Section 145(2) empowers central government to notify in accounting standards to be followed by any class of assessees or in respect of any class of income. In exercise of the mentioned powers central government had earlier notified only 2 accounting standards i.e. i.e. ‘Disclosure of Accounting Policies’ & ‘Disclosure of Prior Period Items and Extraordinary Items and Changes in Accounting Policies’. Central government have further notified 10 standards (Known as ICDS – Income Computation and Disclosure Standards) which are which is to be effective from FY 2015-16 & AY 2016-17 vide Notification No. 32/2015, Dated-31st March, 2015.
Purpose of ICDS
With applicability of IndAS in the FY 2015-16 the financial reporting framework will be impacted to a greater extent. ICDS have been made with a purpose to harmonise the reporting requirements under IndAS with computation of income under PGBP and Other Sources. Though due to phased implementation of IndAS small organization will continue to comply with existing AS unless voluntarily adopted. A comparison of existing AS and ICDS have been given later in this article
ICDS – Income Computation and Disclosure Standards
The ICDSs are effective from FY 2015 – 2016 i.e AY 2016 – 2017 with an applicability to Corporate as well as non-corporate assessees. These are applicable equally to all assessees with no applicability criteria. ICDS are prepared for computation of income and required disclosures and no separate books of accounts are required to be maintained for their compliance. ICDS will not be used for the computation made under section 115JB (MAT Provisions). In a case where there is a conflict between Income Tax Act, 1961 and ICDS the provisions under Income Tax Act, 1961 shall prevail.
Existing AS Vs ICDS (Carve-in Carve-out)
- ICDS mandates percentage of completion method. It doesn’t permit completed contract methods
- During early stages of contracts the revenue shall be recognized to the extent cost incurred. The early stages of contract shall not be more than 25% of percentage of completion
- ICDS doesn’t allows to account for expected losses in onerous contracts. Loss may be allowed on percentage of completion method.
- The transition provision provides that ICDS will apply to all open contracts 31st March 2015. Cumulative revenue and cost recognized in the prior years has to be considered for revenue recognition of these contracts from the translation dates.
- ICDS doesn’t permit capital approach for recording of government grants. The grants are either to be reduced from cost of acquisitions of the assets or to be recognized as an income either immediately or over the period of time depending upon nature of the grant
- Initial recognition of the grant cannot be deferred beyond the date of actual receipt of grant even if all the conditions for recognition of grant are not met. At the receipt of grant, it has to be taken effect into the books of accounts.
- ICDS requires premium, discount and exchange differences under forward contracts (speculation or to hedge the foreign currency risk of firms commitment / highly probable transaction) to be recognized on the date of settlement.
- ICDS requires premium, discount and exchange differences under forward contracts (to hedge recognized asset or liability) to be recognized over the period of the contract. The spot exchange difference are to be recognized in the computation of income.
- ICDS provides exchange differences arising on translation of Non-integral to be recognized as income or expenses
Provisions, Contingent liabilities and Contingent Assets
- Unlike existing AS, ICDS requires recognitions of provisions only if it ‘reasonably certain’. No provision for onerous contracts are allowed
- ICDS required recognition of contingent assets when it is reasonably certain to receive economic benefits.
- ICDS doesn’t specifies minimum period to qualify for being a qualified assets. Hence, borrowing cost can be capitalized even if the assets doesn’t take substantial period of time to complete.
- Exchange differences arising from foreign currency loans to the extents they are considered as borrowing costs are not considered as borrowing cost under the ICDS
- ICDS has prescribed a new formula for capitalization of borrowing cost on general borrowing which is as follows
|Total borrowing cost capitalized for general loans
||Total borrowing cost
||Average cost of qualifying assets
|incurred for general loans
||Average cost of total assets
- For specific borrowings the commencement of capitalization shall commence from date of borrowings and incase of general borrowings the commencement of capitalization shall commence from date of utilization of funds.
- There will be active capitalization of borrowing costs even if there is interruption in active development of qualifying assets. The capitalization shall cease at the date of put to use of such asset
- No amount is to be reduced from the cost on accounts of temporary deployment of unutilized borrowed funds. These shall be treated as income.
- Under existing AS, the foreign exchange differences are to be capitalized under certain circumstances. However under ICDS the treatment is in accordance of section 43A of Income Tax Act, 1961 i.e. The foreign exchange difference on date of payment of liability is to be adjusted with the WDV of such asset.
- Unlike existing AS, the comparison of cost or net realizable value is to be seen category wise instead of individually.
- Securities which are not quoted or quoted irregularly is to be valued at cost.
There could be many other areas of differences for specific transactions and may vary from assessees to assessees.
(The above article is contributed / compiled by Vipin Chaurasia having professional and academic interests in Taxation, SEBI, Listing agreement, IPOs, IFRS areas. He can be approached at email@example.com or Ph no. +91-97 17 748196)