File Content -
“जय ी गणेशाय: नम By- RAJESH SAHU
COMPLIED BY- RAJESH SAHU, CA FINAL, INDORE (M.P.) Page 1
All about Income Computation and Disclosure
Standards
(ICDS)
1. Introduction
The Central Government recently notified 10 (number of ICDS) Income
Tax Computation & Disclosure Standards (ICDS) effective financial year 2015–16 (P.Y.-
01.4.2015 / A.Y. - 2016-2017). {Wide Notification No. 32/2015, F.No.-134/48/2010-
TPL, Dated- 31st March, 2015 }
This will affect the compliance practice of all taxpayers following the mercantile
system of accounting for computing income chargeabl e to income tax under the heads:
Profits and gains of business or profession
Or
Income from other sources
2. Objective of ICDS
ICDS were developed with a view to minimizing tax related disputes by bringing
greater consistency in the application of accountin g principles governing the
computation of income. These standards were develop ed using the old Indian
General Audit and Accounting Practices (GAAP).
3. Main Features of ICDS
In case of conflict between the provisions of the I ncome-Tax Act, 1961 and ICDS,
then the provisions of the Income-Tax Act would pre vail.
No need to maintain separate books of accounts for ICDS. It only for income
computation.
4. Applicability
Applicable to all Assesses following Mercantile Sys tem of Accounting and chargeable
to tax under the head “Profit and Gains of Business or Profession” (PGBP)
OR “Income f rom Other Source” (IFOS)
It is applicable to all assesses
Irrespective of applicability of Tax Audit
Irrespective of Turnover
Impcat of ICDS on head of
Income
Profits and gains of business or profession (PGBP)
OR
Income from other sources (IFOS)
“जय ी गणेशाय: नम By- RAJESH SAHU
COMPLIED BY- RAJESH SAHU, CA FINAL, INDORE (M.P.) Page 2
Irrespective of Status of Individual (AOP, Firm, Re sident, Non Resident etc.)
5. Non Compliance of ICDS
Every assessee is required to implement ICDS and potential impact will be
considered by companies while estimating advance ta x liability for FY 15-16, due
on 15 June 2015. Noncompliance of ICDS will result in best judgment assessment by
tax authorities, which may lead to protracted litig ations.
6. List of ICDS
Sr. No. No. Income Computation and Disclosure
Standards
Corresponding
Accounting
Standards
1 ICDS- I Accounting Policies AS-1
2 ICDS -II Valuation of Inventories AS-2
3 ICDS -III Construction Contracts AS-7
4 ICDS -IV Revenue Recognition AS-9
5 ICDS -V Tangible Fixed Assets AS-10
6 ICDS -VI The Effect of Changes in Foreign Exchange
Rates AS-11
7 ICDS -VII Government Grants AS-12
8 ICDS -VIII Securities AS-13
9 ICDS -IX Borrowing Cost AS-16
10 ICDS -X Provisions, Contingent Liabilities and
Contingent Assets AS-29
7. Impacted areas
I. ICDS – I (Accounting Policy)
No Concept of Materiality in ICDS unlike, AS-1. In absence of materiality
concept, considerable time and cost will be involve d making adjustments in
net profit to arrive at PGBP income.
ICDS provides that expected losses or mark to marke t losses shall not be
recognized. However, ICDS is silent on Mark-to Market (MTM) gains.
Year
Loss
Anticipated
Income
Computation
Remarks Income tax Books of
Accounts
1 Expected
loss = (5000)
Anticipated
income = 1000 1000 (5000)
Foreseeable loss is not
allowed as per ICDS in year
1. But tax is required to be
paid on anticipated profit.
2 Actual loss =
(5000)
Actual income
=1000 (5000) 1000
As per ICDS, the actual loss
will now be allowed in year 2
and actual gain will be
regarded as income.
However provision of MAT is
“जय ी गणेशाय: नम By- RAJESH SAHU
COMPLIED BY- RAJESH SAHU, CA FINAL, INDORE (M.P.) Page 3
also applicable.
II. ICDS – II (Valuation of Inventories)
Valuation in case of Business Concern
Value of Opening Inventory should be same as proceeding’s year closing
inventory. In case of new business cost of inventory will be considered.
Cases of conversion of Capital asset into Stock in trade will remain
unaffected because of overriding provision of sec 45(2).
If the case is of Slum Sale then price paid will b e the cost of Opening
Inventory.
Valuation in case of Service provider
Value of Service Inventory to be lower of Cost OR NRV.
Cost to Include Labour and other Cost of personnel directly engaged in
providing services
Impact:-
Difficulty would arise in case of services whose chargeability depends upon the
success of service.
Valuation of inventory in case of AOP/BOI/Firm/Diss olution
In case of dissolution of AOP/BOI/Firm, notwithsta nding whether
the business is discontinued or not , the inventory on date of dissolution
shall be valued at NRV
Impact:-
This is contrary to Law Settled by Court in case of Shakti Trading Co vs. CIT in
which it was held that at time of dissolution if bu siness is not discontinued then
stock should be valued at lower of NRV or Cost.
III. ICDS – III (Construction Contacts)
Recognition of Contract Revenue
Contract revenue to be recognised when there is rea sonable certainty of its ultimate
collection. The criteria “If it is possible to reliably measure the outcome of
contract” have been omitted.
Retention Money
Contract revenue shall comprise of initial amount o f revenue including Retentions.
Incidental Income
Contract cost shall be by any incidental income, no t being in nature of interest, dividends,
capital gains etc. However these incomes like interest, dividend, and capital gain shall be
taxed as income.
Recognition of Foreseeable losses
ICDS does not allow recognition of foreseeable/Expe cted losses on a contract.
Situation when outcome of contract cannot be reliab ly estimated
“जय ी गणेशाय: नम By- RAJESH SAHU
COMPLIED BY- RAJESH SAHU, CA FINAL, INDORE (M.P.) Page 4
ICDS provides that early stage of contract shall not exceed 25% of stage of Completion.
In other words, up to 25% of stage of completion if the outcome cannot be reliably
measured, contract revenue is recognised only to extent of its cost.
Recognition of Claims/Incentive payments
If Incentive payments & Claims are reliably measura ble and it is probable that it will result
in revenue then ICDS states that we need to recogni se them.
IV. ICDS – IV (Revenue Recognition)
As per AS-9 revenue from service transaction are re cognised as percentage
completion method or by completed service contract method but ICDS provides only
for percentage completion method for recognition of service transactions. No
recognition is done as per Completed service contra ct method.
For a transaction undertaken on or before 31st March 2015 but not competed shall be
recognised as per ICDS.
V. ICDS – V (Tangible Fixed Assets)
Asset acquired against non-monetary consideration
o When a tangible asset is acquired for other asset, the FMV of tangible
asset acquired shall be actual cost.
o When a tangible asset is acquired for shares or ot her securities, the FMV of
tangible asset acquired shall be actual cost.
ICDS applies only to fixed assets, doesn’t cover goodwill.
ICDS use the word Actual Cost as comparative to word Cost defined in AS-10. Such a
narrow definition in ICDS might encourage the taxpa yer to contend that expenditure on
acquisition which is not part of actual cost should be deductible as revenue instead of
capitalising.
As per AS-10 if several assets are purchased for co nsolidated price, consideration is
apportioned on fair basis as determined by competent valuers. But in ICDS there is no
concept of competent valuers. The consideration sha ll be apportioned to various assets
on fair basis .
Right now there is no statutory requirement of main taining fixed asset register for non-
corporate entities subjected to that they will not cover under tax audit. But ICDS specifies
the parameter to consider while maintaining the fix ed asset register i.e. description of
assets, location, actual cost subject to some adjustment, date of asset first put to use.
VI. ICDS – VI (The Effect of Change in Foreign Exchange Rate)
Exchange difference arising on settlement thereof o r on conversion of monetary
items at the last day of previous year shall be recognis ed as income or expense in that
previous year by converting into reporting currency using closing rate .
Non-monetary items in foreign currency shall be converted into report ing currency by
using exchange rate at the date of transaction and exchange difference shall not be
recognise as income or expense .
“जय ी गणेशाय: नम By- RAJESH SAHU
COMPLIED BY- RAJESH SAHU, CA FINAL, INDORE (M.P.) Page 5
Premium or Discount arising in foreign exchange contract shall be amor tised over life
of contract and exchange difference shall be recogn ised as income or expense in that
period.
VII. ICDS – VII (Government Grants)
AS-12 said that when the government grant relates to a d epreciable fixed asset or assets
of a person, the grant shall be deducted from the actual cost of asset or from the
Written down value of block of asset to which concerned asset is belon ged.
Where ICDS emphasize on deduction of grant from the original cost, IND AS-20
prescribe for setting of grant as deferred income a nd transfer to statement of profit and
loss on systematic basis.
Further AS-12 provides for postponement of governme nt grant beyond the date of actual
receipt where condition attached are not fulfilled but as per ICDS no postponement is
possible.
Impact:-ICDS requires recognition of any subsidy as income which is conflicting with
the act. To circumvent the same it is proposed to a mend the definition of income under
section 2(24) by inserting a new sub clause (xviii) to provide that assistance in form of
subsidy or grant or cash incentive or drawback or reimbursement by Government in cash
or kind shall be the income of assesse (other than one consider under explanation
10 of section 43(1))
VIII. ICDS – VIII (Securities)
ICDS states that securities held as stock in trade shall be valued at actual cost or NRV
whichever is lower (Cost shall be determined on the basis of FIFO method).
AS-13 and ICDS both requires the adjustment of pre- acquisition interest from cost
ICDS states that when a security is acquired in exc hange of other security then, FMV of
security so acquired will be the actual cost.
ICDS states that valuation will be done on category basis no individual basis will be
followed. Valuation of unlisted shares or listed bu t not quoted on recognised stock
exchange shall be done at actual cost.
Shares
Cost
NRV
AS-13 (Cost or NRV
whichever is lower)
ICDS
XYZ 50 60 50 –
ABC 100 50 50 –
DEF 200 300 200 –
TOTAL 350 410 300 350
IX. ICDS – IX (Borrowing Cost)
“जय ी गणेशाय: नम By- RAJESH SAHU
COMPLIED BY- RAJESH SAHU, CA FINAL, INDORE (M.P.) Page 6
The Income tax act provides for deduction of intere st except in respect of capital
borrowed for acquisition of asset for extension of existing business or profession. ICDS
provides for capitalisation of borrowing cost without any exception.
AS-16 requires income from temporary deployment of unutilised funds to be reduced
from borrowing cost but ICDS does not provide the same. Income from temporary
Investment will be considered under the head Income from Other Sources.
Borrowing Cost incurred during the period in which active development of asset is
interrupted can also be
Cessation of Capitalisation
o Qualifying Asset- Asset first put to use.
o Inventory- Substantially all activities necessary to prepare for its intended sale are
complete.
ICDS defines what is Qualifying Asset which means
o Tangible Assets – Land, Plant etc.
o Intangible Assets – Patents, Licences etc.
o Inventories that requires 12 months or more to bri ng them to saleable condition.
Impact:
Specified Tangible & Intangible assets are qualifyi ng assets regardless of substantial
period of condition
ICDS includes Land in definition of qualifying asse ts, unlike AS-16
X. ICDS – X (Provisions, Contingent Liabilities and Co ntingent Assets)
Provision shall be recognised if it is reasonably certain that outflow of economic
resources will be required. Criteria for recognitio n of provision on basis of ‘probable’
replaced with requirement of ‘reasonably certain’. However, in the absence of definition
and scope of reasonably certain , an ambiguity would arise on assessment of its cri teria.
Provision made on obligations recognised out of cus tomary business practices or
voluntary obligations may not be allowed (e.g. informal refund policy to dissatisfied
customer etc.)
Contingent asset/ claims to be recognised if inflow of economic benefit is reasonably
certain.
CONCLUSION:-
The ICDS should also entail appropriate modificatio n in Income tax return and
Form 3CD.
The ICDS seem to be based on the current AS issued by ICAI. However listed
Companies are required to adopt IND AS from 1st Apr il 2016. Thus, the
accounting policies for these companies under IND AS could be significantly
different from ICDS.
Thus, providing clarity on tax position in ICDS in alignment with IND AS is also
essential.
---------------xxxx------ -------------
5
CAclubindia
