Analysis of ICDS VI – Effects of Change in Foreign Exchange Rates

a) Monetary items shall be converted into reporting currency by applying the closing rate and the difference shall be recognized as income or expenses in that previous year.
Rita Paryani


CBDT had notified ten Income Computation and Disclosure Standards (‘ICDS’). These are applicable to the taxpayers following the mercantile system of Accounting from the Assessment Year 2015-16, later due to lack of clarification on ICDS, guidance notes, ambiguity and various representations by taxpayers, the Finance Ministry has issued a Press Release dated 6 July 2016, deferring the implementation if ICDS by one year to Assessment Year 2017-18.

Need of ICDS

There has always been various conflicts treating between Income as per the Companies Act and as per the Income Tax Act. To overcome the issue, the CBDT constituted a committee in 2010 to look at the Accounting Standards and to formulate Tax Accounting Standards (‘TAS’). The committee submitted its first report in August, 2012. After inviting public comments on draft TAS, the CBDT has revised 10 TAS and notified them u/s 145 (2) w.e.f 31-03-2015.

One of the reasons of CBDT for issuing ICDS is reduce litigation due to different of opinion of taxpayer and revenue on treatment of items.

ICDS are the applicable only for the Income under the heads ‘Business or Profession’ or ‘Other Source’.

Name of the ICDS issued

ICDS I – Accounting policies

ICDS II – Valuation of Inventories

ICDS III – Construction Contracts

ICDS IV – Revenue Recognition

ICDS V – Tangible Fixed Assets

ICDS VI – Effects of changes in foreign exchange rates

ICDS VII – Government Grants

ICDS VIII – Securities

ICDS IX – Borrowing Costs

ICDS X – Provisions, contingent liabilities and contingent assets

Analysis of ICDS VI – The Effects of Change in Foreign Exchange Rates


This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts.

In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.


1. Initial recognition of foreign currency shall be recorded at the date of transaction.

2. Conversion at Last Date of Previous Year:

a) Monetary items shall be converted into reporting currency by applying the closing rate and the difference shall be recognized as income or expenses in that previous year.

b) Non-Monetary items shall be converted into reporting currency by using the exchange rate at the date of transaction and the difference shall not be recognized as income or expense.

Note: when the closing rate doesn’t reflect the reasonable accuracy for any amount which is receivable or payable in foreign currency, then the relevant exchange rate at the last date of the previous year shall be considered for the amount receivable or payable.

Exception: Initial recognition shall be subject to the provisions of section 43A of the Act or Rule 115 of the Income tax Rules, 1962, as the case may be.

Key points: 

a) For conversion of non-monetary items, no exchange difference would arise. Hence foreign exchange gain or loss will have to reduced or added back respectively.

b) Inventory value shall be unaffected from the exchange rate fluctuation till the time Inventory is disposed off i.e. sold or used.

c) While comparing with Accounting Standards :

As per Ind AS – 21 and AS – 11,revenue non-monetary items like inventory, current investments, etc which are carried at fair value or historical or other similar valuation dominated in a foreign currency are reported using the closing rate. However as per ICDS, the same requires to be converted at the transaction rate on transaction date.

This would require creation of Deferred Tax Liability (‘DTL’) or Deferred Tax Asset (‘DTA’).


The financial statements of a foreign operation shall be translated using the principles and procedures in paragraphs 3 to 6 as if the transactions of the foreign operation had been those of the person himself.

The revised ICDS has eliminated the treatment different of Integral and non-Integral treatment.


 All the forward exchange contracts not intended for trading or speculation or hedging:

a)Any premium or discount arising at the inception shall be amortized as expense or income over the life of the contract.

b)  Exchange differences as such on contract shall be recognized as income or as expense in the previous year in which the exchange rates change.

c) Any profit or loss arising on cancellation or renewal shall be recognized as income or as expense of the previous year.

Transition period:

1. Applicable on the forward exchange contracts existing on or entered from 1st April 2016.

Categories: Income Tax


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