an overview of income computation and disclosure standards (icds) a lecture meeting organized by...

An Overview of Income Computation and Disclosure Standards (ICDS)

A Lecture meeting organized by

AMTOI

14 October 2015PHD & AssociatesChartered Accountants

BackgroundBackground

Section 145 of the Income-tax Act, 1961 provides for the method of

accounting for computation of income under the head "Profits and gains

of business or profession" and "Income from other sources“

Method can either be the cash or mercantile system of accounting

Under the Finance Act, 1995, Central Government is empowered to notify

Accounting Standards (AS) for any class of assessee or for any class of

income

The provision was introduced because it was perceived that there was

flexibility in the standards issued by the ICAI which makes it possible for an

assessee to avoid the payment of correct taxes by following a particular

system

14 October 2015 2CA Hetan Patel


12 Draft Income computation and disclosure standard (ICDS) were released in

January 2015 for comments of the stakeholders.

By Notification No.32/2015, F. No. 134/48/2010-TPL dated 31st March 2015, the 10

ICDS have been notified without any changes to the draft released in January 2015 .

Also the earlier notified 2 accounting standards u/s 145(2) withdrawn.

The notification shall come into force with effect from 1st day of April, 2015 and shall

accordingly apply to the assessment year 2016-17 and subsequent assessment

years.

Transitional provisions are incorporated in the ICDS such that partially completed

transactions/ positions as on 31st March 2015 are subject to the notified ICDS for the

period 1.4.2015 and onwards after due consideration of the income/effects already

considered for tax purposes on or before 31.03.2015.

The Tax returns for assessment year 2015-16 shall not be affected by the ICDS.


Comparative Analysis Comparative Analysis


Sr. No.

AS Notified by MCA Notified as ICDS

1 Disclosure of accounting policies Accounting policies

2 Valuation of Inventories Valuation of Inventories

3 Cash Flow No

4 Contingencies and events occurring after the

balance sheet date

It was proposed in 2012 Draft but dropped in Jan 2015 Draft

5 Net profit or loss for the period, prior period

items, and changes in the accounting policies

It was proposed in 2012 Draft but dropped in Jan 2015 Draft

6 Depreciation accounting No

7 Construction contracts Construction Contracts

8 ____________________ --------------------------

9 Revenue recognition Revenue Recognition

10 Accounting for fixed assets Tangible Fixed Assets



Sr. No.


11 The effects of changes in foreign exchange

rates

The effects of changes in foreign exchange

rates

12 Accounting for government grants Government Grants

13 Accounting for investments Securities

14 Accounting for amalgamations No

15 Employees benefit (revised 2005) No

16 Borrowing costs Borrowing Costs

17 Segment reporting No

18 Related party disclosures No

19 Leases It was proposed in 2012 and Jan 2015 draft but dropped in notification of 31.03.2015

20 Earning Per Share No

21 Consolidated financial statements No

22 Accounting for Taxes on income No



Sr. No.


23 Accounting for investment in associates in

consolidated financial statements

No

24 Discontinuing operations No

25 Interim financial report No

26 Intangible assets It was proposed in 2012 and Jan 2015 draft but dropped in notification of 31.03.2015

27 Financial reporting of interest in Joint Ventures No

28 Impairments of assets No

29 Provisions, contingent liabilities and contingent

assets

Provisions, contingent liabilities and

contingent assets

30 Financial instruments; recognition and

measurements (issued by ICAI not notified by

MCA)

No

31 Financial Instruments; presentation (issued by

ICAI not notified by MCA)

No

32 Financial Instruments; disclosures(issued by ICAI

not notified by MCA)

No

All ‘assessees’ following the mercantile system of accounting shall follow the ICDS

ICDS refers to ‘person’ instead of ‘assessee’

Preamble to each ICDS clarify that:

The ICDS apply to the computation of business income and income from

other sources

In case of conflict with provisions of the ITA, the provisions of the Act shall

prevail to that extent

ICDS not to affect maintenance of books of account

Select disclosures are prescribed:

Disclosure in Return of Income?

Overlap with AS disclosures?

The structure and the language of ICDSs have been substantially modified from the

AS from which it is derived even where the underlying principles are not amended.

ICDS – Basic Features ICDS – Basic Features


Scope of the delegated legislation u/s 145(2)

Is concept of income modified by ICDS?

Relevance of the notified ICDS

The provisions of the Income Tax Act to prevail over the ICDS

The substantive matters for which ICDS is not prescribed – will continue to

be governed by the ICAI notified standards ( the judicial view on AS)

The book profit tax computation will not be affected by the ICDS

The ICDS are derived from the ICAI/MCA Accounting Standards

The language is modified even when principles are adopted

Explanations and examples of AS not incorporated in ICDS

The interpretation issued by ICAI / EAC opinions may still have persuasive value

ICDS – BasicsICDS – Basics


Second Proviso to section 36(1)(vii) reads as :

“Provided further that where the amount of such debt or part thereof has

been taken into account in computing the income of the assessee

of the previous year in which the amount of such debt or part thereof becomes

irrecoverable or

of an earlier previous year

on the basis of income computation and disclosure standards notified under sub-

section (2) of section 145 without recording the same in the accounts, then,

such debt or part thereof shall be allowed in the previous year in which such debt or

part thereof becomes irrecoverable and it shall be deemed that such debt or part

thereof has been written off as irrecoverable in the accounts for the purposes of

this clause.”

ICDS related amendment by Finance Act 2015ICDS related amendment by Finance Act 2015


CA Hetan Patel 1114 October 2015

ICDS - IICDS - I

ACCOUNTING POLICIESACCOUNTING POLICIES

Fundamental accounting assumptions:

Going Concern:

“Going concern” refers to the assumption that the person has neither the intention

nor the necessity of liquidation or of curtailing materially the scale of the business,

profession or vocation and intends to continue his business, profession or vocation

for the foreseeable future.

Consistency:

“Consistency” refers to the assumption that accounting policies are consistent from

one period to another;

Accrual:

“Accrual” refers to the assumption that revenues and costs are accrued, that is,

recognised as they are earned or incurred (and not as money is received or paid)

and recorded in the previous year to which they relate.

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 – Accounting PoliciesICDS – Accounting Policies


Accounting Policies:

The accounting policies refer to the specific accounting principles and the methods of

applying those principles adopted by a person.

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 recognised unless the

recognition of such loss is in accordance with the provisions of any other ICDS.

An accounting policy shall not be changed without reasonable cause.



Disclosure

All significant accounting policies adopted by a person shall be disclosed.

Any change in an accounting policy which has a material effect shall be disclosed.

The amount by which any item is affected by such change shall also be disclosed

to the extent ascertainable.

Where such amount is not ascertainable, wholly or in part, the fact shall be

indicated.

If a change is made in the accounting policies which has no material effect for the

current previous year but which is reasonably expected to have a material effect

in later previous years, the fact of such change shall be appropriately disclosed:

in the previous year in which the change is adopted and also

in the previous year in which such change has material effect for the first

time.



Disclosure (Contd.)

Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate

treatment of the item.

If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are

followed, specific disclosure is not required. If a fundamental accounting assumption is not

followed, the fact shall be disclosed.

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 - IIICDS - II

INVENTORIESINVENTORIES

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 (AS-2 refers to exclusion of WIP of service

provider)

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 – InventoriesICDS – Inventories


Measurement

Valuation at cost , or net realisable 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 [ Duty drawbacks (AS-2) is omitted in view of Section 145A]



In the previous draft, it also read that “ in the case of service provider, the inventories of services shall be valued at cost”.

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 :

Overheads to be included

Similar to AS -2 except that examples given in AS-2 are omitted in the ICDS

Implications of omission of the examples ?

Other Costs :

shall be included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location

and condition.

Interest and other borrowing costs shall not be included in the costs of inventories,

unless they meet the criteria for recognition of interest as a component of the cost as specified in the ICDS on borrowing costs.





Exclusions from the Cost of Inventories

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

Storage costs, unless those costs are necessary in the production process prior to a

further production stage;

Administrative overheads that do not contribute to bringing 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

continues to be the prescribed formula as laid down in AS 2

The option of standard cost method as a technique for the measurement of cost as per

paragraph 18 of AS 2 has not been provided in the ICDS

The option of Retail method as a technique for the measurement of cost as per

paragraph 19 of AS 2 has been permitted subject to the conditions that:

It is to be used only when it is impracticable to use the other prescribed methods

the option of department-wise average percentage is not permitted

Net Realisable Value (NRV)

Inventories shall be written down to NRV on an item-by-item basis.

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 NRV on an aggregate basis.

NRV shall be based on the most reliable evidence available at the time of valuation.

The estimates of NRV shall also take into consideration the purpose for which the

inventory is held.



Net Realisable Value (NRV) (Cont..)

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.

Materials and other supplies held for use in the production of inventories shall not be

written down below the cost, where the finished products in which they shall be

incorporated are expected to be sold at or above the cost. Where there has been a

decline in the price of materials and it is estimated that the cost of finished products will

exceed the net realisable value, the value of materials shall be written down to net

realisable value which shall be the replacement cost of such materials.



Principles relating to NRV in the ICDS are similar to those prescribed in AS-2 subject to language modifications and omission of examples.

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.



This is not prescribed in AS-2.

The purpose is to address the issues arising in a situation where the department may change the valuation principles for closing inventories without corresponding effect on the opening inventories.

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

Of course, AS 2 is silent on this rule

Transitional Provisions

Interest and other borrowing costs, which don't 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.

Significant Issues

Inventories valuation in the case of Service Providers contemplated ?

No recognition to the concept of materiality – overheads computations may be challenging

Retail method of valuation cannot be applied in a routine manner.

Is inventory of Real Estate Developer (ready flats /units) covered by this ICDS?

If yes, the treatment of borrowing cost ?




ICDS - IIIICDS - III

CONSTRUCTION CONTRACTSCONSTRUCTION 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 had recommended issue of separate ICDS for determination of

income in the case of developers, etc.

In line with revised AS 7, ICDS recognizes only the percentage completion

method

Contract revenue

It is defined to include retentions which is defined in the ICDS as the amount of

progress billings which are not paid until the satisfaction of contract conditions or

till rectification of defects

The rule has been incorporated to overcome judicial decisions which held that as

per the concept of real income; the retentions set apart in the progressive

billings, depending upon the terms of the construction contract, need not be

recognised as revenue

ICDS – Construction ContractsICDS – Construction Contracts


Contract Revenue (Cont..)

In line with AS 7, 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

Contract cost shall comprise of:

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 Costs

These 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 that cannot be attributed to any contract activity or cannot be

allocated to a contract shall be excluded from the costs of a construction

contract

Claim 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

recognised

The 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.

It implies that the pre commencement cost incurred for securing the

contracts which are not identifiable with a specific contract will have to be

claimed as deduction under general provisions of the ITA. However, in the

case of newly commenced contract business, it may be characterized as pre

business commencement expenses which cannot be allowed as deduction.

For the on going business, the taxpayer may be on a better footing claiming

of the expenditure



Recognition of contract revenue, expenses and profits

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.

Unconditional choice of method? As per AS 7, choice should be befitting the

nature of contract

Progress payments and advances received from customers are not

determinative of the stage of completion of a contract.



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’



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


Revenue and costs associated with construction contract, which commenced on

or before 31st March 2015 but not completed by the said date, shall be

recognised as revenue and costs in accordance with this standard. The amount of

contract revenue, contract costs or expected loss, if any, recognised for the said

contract for any previous year commencing on or before 01st April 2014 shall be

taken into account for recognizing revenue and costs of the said contract for

previous year commencing on 01st April 2015 and subsequent previous years.


36CA Hetan Patel 14 October 2015


ICDS - IVICDS - IV

REVENUE RECOGNITION REVENUE RECOGNITION

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

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

ICDS – Revenue RecognitionICDS – Revenue Recognition


Revenue recognition

AS-9 considers measurability of revenue and its ultimate

collectability as a criteria for revenue recognition.

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 of

Rendering 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

All the principles of PCM under ICDS on construction contracts shall

apply mutatis mutandis



Revenue recognition in rendering of services

Revenue from service transactions is to be recognised by the

percentage completion method (PCM) where revenue from service

transaction is matched with the service transaction cost incurred in

reaching the stage of completion.

Stage of Completion is determined based on the cost incurred as a

proportion to the total estimated cost

Advance payment for services yet to be carried out have to be excluded

in computation of cost.

Where proportionate completion method is followed in the books, no

further adjustment maybe required for ICDS - IV



When service contract is in its early stage (up to 25%) and the outcome of the

contract cannot be reliably estimated, revenue is recognised only to the extent of the

cost incurred

Percentage completion method is on the basis of current estimates of total revenue

and total costs. When estimates undergo a change, revised estimates can be

considered.

Issues

Transaction costs – whether restricted to cost pertaining to the Indian company or to

include costs of the overseas counterpart ?

Jobs with nil costs



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 received

retention amount

costs incurred

recognized profits and losses




The transitional provisions of Standard on construction contract shall apply mutatis

mutandis to the recognition of revenue and the associated costs for a service

transaction undertaken on or before 31st March 2015 but not completed by the said

date.

Revenue for a transaction, other than a service transaction referred above,

undertaken on or before the 31st day of March, 2015 but not completed by the said

date shall be recognised in accordance with the provisions of this standard for the

previous year commencing on the 1st day of April, 2015 and subsequent previous

year. The amount of revenue, if any, recognised for the said transaction for any

previous year commencing on or before the 1st day of April, 2014 shall be taken

into account for recognising revenue for the said transaction for the previous year

commencing on the 1st day of April, 2015 and subsequent previous years.




ICDS - VICDS - V

TANGIBLE FIXED ASSETS TANGIBLE FIXED ASSETS

Scope of ICDS

Unlike AS 10 which applies to any fixed asset, the ICDS applies to the

specified asset being land, building, machinery, plant or furniture only

Exchange of Assets

As per AS 10 the cost is to be ascertained by reference to FMV of the

asset given or FMV of asset acquired whichever is more clearly evident

As per ICDS it should be capitalized at the Fair Value of the asset

acquired

Improvements and Repairs

In the previous Draft certain deviations from the principles laid down in

AS-10 were proposed

Fortunately, those deviations seem to have been dropped in the notified

ICDS

ICDS – Tangible Fixed AssetsICDS – Tangible Fixed 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

The actual cost of tangible fixed assets, acquisition or construction of which

commenced on or before 31st March 2015 but not completed by said date, shall be

recognized in accordance with this standard. The amount of actual cost, if any,

recognized for the said assets for any previous year commencing on or before the 01 st

April 2014 shall be taken into account for recognizing actual cost of the said assets for

previous year commencing on 01st April 2015 and subsequent previous years.

ICDS – Tangible Fixed AssetsICDS – Tangible Fixed Assets



ICDS - VIICDS - VI

THE EFFECTS OF CHANGES IN THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES FOREIGN EXCHANGE RATES

Scope

This Tax Accounting Standard deals with:

treatment of transactions in foreign currencies

translating the financial statements of foreign operations of a branch office

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

ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates


“Indian currency” shall have the meaning as assigned to it in section 2 of the Foreign

Exchange Management Act, 1999 (42 of 1999)

“reporting currency” means Indian currency except for foreign operations where it shall

mean currency of the country where the operations are carried out

Initial Recognition

Transaction to be recorded at the exchange rate prevailing on the date of the transaction

The 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

At last day of each previous year:

Foreign currency monetary items shall be converted into reporting currency

by applying the closing rate

where closing rate does not reflect with reasonable accuracy, the amount in

reporting currency that is likely to be realized from or required to disburse, a

foreign currency monetary item, owing to restriction on remittances or the

closing rate being unrealistic and it is not possible to effect an exchange of

currencies at that rate, then 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.

Non-monetary items in a foreign currency shall be converted into reporting

currency by using the exchange rate at the date of the transaction



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 capital assets acquired within India ??



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

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)



Forward Exchange Contracts



Nature of Forward

Contracts

Speculative /Trading

Firm Commitment /Highly probable

forecast transaction

Others – say pure Hedge

Expenses/ loss/gains Basis of Recognition

Discount or

Premiums

On settlement On settlement Amortized over contract

life

Mark to market

recognition

No No Yes


All foreign currency transactions existing on 01st April 2015 or

undertaken on or after 01st April 2015 shall be recognized in

accordance with provisions of this standard.

Exchange differences arising in respect of monetary items or non-

monetary items, on the settlement thereof during the previous year

commencing on the 1st day of April, 2015 or on conversion thereof

at the last day of the previous year commencing on the 1st day of

April, 2015, shall be recognised in accordance with the provisions of

this standard after taking into account the amount recognised on

the last day of the previous year ending on the 31st March,2015 for

an item, if any, which is carried forward from said previous year.



Transitional Provisions (Cont..)

The financial statements of foreign operations for the previous year

commencing on the 1st day of April, 2015 shall be translated using

the principles and procedures specified in this standard after taking

into account the amount recognised on the last day of the previous

year ending on the 31st March, 2015 for an item, if any, which is

carried forward from said previous year.

All forward exchange contracts existing on the 1st day of April, 2015

or entered on or after 1st day of April, 2015 shall be dealt with in

accordance with the provisions of this standard after taking into

account the income or expenses, if any, recognised in respect of

said contracts for the previous year ending on or before the 31st

March, 2015.




ICDS – VIIICDS – VII GOVERNMENT GRANTSGOVERNMENT 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

Excludes

the assistance in a form which cannot be valued

Normal trading transactions with government

ICDS – ICDS – Government GrantsGovernment Grants


Recognition of Government Grants

It is subject to reasonable assurance as to compliance with conditions attached to the

grant and that the grants shall be received

However, recognition shall not be postponed beyond the date of actual receipt

Treatment of Government Grants

AS-12 specifies Capital Approach and Income Approach.

Grants given with reference to investment or part contribution towards total capital outlay

without obligation to repay, are required to be credited to shareholder’s funds.

Grants relating to revenue are recognised in the P/L on rational basis over one or more period



As per ICDS :

In the case of depreciable fixed assets

Deduct from the WDV of Block of Assets to which the asset belonged

Impliedly, recognized as income in the same pattern as depreciation claimed

In the case of non depreciable fixed assets (subject to obligations to be fulfilled)

Recognized as income over the same period over which the cost of meeting

such obligations is charged to income

The ICDS is silent in the case of non depreciable fixed asset which is not

subject to obligations

In the case a grant which is not directly relatable to the asset acquired,

proportionate adjustment prescribed



In the case of grant:

received as compensation for expenses or losses incurred in Previous

Financial Year or

for giving immediate financial support to person with no further related costs

To be recognized as income of the period in which it is receivable

Other Government Grants not dealt with herein above

Recognized as income over the period necessary to match them with related

costs which they are intended to compensate

Impliedly, the ICDS suggest that a non depreciable asset ( with no obligations

attached ) should be recognized as income in the year of recognition of the

Grant

In the case of non monetary assets given at a concessional rate

To be accounted for on the basis of acquisition cost



The Definition of Income under section 2(24) of the Act has been amended by Finance Act

2015 to insert clause xviii which reads as:

“assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver

or concession or reimbursement (by whatever name called) by the Central Government or

a State Government or any authority or body or agency in cash or kind to the assessee

other than the subsidy or grant or reimbursements which is taken into account for

determination of the actual cost of the asset in accordance with the provisions of

Explanation 10 to clause (1) of section 43.”

The purpose of this amendment seems to be to bring to tax even those Government

Grants which are in the nature of non taxable capital receipts.

Section 28 of the IT Act : the following income shall be chargeable to income tax under

the head ‘Profits or gain of business and profession’, -

(iiib) cash assistance (by whatever name called) received or receivable by any

person against export under any scheme of the Government of India.

Government Grants – Amendments by Finance Act Government Grants – Amendments by Finance Act 20152015


Important Deviations from the AS 12

Grants related to non depreciable assets (without requiring fulfillment of obligations)

should be credited to capital reserve . The ICDS does not recognize this principle.

Government Grants of the nature of promoters contribution to be credited to capital

reserve and treated as part of shareholders fund. The ICDS is silent on this.

Significant Issues

The Government Grants - the purpose test for treating as capital receipt is made

redundant?

A Grant given as an incentive for set up of new industries - merely because

computed with reference to the value of investment in assets will considered as a

grant related to the asset?

Section 145(2) is a computation provision – ICDS a delegated legislation – cannot

override the concept of income ?



Refund of Government Grants

Refund of Government Grant referred in Para 6,8 and 9

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


All the Government grants that meets with the recognition criteria of the ICDS on or

after 1st day of April and relates to any period ending 31st March 2015 or before

shall be recognized for the financial year commencing on or after 1st April 2015

after taking into account the said Government grant recognized for any period

ending on or before 31st March 2015.



Disclosures

nature and extent of Government grants recognised during the previous

year by way of deduction from the actual cost of the asset or assets or from the

written down value of block of assets during the previous year

nature and extent of Government grants recognised during the previous

year as income

nature and extent of Government grants not recognised during the

previous year by way of deduction from the actual cost of the asset or

assets or from the written down value of block of assets and reasons

thereof; and

nature and extent of Government grants not recognised during the previous

year as income and reasons thereof



Some of the Important Judicial Precedents

Ponni Sugars & Chemicals Ltd (306 ITR 0392 ) – SC

Test to be applied for determining the nature of subsidy is purpose test

If the object of the subsidy scheme was to enable the assessee to run the business more

profitably then the receipt is on revenue account

On the other hand, if the object of the assistance under the subsidy scheme was to enable the

assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy

was on capital account

Form or the mechanism through which the subsidy is given is irrelevant.

As the assessee was obliged to utilize the subsidy only for repayment of term loans

undertaken by the assessee for setting up new units/expansion of existing business, the same

was capital in nature

Fact that the subsidy was routed through the mechanism of price and duty differentials is

immaterial



Some of the Important Judicial Precedents (Cont..)

Reliance Industries Ltd. (339 ITR 0632)- Bombay HC

Object of subsidy being to set up new units in backward area, the same is a capital receipt

Sahani Steels (228 ITR 253) - SC

Subsidy from public funds granted by Government by way of refund of sales-tax, etc. on

purchase of machinery etc. after commencement of production to enable the assessee to

run the business more profitably, and not for setting up of the industry, is operational

subsidy and hence, a revenue receipt.

What is material is the purpose for which it is granted and not the source of grant—If the

purpose is to help the assessee to set up its business or complete a project, the monies

must be treated as to have been received for capital purpose but if monies are given to the

assessee for assisting him in carrying out the business operation and the money is given

only after and conditional upon commencement of production, such subsidies must be

treated as assistance for the purpose of the trade and revenue in nature



Recent Bombay High Court decision on SFIS – 17 August 2015

Bombay High Court upholds the order passed by the Government of India

that the assessee promoting foreign brand ‘Thyssenkrupp’ and hence not

entitled to duty credit script under SFIS ; accepts the contention that the

intention behind the scheme is to encourage the Indian brand and the whole

purpose is to accelerate growth in export of services to create powerful and

unique ‘Served from India’ brand instantly recognised and respected world

over.

Rejects assessee’s contention that the ultimate objective is augmentation of

foreign exchange reserve by export of goods and services and the presence

of shareholder or controlling interest of foreign entity is inconsequential.

Government Grants – Amendments by Finance Act 2015Government Grants – Amendments by Finance Act 2015



ICDS – VIIIICDS – VIII

SECURITIESSECURITIES

Practically an independent standard adopting the principles of accounting

for current investments under AS 13

It is comparable to ICDS on Valuation of Inventories

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.

Definitions

The 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

ICDS – ICDS – SecuritiesSecurities


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 net realisable value 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 realisable 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

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

Valuation of opening and closing securities

As on the beginning of the previous year shall be :

The cost of securities 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 securities as on the close of the immediately preceding previous year, in any other case.

No Transitional Provisions prescribed

`




ICDS – IXICDS – IX BORROWING COSTSBORROWING COSTS

Qualifying Asset

Land, building, machinery, plant or furniture, being tangible assets

Know-how, patents, copyrights, trade marks, licences, 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 – ICDS – Borrowing CostBorrowing Cost


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

Commencement/Suspension of capitalization

As per AS 16, capitalization should not be commenced unless the activities necessary to

prepare the asset for its intended use/sale are in progress

Also, as per AS 16, capitalization of borrowing cost should be suspended after

commencement if the activities for preparation of the asset are interrupted

The above rules are not incorporated in the ICDS

Cessation of Capitalization

As per AS 16, capitalization should cease upon substantial completion of activities

necessary to prepare the asset for its intended use

The benchmark for the cessation under ICDS is stated as date on which the asset is put

to use



General Borrowing Cost

To the extent the funds are borrowed generally and utilized for the purpose of acquisition

of a qualifying asset, the attribution of the borrowing cost to be computed as per

prescribed formula

The formula is:

A * B/C

where,

A = borrowing cost (other than specific purpose borrowings)

B = (i) average cost of qualifying assets on first day and last day of P.Y (other

than QA financed by specific borrowings)

(ii) QA not appearing in the balance sheet on first day or both first

and last day of P.Y, 50% of cost of QA

(iii) QA not appearing in the balance sheet on last day of P.Y, average

of cost of QA on first day of P.Y and on date on completion

C = average of total assets as per the balance sheet



The average to be calculated as value appearing in the balance sheet as on the first

and the last date of the year.

The formula is defective, likely to create litigation similar to Rule 8D and section

14A


All the borrowing costs incurred on or after 1st April 2015 shall be

capitalized for the previous year commencing on or after 1st April 2015 in accordance

with the provisions of this standard after taking into account the amount of

borrowing costs capitalized, if any, for the same borrowing for any previous year

ending on or before 31st March 2015.

Disclosure:

Accounting policies adopted for borrowing costs.

Amount of borrowing costs capitalized during the previous year.




ICDS – XICDS – X

PROVISIONS, PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT LIABILITIES AND CONTINGENT ASSETSCONTINGENT ASSETS

Scope

Unlike AS 29, all executory contracts (including onerous contracts) are scoped out in

ICDS

As per AS 29, provision is recognized if the liability is considered probable. In ICDS,

the condition of ‘probable’ is replaced with ‘reasonable certainty’

Similarly , under AS 29 contingent assets or reimbursement claims are recognised on

the test of virtual certainty. In ICDS the test is ‘reasonable certainty’, bringing

uniformity of test for the provisions and the assets

Unlike AS 29, guidance by examples are not provided. But the guidance provided in As

29 may have persuasive value. The interpretation of the term ‘reasonably certain’ is

likely to be subjective, prone to litigation.


All the provisions or assets and related income shall be recognised for the previous year

commencing on or after 1st April 2015 in accordance with the provisions of this standard after

taking into account the amount recognised, if any, for the same for any previous year ending

on or before 31st March2015.

ICDS – ICDS – Provisions, contingent liabilities and contingent Provisions, contingent liabilities and contingent assetsassets

14 October 201579

CA Hetan Patel

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.


14 October 201580

CA Hetan Patel

Some of the Important Judicial Precedents for reference

Bharat Earth Movers (245 ITR 428) (SC)

Rotark Controls India (314 ITR 62) (SC)

Metal Box Co. of India Ltd (73 ITR 53) (SC)



Taxes will be levied on income which may not have been actually earned.

Deduction for expenses/losses to be denied contrary to the age old

accounting principles of prudence /conservatism

Increased gap between book profits and taxable profits may cause deferred

tax assets or reduce deferred tax liabilities

Though ICDS does not mandate separate books of account, detailed

reconciliations between the book profit and taxable income will have to be

maintained increasing the compliance cost and at times leakage of revenue

for the tax department

Additional burden on tax auditors – more onerous responsibilities

Increased litigation and uncertainties contrary to the stated objectives

MAT liability will not be affected directly but the MAT credit will be impacted

Impact of ICDSImpact of ICDS


an overview of income computation and disclosure standards (icds) a lecture meeting organized by...

Documents