Section-145(2) of Income tax Act, 1961 empowers Central Government to issue Income Computation and Disclosure Standards (ICDS).
Key Features of ICDS
All contract or transactions existing on the 1st day of April, 2015 or entered into on or after the 1st day of April, 2015 shall be dealt with in accordance with the provisions of this standard.
ICDS I –DISCLOSURE OF ACCOUNTING POLICIES
Changes in Accounting Policies
1. All significant accounting policies adopted by the assesse shall be disclosed.
2. Accounting policy can be changed for any “reasonable cause”.
3. Any change in an accounting policy which has material effect: Shall be disclosed along with amount by which such item is affected.
4. If such amount is not ascertainable wholly or in part:The fact shall be indicated.
5. If no material effect in current year, but likely to have material effect in subsequent year: Disclosure to be given in the year when the changes are made.
ICDS II – VALUATION OF INVENTORIES
1. This Income Computation and Disclosure Standard shall be applied for valuation of inventories, except :
which are dealt with by the ICDS VIII;
The following terms are used in this Income Computation and Disclosure Standard with the meanings specified:
1. “Inventories” are assets which include:
2. Net Realisable value
Inventories shall be valued at cost, or net realisable value, whichever is lower.
Cost of Inventories
The costs of purchase shall consist of purchase price
Costs Of Services
The costs of services in the case of a service provider shall consist of
Labour Cost, +
Other costs of personnel directly engaged in providing the service
and attributable overheads.
Costs Of Conversion
It is cost which is incurred in converting materials into finished goods
1. costs directly related to the units of production
2. and a systematic allocation of fixed and variable production overheads
Any By‐products, scrap or waste material which are immaterial,shall be measured at NRV and this value shall be deducted from the cost of the main product.
INCLUDES: cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition
EXCLUDES: Interest Cost specified in the ICDS IX.
Exclusions Of The Cost Of Inventories
Following cost to be EXCLUDED and recognised as expenses of the period:
First‐in First‐out Method (FIFO)
Weighted Average Method (WEIGHTED AVG)
Disclosure & Change of Method of Valuation of Inventory
1. The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause.
ICDS III – CONSTRUCTION CONTRACT
Construction contract means contact negotiated for construction of :
Retention – amount which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified.
Types of Contract
Combining & Segmentation of Contract
This ICDS is applicable to each construction Contract except:
1. Contract revenue shall be recognized when there is reasonable certainty of its ultimate collection.
2. Contract revenue shall comprise of:
3. If income is written off as uncollectable, the same is recognized as
Cost shall include:
Recognition of Contract Revenue and Expenses
1. To be recognized by reference to the stage of completion of the contract.
2. Should be recognized under Percentage of Completion Method (POCM).
3. Mandatory to recognize profit/loss on POCM basis beyond 25%.
4. Retention money to be included as part of contract revenue.
If contract is in progress:
ICDS IV – REVENUE RECOGNITION
Sale of Goods-
1. Revenue is recognized when
Property in goods or all significant risks and rewards of ownership are transferred to the buyer
There is reasonable certainty of its ultimate collection.
2. Where the ability to assess the ultimate collection with reasonable certainty is lacking revenue recognition shall be postponed to the extent of uncertainty involved.
Sale of Services-
Interest, royalties or dividends-
|Particulars of Income||Basis for recognition|
|Royalties||Terms of agreement or any other systematic basis|
|Dividends||Provisions of Income tax Act|
|Discount or premium on debt securities||Time basis|
ICDS V – TANGIBILE FIXED ASSETS
This Income Computation and Disclosure Standard deals with the treatment of Tangible Fixed Assets.
The ICD would apply to assets acquired or construction of which commenced before 31st March, 2015 but not completed till date.
Identification of tangible fixed asset
1. Tangible fixed asset is an asset held for the purpose of producing or providing services and is not held for sale in normal course of business.
2. Stand by equipment and servicing equipment are to be capitalized.
Actual Cost – Components
The actual cost of tangible fixed asset shall include –
The asset is subject to changes on account of its acquisition or construction on account of –
1. Price adjustment, changes in duties or
Exchange fluctuations as specified in ICDS.
The expenditure incurred on startup and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalized. The expenditure incurred after the plant has begun commercial production, that is, production intended for sale or captive consumption, shall be treated as revenue expenditure.
In case of self-generated asset also, the same principles as stated above to arrive at actual cost of the asset.
Any expenditure that increases the benefits derived from the asset are the included in calculation of actual cost of the asset.
When a fixed asset is acquired in exchange for another asset or in exchange of securities, the actual cost shall be thefair value of asset so acquired.
Valuation of asset in Special Cases
Also, if assets are purchased for consolidated price, the consideration is to be apportioned on a fair basis to various assets.
Tangible Assets Register
Where a person owns tangible fixed assets jointly with others, the proportion in the
Actual cost, accumulated depreciation and written down value is grouped together with similar fully owned tangible fixed assets. Details of such jointly owned tangible fixed assets shall be indicated separately in the tangible fixed assets register.
Where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis.
Following disclosures are to be made in respect of tangible fixed assets, which are as under –
ICDS VI – EFFECT OF CHANGE IN FOREIGN EXCHANGE RATES
All foreign currency transactions undertaken on or after 1st day of April,2015 shall be recognised in accordance with the provisions of this standard.
Recognition of Transaction
(Subject to the provisions of Sec.43A or Rule 115 of the IT Act,1961)
1. Initial Recognition
2. Year End Balances
Foreign currency monetary items shall be converted into reporting currency by applying the “closing rate” and exchange difference arising out of settlement shall be recognised as income or expense of that year.
Non-monetary items in foreign currency shall be converted into reporting currency by using the exchange rate at the “date of the transaction” and the exchange difference shall not be recognised as income or expense.
Presentation in Financial Statements
3. Integral Foreign Operations
The financial statements will be translated on the basis of the Recognition principles mentioned above.
4. Non- Integral Foreign Operations
The financial statements will be translated as below:
(Note: When there is a change in the classification of Foreign Operation the new translation procedures should be applied from the date of change in classification.)
Forward Exchange Contracts
The premium or discount arising at the inception of a forward exchange contract shall be amortised over the life of the contract and any exchange difference shall be recognised as income or expense in that period subject to some conditions of recognition of forward contracts.
The ICDS will open up a new area of intellectual and professional challenge, a requirement for technology upgradation for business systems and room for significant litigation in the tax area.
ICDS VIII – TANGIBLE FIXED ASSETS
ICD standard VIII deals with securities held as stock-in-trade.
But does not deal the following (excludes):
Means amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an Arm’s length transaction.
Shares, scrip’s, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, other than Derivatives.
Measurement of Securities
Acquisition by means of Actual Purchase:
Recognized at actual purchase cost.
Actual cost includes purchase price and acquisition charges such as brokerage, fees, tax, duty or cess.
Acquisition by means of Exchange of other securities:
Recognized at fair value or the fair value of the securities issued, whichever is lower.
Acquisition by means of Exchange of another Asset:
Recognized at actual cost of Asset exchanged.
Where unpaid interest has accrued before the acquisition of an interest-bearing security and is included in the price paid for the security, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods; the pre-acquisition portion of the interest is deducted from the actual cost.
At the end of any previous year, securities held as stock-in-trade shall be valued at actual cost initially recognized or net realizable value at the end of that previous year, whichever is lower.
The comparison of actual cost initially recognized and net realizable value shall be done category wise and not for each individual security.
For this purpose, securities shall be classified into the following categories:
(b) Debt securities;
(c) Convertible securities; and
(d) Any other securities other than above.
The value of securities held as stock-in-trade of a business as at the beginning of the previous year shall be:
(b) The value of the securities of the business as on the close of the immediately preceding previous year, in any other case.
In case of securities not listed on a recognized stock exchange; or listed but not quoted on a recognized stock exchange with regularity from time to time, shall be valued at actual cost initially recognized.
Comparison at Category Level v/s Individual Security Level
|Security||Cost||NRV||As per GAAP(Lower of Cost or NRV at Security Level)||As per ICDS(Lower of Cost or NRV at Category Level)|
As per GAAP while Computing Income for Taxation Rs.220/- shall be taxed in the hands of Assesse, while as per ICDS Rs.300/- shall be taxed.
This could be limiting factor where carrying back/drawing back of past losses that needs to be set off.
ICDS IX – BORROWING COST
Borrowing Costs are interest and other costs incurred by a person in connection with the borrowing of funds and include:
1. Commitment charges on borrowings;
2. Amortised amount of discounts or premiums relating to borrowings;
1. Finance charges in respect of assets acquired under finance leases or under other similar arrangements.
Qualifying Asset means:
1. Tangible assetslike land, building, machinery, plant or furniture;
2. Intangible assetslike know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature;
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying assetshall be capitalized as part of the cost of that asset.
Borrowing cost other than for capitalization shall be recognized in accordance with the provisions of the Act.
Borrowing costs eligible for capitalization:
1. If the funds are borrowed specifically for the purpose of acquisition of a qualifying asset, the amount of borrowing costs to be capitalizedon that asset shall be the actual borrowing costs incurred during the period on the funds so borrowed.
2. For generally borrowed funds, the amount of capitalization shall be computed as follows: A*B/C
A = General borrowing costs incurred
B = Avg. costs of qualifying asset appearing in the balance sheet
C = Avg. of the amount of total assets as appearing in the balance sheet
Commencement of Capitalization:
The capitalization of borrowing costs shall commence:
Cessation of Capitalization:
The capitalization of borrowing costs in other cases and when the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalization shall cease:
ICDS X – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
This ICDS deals with contingent Liability and Assets but,
Provisions excludes :-
Is Possible Obligation Is Possible Asset
“that arises from past events and the existence of which will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events”
1. A provision can be recognized when :-
2. No provision shall be recognised for costs that need to be incurred to operate in the future.
3. Only obligations arising from the past events existing independently of a person’s future actions(i.e future conduct of its business) shall be recognised as provisions
4. Where details of a proposed new law have yet to be finalised, an obligation arisesonly when the legislation is enacted.
♠ Best Estimate
Best Estimate of Provisions & Contingent Liability is “Expenditure required to settle a present obligation”
Best Estimate of Contingent Assets “value of economic benefit arising”
These estimates are measured at the end of the previous year. The amount and related income shall not be discounted to its present value.
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 only the person settles the present obligations.
Provisions shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate.
♠ For each class of provision
1. brief description of the nature of the obligation;
2. the carrying amount(CA) at the beginning and end of the previous year;
3. additional provisions made during the previous year, including increases to existing provisions;
4. amounts used, that is incurred and charged against the provision, during the previous year;
5. unused amounts reversed during the previous year; and
6. the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.
(We have not covered ICDS VII – Government Grants)
Special Thanks to CA Virag Shah , CA Jigar Jain, Aasna Shah,Vinil Malde, Rainy Sanghvi, Karan Khatri, Veear Parekh, Nikita Baid, Khushbu Parekh and Kunal Shah who helped us in preparing this article