8/8/2019 NIKS Final

1/85

Report

on

MANAGEMENT OF ASSETS ANDLIABILITIES

At

INDIAN OIL CORPORATION LIMITED

GUJARAT REFINERY(Where growth is essence of life)

Prepared byNIKUNJ THAKKAR

Registration No:09PG238

Under the Guidance ofProf. ZOHRA BI

In partial fulfillment of the Course: Students Internship Programme (SIP)

In Term IV of the Post Graduate Programme in Management

(Batch: 2009 2011)

1

8/8/2019 NIKS Final

2/85

Bangalore

Post Graduate Programme

Post Graduate Diploma in Management:2009-11

Term IV: Students Internship Programme(SIP)

Declaration

This is to declare that the Report entitled MANAGEMENT OF ASSETS AND

LIABILITIES has been made for the partial fulfillment of the Course: Students Internship

Programme (SIP) in Term IV (Batch: 2009-2011) by me at INDIAN OIL CORPORAION

Ltd., GUJARAT REFINERY, VADODARA GUJARAT under the guidance of Prof.

ZOHRA BI.

I confirm that this Report truly represents my work undertaken as a part of my Students

Internship Programme (SIP). This work is not a replication of work done previously by any

other person. I also confirm that the contents of the report and the views contained therein

have been discussed and deliberated with the Faculty Guide.

Signature of the Student :

Name of the Student (in Capital Letters) : NIKUNJTHAKKAR

Registration No : 09PG238

2

8/8/2019 NIKS Final

3/85

Bangalore

Post Graduate Programme

Post Graduate Diploma in Management:2009-11

Certificate

This is to certify that Mr. NIKUNJ THAKKAR Regn. No.09PG238 has completed the

Report entitled MANAGEMENT OF ASSETS AND LIABILITIES under my guidance

for the partial fulfillment of the Course: Students Internship Programme (SIP) in Term IV of

the Post Graduate Programme in Management (Batch: 2009 2011).

Signature of Faculty Guide

__________________________

Prof. ZOHRA BI

3

8/8/2019 NIKS Final

4/85

TABLE OF CONTENTS

Sr. No. Content Page Number

PREFACE 5

ACKNOWLEDGEMENT 6

EXECUTIVE SUMMARY 7

1 OIL SECTOR AT WORLDLEVEL

8

2 ABOUT IOCL 22

3 FINANCE DEPARTMENT 42

3.1 Introduction and objectives 44

3.2 Project profile 46

3.3 Objectives and limitations 46

4 OBSERVATION/ANALYSIS 485 LEARNING

OUTCOME/FINDINGS88

6 RECOMMENDATIONS ANDCONCLUSION

89

BIBLIOGRAPHY 91

4

8/8/2019 NIKS Final

5/85

PREFACE

In developing economy, students exposure has been gaining increasingly significant.

Students are looked upon as an especially talented person capable of assuming risk,

marshalling the necessary resources & above all having the insight to go in for innovations &

adopting to fast changing circumstances. In 21st century, the world is kept on changing very

fast. We are across many theories and implementation of machinery.

I have visited the industry in order to set the practical knowledge about which I have studied

in classroom so that as a student of management I can know the picture of industry and

operation in training age.

The myth that leaders are not born and not made has been effectively erased. Today, we

dont just plan & present program for student general but go a step further and talk about over

all exposure to the organization.

I have prepared this report so far as best of my knowledge. This report reflects of what

so I come to know industry during the training at IOCL.

5

8/8/2019 NIKS Final

6/85

ACKNOWLEDGEMENT

Training is a part of our study which gives practical knowledge to us. From training

student will learn about different function carried out by different departments of the

organization. With this student also knows the actual problem that they have to face in near

future.

A project study of this nature involves the co-operation, well wishes and also sacrifices

of a number of people. I would hereby like to appreciate and thank them all for their

invaluable contribution.

My debt to those who have helped me in one way or the other is heavily I need while I

take this opportunity to thank all of them. They are too numerous to be mentioned in this

brief preface. I would like to acknowledge my deep sense of gratitude to authority to

granting me the permission to undergo summer training at Gujarat refinery.

I wish to reiterate my debt of Gujarat refinery for giving a wonderful training

experience, & also providing all the necessary information & data despite of their busy

schedule.

I am very much thankful to Mr.V.K.Jain (CFM), who has given me the golden

opportunity to undergo training at finance department.

I would like to give special thanks to Mr. N.V.BHATT(DFM).As he gave us cooperation

at fullest extent during my training span and taught practical problems in corporate. His

friendly nature is also appreciable.

I would also like to thank Prof. ZOHRA BI for her esteemed guidance during this

Internship programme. I am highly grateful to her for her Co-operative efforts in making this

internship a successful learning experience.

NIKUNJ THAKKAR

6

8/8/2019 NIKS Final

7/85

EXECUTIVE SUMMARY

Asset management

is the process of guiding the acquisition, use and disposal of assetsto make the most of their service delivery potential and manage the related risks and costs

over their entire life.

In this project on Management of Assets and Liabilities at IOCL, I have covered all

the accounting policies and practices followed by the company for the management of assets

and liabilities. This project covers information on the depreciation practices followed at IOCL

and the accounting for depreciation. It also covers various different practices of the company

relating to the transfer and disposal of assets, impairment of assets, amortization etc. This

project also covers the management of fixed assets (tangible and intangible) and current

assets. It also describes the Inventory Management policies at IOCL and the need to hold

inventory.

This project also covers the codification of assets in IOCL based on the characteristics

whether it is an insured or non insured, inventory control or non inventory control, critical or

non critical item etc. It also explains the Additional Facility AF proposal process followed by

the company. It compares the important accounting policies applied at IOCL with many

different players in the same industry like Reliance, Hpcl etc. It also covers the policies for

the management of Short term and Long term Liabilities at IOCL.

The above data has been collected from the companys website, some financial

websites such as studyfinance.com. I took help from previous reports prepared on the same

topic and much more information was collected from the continuous interaction with the

company employees and the Industry guide.

7

8/8/2019 NIKS Final

8/85

CHAPTER 1

INDUSTRY OVERVIEW

8

8/8/2019 NIKS Final

9/85

1) OIL SECTOR AT WORLD LEVEL

Technically speaking, oil can be both refined and unrefined. Refined oil is

transformed into familiar products such as gasoline, kerosene, diesel fuel, motor oil,

etc. Unrefined oil is known simply as crude oil due to the presence of various amounts

of impurities that have mixed with the oil deep down in the earth.

Crude oil typically ranges from black to brown to green in color and can have a

waxy feel to it. It also has a strong scent. When oil is produced from wells it is known

as crude oil until that time when it is delivered to a refinery and is processed into some

of the refined products mentioned above.

But, there are other terms for oil. The most common term not mentioned already is

petroleum (the literal oil definition: Petra = rock, oleum = oil). Petroleum is a

name pretty much synonymous with oil but differs primarily in that petroleum can be

a gas (i.e., vapor), a liquid, a solid, and a semi-solid. These different forms are known

as phases.

Therefore, crude oil is a liquid phase of petroleum.

Some of the other terms for petroleum are called natural gas, and bitumen (i.e.,

asphalt, and tar).

9

8/8/2019 NIKS Final

10/85

HISTORY OF OIL SECTOR

The two oldest of the major oil companies were created at the end of the 19th

century, The

American, Standard Oil belonging to Rockefeller, and the Anglo-Dutch, Royal Dutch/Shell.

Very rapidly, the American majors invested abroad, attracted by the enormous profits

generated by low-cost oil (Middle East), sold at the same price as Venezuelan or Texan crude

that was more expensive to produce. In July 1928, BP, Shell, Exxon, Mobil and the CFP

signed the Red Line Agreements. This was an agreement to pool their prospecting facilities

and to share by mutual agreement the oil resources discovered.

In the 1950s, the producer countries share of petroleum revenues increased

significantly, but the profits of the majors were almost unaffected, thanks to fiscal advantages

granted by their governments.

The two decades following the turning point of the first petrol crisis are marked for the

oil companies by income levels forced upwards by price increases and, at the same time,

downwards by the continued increase in the producer states share of petroleum revenues. The

progressive abandonment of the system of concessions resulted in large losses of money for

the majors, compensated for, overall, by the increase in the barrel price and the development

of trading activities (trading of crude and petroleum products).

The oil companies continue to earn large profits. This money could be used in part to

finance energy re-conversion in developed countries.

10

8/8/2019 NIKS Final

11/85

GLOBAL SCENARIO:

Oil accounts for 40% of the worlds total primary energy demand and economic conditions

are governed to a large degree by its availability.

The major sources of oil in the world include the Arabian countries, North Africa and some

countries of Asia and South America.

According to the current research by Campbell, in approximately ten years, there will be an

onset of global long-term shortage when the Middle East will be required to supply at least

50%of the worlds oil and that it will not be able to meet this requirement.

The study further indicated that given an equal distribution of reserves, static consumption

and production levels, there might be 100 years of consumption left.

With 65% of the worlds oil reserves located in the Middle East, it is apparent that global

distribution of oil is not equitable and the graph below indicates that consumption and

production are also widely disparate and bear little relationship to the presence of reserves.

11

8/8/2019 NIKS Final

12/85

North America, Far East and Oceania and Western Europe consume 77.5% of the

worlds oil, produce 44.4% but actually only contain 12.5% of the worlds oil

reserves. For these areas, 100 years is an unrealistically long period. The Middle East,

in contrast, although containing 65% of the worlds oil reserves only produces about

30% and consumes about 6% of the worlds supply.

The amount of oil we can take from the ground each year is about to reach a limit

that cannot be increased by ingenuity or determination. That limit will then decrease

forever, with short plateaus and little upward bumps on the way down. A similar limit

for natural gas will follows in a few years.

How does oil pricing work

12

8/8/2019 NIKS Final

13/85

Crude oil's value is based on its refined use. The primary use dictated by current

global demand is for fuels like gasoline, diesel, heating oil, and jet fuel to run the

equipment that support our ways of life.

The various characteristics/properties of crude from around the world - referred to

euphemistically in industry jargon as light, sweet, intermediate, sour, heavy, etc. -

contain differing amounts of the various hydrocarbons and impurities. Their locations

around the globe also speak to the costs of getting the oil to local refineries and

markets - thereby establishing their relative value for the products in demand.

UP & DOWN STREAM IN OIL SECTOR

The oil sector is usually divided into three major components: upstream,

midstream and downstream. Midstream operations are usually included in the

downstream category.

Up stream:

The upstream oil sector is a term commonly used to refer to the searching for and

the recovery andproduction of crude oil and natural gas. The upstream oil sector is

also known as the exploration and production (E&P) sector.

The upstream sector includes the searching for potential underground or

underwater oil and gas fields, drilling of exploratory wells, and subsequently operating

the wells that recover and bring the crude oil and/or raw natural gas to the surface.

Mid stream:

To refer to the refining ofcrude oil, and the selling and distribution ofnatural gas

and products derived from crude oil. Such products include liquefied petroleum gas

13

http://en.wikipedia.org/wiki/Upstream_(oil_industry)http://en.wikipedia.org/wiki/Downstream_(oil_industry)http://en.wikipedia.org/wiki/Extraction_of_petroleumhttp://en.wikipedia.org/wiki/Crude_oilhttp://en.wikipedia.org/wiki/Natural_gashttp://en.wikipedia.org/wiki/Petroleumhttp://en.wikipedia.org/wiki/Natural_gashttp://en.wikipedia.org/wiki/Refininghttp://en.wikipedia.org/wiki/Petroleumhttp://en.wikipedia.org/wiki/Natural_gashttp://en.wikipedia.org/wiki/Liquified_petroleum_gashttp://en.wikipedia.org/wiki/Upstream_(oil_industry)http://en.wikipedia.org/wiki/Downstream_(oil_industry)http://en.wikipedia.org/wiki/Extraction_of_petroleumhttp://en.wikipedia.org/wiki/Crude_oilhttp://en.wikipedia.org/wiki/Natural_gashttp://en.wikipedia.org/wiki/Petroleumhttp://en.wikipedia.org/wiki/Natural_gashttp://en.wikipedia.org/wiki/Refininghttp://en.wikipedia.org/wiki/Petroleumhttp://en.wikipedia.org/wiki/Natural_gashttp://en.wikipedia.org/wiki/Liquified_petroleum_gas

8/8/2019 NIKS Final

14/85

(LPG), gasoline or petrol, jet fuel, diesel oil, other fuel oils, asphalt and petroleum

coke.

The midstream industry processes, stores, markets and transports commodities

such as crude oil, natural gas, natural gas liquids (LNGs, mainly ethane, propane and

butane) and sulphur.

Downstream:

The downstream oil sector is a term commonly used

The downstream sector includes oil refineries, petrochemical plants, petroleum

product distribution, retail outlets and natural gas distribution companies.

The downstream industry touches consumers through thousands of products such

as petrol, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics,

fertilizers, antifreeze,pesticides, pharmaceuticals, natural gas and propane

Oil companies ranking

Oil Company Rankings occur all of the time. Often, when one considers oil companies, they

think of the various gas stations they drive by and visit on their way to and from work or some

14

http://en.wikipedia.org/wiki/Liquified_petroleum_gashttp://en.wikipedia.org/wiki/Gasolinehttp://en.wikipedia.org/wiki/Diesel_oilhttp://en.wikipedia.org/wiki/Fuel_oilhttp://en.wikipedia.org/wiki/Asphalthttp://en.wikipedia.org/wiki/Petroleum_cokehttp://en.wikipedia.org/wiki/Petroleum_cokehttp://en.wikipedia.org/wiki/Oil_refineryhttp://en.wikipedia.org/wiki/Petrochemicalhttp://en.wikipedia.org/wiki/Heating_oilhttp://en.wikipedia.org/wiki/Lubricanthttp://en.wikipedia.org/wiki/Plastichttp://en.wikipedia.org/wiki/Pesticidehttp://en.wikipedia.org/wiki/Liquified_petroleum_gashttp://en.wikipedia.org/wiki/Gasolinehttp://en.wikipedia.org/wiki/Diesel_oilhttp://en.wikipedia.org/wiki/Fuel_oilhttp://en.wikipedia.org/wiki/Asphalthttp://en.wikipedia.org/wiki/Petroleum_cokehttp://en.wikipedia.org/wiki/Petroleum_cokehttp://en.wikipedia.org/wiki/Oil_refineryhttp://en.wikipedia.org/wiki/Petrochemicalhttp://en.wikipedia.org/wiki/Heating_oilhttp://en.wikipedia.org/wiki/Lubricanthttp://en.wikipedia.org/wiki/Plastichttp://en.wikipedia.org/wiki/Pesticide

8/8/2019 NIKS Final

15/85

other destination. They even form opinions of the companies based on the quality of service they

receive from the attendants.

Of course, oil companies are much more than their service station arms - although marketing is

essential. Each company has goals and objectives established by their directors which give them

each their own particular character.

Even governments run their own oil companies and dictate the terms of private operations within

their countries!

Oil companies around the world - especially those who are not owned by their government -

compete with each other to find oil, produce it, and grow their market share.

Oil company rankings, then, are essential to understanding this global industry.

Oil primer ranks the top major oil companies amongst each other based on basic industry

metrics: assets, revenue, net income, and oil and gas production and reserves.

1.1) PETROLEUM SECTOR AT WORLD LEVEL

15

8/8/2019 NIKS Final

16/85

OVERVIEW

More than six years have passed since the occupation of Iraq and its petroleum industry still

has not recovered to the level of the pre-invasion period.

Billions of US dollars have been sunk into the industry without an apparent result to be

compared with the difficult years of the embargo which preceded the occupation.

Although this is an improvement over previous years, there are signs of deterioration in the

production of the state-owned South Oil Co. (SOC)

Where a decline of almost 200,000 b/d was seen in the last few months compared to

previous years.

Changes in management and fast-track remedies to salvage the situation are unlikely to bring

a quick fix as long as the divisive and unstable general conditions in the country are still there.

In the downstream sector the situation is not much different.

The refineries and gas processing plants are working at about 65% of capacity at a time

when the country is importing enormous quantities of liquid fuels.

Although there was a noticeable improvement in 2008 over previous years, local production

of light fuels (LPG, gasoline and middle distillates) at the overall level of 225,000 b/d is still

25% below the average level in 2001-02

The situation has been helped by a drastic reduction in demand for light fuels as it has fallen

by almost 18% since 2005.

This has forced the electricity industry to use more liquid fuels as a substitute including

crude oil where in 2007 the average use amounted to 70,000 b/d in power stations that would

have benefited so much from the cleaner natural gas.

"To get out of this gloomy situation is not easy in the circumstances where the [central]

administration is lacking in direction and the ability to make the hard decisions required

moving forward.

16

8/8/2019 NIKS Final

17/85

The solution may lie outside the realm of the oil industry and the country has to rid itself of

the occupation and the culture that came with it.

AT INDIA LEVEL

OIL DEMAND BY END USE - INDIA

This chart shows the demand end use by the India. The maximum use of oil is done by the

transport business. The household is the second big customer of the oil in India.

Then the industries, agriculture, feedstock, specialties and very small portion is consumed

by the commercial sector.

Major companies in Oil and Gas

Indian Companies

1. Indian Oil Corporation Ltd

2. ONGC Ltd

3. Bharat Petroleum Ltd

4. Reliance Petroleum Ltd

17

H ous eho l

1 9 %C om m e rc i

1 %

I n d u s t r y1 1 %

Fe e ds t o c8 %

T ra n spo r

4 6 %

A g r i c u l t u r 9 %

S pe c ia l i t ie

6 %

8/8/2019 NIKS Final

18/85

5. Essar Oil Ltd

6. Gas Authority Of India

7. Hindustan Petroleum Corporation Ltd

8. Aban

9. Oil India Ltd

10. Tata Petrodyne

PETROLEUM INDUSTRY

OVER VIEW

Key Findings of the Definitional Mission Over the past decade, Indias domestic oil

production has remained essentially unchanged from year to year, while the countrys demand for

petroleum products has almost doubled. This has caused Indias reliance on foreign oil to grow to

the point where more than two-thirds of the countrys petroleum supplies are now acquired from

abroad. The foreign exchange cost of the imported petroleum is in access of $10 billion per year.

While Indias hydrocarbon resource base is estimated at 29 billion tons of oil and

oil-equivalent gas (215 billion barrels), about two-thirds of its potential hydrocarbon producing

areas remains either poorly explored or totally unexplored. Consequently, only 6.8 billion tons of

reserves have been established through exploration.

In response to the underdevelopment of domestic hydrocarbon reserves in the face of

a growing dependence on petroleum imports, the Government of India is encouraging both

domestic and international private investors to increase exploration and production efforts in the

country with the implementation of a new exploration licensing policy (NELP).

Since January 1999, a total of 21 entities - 10 foreign companies, 6 Indian private

companies and 5 public-sector enterprises have participated in the NELP bidding process.

However, to the governments disappointment, no major international oil companies have

joined in the recent bidding.

18

http://petroleum.nic.in/index.htmhttp://petroleum.nic.in/index.htm

8/8/2019 NIKS Final

19/85

It has been one and a half years since the government dismantled Administered

Price Mechanism (APM). Earlier, under the tight control of APM, the Indian oil and gas sector

had four major petroleum products: Petrol, diesel, kerosene and LPG.

These subsidies were compensated by higher prices charged on petrol and diesel.

But the higher prices were not sufficient to cover the subsidies as a result of which the

government was facing losses in the form of oil pool deficit.

But the prices of petroleum products in India are less compared to the international level.

To match the international prices, the government has allowed PSUs to change their prices.

With the entry of private players, petroleum products are priced at international levelsresulting in the increase of the price volatility in the market and as a result of which the

government has lost control over prices.

Petroleum Industry is considered to be the back bone of an economy because this is

the main source of energy till date. Any economy around the world would fail to precede a single

step in the absence of Petroleum Industry.

The most important part of the Petroleum Industry is the Petroleum Refining

Industry which refines the crude oil to convert it to the usable fuel. It also derives many derivative

products out of the crude petroleum like natural gas, naphtha, etc which can be used in various

ways

Petroleum is not a domestic product and any kind of shortage in the same has serious

ramifications on all possible industries along with the economies all over the world.

Petroleum Industry always needs to perform exploration research all over the world for

finding more petroleum sites which also become instrumental in the setting up Petroleum

Industry Trends around the world.

Future of Indian petroleum industry

19

8/8/2019 NIKS Final

20/85

The future of Indian petroleum industry has good potential but it needs developmental

activities in this sector to strengthen itself.

The world at present is experiencing a lot of changes of mammoth proportions. The

Petroleum Industry in India is one of the harbingers of huge economic growth. The arena for

business has now gone global since trade boundaries are fast dissolving. These developments

present India with tremendous opportunities in the future to be one of the major players in the

export of petrochemical intermediaries.

Today, India imports more than 70% of its oil requirements. The search for more oil led

India to sift through the international markets comprising of the emerging energy-trading

countries - China, Russia, and Iran.

India has made new partnerships with Venezuela, Burma, Middle East nations, and

Pakistan.

The long-term energy strategies of India have to emphasize on the methods of using energy

effectively and efficiently, and to enhance energy self-sufficiency.

To lift the Indian economy to enhanced economic standards innovation, diplomacy,

creativity, and vision are the need of the hour. India has to compete for conventional energy

sources and for that there must be developmental activities for energy efficient buildings and

vehicles.

The main problems with the Petroleum Industry in India are related to infrastructural

developments. The lack of proper storage facilities, enhancements in refining capacities, and

fluctuating import prices plays important role in the development of the sector.

THE KEY FINDINGS OF PETROLEUM SECTOR:

Demand for petroleum is growing in leaps and bounds

Shifting focus to more production of olefin - ethylene, propylene, butadiene,

Price and availability of crude oil and gas as feedstock would still be critical factors

The demand of the end products would affect the demand of the intermediary products

20

8/8/2019 NIKS Final

21/85

21

8/8/2019 NIKS Final

22/85

CHAPTER 2

COMPANY PROFILEAND

OVERVIEW

2) ABOUT IOCL

OVER VIEW

Indian Oil Corporation Limited is India's largest commercial enterprise, with a

sales turnover of Rs.2,40000 crore and profits of Rs.7,999 crore for fiscal 2007.IndianOil is alsothe highest ranked Indian company in the prestigious Fortune Global 500 listing, having

22

8/8/2019 NIKS Final

23/85

moved up 19 places to the 116th position this year based on fiscal 2008 performance. It is also the

20th largest petroleum company in the world.

The Indian Oil Group of companies owns and operates 10 of Indias 19 refineries

with a combined refining capacity of 60.2 million metric tones per annum (MMTPA i.e. 1.2

million barrels per day).

The Corporation's cross country crude oil and product pipeline network spanning

about 9,300 km, the largest in the country, meets the vital energy needs of the consumers in an

efficient, economical and environment friendly manner.

HISTORY

Indian Oil was incorporated on June 30, 1959 under the name and style of Indian Oil

Company Ltd. Upon merger with Indian Refineries Ltd.

On September 1, 1964, the name of the company was changed to Indian Oil

Corporation Limited.

Guwahati Refinery, the first public sector refinery of the country, was built with

Romanian collaboration and was inaugurated by the first Prime Minister of India, Pandit

Jawaharlal Nehru, on 1st January 1962.

Indian Oil refineries registered a record throughput of 35.3 million tones during thefinancial year surpassing the previous best of 33.8 million tones in 2001-2002.

Indian Oil commissioned India's first product pipeline, the Guwahati - Siliguri

pipeline, in 1965. This 435-Km pipeline connecting Guwahati Refinery to different installations

was designed to carry about 0.818 MMT of oil per year.

From a small beginning with a sale of 0.032 million kilolitres, Indian Oil achieved

sales of 10 million kilolitres with a turnover of Rs. 635 crore* and profit Rs. 22.5 crore by the late

60's.

23

8/8/2019 NIKS Final

24/85

From then on, the company has grown from strength to strength and for the fiscal 2007,

the Indian Oil group sold 59.29 million tones of petroleum products, including 1.74 million tones

of natural gas, and exported 3.33 million tones of petroleum products.

Indian Oil is investing Rs. 43,393 crore (US $10.8 billion) during the period 2007-12 in

augmentation of refining and pipeline capacities, expansion of marketing infrastructure and

product quality up gradation as well as in integration and diversification projects

International rankings:

Indian Oil is the highest ranked Indian company in the prestigious Fortune Global 500

listing, the 116th position (in 2008) based on fiscal 2007 performance.

It is also the 18th largest petroleum company in the world and the number one petroleum

trading company among the National Oil Companies in the Asia-Pacific region.

IOCL was featured on the 2008 Forbes Global 2000 at position 303.

Competitors:

Indian Oil Corporation has two major domestic competitors, Bharat Petroleum and

Hindustan Petroleum.

Both are state-controlled, like Indian Oil Corporation. There are two private competitors,

Reliance Petroleum and Essar Oil.

Achievements:

No. 1 Company in Oil Trading in Asia Pacific Region

Indian Oil among top global stock picks: Deutsche Bank

24

http://en.wikipedia.org/wiki/Fortune_Global_500http://en.wikipedia.org/wiki/Forbes_Global_2000http://en.wikipedia.org/wiki/Fortune_Global_500http://en.wikipedia.org/wiki/Forbes_Global_2000

8/8/2019 NIKS Final

25/85

Plats World Energy Rankings 2005

Indian Oil retains the #1 spot by sales in ET500 listing

Ranked as India's most valuable brand

Most trusted petrol pump brand: ET Brand Equity Survey

Ranked fourth in TNS Corporate Reputation Study

Among top ten 'Best Employers in India' for second year

No.1 Company in business listing.

Objectives

To serve the national interests in oil and related sectors in accordance and consistent

with Government policies.

To ensure maintenance of continuous and smooth supplies of petroleum products by

way of crude oil refining, transportation and marketing activities and to provide appropriate

assistance to consumers to conserve and use petroleum products efficiently.

To enhance the country's self-sufficiency in crude oil refining and build expertise in

laying of crude oil and petroleum product pipelines. To further enhance marketing infrastructure and reseller network for providing assured

service to customers throughout the country.

To create a strong research development base in refinery processes, product

formulations, pipeline transportation and alternative fuels with a view to

minimizing/eliminating imports and to have next generation products.

To optimize utilization of refining capacity and maximize distillate yield and gross

refining margin.

25

8/8/2019 NIKS Final

26/85

To maximize utilization of the existing facilities for improving efficiency and

increasing productivity.

To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in

marketing operations to effect energy conservation.

To earn a reasonable rate of return on investment.

To avail of all viable opportunities, both national and global, arising out of the

Government of Indias policy of liberalization and reforms.

Obligations

Towards customers and dealers: - To provide prompt, courteous and efficient

service and quality products at competitive prices.

Towards suppliers: - To ensure prompt dealings with integrity, impartiality and

courtesy and help promote ancillary industries.

Towards employees: - To develop their capabilities and facilitate their advancement

through appropriate training and career planning. To have fair dealings with recognized

representatives of employees in pursuance of healthy industrial relations practices and sound

personnel policies.

Towards community: - To develop techno-

economically viable and environment-friendly products. To maintain the highest standards in

respect of safety, environment protection and occupational health at all production units.

26

8/8/2019 NIKS Final

27/85

Towards Defense Services: - To maintain

adequate supplies to Defense and other Para-military services during normal as well as

emergency situations.

Vision

A major diversified,trans-national, integrated energy company, with national leadership and

a strong environment conscience, playing a national role in oil security & public distribution.

Mission

To achieve international standards of excellence in all aspects of energy and diversified

business with focus on customer delight through value of products and services, and cost

reduction. To maximize creation of wealth, value and satisfaction for the stakeholders.

To attain leadership in developing, adopting and assimilating state-of-the-art technology

for competitive advantage.

To provide technology and services through sustained Research and Development.

To foster a culture of participation and innovation for employee growth and

contribution.

To cultivate high standards of business ethics and Total Quality Management for a

strong corporate identity and brand equity.

To help enrich the quality of life of the community and preserve ecological balance and

heritage through a strong environment conscience.

MAJOR DIVISONS OF IOCL

27

INDIAN OIL CORPORATION

LIMITED

REFINERIES PIPELINE MARKETING R & D IBP

8/8/2019 NIKS Final

28/85

8/8/2019 NIKS Final

29/85

From a fledgling company with a net worth of just Rs. 45.18 crore and sales of 1.38

million tones valued at Rs. 78 crore in the year 1965, Indian Oil has since grown over 3000

times with a sales turnover of Rs. 285,337 crore, the highestever for an Indian company, and a

net profit of Rs. 2,950 crore for 2008-09.

Set up with the mandate of achieving self-sufficiency in refining and marketing operations

for a nascent nation set on the path of economic growth and prosperity, Indian Oil today

accounts for nearly half of Indias petroleum consumption, reaching precious petroleum

products to millions of people everyday through a countrywide network of around 35,000 sales

points.

They are backed for supplies by 167 bulk storage terminals and depots, 101 aviation fuel

stations and 89 Indene LPG bottling plants.

For the year 2008-09, Indian Oil sold 62.6 million tones of petroleum products,

including 1.7 million tones of natural gas.

Indian Oil celebrated its Golden Jubilee during 30th June - 1st September 2009.

Established as an oil marketing entity on 30th June 1959, Indian Oil Company Ltd. was

renamed Indian Oil Corporation Ltd. on 1st September 1964 following the merger of Indian

Refineries Ltd. (established in August 1958).

The integrated refining & marketing entity has since grown into the countrys largest

commercial enterprise and Indias No.1 Company in the prestigious Fortune Global 500

listing of the worlds largest corporates, currently at the 116thposition.

THE KEY FINDINGS RELATED TO IOCL:

29

8/8/2019 NIKS Final

30/85

In spite of deregulation of the oil sector and stiff competition from private

players, Indian Oil has maintained its position as India's flagship national oil company. Indian

Oil People have been in the forefront in adapting to the changing environment and enhancing

the organizations capabilities in providing innovative and value-added offerings to the

customers.

Against the backdrop of a rapidly changing business environment, Indian Oil is focusing

on certain key issues for sustained growth in the deregulated market. These are: prudent

finance and projects management, optimum capacity utilization of refineries and pipelines

network, competitive business strategies, customer-focused innovations in product and service

offerings, streamlining of business processes, and achieving greater synergy with group

companies for enhanced efficiency and effectiveness in the marketplace.

The rising customer aspirations for quality products and services, at par with

international standards, have also thrown up myriad opportunities. Indian Oil is making the

most of them mainly in expanding its existing customer base, customizing products for

specific market segments, streamlining distribution infrastructure, etc.

As part of the Marketing Transformation Programmed to move closer to the

customers, Indian Oil has bifurcated its marketing function vertically into exclusive retail and

direct consumer groups, transferred powers from the four regional offices to 16 marketing

offices in State capitals, and set up exclusive groups for process & systems optimization,

brand management and bio-fuels.

The ambitious Project Manthan IT re-engineering project has enabled the organization to

assimilate IT and web-based business solutions for real time, integrated transactions and ITsolutions for supply chain optimization.

Pictorial Representation of Present Business Process Flow

30

CrudePurchase

8/8/2019 NIKS Final

31/85

DIFFERENT BRANDS OF IOCL

31

Retailing

Distribution

Blending

Refining

Distribution

8/8/2019 NIKS Final

32/85

BRANDS IN DETAIL

AutoGas:

AutoGas (LPG) is a clean, high octane, abundant and eco-friendly fuel. It is obtained

from natural gas through fractionation and from crude oil through refining. It is a mixture of

petroleum gases like propane and butane. The higher energy content in this fuel results in a

10% reduction of CO2 emission as compared to MS

AutoGas is a gas at atmospheric pressure and normal temperatures, but it can be liquefied

when moderate pressure is applied or when the temperature is sufficiently reduced.

The use of LPG as an automotive fuel has become legal in India with effect from April 24,

2000, albeit within the prescribed safety terms and conditions.

The fuel is marketed by Indian Oil under the brand name AutoGas

32

8/8/2019 NIKS Final

33/85

.

AutoGas impacts greenhouse emissions less than any other fossil fuel when

measured through the total fuel cycle. Conversion of petrol to AutoGas helps substantially

reduce air pollution caused by vehicular emissions.

The saving on account of conversion to AutoGas in comparison to petrol is about 28%.

Low filling times and the 28% saving is a reason enough for a consumer to convert his vehicle

to AutoGas.

Aviation Turbine Fuel Service:

Indian Oil Aviation Service is a leading aviation fuel solution provider in India and the

most-preferred supplier of jet fuel to major international and domestic airlines. Between one

sunrise and the next, Indian Oil Aviation Service refuels over 1500 flights from the bustling

metros to the remote airports linking the vast Indian landscape, from the icy heights of Leh

(the highest airport in the world at 10,682 ft) to the distant islands of Andaman & Nicobar.

Jet fuel is a colorless, combustible, straight-run petroleum distillate liquid. Its principal

uses are as jet engine fuel. The most common jet fuel worldwide is a kerosene-based fuel

classified as JET A-1.The governing specifications in India are IS 1571: 2001 (7th Rev).

Indian Oil is India's first ISO-9002 certified oil company conforming to stringent

global quality requirements of aviation fuel storage & handling. Indian Oil Aviation group

regularly organizes International Aviation conferences that act as a vital information

facilitator with participation from leading international and all domestic airlines, allied

industries, statutory aviation authorities and government agencies from over 35 countries.

Indian Oil is the only oil company in India to market the widest possible range of

fuels used by the aviation industry in India- JP-5, Avgas 100LL, Methanol Water Mixture, Jet

A-1 and aviation lubricants, etc.

High Speed Diesel:

Diesel is used in diesel engines, a type of internal combustion engine. Rudolf Dieseloriginally designed the diesel engine to use coal dust as a fuel, but oil proved more effective.

33

8/8/2019 NIKS Final

34/85

Diesel engines are used in cars, motorcycles, boats and locomotives. Automotive diesel fuel

serves to power trains, buses, trucks, and automobiles, to run construction, petroleum drilling

and other off-road equipment and to be the prime mover in a wide range of power generation

& pumping applications. The diesel engine is high compression, self-ignition engine.

The Indian Standard governing the properties of diesel fuels are IS 1460:2005 (5th

Rev). Important characteristics are ignition characteristics, handling at low temperature, flash

point.

XTRAMILE:

Indian Oils XTRAMILE Super Diesel, the leader in the branded diesel

segment is blended with world-class Multi Functional Fuel Additives (MFA A growing

section of customers who own diesel automobiles, both in the lifestyle and passenger

category, prefer XTRAMILE as a fuel for its added and enhanced performance. XTRAMILE

has brought in a huge savings in the high mileage commercial vehicle segment. Transport

fleets that operate a large number of trucks crisscrossing the country are using XTRAMILE to

not only obtain a higher mileage but also for low maintenance costs.

Indane Gas:

Indane is today one of the largest packed-LPG brands in the world. Indian Oil pioneered the

launch of LPG in India in the 1970s and transformed the lives of millions of people with the

introduction of the clean, efficient and safe cooking fuel. LPG also led to a substantial

improvement in the health of women in rural areas by replacing smoky and unhealthy

chullahs with Indane. It is today a fuel synonymous with safety, reliability and convenience.

LPG is a blend of Butane and Propane readily liquefied under moderate pressure.

LPG vapor is heavier than air; thus it normally settles down in low-lying places. Since LPG

has only a faint scent, a mercaptan odorant is added to help in its detection.

34

8/8/2019 NIKS Final

35/85

In the event of an LPG leak, the vaporization of liquid cools the atmosphere and

condenses the water vapor contained in it to form a whitish fog, which is easy to observe.

LPG in fairly large concentrations displaces oxygen leading to a nauseous or suffocating

feeling.

To prevent diversion, the Indane brand is being backed by RFID technology, a new concept

that helps track the movement of LPG cylinders.

Initial trials are currently going on, after which it will be implemented on a countryside basis.

SERVO lubricants & greases:

Indian Oils SERVOrange of lubricants reigns as the undisputed market leader in the

Indian lubricants market. Known for its cutting-edge technology and high-quality products,

SERVO backed by Indian Oils pioneering R&D, extensive blending and distribution

network, sustained brand enhancement and new generation packaging is a one-stop shop for

complete lubrication solutions in the automotive, industrial and marine segments.

In the retailing segment, besides Indian Oil petrol stations, SERVO range of

lubricants is available through a network of SERVO press stations, bazaar outlets and

thousands of auto spare parts shops across the country. The SERVO range includes over 500

lubricants and 1200 formulations encompassing literally every lubricant requirement.

The SERVO Xpress is a one-stop shop for quick, easy and convenient auto care,

providing customers with a refreshing experience. The SERVO Xpress stations have facilities

for oil change, tyre /battery checkups, A/C service, vacuum cleaning, perfuming, upholstery

cleaning, and polishing and lamination installation too.

Superior Kerosene Oil:

35

8/8/2019 NIKS Final

36/85

Kerosenes are distillate fractions of crude oil in the boiling range of 150-250C. They are

treated mainly for reducing aromatic content to increase their smoke point (height of a

smokeless flame) and hydrofining to reduce sulphur content and to improve odour, color &

burning qualities (char value).

Kerosene is used as a domestic fuel for heating / lighting and also for manufacture of

insecticides /herbicides /fungicides to control pest, weeds and fungi. Since kerosene is less

volatile than gasoline, increase in its evaporation rate in domestic burners is achieved by

increasing surface area of the oil to be burned and by increasing its temperature. The two

types of burners which achieve this fall into two categories namely vaporizers & atomizers.

The Indian Standard governing the property of kerosene is IS 1459:1974 (2nd Rev). .

About Gujarat Refinery

The Gujarat Refinery at Koyali in Gujarat in Western India is Indian Oils largest refinery.

Foundation stone laid by Pandit Jawaharlal Nehru, the then Prime Minister of India in May,

1963.Commissioned in Dec 1965.Largest refinery of Indian Oil with crude processing

capacity of 13.7 MMTPA.

The refinery was commissioned in 1965. Its facilities include five atmospheric crude

distillation units. The major units include CRU, FCCU and the first Hydro cracking unit of

the country. Through a product pipeline to Ahmedabad and a recently commissioned product

pipeline connecting to BKPL product pipeline and also by rail wagons/trucks, the refinery

primarily serves the demand for petroleum products in western and northern India

When commissioned, the Gujarat refinery had a design capacity of 3.0 MMTPA. It was

subsequently increased to 4.3 MMTPA by the revamping of three distillation units. In 1978,

its processing capacity was further increased to 7.30 MMTPA by the addition of a crude

distillation unit. A fluidized catalytic cracking unit was added to the refinery in 1981 to

increase production of middle distillates, such as diesel and LPG.

36

8/8/2019 NIKS Final

37/85

The capacity of the refinery was further increased to 9.5 MMTPA by 1990 through low cost

revamping / de-bottlenecking and addition of a hydro cracker in 1992 for maximization of

middle distillates.

Subsequently the crude capacity was increased to 12.5 MMTPA in 1999 by addition

of new Atmospheric Unit of 3 MMTPA along with revamp of FCC Unit. The capacity has

since been increased to its present capacity of 13.70 MMTPA by low cost debottlenecking.

The company has already commissioned the facilities for MTBE and Butene-1 production.

The refinery also produces a wide range of specialty pro ducts like Benzene, Toluene,

MTO, Food Grade Hexane, solvents, LABFS, etc.

The Gujarat Refinery achieved the distinction of becoming the first refinery in the

country to have completed the DHDS (Diesel Hydro De-sulphurisation) project in June 1999,

when the refinery started production of HSD with low sulphur content of 0.25% wt (max.).

A project for production of high value LAB (Linear Alkyl Benzene -- which is one of

the major raw materials used in manufacturing detergents) from kerosene streams has been

implemented. In order to meet future fuel quality requirements, MS Quality improvement

facilities are planned to be installed by 2006.

37

8/8/2019 NIKS Final

38/85

Institutional Arrangements In India

38

8/8/2019 NIKS Final

39/85

Figure 1.1

Ministry of Petroleum & Natural Gas shelters 3 types of Industries: 1) Upstream:

Limited.

39

8/8/2019 NIKS Final

40/85

ENVIRONMENT PROTECTION, HEALTH AND SAFETY

Environment Protection

Initially there were four effluent treatment plants (ETPs), but in order to create free space

inside the refinery for value added projects, a state-of-the-art Central Effluent Treatment t

effluent is reused in the refinery. Thus Gujarat Refinery is a zero discharge refinery.

To control air pollution, low sulphur content fuels are used in boilers and process heaters.

Other mitigated facilities like tall stacks for better dispersion of emission, CO boiler in FCC,

floating roof tanks for volatile products and high efficiency cyclone separators have been

provided.

A meteorological data station has been installed to record wind speed, wind direction, ambient

temperature, humidity and rain fall.

A Secured Landfill site for storing the residual oil sludge after treatment has also been

provided.

ISO-14001 Accreditation

Gujarat Refinery has got international recognition for its Environmental Management System

and commitment towards environmental protection.ISO-14001 accreditation has been

certified by M/s. DNV in July 1997.

OHSMS and ISRS Accreditation

Occupational Health and Safety Management System (OHSMS) and International Safety

Rating System (ISRS) are modern safety / loss control evaluation systems. Gujarat Refinery

was awarded OHSMS certificate for maintaining world class standard in regard to safety and

health. It also achieved ISRS Level-7 in the scale of 0 to 10.

Green Belt

40

8/8/2019 NIKS Final

41/85

A 100 metre wide green belt in south and western sides and another 500 metre wide green

belt in the eastern side of Hydrocracker complex have been developed. About 2.1 lacs

special species of trees have been planted in these green belts.

Health Monitoring

Work environment monitoring is a regular feature at Gujarat Refinery and covers monitoring

of toxic gases like SO2, H2S, CO, Cl2 and sound level. Periodical medical examination of

workers are conducted at an independent occupational health centre.

Fire & Safety

Gujarat Refinery has two fire stations which are well equipped with the fleet of 9 nos. of fire

tenders and modern accessories like fire alarms, hot lines, walkie talkies, High Volume Long

Range monitors, sirens etc. Gas detectors at LPG and process unit areas and automatic water

sprinkler system for critical areas have been provided. On site as well Off Site emergency

management plans have been developed.

Safety Performance

Gujarat Refinery owns and operates one of the best Safety and Fire Management System in

the Indian refining sector. Its exemplary safety record boast of five fire free years with sixth

year in running as on April 2003. It is also the first Indian refinery to achieve International

Safety Rating of Level 8

41

8/8/2019 NIKS Final

42/85

CHAPTER - 3

FINANCE

DEPARTMENT

OF

GUJARAT REFINERY

42

8/8/2019 NIKS Final

43/85

3.FINANCE

3.1 Introduction

Finance is like a blood to any type of business organization. Finance is the basic pillar to the

any organization. In a dynamic business environment financial performance is the lifeline.

The main function of finance department of any organization is to accumulate finance for

the organization whenever necessary.

It has to seek the way of obtaining capital which is less costly i.e. how the organization

will get capital for long time with less interest payment. Whether is will get enough capital from its

internal sources or from external sources.

The finance function with the more emphasis on profitability, cost cutting, effective

forecasting, innovation new financial product & optimum financial risk management is a key to

management information & decision making system.

Finance with the greater focus on simplifying & consolidating financial procedures,

following best practices of corporate governance, customer satisfaction, and skill development

assists in achieving the goal of excellence with continues improvement.

43

8/8/2019 NIKS Final

44/85

3.2Financial objectives

To ensure adequate return on the capital employed and maintain a reasonable annual

dividend on equity capital.

To ensure maximum economy in expenditure.

To develop long-term corporate plans to provide for adequate growth of the Corporations

business.

To manage and operate all facilities in an efficient manner so as to generate adequate internalresources to meet revenue cost and requirements for project investment, without budgetary support.

To complete all planned projects within the scheduled time and approved cost.

To reduce the cost of production of petroleum products by means of systematic cost control

measures and thereby sustain market leadership through cost competitiveness.

To continue to make an effort in bringing reduction in the cost of production of petroleum

products by means of systematic cost control measures.

To generate sufficient internal resources for financing partly/wholly expenditure on new

capital projects.

To ensure adequate return on capital employed and maintain a reasonable annual dividend on

its equity capital

To ensure maximum economy in expenditure.

The endeavor to complete all plan projects within stipulated time and within stipulated cost

estimated.

44

8/8/2019 NIKS Final

45/85

DIFFERENT SECTIONS OF THE FINANCE DEPARTMENT

Main Accounts

Purchase Works

Payroll

Stores

CENVAT

TA& Medical

Miscellaneous

Production

Cash Section

Projects Works

Projects Purchase

PF/Advances

Oil Accounts

Concurrence

Coordination

45

8/8/2019 NIKS Final

46/85

3.3 PROJECT PROFILE

I, Nikunj Thakkar have undergone the trainiing process in IOCL GIJARAT REFINERY

under the Finance DFM Mr. N.V.BHATT as a Vocational Trainee on the topic ofManagement of the Assets and Liabilities. As a Vocational Trainee my work there was to

study the different policies at IOCL for the Management of Assets and Liabilities. The ways

in which the company carried out its depreciation on the fixed assets, the impairment and the

transferr and disposal of assets etc.

The scope and methodology of my work was to learn about the different policies of IOCL for

the management of assets and liabilities through continuous interaction with the employees of

the organisation headed by the finance manager Mr. V.K.JAIN who was very co-operative

during this span of IIP. I interacted with various employees of the department and studied

about the required policies and practices of the company.

3.4 OBJECTIVES OF THE STUDY

To study about the different products of the IOCL and the different types of fixed assets

held by the company.

To study about the fixed asset management policies of the IOCL.

To study about the different types of accounting policies applied by the company for the

accounting of fixed assets, tangible and intangible assets.

To study about the policies for depreciation, amortization, impairment, transfer and

disposal of fixed assets.

To study about the SAP system applied at the IOCL and about how the assets work under

the SAP system.

46

8/8/2019 NIKS Final

47/85

To study about the current asset policies of IOCL.

To study the policies for inventory control.

To study how the different assets are codified in IOCL and on which basis.

To study about the historical review of fixed assets and the Additional Facility proposal.

To study about the different types of policies applied at the IOCL for the management of

short term and long term liabilities.

3.5 LIMITATIONS OF THE STUDY

Asset blocks of Gujarat Refinery have been taken as representation for the assets of

IOCL.

The list of assets that are referred to may not be included in the report due to itsclassified informational content.

The data used in study is dependent on organization as far as accuracy is concerned.

The officials of the organizations due to their policy of maintaining secrecy

were reluctant to share all the required information.

The accuracy of the analysis of the companies and suggestions depend upon

the information shared with me and the observation made by me.

47

8/8/2019 NIKS Final

48/85

ANALYSIS

AND

FINDINGS

48

8/8/2019 NIKS Final

49/85

3.6 ASSET MANAGEMENT

Asset management is a business process and a decision-making framework that covers an

extended time horizon, draws from economics as well as engineering, and considers a broad

range of assets. The asset management approach incorporates the economic assessment of

trade-offs among alternative investment options and uses this information to help make cost-

effective investment decisions.

Definition

Asset management* is the process of guiding the acquisition, use and disposal of assets to

make the most of their service delivery potential and manage the related risks and costs over

their entire life.

Objectives

The principal objective of asset management is to enable an agency to meet its service

delivery objectives efficiently and effectively. Effective asset management also:

makes the most of the service potential of assets by ensuring they are appropriately used and

maintained;

reduces the demand for new assets and saves money through demand management techniques

and non-asset service delivery options;

achieves greater value for money through economic evaluation of options that take into

account life cycle and full costs, value management techniques and private sector

involvement;

reduces unnecessary acquisition of assets by making agencies aware of, and requiring them to

pay for, the full costs of holding and using assets; and

focuses attention on results by clearly assigning responsibility, accountability and reporting

requirements.

49

8/8/2019 NIKS Final

50/85

Figure 4.1

Key activities

Asset management is a

continuous process covering the

whole life of the asset. An

agencys asset management

program should encompass all

the activities illustrated above.

In the following pages we shall discuss a part of the above module viz. Recording, valuation

and reporting activities. We shall focus on Depreciation treatment for such fixed assets

and its implementation SAP.

Depreciation on assets:

In Indian Oil Corporation Limited:

Depreciation/amortization is charged pro-rata on quarterly basis on assets, from/upto the

quarter of capitalization/sale, disposal and dismantled during the year as under:

MAIN PRODUCTS OF IOCL

50

8/8/2019 NIKS Final

51/85

1. LPG

2. BENZENE

3. TOLUENE

4. NAPHTHA

5. MTBF

6. HEPLANT

7. SULPHUR

8. PETROL

9. DIESEL

FIXED ASSETS MENAGEMENT POLICIES

Fixed asset are those assets which is held with an intention of being used for the

purpose of producing or providing goods & services. It is not held for sale in the normal

course of business. Expected to be used for more than one accounting period. Example of

fixed assets are Land, Building free hold, leasehold Building, Plant & Machinery, Furniture

etc.

Asset controlled by an enterprise as a result of past events & from which future

economic benefits are expected to flow to the enterprise

There are two types of asset, they are:-

1. Tangible Asset

2. Intangible Asset

Tangible Asset are those asset having physical substance & can be seen & touched

like Building, Plant & Machinery etc.

Intangible Asset are those asset not having any physical substance & therefore cannot

be seen & touched like Goodwill, Patent, Brands & Trademarks etc.

51

8/8/2019 NIKS Final

52/85

FIXED ASSET OF IOCL AND ITS POLICIES

The Indian Oil Corporation Ltd is a large scale unit. The Indian Oil Corporation Ltd is

a public sector company form of organization. Every Company does the whole calculation &

every thing about the fixed asset on SCHEDULE-E. It is shown in the balance-sheet. The

company fixed assets are Land-Freehold, Land-Leasehold, Buildings, Roads, Plant &

Machinery, Transport Equipments, Furnitures and Fixtures, Railway Sidings, Drainage,

Sewage & Water Supply System.

POLICIES OF IOCL FOR FIXED ASSETS

Different companies maintain policies for their firm, so the policies for IOCL are as

follows.

FIXED ASSETS

LAND

Land acquired on perpetual lease as well as on lease for over 99 years is treated

as free hold land.

Land acquired on lease for 99 years or less is treated as leasehold land.

Construction Period Expenses on Projects

Revenue expenses exclusively attributable to projects incurred during

construction period are capitalized. However, such expenses in respect of capital facilities

being executed along with the production/operations simultaneously are charged to revenue.

Financing cost incurred during the construction period on loans specially

borrowed & utilized for projects is capitalized on quarterly basis.

Financing cost, if any, incurred on General Borrowings used for projects is

capitalized at the weighted average cost. The amount of such borrowing is determined on

quarterly basis after setting off the amount of internal accruals.

52

8/8/2019 NIKS Final

53/85

Depreciation/Amortisation

Cost of lease hold land for 99 years or less is amortised during the lease period.

Depreciation on fixed assets including LPG Cylinders & Pressure Regulators isprovided in accordance with the rates as specified in Schedule XIV to The Companies Act,

1956, on straight line method, upto 95% of the cost of the asset. Depreciation is charged pro-

rata on quarterly basis on assets, from/upto the quarter of capitalization/sale, disposal &

dismantled during the year.

Assets, other than LPG cylinders & Pressure Regulators, costing upto Rs.5000/-

are depreciated fully in the year of capitalization.

Capital expenditure on items like electricity transmission lines, railway siding,roads, culverts etc, the ownership of which is is not with the corporation are charged of to

revenue. Such expenditure incurred during construction period of projects is accounted as

unallocated capital expenditure & is charged to revenue in the year of capitalization of such

projects.

IMPAIRMENT OF ASSETS

Impairment of cash generating units/assets is ascertained & considered where

the carrying cost exceeds the recoverable amount being the higher of net realizable amount &

value in use.

INTANGIBLE ASSETS

Costs incurred on technical know-how/license fee relating to production process

are charged to revenue in the year of incurrence.

Costs incurred on technical know-how/license fee relating to process

design/plants/facilities are accounted as Work-in-Progress-Intangible Assets during the

construction period of the said plan/facility. At the time of capitalization of the said

plant/facility, such costs are capitalized as Intangible Asset & amortised on a straight line

basis over a period of ten years or life of the said plant/facility, whichever is earlier beginning

from the quarter in which the said plant/facilities is capitalized.

53

8/8/2019 NIKS Final

54/85

8/8/2019 NIKS Final

55/85

To comply all these accounting & income tax requirements, it is essential that

each item of asset should be given an identification number.

One category of asset is not controlled by more than one department. Each such

category shall be allotted a central account in the financial ledger. In case any item of asset is required by some other department, the controlling

department can issue the asset but a record shall be kept of such assets loaned to other

department. Movements between the one department to another shall take place only through

the controlling department. For example, furnitures & fixtures shall be maintained by the

Administration department whenever there is a transfer it should be routed only through the

Administration department.

No asset item should be issued by stores without painting on it the identification

number as given by the controlling department in the issue voucher.

For inter unit & inter divisional, transfer of assets, the same shall be done

through the stores department. The asset to be transferred shall be returned under a Material

Return Voucher to the stores who shall arrange for the dispatch of the asset item, to the

transfer unit/division.

After issue of the asset item the issue voucher as usual is to be sent to finance,

then they on the basis of the identification number available in the issue voucher shall write

the same in their asset ledger for future reference. When an asset is returned to the stores

department the Material Return Voucher shall invariably bear the identification number as the

same would be necessary for linking the asset to its date of acquisition & is original cost.

Physical verification of all assets shall be undertaken once in every three shall

be undertaken once in every three years. The Verification team shall start on the basis of the

identification number & other details available in the Asset Ledger.

FUNCTIONS

Main functions in respect of accounting of asset.

Capitalisation of the cost of acquisition of assets.

Accounting of depreciation

Transfers, disposal & discarding of assets

Maintenance of asset ledger

Arrangement for physical verification of asset

55

8/8/2019 NIKS Final

56/85

preparation of schedules for Balance Sheet.

ACCOUNTING OF DEPRECIATION

# Section 205 of the companies act stipulated that no dividend shall be declared or paid

by a company for any financial year except out of the profit of the company for that year

arrived at after providing for depreciation on the following basis or out of the profits of the

company for any previous financial year.

Depreciable asset is arrived at by dividing 95% of the original cost thereof by a

specified period in respect of each such asset.

In accordance, with the provisions of sub section 2(b) of sub section 205 of the

companies act.

No further, depreciation & the balance 5% shall be kept as residuary value in the

books of account.

If the asset after its commissioning is kept idle, full depreciation shall be charged on

such asset.

# For temporary assets such as temporary buildings, sheds, temporary sewage drainage

& water supply & temporary electric supply line etc, erected as a part of construction site

requirements having only salvage value on dismantling after the completion of construction,

depreciation shall be charged at the rate of 100% in the year in which the cost is incurred.

# In case of other temporary assets such as diesel generating sets, transformers &

temporary buildings etc which are required for construction but are not to be demolished or

the assets can be still gainfully used, depreciation shall be charged at normal rates as

applicable.

# After the first capitalization, if there is any extra payment on account of assets already

capitalized arising out of acceptance of certain claims of contractors/suppliers or due to

arbitration awards, or due to any other reasons or alternatively, there is a reduction in the cost

of assets due to certain reduction of custom duty etc, retrospective depreciation shall be

charged from the original date of commissioning of the asset under references.

56

8/8/2019 NIKS Final

57/85

TRANSFERS & DISPOSAL OF ASSETS

# All transactions relating to inter-unit transfer of asset shall be routed through the stores

department. Whenever it is decided to transfer an asset from one unit to another, the custodian

department shall return the asset under the Material Return Voucher giving the identification

number of the asset to the stores department. The stores department shall take necessary

action to dispatch the asset to the unit to which it is to be transferred. The Material Return

Voucher & issue note giving identifications numbers shall be sent by the stores department to

account for passing necessary adjustments entries. No inter-unit transfer shall be undertaken

without giving intimation to finance.

# When the asset is transferred from one unit to another during the financial year,

depreciation for the whole year shall be borne by the unit at the receiving end regardless of

the period for which the asset is utilized by the receiving unit.

# After the transfer, the asset accounting entries shall find out the original cost of the

asset & the cumulative depreciation provided on the basis of the identification numbers

furnished in the documents sent by the stores department. Debt note for the original cost of

assets & the credit note for cumulative depreciation shall be sent to the Unit/Division

concerned as per procedure.

# For assets to be declared unserviceable the procedure as prescribed in the stores

manual shall be followed & the assets shall be disposed of after getting the approval of the

competent authority.

# After the asset is declared unserviceable the same shall be returned to the stores

department under Material Return Voucher by the custodian department. The Material Return

Voucher shall contain the description of the asset along with its identification number.

57

8/8/2019 NIKS Final

58/85

SAP SYSTEM

SAP, an Enterprise-wide Business Software Package designed tc integrate each area of

a business stands for Systems, Applications & Products for Data Processing. Its Modules are

fully integrated. This means that all the businesses & functions in the company are

connected in the system. SAP/R3 is an Online, Real Time system. This means that when

data is entered into the SAP system, it is processed & stored immediately. This real time

information is up-to-date & available for others to use immediately.

SAP AG, the parent company is based in Walldorf, Germany & provides Leading

package software in the client/server market. It facilitates decision making but doesnt

decided by itself. It provides comprehensive information to optimize but doesnt optimize by

itself. It automates & integrates transactions which enable customer care in terms of

speed/cost/quality/service but it doesnt delight customer by itself.

Today, Indian Oil team along with project consultant Price waterhouse Coopers have

built a valuable knowledge bank of all the existing business processes & envisioned the To-

Be processes on the basis of which SAP system is configured.

To strengthen the system base SAP is implemented across eight functional base SAP

is implemented across eight functional areas namely Finance & Controlling, Sales &

Distributing, Materials Management, Human Resources, Plant Maintenance, Quality

Management, Production Planning & Project Systems under the project namely

MANTHAN

58

8/8/2019 NIKS Final

59/85

ORGANISATION STRUCTURE

The SAP hierarchy is the backbone of the SAP system & is linked to every

transaction & master data element in the SAP system. The result is that the SAP hierarchy

provides the translation of the Organization Structure, Reporting Requirements & Process

Environment of the organization where, SAP is being implemented.

SAP has flexible reporting tools & can extract data in a variety of different ways for

management reporting. The system is dependent upon the most appropriate organization

structure being built as foundation for the support of data entry, reporting & management. The

objectives of the SAP organization structures are:

# to be able to organize the system to mirror the business organization (current & future)

# to be able to report using this structure to monitor the effectiveness of the

organization.

# to be able to adapt to a changing business by building the most flexible structure

possible.

The Organization structure is central to the SAP software & there is no standard feature

within SAP to allow data to be changed to a new structure once it has been posted to the

system. Changes to the structure can only be achieved using conversion programs. This

process is very complex & requires a major investment in terms of time & skilled SAP

technical resources. Changes will likely result in significant modifications to documentation,

user manuals, training materials, scripts etc. therefore it is critical to consider the future vision

of the organization before finalizing the organization structure in SAP.

59

8/8/2019 NIKS Final

60/85

HOW THE ASSETS WORKS IN SAP SYSTEM

The whole IOCL works in SAP system, after 2002, it maked the whole work of IOCL

easy and faster, by it we can arranged all the assets in their order, and they can be easily be

classified. It helps the employee a lot, first it was difficult, but from when the SAP came in

the organization, it has become a lot easier.

CURRENT ASSETS POLICIES

Current assets are those assets which can be converted into cash, within a given period

of time. Current assets mainly consists of Cash & Bank Balance, Stock, Debtors, Bills

receivables, Prepaid expenses, Loans & Advances.

CURRENT ASSETS IN IOCL

IOCL holds the current assets in two ways:-

1. Inventories

2. Stores and Spares

I. INVENTORIES

In financial parlance, Inventory is defined as the sum of the value of raw materials,

fuel & lubricants, spare parts. Maintenance consumables, semi processed materials &

finished goods, at any given point of time. The operational definition of inventory would be,

The amount of raw materials, fuels, lubricants, spare parts & semi processed material,

stocked for smooth running of plant. Since these resources are idle when kept in stores,

inventory is defined as an ideal resource of any kind having an economic value.

Inventories are the stocks of the product a company is manufacturing for sale and the

components that make of the product. The various forms in which inventories exists inmanufacturing companies are:

60

8/8/2019 NIKS Final

61/85

Raw materials inventories are those units of inputs, which have been purchased or

stored for future productions.

Work in progress inventories are semi-manufactured products. They represent the

products that need more work before they become finished products for sale.

Finished goods inventories are those completely manufactured products, which are

ready for sale.

Stock of raw materials and work in process facilitate production, while stock of

finished goods is required for smooth marketing operations. Thus, inventories serve as a link

between the production and consumption of goods.

Inventories differ depending on the nature of business. A manufacturing firm will

have substantially high level of all three kinds of inventories, while retail, or a wholesale, firm

will have a very high level of finished goods inventories and no raw material and work in

process inventories. A fourth kind of inventory, i.e., inventories of supplies are also

maintained by firms, but it does not involve significant investment. Therefore, a sophisticated

system of inventory control may not be maintained for them.

Inventories constitute the most significant part of the current assets of a large majority of

companies in India. For eg., on an average, inventories are approximately 60% of current

assets in public limited companies in India. It is about 30% and below in printing and

publishing, electricity generation and supply, trading & shipping industries. It is as high as

76% in tobacco industry. Because of the large size of the inventories maintained by the firms,

a considerable amount of the funds is required to be maintained by the firm. It is, therefore,

absolutely imperative to manage the inventories efficiently and effectively in order to avoid

unnecessary investment in them. An undertaking neglecting the management of inventory will

be jeopardizing its long-run profitability and may fall ultimately. It is possible for a company

to reduce its levels of inventories to considerable degrees, e.g., 10 to 20% without any adverse

effect on production & sales, by using simple inventory planning & control techniques. The

reduction in excessive inventory carries a favorable impact on the companys profitability.

61

8/8/2019 NIKS Final

62/85

NEED TO HOLD INVENTORIES

Inventory being an ideal resource, if it was uneconomical & unprofitable to hold

inventories, no business or industry would maintain them. With the rapid industrialization

during the last three decades holding inventories has become an economic necessity in the

organizations, which can be fully justified if we look at the magnitude of inventory holdings

in Refineries & Pipelines division. The reason of holding such a high inventory is that

refining of crude in our Refineries is done on continuous basis as such an industry like ours

can hardly afford stoppage of production for want of inventory.

Raw materials, additives, consumables etc., required for conversion of crude oil into

various types of finished petroleum products.

Fuels, lubricants, spares and components etc., required for smooth and uninterrupted

running of the plant equipments. The major resource for holding inventory therefore

are :

To maintain targeted flow of production in line with national demand.

Protection against uncertainties of demand & supply which cannot be predicted

with sufficient accuracy.

To avoid stock out in period of storage.

In periods of rapid price rise higher inventory levels may well have to be

accepted.

62

8/8/2019 NIKS Final

63/85

NEED FOR INVENTORY CONTROL

Stock/Inventory although are main weapons in a refinerys armory but still, these are

one of its chief liabilities. Inventory holding costs money. Therefore, on one hand where it

is essential to hold inventories, on the other hand it is absolutely vital to have a tight control

on the inventory levels and the aim should be to keep them at optimum level. Inventory

control, therefore deals with determination of optimal procedure for maintaining stocks to

ensure continued availability of required material but avoid storage of excessive and

obsolete stock.

CURRENT ASSETS OF IOCL

INVENTORY OF RAW MATERIALS:-

The current assets in IOCL are handled by A/8 section. A/8 section holds the raw

material, work in process and finished goods. Any changes or anything which is in touch

with the current asset is handled by A/8 section. A/8 does the function of crude oil process.

It starts with the types of material then in it the opening balance is opened then BS & W is

deducted then out of that Net value is obtained. The materials are processed on MMB

(Materials Monthly Basis) basis.

The main material of IOCL is crude oil; A/8 does the function of financial accounting

of processing of crude oil. The types of crude oil are as follows,

Indigenous on-shore oil

Indigenous off-shore oil (Bombay High)

Imported crude oil

Various crude oil used are:-

SG : South Gujarat (low Sulfur)

63

8/8/2019 NIKS Final

64/85

NG : North Gujarat (low Sulfur)

BH : Bombay High (low Sulfur)

The Gujarat Refinery has at present four crude distillation units, the fifth one isunder construction. These units are AU-1, AU-2, AU-3, AU-4, AU-5. Depending upon the

capacity, availability and compatibility (with the feed-low sulfur/high sulfur) of these units,

they are fed with suitable mix of fed. Indigenous raw material, which are purchased from

ONGC. On shore crude supplies are received through the pipeline by the inland refineries as

per crude intake programme agreed upon with the supplies. The quantity is determined on the

basis of dips of the receiving tank. The off-shore indigenous crude oil supplied by ONGC is

determined on the basis of the dips of receiving tanks. The measurement & accounting of

crude oil receipt is done as per mutually accepted procedure with the supplies and the

payments are made on dry crude basis.

The other types of crude oil are:

HS High Sulphur

LS Low Sulphur

These are the improved raw materials purchased from abroad like Iraq, Iran, Nigeria, UAE.

The payments are made on the basis of bill of lading quantity in respect of part transfer or

receipt of crude to/from other oil companies. Accounting of these materials is done daily on

tones preparation. They have to maintain Dip memo, which means the whole size of tank.

They also maintain Dip regiater. Accounting is based on measurement of net metric tones.

Generally it is measured on the basis of the diameter of the tank. Offshore

indegenous/imported crude is transported to inland refineries through pipelines. The

difference between the quantity pump from the shore tanks and the quantity received in the

refinery tanks on dry crude basis is considered as pipelines tranportation loss.

64

8/8/2019 NIKS Final

65/85

Annual consumption of crude oil is appr. 10.9MMT and the daily consumption rate is appr.

31.5 thousand metric tones. There are different storage tanks allocated to different types of

crude, their capacities are as follows:

Crude Oil Total capacity

South Gujarat (low sulphur) 50 TMT

North Gujarat (low sulphur) 30 TMT

Bombay High (low sulphur) 70 TMT

High Sulphur & Low Sulphur (Imported) 100 TMT

Raw Materials Purchased:-

For imported purchases, government issues licenses, so the purchase can be done. When the

purchase is done from abroad the payment made to all countries is done in US Dolar by

IOCL. The purchase of crude oil depends on the quality of crude. If the quality is bad IOCL

does not purchase it. The rates applied on crude oil by custom duty is 5%.

Work in progress:-

The work in progress inventory acts as a buffer between two stages of the manufacturing

system which may consist of a group of machine or assembly line/production process stage

which can be termed as work center. Products of the refinery have an established market and

the production is well defined, hence they are manufactured in a line process system. The raw

material enters at the beginning and undergoes the operations at different work centers and

emerges as the product at the end of the product line. Ion addition to the basic raw material

there are inputs at various stages in the line. Manufacturing of the components and sub-

assembly in different lines and combining for final assembly in a single line is another

variation of this line manufacturing process. The rate of the manufacture will be dictated by

the slowest work center in the line. A major problem in managing of the line is to balance the

capacity of the work center. Improper line balancing causes (a) overstalking of semifinished

goods before a slow working center and (b) idling of work center further down the line.

Another factor which has to be considered instantly even in balanced line, the work center are

prone to breakdown.

65

8/8/2019 NIKS Final

66/85

Working process is valued at the raw material cost. Normally the feed stock is the crude oil

except in the case of benzene, toluene, etc., when the feed is naphtha.

Products of IOCL and their uses:-

1) Motor spirit (petrol):- fuel for vehicles

2) Diesel:- fuel for heavy vehicles

3) Benzene:- petorchemical viz. Caprolactum

4) Sulphur:- manufacture of sulphuric acid

Finished Products:-

The finished products are valued at cost or net realisable value whichever is lower.

STORES & SPARES

The inventory of stores and spares is about 25% of the total inventory of the Gujarat

Refinery. This inventory is totally under control of the Materials Department. The authority

for receipt storage & issue of all materials is centralized in the materials department subject to

the exception in certain cases. The user departments are not permitted to have any stock of

materials either of them in form of sub-stores. However, in certain cases a nominal stock of a

few urgent items can be permitted for meeting emergencies. The functions of the stores

section of the Materials department are as under:-

Receipt & Transportation

Custody & Issue

Inventory Control

Surplus Stores.

The section dealing with accounting of stores in the Finance dep