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ICDS - A complete understanding of a new regime

CA Saurabh Singh 
on 20 June 2016



• The Central Government (CG) recently notified 10 Income Tax Computation & Disclosure Standards (ICDS) effective financial year 2015–16. This will affect the compliance practice of all taxpayers following the mercantile system of accounting for computing income chargeable to income tax under the heads:

- Profits and gains of business or profession or
- Income from other sources


The introduction of ICDS will help bring:

• Increased consistency in computation and reporting of taxable income,

• Reduce litigation and minimize the alternatives provided by the existing Accounting Standards issued by the Institute of Chartered Accountants of India.

• Any Conflict between the provision of Income Tax Act and ICDS the provisions of Act shall prevail


• Expected losses or mark-to-market (MTM) losses will not be recognized unless permitted by any specific ICDS. Provisions silent in relation to MTM gains

• ICDS is applicable to all open construction contract as on 31 March 2015

• Introduction of new formula for capitalization of borrowing costs in case of general purpose borrowings

• Only Forward Contracts and Foreign Currency Options (Forex derivatives) are covered by ICDS

• Recognition of provisions and contingent assets will be considered if outflow/inflow of economic resources is considered reasonably certain

• The service sector will mandatorily have to adopt Percentage of Completion Method (POCM) for revenue recognition

• Concept of “prudence” according to IGAAP1 modified by ICDS

• Inventory of service providers to be valued at lower of cost or NRV

• In case of Non Following of ICDS, best judgment assessment would apply.

ICDS-I (Disclosure of Accounting policies)

• Major Highlights :

- Marked to market loss or an expected loss shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other ICDS standards

- An accounting policies shall not be changed without reasonable cause.

- 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. 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.

- If Fundamental accounting assumptions are not followed then only there is requirement of their specific disclosure, else not.

ICDS-II (Valuation of Inventories)

• Major Highlights:

- Inventories shall be valued at cost, or net realizable value, whichever is lower

- Cost of inventories shall be assigned by using the First-in First-out (FIFO), or weighted average cost formula. The formula used shall reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and conditions.

- In case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at NRV.

- The above is contrary to decision given in case of Shakti Trading Co. Vs CIT, which states that at time of dissolution if business is not discontinued then stock should be valued at lower of NRV or Cost.

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