case 3-bhel

8/3/2019 Case 3-BHEL

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BhARAT HEAVY ELECTRICALS LIMITED.

By: Dheeraj Agarwal, Sanchit Agarwal, Kriti Singhal, SonaliSharma, Pankaj Juneja, Nishant Pruthi


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INFORMATION GIVEN Bharat Heavy Electricals Limited (BHEL) is the largest manufacturer of

power plant equipment in India. Selected portions of the companysaccounting policy on inventory valuation (Accounting Policy Note 7)taken from the report for the year ended March 31, 2006 are given.

Also the items in BHELs revenue 2005-2006 are as follows:Turnover

Other operational incomeOther income

Jobs done for internal useInterest income on investmentOther interest incomeExchange VariationProvision written back

Accretion/Decretion to work in progress, finished goods andscrap


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REQUIRED1. Does BHELs inventory valuation policy conform to

generally accepted accounting principles applicableto inventories? Explain

2. Explain the significance of the itemAccretion/decretion to work in progress, finishedgoods appearing as a revenue. Do you agree with the

manner of presentation of the item? The amount forthe years 2005-2006 and 2004-2005 were Rs. 3860million and Rs. 5398 million respectively. How wouldyou interpret these numbers?


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1. Inventory valuation & GAAPi. Inventory is valued at actual/estimated cost or

net realizable value, whichever is lower.

This conforms to GAAP as according to thecostprinciple all values listed and reported are thecosts to obtain or acquire the asset, and not the fairmarket value. This follows the principle of

conservatism according to which we take that valueof inventory i.e. actual or realizable whichever isminimum.


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ii. Finished goods in plant and work-in-progress involvingHydro and Thermal sets including gas-based powerplants, boilers, boiler auxiliaries, compressors andindustrial turbo sets are valued at actual/estimated

factory cost or at 97.5% of realizable value, whichever islower.

According to US GAAP, Revenue is recognized onpercentage-of-completion method for Construction Contracts.Percentage of completion; or the intrinsic value, reckoned at97.5% of contract value, the remaining 2.5% is recognized asincome when the contract is completed. Hence the items inproduction cycle are valued at actual/estimated factory cost or97.5% of the realizable value, whichever is lower.


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iii. In respect of valuation of finished goods in plantand work in progress, cost means factory cost;actual/estimated factory cost includes excise duty

payable on manufactured goods.

It conforms to GAAP because according toAccounting Standard 2 the cost of inventories comprise

costs of conversion, costs of purchase and other costsincurred in bringing the inventories to their presentlocation and condition. Hence it will include the exciseduty payable on manufactured goods.


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iv. In respect of raw materials, components, loosetools, stores and spares, cost means weightedaverage cost.

According to Accounting Standard 2 thecost of items that are ordinarily interchangeable (like

raw material) is assigned by using the first-in, first-out(FIFO), or weighted average cost formula.


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v. For construction contracts entered into on or after01.04.2003

a) Where current estimates of cost and selling price of a

contract indicates loss, the anticipated loss in respect ofsuch contract is recognized immediately irrespective ofwhether or not work has commenced.

According to Accounting Standard 7 When it is

probable that total contract costs will exceed total contractrevenue, the expected loss should be recognized as an expenseimmediately. The amount of such a loss is determinedirrespective of: whether or not work has started on the contract.Hence the given condition is in accordance with GAAP.


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v. For all other contracts

b. Where current estimates of cost and selling price ofan individually identified project forming part of a

contract indicates loss, the anticipated loss, inrespect of such project on which the work hadcommenced, is recognized.

According to Full Disclosure principle of GAAPan enterprise need to disclose the aggregate amount ofcosts incurred and recognized profits (or recognizedlosses) up to the reporting date, hence given condition is inconformation with GAAP.


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c. In arriving at the anticipated loss, total incomeincluding incentives on exports/ deemedexports is taken into consideration.

According to Accounting Standard 7 incentivepayments are additional amounts payable to the

contractor these form a part of contract revenue andhence help in calculating the anticipated loss.


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vi. The components and other materialspurchased/ manufactured against productionorders but declared surplus are charged off torevenue retaining residual value based ontechnical estimates.

According to GAAP the contract cost maybe reduced by incidental income like the sale ofsurplus materials at the end of the contract. Hencethe declared surplus is charged off to revenue.


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2. ACCRETION/ DECRETIONBy accretion or decretion of work in progress, finished

goods and scrap we mean change(i.e increase ordecrease) in the stock.

IMPORTANCE: The inventory change is oftenpresented as an adjustment to purchases in thecalculation of the cost of goods sold.

In the given example it is used as a revenue as it formsa part of inventory valuation.


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The change in inventories

The above figures tells us that in

In 2004-2005 as compared to 2005-2006 revenue from inventories is more.

We can also say that in 2005-2006 there is more revenue from conversion ofinventories to sales as compared to in 2004-2005.

Hence Accretion/(decretion) to work-in-progress, finished goods and scrapappearing as a revenue signifies the increase or decrease in sales. It implies thatthere is increase in sales if there is decretion as it means there is less stock

available compared to previous year and more stock has been sold in currentear. Similarl there is decrease in sales if there is accretion.

YEAR Accretion/Decretion(Rs.million)

2005-2006 38602004-2005 5398


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We dont agree with the manner of presentation of the

item because Accretion/(decretion) to work-in-progress

doesnt imply that there is increase or decrease in sales.

But Accretion/(decretion) to finished goods implies that

there is increase or decrease in sales. So the item should

appear as Accretion/(decretion) to finished goods.


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case 3-bhel

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