Income Computation and Disclosure Standard- II Valuation of Inventories

Preamble

This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of Business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of Income Tax Act, 1961 (‘the Act)’ and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent”.

 Scope (Para 1)

“This Income Computation and Disclosure Standard shall be applied for valuation of inventories, except:

(a) Work‐in‐progress arising under ‘construction contract, including directly related service contract which is dealt with by the Income Computation and Disclosure Standard on construction contracts;

Inventories which have not been used in construction and have not become the part of construction contract, shall be dealt with this ICDS.

(b) Work‐in‐progress which is dealt with by other Income Computation and Disclosure Standard;

Till time not other ICDS has not been notified. Further Capital Work in Progress doesn’t form the part of inventories and hence ICDS II shall not be applied.

(c) Shares, debentures and other financial instruments held as stock‐in‐trade which are dealt with by the Income Computation and Disclosure Standard on securities;

ICDS VIII deals with the stock in trade held in the form shares, debentures and other financial instrument including share of company in which public are not substantially interested held by an Assessee.  However, ICDS VIII does not deal with securities held by

1. mutual funds,

2. Venture capital funds,

3. Banks,

4. Public financial institutions formed under a Central Act or a State Act or entities declared as public financial institutions under the Companies Act, 1956 or the Companies Act, 2013.

5. Inventories held by Insurance Business.

6. Derivatives held by an Assessee as a part of stock in trade

Consequently, valuation of securities held as stock-in-trade by entities referred above i.e. mutual funds, venture funds, financial institutions and derivatives held by an Assessee will be governed by ICDS II.

However inventories held by Assessee engage in insurance business will be governed by Section 44 of Income Tax Act.

(d) Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realisable value;

ICDS excludes from its scope the aforesaid inventories held by producers. However it does not exclude trader of inventories. Hence inventories held by the Trader of aforesaid inventories shall be governed by the provisions of ICDS II.

(e) Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular, shall be dealt with in accordance with the Income Computation and Disclosure Standard on tangible fixed assets.”

Comparative Study

Accounting Standard Issued by ICAI – AS—2	Income Computation and Disclosure Standard II	Difference
AS- 2 shall apply for the valuation of inventories except on following:	ICDS II shall apply for the valuation of inventories except on following:
a) Work in progress arising under construction contracts, including directly related service contracts	a) Work‐in‐progress arising under ‘construction contract, including directly related service contract	No Difference
b) Work in progress arising in the ordinary course of business of service provider	b) Not Mentioned	ICDS does not specifically provide for the exclusion of WIP arising in the ordinary course of service provider.  However it is also not specified any provision for the valuation of inventories.
c) Shares, debentures and other financial instruments held as stock in trade	c) Shares, debentures and other financial instruments held as stock‐in‐trade which are dealt with by the Income Computation and Disclosure Standard on securities ICDS VIII deals with the stock in trade held in the form shares, debentures and other financial instrument including share of company in which public are not substantially interested held by an Assessee.  However, ICDS VIII does not deal with securities held by 1. Mutual funds, 2. Venture capital funds, 2. Banks, 3. Public financial institutions formed under a Central Act or a State Act or entities declared as public financial institutions under the Companies Act, 1956 or the Companies Act, 2013 4. Inventories held by Insurance Business. 5. Derivatives held by an Assessee as a part of stock in trade	AS -2 (revised) specifically exclude the share debentures and other financial instruments held as stock in trade, whether it held by any entity or held as derivatives. In case it is held by the entity as stock in trade, then guiding principles laid down by the ICAI should be applied. Normally these financial instruments are valued at NAV basis.   However financial instruments held by specified entities prescribed by ICDS VIII shall be valued in accordance to ICDS II i.e. on cost or net realizable value. Hence suitable adjustment should be made in books of accounts of aforesaid entities.
d) Inventories do not include spare parts, servicing equipment and standby equipment which meet the definition of property, plant and equipment as per AS 10, Property, Plant and Equipment. Such items are accounted for in accordance with Accounting Standard (AS) 10, Property, Plant and Equipment.	d) Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular, shall be dealt with in accordance with the Income Computation and Disclosure Standard on tangible fixed asset	No Difference

Definitions (Para 2)

Meaning of Inventories

(a) Held for sale in the ordinary course of business (finished goods including trading merchandise, software, land or other property held for re-sale)

(b) In the process of production for such sale ( work in progress)

(c) In the form of materials or supplies to be consumed in the production process or in the rendering of services. (including maintenance supplies, consumables and loose tools used in production process. However machinery spares exclusively used with fixed assets are excluded)

Net Realizable Value:-

Is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale.

Comparative Study

Accounting Standard Issued by ICAI – AS—2	Income Computation and Disclosure Standard II	Difference
(a) Held for sale in the ordinary course of business (finished goods including trading merchandise , software, land or other property held for re-sale) (b) In the process of production for such sale ( work in progress) (c) In the form of materials or supplies to be consumed in the production process or in the rendering of services.    (including maintenance supplies, consumables and loose tools used in production process. However machinery spares exclusively used with fixed assets are excluded)	(a) Held for sale in the ordinary course of business (finished goods including trading merchandise , software, land or other property held for re-sale) (b) In the process of production for such sale ( work in progress) (c) In the form of materials or supplies to be consumed in the production process or in the rendering of services. (including maintenance supplies, consumables and loose tools used in production process. However machinery spares exclusively used with fixed assets are excluded)	No Difference
Net Realizable Value:- Is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale.	Net Realizable Value:- Is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale.	No Difference

Other Points concerning with Definition

1. Material issued on loan to other person cannot be classified as inventories. Loan means leading advance of money with absolute promise to repay, a borrowing with a promise to repay, delivery of money by one party and receipt by another on agreement, express or implied, to repay or a deposit. The four elements of loan are——

a) An amount, a sum either in the form of money or kind

b) Placing of it with another, called borrower

c) An agreement to repay

d) A recognition of liability on the part of the borrower to return it with or without interest.

2. Where a company in the business of refining, transportation through pipeline and marketing petroleum products. The crude oils in pipeline and dead stock in tank should be valued in accordance to provisions of this accounting standard. Such stock cannot be capitalized as fixed assets nor valued at fixed base price. They have to be valued in accordance with Accounting Standard at the lower of cost or net realizable value and the const is determined using FIFO or Weighted Average Method.

3. Where a company is engaged in the manufacture of electronic products and systems. Company has installed a prototype at a customer location for getting acceptance on performance of the systems. Since the ownership of prototype is vested in company, hence such prototype should be capitalized in the books of account at its bought out cost and depreciation should be charged on it.

Management of company has failed to understand that the such prototype is part of company’s inventory and hence should be valued as part of inventory in accordance of principle of AS-2. Such installation at customer site for their acceptance should be treated as “Sales of Goods on Approval basis.

4. ICDS II is not applied on the Producer’ inventories of livestock, agricultural and forest products and minerals oils, ores and gases to the extent that they are measured at net realizable value in accordance with well established practices in those industries. However such exception is not available for the whole seller of food and agro products. They have to value the closing stock at cost or net realizable value basis.

Measurement (Para 3)

Inventories shall be valued at lower of

a) Cost

or

b) Net realizable value whichever is lower.

Meaning of Cost (Para 4)

Cost of inventories shall comprise of all costs of purchase, costs of services, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Cost of Inventories comprise following elements:

1. Cost of Purchase

2. Conversion Cost; and

3. Cost of Service as a part of Conversion Cost

4. Other cost incurred in bringing the inventories to their present location and condition.

Comparative Study

Income Computation and Disclosure Standard II	Accounting Standard issued by ICAI	Difference
Cost of Inventories includes following elements 1. Cost of Purchase 2. Conversion Cost; and 3. Cost of Service as a part of Conversion Cost 4. Other cost incurred in bringing the inventories to their present location and condition	Cost of Inventories includes following elements 1. Cost of Purchase 2. Conversion Cost; and 3. Other cost incurred in bringing the inventories to their present location and condition	ICDS includes the cost of service incurred in bringing the inventories to their present location and condition. However AS-2 doesn’t include service cost as a part of cost. This imply that if a consultant is hired to provide the technical guidelines for production or manufacturing of inventories, then cost of inventories shall include cost of service as a part of conversion cost. For example service of quality control personnel or technical testing or product for identification of possible defect

Cost of Purchase (Para 5)

The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase.

1. Based on the provisions, cost of inventory comprises following elements:

Purchase Price	xxx
Add:
Freight Inwards	xxx
Duties and Taxes	xxx
Other expenditure directly attributable to the purchase	xxx
Less:
Trade Discount, Rebates, Duty Drawbacks and other similar items	xxx

2. ICDS II provides the principles for the inclusion of duties and taxes paid on purchase of inventories even these duties and taxes are subsequently recovered or not. Hence suitable adjustment entries should be made in financial statement.

3. Expenditure directly attributable includes

a) Cost of Containers

b) Transit Insurance

c) Buying Commission (where purchase of raw material only though buying agents)

Comparative Study

Income Computation and Disclosure Standard II	Accounting Standard issued by ICAI	Difference
Cost of Purchase includes: a) Purchase Price b) Freight Inwards c) Duties and Taxes whether refundable/ adjustable  or not d) Other Expenditures directly attributable to purchase	Cost of  Purchase includes: a) Purchase Price b) Freight Inwards c) Duties and Taxes which are not refundable/ adjustable. d) Other Expenditures directly attributable to purchase.	The basic difference is treatment of Duties and Taxes incurred in relation to purchase. ICDS II includes all the taxes and duties such as Excise, Vat, or Custom duties as part of cost of purchase whether these are adjustable/ refundable. However AS-2 includes only those taxes in cost of purchase which are not refundable or adjustable.
Guidance Note on Treatment of Excise Duty provides that while computing the cost of closing stock, provision of excise duty should be made on finished goods held at the end of year.

Relevant Provision in Income Tax

1. Section 145A of Income Tax Act provides that purchases, sales and inventory were required to be valued by including therein the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the Assessee. It was therefore necessary to make adjustments to comply with the provisions of section 145A.

2. One may refer para 23 of the Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961 issued by the ICAI. Paras 23.7 to 23.24 deal with deviations from the method of valuation prescribed under section 145A and the effect thereof on the profit or loss to be reported under clause 14(b) of Form 3CD. These sub-paras explain the adjustments to be made to comply with the provisions of section 145A and the procedure for the adjustments to be carried out in case of both, trading and manufacturing concerns.

3. The illustrations given in the said Guidance Note show that the overall impact of the adjustments made to comply with the provisions of section 145A on the income of the Assessee is nil. Accordingly, if an exclusive method is followed for the purpose of valuation of inventory as per AS, the tax payer would be required to prepare the memorandum account to demonstrate that vis a vis inclusive method, it is tax neutral. This will be in compliance with section. 145A and ICDS.

4.Cost of Services (Para 6)

The costs of services shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.

ICDS has made a specific provision for inclusion of Service Cost that is directly related with the inventories. This imply that if a consultant is hired to provide the technical guideness for production or manufacturing of inventories, then cost of inventories shall include cost of service as a part of conversion cost. For example service of quality control personnel or technical testing or product for identification of possible defect.

Conversion Cost  (Para 7)

The costs of conversion of inventories shall include costs directly related to the units of production and a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads shall be those indirect costs of production that remain relatively constant regardless of the volume of production. Variable production overheads shall be those indirect costs of production that vary directly or nearly directly, with the volume of production

The costs of conversion of inventories include cost directly related to the units of productions, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods.

Hence conversion cost includes following

a. Direct Labour

b. Variable Overheads

c. Fixed Overheads

Meaning and Allocation Base

a) Direct Labour:  Workers who are directly associated in the production process. Hence cost of direct labour should be included in computing the conversion cost.

b) Variable Overheads: Variable cost means indirect cost (e.g. indirect labour and indirect material) which vary directly or nearly directly with the volume of productions. Such cost should be allocated on actual use of production facilities.

c) Fixed Overheads: Fixed production overheads are those indirect cost of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and cost of management and administration of factory building. Such overheads should be allocated on Normal capacity of production. (Para 8)

Meaning of Normal Capacity

Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking  into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if approximate normal capacity. There are following three different situations:

Planned Capacity = Actual	Planned Capacity > Actual	Planned Capacity< Actual
Total fixed overheads will be assigned on inventories cost Fixed overheads recovery cost per unit should be computed by using following formula: Fixed overhead/Normal capacity Assigned Cost: Actual Production x Computed assigned cost per unit	Fixed overheads recovery cost per unit should be computed by using following formula: Fixed overhead/Normal capacity Assigned Cost: Actual Production x Computed assigned cost per unit Unallocated fixed overheads should be recognized as an expense in the period in which they are incurred.	Fixed overheads recovery cost per unit should be computed by using following formula: Fixed overhead/Normal capacity Because normal production is higher than normal capacity, hence revised fixed cost per unit should be computed by using following formula: Fixed overhead/Actual capacity Assigned Cost: Actual Production x Computed assigned cost per unit
Example. Fixed Overheads Rs. 100000 Normal Capacity: 10000 units Actual Capacity: 10000 units Recovery Rate: Fixed O.H.100000/ Normal capacity10000 Rate: Rs. 10 per unit	Example. Fixed Overheads Rs. 100000 Normal Capacity: 10000 units Actual Capacity:    8000 units Recovery Rate: Fixed O.H.100000/ Normal capacity10000 Rate: Rs. 10 per unit	Example. Fixed Overheads Rs. 100000 Normal Capacity: 10000 units Actual Capacity:  20000 units Recovery Rate: Fixed O.H.100000/ Normal capacity10000 Rate: Rs. 10 per unit
Assigned Cost: Actual production 10000 x 10—Rs.100000	Assigned Cost: Actual production 8000 x 10—Rs.80000 Period Cost: Rs. 100000-Rs. 80000 = Rs. 20000	Revised Recovery Rate Fixed O.H.100000/ Actual capacity20000 Rate: Rs. 5 per unit Assigned Cost: Actual production 20000 x 5—Rs.100000

Treatment of Joint Product and By Product (Para 9)

Joint Product

1. Where a production process results in more than one product being produced simultaneously and the costs of conversion of each product are not separately identifiable, the costs shall be allocated between the products on a rational and consistent basis. Hence following steps should be used:

a) Compute Joint cost of all main products

b) Apportion Joint Cost over various products on a rational and consistent basis i.e. Relative sales value at split off point or after further processing, physical quantities methods.

By Product

Where by‐products, scrap or waste material are immaterial, they shall be measured at net realisable value and this value shall be deducted from the cost of the main product. Following steps should be used:

a) Compute the joint cost of all main products

b) Compute the net realizable value of by products/ waste / scrap

c) Compute Net Joint Cost – Total Joint Cost Less Net Realizable Value of By Products

Other Cost

1. Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories. (Para 10)

2. Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories. (Para 11)

Exclusion from Cost of Inventories (Para 12)

In order to compute the cost of inventories, following the expenses should not be included in cost of inventories:

1. Abnormal amount of wasted material, labour and other production cost.

2. Storage cost, unless those cost are necessary in the production process prior to a further production stage.

3. Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and

4. Selling and distribution cost.

Cost Formulae

Specific Cost Assign

1. The Cost of inventories of items –

(a) That are not ordinarily interchangeable; and

(b) Goods or services produced and segregated for specific projects shall be assigned by specific identification of their individual costs. (Para 13)

2. Specific identification of cost’ means specific costs are attributed to identified items of inventory. (Para 14)

3. For Example: XYL Limited is engaged in building projects purchase two lift/ elevators for its building projects. In this case elevators should be valued at their respective cost rather than other valuation methods.

Common Basis for Allocation

4. For all the inventory items for which specific cost identification method cannot be used, FIFO or Weighted average method should be used which should reflect the fairest possible approximation to the cost incurred in bringing the inventory to their present location and conditions (Para 16)

5. First in First out Method

It is a method of pricing the issue of materials in order in which they are purchased. The earliest price at which material were received are exhausted first before subsequent price are taken up. (Para 17)

6. Weighted Average Method

Weighted average price method give due weightage to quantities purchased and their purchase price to determine the issue price. The weighted average price issue is calculated by dividing the total cost or materials in stock by total quantity of material prior to each issue. (Para 17)

Formula:

Total Cost of Raw Material Received

Total Quantity Received

Technique for the Measurement of Cost (Para 18)

1. Techniques for the measurement of the cost of inventories such as the standard methods or retail method may be used for convenience if the results approximate to the actual cost.

2. Standard Cost Method

Standard cost take into account normal level of consumption of materials and supplies, labour, efficiency and capacity utilization. If enterprise uses absorption costing based on normal capacity to valuation of inventories, then standard cost system need not be adopted.

3. Retail Price Method

The retail price method is often used in the retail trade for measuring inventories of large numbers of rapidly changing items that have similar margins and for which it is impracticable to use other costing methods.

In this method valuation is done by using the following formula

Sales value less appropriate gross margin

Gross Margin percentage should be adjusted for inventories marked down to below its original selling price.

Example

ABC Limited operate a retail business, for a financial year the following date is given—

Particulars		At Retail Price		At Cost
Value of opening inventories		80000		60000
value of purchase		140000		120000

Compute the value of closing stock of inventories, if sale made during the period is Rs. 200000

Solution:

Average Percentage of Cost to Retail Price
Total Average Cost		(60000+120000)		180000
Total Average Retail value		(80000+140000)		220000
Average Cost				81.82
Gross Margin percentage		(100-81.82)		18.18
Value of Closing Inventories		(20000-18.18%)		16364

 Net Realizable Value

1. Inventories shall be written down to net realizable value on an item‐by‐item basis. Where ‘items of inventory’ relating to the same product line having similar purposes or end uses and are produced and marketed in the same geographical area and cannot be practicably evaluated separately from other items in that product line, such inventories shall be grouped together and written down to net realizable value on an aggregate basis. (Para 19)

2. Net realizable value shall be based on the most reliable evidence available at the time of valuation. The estimates of net realizable value shall also take into consideration the purpose for which the inventory is held. The estimates shall take into consideration fluctuations of price or cost directly relating to events occurring after the end of previous year to the extent that such events confirm the conditions existing on the last day of the previous year. (Para20)

3. There are some instances where the cost is not fully recoverable e.g.

a) Inventories are damaged

b) Inventories are become wholly or partially obsolete

c) Selling price is declined below the cost

d) The estimated cost of completion or estimated costs necessary to make the sale have increased.

4. Inventories are usually written down to net realizable value on an item by item basis. However in the following circumstance it may be appropriate to group similar or related items:

a) Inventories items relating to the same product line that have similar purpose or end use.

b) Produced and marketed in the same geographical area

c) Cannot be practicably evaluated separately from other items in the product line

5. If the inventory is held both, for export market as well as domestic market or for markets where the NRV is not the same, NRV should be based on the estimated quantity expected to be sold in each market and the selling price prevailing in each market.

6. Valuation Principle (Para 21)

a) Finished goods Inventories: Cost or Net Realizable Value whichever is lower

b) Raw material and supplies held for use in production  process: Cost

However in the following situations Raw Material and Supplies should be valued on NRV (Replacement cost)

a) When the finished products in which raw material is incorporated, are expected to be sold below cost.

b) When there is a decline in the price of material and it is estimated that the cost of finished goods will exceed Net Realizable value.

Value of Opening Inventories (Para 22)

The value of the inventory as on the beginning of the previous year shall be:

> 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

> The value of the inventory as on the close of the immediately preceding previous year, in any other case.

2. The above provision deals the specific consideration about the inventories held by the Assessee in the beginning of Previous Financial Year. In general circumstance, value of inventory at the close of previous financial year shall be considered as value of inventory at the beginning of the succeeding previous year.

3. In case, where an Assessee held the inventory at the commencement of business and contribute as capital, then cost of inventory shall opening value of inventory of business.

4. In case, where Assessee held the inventory as capital assets and convert into stock in trade, then the provisions of section 2(47)(iv) treating such conversion as transfer. Section 45(2) provides the provisions of computing the business profit and capital gain.  The Supreme Court in the case of CIT v Bai Shirinbai  K. Kooka [1962] 46 ITR 86 (SC) held that for computing the trading profit the fair market value of the asset on the date of conversion into stock-in-trade is cost to the business.

5. The provisions of section 43C, which provide for the cost of stock in trade, in cases of amalgamation, total or partial partition of an HUF, or receipt under a gift, will or irrevocable trust, require the value of the stock in trade to be taken as per that section, and not as per this ICDS. This is on account of the fact that provisions of the Act would override the provisions of the ICDS.

Comparative Study

Income Computation and Disclosure Standard II	Accounting Standard issued by ICAI	Difference
Valuation of Inventory at the beginning of previous year shall be > 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 > The value of the inventory as on the close of the immediately preceding previous year, in any other case.	No Specific Provisions	AS-2 does not have any specific provision for computing the value of inventory at the beginning of previous year. However as a generally accepted accounted practice closing value of inventory at the preceding previous year shall become the value of inventory of succeeding previous year. Where  inventory held by the Assessee at the commencement of business, then cost of inventory shall be considered as value of inventory at the beginning of business.

Change of Method of Valuation (Para 23)

The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause.

1. ICDS provides that Valuation of Inventories should not be changed once adopted. Valuation of inventory means method used to compute the cost of inventories and cost formulae used to compute the value of inventories.

2. Method of inventories should be changed only when there are sufficient reasonable causes. What causes are considered as sufficient should be considered in accordance to circumstances.

3. Change in the applicable law necessitating a change, change in the nature of business, etc. could be considered as examples of reasonable causes. Changes in the circumstances which lead to the existing method not reflecting the fairest approximation of the cost incurred in bringing the inventory to the present location and condition would be a reasonable cause for changing the method of valuation of inventory.

Valuation of Inventory in case of dissolutions (Para 24)

In case of dissolution of a partnership firm or association of persons or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realizable value

1. The ICDS provides that in case of dissolution of a partnership firm, an association of persons or a body of individuals, the inventory on the date of dissolution shall be valued at the NRV. This is irrespective of the fact whether or not on dissolution the business of the entity is discontinued.

2. The above provisions shall also apply on dissolution of LLP firm.

Comparative Study

Income Computation and Disclosure Standard II	Accounting Standard issued by ICAI	Difference
The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause.	No Specific Provisions	AS – 2 doesn’t include any such provision. However, provisions of AS -2 should be considered in the light of Jurisdiction pre announcement and should be valued on NRV basis.

Transitional Provisions (Para 25)

1. If the borrowing cost and interest which should have not been included in the value of inventories but included in the inventories as on 1^stApril 2016, in such case, these interest and borrowed cost shall continued be included in value of inventories.

2. If such inventories continues to exist at the close of previous year ended on 31^stMarch 2017, then shall be valued by including the interest and borrowing cost, that have been recognised in the beginning of previous year.

Disclosure (Para 26)

The accounting policies adopted in measuring inventories including the cost formulae used.

Assessee should disclose following:

(a) Accounting Policies used: Valuation of Inventories should be done on Cost or Net Realizable Value whichever is lower.

(b) Cost Formulae used: Cost formulae should be FIFO or Weighted Average Method.

(c) Assessee should consider an adjustment to be made about the inclusion of duties and taxes in inventories valued in accordance ICDS. Proper disclosure should be made under Section 145A of the Act by making proper reconciliation along with proper reporting under clause 14(b) of form 3CD.

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;

Assessee should be give separate details of inventories which are valued at standard cost.  There should be confirmation from Assessee side that standard cost is an approximate to actual cost. Normally, Petroleum and Crude Oil Industries normally values its inventories on standard cost basis.

3. The total carrying amount of inventories and its classification appropriate to a person

Assessee should disclose the carrying amount of inventories i.e. closing value of inventories along with its classification such as finished goods, work in progress, raw material, stores and spares.

Comparative Study

Income Computation and Disclosure Standard II	Accounting Standard issued by ICAI	Difference
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;	No Specific Provisions	AS – 2 doesn’t include any such provision. However Assessee could disclose such as additional disclosure.

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25 FAQs on Income Computation and Disclosure Standards (ICDS)