Differences between Income Computation and Disclosure Standard and Accounting Standard

ICDS corresponding to accounting Standards

ICDS  No.	ICDS	Corresponding to AS	Applicability on JAL
I	Accounting Policies	AS-I	YES
II	Valuation of Inventories	AS-2	YES
III	Construction Contracts	AS-7	NO
IV	Revenue Recognition	AS-9	YES
V	Tangible Fixed Assets	AS-10 & AS-6	YES
VI	The Effects of Changes in Foreign Exchange Rates	AS -11	YES
VII	Government Grants	AS-12	NO
VIII	Securities	AS-13	NO
IX	Borrowing Cost	AS-16	YES
X	Provision, Contingent Liabilities and Contingent Assets	AS-29	YES

Introduction

1. ICDS applies to all taxpayers following accrual system of accounting for the purpose of computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts. Accordingly, ICDS should not impact maintenance of books of accounts or preparation of financial statements. The financial statements would continue to be prepared based on Accounting Standards (AS).

2. ICDS has come into effect from 1 April 2015 and accordingly, applies from assessment year 2016-17 onwards, therefore the implications under ICDS is required to be considered for the first advance tax installment as ICDS is applicable for assessment year 2016-17

3. In the case of conflict between the provisions of the Incomeâ€ï¿½tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.

4. The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by a person.

5. All significant accounting policies adopted by a person shall be disclosed.

6. An accounting policy shall not be changed without reasonable cause, however “reasonable cause” not defined in the ICDS and the Act.

7. If changes would not have a significant impact since bonafide change may constitute “reasonable cause”.

8. Any change in an accounting policy which has a material effect shall be disclosed and 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.

9. If a change is made in the accounting policies which 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 and *also in the previous year in which such change has material effect for the first time. *(Additional Requirement from AS).

10. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item.

11. If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed.

12. All contract or transaction existing on the 1st day of April, 2015 or entered into on or after the 1st day of April, 2015 shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognised in respect of the said contract or transaction for the previous year ending on or before the 31st March, 2015.

13. All the ICDS, except ICDS on securities, have incorporate transitional provisions according to which the provisions of ICDS may apply retrospectively in certain case and prospectively in some other case.

14. Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose,

- the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form; and

- Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard.

ICDS-I (Accounting Policies)

Differences

a. As per ICDS-I, Prudence and materiality consideration not used in the selection and treatment of accounting policies, However as per AS- 1 these are the primary consideration in the selection of accounting policies by an enterprise for preparation and presentation of the financial statements.

b. In the absence of prudence, there could be several situations which could result in earlier recognition of income or gain or later recognition of expenses as compared to that AS. 

c. ICDS eliminates concept of prudence; hence no unrealised losses to be provided unless specifically permitted.

d. If a change is made in the accounting policies which has no material effect for the current previous year but which is reasonably expected to have a material effect in later previous years in that case “fact” of such change shall be appropriately disclosed previous year in which the change is adopted as well as in the previous year in which such change has material effect for the first time, However as per AS- 1.

e. The treatment of mark- to- market unrealized gains not given in the ICDS.

f. ICDS does not consider prior period items in determination of net profit or loss of the period in which the error or omission pertaining to a prior period is discovered.

g. “Reasonable cause” not defined in ICDS.

ICDS-II (Valuation of Inventories)

Difference:

a. The costs of purchase consist of the purchase price including duties and taxes, However as per AS-2, the costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities).

b. As per Section 145A of the income tax act, 1961, Assessee should be followed the Inclusive method for valuation of inventories. If valuation of inventories followed by assessee not coincide with the provision of the Act, in that case effect thereof should be given in the computation of income.

c. ICDS not permit “Standard costs” method for the purpose of inventories valuation.

d. General approach of adjusting sale value by appropriate “percentage gross margin” is permitted. No specific mentioning of use of average percentage for each retail department.

e. Allocation of fixed production overheads is based on normal capacity of production facilities. The actual level of production should be used, if it approximates normal capacity, However as per AS-2, the actual level of production may be used, if it approximates normal capacity.

f. Conversion of capital assets into stock –in –trade with intent to commence business may remain unaffected due to overriding provisions of section 45(2) of the Act.

g. AS -2 does not include work in progress arising in the ordinary course of business of service provider, however valuation of service inventory (other than deal with other ICDS) to be lower of cost (i.e. labour and other cost of personnel directly engaged in providing service including supervisory personnel and attributable overhead) or net realizable value.

h. Difficulty would arise in case of services whose chargeability depends on the success of the service. 

ICDS-IV (Revenue Recognition)

Difference:

a. ICDS-IV requires additional disclosure of total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty.

b. In case of service transactions, revenue is to be recognized by only on the basis of “percentage of completion” method. Under, However as per AS, measurement of revenue of Service should be either under the “completed service contract” method or under the “proportionate completion” method.

c. No specific criteria for recognition of Dividend Income have given in ICDS-IV, therefore provision of Income tax Act Prevail over ICDS.

d. As per Act (U/s 8 read with section 10 (34), 56 (2), 115BBD and ), following recognition of dividend income are as given below:

e. Any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be,

f. Any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

Note:

1. Dividend Income Received or receivable from Domestic Company is exempt U/s 10 (34) of the Income tax Act, 1961.

2. Dividend Income Received or receivable from Foreign Company is taxable in the hand of the Indian company subject u/s 115 BBD (i.e. Dividend Income taxable @15%).

ICDS-V (Tangible Fixed Assets)

Differences

Actual cost include exchange fluctuation as specified in the this ICDS is similar with AS-10,  however as per income tax allow only Exchange difference arise at the time of making payment of moneys borrowed for acquisition of asset which is acquired from outside India.

According to this ICDS, Actual cost include

“The cost of a 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 as specified in Income Computation and Disclosure Standard on the effects of changes in foreign exchange rates.”

Treatment of Exchange fluctuation as per section 43A

“Exchange difference arise in any previous year after the acquisition of asset acquired from a country outside India, at the time of making payment towards repayment of the whole or a part of the moneys borrowed in any foreign currency specifically for the purpose of acquiring the asset along with interest (if any) shall be added to or deducted from the actual cost of the asset as defined in clause (1) of section 43 and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the cost of acquisition of the capital asset as aforesaid”

Therefore Exchange difference arises on repayment of foreign currency loan taken for the acquisition of fixed assets acquired from outside India on, shall be added or reduce from actual cost of  assets without any limitation, rest  exchange difference not added or deducted from the Actual cost of Fixed assets.

When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost However in AS-10 provide following alternative basis for calculation of non -monetary  consideration are as given below:

a. Fair market value of the consideration given, or

b. Fair market value of the asset acquired, if this is more clearly evident, or

c. If assets are similar, is to record the asset acquired at the net book value of the asset given up; in each case an adjustment is made for any balancing receipt or payment of cash or other consideration.

When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost, in AS-10 provide following alternative basis for calculation of non -monetary  consideration are as given below:

a. Fair market value of assets , or

b. Fair market value of the securities issued, whichever is more clearly evident.

Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act.

Depreciation on a tangible fixed asset shall be computed in accordance with the provisions of the Act.

It has similar definition of AS-10 but word used is “Actual Cost” as compared to “Cost” in AS-10, The Act also provide definition of Actual Cost, However when there in conflict  in interpreting the abovementioned term under ICDS and Act, the Act will prevail over ICDS.

When several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis however as per AS-10 fair basis determined by competent valuers, in absence of determined by registered valuer in ICDS word “Fair basis” become subjective and might be prone to litigation.

Following disclosure shall be made in respect of tangible fixed assets, namely:—

description of asset or block of assets;

a. rate of depreciation;
b. actual cost or written down value, as the case may be;
c. additions or deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of—

Central Value Added Tax credit claimed and allowed under the CENVAT Credit Rules, 2004;

i. change in rate of exchange of currency;
ii. subsidy or grant or reimbursement, by whatever name called;

iii. depreciation Allowable; and

Written down value at the end of year.

ICDS-VI (Effects of changes in foreign exchange rates)

Differences

a. There is no scope exception for exchange differences arising from foreign currency borrowings which may be regarded as an adjustment to interest costs. However AS-16 provide an exception for exchange differences arising from foreign currency borrowings to the extent considered as an adjustment to interest costs.

b. Recognition of exchange difference shall be subject to provisions of section 43A of the Income tax Act, 1962 Act or Rule 115 of the Income Tax Rules, 1962 as the case may be.

c. Exchange differences arising from Non-monetary foreign currency items shall not be recognised as income or expense in that year, hence the foreign exchange gain/loss as per books of account will have to be reduced / added back respectively while computing the taxable income.

d. There is no exception to the above that

e. Limited period irrevocable option for capitalisation of exchange differences on long-term foreign currency monetary items incurred for acquisition of depreciable capital assets and to amortise exchange differences on other long-term foreign currency monetary items over the life of such items but not beyond the stipulated date.

f. Exchange differences on monetary items that in substance, form part of net investment in a foreign operation, are accumulated in a foreign currency translation reserve in the enterprise’s financial statements until the disposal of the net investment, at which time they should be recognised as income or as expenses.

g. Deferred tax Liabilities (DTL) will be created on difference of valuation of inventory (i.e. Non –Monetary items), when stock will be sold in that year it will result into reversal of DTL.

ICDS-VIII (Securities)

Differences

This ICDS deals only with securities held as stock-in-trade, not deal with Investment.

ICDS-IX (Borrowing Cost)

Differences

a. As per AS-16 land is not a qualifying asset. However ICDS on “borrowing cost” includes land in definition of qualifying assets. The borrowings cost pertains to the land, which is not put to use will be capitalized for tax purpose. However the capitalized cost shall form part of cost of asset while calculating income from capital gain in respect of that land.

b. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest cost are not covered under this ICDS.

c. all assets other than inventories regardless of the time, will be considered for capitalisation of borrowing costs However  as per AS-16 Qualifying asset is one which takes substantial period (i.e. a period of twelve months or more) of time to get ready for its intended use or sale.

d. The income from temporary investments of those borrowings is not reduced from the amount of borrowing costs incurred, However as per AS-16, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.

e. To the extent the funds are borrowed generally and utilized for the purposes of acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalized shall be computed in accordance with the following formula:

f. Borrowing cost except on borrowings directly relatable to specific purposes Multiply with Average cost of qualifying assets other than those qualifying assets which are directly funded out of specific borrowings divided by average of total assets other than assets that are directly funded out of specific borrowings.

g. Commencement of capitalization of ICDS is different from AS-16: capitalization period start early under ICDS as compare to AS.

Nature of Borrowings	Capitalisation of borrowing costs shall commence
	ICDS-IX	AS-16
specific borrowings	from the date on which funds were borrowed	all the following conditions are satisfied
		(a) expenditure for the acquisition, construction or production of a qualifying asset is being incurred;
general borrowings	from the date on which funds were utilized	(b) borrowing costs are being incurred; and
		(c ) activities that are necessary to prepare the asset for its intended use or sale are in progress

Cessation of capitalization:

ICDS-IX	AS-16
Qualifying assets, when such asset is first put to use	qualifying asset for its intended use/ready to use

Suspension of capitalization not given in ICDS, However as per AS 16 capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted.

ICDS-X (Provisions, Contingent Liabilities and Contingent Assets)

Differences

a. the term “virtually certain” under AS is replaced with “reasonably certain”

b. The term ‘reasonably certain’ has not been defined in the ICDSs, the Act or the Rules.

c. The amount recognized as asset and related income shall be the best estimate of the value of economic benefit arising at the end of the year. The amount and related income shall not be discounted to its present value. An asset and related income recognized shall be reviewed at the end of each year and adjusted to reflect the current best estimate.

d. No specific provision for “recognition of provisions” is given in the act, However Provisions are allowed based on accrued liabilities as per ordinary principal of accounting. 

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