FAQs on ICDS (Income Computation and Disclosure Standards)

ICDS (Income Computation and Disclosure Standards) outline how to determine revenue and costs for construction contracts, which must be recognized based on contract completion percentage. ICDS-III specifically covers these contracts but excludes service contracts. A construction contract is defined as one focused on constructing assets or interrelated assets, including related services. Contracts may need to be combined or segmented as per ICDS requirements. Disclosures in Form 3CD for construction contracts include recognized revenue and the method used, while ICDS-IV covers general revenue recognition for sales and services, excluding construction contracts. ICDS-V addresses tangible fixed assets’ classification and cost calculation, with required disclosures including asset descriptions and depreciation. ICDS-VI deals with foreign currency transactions and ICDS-VII with government grants. ICDS-VIII focuses on securities held as stock-in-trade. ICDS-IX pertains to borrowing costs and ICDS-X covers provisions and contingent liabilities. ICDS are applicable to all assessees maintaining mercantile accounts and apply to various financial entities unless otherwise specified. In case of conflicts with the Income-tax Act, the Act prevails. Failure to follow ICDS may result in best judgment assessments by the authorities.

FAQs on ICDS

Q1. What is the scope of ICDS-III?

Ans: ​ICDS-III provides that the revenue from, and cost of, a construction contract shall be determined in accordance with this ICDS. The revenue and costs associated with a co​nstruction contract shall be recognised by reference to the percentage of completion of a contract at the reporting date.​

Q2. Whether ICDS-III shall apply to a service contract?

Ans: ICDS-III shall not apply to a service contract.​

Q3. What is the meaning of a Construction Contract?

Ans: ‘Construction Contract’ is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology, and function or their ultimate purpose or use, and it includes:

(a) Contract for the rendering of services which are directly related to the construction of assets, i.e., services of project managers, architects, etc.

(b) Contract for destruction or restoration of assets and the restoration of the environment after the demolition of the asset.

The inter-relation or inter-dependency of assets shall be checked with reference to their design, technology, and function or their ultimate purpose or use.

Q4. What is the process for combining or segmenting contracts in accordance with ICDS?

Ans: In some cases, a single contract may represent multiple, separately identifiable contracts, or multiple contracts may be considered as a single contract due to their terms and conditions. In order to comply with ICDS, the contractor may be required to combine multiple contracts into one contract or to segregate a single contract into multiple separate contracts.​

Q5. What disclosures are required in Form 3CD for construction contracts?

Ans: The following disclosures are required in Form 3CD for construction contracts:

• The amount of contract revenue recognised as revenue in the period; and
• The method used to determine the stage of completion of contracts in progress
  A person shall disclose the following details for contracts in progress at the reporting date:
• Amount of cost incurred and profit recognised (less recognised losses) up to the reporting date;
• The amount of advances received; and
• The amount of retentions.​

Q6. What is the scope of ICDS-IV?

Ans: ​ICDS-IV deals with the recognition of revenue arising from the ordinary activities of a person, including the sale of goods, rendering of services, and the use of resources yielding interest, royalties, or dividends.​

Q7. Does ICDS-IV apply to construction contracts?

Ans: ​No, ICDS-IV does not apply to construction contracts. The revenue from construction contracts should be determined in accordance with ICDS-III.​

Q8. Does ICDS-IV apply to incomes in the nature of interest, royalty, or fees for technical services?

Ans: ​​​​Yes, the provisions of ICDS-IV shall also apply for the computation of incomes in the nature of interest, royalty, or fees for technical services, which are taxable on a gross basis in the hands of non-residents under Section 115A.​

Q9. What are the disclosure requirements for ICDS-IV?

Ans: The following information is required to be disclosed in Form 3CD in relation to revenue recognition:

(a) In a transaction involving the sale of goods, the total amount that was not recognised as revenue during the previous year due to a lack of reasonable certainty of its ultimate collection, along with the nature of the uncertainty.

(b) The amount of revenue from service transactions that was recognised as revenue during the previous year.

(c) The method used to determine the stage of completion of service transactions in progress.

(d) For service transactions in progress at the end of the previous year:

• The amount of costs incurred and recognised profits (less recognised losses) up to the end of the previous year;
• The amount of advances received; and
• The amount of retentions.

Q10. What is the scope of ICDS-V?

Ans: ​ICDS-V provides guidance on classifying an asset as a tangible fixed asset and for calculating the actual cost of tangible assets.​

Q11. What is considered a tangible fixed asset?

Ans: ​A tangible fixed asset is defined as land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. Assets held for administrative purposes may also be considered tangible fixed assets if they are not held for sale in the ordinary course of business.​

Q12. What disclosures are required to be made in respect of tangible fixed assets for ICDS-V?

Ans: The following disclosures are required to be made in Form 3CD in respect of tangible fixed assets:

(a) Description of asset or block of assets;

(b) Rate of depreciation;

(c) Actual cost or written down value, as the case may be;

(d) Additions or deductions made during the year, along with the dates.

In case of the addition of an asset, the date of put to use shall also be disclosed along with the following information:

• Input tax credit claimed and allowed under the GST Acts
• Gains or losses due to change in rate of exchange of currency
• Subsidy or grant or reimbursement, by whatever name called

(e) Depreciation allowable; and

(f) Written down value at the end of the year.​​

Q13. What is the scope of ICDS-VI?

Ans: ​ICDS-VI deals with the treatment of transactions in foreign currencies, translating the financial statements of foreign operations and treatment of foreign currency transactions in the nature of forward exchange contracts.​

Q14. Does ICDS-VI apply to the foreign exchange gain or loss arising in respect of capital assets purchased from a foreign country?

​​​Ans: No, the provisions of ICDS-VI shall not deal with the foreign exchange gain or loss arising in respect of capital assets purchased from a foreign country, as it is dealt with in accordance with Section 43A.​

Q15. What disclosures are required to be made for ICDS-VI?

​​​Ans: ​No, disclosure is required in Form 3CD in regard to ICDS-VI.​

Q16. What is the scope of ICDS-VII?

​​​Ans: ICDS-VII deals with the treatment of Government Grants. The government grants may be called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc.

This ICDS does not deal with:

(a) Government assistance other than in the form of Government grants; and

(b) Government participation in ownership of an enterprise.​

Q17. What is the meaning of Government Grant?

​​​Ans: ‘Government Grant’ refers to assistance provided in cash or kind by Government to a person for past or future compliance with certain conditions. It does not include the following:

(a) Assistance which does not have any value placed upon ​them, such as free technical or marketing advice.

(b) Transactions with the Government which cannot be distinguished from normal trading transactions.​

Q18. What disclosures are required to be made in respect of government grants for ICDS-VII?

Ans: Following disclosures are required to be made in Form 3CD in respect of nature and extent of government grants:

(a) Grants recognised during the previous year by way of deduction from actual cost of asset or from WDV of block of assets.

(b) Grants recognised during the previous year as income.

(c) Grants not recognised during the previous year by way of deduction from actual cost of asset or from WDV of block of assets and reasons thereof.

(d) Grants not recognised during the previous year as income and reasons thereof.​

Q19. What is the scope of ICDS-VIII?

Ans: ​ICDS-VIII deals with securities held as stock-in-trade. This ICDS provides guidance for the valuation of securities held as stock-in-trade and for the valuation of securities held by the Scheduled Banks and Public Financial Institutions.​

Q20. What is ICDS?

​​Ans: ICDS stands for Income Computation and Disclosure Standards. These have been issued by the Central Government in the exercise of the powers conferred by Section 145(2) of the Income-tax Act, 1961 to bring uniformity in the accounting policies and provisions of the Income-tax Act and to reduce litigations. The following are the notified ICDS:

1. ICDS I: Accounting Policies

2. ICDS II: Valuation of inventories

3. ICDS III: Construction contracts

4. ICDS IV: Revenue Recognition

5. ICDS V: Tangible fixed assets

6. ICDS VI: The effects of change in Foreign exchange rates

7. ICDS VII: Government Grants

8. ICDS VIII: Securities

9. ICDS IX: Borrowing costs

10. ICDS X: Provisions, Contingent Liabilities, and Contingent Assets

ICDS is applicable only for the computation of taxable income and not for the maintenance of books of account.​

Q21. What is the meaning of Securities?

Ans: The securities under ICDS shall include shares (listed or unlisted), scrips, mutual funds, bonds, debentures, Govt. securities, units, rights or interest in securities, except derivatives.​

Q22. Which transaction or securities are not covered in the ambit of ICDS-VIII?

Ans: This ICDS shall not deal with the following:

(a) Basis for recognition of interest and dividends on securities (dealt with ICDS IV – Revenue Recognition).

(b) Securities held by the person engaged in the business of insurance.

(c) Securities held by mutual funds, venture capital funds, banks and public financial institutions formed under an Act or so declared under the Companies Act.

Q23. What is the scope of ICDS-IX?

Ans: ​ICDS-IX deals with the treatment of borrowing costs. This ICDS provides guidance for the calculation of borrowing cost in case of specific and general borrowing, which shall be capitalised with the actual cost of the asset.​

Q24. What is the meaning of borrowing cost?

Ans: ​Borrowing cost means interest and other cost incurred by a person in connection with the borrowing of funds. It includes commitment charges, amortised amount of discounts or premiums relating to borrowings, processing charges, charges incurred under the finance lease or any other similar arrangements. The CBDT, vide Circular No. 10/2017, dated 23-3-2017, has clarified that bill discounting charges and other similar charges are also treated as borrowing costs.​

Q25. What is the treatment of borrowing costs?

​Ans: ​The treatment of borrowing costs shall depend on the purpose for which it has been incurred. It may either be capitalised with the actual cost of the asset or recognised as an expense in the profit and loss account. The capitalisation of borrowing cost shall apply for that portion of the borrowing cost which is otherwise allowable as a deduction under the Act.​

Q26. What disclosures are required to be made in respect of government grants for ICDS-IX?

​Ans: The following disclosures are required to be made in Form 3CD in respect of borrowing costs:

(a) The accounting policy adopted for borrowing costs; and

(b) The amount of borrowing costs capitalised during the previous year.

Q27. What is the scope of ICDS-X?

​Ans: ICDS-X deals with the provision, contingent assets and liabilities, except those resulting or arising from financial instruments, executory contracts, insurance business from the contract with policyholders, recognition of revenue (as it dealt with ICDS-IV) and depreciation, impairment of assets and doubtful debts as an adjustment to carrying value of the asset (as these are dealt with ICDS-V).​

Q28. What is the meaning of provision?

​Ans: ​‘Provision’ is a liability which can be measured only by using a substantial degree of estimation.​

Q29. What is the meaning of contingent assets?

​Ans: ‘Contingent Asset’ is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the person.​

Q30. What is the meaning of contingent liability?

​Ans: ‘Contingent Liability’ is:

(a) A possible obligation/liability that arises from past events. Its existence is confirmed only by the occurrence or non-occurrence of one or more uncertain future events which a person cannot control wholly.

(b) A present obligation that arises from past events but is not recognised because:

• It is not reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; or
• A reliable estimate of the amount of the obligation cannot be made.​

Q31. Who is required to comply with ICDS?

​Ans: ​Every assessee earning income taxable under the head of ‘Profit and gains from business or profession’ or ‘income from other sources’ or both are required to compute taxable income in accordance with notified ICDS. However, the ICDS shall be followed only if the assessee maintains accounts as per the ‘Mercantile system’ of accounting.​

Q32. What is the meaning of executory contracts?

​Ans: ‘Executory Contracts’ are contracts under which both the party has not performed any of their obligations or both parties have partially performed their obligations to an equal extent.

Q33. When shall a provision be recognised as per ICDS-X?

​Ans: As per ICDS-X, a provision shall be recognised when:

(a) There is a present obligation as a result of the past event to settle the liability;

(b) Outflow of resources embodying economic benefits to settle the liability is reasonably certain; and

(c) The amount of the liability can be reasonably estimated.​

Q34. What disclosures are required to be made in respect of provisions for ICDS-X?

Ans: Following disclosures are required to be made in Form 3CD in respect of each class of provision:

(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 (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 recognised for that expected reimbursement.

Q35. What disclosures are required to be made in respect of contingent assets for ICDS-X?

Ans: Following disclosures are required to be made in Form 3CD in respect of each class of asset and related income:

(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 recognised during the year, including increases to assets and related income already recognised.

(d) Amount of asset and related income reversed during the previous year.

Q36. Is there any threshold limit for the applicability of ICDS?

Ans: No, the ICDS shall apply mandatorily without any threshold benefit.​

Q37. Whether ICDS applicable to all Individuals and HUFs?