Adjustments as required under ICDS – Clause 13 (e) of Form 3CD

Hope everyone is having great time at tax audit season. Worried about clause 13 (e) of form 3CD? The adjustments as required under ICDS?

Stop worrying!!!! here in the attached sheet please find the ICDS wise Glimpses of adjustments as required under clause 13(e) of Form 3CD

If you have any questions or concerns, don’t hesitate to let me know and I look forward to hearing from you.

it is only when we truly know and understand that we have limited time on earth — and that we have no way of knowing when our time is up — than we will begin to live each day to the fullest, as if it was the only one we had.

I. Accounting Policies

♦ Dis allowance of expenditure debited in books of account on exercising Prudence

• Expected Loss
• Marked to Market Loss / (MTM Gains)
• Any other

♦ Dis allowance of expenditure debited in books on account of Materiality!

II. Inventories

♦ Distribution expenses also to be included in cost of Inventory

 ♦  Consider value of Inventory for Service Provider [To the extent not recognized as revenue]

– Technical Guide of ICAI says it is not required

♦ In case of Dissolution of Firm / AOP / BOI, stock should be valued at NRV as on date of dissolution, irrespective of whether business is continued or discontinued

III. Construction Contract

♦ Income to be recognised on Percentage of Completion Method [if following completed contract method – CCM is not permitted under ICDS – Also in AS]

♦ Disallowance of expected loss on Onerous contract recognized [Loss allowed in the year in which it is actually incurred]

♦ Loss is allowed on incurred / actual loss basis and not on expected loss basis –
ICDS doesn’t take into account the concept of Prudence

♦ Contract revenue to include Retention money
[Caution: Please don’t mis-interpret]

♦ During the early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognised only to the extent of cost incurred.

[The early stage of a contract shall not extend beyond 25% of the stage of completion]

♦ Contract revenue to be recognized beyond 25% stage, if not done

[AS only states in subjective terms that early stage revenue must not be recognized – whereas ICDS states that Contract Revenue must be recognized beyond 25%]

♦ Contract Cost, fully written off since its recovery is not probable, to be included as cost & rework profit arising thereof using PCM

♦ Incidental revenue (Interest / Dividend / CG) to be taxed separately and not to be reduced from Contract cost

[AS states that ALL incidental incomes MAY be reduced from the Contract Cost]

♦  WIP on transition date (01.04.2016) : To continue as per method regularly followed by the assesse

IV. Revenue Recognition

♦ Revenue from service transactions to be recognized under Percentage of Completion Method [for service contracts with duration > 90 days]

♦ When services are provided by an indeterminate no. of acts over a specific period of time, revenue may be recognized on Straight Line Method [SLM] basis over the specific period

♦  Revenue not recognized because Amount of Revenue cannot be measured

♦  Interest on Statutory Refund – Recognize on receipt basis

Note: Revenue recognized in ICDS but not in books – When such amount are irrecoverable, such bad debts are allowed as deduction

V. Tangible Fixed Assets

♦  Exchange of Assets – Actual cost of asset acquired would be Fair Value of Tangible Fixed Asset so acquired, as per ICDS [AS – 10 also gives an option of recording it at Fair Market Value [FMV] of asset given up, if it is more clearly evident]

VI. Forex

♦ Disallowance of MTM Losses / Gains on Premium, discount or Exchange Difference intended

– For Trading or Speculation or

– Hedging FC Risk of a firm commitment or highly probable forecast transaction

[Excluding those entered to Hedge Foreign Currency [FC] risk of Existing Asset/Liability]

[MTM shall be allowed on such transaction at the time of settlement]

♦ Translation difference of assets of Non-Integral Foreign operations routed through Foreign Currency Translation Reserve Account [FCTRA]

[Exchange difference to be recognized through P&L as per ICDS]

♦ ICDS makes no mention of Integral Foreign Operation & Non-Integral Foreign Operation and Para 7 states the Financial Statement of a foreign Operation to be translated like other cases, as if, the transaction of Foreign Operation had been those of the person himself. In effect for ICDS all Foreign Operation to be treated like Integral Foreign Operation only

♦ Exchange difference on restatement of Forex gain / loss due to forex loan on imported assets – Section 43A Equivalent

VII. Government Grants

♦ Grant received taxable (whether capital or revenue or promotor contribution)

[except if pertaining to fixed asset and reduced from its carrying value – Option of Capital Approach as in AS-12 not provided in ICDS]

♦ Government grant postponed beyond the date of actual receipt as condition required may not be complied

[recognize the grant on date of actual receipt even when condition required may not be complied]

VIII. Securities 

♦ Securities includes Shares of a Company in which public are not substantially interested also. It also has a separate Part-B dealing with securities held by BFI, which needs to be classified, recognized and measured as per RBI Guidelines

♦ Valuation difference routed through P&L account with respect to – unlisted or unquoted listed securities

[Difference because AS-13 valuation is based on whether it is Current or Long Term whereas ICDS permits only cost based valuation]

♦ Difference due to any amount routed through Profit & Loss Account because of the following differences

[If actual cost cannot be ascertained by reference to specific identification, the cost of such security shall be determined on basis of FIFO or WAC]

♦ Comparison of Cost or NRV (Only in case of Listed Companies, else at Cost) of Securities as per ICDS done Category wise and not individually as permitted in AS-13

[Individual option loss could be higher – significant change in result from current practice]

♦ Investment acquired in exchange of Asset – Actual cost of Investment acquired would be Fair Value of Investment so acquired in ICDS.

[AS-13 also gives an option of recording it at FMV of the asset given up, if it is more clearly evident]

IX. Borrowing Cost

 ♦ Borrowing cost debited to P&L on Tangible Fixed Asset & Intangible Asset not being qualifying asset [Substantial Period of Time < 12 period for construction] as per AS – 16

[Such BC needs to be capitalized as per ICDS – Presently also due to proviso to Section 36 (1) (iii)]

♦ Borrowing cost debited to P&L “being incurred on Tangible Fixed Assets & Intangible Assets whose active development is suspended” as per AS-16

[Such BC needs to be capitalized for Income Tax Purpose]

♦ Borrowing cost debited to P&L “being certain Exchange Difference on Forex loans to extent regarded as adjustment to interest cost” as per AS-16

[ICDS does not permit such adjustment]

♦ Borrowing cost incurred on funds borrowed generally and utilized for Qualifying asset to be capitalized as per formula given in ICDS iff different in A/cs.

♦ Income from Temporary use of unutilized borrowed funds – otherwise deducted from BC as per AS-16

♦ BC on assets from “Date of ready to use” to date it is put to use“

[AS say capitalize BC up to date of the asset is ready to use, ICDS says up to the date of put to use]

(means capitalize BC up to date of put to use as per ICDS)

X. Provisions and contingent liabilities

♦ Disallowance of Provision for loss on Onerous Contracts

[ICDS does not take into account the Concept of Prudence for selection of Accounting policies]

♦ Disallowance of Provision in P&L due to its existence considered as Probable as per AS – 29 Vs. Reasonable certainty as per ICDS

Example – Provision for warranty at higher than the past trend done out of extra caution / prudence.

♦ Effect of recognizing contingent asset to asset & related income due to its inflow of economic benefits being “Reasonably certain” as  in ICDS Vs. Virtual certainty as per AS – 29

XI. General Notes

♦ Adjustments under ICDS will mean additions to arrive at total income in beginning and in later years same additions will have to be deducted in computation of Total income.

♦ The adjustments thus are in the nature of only timing difference – advancing the revenue collection – But Tax neutral in the long run.

♦ Disclosure with respect to ICDS to be done in Form 3CD – only if assesse is subject to tax audit

♦ Impact of ICDS would be more to those who were Never following Accounting Standards of ICAI / Companies Accounting Standard Rules

The Black Spot – Inspirational short story

One day a professor entered the classroom and asked his students to prepare for a surprise test. They waited anxiously at their desks for the test to begin. The professor handed out the question paper, with the text facing down as usual. Once he handed them all out, he asked his students to turn the page and begin. To everyone’s surprise, there were no questions…. just a black dot in the center of the page. The professor seeing the expression on everyone’s face, told them the following:

“I want you to write what you see there.”

The students confused, got started on the inexplicable task.

At the end of the class, the professor took all the answer papers and started reading each one of them aloud in front of all the students. All of them with no exceptions, described the black dot, trying to explain its position in the middle of the sheet, etc. etc. etc. After all had been read, the classroom silent, the professor began to explain:

“I am not going to grade on you this, I just wanted to give you something to think about. No one wrote about the white part of the  paper. Everyone focused on the black dot – and the same happens in our lives. We have a white paper to observe and enjoy, but we always focus on the dark spots. Our life is a gift given to us by God, with love and care, and we always have reasons to celebrate – nature renewing itself everyday, our friends around us, the job that provides our livelihood, the miracles we see everyday…….

However we insist on focusing only on the dark spots – the health issues that bother us, the lack of money, the complicated  relationship with a family member, the disappointment with a friend etc.

The dark spots are very small compared to everything we have in our lives, but they are the ones that pollute our minds.

Take your eyes away from the black spots in your life. Enjoy each one of your blessings, each moment that life gives you.

Be happy and live a life positively!

(The author can be reached at shreyanse.khabiya@gmail.com)

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