V MAYANK TALWAR

V RAJWINDER PURI
V ROHAN KIR
V PARTHA SARTHI ROUT
V ANSHUL CHHABRA
V ÷





 ’÷  is one of the oldest and largest
state-owned engineering and manufacturing enterprise in India in the
energy-related and infrastructure sector which includes Power, Railways,
Telecom, Transmission and Distribution, Oil and Gas sectors and many
more.
V It is the 12th largest power equipment manufacturer in the world.
V It was established more than 50 years ago, ushering in the indigenous
Heavy Electrical Equipment industry in India.
V 73% of the total power generated in India is produced by equipment
manufactured by BHEL.
V It is one of India's nine largest Public Sector Undertakings or PSUs,
known as the ë
   or 'the nine jewels'.
V In 2009, cos. Revenue was Rs. 4430 mn and it had Total Assets worth of
Rs. 29532 mn.
V Bharat Heavy Electricals Limited ’BHEL is the largest
manufacturer of power plant equipment in India. Selected
portions of the companyǯs accounting policy on inventory
valuation ’Accounting Policy Note 7 taken from the report for the
year ended March 31, 2006 are given.
V Also the items in BHELǯs revenue 2005-2006 are as follows:
Turnover
Other operational income
Other income
Jobs done for internal use
Interest income on investment
Other interest income
Exchange Variation
Provision written back
Accretion/Decretion to work in progress, finished goods and
scrap
1. Does BHELǯs inventory valuation policy conform
to generally accepted accounting principles
applicable to inventories? Explain
2. Explain the significance of the item
ǮAccretion/decretion to work in progress,
finished goodsǯ appearing as a revenue. Do you
agree with the manner of presentation of the
item? The amount for the years 2005-2006 and
2004-2005 were Rs. 3860 million and Rs. 5398
million respectively. How would you interpret
these numbers?
V The 





comprises of all costs of purchase, costs of
conversion, and other costs incurred in
bringing it to the present condition.
V Excludes all abnormal losses, administrative
and selling costs.
V Inventory is t be valued at the cost or Net
Realizable Value ’NRV whichever is less.
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This is in conformation to GAAP as

according to the   áá It follows the
principle of conservatism as per which we
take the value of inventory at lesser of actual
or realizable value.
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As per US GAAP the items in production
cycle are valued at actual/estimated factory cost or
97.5% of the realizable value, whichever is lower. This
conforms the GAAP as 2.5% is deducted from the
NRV ,as a profit margin, to arrive at the lower
permissible limit under GAAP.
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It conforms to GAAP. The cost of inventories
should comprise all costs of purchase, costs of
conversion and other costs incurred in bringing
the inventories to their present location and
condition. Hence, it would include the excise
duty payable on manufactured goods.
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As per GAAP, a company may use

any method for inventory valuation out of-
FIFO, LIFO, Physical Identification or
Weighted Average Method as per the
suitability of the inventory of the co.
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According to GAAP, When it is probable that
total contract costs will exceed total contract revenue,
the expected loss should be recognized as an expense
immediately. The amount of such a loss is determined
irrespective of whether or not work has commenced on
the contract. Hence the given condition is in accordance
with GAAP.
 
  

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According to Disclosure principle of GAAP

an enterprise need to disclose the aggregate amount
of costs incurred and recognized profits ’or
recognized losses up to the reporting date, hence
given condition is in line with GAAP.


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As per -. , Contract revenue should comprise:
’a the initial amount of revenue agreed in the contract;
’b variations in contract work, claims and incentive
payments:
’i to the extent that it is probable that they will
result in revenue
’ii they are capable of being reliably measured.
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According to GAAP the contract cost
may be reduced by incidental income like the
sale of surplus materials at the end of the
contract. Hence the declared surplus is charged
off to revenue.
V By accretion or decretion of work in
progress, finished goods and scrap we mean
change’i.e increase or decrease in the stock.
V SIGNIFICANCE: The inventory change is
often presented as an adjustment to
purchases in the calculation of the cost of
goods sold.
V In the given case it is used as a revenue as
it forms a part of inventory valuation.
Reversal ’or accretion is required for a
subsequent increase in value of inventory ’for
e.g; in case of sales or re-estimation
previously written down.
The change in inventories
M  
 


2005-2006 3860
2004-2005 5398

V 2004-2005 as compared to 2005-2006 more revenue is added

to inventories
V We can interpret that inventory is valued at NRV which is
lower than the Historical Cost; and upward revisions in the value of
closing inventory have taken place.
V In 2005-2006 the sales value has increased over the previous
estimates more than they did in 2005-2006, leading to increase in
the value of previously undervalued inventory.