INCOME COMPUTATION AND

DISCLOSURE STANDARDS
KEY IMPACT AREAS

Contents
I.

Borrowing Cost ICDS IX.............................................................. 1

II. Accounting Policies ICDS I .......................................................... 1

III.

Construction Contracts ICDS III ............................................... 1

IV.

Government Grants ICDS VII ................................................... 2

V. Effects Of Changes In Foreign Exchange Rates ICDS VI ............... 2

V.i. Foreign Currency Transactions ................................................ 2
V.ii. Financial Statements Of Foreign Operations ............................. 2
V.iii. Forward Exchange Contracts ................................................... 3
VI.

Provisions, Contingent Liabilities And Assets ICDS X ................ 3

VI.i. Provisions ................................................................................ 3

VI.ii. Contingent Liabilities And Contingent Assets............................ 4
VII. Valuation Of Inventories ............................................................. 4
VIII. Securities ICDS VIII ................................................................. 4
IX.

Revenue Recognition ICDS IV ................................................... 5

X. Tangible Fixed Assets ICDS V ..................................................... 5

INCOME COMPUTATION AND DISCLOSURE STANDARDS

KEY IMPACT AREAS

I.

BORROWING COST ICDS IX

1. ICDS does not provide for a minimum period for classification of capital assets
as qualifying assets. Hence, any borrowing cost related to capital assets would
have to be capitalized. However, with regard to inventories, ICDS provides that
inventories which require a period of twelve months or more to bring them to a
saleable condition would be a qualifying asset.
2. Exchange differences arising from foreign currency borrowings to the extent
regarded as interest cost are not considered as borrowing cost under ICDS.
3. ICDS has also prescribed a new formula for capitalization of borrowing cost on
general borrowings. The formula is similar to the prorate allocation of borrowing
cost under Rule 8D(2)(ii) of Income Tax Rules, 1962. It involves allocating the
total general borrowing cost incurred in the ratio of average cost of qualifying
assets on the first day and last day of the previous year and the average cost of
the total assets on the first and last day of the previous year.
4. Regarding borrowing cost relating to specific borrowings, the borrowing cost
would be capitalized to the assets directly funded.
5. During the time when active development is interrupted, then also the
borrowing cost would be capitalized.

II.

ACCOUNTING POLICIES ICDS I

1. ICDS does not recognize the concept of produce. This appears to be in line with
the settled principle that the provisions would be an allowable expenditure
under the Income Tax Act, 1961.
2. Moreover, even the concept of materiality has been excluded in ICDS.
3. ICDS does not permit changes in accounting policies without reasonable cause.
The term reasonable cause has not been defined under ICDS.

III.

CONSTRUCTION CONTRACTS ICDS III

1. ICDS does not permit accounting under the completed contract method. Only
the percentage of completion method can be applied.

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2. Until completion of 25% of the construction, the margin on cost may not be
recognized. In other words, income need not be recognized until completion of
25% of the construction.
3. The ICDS does not permit the provision for expected losses on onerous
contracts.

IV.

GOVERNMENT GRANTS ICDS VII

1. In case grants are in relation to capital asset, then the ICDS provides that:
a. In the case of depreciable asset, the grant shall be adjusted against the
cost of the asset;
b. In the case of non-depreciable asset, the grant shall be recognised as
income over the same period over which the cost of meeting such
obligations is charged to income.
c. In case government grant is not directly relatable to the asset acquired,
then the same will be adjusted against the cost of the assets for which
the grants have been received on pro rata basis
2. In case the grant is for expenses or losses incurred in a previous financial year
or for the purpose of giving immediate financial support to the person with no
further related costs, shall be recognized as income of the period in which it is
receivable.
3. The grants given in the form of non-monetary assets will be recorded at the
acquisition cost.

V.

EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES ICDS VI

V.i.

Foreign Currency Transactions

1. In the case of monetary items exchange difference:

a. Arising on the settlement thereof; or
b. Conversion thereon on the last day of the previous year
shall be recognized as income or expense in that previous year.
2. In respect of non-monetary items, exchange difference on conversion on the last
day of the previous year shall not be recognized as income or expense.

V.ii.

Financial Statements of Foreign Operations

1. In the case of integral foreign operations, rules would be the same as that
discussed in V.i above.

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2. In the case of non-integral foreign operations, foreign exchange differences

relating to:
a. Assets and liabilities shall be translated at the closing rate;
b. Incomes and expenses shall be translated at exchange rates at the dates
of transactions;
c. All resulting exchange differences shall be recognized as income or
expense in that previous year.

V.iii.

Forward Exchange Contracts

1. Where a forward exchange contract is entered into to establish the amount of

reporting currency required or available at the settlement date of the
transaction and the same is not intended for trading or speculation purposes;
then:
a. Any premium or discount arising at the inception of a forward exchange
contract shall be amortized as expense or income over the life of the
contract.
b. Exchange differences on such a contract shall be recognized as income
or as expense in the previous year in which the exchange rates change.
c. Any profit or loss arising on cancellation or renewal shall be recognized
as income or as expense for the previous year.
2. In cases where the forward contract is for future commitments or probable
outflows then the provisions mentioned above would not be applicable.

VI.

PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

ICDS X
VI.i.

Provisions

1. A provision shall be recognized if any only if:

a. A person has a present obligation as a result of a past event;
b. It is reasonably certain that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
c. A reliable estimate can be made of the amount of the obligation.
2. It is only those obligations arising from past events existing independently of a
persons future actions, that is the future conduct of its business, that are
recognized as provisions.
3. Where some or all of the expenditure required to settle a provision is expected
to be reimbursed by another party, the reimbursement shall be recognized
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when it is reasonably certain that reimbursement will be received if the person

settles the obligation. The amount recognized for the reimbursement shall not
exceed the amount of the provision.

VI.ii.

Contingent Liabilities and Contingent Assets

1. Contingent liability should not be recognized.

2. Contingent assets have to be assessed continually and when it becomes
reasonably certain that inflow of economic benefit will arise, the asset and
related income are recognized in the previous year in which the change occurs.

VII.

VALUATION OF INVENTORIES

1. ICDS provides that the following costs shall not be included in the valuation of
inventories:
a. Abnormal amounts of wasted materials, labour, or other production
costs;
b. Storage costs, unless those costs are necessary in the production process
prior to a further production stage;
c. Administrative overheads that do not contribute to bringing the
inventories to their present location and condition;
d. Selling costs.
2. Only FIFO and weighted average cost method are allowed under ICDS.
3. Where it is impracticable to use the costing methods referred to above, the retail
method can be used in the retail trade for measuring inventories of large
number of rapidly changing items that have similar margins. The cost of the
inventory is determined by reducing from the sales value of the inventory, the
appropriate percentage gross margin. The percentage used takes into
consideration inventory, which has been marked down to below its original
selling price.
4. The method of valuation of inventories once adopted by a person in any
previous year shall not be changed without reasonable cause.

VIII. SECURITIES ICDS VIII

1. This Income Computation and Disclosure Standard deals with securities held
as stock-intrade.
2. A security on acquisition shall be recognized at actual cost.
3. The actual cost of a security shall comprise of its purchase price and include
acquisition charges such as brokerage, fees, tax, duty or cess.
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4. Where a security is acquired in exchange for other securities, the fair value of
the security so acquired shall be its actual cost.
5. Where a security is acquired in exchange for another asset, the fair value of the
security so acquired shall be its actual cost.
6. Where unpaid interest has accrued before the acquisition of an interestbearing
security and is included in the price paid for the security, the subsequent
receipt of interest is allocated between preacquisition and postacquisition
periods; the preacquisition portion of the interest is deducted from the actual
cost.
7. At the end of the previous year, the securities held as stock-in-trade shall be
valued at actual cost or NRV whichever is lower. For this purpose, the NRV
would be ascertained category-wise and individually. The categories would be:
a. Shares;
b. Debt securities;
c. Convertible securities;
d. Any other securities not covered above.

IX.

REVENUE RECOGNITION ICDS IV

1. Revenue shall be recognized when there is reasonable certainty of its ultimate

collection. The language of the clause in ICDS is different from the AS which
says that revenue shall be recognized at the time of sale or rendering of service
if it would not be unreasonable to expect ultimate collection.
2. Other provisions are substantively the same as contained in AS.

X.

TANGIBLE FIXED ASSETS ICDS V

1. ICDS, prescribes that when a tangible fixed asset is acquired in exchange for
another asset, or in exchange for shares or other securities, the fair value of the
tangible fixed asset so acquired shall be its actual cost.
2. ICDS, does not incorporates in itself the provisions relating to revaluation of
fixed assets, hence revaluation would not be recognized while computing
income.

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