development and other capital
 advances are considered as advances on capital account until the same
 are allocated to fxed assets, capital work-in- progress, expenditure
 during construction and other relevant accounts, as applicable.
 
 Expenditure incidental to the construction of projects or assets under
 construction or development that take substantial period of time to get
 ready for their intended use is accumulated as expenditure during
 construction, pending allocation to fxed assets and other relevant
 accounts, as applicable.
 
 6.  Depreciation
 
 Depreciation on plant and machinery is provided as per straight line
 method. All other assets are depreciated as per written down value
 method. Depreciation is computed at the rates based on the estimated
 useful lives of the assets or at the rates provided under Schedule XIV
 of the Companies Act, 1956, whichever is higher.
 
 Depreciation on additions/deductions to fxed assets made during the
 year is provided on a pro-rata basis from/upto the date of such
 additions/deductions, as the case may be.
 
 Cost of assets purchased and/or constructed by the Company whose
 ownership vests with others by virtue of a contract or otherwise, are
 amortised at the higher of rates based on the estimated useful lives of
 the assets or the contract period, or at the rates provided under
 Schedule XIV of the Companies Act, 1956.
 
 7.  Intangible assets and amortisation
 
 Intangible assets are recognised only when it is probable that the
 future economic benefits that are attributable to the assets will fow to
 the Company and the cost of the assets can be measured reliably.
 Intangible assets are stated at cost less accumulated amortisation and
 impairment loss, if any.
 
 Intangible assets are amortised over the best estimate of their useful
 lives, subject to a rebuttable presumption that such useful lives will
 not exceed ten years.
 
 8.  Oil and gas exploration and development of assets The Company
 follows the full cost method of accounting for its oil and gas
 exploration and development activities whereby, all costs associated
 with acquisition, exploration and development of oil and gas reserves,
 are capitalised under capital work-in-progress, irrespective of success
 or failure of specifc parts of the overall exploration activity within
 or outside a cost centre (known as ‘cost pool'').
 
 Exploration and evaluation expenditure remain outside the cost pool
 until determination of commercial reserves or otherwise.  These costs
 remain un-depleted, subject to there being no evidence of impairment.
 When any feld in a cost pool is ready to commence commercial
 production, the accumulated costs in that cost pool are transferred
 from capital work-in-progress to the gross block of assets under
 producing properties.  Subsequent exploration expenditure in that cost
 pool is added to the gross block of assets either on commencement of
 commercial production from a feld discovery or failure. In case any
 block is surrendered, the accumulated exploration expenditure
 pertaining to such block is transferred to the gross block of assets
 within the cost pool.
 
 Expenditure carried within each cost pool (including future development
 cost) is depleted on a unit-of-production basis with reference to
 quantities, with depletion computed on the basis of the ratio that oil
 and gas production bears to the balance proved and probable reserves at
 commencement of the year.
 
 9.  Impairment of assets
 
 The Company assesses at each balance sheet date whether there is any
 indication that an asset may be impaired. If any such indication
 exists, the Company estimates the recoverable amount of the asset. If
 such recoverable amount of the asset is less than its carrying amount,
 the carrying amount is reduced to its recoverable amount. The reduction
 is treated as an impairment loss and is recognised in the statement of
 proft and loss. If at the balance sheet date, there is an indication
 that a previously assessed impairment loss no longer exists, the
 recoverable amount is reassessed and the asset is refected at the
 recoverable amount but limited to the carrying amount that would have
 been determined (net of depreciation/amortisation) had no impairment
 loss been recognised in prior accounting periods.
 
 10.  Valuation of inventories
 
 Inventories (other than crude oil extracted by exploration and
 production segment) are valued at the lower of cost and net realisable
 value. The cost of crude inventory is determined using the frst in frst
 out cost formula and the cost of fnished goods inventory,
 work-in-progress and stores and spares is determined using the weighted
 average cost formula. Finished goods and work-in-progress include costs
 of conversion and other costs incurred in bringing the inventories to
 their present location and condition.
 
 Closing stock of crude oil extracted and in saleable condition is
 valued at net realisable value.
 
 11.  Foreign currency transactions
 
 Foreign currency transactions are accounted at the rate normally
 prevailing on the transaction date. Monetary items denominated in
 foreign currency other than net investment in non-integral foreign
 operations are translated at the exchange rate prevailing at the
 balance sheet date. In case of non- integral foreign operations, all
 the assets and liabilities are translated at the closing rate whereas
 the income and expense items are translated at average exchange rate
 during the period.
 
 Exchange differences arising on a monetary item that, in substance,
 forms part of an enterprise''s net investments in a non-integral
 operation are accumulated in a foreign currency translation reserve
 until the disposal of the net investment, at which time the same is
 recognised in the statement of proft and loss.
 
 Exchange differences arising on settlement or conversion of short term
 monetary items are recognised in the statement of proft and loss or
 capital work-in-progress/expenditure during construction, as
 applicable. Exchange differences relating to long term monetary items
 are accounted as under:
 
 (i) in so far as they relate to the acquisition of a depreciable
 capital asset added to/deducted from the cost of the asset and
 depreciated over the balance useful life of the asset;
 
 (ii) in other cases such differences are accumulated in Foreign
 Currency Monetary Item Translation Difference
 
 Account and amortised in the statement of proft and loss over the
 balance life of the long term monetary item or March 31, 2011 whichever
 is shorter.
 
 Premia or discounts arising on forward exchange contracts entered into
 for the purpose of hedging currency risk, are recognized in the
 statement of proft and loss or expenditure during construction, as
 applicable, over the life of the contract. The impact of exchange rate
 differences between the rates prevailing on the date of forward
 exchange contracts and the rate prevailing on the balance sheet date or
 on the dates of settlement of forward exchange contracts whichever is
 earlier, is recognised in the statement of proft and loss or
 expenditure during construction, as applicable.
 
 12.  Derivative instruments (other than forward exchange contracts)
 
 Commodity derivatives
 
 In order to hedge its exposure to commodity price risk, the Company
 enters into non-speculative hedges, such as forward, option or swap
 contracts and other appropriate derivative instruments. These
 instruments are used only for the purpose of managing the exposure to
 commodity price risk and not for speculative purposes. The premium and
 gains/losses arising from settled derivative contracts, and mark to
 market (MTM) losses in respect of outstanding derivative contracts as
 at balance sheet date are credited for gains or charged for losses to
 the raw material consumed in so far as it relates to the derivative
 instruments taken to hedge risk of movement in price of crude oil, and
 credited for gains or charged for losses to sales in so far as it
 relates to the derivative instruments (including margin cracks) taken
 to hedge risk of movement in price of fnished products. The net MTM
 gains in respect of outstanding derivatives contracts are not
 recognised on conservative basis.
 
 Others
 
 Gains or losses arising on settlement of fnancial derivative contracts
 are credited for gains or charged for losses to the statement of proft
 and loss or expenditure during construction, as applicable, as and when
 settlement takes place. The net MTM losses in respect of outstanding
 derivative contracts as at the balance sheet date are provided for. The
 net MTM gains in respect of outstanding derivative contracts are not
 recognised on conservative basis.
 
 13.  Lease
 
 Operating lease
 
 Lease expenses and lease income on operating leases are recognised on a
 straight line basis over the lease term in the statement of proft and
 loss or expenditure during construction, as applicable.
 
 Finance lease As lessee:
 
 Assets taken on lease are capitalised at fair value or net present
 value of the minimum lease payments, whichever is lower. Depreciation
 on the assets taken on lease is charged at the rate applicable to
 similar type of fxed assets as per accounting policy of the Company on
 depreciation. If the leased assets are returnable to the lessor on the
 expiry of the lease period, depreciation is charged over its useful
 life or lease period, whichever is shorter. Lease payments made are
 apportioned between the fnance charges and reduction of the outstanding
 liability in respect of assets taken on lease.  The leases are
 generally recognised in the books of account at the inception of the
 lease term. The leases of assets under construction are recognized on
 commencement of the lease term in accordance with International
 Accounting Standard 17 - Leases, as there is no specifc guidance
 available under Indian Accounting Standard (AS-19) Leases.
 
 As lessor:
 
 The assets given under a fnance lease are recognised as a receivable in
 the balance sheet at an amount equal to the net investment in the
 lease. The recognition of fnance income is based on a pattern refecting
 a constant periodic rate of return on the net investment outstanding in
 respect of the fnance lease.
 
 14. Employee benefits
 
 i.  Post-employment beneft plans
 
 Contribution to defned contribution retirement beneft schemes are
 recognised as expense in the statement of proft and loss/expenditure
 during construction, as applicable, when employees have rendered
 services entitling them to contributions.
 
 For defned beneft schemes, the cost of providing benefits is determined
 using the Projected Unit Credit Method, with actuarial valuations being
 carried out at each balance sheet date. Actuarial gains and losses are
 recognised in full in the statement of proft and loss/expenditure
 during construction, as applicable, for the period in which they occur.
 Past service cost is recognised immediately to the extent that the
 benefits are already vested, and is otherwise amortised on a
 straight-line basis over the average period until the benefits become
 vested.
 
 The retirement beneft obligation recognised in the balance sheet
 represents the present value of the defned beneft obligation and is
 adjusted both for unrecognised past service cost, and for the fair
 value of plan assets.  Any asset resulting from this calculation is
 limited to the present value of available refunds and reductions in
 future contributions to the scheme, if lower.
 
 ii.  Short-term employee benefits
 
 The undiscounted amount of short-term employee benefits expected to be
 paid in exchange for the services rendered by employees is recognised
 during the period when the employee renders the services.  These
 benefits include compensated absences such as paid annual leave and
 performance incentives.
 
 iii.  Long-term employee benefits
 
 Compensated absences which are not expected to occur within twelve
 months after the end of the period in which the employee renders the
 related services are recognised as a liability at the present value of
 the defned beneft obligation determined actuarially by using Projected
 Unit Credit Method at the balance sheet date.
 
 15.  Valuation of investments
 
 Investments are classifed into long term and current investments. Long
 term investments are carried at cost.  Diminution in value of long term
 investments is provided for when it is considered as being other than
 temporary in nature. Current investments are carried at the lower of
 cost and fair value.
 
 16.  Borrowing costs
 
 Borrowing costs that are attributable to the acquisition, construction
 or development of qualifying assets (i.e. the assets that take
 substantial period of time to get ready for its intended use) are
 charged to expenditure during construction.
 
 Other borrowing costs are recognised in the statement of proft and
 loss.
 
 17.  Taxation
 
 Provision for current taxation is computed in accordance with the
 relevant tax laws and regulations. Deferred tax is recognised on timing
 differences between the accounting and the taxable income for the year
 and quantifed using the tax rates and laws enacted or substantively
 enacted as on the reporting date. Deferred tax assets are recognised
 only when there is a reasonable certainty that suffcient future taxable
 income will be available against which they will be realised.  Where
 there is a carry forward of losses or unabsorbed depreciation, deferred
 tax assets are recognised only if there is a virtual certainty
 supported by convincing evidence of availability of taxable income
 against which such deferred tax assets can be realised in future.
 
 18.  Provisions, contingent liabilities and contingent assets
 
 A provision is recognised when there is a present obligation as a
 result of a past event and it is probable that an outfow of resources
 embodying economic benefits will be required to settle the obligation.
 Contingent liabilities are not recognised but disclosed unless the
 probability of an outfow of resources is remote. Contingent assets are
 neither recognised nor disclosed.
 
 
Source : Dion Global Solutions Limited
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