CA Debasis Sahoo
CBDT vide its Notification No: 32/2015 dated 31-03-2015 notified 10 Income Computation and Disclosure Standards(ICDS) which is to be followed by all assesses at the time of computation of income chargeable to income tax under the head “Profit and gains of business or profession” or “ Income from other sources”. The effective dates of such ICDSs are 01st April, 2015 and shall accordingly apply to the Assessment Year 2016-17 and subsequent assessment years.
Brief About ICDS:
Section-145 (2) of Income tax Act,1961 empowers Central Government(CG) to issue Accounting Standards for computation of Income. Earlier in 1996 CG had notified only two accounting standards i.e. ‘Disclosure of Accounting Policies’ & ‘ Disclosure of Prior Period Items and Extraordinary Items and Changes in Accounting Policies’. During December 2010 Central government (CG) constituted a committee to draft Income Computation and Disclosure Standard(ICDS). In August 2012 the committee provides draft of 14 tax accounting standards which were issued for public comments and after revision now CG notified 10 ICDS which is to be effective from FY:2015-16 & AY:2016-17.
By virtue of applicability of Indian Accounting Standards(IndAS) by MCA, it will have a greater impact on preparation and presentation of financial Statements. The main focus of IndAS is to provide clarity of presentation in financial statements to investors. But In order to harmonize with the provision of the IndAS for computation of income to be chargeable under the head Profit and gains of business or profession” or “ Income from other sources” ICDS has been brought into the picture. The List of ICDS & equivalent New IndAS & Accounting Standards(AS) as per Accounting Standards rule,2006 are
|ICDS NO||NAME||Equivalent New IND AS No||Equivalent AS No|
|I||Accounting Policies||1 & 8||1|
|II||Valuation of Inventories||2||2|
|V||Tangible Fixed Asset||16||10|
|VI||Effects of changes in foreign exchange rates||21||11|
|X||provisions, contingent liabilities and contingent assets||37||29|
Key Features of ICDS:
Few Major highlights are
a. Inventories: (ICDS-II): Clause No:22 envisage valuation opening stock i.e.
The value of the inventory as on the beginning of the previous year shall be
i. the cost of inventory available, if any, on the day of the commencement of the business when the business has commenced during the previous year; and
ii. the value of the inventory as on the close of the immediately preceding previous year, in any other case.
If one enterprise want to change its valuation of closing stock from FIFO to weighted average method then entity cannot change it’s opening stock by virtue of above clause. Such type of clause is not presented in INDAS-2 & AS-2
b. Construction Contract: ICDS-III: Clause No:20 envisage revenue recognition of contract at early stage i.e
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 costs incurred. The early stage of a contract shall not extend beyond 25 % of the stage of completion.
Both IndAS-11, AS-7 & ICDS contain revenue recognition criteria for early stage of contract but additionally the threshold limit of 25% for judgment of early stage of completion which is contain in ICDS will have a greater impact on computation.
Further, unlike INDAS-11 & AS-7, ICDS did not provide for recognition of losses immediately on expected losses on contracts. Hence, as on 31-03-2015 if entity booked expected losses on contract as per AS-7 then entire loss will be disallowed and allowed on percentage completion method basis.
c. Effects of changes in foreign exchange rates : ICDS-VI: Clause No:9(c): exchange differences on translation of non-integral foreign operations i.e.
all resulting exchange differences shall be recognised as income or as expenses in that previous year.
AS-11 stipulates that exchange differences on translation of non-integral foreign operations should be recognition in the Foreign Currency Translation Reserve. But ICDS provide for charging to Profit & Loss.
d. Effects of changes in foreign exchange rates : ICDS-VI: ClauseNo: 5 (i) envisage recognition of exchange difference arising on settlement of monetary items.
Exchange Difference in respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognized as income or as expense in that previous year.
However, Similar provision also contained in IndAS-21 but as per para-46A of AS-11 of accounting Standards rule,2006 :
Exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a ‘‘Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the balance period of such long term asset or liability, by recognition as income or expense in each of such periods.
From the above it is clearly understood that company having balance in FCMITD account will now required to charge to Profit & Loss for the purpose of computation of income by virtue of Transitional provision contained in ICDS.
e. Government Grants:ICDS-VII: Clause no5 envisage treatment of Government Grant i.e.
Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to.
Where ICDS emphasize on deduction of grant from the original cost of the asset, IndAS-20 prescribed for setting of grant as deferred income and transferred to Statement of Profit & Loss on a systematic basis.
Further, AS-12 provide for postponement of government grant beyond the date of actual receipt where condition attached to the grant are not fulfilled. Whereas, as per ICDS such postponement is not possible.
f. Borrowing Cost:ICDS-IX: the definition of borrowing cost as per ICDS does not provide for exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. The same provision contained in para 4(e) of AS-16 and para 6(e) of INDAS-23. Entity having borrowing cost by virtue of above mentioned AS & IndAS will not be entitled to claim borrowing cost under ICDS while computation of income.
Further, the formula given for borrowing cost eligible for capitalization in case of general borrowing is different from the method prescribed in IndAS-23& AS-16.
Conclusion- By virtue of applicability of ICDS w.e.f. 01-04-2015 entity is now under compulsion to start calculate its taxable income under the head “ Profit and gains of business or profession” or “ Income from other sources” which will in turn also applicable for calculation of advance tax for AY:2016-17. From FY:2015-16 onwards tax auditors of entities need to be more cautious while checking income tax calculation.