CA Darshan Jain
There has been a lot of hue and cry by both the assessees’ as well as the Chartered Accountants fraternity over the additional compliance burden instigated by the new standards issued by the Tax Department. Meanwhile, the ICAI has come out with a fantastic technical guide on ICDS in the month of July, 2017. The technical guide covers each of the aspect of the 10 ICDS so notified, in great detail and also explains the carve-ins and carve-outs with reference to the accounting standards as well as the Ind-AS. As the name suggests ICDS are not merely Computational Standards but they also require certain amount of disclosures. These disclosures are required to be made in Para 13(f) of the Form 3CD. There has been a lot of confusion over the nature and method of providing the required disclosures as per ICDSs. The fields provided for disclosure in Form 3CD could not exceed 500 characters and probably in most of the cases the disclosures to be made could not fit in the allotted space. With the tax audit due date drawing near, a simple guide to the disclosure requirements and sample disclosures are the covered by this article.
In the clarifications issued by the CBDT on ICDS vide CIRCULAR NO. 10/2017, DATED: 23-03-2017 (for short “FAQ”), has specifically dealt with the disclosure requirements as per ICDS in its last question, which reads as under
“Question 25: ICDS-I requires disclosure of significant accounting policies and other ICDS requires specific disclosures. Where is the taxpayer required to make such disclosures specified in ICDS?
Answer: Net effect on the income due to application of ICDS is to be disclosed in the Return of income. The disclosures required under ICDS shall be made in the tax audit report in Form 3CD. However, there shall not be any separate disclosure requirements for persons who are not liable to tax audit.”
While the assessee is obliged to disclose the net effect of ICDS in its return of income, the core disclosures are required to me made in the Tax Audit Report. It is also clarified that no separate disclosures are required to be made by persons not liable for tax audit even when they are obliged to compute income as per the ICDS.
ICDS I: Accounting Policies
|Para 6||All significant accounting policies adopted by a person shall be disclosed|
It is said that “Well begun is half done”. The para 6 of ICDS I is a superb case of well begun in terms of confusion on part of the department. On one hand, it has been clarified that ICDS would not apply for maintenance of books but on the other hand it requires significant accounting policies to be disclosed. In response to question 1 of the FAQ, the department has clarified that the accounting policies mentioned in ICDS-I being fundamental in nature shall be applicable for computing income under the heads “Profits and gains of business or profession” or “Income from other sources”.
The company’s financial statements have been prepared in accordance with the provisions of the Companies Act, 2013 and the Indian Accounting Standards (“Ind AS”) notified under the Companies (Indian Accounting Standards) Rules, 2015 issued by Ministry of Corporate Affairs. The Company maintains accounts on accrual basis following the historical cost convention, except for certain financial instruments that are measured at fair value in accordance with Ind AS. The accounts comply with the ICDSs referred to u/s. 145 of the Income Tax Act, 1961 except for matters reported in notes to Clause 13(e) of Form 3CD. The accounting policies are separately disclosed in Notes to Accounts forming part of Financial Statements.
|Para 7|| |
a. Any change in an accounting policy which has a material effect shall be disclosed.
b. The amount by which any item is affected by such change shall also be disclosed to the extent ascertainable.
c. Where such amount is not ascertainable, wholly or in part, the fact shall be indicated.
d. If a change is made in the accounting policies which has no material effect for the current previous year but which is reasonably expected to have a material effect in later previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted and also in the previous year in which such change has material effect for the first time.
An accounting policy once adopted must be followed consistently year after year. However, a change may be required by law or if it leads to a more appropriate presentation of financial statement. In case of ICDS although a change in policy could be made if there exists a reasonable cause. In case change in policy is effected the assessee would have to disclose the 4 parameters of Para 7.
In order to follow uniform accounting policy across all the group companies, the company has changed the method of charging depreciation from SLM to WDV method of charging depreciation during the year under consideration. As a result of the change the depreciation charged in profit and loss has reduced by Rs. 20 Lakhs and depreciation of the preceding years amounting to Rs. 120 Lakhs has been reversed. Consequently, the profit for the year and the reserves are higher by Rs. 140 Lakhs.
|Para 9|| |
If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed
Going Concern, Consistency and Accrual are the three fundamental accounting assumptions. The method of accounting and/or presentation of financial statements could undergo a change, if any, of these assumptions is jeopardized. Disclosure is required only in event of deviation from the fundamental assumptions and not otherwise.
The company is unable to continue as a going concern in view of the change in government policy on Liquor. It is required to realize assets and settle liabilities otherwise than in the normal course of business. The financial statements are accordingly drawn at realizable values instead of historical costs.
ICDS II : Valuation of Inventories
|Para 26(a)|| |
1. The accounting policies adopted in measuring inventories including the cost formulae used.
2. Where Standard Costing has been used as a measurement of cost, details of such inventories and a confirmation of the fact that standard cost approximates the actual cost
This is one of the most important ICDS. Its application has become a big headache due to the “Inclusive Method” prescribed for taxes. The technical guide in para 6.4 on page no. 45, has prescribed that the assessee should prepare a Memorandum Account in order to demonstrate that following exclusive method instead of inclusive, is tax neutral. The whole circus of following inclusive method seems to be there in order to support dis allowance u/s. 43B(a) for unpaid duties and taxes. Usually, government doesn’t shy away from inserting deeming fictions. It would have been better if a deeming fiction would have been added to 43B(a) instead of imposing the inclusive method through ICDS-II.
Para 4 of the said ICDS requires all inventories to be measured at Cost or Net Realizable Value, whichever is lower. Thus, in pt. 1 above the assessee is required to disclose the accounting policy adopted in the measurement of inventories.
Para 13-17 deals with Cost Formulae, which requires assessee to follow Specific Identification method (for short “SIM) for the purposes of arriving cost of inventory and where the application of SIM is not possible, the cost may be assigned using the First-in First-out (FIFO) or the weighted average cost formula. It may be noted that cost formula shall assume importance only when inventories are valued at cost and not at net realizable value.
Para 18(1) and 18(2) provides for techniques for measurement of costs. Thus, apart from calculating actual cost as enunciated in para 4-12 of ICDS -2, an assessee could also use the Standard Cost Method or Retail Method, if such methods provide a base which approximates actual costs. The assessee thereby has the flexibility to adopt any of the techniques, of course, subject to fulfillment of the conditions. In case the assessee follows standard costing for measurement, the assessee would be required to disclose and confirm that the standard cost approximates actual cost. No such disclosure requirement is laid down for Retail Method.
1. Inventories are valued at lower of cost or net realizable value. Cost of inventories comprises of all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their current location. Cost is determined by the Weighted Average Cost method. The cost of purchase is exclusive and not inclusive of duties and taxes that are subsequently recoverable. The net effect of such deviation from ICDS – II is NIL and is duly supported by an inclusive memorandum account attached separately.
2. Inventories are valued at lower of cost or net realizable value. Cost of WIP and Finished Goods includes the cost of purchases, fixed and variable production overheads and other costs incurred in bringing the inventories to their present location. Cost is determined using standard cost method that approximates actual cost.
|Para 26(b)||The total carrying amount of inventories and its classification appropriate to a person.|
Ideally, the carrying amount of inventories would be the amount at which such inventories are carried in books of accounts and not the amount as determined under ICDS – II. However, there would no use of reiterating what has already been disclosed as per AS – 2. Since the disclosures are to be made in point 13(f) of Form 3CD, it could reasonably be construed that what should be disclosed here is the amount determined as per ICDS – II. However, in a case where the carrying amount under AS – 2 and ICDS – II is equal a reference to the relevant note prepared as per AS – 2 should be sufficient to comply with the disclosure requirement under this para of ICDS.
The total carrying amount of inventories computed as per ICDS – II and its classification is as under:
ICDS III : Construction Contracts
|Para 23(a) |
The amount of contract revenue recognized as revenue in the period and
The methods used to determine the stage of completion of contracts in progress.
Both contract revenues, as well as contract costs, are to be recognized by reference to the stage of completion of contract at the reporting date. Thus, the method used for determining the stage of completion becomes important. The para 18 provides for 3 methods of determining the stage of completion which is similar to para 29 of AS-7 issued by ICAI. The contractor could choose any of three methods, however, a suitable disclosure would have to be made about the method opted by the contractor. There could still be a difference between the contract revenue recognized as per ICDS-III and AS-7 on account of terminologies used in both the standards for recognition of contract revenue. Hence, a separate disclosure of contract revenues recognized as per ICDS – III is required to be made in clause 13(f) of Form 3CD. It may be noted that the disclosure requirements have to be fulfilled separately for each construction contracts in terms of Para 5 of ICDS – III.
Revenues from contracts are recognized when there is a reasonable certainty of its ultimate collection on the percentage of completion method in proportion that the contract costs incurred for work performed up to the reporting date bears to the estimated total contract costs. The total amount of contract revenue so recognized amounted to Rs xxx
|Para 24|| |
A person shall disclose the following for contracts in progress at the reporting date, namely:
(a) amount of costs incurred and recognized profits (less recognized losses) up to the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
In addition to the disclosures made vide para 23, a contractor shall also be required to make the disclosures provided in para 24(a),(b) and (c) of ICDS – III. All the clauses require amounts to be disclosed and hence the amounts as determined under the ICDS should be disclosed for each of the contracts so identified.
|Sample||The disclosure of contracts in progress as at the reporting date as per the ICDS – III is as under: |
ICDS IV : Revenue Recognition
|Para 13(a)|| |
In a transaction involving sale of good, total amount not recognized as revenue during the previous year due to lack of reasonable certainty of its ultimate collection along with nature of uncertainty;
The assessee is required to report not the amount of revenue recognized by virtue of ICDS but the amount of revenue not recognized by the assessee due to lack of reasonable certainty. It may be difficult for an auditor to figure out what has not been recognized as revenue as no book entry would generally be available for an amount not recognized. The auditor would have to rely on representation provided by the management in this regards. Unlike AS-9, under the ICDS – IV revenues may have to be recognized, even if there is an element of uncertainty in the measurement of the amount of such revenues. Thus, what is disclosed as per para 14 of AS-9 may not be equal to the disclosure required under ICDS – IV.
Revenues from the sale of goods have been recognized on accrual basis. However, in respect of transaction of sales amounting to Rs. xxx, there could not be a substantial recovery in spite of the best effort by the company due to the quality dispute raised by the customer. The recovery of such amount is considered to be remote and accordingly, it has not been recognized as revenue, as per Para 4 of ICDS – IV.
|Para 13(b) |
The amount of revenue from service transactions recognized as revenue during the previous year;
The method used to determine the stage of completion of service transactions in progress;
The requirement of disclosure is similar to that in ICDS – III on Construction Contracts. Para 6 of ICDS – IV also requires the revenues from service transactions to be recognized in accordance with principles laid in ICDS – III. Although other options for recognition of revenues are also available with the assessee under ICDS – IV in respect of the following
a. Service transactions involving indeterminate number of acts over a period of time
b. Service contracts with a duration of not more than 90 days.
Revenues from service transactions (other than contracts with a duration of not more than 90 days) are recognized when there is a reasonable certainty of its ultimate collection on the percentage of completion method in the proportion that the costs incurred for work performed up to the reporting date bears to the estimated total service transaction costs. Revenue from short term service contracts, with duration of up to 90 days, is recognized on completion of such transaction.
The total amount of revenue from service transaction so recognized during the year amounted to Rs xxx
|Para 13(d)||For service transactions in progress at the end of the previous year: |
(i) amount of costs incurred and recognized profits (less recognized losses) upto end of previous year;
(ii) the amount of advances received; and
(iii) the amount of retentions.
Additional disclosures are required in respect of ongoing execution of service transactions as on the reporting date. The disclosure would not be required in respect of the contract with duration of upto 90 days where revenues are recognized on completion basis.
The disclosure of service transactions in progress as at the reporting date as per the ICDS – IV is as under:
ICDS V : Tangible Fixed Assets
The disclosure requirement under this standard is provided in para 19 of ICDS – V. The disclosures required by the standard are exactly similar to the requirements of clause 18 of Form 3CD. Thus providing a reference to particulars of depreciation furnished in Clause 18(a) to 18(f) of Form 3CD should be sufficient compliance, in respect of disclosures required by this ICDS.
ICDS VII : Government Grants
|Para 14(a)|| |
Nature and extent of Government grants recognized during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year;
Disclosure is required in respect of nature of government grant recognized by way of deduction from the actual cost of asset or from WDV of the block. Thus, only grants which relates to assets as provided in Para 5 and Para 7 of the ICDS have to be reported under this clause.
The company has recognized grant received from DRDO of Rs. 50 Lakhs towards reimbursement of cost of the new asset. The amount of grant is reduced from the actual accost of the respective asset.
|Para 14(b)|| |
Nature and extent of Government grants recognized during the previous year as income
Disclosure would be required in respect of government grants to be recognized as income as provided in Para 6, 8 and 9 of the ICDS. Thus, the nature and extent of following grants would have to be disclosed:
a. Grant related to non-depreciable assets or assets with certain obligations
b. Grant for compensation of losses or expenses or for financial support
c. Other monetary grants not covered elsewhere.
The company is eligible for Interest subsidy from TUFS. The amount of such interest subsidy recognized as income during the year amounted to Rs. xxx. The same has been reduced from the relevant interest expense.
|Para 14(c) |
Nature and extent of Government grants not recognized during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets and reasons thereof
Nature and extent of Government grants not recognized during the previous year as income and reasons thereof.
The recognition criteria are duly provided in para 4 of ICDS. The amount of grant not recognized due to the conditions existing in para 4(1) should be disclosed along with the reason for the existence of such conditions. It is difficult for the auditor to verify disclosures under this clause, as the same would not find any mention in the accounting records of the assessee. The auditor would be required to rely on the management representation for disclosure of grants not recognized.
The company has applied for a subsidy for setting up of the unit in backward district to the extent of Rs. xxx. In view of the agitation of the public led by local leaders, it would not be possible commence the production activity, which is an important condition attached for accrual of grant. In view of such uncertainty, the grant is not recognized during the year under consideration.
No disclosures are required for refund of government grants and treatment thereof in financial statements.
ICDS IX : Borrowing Costs
|Para 11(a)||The accounting policy adopted for borrowing costs|
ICDSs purportedly do not deal with the accounting of transactions. Then one may wonder why a disclosure of accounting policy is required. An assessee has to deal with borrowing costs in accordance with principles provided in ICDS – IX for the purposes of computation of income and hence disclosure of accounting policy is totally irrelevant. In my opinion a mere reference to the significant accounting policies disclosed by virtue of AS – 1 should be sufficient compliance with this disclosure requirement.
The accounting policy adopted for borrowing costs is duly disclosed in point no. xx of note on accounts attached to the financial statements.
|Para 11(b)||The amount of borrowing costs capitalized during the previous year|
This is possibly a simple disclosure to be made under all ICDS. What is required to be disclosed is the amount of borrowing cost capitalized as per the terms of ICDS. There would be certainly a difference in cost capitalized as per AS – 12 and ICDS IX. The para 9.2 of the technical guide issued by ICAI also requires only the aggregate amount of interest capitalized as per ICDS. The assessee may keep block-wise details of capitalization as working note.
|Sample||The total amount of capitalization of borrowing costs as per ICDS – IX amounted to Rs. xxx.|
ICDS X : Provisions, Contingent Liabilities & Contingent Assets
|Para 21(1)|| |
Following disclosure shall be made in respect of each class of provision, namely:
(a) a brief description of the nature of the obligation;
(b) the carrying amount at the beginning and end of the previous year;
(c) additional provisions made during the previous year, including increases to existing provisions;
(d) amounts used, that is incurred and charged against the provision, during the previous year;
(e) unused amounts reversed during the previous year; and
(f) the amount of any expected reimbursement, stating the amount of any asset that has been recognized for that expected reimbursement.
The requirement for disclosure in respect of provisions made by an assessee is similar to the disclosure in AS – 29 issued by ICAI. A similar view is contained in para 7.10 on pg. 209 of the technical guide issued by ICAI. Thus, a reference to the disclosures made in notes to accounts may be treated as sufficient compliance of ICDS X.
|Sample||The disclosures required for each class of provision is as under |
|Para 21(2)|| |
Following disclosure shall be made in respect of each class of asset and related income recognized as provided in para 11, namely:
(a) a brief description of the nature of the asset and related income;
(b) the carrying amount of asset at the beginning and end of the previous year;
(c) additional amount of asset and related income recognized during the year, including increases to assets and related income already recognized; and
(d) amount of asset and related income reversed during the previous year
Para 10 of ICDS X clarifies that Contingent Assets are not to be recognized. But then recognition is required as soon as the contingencies removed and inflow of resources becomes reasonably certain. In such cases not only the asset has to be recognized along with related income but also disclosures are required to be made under ICDS. The disclosures are useful as what is recognized as income as per ICDS X may not be recorded as income as per AS-29 or Ind AS 37 due to the difference in the recognition principles. Such a disclosure would help reconcile the probable mismatch.
The company has made a claim of about Rs. xxx against the contractors for laxity in the provision of services. The Company has already invoked the dispute resolution mechanism and issued a Notice of Arbitration to the Contractor on xx/xx/20xx. The arbitration proceedings are in the last leg as on the reporting date and it is reasonably certain that the company would receive an amount of Rs. xxx. The brief particulars of the assets so recognized is as under
Readers may feel that ICDS-VI and ICDS-VIII have been skipped in the article. However, fortunately for the assessee, there are no disclosure requirements prescribed by the two ICDS. The department seems to have used a pick and choose policy so far as the ICDSs are concerned. It like the old Indian adage “Chit bhi meri aur pat bhi”, heads I win, tails you lose. Despite so many representations and a strong campaign by the BCAS on “change.org”, the government has remained defiant. Now that ICDS is a reality, we got to live with it and keep disclosing the undisclosed. Readers may keep adding sample disclosures in the comment section for the benefit of others.
(Author is a Chartered Accountant and can be reached at email@example.com)