2. 1. Preamble
2. Construction contract
3. Contract revenue
4. Degree of completion
5. Contract cost
6. Exclusions of contract cost
7. Combining & Segmenting
8. Act vs. ICDS
9. Transitional provisions
10. Difference btw ICDS & AS-7
3. Preamble
ICDS III
Applicability: With effect from 01/04/2015 and accordingly apply to A.Y.2016-17
and subsequent years.
Purpose : This ICDS is applicable for computation of income chargeable under the heads
“PGBP” and “IOS” and not for purpose of maintenance of books of accounts.
Retrospective or Prospective:
ICDS III applies prospectively not retrospectively
ACT VS ICDS:
When there was a conflict between Act and ICDS, Act will prevail over the standard.
Scope of ICDS III:
This standard is applied in determination of income for a construction contract of a
contractor.
4. WHAT IS CONSTRUCTION CONTRACT ?
It is a contract a) specially negotiated for the construction of assets or
b) combination of assets that are closely interrelated in terms of design , technology and
function or use and includes the following:
i) Contract for rendering the services directly related to construction of asset
ii)Contract for destruction (or )restoration of assets
TYPES OF CONTRACTS:
For the purpose of ICDS there are two types of contracts. They are as follow:
TYPES
FIXED PRICE COST PLUS
Contractor agrees at a fixed
contract price or fixed rate per
unit of output
Contract price=Cost + Markup
5. CALCULATION OF PROFIT/LOSS UNDER PERCENTAGE OF COMPLETION METHOD:
REVENUE: Contract Revenue x Degree of completion xxx
Less: Contract Cost Incurred (xxx)
Cumulative Profits / Loss xxx
Less: Profit or loss of previous year (xxx)
Profit/loss of the year xxx
Contract Revenue:
a) The initial amount of revenue agreed in the contracts including retentions.
b) Variations in contract work, claims and incentive payments:
(i) To the ex tent that is probable that they will result in revenue; and
(ii) They are capable of being reliably measured.
a) b)
Probable outcome X
Certainty
X
Measurability X
6. Retention Money:
“ Retentions “ are amounts of progress billings which are not paid until the satisfaction of
conditions specified in the contract for the payment of such amount or until the defects have
been rectified.
“ Progress billings “ are amounts billed for work performed on a contract whether (or) not they
have been paid by the customer.
CASE LAWS
In CIT v. P&C Constructions' (P.) Ltd ( 2009) 318 ITR 113(Mad.)
CIT v. Simplex Concrete Piles India (P.) Ltd.(1989) 45 Taxman 37 (Cal.) judgments retention
money is not taxable due to following reasons
As retention money is repayable only after the satisfaction of conditions so it could not be said
that said amount had accrued to assesse at he time of contract and could not be taxed in
assessee ‘s hand.
Moreover the right to receive retention money will not arises at the time of submission of bills.
In order to nullify the above judgments ICDS explicitly stated that retention monies are
part of contract and they are to be recognized as revenue on percentage of completion method.
7. What happens if Contract revenue recognized is subsequently unrealized?
The unrealized amount should be recognized as expense and not as an adjustment of the
amount of contract revenue.
But practically it is not possible to follow, as books of accounts are prepared in accordance with
standard and for the computation of income we are considering ICDS so in order to solve the
situation Finance Act 2015 has amended the section 36(1)(vii) by inserting a new second proviso
w.e.f A.Y 2016-17 the said new second proviso provides that:
It shall be deemed that such debt or part thereof has been
written of as irrecoverable in the books of accounts.
Then such debt or part thereof shall be allowed in the P.Y in
which such debt or part thereof becomes irrecoverable
Where the amount of such or part thereof has been taken in to account in
computing the income of assesse (on basis of ICDS without considering the same
in the accounts)
Of the previous year in which such
debt has become irrecoverable
Of an earlier P.Y.
or
and
8. ILLUSTRATION
Contract Price as per agreement is 10,00,000
Contract revenue recognized in books is 9,00,000 ( Due to non recoverability from the party)
For the purpose of computing income of the assessee in accordance with ICDS, income is
considered as 10,00,000 based on the contract price and accordingly assessee had paid tax on it.
In subsequent years it is very clear that amount of 1,00,000 is not recoverable from party.
Based on the non recoverability the assessee can claim 1,00,000 as an irrecoverable bad debt as
per provisions of section 36(1)(vii) in computation of total income.
9. Degree of completion:
Cost incurred x 100
Total estimated contract cost
(or)
Surveyors of work performed.
(or)
Completion of physical portion of contract work.
Note: Progress payments and advances received from customers are not determinative of the
stage of completion of contract.
Contract cost:
CONTRACT
COST
Indirect
expenses
Direct
expenses
Borrowing
cost
Cost to
specifically
charged to
customer
10. Borrowing Cost: It was newly inserted by ICDS where the borrowing Costs for inventories
that require a period of 12 months or more to bring them in to a saleable condition should
be allocated as per ICDS 9 “Borrowing Cost”
Exclusions from contract costs:
Incidental income: Any incidental income not being in the nature of :
1) interest
2) dividends
3) capital gains shall be deducted from contract costs.
Costs that cannot be attributed to any contract activity shall be excluded.
When costs incurred in securing a contract are recognized as an expense in the period in
which they are incurred they are not included in cost for subsequent years.
Contract cost that relate to future activity are recognized as an asset and are classified as
contract work in progress.
Payments made to subcontractors in advance of work performed under the sub- contract.
Illustration
Contract cost incurred 9500
Less: Contract cost recognized as contract expense as per ICDS III 9000
( Estimated cost x DOC)
Work in progress 500
11. EARLY STAGES OF CONSTRUCTION
During the early stages of a contract where the outcome of a contract cannot be estimated
reliably,
Contract revenue is recognized only to the extent of the cost incurred
The early stage of a contract shall not extend beyond 25% of the stage of completion
RECOGNISATION METHOD
Percentage of completion method is applied on a “Cumulative basis” in each previous year to
the current estimates of contract revenue and contract costs.
Change in Estimates: Where there is change in estimate s, 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.
Prospective
Retrospective X
12. Combining and segmenting of construction contracts
ICDS III should be applied to the
Separately identifiable components of a single contract ( Segmenting of contracts)
(or)
To a group of contracts together ( Combining of contracts)
Segmenting of contract:
Where a single contract covers a number of assets, the
construction of each asset should be treated as a
separate construction contract when:
Separate
proposals have
been submitted
for each asset
Each asset has
been subject to
separate
negotiation
The costs and
revenues of each
asset can be
identified.
13. A group of contracts , whether with a single customer or with several customers , should be treated
as a single construction contract when:
The group of contracts is
negotiated as a single package
The contracts are so closely
interrelated that they are in
effect part of a single project
with an overall profit margin
The contracts are performed
concurrently or in a
continuous sequence.
Combining of contracts:
14. Creation of additional asset
Asset differs significantly in
design
technology from the asset or assets covered
function the original contract
( or)
The price of the asset is negotiated without having regard to the
original contract price.
Treated as a single construction contract
when
15. ACT VS ICDS
When there was a conflict between Act and ICDS then “Act will prevails over standard”
43 CA vs ICDS III
The Finance Act, 2013 inserted section 43CA of the Act applicable from A.Y. 2014-15
which deals with the taxability of transfer of immovable properties, i.e., land or
building or both in the nature of stock-in-trade. The primary intention of this
provision is that sale value of a property held as stock in-trade should not be less
than the value adopted for stamp duty purposes. These newly introduced
provisions are identical to the provisions of section 50 c
Illustration
Then contract price will be 10,50,000 not 10,00,000
• Contract price in agreement
including retentions is
10,00,000
ICDS III
• Stamp value at the time of sale
is 10,50,00043CA
16. Transitional Provision
Contract revenue and contract costs associated with the construction contract, which
commenced on or before the 31 st day of March 2015 but not completed by the said
date , shall be recognised as revenue and costs respectively in accordance with the
provisions of the 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 the 01/04/2014
shall be taken in to account for recognizing revenue and costs of the said contract for
the previous year commencing on the 1/04/2015 and subsequent previous years.
Commenced on or before 31/03/2015 but not completed
F.Y 2011-12 F.Y.2012-13 F.Y. 2013-14 F.Y 2014-15
31/03/2015
Transitional Provision will apply
18. Example 1:
If contract started on 01/4/2013 and it was to complete with in 4 years . The contractor want
to follow completed contract method and does not recognize any revenue and costs.
Contract price 10,00,000
Estimated contract cost 8,00,000
Surveyor has given degree of completion for 3 years i.e. from 01/04/2013-31/03/2016 as
30%,60%,80%.
If transitional provision apply how to consider the costs and revenue in F.Y.2015-16?
Solution:
If contract cost and revenue not recognised in earlier years recognize in accordance with
the provisions of this standard.
Earlier year Current year
Completed contract method Percentage of completion method
Moreover ICDS III is applied prospectively and not retrospectively hence the provisions
of the standard is applicable to current year.
By applying the provisions of standard current year income is calculated as follows
19. Impact:
Due to absence of prudence concept more revenue is recognised although it
relates to previous year.
As per the accrual concept revenue and expenses is to be recognised when it is
occurred but recognizing earlier years income and expenses although it is not
accrued questions the applicability of accrual concept.
2013-14 2014-15 2015-16
Degree of completion 30% 60% 80%
A. Contract revenue (10,00,000)
Recognized = contract price x
DOC
- - 8,00,000
B. Contract cost
Estimated total cost x DOC
(8,00,000)
- - 6,40,000
C. Cumulative profit (A-B) - - 1,60,000
D. Profit of the year
Cumulative profit – Profit of
previous years
- - 160000
20. Example 2:
If contract started on 01/4/2013 and it was to complete with in 4 years . The contractor want to
follow percentage of completion method and recognizes corresponding revenue and costs.
Contract price 10,00,000
Estimated contract cost 8,00,000
Surveyor has given degree of completion for 3 years i.e. from 01/04/2013-31/03/2016 as
30%,60%,80%.
If transitional provision apply how to consider the costs and revenue in F.Y.2015-16?
Solution:
If contract cost and revenue are recognised in earlier years then Contract cost and revenue recognised
should be taken in to account in recognizing the revenue and cost of the P.Y.2015-16 and subsequent
years. Hence the solution is as follows.
2013-14 2014-15 2015-16
Degree of completion ` 30% 60% 80%
A. Contract revenue Recognized =
contract price x DOC
3,00,000 6,00,000 8,00,000
B. Contract cost
Estimated total cost x DOC
2,40,000 4,80,000 6,40,000
C. Cumulative profit (A-B) 60,000 1,20,000 1,60,000
D. Profit of the year
Cumulative profit – Profit of
previous years
60,000 60,000 40,000
21. ICDS VS AS 7
S.No Points for Comparison ICDS-III AS-7
1. Applicability This ICDS is applicable
for computation of
income chargeable under
the heads “PGBP” (or)
“IOS” and not for
purpose of
maintenance of books
of accounts.
This AS-7 is applicable for
purpose of preparation of
Financial statements.
2. Criteria for recognition of
variations in contract work
claims
incentive payments
Not specified in ICDS III Recognition criteria
specified in AS 7
3. Contract cost which relate to future
activity
Recognized as asset . If
such costs are not
realizable then it will be
allowable under I.T.Act.
Recognized as an asset
when it is probable that
such costs are recoverable.
4. Retentions Retentions shall include
in contract revenue
AS-7 is silent on
retentions
22. ICDS VS AS 7
S.No Points for
Comparison
ICDS-III AS-7
5. Recognition of
contract costs and
contract revenues with
reference to
percentage completion
method
Contract revenue and contract costs
associated with the construction contract
should be recognized as revenue and expenses
respectively by reference to the stage of
completion of the contract activity at the
reporting date.
When the outcome of the
construction contract can
be estimated reliably,
Contract revenue and
contract costs associated with
the construction contract
should be recognized as
revenue and expenses
respectively by reference to
the stage of completion of
the contract activity at the
reporting date.
AS7 specifies criteria as to
when the outcome of the
construction contract can be
estimated reliably for fixed
price contracts and cost
6. Reversal of contract
revenue recognized
Before reversal of revenue ,the sum shall
be written off in the books of accounts in
line with provisions of 36(1)(vii)
No such reversal is possible
23. ICDS VS AS 7
S.No Points for
Comparison
ICDS-III AS-7
7. Borrowing costs Allocated Borrowing costs in accordance
with ICDS 9 on Borrowing Costs
Shall not be included in
contract costs
8. Netting of costs by
incidental income.
All types of incidental incomes except in
the nature of interest, dividend and
capital gains are reduced from the
contract costs.
All types of incidental
incomes are reduced from
contract costs.
9. Early stages of
completion of contract .
During the early stages of contract where the
outcome of the contract cannot be estimated
reliably.
Contract revenue is recognized only to the
extent of costs incurred.
The early stage of a contract shall not
extend beyond 25% of the stage of
completion.
During the early stages of
contract where the outcome
of the contract cannot be
estimated reliably.
Contract revenue is
recognized only to the extent
of costs incurred.
No such percentage is
mentioned.
10. Recognition of
expected losses from
contract
In proportion to percentage of
completion.
To be recognized in full.
24. Illustration : Disallowance of expected losses
There was a proposal to construct a
residential building which takes 2 years
to complete , the particulars of
contract was as follows ( In Lakhs)
• Contract Revenue – 100
• Cost incurred during year 1 – 60
• Estimated Total cost - 120
• Degree of Completion at the end of
year 1 – 50 % ( 60/120)
• Cost incurred during 2nd year – 60
• Degree of Completion at the end of
2nd year – 100 % ( 120/120)
Note : Calculation of provision
Year 1 Year 2
Total estimated cost 120 120
(-) Total revenue ( 100) ( 100)
Total loss 20 20
(-)loss recognized (10) (20)
Provision to made 10 _
Year 1 Books ICDS
REVENUE: Contract Revenue x Degree of
completion ( 100 X 50 %)
50 50
Less: Contract Cost Incurred till reporting date 60 60
Loss for the year ( 10) (10)
Less : Provision for expected losses ( 10) -
Net loss for the year (20) (10)
Year 2 Books ICDS
REVENUE: Contract Revenue x Degree of
completion ( 100 X 100 %)
100 100
Less: Contract Cost Incurred till
reporting date (60+60)
120 120
Cumulative loss (20) (20)
Less: loss of earlier years 20 10
Net loss for the year - ( 10)
25. Disclosure
1
• Amount of contract revenue recognized
2
• Method used to determine stage of completion
3
• Amount of cost incurred
4
• Recognized profits and losses up to reporting date
5
• Amount of advances received
6
• Amount of retentions
