Comparison between ICDS and AS & Changes due to ICDS in ITR

TG Team 28 Apr 2016 12,205 Views 0 comment Print Income Tax | Articles

CA Rahul Modi

Changes due to ICDS in ITR Forms:-

Due to ICDS there are changes in ITR Form no. 4,5,6.

Now assessee has to provide for

1. The Effect on the profit because of deviation , if any as per ICDS notified under section 145(2) in column Part A – OI at third no.

2. Now schedule of ICDS will be prepared which shows the Effect of ICDS on profit

MAJOR DIFFERENCES BETWEEN INCOME COMPUTATION AND DISCLOSURE STANDARDS:

Income Computation and Disclosure Standards No.	Income Computation and Disclosure Standards	Corresponding to Accounting Standard
ICDS I	Accounting Policies	AS – 1
ICDS II	Valuation of Inventories	AS – 2
ICDS III	Construction Contracts	AS – 7
ICDS IV	Revenue Recognition	AS – 9
ICDS V	Tangible Fixed Assets	AS – 10
ICDS VI	The Effects of Changes in Foreign Exchange Rates	AS – 11
ICDS VII	Government Grants	AS – 12
ICDS VIII	Securities	AS – 13
ICDS IX	Borrowing Costs	AS – 16
ICDS X	Provisions, Contingent Liabilities and Contingent Assets	AS – 29

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Income Computation And Disclosure Standards	Point of Difference	Income Computation And Disclosure Standard	Accounting Standard
ICDS – 1 – Relating to accounting Policy	Disclosure of Accounting Policy	The treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form concept of Prudence and Materiality are no more available	Major Considerations governing the selection and application of accounting policies are Prudence , substance over form and materiality
	Mark to market losses and expected losses	There is specific provision that marked to market loss or an expected loss shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other ICDS. However ICDS is silent on the treatment of mark to market unrealized gains	Mark to market losses will be provided for in view of prudence concept. Expected losses will be provided for in accordance with relevant Indian GAAP standards
	Change in accounting policy	Only when there is reasonable cause , ICDS has not defined reasonable cause	Change can be made when required by statue, for compliance with Accounting standard, or for more better presentation in financial statements
ICDS – II – Relating to valuation of Inventory	Valuation of Inventory – Inventory of Service	ICDS requires valuation of inventory of service at cost or net realizable value, whichever is lower . Cost of service shall consist of labour and other cost of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.	There is no valuation of services in AS – 2
	Methods for ascertaining cost of Inventory	Retail method is now permitted to ascertain the value of inventory if it is impracticable to use ‘FIFO’ or Weighted Average Cost Formula Standard cost method is not permitted.	Retail method or standard cost can be used as a technique if the results approximate the actual cost
	Value of opening Inventory	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 inventory as on the close of the immediately preceding previous year , in any other case	There is no such provision in AS – 2
	At the time of dissolution	Inventory should be valued at Net Realizable Value	Inventory should be valued at cost
ICDS – III – Relating to Construction contracts	Method for recognizing cost and revenue	Under ICDS III, percentage of completion method is applicable, except during early stages of a contract when the outcome of the contract cannot be estimated reliably. In this case, revenue is recognised to the extent of costs incurred. This is possible only when up to 25% of the work is completed otherwise proportionate method will apply. Thus, profit recognition has to start compulsorily once 25% stage is completed.	Under AS 7, contract revenue and contract costs are recognised by reference to the percentage of completion method if the outcome of the contract can be estimated reliably; else, revenue is recognised only to the extent of costs incurred if recovery is probable
	Loss During Construction	Losses incurred on a contract shall be allowed only in proportion to the stage of completion	It requires a provision to be made for the expected losses on onerous construction contract immediately on signing the contract.
ICDS – 1V – Relating to Revenue Recognition	Method of measuring performance of of Service	Revenue from service transactions shall be recognized by the percentage completion method	Revenue from service transactions is usually recognized either by the proportionate completion method or by the completed service contract method.
ICDS – V – Relating to Tangible Fixed Assets	Fixed Assets acquired for Non Monetary Consideration	When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost.	When a Fixed asset isacquired in exchange for shares or other securities in the enterprise should be recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident.
	Identification of Tangible Fixed Assets	Machinery spares which can be used only in connection with a Tangible fixed asset and where use is irregular, have to be capitalised	Machinery spares are usually charged to profit and loss as and when consumed. However, if such spares can be used only in connection with an item of fixed asset and their use is expected to be irregular, it may be appropriate to allocate total cost on a systematic basis over a period not exceeding the useful life of the principal item.
	Revaluation of Fixed Assets	It does not incorporate provisions of revaluation in itself, hence revaluation would not be recognized while computing income	It recognises the concept of revaluation well while calculating income.
	Transfer of Fixed Assets	ICDS, suggests that income arising on transfer of a tangible fixed asset shall be computed in accordance to the provisons of the Act	Whereas as per AS -10, the gain or loss arising on disposal are generally recognised in the profit and loss statement and in case of loss arising out of revalued asset, an increase which was previously recorded as credit to revaluation reserve and which has not been subsequently reversed or utilised, it is charged directly to that account.
ICDS – VI – The Effect of changes in Foreign Exchange Rate	Regarding Interest Cost	There is no scope exception for exchange differences arising from foreign currency borrowings which may be regarded as an adjustment to interest costs	There is exception for exchange differences arising from foreign currency borrowings to the extent considered as an adjustment to interest costs.
	Recognition of Exchange Difference	Exchange differences on non-integral foreign operations shall also be included in the computation of income	Exchange differences on a non-integral foreign operation are not recognized in the P&L, but accumulated in a foreign currency translation reserve. Such a foreign currency translation reserve is recycled to the P&L when the non-integral operation is disposed.
	Recognition of gain/loss	It requires gains or losses to be recognized in income computation only on settlement	All mark-to-market gains or losses on forward exchange or similar contracts entered into for trading or speculation contracts shall be recognized in P&L
ICDS – VII – Relating to government grant	Treatment of government grants	ICDS, does not prescribes the capitalization of government grants i.e. Government grant should either be treated as revenue receipt or should be reduced from the cost of fixed assets based on the purpose for which such grant or subsidy is given.	It prescribes two broad approaches i.e capital approach or the income approach
	Recognition of government grant	Recognition of government grants shall not be postponed beyond the date of actual receipt.	Recognition of government grants can be postponed even beyond the actual date of receipt when it is probable that conditions attached to the grant may not be fulfilled and the grant may have to be refunded to the government.
ICDS – VIII – Relating to Securities	Scope	As ICDS, deals with computation of income under business or other sources heads hence it only deals with securities held as stock – in – trade	Whereas under AS – 13, securities held as stock-in-trade are outside the scope,however provisions of AS -13 relating to current investments are applicable to securities held as stock in trade with suitable modifications.
	Subsequent measurement of securities	ICDS states that the securities should be valued at lower of cost or net realizable value. It further elaborates that the comparison of cost and NRV shall be done category wise and not for each individual security. The major heads of classification are (i) shares (ii) debt securities (iii) convertible securities (iv) any other securities not covered above	Whereas, AS – 13, values long term and current investments differently, i.e long term investments are valued at cost and current investments are valued at cost or fair value which ever is lower
	Subsequent measurement of securities	ICDS, prescribes that the securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised	AS -13, incorporates in itself no such condition related to recognition of cost of unlisted or listed but not quoted on a recognised stock exchange.
	Subsequent measurement of securities	ICDS prescribes that where the actual cost initially recognised cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of first-in-first-out method.	AS – 13, incorporates in itself no such condition of first-in-first-out method.
	Subsequent measurement of securities	ICDS, prescribes that when a security is acquired in exchange for other securities or for another asset, the fair value of the security so acquired shall be its actual cost.	Whereas AS -13, firmly prescribes that in case a security is acquired in exchange for another security, the fair value of the securities issued should be its actual cost. Whereas in case a security is acquired in exchange for another asset, acquistion cost of investment is fair value of the asset given up or fair value of the investment received if it is more clearly evident.
ICDS – IX – Relating to Borrowing Costs	Exchange difference from foreign currency borrowings	ICDS is similar to AS -16 except that exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest cost are not covered under it.	Whereas AS – 16, includes in itself exchange difference arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs
	Definition of qualifying asset	All the assets (tangible as well as intangible) other than inventories regardless of time,will be considered for capitalization of borrowing cost	As per AS – 16 , Qualifying asset means asset which takes substantial period of time to get ready for its intended use or sale.
	Eligibility for capitalization – Specific borrowing	In case of specific borrowing, ICDS does not allows income earned on temporary investment of borrowed amount to be deducted from the actual borrowing cost.	Whereas, AS -16, prescribes that if funds are borrowed specifically for purchase of qualifying assets, the temporary income earned on those borrowed amount to be deducted from the actual borrowing cost
	Eligibility for capitalization – General borrowing	ICDS, prescribes the following method of capitalization of generally borrowed fund. i.e. A * B / C * where A = borrowing costs incurred during the previous year except on borrowings directly relatable to specific purposes; B = (i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the first day and the last day of the previous year (ii) in case the qualifying asset does not appear in the balance sheet of a person on the first day or both on the first day and the last day of previous year, half of the cost of qualifying asset; (iii) in case the qualifying asset does not appear in the balance sheet of a person on the last day of previous year, the average of the costs of qualifying asset as appearing in the balance sheet of a person on the first day of the previous year and on the date of put to use or completion, as the case may be other than those qualifying assets which are directly funded out of specific borrowings; or C = the average of the amount of total assets as appearing in the balance sheet of a person on the first day and the last day of the previous year, other than those assets which are directly funded out of specific borrowings.	Under AS – 16, borrowing cost eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset. i.e. weighted average rate of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period other than borrowings made specifically for the purpose of obtaining qualifying asset. Amount of borrowing cost capitalized during a period should not exceed the amount of borrowing cost incurred during that period.
	Commencement of capitalization	ICDS, prescribes that commencement of capitalization should begin as follows: In case of specific borrowings from the date on which funds were borrowed and in case of general borrowings from the date on which funds were utilised	Whereas AS – 16, prescribes three conditions to be fulfilled in entirety before the commencement of capitalization of borrowing cost. Those are: (i) Activities, which are essential to prepare the asset for its intended use, should be in progress. (ii) Borrowing cost is incurred. (iii) Expenditure for acquisition, construction or production of a qualifying asset is being incurred.
	Suspension of capitalization	ICDS, contains in itself no condition as to suspension of capitalisation during interruption of active development.	Whereas AS- 16, prescribes that capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted
ICDS – X – Relating to Provisions , Contingent Liabilities , Contingent assets	Recognition of provision	According to ICDS, A provision should be recognised when it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation –	According to AS – 29, A provision should be recognised when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
	Recognition of Contingent Asset	According to ICDS, contingent assets should be assessed continually and when it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income are recognised in the previous year in which the change occurs.	According to AS – 29, contingent assets are assesed continually and if it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs.
	Measurement of Contingent Asset	The amount recognised as asset and related income shall be the best estimate of the value of economic benefit arising at the end of the year. The amount and related income shall not be discounted to its present value. An asset and related income recognised shall be reviewed at the end of each year and adjusted to reflect the current best estimate.	No guidance included
	Reimbursement	Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when it is reasonably certain that reimbursement will be received if the entity settles the obligation.	Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation