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Major Differences Between ICDS and Accounting Standards

This Income Computation and Disclosure Standard is applicable to all the assesses following mercantile system of accounting 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.

CA Saloni Thawani

MAJOR DIFFERENCES BETWEEN INCOME COMPUTATION AND DISCLOSURE STANDARDS (ICDS) AND ACCOUNTING STANDARDS

A new paradigm for future ahead ! A future for companies, professional and many more.

The actions are enough fast from the side of government, it seems something BIG is being cooked. A draft of 14 ICDS were first issued in august 2012. Than further on January 2015, public comments were called for a draft of 12 ICDS, and finally 10 ICDS came into for a sudden action on 31 st March 2015.

This Income Computation and Disclosure Standard is applicable to all the assesses following mercantile system of accounting 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 the Income‐tax Act, 1961 ‘the Act’ and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.

The relevant are the ICDS corresponding to accounting Standards

Income Computation and Disclosure Standards No. Income Computation and Disclosure Standards Corresponding to Accounting Standard
ICDS I Accounting Policies AS – 1
ICDS II Valuation of Inventories AS – 2
ICDS III Construction Contracts AS – 7
ICDS IV Revenue Recognition AS – 9
ICDS V Tangible Fixed Assets AS – 10
ICDS VI The Effects of Changes in Foreign Exchange Rates AS – 11
ICDS VII Government Grants AS – 12
ICDS VIII Securities AS – 13
ICDS IX Borrowing Cost AS – 16
ICDS X Provision, Contingent Liabilities and Contingent Assets AS – 29

Income Computation And Disclosure Standards Point of Difference Income Computation and Disclosure Standard Accounting Standard
Income Computation and Disclosure Standard I Relating to accounting policies Disclosure of Accounting Policies – Fundamental Assumption Removed Prudence from the Fundamental Assumptions. — it said–To represent a true and fair view of the state of affairs and income of the business, profession or vocation, the treatment and presentation of transactions and events shall be governed by their substance and not merely by their legal form. The major considerations governing the selection and application of accounting policies are: Prudence Substance over form Materiality
Disclosure of Accounting Policies – Materiality The concept of materiality which is an important consideration in preparing financial statements has not been considered under ICDS. The major considerations governing the selection and application of accounting policies are: Prudence Substance over form Materiality
Disclosure of Accounting Policies – Mark to market losses and expected losses There is a specific provision that marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other ICDS. However, ICDS is silent on the treatment of mark- to- market unrealised gains. Mark to market losses will be provided for in view of prudence concept. Expected losses will be provided for in accordance with relevant Indian GAAP standards.
Disclosure of Accounting Policies – Changes in accounting policies Changes in accounting policy will not be done unless for a ‘reasonable cause’. ICDS does not define reasonable cause and thus would involve exercise of judgement by management and tax authorities. Changes in accounting policies should be made only if it is required by statute, for compliance with an Accounting Standard or for a more appropriate presentation of the financial statements on a prospective basis.
If a change is made in the accounting policies which has no material effect for the current year but which is reasonably expected to have a material effect in later years, the fact of such change should be appropriately disclosed in the year in which the change is adopted and also in the year in which such change has material effect for the first time If a change in the accounting policy has no material effect on the financial statements for the current period, but is expected to have a material effect in the later periods, the same should be appropriately disclosed.
Disclosure of Accounting Policies – Prior period items ICDS ‘does not’ consider prior period items inclusion in determination of net profit or loss of the period in which the error pertaining to a prior period is discovered. Prior period items are included in determination of net profit or loss of the period in which the error pertaining to a prior period is discovered and are separately disclosed in the statement of profit and loss in a manner that the impact on current profit or loss can be perceived.
Income Computation and Disclosure Standard II Relating to valuation of inventories Valuation of Inventories – Inventory of services ICDS requires valuation of inventory of services at cost or net realizable value, whichever is lower. Cost of services shall consist of labour and other cost of personnel directly engaged in providing the service including supervisory personnel and attributable overheads. Earlier not services but stores, spares, raw material and consumables included while providing services were to be valued according to AS – 2.
Valuation of Inventories – Methods for ascertaining cost of inventories Retail method is permitted as technique for measurement of cost if it is impracticable to use ‘FIFO’ or ‘Weighted Average Cost Formula’. Techniques such as standard cost or retail method may be used for convenience, if the results approximate the actual cost.
Valuation of Inventories – Value of inventory at the beginning of the previous year As per ICDS 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. Whereas as per AS -2, there is no such specific provision in it.
Valuation of Inventories – Change of method of valuation of inventory As per ICDS the method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause. As per AS – 2 , a change in method of valuation of inventories should be made only if it is required by statue or for compliance with an AS or if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.
Valuation of Inventories – In case of certain dissolutions As per ICDS, in case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realisable value. As per AS – 2, these situations are not considered under it considering the going concern assumption.
Income Computation and Disclosure Standard III Relating to construction contracts Construction Contracts – Method for recognising cost and revenue ICDS prescribes use of percentage of completion method except during early stages of a contract when the outcome of the contract cannot be estimated reliably. In this case, revenue is recognised to the extent of cost incurred. This is possible only upto 25% of the work is completed otherwise proportionate method will apply. Thus, profit recognition has to start compulsorily once 25% stage is completed. Under AS 7, contract revenue and contract cost are recognised by reference to the percentage of completion method if the outcome of the contract can be estimated reliably, else, revenue is recognised only to the extent of costs incurred if recovery is probable.
Construction Contracts – Pre construction income As per ICDS, pre – construction income in the nature of interest, dividend and capital gains shall not be reduced from the cost of construction, rather they will be taxed as income. But incomes other than interest, dividend and capital gains shall be reduced from contract cost which are not included in contract revenue. As per AS – 7, cost that relate directly to a specific contract may be reduced by ‘any’ incidental income that is not included in contract revenue.
Construction Contracts – Recognition of loss As per ICDS, contract costs are to be recognised as an expense in the period in which they are incurred and thus expected loss should be recognised in proportion of work completed. As per AS – 7, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately.
Construction Contracts – Condition on non recognition of revenue ICDS, no where emphasises non recognition of contract revenue, if it is not possible to reliably measure the outcome of a contract. Whereas, AS – 7, posses a tight condition of recognising revenue i.e. total contract revenue could be measured reliably.
Income Computation and Disclosure Standard IV relating to revenue recognition. Revenue Recognition – Methods of measuring performance of service ICDS, prescribes only one method for recognising revenue from service transaction i.e. ‘percentage completion method’ alone. AS – 9, prescribes two methods for recognising revenue from service transactions that are ‘percentage completion method’ and ‘completed service contract method’. The methods could be used either or ways .
Income Computation and Disclosure Standard V relating to tangible fixed assets. Accounting for Fixed Assets – Non monetary consideration ICDS, prescribes that when a tangible fixed asset is acquired in exchange for another asset, or in exchange for shares or other securities , the fair value of the tangible fixed asset so acquired shall be its actual cost. AS – 10, prescribes that when fixed asset is acquired in exchange for another asset, shares or other securities issued, cost of asset acquired should be recorded either at fair market value of asset given up / shares or securities issued or fair market value of asset aquired, whichever is more clearly evident.
Accounting for Fixed Assets – Identification of tangible fixed assets ICDS, prescribes capitalization of machinery spares which can be used only in connection of tangible fixed asset and its use is irregular. As per AS -10, spares which can be used only in an item of fixed asset and its use is expected to be irregular should be allocated on a systematic basis over a period not exceeding the useful life of the priciple item.
Accounting for Fixed Assets – Revaluation of assets ICDS, does not incorporates in itself the provisions relating to revaluation of fixed assets, hence revaluation would not be recognised while computing income. Whereas AS -10, recognised the concept of revaluation well while calculating income.
Accounting for Fixed Assets – Transfers ICDS, suggests that income arising on transfer of a tangible fixed asset shall be computed in accordance to the provisons of the Act. Whereas as per AS -10, the gain or loss arising on disposal are generally recognised in the profit and loss statement and in case of loss arising out of revalued asset, an increase which was previously recorded as credit to revaluation reserve and which has not been subsequently reversed or utilised, it is charged directly to that account.
Income Computation and Disclosure Standard VI relating to the effects of changes in foreign exchange rates. Effects of changes in foreign exchange rates – Scope Exception ICDS contains no scope exception for exchange differences arising from foreign currency borrowings which may be regarded as an adjustment to interest cost. Whereas as AS -11, contains an exception for exchange differences arising from foreign currency borrowings to the extent considered as an adjustment to interest costs.
Income Computation and Diclosure Standard VII relating to government grants. Government Grants – Treatment of government grants ICDS, does not prescribes the capitalization of government grants i.e. Government grant should either be treated as revenue receipt or should be reduced from the cost of fixed assets based on the purpose for which such grant or subsidy is given. Whereas AS – 12, prescribes two broad approaches i.e capital approach or the income approach.
Government Grants – Recognition of government grants ICDS prescribes the conditions for recognition of government grants. They are : The person receiving the grant shall comply with the conditions attached to them and the grants will be received, but it firmly states that the recognition of government grants shall not be postponed beyond the date of actual receipt. Whereas AS – 12, states the conditions for recognising the grants as follows : where there is reasonable assurance that the enterprise will comply with the conditions attached to them and where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made. It firmly states that the mere receipt of a grant in no ways stands as a coclusive evidence that the conditions attaching to the grant have been or will be fufilled.
Income Computation and Diclosure Standard VIII relating to securities. Securities ( Realted to AS -13, Accounting for investments ) – Scope As ICDS, deals with computation of income under business or other sources heads hence it only deals with securities held as stock – in – trade. Whereas under AS – 13, securities held as stock-in-trade are outside the scope, however provisions of AS -13 relating to current investments are applicable to securities held as stock in trade with suitable modifications.
Securities ( Realted to AS -13, Accounting for investments ) – Subsequent measurement of securities ICDS states that the securities should be valued at lower of cost or net realizable value. It further elaborates that the comparison of cost and NRV shall be done category wise and not for each individual security. The major heads of classification are (i) shares (ii) debt securities (iii) convertible securities (iv) any other securities not covered above. Whereas, AS – 13, values long term and current investments differently, i.e long term investments are valued at cost and current investments are valued at cost or fair value which ever is lower.
Securities ( Realted to AS -13, Accounting for investments ) – Subsequent measurement of securities ICDS, prescribes that the securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised. AS -13, incorporates in itself no such condition related to recognition of cost of unlisted or listed but not quoted on a recognised stock exchange.
Securities ( Realted to AS -13, Accounting for investments ) – Subsequent measurement of securities ICDS prescribes that where the actual cost initially recognised cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of first-in-first-out method. AS – 13, incorporates in itself no such condition of first-in-first-out method.
Securities (Related to AS -13, Accounting for investments ) – Recognition and initial measurement of securities ICDS, prescribes that when a security is acquired in exchange for other securities or for another asset, the fair value of the security so acquired shall be its actual cost. Whereas AS -13, firmly prescribes that in case a security is acquired in exchange for another security, the fair value of the securities issued should be its actual cost. Whereas in case a security is acquired in exchange for another asset, acquistion cost of investment is fair value of the asset given up or fair value of the investment received if it is more clearly evident.
Income Computation and Diclosure Standard IX relating to Borrowing costs. Borrowing Cost – Meaning and Inclusion ICDS is similar to AS -16 except that exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest cost are not covered under it. Whereas AS – 16, includes in itself exchange difference arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
Borrowing Cost – Meaning of qualifying asset ICDS, to remain in tandem with the Act brought a major change. I.e all assets ( tangible as well as intangible ) other than inventories regardless of the time, will be considered for capitalization of borrowing cost. Hence for capitalization the condition of extension has been removed. As per AS – 16, Qualifying asset is one which takes substantial period of time to get ready for its intended use or sale.
Borrowing Cost – eligibilty for capitalization ( specific borrowing ) In case of specific borrowing, ICDS does not allows income earned on temporary investment of borrowed amount to be deducted from the actual borrowing cost. Whereas, AS -16, prescribes that if funds are borrowed specifically for purchase of qualifying assets, the temporary income earned on those borrowed amount to be deducted from the actual borrowing cost.
Borrowing Cost – eligibilty for capitalization ( general borrowing ) ICDS, perscribes the following method of capitalization of generally borrowed fund. i.e. A * B / C (detailed formula at last*) Under AS – 16, borrowing cost eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset. i.e. weighted average rate of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period other than borrowings made specifically for the purpose of obtaining qualifying asset. Amount of borrowing cost capitalized during a period should not exceed the amount of borrowing cost incurred during that period.
Borrowing Cost – commencement for capitalization ICDS, prescribes that commencement of capitalization should begin as follows: In case of specific borrowings from the date on which funds were borrowed and in case of general borrowings from the date on which funds were utilised. Whereas AS – 16, prescribes three conditions to be fulfilled in entirety before the commencement of capitalization of borrowing cost. Those are: (i) Activities, which are essential to prepare the asset for its intended use, should be in progress. (ii) Borrowing cost is incurred. (iii) Expenditure for acquisition, construction or production of a qualifying asset is being incurred.
Borrowing Cost – commencement for capitalization ICDS, contains in itself no condition as to suspension of capitalisation during interruption of active development. Whereas AS- 16, prescribes that capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted.
Income Computation and Diclosure Standard X relating to provisions, contingent laibilties and contingent assets. Provisions, Contingent laibilities and Contigent assets – Scope ICDS while defining the scope excludes the following: (a) resulting from financial instruments;

(b) resulting from executory contracts;

(c) arising in insurance business from contracts with policyholders; and

(d) covered by another Income Computation and Disclosure Standard.

Whereas AS -29, while defining the scope excludes the following : (a) Those resulting from financial instrument that are carried at fair value. (b) Those resulting from executory contracts, except where the contract is onerous. ( c) Those arising in insurance enterprise from contracts with policy holders. (d) Those covered by another Accounting Standard.
Provisions, Contingent laibilities and Contigent assets – Recognition ( Provision ) According to ICDS, A provision should be recognised when it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation. According to AS – 29, A provision should be recognised when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
Provisions, Contingent laibilities and Contigent assets – Recognition ( Contingent Assets ) According to ICDS, contingent assets should be assessed continually and when it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income are recognised in the previous year in which the change occurs. According to AS – 29, contingent assets are assesed continually and if it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs.

* where A = borrowing costs incurred during the previous year except on borrowings directly relatable to specific purposes;

B = (i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the first day and the last day of the previous year

(ii) in case the qualifying asset does not appear in the balance sheet of a person on the first day or both on the first day and the last day of previous year, half of the cost of qualifying asset;

(iii) in case the qualifying asset does not appear in the balance sheet of a person on the last day of previous year, the average of the costs of qualifying asset as appearing in the balance sheet of a person on the first day of the previous year and on the date of put to use or completion, as the case may be other than those qualifying assets which are directly funded out of specific borrowings; or

C = the average of the amount of total assets as appearing in the balance sheet of a person on the first day and the last day of the previous year, other than those assets which are directly funded out of specific borrowings.

Thus a paradigm that is expected to relieve the sytstem of Income tax laws from the complexties it was facing. At this moment of change, the experienced chartered would be at par with the freshers, but obviously the experienced one with their great grasping power and experience would be ruling once again. It is this economy period which along with GST, Companies Act, 2013, ICDS etc is bringing a major change not only for the industry to change but also a challenging period for Chartered and many more Professionals.

Categories: Income Tax

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