An insight into the 'Income Computation and Disclosure Standards'

1. Income Computation and
Disclosure Standards
– An Insight
Aniruddha Bhide

2. ICDS – An Insight
Background
The CBDT has brought in a new framework for
computation of income under Income Tax Act,
1961, through issuance of standards which
will be the basis for the computation of
income. There are ten such standards to be
known as ‘Income Computation and
Disclosure Standards’ issued within the
powers of sec. 145(2) of Income Tax Act,
1961. The standards resemble in many ways
to the Accounting Standards, however, there
are certain areas having different accounting
treatment. The Income Tax Act, 1961,
mandates the assessees to follow these
standards while computing their income as
per the Income Tax Act, 1961. These
provisions are applicable from Assessment
Year 2016-17 i.e. for the financial year ending
on 31st March, 2016. The assessees are now
required to adjust their accounting income
following the provisions of Income
Computation and Disclosure Standards(ICDS)
for the purpose of computation of income.
Thus, the assessees will need to evaluate the
extent of adjustments required in all areas
covered by ICDS. However, it is clearly stated
that ICDS are meant for computation of
income of the assessee and have no impact on
maintenance of books of accounts. The CBDT
and its authorities shall also follow these
standards while assessing the income of the
assessee.
ICDS
#
Standard
AS
#
I Accounting Policies 01
II Valuation of Inventories 02
III Construction Contracts 07
IV Revenue Recognition 09
V Tangible Fixed Assets 10
VI
The effects of changes in
foreign exchange rates
11
VII Government Grants 12
VIII Securities 13
IX Borrowing Costs 16
X
Provisions, Contingent
Liabilities and Contingent
Assets
29
Applicability
 Income Head
 Profits and Gains from Business or
Profession
 Income from Other Sources
 Accounting Basis : Mercantile
 A.Y. : 2016-17
 Assessees : All Assessees
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3. ICDS – An Insight
Accounting Policies
•The ICDS does not recognize the concept of
prudence and disallows recognition of
expected or market losses unless otherwise
required by any other standard.
•The ICDS clearly states that the accounting
policy shall not be changed without
reasonable cause.
Valuation of Inventories
•Cost of Inventories shall include cost of
services in the case of service provider.
•In case of dissolution of a partnership firm or
association of person or body of individuals,
whether business is discontinued or not, the
inventory on the date of dissolution shall be
valued at the net realisable value.
Construction Contracts
•Where contract revenue, already recognised
as income, is subsequently written off in the
books of accounts as uncollectible, the same
shall be recognised as an expense and not as
an adjustment of the amount of contract
revenue.
•Contract cost shall comprise of allocated
borrowing costs in accordance with the
Income Computation and Disclosure Standard
on Borrowing Costs.
•ICDS allows only percentage completion
method for recognition of revenue and no
other method shall be allowed to revenue
recognition.
•Contact revenue shall be recognized to the
extent of costs incurred if the outcome of the
contract cannot be estimated reliably. Such
practice is allowed only till the stage of
completion does not exceed 25% of the total
contract.
Revenue Recognition
•The ICDS prescribes only proportionate
completion method as recognition criterion
for provision of services. The ICDS prohibits
any other method for recognition of revenue
in case of provision of services.
Effects of changes in foreign exchange rates
•ICDS prescribes recognition of exchange
differences arising from translation of non-
integral foreign operations as income or
expense in the same previous year.
•Premium, discount or exchange difference on
contracts, that are intended for trading or
speculation purposes, or that are entered into
to hedge the foreign currency risk of a firm
commitment or a highly probable forecast
transaction shall be recognised at the time of
settlement unlike marking the contract value
to its current market value provided by AS-11.
Government Grants
•The ICDS prescribes the latest date for
recognition as the date of actual receipt.
•The ICDS provides for deduction of the grant
from the actual cost of the asset or the written
down value of the asset, in case of grants
relating to depreciable assets.
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4. ICDS – An Insight
Securities
•Securities held as stock-in-trade shall be
valued at lower of actual cost or net realizable
value as at the end of the previous year. The
comparison for the valuation shall be done
category wise and not on individual basis.
•Unlisted or unquoted securities including
stock-in-trade, shall be valued at actual cost.
Borrowing Costs
•The ICDS does not specify any minimum
period for classification of asset as qualifying
asset except in the case of inventories.
•The ICDS does not specifically include
exchange differences arising from foreign
currency borrowings to the extent that they
are regarded as an adjustment to interest
costs.
•The ICDS has prescribed a new formula for
capitalization of borrowing cost on general
borrowings which involves allocating the total
general borrowing cost incurred in the ratio of
average cost of qualifying assets and the
average cost of total assets (other than those
which are specifically funded) .
•The ICDS has specified that, in case of specific
borrowings, capitalization of borrowing cost
shall commence from the date of the
borrowing, whereas, in the case of general
borrowings, the capitalization shall commence
from the date of utilization of funds.
•ICDS does not require suspension of
capitalization of borrowing costs on qualifying
asset whose active development is
interrupted.
Provisions, Contingent Liabilities and
Contingent Assets
•This standard does not apply to onerous
contracts.
•This ICDS states that the provision shall be
recognized only when it is reasonably certain
that an outflow of resources embodying
economic benefits will be required to settle
the obligation, as against, the recognition
criterion of AS-29 being ‘probability of outflow
being more likely than not’.
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5. ICDS – An Insight
Issues in Implementation
 Identification of Income Computation and
Disclosure Standards (ICDS) applicable to the
assessee
 Variations in accounting treatment in
Accounting Standards and Income Computation
and Disclosure Standards
 Maintenance of information under both
reporting mechanisms
 Treatment of the deviations from Accounting
Standards
 Compliance with various disclosure
requirements prescribed under Income
Computation and Disclosure Standards(ICDS)
How can we make your ICDS
journey smooth ?
Phase I : Identification and Assessment
 Identification of the existing system for
computation of taxable income and tax liability
 Identification of applicable Income
Computation and Disclosure Standards (ICDS)
 Identification of the deviations from the
applicable financial reporting framework and
applicable Income Computation and Disclosure
Standards (ICDS)
 Impact Assessment on tax computations,
earnings to shareholders, etc.
 Identification of system changes required for
implementation of Income Computation and
Disclosure Standards (ICDS)
Phase II : Implementation
 Implementation of changes required to align
with the computation methodology
 Parallel system of reporting and computation
as per applicable GAAP and ICDS methodology
 Training and Guidance to personnel
 Knowledge Management
 Computation of Income as per Income
Computation and Disclosure Standards (ICDS)
through making adjustments to the accounting
income
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6. THANK YOU
Aniruddha Bhide
+ 91 9561 912 889
aniruddhadbhide@gmail.com