Insight into Income Computation and Disclosure Standard (ICDS) I and II with reference to IAS 1 and IAS 2:-
The CBDT has come out with notification for assesses following mercantile system of accounting, to compute income chargeable to income tax under the head Profits and Gains of Business or Profession or Income from other Sources.
This notification comes into force with effect from 1st day of April, 2015 and shall accordingly apply to the assessment year 2016-2017 and subsequent assessment years.
This article focuses on:
ICDS I - Relating to accounting policies and IAS 1- Presentation of Financial Statements as well as
ICDS II - Relating to Valuation of Inventories and IAS 2- Inventories
ICDS I is required for computation of income under PGBP or Income from other Sources and not for maintenance of books of accounts.
IAS 1 provides the guidelines for presentation of financial statements, advice on their structure and the least requirement for their content.
1) The first fundamental assumption is that the business is a Going Concern. The business has no intention of liquidation but sees itself continuing business in the force able future.
2) Consistency:- Accounting policies are consistent from one period to another.
3) Accrual:- Revenues and cost are recognised as they are earned or incurred and recorded in the previous year to which it relates.
Assumptions under IASB framework is based on two main assumptions:-1) Accrual Basis and 2) Going Concern.
ICDS I: -
1) Accounting policies adopted by a person must reflect true and fair view of the statement of affairs and income of business, profession or vocation.
a) The treatment and presentation shall be governed by substance and not merely legal form.
b) Marked to market loss or expected loss shall not be recognised until such loss recognition is in accordance with any provision of any other Income Computation and Disclosure Standard.
1) Fair presentation and compliance with IFRS framework:- IAS 1 requires entities to make a clear and detailed statement of compliance with IFRS in their notes if they comply with it.The presentation of statements must be true and fair.
2) Going Concern:- It is expected that the entity will do business and not liquidate the entity. If the entity deviates from this consideration, the same must be disclosed along with the basis followed for preparing the statements.
3) Consistency:- The presentation and classification must be retained until it is required by the Standard or another option is more apt.
4) Accrual:- All financial statements except cash flow must be prepared on accrual basis.
5) Comparative information relating to previous period must be reported along with current period disclosure. Any change in policy shall lead to reclassification.
6) Materiality:- Each material class of similar item must be presented separately in the statement. Items dissimilar by function must be disclosed separately.
7) Offsetting-Until the standard allows no assets, liabilities and income, expenses can be adjusted against each other.
ICDS I:- it also deals with Accounting Policies. Here it talks about the accounting principles and various methods of applying them. It must be remembered in case of conflict between the provisions of Income Tax Act -1961 ("The Act"). and ICDS, the provisions of the Act shall prevail.
ICDS II:- Valuation of Inventories and IAS 2-Inventories
IAS 2 and ICDS II deal with inventory defined as:-
An asset that is
1- held for sale in normal course of business
2- In the process of production of such sale
3- In the form of material or supplies used in rendering services or production process.
The measurement parameter is either cost or net realisable value whichever is lower.
Cost of Inventories:-
1) Cost of purchase= Purchase Price+ Import Duty+ Transportation Cost + Handling Cost - Trade Discounts or Rebates
2) Cost of Conversion: - It is the fixed and variable overhead incurred and directly for converting the raw material into finished goods. Allocation of overhead to cost of conversion is based on normal capacity.
3) Other Costs incurred to design product to customer needs. It can be cost in cured to bring the inventory to their present location and condition.
4) Cost of services: - In case of service providers this cost is considered for inventory.
1) Abnormal amount of wastage material, labour and other production costs.
2) Storage cost irrelevant to production process.
3) Administrative cost not contributing to bringing the inventory to its present location
4) Selling cost.
In regard to ICDS II interest and borrowing cost shall only be considered if they meet the criteria for recognition of interest as cost as disclosed in ICDS for borrowing costs.
The Cost Formulas:-
It can either be FIFO method
Or the Weighted Average method.
ICDS II clearly states where it is impracticable to apply FIFO or Weighted Average, Retail Method is applied for retail industry. The method determines inventory cost by deducting gross margin from sales value.
The concept of net realisable value is found both in ICDS II and IAS 2.The simple concept is the assets should not be considered at an excess of amount likely to be realised from their sale or use.
Two such disclosures required in ICDS II and IAS 2 are:-
• Accounting policies adopted for measuring inventories and the cost formulae used.
• Total carrying amount of inventories and its classification appropriate to the entity (IAS2)/person (ICDS-2).
It must be remembered that IAS deals with standards that provide guidance for presentation of financial statements and accounting treatment and minimum requirements to be met with. ICDS is required for computation of income under PGBP or Income from other Sources and not for maintenance of books of accounts. This article tries to relate the similar points found in the concerned ICDS and IAS.