3. Material Accounting Policies
3.1 Statement of Compliance
These financial statements (“the financial statements") have been prepared to comply in all material respects with the Indian Accounting Standards (“Ind AS") as per the Companies (Indian Accounting Standards) Rules, 2015 (as amended from time to time) and presentation requirements of Division II of Schedule III as prescribed under Section 133 of the Companies Act, 2013 (“the Act"), other relevant provisions of the Act and guidelines issued by the Securities and Exchange Board of India (“SEBI"), as applicable.
The Company's presentation currency and functional currency is Indian Rupees. All figures appearing in the Financial Statements are rounded off to the nearest lakhs (^ in lakhs), except where otherwise indicated.
3.2 Basis of Measurement
The financial statements have been prepared on a going concern basis and using historical cost, except for the following:
a. Financial assets and liabilities measured at fair value (refer accounting policy regarding financial instruments); and
b. Defined benefit plans - plan assets measured at fair value.
3.3 Current and Non-Current Classification
The company presents assets and liabilities in the Balance Sheet based on current and non-current classification.
An asset is current when it is:
• Expected to be realised or intended to be sold or consumed in a normal operating cycle;
• Held primarily for the purpose of trading;
• Expected to be realised within twelve months after the reporting period; or
• Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
All other assets are classified as non-current.
A liability is current when:
• It is expected to be settled in a normal operating cycle;
• It is held primarily for the purpose of trading;
• It is due to be settled within twelve months after the reporting period; or
• There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.
All other liabilities are classified as non-current. Deferred tax assets / liabilities are classified as non-current assets or non-current liabilities.
The operating cycle is the time between the acquisition of assets for processing and their realisation in cash and cash equivalents. As the operating cycle can not be identified in normal course due to the special nature of industry, the same has been assumed to have duration of 12 months.
3.4 Use of Estimates and Judgements
The preparation of Financial Statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets, liabilities and the accompanying disclosures along with contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require material adjustments to the carrying amount of assets or liabilities affected in future periods. The Company continually evaluates these estimates and assumptions based on the most recently available information. Difference between actual results and estimates are recognized in the period prospectively in which the results are known / materialized.
3.5 Inventories
Inventories are valued in the balance sheet as follows :
a) Crude oil : Valued at cost or net realisable value whichever is lower. Cost is calculated on absorption cost method (on FIFO basis).
b) Component, stores, spares and consumables (including items related to hydrocarbon properties): at cost (on FIFO basis) or net realizable value, whichever is lower. However, items held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost.
Cost comprises of all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.
3.6 Cash and Cash Equivalents
Cash and cash equivalents in the financial statements comprise cash in hand, balance with Banks, short-term deposits with an original maturity of three months or less and highly liquid investments that are readily convertible into known amount of cash and which are subject to insignificant risk of changes in value.
3.7 Tax Expenses
Tax expenses represents the sum of the tax currently payable and deferred tax. It is recognised in the statement of profit and loss except to the extent that it relates to an item recognized directly in equity or in other comprehensive income.
a) Current Income Tax
Tax on income for the current period is determined on the basis of estimated taxable income and tax credits computed in accordance with the provisions of the relevant tax laws and based on the expected outcome of assessments /appeals.
Current income tax relating to items recognised directly in equity is recognised in equity and not in the Statement of Profit and Loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
b) Deferred Tax
Deferred tax is provided using the Balance Sheet approach on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognised for all taxable temporary differences
Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.
Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Deferred tax relating to items recognised outside the Statement of Profit and Loss is recognised either in other comprehensive income or in equity in correlation to the underlying transaction recognised either in OCI or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority and the Company intends to settle its current tax assets and liabilities on net basis.
3.8 Property, Plant and Equipment
Property, Plant and Equipment held for use in the production or/and supply of goods or services, or for administration purposes are stated in the Balance Sheet at cost, less accumulated depreciation & accumulated impairment losses (if any). Cost of an item of Property, Plant and Equipment acquired comprises its purchase price including import duties and non-refundable purchase taxes, directly attributable borrowing costs, any other directly attributable costs of bringing the assets to its working condition and location for its intended use,
present value of any estimated cost of dismantling and removing the item and restoring the site on which it is located.
If significant parts of an item of Property, Plant and Equipment have different useful lives, then they are accounted for a separate items (major components) of property, plant and equipment. Profit or loss arising on disposal of property, plant and equipment are recognized in the statement of profit and loss.
Subsequent costs are included in the asset's carrying amount, only when it is probable that future economic benefits associated with the cost incurred will flow to the Company and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognized when replaced. Major Inspection/Repairs/Overhauling expenses are recognized in the carrying amount of the item of Property, Plant and Equipment as a replacement if the recognition criteria are satisfied. Any unamortized part of the previously recognized expenses of similar nature is derecognized.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between net disposal proceeds and the carrying amount of the asset and is recognized in the statement of profit and loss.
Capital work in progress is stated at cost less accumulated impairment losses, if any, which includes expenses incurred during construction period, interest on amount borrowed for acquisition of qualifying assets and other expenses incurred in connection with project implementation in so far as such expenses relate to the period prior to the commencement of commercial production.
3.9 Intangible Assets
Intangible assets are recognised when it is probable that the future economic benefits that are attributable to the assets will flow to the company and the cost of the asset can be measured reliably.
Intangible assets acquired separately are measured at cost. Subsequent to initial recognition, intangible assets are stated at cost less accumulated amortisation and accumulated impairment loss, if any. Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in profit and loss in the period in which the expenditure is incurred.
Intangible assets consisting of computer software are amortised over a period of 3-5 years.
Gains or losses arising from derecognising of an intangible asset are measured as the difference between the net disposal proceed and the carrying amount of the asset and are recognised in the statement of profit and loss when the asset is derecognised.
3.10 Depreciation on Property, Plant and Equipment (PPE)
Depreciation on tangible assets is provided on straight line method at the rates determined based on the useful lives of respective assets as prescribed in the Schedule II to the Act. On additions costing less than ^ 5,000/-, depreciation is provided at 100% in the year of addition. The determination of the useful economic life and residual values of property, plant and equipment is subject to management estimation. The residual value of PPE has been considered as Nil. The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. For property, plant and equipment which are added/disposed off during the year, depreciation is provided on pro-rata basis with reference to the date of addition/deletion.
3.11 Development of Hydrocarbon Properties (DHP)
It has been considered appropriate to show the development expenses of oil wells as “Development of Hydrocarbon Properties" as a separate item in financial statements. “Development of Hydrocarbon Properties" includes the cost incurred on the collection of seismic data, drilling of wells and other associated drilling related costs, reservoir modeling costs and other related expenditures on development of oil fields.
Amortisation for the same is done on a straight line basis over the remaining/extended lease period as under the contract or any Government Notifications issued, as considered appropriate by the Management, as this method reflects the expected pattern of consumption of the future economic benefits embodied in the asset and this method is applied consistently from period to period.
The Company has been granted extension of ten years up to 12th March, 2030 to the Production Sharing Contract (PSC) with respect to the Bakrol and Lohar Oilfields under the extant policy of the Government of India dated 28th March, 2016. The Company's PSC contracts for Karjisan and Ognaj oilfields are valid up to 22nd November 2030 and 4th August, 2023 respectively. The Company has surrendered Ognaj Oilfield due to rapid urbanisation in the block area. However, Government approval is pending to complete the process of surrender.
3.12 Impairment of Non-Financial Assets
As at each reporting date, the Company assesses whether there is an indication that an asset may be impaired and also whether there is an indication of reversal of impairment loss recognised in the previous periods. If any indication exists, or when annual impairment testing for an asset is required, if any, the Company determines the recoverable amount and impairment loss is recognised, in the statement of profit and loss, when the carrying amount of an asset exceeds its recoverable amount.
Recoverable amount is determined:-
a. In the case of an individual asset, at the higher of the fair value less cost to sell and the value in use; and
b. In the case of cash generating unit (a group of asset that generates identified, independent cash flow), at the higher of the cash generating unit's fair value less cost to sell and the value in use.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discounting rate that reflect the current market assessment of the time value of the money and the risk specific to the asset. In determining fair value less cost of disposal, recent market transaction is taken into account. If no such transaction can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.
3.13 Leases
The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.
Company as a Lessee
The Company's lease asset classes primarily comprise of lease for land and building. The Company assesses whether a contract contains a lease, at inception of a contract. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether: (i) the contract involves the use of an identified asset (ii) the Company has substantially all of the economic benefits from use of the asset through the period of the lease and (iii) the Company has the right to direct the use of the asset.
At the date of commencement of the lease, the Company recognizes a right-of-use asset (“ROU") and a corresponding lease liability for all lease arrangements in which it is a lessee, except for leases with a term of twelve months or less (short-term leases) and low value leases. For these short-term and low value leases, the Company recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease.
Certain lease arrangements include the options to extend or terminate the lease before the end of the lease term. ROU assets and lease liabilities include these options when it is reasonably certain that they will be exercised. The right-of-use assets are initially recognized at cost, which comprises the initial amount of the lease liability recognised adjusted for any lease payments made at or prior to the commencement date of the lease plus any initial direct costs less any lease incentives. They are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated from the commencement date on a straight-line basis over the shorter of the lease term and estimated useful life of the underlying asset. If ownership of the leased asset transfers to the Company at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right of use assets are also subject to impairment. Refer to the accounting policies in section 'Impairment of Non-Financial Assets'.
The lease liability is initially measured at amortized cost at the present value of the future lease payments to be made over the lease term. The lease payments include fixed payments (including in substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating the lease, If any. The lease payments are discounted using the incremental borrowing rate at the lease commencement date. Lease liabilities are remeasured with a corresponding adjustment to the related right of use asset if the Company changes its assessment if whether it will exercise an extension or a termination option.
Lease liability and Right of Use Assets (ROU) have been separately presented in the Balance Sheet and lease payments have been classified as financing cash flows.
Company as a Lessor
Leases for which the Company is a lessor is classified as a finance or operating lease. Whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee, the contract is classified as a finance lease. All other leases are classified as operating leases. For finance leases, lease rental receipts are apportioned between the finance income and capital repayment based on the implicit rate of return. For operating leases, rental income is recognized on a straight line basis over the term of the relevant lease. Contingent rents are recognized as revenue in the period in which they are earned.
3.14 Revenue Recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the transaction price of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duties collected on behalf of the government.
a) Sale of Goods:
Income on sale of crude oil and gas is accounted for net of VAT and Profit Petroleum payable to the Government of India is recognised when the risk and rewards are transferred to customers.
b) Dividend Income:
Dividend income is accounted for when the right to receive the same is established, which is generally when the mutual fund/shareholders approve the dividend.
c) Interest Income
For all financial instruments measured at amortised cost, interest income is recorded using the effective interest rate (EIR) which is the rate that exactly discounts the estimated future cash payments or receipt through the expected life of the financial instrument or a shorter period, where appropriate to the net carrying amount of the financial asset. Interest income is included in other income in the statement of profit and loss.
3.15 Employee Benefits
Employee benefits include salaries, wages, provident fund, gratuity, leave encashment towards un-availed leave, share based payments and other terminal benefits.
a) Short Term Employee Benefits
All short term employee benefits are expensed as the related service is provided. A liability is recognized for the amount expected to be settled wholly before twelve months after the year end, if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
b) Long Term Employee Benefits
The Company's net obligation in respect of other long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. It includes compensation for earned leaves. The cost of providing benefits are determined on the basis of actuarial valuation at each year end. Separate actuarial valuation is carried out using the projected unit credit method. A liability is recognised for the amount not expected to be settled wholly before twelve months after the year end. From the FY 2022-23, Company had discontinued to provide the compensation for earned leaves. Accordingly no actuarial valuation is carried out to determine the liability.
c) Post Employment Benefits:
Defined Contribution Plan: Retirement benefits in the form of contribution to Provident Fund is defined contribution plan. The contributions are charged to statement of profit and loss for the year when the contributions are due. The Company has no obligation other than the contribution payable to the fund.
Defined Benefit Plan: The liability or asset recognized in the Balance Sheet in respect of defined benefit plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The Company's net obligation in respect of defined benefit plan is calculated by estimating the amount of future benefit that employees have earned in the current and prior periods. The Company operates a defined benefit gratuity plan with Life Insurance Corporation of India. The costs of providing benefits under this plan are determined on the basis of actuarial valuation at each year-end. Actuarial valuation is carried out for the plan using the projected unit credit method. Remeasurements of the net defined benefit obligation, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling, are recognized in other comprehensive income. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to the Statement of Profit and Loss.
d) Employee Share based Payments:
The Company operates equity settled share-based plan for the employees (Referred to as employee stock option plan (ESOP)). ESOP granted to the employees are measured at fair value of the stock options at the grant date. Such fair value of the equity settled share based payments is expensed off on a straight line basis over the vesting period, based on the Company's estimate of equity shares that will eventually vest, with a corresponding increase in equity (employee stock option reserve). At the end of each reporting period, the Company revises its estimate of number of equity shares expected to vest. The impact of the revision of the original estimates, if any, is recognized in the Statement of Profit and Loss such that cumulative expense reflects the revision estimate, with a corresponding adjustments to the employee stock option reserve.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.
3.16 Foreign Currency Transactions
a) Foreign currency transactions are translated into the functional currency using the spot rates of exchanges
prevailing on the date of transaction. Monetary outstanding liabilities/receivables denominated in foreign currencies are translated at the functional currency spot rate of exchange at reporting date and the resultant exchange difference is recognised in the Statement of Profit and Loss. Non monetary items are not retranslated at period end and are measured at historical cost (translated using the exchange rate at the transaction date).
b) In terms of Production Sharing Contracts (PSCs) with the Government of India, wherever crude oil sales are
made in US Dollars, the conversion of US Dollars to Indian Rupees is done as per the contractual agreements with the customers. The PSC also permits sale of gas to domestic users. Sale of Gas is based on US Dollars or rupee denominated rate as per contractual agreements and for conversion of US Dollars to Indian Rupees, Company primarily uses average of RBI rates for the period of supply.
3.17 Segment Reporting
The Company operates in a single segment of production of Oil and Natural Gas. Therefore, Ind AS-108 on Segment Reporting is not applicable to the Company.
3.18 Earning Per Share
Basic earnings per share is calculated by dividing the net profit or loss for the period attributable to equity shareholders (after deducting preference dividend, if any, and attributable taxes) of the Company by the weighted average number of equity shares outstanding during the period.
Diluted earnings per share are calculated by dividing the profit or loss for the period attributable to the equity shareholders by the weighted average number of equity shares outstanding during the period after adjusting for the effect of all dilutive potential equity shares.
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