icds - dayavanti rana

INCOME COMPUTATION AND DISCLOSURE STANDARDS

By Dayavanti Rana__th August 2015

Background

• Section 145(1) of the Income-tax Act, 1961 (Act) stipulates that the method of accounting for computation of income under the heads “Profits and gains of business or profession” and “Income from other sources” can either be cash or mercantile system of accounting.

• Section 145(2) of the Act states that the Central Government may notify the accounting standards to be followed by any class of assesses or in respect of any class of income

• Accordingly, two tax accounting standards had been notified until now:

1. Disclosure of accounting policies2. Disclosure of prior period and extraordinary items and

changes in accounting policies

Background

• Finance Act, 2014 amended section 145(2) of the Act to substitute “accounting standards” with “income computation and disclosure standards” (ICDS).

• The CBDT constituted the Accounting Standards Committee which had earlier issued draft 14 Tax Accounting Standards in 2012. On the basis of the suggestions and comments received from the stakeholders, CBDT had revised and issued 12 draft ICDS for public comments.

• On 31st March, 2015, the Central Government has notified 10 our of the 12 draft ICDS which shall be effective from 1st April, 2015.

• The introduction of ICDS may significantly alter the way companies compute their taxable income.

Applicability• ICDS are applicable for computation of income chargeable under

the head “profits and gains of business or profession” and “income from other sources” and not for maintaining books of accounts.

• ICDS applies to all taxpayers

• In case of conflict between the provisions of the Act and ICDS, the provisions of the Act shall prevail to that extent.o What if in case of conflict between HC / SC rulings and ICDS?o The risk of best judgment assessment u/s 144 if positions

adopted as per ICDS which is contrary to rulings.

• ICDS applies only to taxpayers following mercantile system of accounting.

ICDS - 1

ACCOUNTING POLICIES

ICDS – 1 Accounting PoliciesFundamental Accounting Principles• Going Concern:

– Apart from business, reference to profession or vocation– ICDS not to apply to books of account, implication of the

assumption?

• Consistency:– Assumption that the accounting policies are consistent from one

‘period’ to another– Implies that ordinarily accounting policies cannot be changed

• Accrual:– The Notification dated 31/3/2015 states that the ICDS shall be

followed by all assessees following mercantile system of accounting.– The assessees following cash system of accounting are outside the

purview of ICDS

ICDS – 1 Accounting Policies• Accounting policies (AP)

should be consistent– ICDS permits change in AP when

Required by the statuteCompliance with ICDSMore appropriate presentation of

Financial StatementsAs per ICDS, AP should not be

changed without a reasonable cause

ICDS – 1 Accounting Policies• Considerations in selection and change

of Accounting Policies– Accounting policies adopted by a person shall

be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose, the treatment and presentation of transactions and

events shall be governed by their substance and not merely by the legal form; and

marked to market loss or an expected loss shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other ICDS.

ICDS – 1 Accounting Policies• Prudence as a consideration for selection of accounting policy

– AS-1 includes Prudence as one of the consideration for selection of AP– The accounting standard u/s 145(2) notified vide 25.01.1996 notification

included ‘Prudence’ as a consideration for selection of AP.– ICDS omits the Prudence - Implications ?

• Disclosure of AP– All significant AP shall be disclosed– Impact of change in AP to be disclosed– Disclose deviation from fundamental accounting assumptions

• Transitional provisions– All contract or transaction existing on 01st April 2015 or entered into on

or after 01st April 2015 shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognized in respect of the said contract or transaction for the previous year ending on or before 31st March 2015

ICDS – 1 Accounting Policies• Variation from Ind. AS

– No concept of materiality in ICDS– In absence of Prudence as an AP,

there could be cases of earlier recognition of gains and delay in recognition of losses

ICDS - 2INVENTORIES

ICDS – 2 Inventories• Inventories defined as assets

– Held for sale in ordinary course of business– In process of production for such sale– In form of materials or supplies to be consumed in

production process or rendering of services

• Scope Exclusions– Work in progress arising in construction contract

including directly related service contract– Work in progress dealt by other ICDS– Shares, debentures and other financial instruments held

as stock in trade– Producers inventories of livestock, agriculture and

forest products, mineral oils, ores and gases– Machinery spares

ICDS – 2 Inventories• Measurement

– Valuation at cost , or net realizable value, whichever is lower

• Cost of Inventories shall comprise of :– 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 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

ICDS – 2 Inventories• Cost of Services in the case of Service Provider shall consist of :

– labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.

• Cost of conversion :– Directly related product cost plus systematic allocation of fixed and variable

overheads– Systematic allocation shall be based on normal capacity after considering

any loss on capacity thereon– In case of production of more than one product from the same production

process, the allocation to be on a rational and consistent basis– By products, scrap valued on NRV and to be reduced from the value of main

product.

• Other Costs :– to the extent that they are incurred in bringing the inventories to their

present location and condition.– No Interest and other borrowing costs, unless they meet the criteria in ICDS

9

ICDS – 2 Inventories• Exclusions from the Cost of Inventories

– Abnormal amounts of wasted materials, labour, or other production costs;

– Storage costs, unless necessary in the production process;

– Administrative overheads not contributing to bring the inventories to their present location and condition ;

– Selling costs [(AS-2) also refers to distribution costs]

• Cost formulae– Specific identification of cost– FIFO or weighted average cost (same as AS-2)– The option of standard cost method as a technique for

the measurement of cost as per AS 2 has not been provided in the ICDS (CA 2013 allows this method)

ICDS – 2 Inventories– The option of Retail method as a technique for the measurement

of cost has been permitted subject to the conditions that: It is to be used only when it is impracticable to use the other prescribed

methods Appropriate gross margin percentage to be reduced from sales to be used

for valuing inventory

• Net Realisable Value (NRV)– Inventories shall be written down to NRV on an item-by-item

basis.– Inventories having similar characteristics or from within same

product line where separate evaluation is not feasible shall be grouped together and written down to NRV on an aggregate basis.

– Valuation to be on the basis of most reliable evidence available.– Purpose for holding inventory to be considered.– Year end fluctuations to price affecting the balances of previous

year financials shall be taken into consideration– Only when the cost of finished goods is expected to increase its

NRV, the materials and other consumables to be valued at NRV.

ICDS – 2 Inventories• Value of Opening 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.

• Valuation of inventory in case of certain dissolutions– In case of partnership firm, AOP or BOI inventory on the date of

dissolution shall be valued at the net realisable value, whether or not business is discontinued

– The rule is intended to settle the ratios laid down in various court judgements

– The rule does not take companies within its sweep, whether on amalgamation or otherwise

No Such requirement in AS.

ICDS – 2 Inventories• Transitional Provisions

– Interest and other borrowing costs, which do not meet criteria for its recognition as a component of cost, but included in the cost of opening inventory as on 01-04-2015, shall be taken into account for determining cost of such inventory for valuation as on close of previous year beginning on or after 01-04-2015 if such inventory continue to remain part of inventory as on close of the previous year beginning on or after 01-04-2015

• Disclosure– the accounting policies adopted in measuring inventories

including the cost formulae used; and– the total carrying amount of inventories and its

classification appropriate to a person.

ICDS - 3

CONSTRUCTION CONTRACTS

ICDS – 3 Construction Contracts

• Scope of the ICDS– Determination of income for a

construction contract of a ‘contractor’Is it applicable to a developer of real

estate or other assets ??CBDT report recommends separate ICDS

for determination of income of developers, etc.

Revenue recognition in line with AS 7 (percentage completion method)


• Construction Contract shall mean– A contract for construction of an asset, rendering of services

for such construction, destruction or restoration of any asset and restoration of environment following destruction of asset

• Combining and Segmenting of Contracts– ICDS may be applied to separate components of a contract

or by combining a group of contracts– Contracts to be identified separately when

There are separate proposals for each asset Separate negotiation for each asset has been agreed upon Costs and revenues for each asset can be identified

Group of contracts to be treated as a single contract when All contracts in the group are negotiated as a “single package” They are closely interrelated representing in effect a “single project

with overall profit margin” Are performed concurrently or in a continuous manner


• Contract revenue– Amount of revenue to include retentions– revenue on account of variations in

contract work, claims and incentive payments to be recognised only to the extent that it is possible that they will result in revenue and they are capable of being reliably measured (recognition may be pre-poned)Revenue already recognised when subsequently

written off shall be treated as expense and not as a deduction from contract revenue


• Contract Costs– costs that relate directly to the specific contract;– costs that are attributable to contract activity in

general and can be allocated to the contract;– such other costs as are specifically chargeable to

the customer under the terms of the contract; and– allocated borrowing costs in accordance with the

ICDS on Borrowing CostsThese costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue


– Costs not attributable or allocable to any contract activity shall be excluded from the costs of a construction contractClaim for deduction of such excluded expenses under ITA

– Contract cost that relate to future activity on the contract to be recognised as an asset i.e. to be expensed out when corresponding revenue is recognisedThe corresponding AS 7 contains a caveat that recognition

of asset is subject to probability of earning of future revenue – which is not incorporated in ICDS

– Contract cost may include the costs incurred in securing a contract, subject to such cost being separately identifiable and there is a probability of contract being obtained.


• Recognition of Contract Revenue and Costs– Unless outcome of a contract, during the early stages of the

contract, cannot be estimated reliably, the contract revenue must be recognised as per the stage of completion of work.

– In case if outcome cannot be estimated reliably during the early stage of the contract, the contract revenue shall be the same as the contract cost

– Notwithstanding that the outcome of a contract may not be estimated reliably, when the contract completion achieves the bench mark of more than 25%, the contract revenue and contract expenses must be recognised to the extent of stage of completion reached (the percentage completion method)

– Pursuant to this method the proportionate profits or loss will be determined for taxation purpose on actual basis

– Unlike AS 7 whereby an estimated/anticipated loss is required to be recognised in full at any stage of completion, ICDS does not take cognizance of such loss at all


• Changes in Estimates– The percentage of completion method is applied on a

cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Where there is change in estimates, the changed estimates shall be used in determination of the amount of revenue and expenses in the period in which the change is made and in subsequent periods.

– If the revised estimates of cost and revenue in the subsequent period are pessimistic to the previous estimates, there could be a reversal of revenue and profits recognised in the earlier year/s. Will department refund the tax? Or will find fault with estimates? Where will the tax auditor stand? – the breeding ground for litigation


• Determination of stage of completion– The stage of completion of a contract shall be determined with

reference to: The proportion that contract costs incurred for work performed up to the

reporting date bear to the estimated total contract costs; or surveys of work performed; or completion of a physical proportion of the contract work.

– When the stage of completion is determined by reference to the contract costs incurred method, only those contract costs that reflect work performed are included in costs incurred up to the reporting date. Contract costs which are excluded are:

contract costs that relate to future activity on the contract; and payments made to subcontractors in advance of work performed under

the subcontract– The ICDS uses the phrase ‘reporting date’ at various places –

which is inconsistent with the underlying concept that ICDS has no bearing on the books of account. Ideally therefore the phrase should be replaced with ‘end of previous year’


• Transitional Provisions– Revenue from contracts entered into on or after 1st April,

2015 shall be recognised as per the principles of this ICDS also taking into consideration the revenue from the said contract already recognised before the said date.

• Disclosure :– Amount of revenue recognized during the period, and– the methods used to determine the stage of completion of

contracts in progress– For contracts in progress:– Amount of costs incurred and recognized profits ( less

recognized losses)– Advances received,– retention amount

ICDS - 4

REVENUE RECOGNITION

ICDS – 4 Revenue Recognition

• Definition of revenue (ICDS)– “Revenue” is the gross inflow of cash, receivables or other consideration

arising in the course of the ordinary activities of a person from the sale of goods, from the rendering of services, or from the use by others of the person’s resources yielding interest, royalties or dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration

• Definition of Revenue (AS 9)– Revenue is the gross inflow of cash, receivables or other consideration

arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration


• Recognition of revenue for:– Sale of Goods

Transfer of property along with its significant risks and rewards – reasonable certainty of ultimate collection required

– Rendering of servicesPOCM applied for revenue recognition and

concepts laid down in ICDS 3 to be followed– Other source based incomes

Interest / discounts / premium based on the time and maturity of security

Royalty based on the terms of the agreementDividend based on the provisions of the IT Act.


• The ICDS omits the test of:– measurability of the revenue in the

case of sale of goods– ultimate collectability in the case of

revenue recognition in the case ofRendering of services• Interest, royalties or dividend income

– Unlike AS 9, choice of completed contract method is withdrawn in ICDS. Only proportionate completion method (PCM) to be followed


• Disclosure:– In sale of goods transaction, total amount not

recognized as revenue due to lack of certainty of ultimate collection and nature of uncertainty.

– the methods used to determine stage of completion of service transactions in progress.

– Amount of revenue recognized from service transactions.

– For service transactions in progress:Advances receivedretention amountcosts incurredrecognized profits and losses


• Transitional Provisions– Same as applicable for ICDS 3 –

Construction Contracts– Revenue from transactions entered

into on or after 1st April, 2015 shall be recognised based on the principles of this ICDS also taking into consideration the revenue recognised on the same before the said date.

ICDS - 5

TANGIBLE FIXED ASSETS

ICDS – 5 Tangible AssetsAS- 10 ICDS

• It applies to tangible fixed assets as well as goodwill

• It applies to only tangible fixed assets.

• Cost of fixed asset comprises its purchase price, non refundable taxes and any directly attributable cost of bringing the asset to its working condition for its intended use.

• It has similar definition to AS 10 but the words used are actual cost as compared to cost in AS -10.

Impact:The Act provides for the definition of the term ‘actual cost’ and it is again repeated in the ICDS but it does not modify the concept of actual cost. However when there is conflict in interpreting the abovementioned term under ICDS and Act, the Act will prevail over ICDS. Such a narrow definition in ICDS might encourage the taxpayer to contend that expenditure on acquisition which is not part of actual cost should be deductible as revenue instead of capitalising.


• AS 10 read with guidance note on Machinery for Spares provides for charge to P/L, however spares to specific asset should be capitalised and shall form part of that Asset .

• It provides that machinery spares which can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, shall be capitalized.

Impact:ICDS specifies that machinery spares dedicated to a tangible fixed asset should be capitalized, it does not provide any further guidance on subsequent treatment that whether it will form part of the block of the asset. However, in absence of such clarification spares would form part of the block and once the principal asset is put to use, the spares shall qualify for the depreciation at the same rate.

AS- 10 ICDS• When a fixed asset is

acquired in exchange or in part exchange for another asset, the cost of acquired asset should be recorded either at FMV or NBV of asset given up, adjusted for any balancing payment or receipt of cash or other consideration.

• When a tangible fixed asset is acquired in exchange for other asset, the fair value of the tangible fixed asset so acquired shall be its actual cost

• Fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its FMV, or the FMV of the securities issued, whichever is more clearly evident.

• When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost.

Usual Practice: Concept of cost should normally relate to what is given up.

ICDS – 5 Tangible Assets


• Para 15.3 says that when several assets are purchased for consolidated price, the consideration is apportioned on fair basis as determined by competent valuers.

• When several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis.

Impact: In absence of determination by registered valuers in ICDS words “fair basis” becomes subjective and might be prone to litigation.

ICDS – 5 Tangible Assets• Depreciation on a tangible fixed

asset and income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act.

• The requirement of maintenance of ICDS specific tangible fixed asset register as proposed earlier has been done away with.

ICDS – 5 Tangible Assets• Disclosure

– Description of asset or block of asset– Rate of depreciation and depreciation allowable– Actual cost or Written down value of asset– Additions or deductions during the year with dates. In case of

addition, adjustment of– CENVAT claimed and allowed, change in exchange rates of

currency, Subsidy or grant.– Written down value at end of the year.

• Transitional Provisions– Assets which are acquired / constructed or yet to be acquired

/ constructed as on 1st April, 2015 shall follow the principles laid down in this standard for determination of actual cost and the actual cost already recognised before the said date shall also be taken into consideration.

ICDS - 6

EFFECTS OF CHANGES IN FOREX RATES

ICDS – 6 Changes in Forex Rates - Effects

• Scope– treatment of transactions in foreign currencies– translating the financial statements of foreign operations– treatment of foreign currency transactions in the nature of

forward exchange contracts.

• Definitions – new/modified– “foreign currency transaction” is a transaction which is

denominated in or requires settlement in a foreign currency, including transactions arising when a person:

buys or sells goods or services whose price is denominated in a foreign currency; or

borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or

becomes a party to an unperformed forward exchange contract; or Otherwise acquires or disposes of assets, or incurs or settles

liabilities, denominated in a foreign currency


• Initial Recognition– Transaction to be recorded at the exchange

rate prevailing on the date of the transactionThe option of adopting weekly/monthly rate is

available if there is no significant fluctuations in the exchange rates

No guidance as to source of the rate to be adopted. Currently, on the materiality ground, varied practices are followed. For ITA in the wake of materiality concept, unproductive administrative hassles likely to emerge

This rule likely to create more difficulties in the translation of statements of foreign operations where the taxpayer has little control over the accounting practice followed overseas


• Conversion at Last Date of Previous Year– Foreign currency Monetary Items (trade

receivables / payables etc.)To be converted into reporting currency by applying the

closing rateIn absence of reasonable accuracy of the closing rate,

the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realized from or required to disburse such item at the last date of the previous year.

−Foreign currency Non-Monetary Items (inventory)To be converted into reporting currency by using the

exchange rate at the date of the transaction−No deviation from AS hence no change in tax

position*


• Recognition of Exchange differences (ED) [other than forward contracts]– For monetary items, ED on conversion or

settlement to be recognised as income or expense of the year

– ED arising on conversion of non-monetary items shall not be recognised as income or expense of the year

• This is however, subject to over-riding provisions of section 43A of ITA or Rule 115 of IT Rules.


Exchange Difference in case of Imported and Non-Imported assets

AS- 11 ICDS Requires recognition in P&L

A/c. Option of capitalization u/s

211(3C) of companies Act, 1956 as per which (Para 46 & 46A) exchange differences arising in case of long-term foreign currency monetary items shall be either adjusted to capital asset or accumulated in FCMITDA.

Requires recognition in P&L A/c subject to provisions of Section 43A.

No Para 46 & 46A exists.

Impact for Imported AssetsPresently, Section 43A permits capitalization on payment basis of exchange differences relating to asset acquired from a country outside India. Hence, there would be no change in the tax position.Impact for Non-Imported AssetsSection 43A does not apply since it applies only if it relates to the imported assets.Presently, such FE differences are not recognized for tax purposes i.e. gain is not taxable, loss is not deductible/ allowable.


• Conclusion

– Since ICDS requires recognition in P&L A/c subject to provisions of Section 43A and Section 43A applies only if it relates to imported assets, a controversy may arise, whether such exchange fluctuation gain or loss on capital monetary items (not relating to imported assets) would be allowable as an income or expense as per ICDS or not.

– May be considered as non-cognizable for tax purposes based on its Capital nature.

– It is also arguable that judicial settled position would remain unchanged as the Act shall prevail in case of conflicts with ICDS.


• Integral Foreign Operations– It shall comprise of branch only– The FS of an integral foreign operation shall be translated using the

same principles and procedures applicable to own transactions– The definition of foreign operations given under ICDS does not

include a subsidiary, associate or joint venture of the reporting enterprise. Hence, the tax positions will remain the same in the case of foreign operations being a subsidiary, associate or joint venture of the person

• Non-integral Foreign Operations– It shall comprise of branch only– The assets and liabilities, both monetary and non-monetary, of the

non-integral foreign operation shall be translated at the closing rate;– Income and expense items of the non-integral foreign operation shall

be translated at exchange rates at the dates of the transactions; and– All resulting exchange differences shall be recognised as income or

as expenses in that previous year (as per AS 11, it is accumulated in the reserve account until the disposal of the net investment)


• Impact:– FE differences arising from the translation of the financials on MTM

basis will have to be considered in Computation of Income Statement.

– Capital and revenue items are not distinguished in ICDS. MTM to be recognised even on tangible fixed assets.

– Recognition of the amount lying in the FCTR on 31st March, 2015.

– In case of change of foreign operations from integral to non-integral and vice-versa, no adjustment is required for the foreign exchange difference, since unlike AS, no FCTR is maintained under ICDS.

– DTL or DTA will be created as the case may be due to the above difference.

– On disposal of Net Investment in Non Integral Operation, according to AS 11 the balance in FCTR will be recognized as income which will result into reversal of DTA.


Nature of forward

contractsSpeculative /

Trading

Firm Commitment

/ Highly probable forecast

transaction

Others – say hedge

Expenses / loss / gains On settlement

Discounts or premiums On settlement On settlement Amortized over

contract life

Mark to market recognition

No No Yes


• Other forex derivatives like, futures, interest rate swaps, etc. are not covered by ICDS VI.

• ICDS I on accounting policies provides that marked to market loss or an expected loss shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard. .

• Hence, in case of forex derivatives not covered by ICDS VI, ICDS I would apply.

• Forward exchange contract includes foreign currency option contract also.


• Transitional Provisions– All foreign currency transactions existing on– Exchange differences arising in respect of

monetary items or nonmonetary items on the settlement thereof

– The financial statements of foreign operations for the previous year commencing on

– All forward exchange contracts existing on01st April 2015 or undertaken on or after 01st April2015 shall be recognized in accordance with provisions of this standard and the situation thereof existing before the said date shall be taken into consideration.

ICDS - 7

GOVERNMENT GRANTS

ICDS – 7 Government Grants• Scope of the Standard

– Deals with the treatment of Government Grants– Subsidies, cash incentives, duty drawbacks, waiver, concessions,

reimbursements etc.• Exclusions from the Scope

– Government assistance which is not in the form of Government Grants

– Government participation in the ownership of the enterprise• Definitions

– “Government” refers to the Central Government, State Government, agencies and similar bodies, whether local, national or international

– “Government Grants” are assistance by government In cash or kind For past or future compliance with certain conditions and

Excludes the assistance in a form which cannot be valued Normal trading transactions with government

ICDS – 7 Government GrantsAS- 12 ICDS VII

• Recognition of grant− On reasonable assurance

of compliance of attached conditions and reasonable certainty of ultimate collection

− Mere receipt is not sufficient

− On reasonable assurance of compliance of attached conditions and reasonable certainty of ultimate collection

− Recognition cannot be postponed beyond date of actual receipt

Impact: If the grant is recognized on receipt basis, it would create DTA/DTL and MAT mismatch also. Further, an issue may arise whether grants received in earlier years but not recognized pending fulfillment of conditions will require recognition on receipt basis as per ICDS in year of transition.• Grants other than those covered by specific provisions− Revenue grant to be

credited as income or reduced from related expense.

− Same as AS-12 but no clarification that it is restricted only to revenue grants.


• Relatable to depreciable fixed assets− Requires reduction from

the cost of fixed asset or recognition as deferred revenue by systematic credit to P&L A/c.

− Consistent with Explanation 10 to Section 43(1), requires reduction from the cost of fixed asset.

• Relatable to non depreciable fixed assets− To be credited as capital

reserve, if no conditions attached to the grant.

− To be credited to P&L A/c over period of incurring cost of meeting conditions of grant.

To be treated as income –

− on an upfront basis, if there are no conditions attached to grant.

− over period over which cost of meeting conditions is incurred.


• Grant in the nature of promoter’s contribution

− To be credited to capital reserve and to be treated as shareholders funds.

− No such clarity for grants in the nature of promoter’s contribution. Therefore, by implication, requires recognition as income.

• Compensation for expenses / loss incurred or for giving immediate financial support

− To be recognised in P&L A/c in the year in which it is receivable

− Same as AS-12

• Disclosure requirements

• No disclosure of unrecognized grants

Disclosure of unrecognized grants required

ICDS – 7 Government Grants• Treatment for Refund of Government Grants

– First apply against any unamortized deferred credit– Refund in excess of the above to be charged to Profit & Loss A/c– Refund of Government Grant related to a depreciable fixed asset– Increase the WDV of block of assets– Depreciation prospectively on the revised WDV of the block of assets

• Transitional Provisions– Grants qualifying under this standard and received on or after 1st

April, 2015 shall be recognised as per the principles laid down herein.

• Disclosure of nature and extent of grants recognised / not recognised – By way of deduction from actual cost of assets– By way of income

ICDS - 8SECURITIES

ICDS – 8 Securities• Scope

– Applies to securities held as stock-in-trade– Does not affect the basis for recognition of dividend/interest

dealt with by ICDS on revenue recognition– Does not apply to securities held by insurance companies,

mutual funds, venture capital funds, banks and public financial institution, etc.

• DefinitionsThe following terms are used in ICDS with the meanings specified:– “Securities” shall have the meaning assigned to it in clause (h) of

Section 2 of the Securities Contract (Regulation) Act, 1956, other than Derivatives referred to in sub clause (1a) of that clause

– “Fair value” is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction

ICDS – 8 Securities• Recognition and initial measurement

– A security on acquisition to be recognised at actual cost which shall comprise of its purchase price and acquisition charges such as brokerage, fees, tax, duty or cess.

– In case of security acquired in exchange of other security, the cost of acquisition shall be the fair value of the security acquired

– Where a security is acquired in exchange for another asset, the cost shall be the fair value of the securities acquired

– In case of cum – interest securities, the accrued interest to be adjusted against the cost of acquisition

ICDS – 8 Securities• Subsequent measurement of securities

– At the end of any previous year, securities held as stock-in-trade shall be valued at actual cost initially recognised or NRV at the end of that previous year, whichever is lower. (applies only for the listed securities which are regularly quoted)

– The comparison of actual cost initially recognised 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:

Shares; Debt securities; Convertible securities; and Any other securities not covered above

– The above valuation rules are intended to set off unrealized losses against unrealized gains contrary to the GAAP

– In case of unlisted securities or the listed securities not quoted regularly, the valuation shall be at the actual cost initially recognized

ICDS – 8 Securities• Technique of ascertaining cost

– Normally, specific identification method should be followed

– If not possible, FIFO method to be followed

– Also refer Circular no. 786 dated 24-06-1998 – of course, its in the context of capital gains

– No Transition principles provided

ICDS - 9

BORROWING COST

ICDS – 9 Borrowing Costs• Qualifying Asset

– Land, building, machinery, plant or furniture, being tangible assets– Know-how, patents, copyrights, trade marks, licenses, franchises or

any other business or commercial rights of similar nature, being intangible assets

– Inventories that require a period of twelve months or more to bring them to a saleable condition

• It means that except in the case of inventories, for all other assets, borrowing cost incurred before the asset is put to use should be capitalized even though there is smaller time gap between the acquisition of the asset and it being put to use.

• Borrowing cost– The exchange differences arising from foreign currency borrowings

to the extent regarded as an adjustment to the interest cost [paragraph 4(e) of AS 16] is excluded from the scope. It means that such portion of the exchange difference will not form part of the borrowing cost which need be considered for capitalization

ICDS – 9 Borrowing Costs• Impact:

– The borrowing cost eligible for the capitalization under ICDS shall be lesser than the eligible amount as per AS-16. Further, the exchange differences due to principal amount except u/s 43A, was not allowed before ICDS. However, ICDS provides for the recognition of the same in P&L a/c subject to section 43A.

– The Income-tax Act provides for the deduction of the interest cost except in respect of capital borrowed for acquisition of an asset for

extension of existing business or profession. ICDS IX relating to borrowing costs provides for capitalization of borrowing costs without any exception.

ICDS – 9 Borrowing Costs– The Income-tax Act is

being amended to provide that interest in respect of capital borrowed for the acquisition of an asset shall not be allowed as deduction in any case. Effectively, as per the ICDS, the interest in respect of capital borrowed for the acquisition of an asset shall be capitalized including interest in respect of capital borrowed for acquisition of an asset for extension of existing business or

profession.

– Unlike AS 16, income earned on the temporary investment out of the borrowed funds will not be allowed to be reduced from the aggregate amount of borrowing cost eligible for capitalization. The modification to the standard has been made to address the litigation issue as to whether such income during construction period is liable to tax as an independent income

ICDS – 9 Borrowing Costs• Qualifying Assets mean:

– Tangible Assets – land, plant, etc.– Intangible Assets – patents, licenses, etc.– Inventories – that require 12 months or more to

bring them to saleable condition.− Specified tangible & intangible assets are

qualifying assets regardless of substantial period condition. ICDS includes ‘land’ also in the definition of qualifying

assets, unlike AS-16. As per ICDS, the borrowing cost in respect of land shall be capitalized. The depreciation shall not be allowed on the same since the land is a non-depreciable asset. However, the capitalized cost shall form part of a cost of asset while calculating Income from Capital Gain in respect of that land.

ICDS – 9 Borrowing Costs• Commencement of Capitalisation

– Specific Borrowings – date on which funds were borrowed– General borrowings – date on which funds were utilised

The capitalisation period starts early under the ICDS

• Method of capitalisation– Specific borrowings – actual borrowing cost incurred

during the period on the funds borrowed AS-16 requires income from temporary deployment of unutilised

funds to be reduced from borrowing cost. However, ICDS does not provide for the same. The income from temporary deployment of unutilised funds from specific loans shall be taxable as Income from other sources under the ICDS.

− General Borrowings – Costs determined by the following formula; A*B/C

ICDS – 9 Borrowing Costs• In the formula given in ICDS for capitalisation of

general borrowing costs A, B and C stands for:– A = Borrowing costs incurred during previous year except

on specific borrowings– B =

a)Average cost of QA appearing in balance sheet on first and last day of the previous year

b)Half of the cost of QA, if it does not appear in balance sheet on the first day or both first and last day of the previous year

c)Average cost of QA as on first day of previous year and date of completion, if it does not appear in balance sheet on the last day of the previous year

– C = Average of total assets, other than those funded by specific borrowings, as appearing in balance sheet as on first and last day of previous year

– * QA = Qualifying Assets other than those funded by specific borrowings.

ICDS – 9 Borrowing Costs• Suspension of capitalisation

– No provision exists– Borrowing cost incurred during the periods in which active

development of the asset is interrupted can also be capitalised under the ICDS.

• Cessation of Capitalisation– Qualifying Asset – when such asset is first put to use– Inventory – when substantially all activities necessary to prepare it

for its intended sale are complete.• Transitional Provisions

– For all borrowing costs incurred on or after 1st April, 2015 the principles laid down in this standard shall be followed after taking into consideration the borrowing costs capitalised in earlier years.

• Disclosure:– Accounting policies adopted for borrowing costs.– Amount of borrowing costs capitalized during the previous year.

ICDS – 10

PROVISIONS,CONTINGENT LIABILITIES AND CONTINGENT ASSETS

ICDS – X Provisions, Contingent Liabilities and Assets

Recognition of ProvisionsAS - 29 ICDS

• Provisions shall be recognised if it is probable that outflow of economic resources will be required.

• Provision is not discounted to NPV

• Provisions shall be recognised if it is reasonably certain that outflow of economic resources will be required.

• Provision is not discounted to NPV

• Amount recognised is the best estimate of expenditure

• It is required to be reviewed at the end of each year to reflect best estimate.

Impact:• The criteria for recognition of provisions on the basis of the test of

‘probable’ (i.e. more likely than not criteria) replaced with the requirement of ‘reasonably certain’.

• In the absence of definition and scope of ‘reasonably certain’ criteria, an ambiguity would arise on assessment of ‘reasonably certain’ criteria.

• In the Act, there is no specific provision for recognition of provisions. However, provisions are allowed based on accrued liabilities as per ordinary principles of commercial accounting.


Meaning of ObligationAS - 29 ICDS

• Clarifies that obligations may be legally enforceable and may also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner.

• No specific guidance on meaning of ‘obligation’

Impact:• Provisions made on obligations recognized out of customary

business practices or voluntary obligations may not be allowed. (e.g. informal refunds policy to dissatisfied customers, employee welfare, etc.)


Onerous executory contractsAS – 29 ICDS

• AS-29 is not applicable to “executory contracts” except where contract is onerous.

• Since “onerous contracts” are excluded from executory contracts, AS is applicable to onerous contracts.

• Requires upfront recognition of liabilities under onerous contracts.

• It is not applicable to “executory contracts”.

• However, here “onerous contracts” are not specifically excluded from executory contracts.

Impact:• Deduction for the accrued liabilities on onerous contracts in

books will be allowed in a year in which liability to pay arises.


Contingent Liabilities, assets & reimbursement claims

AS – 29 ICDS• Contingent assets/

reimbursement claims are recognized if inflow of economic benefits/ reimbursement is “virtually certain”.

• Contingent Liabilities are not to be recognised

• Contingent assets/ reimbursement claims to be recognized if inflow of economic benefits/ reimbursements is “reasonably certain”.

• Contingent Liabilities are not to be recognised

Impact:• Revenue authorities may contend that ‘reasonably certain’ is a

lower threshold than ‘virtually certain’.• It is not made clear whether transitional provision requires

recognition of all past accumulated contingent assets in F.Y. 2015-16.


• Disclosure for each class of provision:– A brief description of the nature of the obligation– the carrying amount at the beginning and end of the previous year– Additional provisions made during the previous year, including

increases to existing provisions.– Amounts incurred and charged against provision– Unused amounts reversed during the previous year– Amount of any expected reimbursement, stating the amount of asset

that has been recognized for that expected reimbursement.– For all class of assets: Brief description of nature of asset and related

income, carrying amount of asset at beginning and end of the year, additional amount of asset and related income, additional amount of asset and related amount reversed during previous year.

• Transitional Provisions– All the provisions or assets and related income arising on or after 1st

April, 2015 shall be recognised as per the principles of this standard.s

Dayavanti RanaMukund & Rohit Chartered AccountantsEmail (O): [email protected](P): [email protected](M): +919426210614

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