CA Jigita A Shah
HOW ICDS WAS NOTIFIED
As we are aware in 1996 two accounting standards relating to ‘Disclosure of Accounting Policies’ and ‘Disclosure of prior period and extraordinary items and change in accounting policies were notified. And accounting standards issued by ICAI to be followed by any class of assesses or in respect of any class of income prior to notification on ICDS
But in 2010 when ministry of corporate affairs had announced a roadmap for converging Indian financial reporting with IFRS in phased manner,one of the biggest challenges faced by corporate sector was how this change in financial reporting would impact taxable income, as many companies would report using Ind AS while others would report using the older Accounting Standards(AS).
Hence CBDT constituted Accounting Standard Committee in 2010.The committee has submitted its final report in August 2012. And on March 31st 2015 i.e. after two years, 10 Income Computation & Disclosure Standards (‘ICDS’) notified by the CBDT under section 145(2) of the income tax act 1961(the act) vide ‘notification No. 32/2015 [F.NO.134/48/2010-TPL]/SO 892(E) Dated 31 March 2015 and committee recommended the nomenclature of Tax Accounting Standards for the standards notified u/s 145(2). Since this standard are meant to be adopted for computation of income. Hence section 145(2) as amended refers to Income Computation and Disclosure Standards.
The ICDS notified under the act should be made applicable only to the computation of taxable income and taxpayer should not be required to maintain books of accounts on the basis of ICDS notified under the act
This notified income computation and disclosure standards are specified in the annexure are to be followed by all asessees following mercantile system of accounting, for purpose of computation of income chargeable to income tax under the head “Profits and gains of business or profession” or “ Income from other sources” this shall come into force with effect from 01.04.2015.Thus ICDS shall not apply to assesses following cash system of accounting.
For MAT purposes ICDS shall not be applicable in view of the First Proviso to section 115 JB (1)
In case there is conflict between provisions of income tax act and ICDS the provisions of the act shall prevail to that extent
It seems that ICDS shall not apply to computation of income under the head “Profits and gains of business or profession” under section 44AD and 44AE.CBDT need to clarify on this point.
Issuance of ICDS on selected issues and non inclusion of other topics covered by Accounting Standard issued by ICAI may be because some of them relate to ‘disclosure’ requirement, while some other contains matter that is adequately dealt with the income tax laws.
The Annexure to the notification specifies 10 Income Computation and Disclosure Standards as under:
|INCOME COMPUTATION AND DISCLOSURE STANDARDS
||CORRESPONDING TO AS-1
||CORRESPONDING TO AS-2
||CORRESPONDING TO AS-7
||CORRESPONDING TO AS-9
||TANGIBLE FIXED ASSETS
||CORRESPONDING TO AS -10
||EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
||CORRESPONDING TO AS-11
||CORRESPONDING TO AS-12
||CORRESPONDING TO AS-13
||CORRESPONDING TO AS-16
||PROVISIONS,CONTINGENT LIABILITIES AND CONTINGENT ASSETS
||CORRESPONDING TO AS -29
NEED OF ICDS
ICDS is not an extension of the Act rather it is a part of the Act which accords the treatment in respect of issues covered therein viz foreign exchange fluctuations, construction contract,
tangible fixed assets etc. Hence, ICDS only meant to supplement the present Income Tax Act.
The rationale behind issuing ICDS is to lessen the uncertainty of alternative accounting treatment due to flexibility offered by AS & also to reduce litigation that crops up when the stand taken by I.T. Authorities is not in alignment with the AS. However, to what extent ICDS shall be applied in right spirit, especially by the lower income tax authorities needs to be seen.
Each ICDS requires disclosures in respect of various items dealt in the said standard. However, ICDS is silent about as to where such disclosure has to be given. Therefore, it is likely thatappropriate changes will be made to include in the Tax Audit Report and Income Tax return to capture such disclosures.
In case there is variance between ICDS and AS than ICDS shall prevail for computation of income. However where on any point the income tax Act, rules hereunder and ICDS are silent AS would apply for computation of income.
ICDSs are expected to fill up some gaps that existed in the current taxation set up by bringing in consistency and clarity in computation of taxable income and providing stability in tax treatments of various items. ICDSs also address the significant issue relating to taxability of assessees when companies in India move their financial reporting to Indian Accounting Standards (Ind – AS) that are Converged with International Financial Reporting Standards (IFRS) in a phased manner commencing 1 April 2015.
SIGNIFICANT IMPACT AREAS AND DIFFERENCES FROM EXISTING AS ARE HIGHLIGHTED BELOW:
ICDS-I ACCOUNTING POLICIES
- ICDS does not recognise the concept of prudence. Hence, it disallows recognition of expected losses or mark to market losses unless specifically permitted by any other ICDS. However ICDS is silent on the treatment of mark to market unrealised gains
- Further, the concept of materiality which is an important consideration in preparing financial statements has not been considered under ICDS. This could pose implementation challenges for instance the treatment of unadjusted audit differences in the financial statements may need to be considered while computing taxable income.
- ICDS does not permit changes in accounting policies without “reasonable cause”. ICDS does not define reasonable cause and hence would involve exercise of judgment by management and the tax authorities.
ICDS II INVENTORIES
- Existing AS states that techniques for the measurement of the cost of the inventories such as the standard cost method may be used for convenience if the results approximate to the actual cost. However, ICDS does not permit use of the standard cost method.
- ICDS provides for valuation of inventories in the case of service provider. Inventories in the case of service providers are materials or supplies to be consumed in rendering of services.
- Method of valuation of inventory once adopted cannot be changed, unless there is reasonable cause for doing so.
- In case of dissolution of a partnership firm or Association of Persons (‘AOP’) or Body of Individuals (‘BOI’), value of inventories shall be the net realizable value on the date of dissolution.
ICDS-III CONSTRUCTION CONTRACTS AND ICDS-IV REVENUE RECOGNITION
- ICDS does not permit accounting under the completed contract method, and mandates that only the percentage of completion method should be applied for recognition of revenue from rendering of services or construction contracts.
- ICDS prescribes non recognition of margins during the early stages of the contract and thus allowing contract revenue to be recognised only to the extent of costs incurred. It prohibits such deferral if the stage of completion exceeds twenty five per cent.
- ICDS does not contain detailed guidance on recognition of revenue as a principal or agent (gross vs net) which may impact turnover computation under section 44AB of the Act
- In addition, ICDS on construction contracts and revenue does not permit the recognition of expected losses on onerous contracts.
- The transitional provisions under notified ICDS provide that ICDS will apply to all open contracts as at 31 March 2015. Cumulative revenue and costs recognised in the prior years has to be considered for revenue recognition of these contracts from the transition date.
ICDS V TANGIBLE FIXED ASSETS
- Existing AS permits capitalisation of foreign exchange differences along with the underlying asset under certain circumstances. ICDS reiterates the fact that capitalisation of exchange differences relating to fixed assets shall be in accordance with Section 43A and other similar provisions of the act.
- In case of acquisition of a tangible fixed asset in exchange for another asset, shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost.
- There is no concept of revaluation of asset in the ICDS. The same is in conformity with the provision of the Act wherein also the concept of revaluation of assets is not recognised.
- ICDS prescribes disclosure requirement similar to requirement of Tax Audit Report. Even the persons not subject to tax audit have to comply with such disclosure requirement.
ICDS VI EFFECT OF CHANGES IN FOREIGN EXHANGE RATE
- ICDS requires premium, discount or exchange difference on forward contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction to be recognised at the time of settlement. This is different from the current practice under existing AS of either recognition of gains and losses on mark to market basis or recognition of only losses in line with the principle of prudence.
- Further, ICDS prescribes that accounting for foreign currency option contracts and other similar contracts should be similar to forward exchange contracts. When these contracts are entered to hedge recognised assets or liabilities, the premium or discount is amortised over the life of the contract and the spot exchange differences are recognised in the computation of taxable income.
- ICDS provides that the exchange differences on translation of non-integral foreign operations to be recognised as an income or expense unlike under existing AS.
ICDS-VII GOVERNMENT GRANTS
- ICDS does not permit the capital approach for recording of government grants.
- Accordingly, ICDS requires accounting of all grants either to be reduced from cost of assets or recognised as income either immediately or over a period of time, depending on the nature of grants.
- Initial recognition of government grants cannot be postponed beyond the date of actual receipt even though all the recognition conditions in accordance with AS are not met.
- Unlike existing AS, ICDS only covers securities held as stock -in-trade. ICDS requires the comparison of cost and net realisable value for securities held as stock-in-trade to be assessed category wise and not for each individual security.
- ICDS also provides that securities that are not quoted or are quoted irregularly shall be valued at cost. This could also represent a change in practice for some entities.
ICDS IX BORROWING COST
- Unlike Accounting Standard (AS) 16, Borrowing Costs, ICDS does not define any minimum period for classification of an asset as a qualifying asset (with the exception of inventories). Borrowing cost, may need to be capitalised even if an asset does not take substantial period of time to construct.
- Unlike , AS 16, exchange differences arising from foreign currency borrowings to the extent they are regarded as interest cost are not considered as borrowing cost under ICDS
- ICDS has prescribed a new formula for capitalisation of borrowing cost on general borrowings which involves allocating the total general borrowing cost incurred in the ratio of average cost of qualifying assets on the first day and last day of the previous year and the average cost of total assets on the first and last day of the previous year (other than those assets which are directly funded out of specific borrowings). The current formula may require further clarification.
- ICDS states that, in case of a specific borrowing, capitalisation of borrowing cost should commence from the date of the borrowing and in case of general borrowing, from the date of the utilisation of funds.
- Further, ICDS requires capitalisation even if active development of a qualifying asset is interrupted. Also, in case of qualifying assets other than inventories, capitalisation of borrowing cost should cease when the asset is put to use.
- In addition, under ICDS, income from temporary deployment of unutilised borrowed funds would not be deducted from the borrowing cost to be capitalised. Rather this will be treated as income.
ICDS X PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
- Unlike existing AS, ICDS requires recognition of provisions only if it is reasonably certain’. It excludes from its ambit onerous contracts.
- In addition, ICDS also requires recognition of contingent assets when the inflow of economic benefits is reasonably certain.
- These changes are presumably made with the intention to bring in consistency to the tax treatment of losses and gains
(Author is a practicing chartered accountant from Vadodara)