Professional Documents
Culture Documents
Computation
And Disclosure
Standards
(ICDS)
RAKESH AGRAWAL
(M.com, L.L.B, FCA, DISA)
carakeshagrawal@gmail
.com
Contents
1) Background
2) General principles
3) ICDS I: Accounting Policies
4) ICDS II: Valuation of Inventories
5) ICDS III: Construction Contracts
6) ICDS IV: Revenue Recognition
7) ICDS V: Tangible Fixed Assets
8) ICDS VI: The effects of changes in foreign exchange rates
9) ICDS VII: Government Grants
10)ICDS VIII: Securities
11)ICDS IX: Borrowing Costs
12)ICDS X: Provisions, Contingent liabilities and Contingent
assets
Background
Section 145(1) of the Income-tax Act, 1961 (Act) stipulates that the method of
accounting for computation of income under the heads Profits and gains of
business or profession and Income from other sources can either be cash or
mercantile system of accounting.
Section 145(2) of the Act states that the Central Government may notify the
INCOME COMPUTATIONAND DISLOSURE STANDARDS to be followed by any
class of assesses or in respect of any class of income.
Finance Act, 2014 amended section 145(2) of the Act to substitute accounting
standards with income computation and disclosure standards (ICDS).
According to Section 145(3) if the assessing officer is not satisfied a bout the
correctness or completeness of the accounts of the assesse where the
method of accounting provided in sub- section (1) or ICDS as notified under
sub- section (2) have not been regularly followed by the assesse the Assessing
Officer may make an assessment in the manner provided in section 144.
Background
The
General principles
ICDS
Overview
Accounting Policies
GOING CONCERN
Going
CONSISTENCY
Consistency
ACCRUAL
Accrual refers to the assumption that revenue and cost
Observations
The term reasonable cause has not been defined under ICDS.
Hence the same may be subject matter of dispute.
DISCLOSURE OF ACCOUNTING
POLICIES
All
significant accounting policies adopted by a person shall be disclosed.
Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item.
If the Fundamental Accounting Policies are not followed, the fact should be disclosed.
Any change in an accounting policy which has a material effect shall be disclosed. The
amount by which any item is affected by such change shall also be disclosed to the extent
ascertainable. Where such amount is not ascertainable, wholly or in part, the fact shall be
indicated.
If a change has no material effect for the current previous year but which is reasonably
expected to have a material effect in later previous years, the fact of such change shall be
appropriately disclosed in the previous year in which the change is adopted + also in the
previous year in which such change has material effect for the first time.
TRANSITIONAL PROVISIONS
All contract or transaction existing on the 1st day of
April, 2015 or entered into on or after the 1 st day of
April, 2015 shall be dealt within accordance with the
provisions of this standard after taking into account
the income, expense or loss, if any, recognized in
respect of the said contract or transaction for the
previous year ending on or before the 31 st March,
2015.
Consideration in selection OF
ACCOUNTING POLICIES
True and Fair View
Substance Over Form
Materiality
No concept of materiality in ICDS unlike, AS-1.
Prudence
Based
ACCOUNTING STANDARD-1
V/S
INCOME COMPUTATION AND
DISCLOSURE STANDARDS-1
TOPIC
AS
ICDS
Changes in
Accounting Policies
Disclosure of
Change in
Accounting Policy
not having effect in
current Year
TOPIC
AS
ICDS
Consideration in
Selection of
Accounting Policies
Selection
is
governed
by
substance and not merely by the
legal form.
The
major
considerations
governing the selection :a. Prudence
b. Substance over Form
c. Materiality
definitions
INVENTORIES are assets -
COST OF INVENTORIES
COST OF PURCHASE
COST OF SERVICES
COST OF CONVERSION
IMPORTANT POINTS: Joint Products : Where a production process results in more than
one product being produced simultaneously and the costs of
conversion of each product are not separately identifiable, the
costs shall be allocated between the products on a rational
and consistent basis.
Where by-products, scrap or waste material are immaterial, they
shall be measured at net realizable value and this value shall be
deducted from the cost of the main product.
Method of Valuation
Inventories shall be valued at Cost or Net Realizable Value
whichever is lower (similar to Accounting standard -2).
A.L.A. Firm v. CIT [1991] 55 Taxman 497 (SC) / 189 ITR 285
In cases of dissolution of firm, the stock-in-trade will have to be valued at
the prevailing market price while preparing the accounts if the business
of the firm is discontinued.
Sakthi Trading Co. v. CIT [2001] 118 Taxman 301 (SC) / 250 ITR
871
If on dissolution of the firm the business is not discontinued, then, the
ordinary principle of commercial accounting permitting valuation of stockin-trade at Cost or Net Realizable value whichever is lower will apply.
DISCLOSURES:The following aspects shall be disclosed, namely: The accounting policies adopted in measuring the inventories including
the cost formulae used; and
The total carrying amount of inventories and its classification appropriate
to a person.
ACCOUNTING STANDARD-2
V/S
INCOME COMPUTATION AND
DISCLOSURE STANDARDS-2
ICDS
TOPI
C
In case of
Dissolution
Cost of
purchase
In case of dissolution of
partnership, Association of
Persons, Body of
Individuals irrespective of
dissolution of business,
inventory will be valued
at NRV.
Purchase price includes
duties and taxes.
If duties and taxes are
subsequently recoverable
from authorities, then also
they are included in the
cost of the inventory.
AS2
These situations are not
dealt with in AS 2.
DEFINITIONS :-
Construction Contract
Fixed Price Contract
Cost Plus Contract
Retentions
Progress Billings
Advances
CONTRACT REVENUE:-
CONTRACT COST
Contract costs shall comprise of :
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general
and can be allocated to the contract;
(c) such other costs as are specifically chargeable to the
customer under the terms of the
contract; and
(d) allocated borrowing costs in accordance with the Income
Computation and Disclosure Standard on Borrowing Costs.
These costs shall be reduced by any incidental income, not
being in the nature of interest, dividends or capital gains, that
is not included in contract revenue.
reference to:
(a) the proportion that contract costs incurred for work performed
upto the reporting date bear to the estimated total contract costs; or
(b) surveys of work performed; or
(c) completion of a physical proportion of the contract work.
Progress payments and advances received from customers are not
determinative of the stage of completion of a contract.
When the stage of completion is determined by reference to the
contract costs incurred upto the reporting date, only those
contract costs that reflect work performed are included in costs
incurred upto the reporting date. Contract costs which are
excluded are:
(a) contract costs that relate to future activity on the contract;
and
(b) payments made to subcontractors in advance of work
TRANSITIONAL PROVISIONS
All contract revenue and contract costs associated
with the construction contract, which commenced on
or before the 31st day of March, 2015 but not
completed, shall be recognized as revenue and costs
as per this ICDS.
The amount of contract revenue, contract costs or
expected loss, recognized for the said contract for
any previous year commencing before 1st April, 2014
shall be taken into account for recognizing revenue
and costs for the subsequent years.
DISCLOSURES:A person shall disclose: The amount of contract revenue recognized as revenue;
The methods used to determine the stage of completion of contracts
in progress;
Amount of costs incurred and recognized profits up to the reporting
date;
The amount of advances received; and
The amount of retentions.
ACCOUNTING STANDARD-7
V/S
INCOME COMPUTATION AND
DISCLOSURE STANDARDS-3
Construction Contracts
AS - 7
Recognition of Contract Revenue
ICDS III
Contract revenue to be
Contract revenue to be recognized when
recognized if it is possible to
there is reasonable certainty of its ultimate
reliably estimate the outcome of collection.
a contract. (Para 21)
The criteria if it is possible to reliably
measure the outcome of a contract has
been omitted.
Construction Contract
AS-7
ICDS III
Retention Money
Contract revenue shall comprise:
Contract revenue shall comprise:
The initial amount of revenue agreed in the The initial amount of revenue agreed in
contract
the contract, including retentions.
Incidental Income
Any incidental income, not included in the Contract cost shall be reduced by any
contract revenue, shall be deducted while incidental income, not being in the nature
computing construction cost.
of interest, dividends or capital gains, that
is not included in the contract revenue.
Therefore, those interest income, dividend
income and capital gains shall be taxed as
income in accordance with the applicable
provisions of the Act.
RECOGNITION OF EXCHANGE
DIFFERENCES
Non Integral
foreign
operations
The following are indications that a foreign operation is a non-integral foreign
operation rather than an integral foreign operation:
Integral foreign
operations
(a) while the person may control the foreign operation, the activities of the foreign
operation are carried out with a significant degree of autonomy from the activities
of the person;
(b) transactions with the person are not a high proportion of the foreign operation's
activities;
(c) the activities of the foreign operation are financed mainly from its own
operations or local borrowings;
(d) costs of labour, material and other components of the foreign operation's
products or services are primarily paid or settled in the local currency;
(e) the foreign operation's sales are mainly in currencies other than Indian
currency;
(f) cash flows of the person are insulated from the day-to-day activities of the
At closing
rate
At the date
of
transaction
TRANSITIONAL
PROVISIONS:
ICDS
Impact
Converted into
reporting
currency using
the exchange
rate
at
the
date of the
transaction.
No
exchange
difference
would arise as per ICDS.
Hence, the FE gain/loss as
per the books of accounts
will have to be reduced/
added back respectively
while computing the taxable
income.
Exchange
Rate
Cost
55 as on date
of acquisition
NRV
$50
60 closing rate
i.e. at B/S date
Valuation at lower of cost or NRV ($100 or $50)
i.e. $50
As per AS 11
As per ICDS
Amount in
Forex
$100
Value
Rs.5,500
Rs.3,000
Rs.3,000
(50*60)
Rs.2,750
Applicability of AS 22
This will result into creation of Deferred Tax Liability (DTL) as per AS
22 Accounting for Taxes on Income
DTL will be created on difference of valuation of Inventory as per
Taxation and as per Books of accounts
= Rs. 3000 Rs. 2750 = Rs. 250 * Applicable Tax Rate
When stock will be sold, in that year it will result into reversal of DTL.
Thank You
This Income Computation and Disclosure Standard does not deal with the
aspects of revenue recognition which are dealt with by other Income
Computation and Disclosure Standards.
REVENUE RECOGNITION
Revenue shall be recognized when the seller of goods has transferred to the buyer
the property in the goods for a price or all significant risks and rewards of
ownership have been transferred to the buyer and the seller retains
no effective control of the goods transferred to a degree usually
associated with ownership.
Revenue shall be recognized when there is reasonable certainty of its ultimate
collection.
Where the ability to assess the ultimate collection with reasonable certainty is
lacking at the time of raising any claim for escalation of price and export incentives,
revenue recognition for such claim shall be postponed to the extent uncertainity
involved.
Rendering of services
Revenue from service transactions shall be recognized by the percentage completion
method.
Under this method, revenue from service transactions is matched
with the service transactions costs incurred in reaching the stage of
completion, resulting in the determination of revenue, expenses
and profit which can be attributed to the proportion of work
completed.
Dividen
ds
Disclosures:(a) In case of sale of goods:Total amount not recognized as revenue due to the lack of reasonable
certainty of its ultimate collection along with nature of uncertainty.
ACCOUNTING STANDARD-9
V/S
INCOME COMPUTATION AND
DISCLOSURE STANDARDS-4
AS - 9
ICDS
It does not apply to ICDS is silent on same.
companies
engaged
in
insurance business.
Revenue
from
service ICDS provides only for
transactions are recognised
percentage
completion
as percentage completion
method for recognition of
method
or
by
the
service transactions.
completed service contract
method.
Dividends are recognized in Dividend is recognized when
accordance
with
the
the owners right to receive
provisions of the Act.
payment
is
established.
Dividend is recognized only
when it is declared by the
Identification of tangible fixed assets: Tangible fixed asset is an asset being land, building, machinery, plant or
furniture held with the intention of being used for the purpose of
producing or providing goods or services and is not held for sale in the
normal course of business.
Stand-by equipment and servicing equipment are to be capitalized.
Machinery spares shall be charged to the revenue as and when
consumed. When such spares can be used only in connection with an
item of tangible fixed asset and their use is expected to be irregular, they
shall be capitalized.
The cost of the tangible fixed asset may undergo changes subsequent to its
acquisition or construction on account of
(i) Price adjustment, changes in duties or similar factors; or
(ii) Exchange fluctuation.
Administration and other general overhead expenses are to be excluded from the
cost of tangible fixed assets if they do not relate to a specific tangible fixed asset.
Expenses which are specifically attributable to construction of a project or to the
acquisition of a tangible fixed asset or bringing it to its working condition, shall
be included as a part of the cost of the project or as a part of the cost of the
tangible fixed asset.
The expenditure incurred on start-up and commissioning of the project, including
the expenditure incurred on test runs and experimental production, shall be
capitalized.
The expenditure incurred after the plant has begun commercial production, i.e.,
production intended for sale or captive consumption, shall be treated as revenue
expenditure.
Self constructed tangible fixed assets: Cost of construction that relate directly to the specific tangible fixed asset
and costs that are attributable to the construction activity in general and
can be allocated to the specific tangible fixed asset shall be included in
actual cost.
Any internal profits shall be eliminated in arriving at such costs.
An Expenditure that increases the future benefits from the existing asset
beyond its previously assessed standard of performance is added to the
actual cost.
Valuation of tangible fixed assets in special cases: Where a person owns tangible fixed assets jointly with others, the
proportion in the actual cost, accumulated depreciation and written down
value is grouped together with similar fully owned tangible fixed assets.
Details of such jointly owned tangible fixed assets shall be indicated
separately in the tangible fixed assets register.
Where several assets are purchased for a consolidated price, the
consideration shall be apportioned to the various assets on a fair basis.
ACCOUNTING STANDARD-10
V/S
INCOME COMPUTATION AND
DISCLOSURE STANDARDS-5
ICDS
AS- 10
ICDS
ICDS
Para 15.3 says that when several When several assets are
assets
are
purchased
for
purchased for a consolidated
consolidated
price,
the
price, the consideration shall
consideration is apportioned on fair
be apportioned to the various
assets on a fair basis.
basis as determined by competent
valuers.
Impact: In absence of determination by registered valuers in ICDS words
fair basis becomes subjective and might be prone to litigation.