A STUDY on ICDS Reporting Requirements

A STUDY on ICDS
-Phanitej Raja

CONTENTS
1. Introduction to ICDS
2.Background
3.Reporting Requirement
4.Penal Consequences
5.List of ICDS
6.ICDS v/s AS GAAP

INTRODUCTION TO ICDS
 Meaning: The standards according to which computation of income and disclosures
to be done under Income Tax Act,1961
 Objective: Minimizing tax related disputes
 Main features: i)Act will over ride ICDS
ii)No need to maintain separate BOA
iii)Only for Income computation
 Applicability: i)All assesses (except I/HUF who are not under 44AB Audit)
ii)Mercantile system followers
iii)Only for computing PGBP & IFOS

 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 out of the 12
draft ICDS which were earlier effective from 1st April, 2015.
 On 29th September ,2016 ,the Central Government has notified 10 ICDS
which shall be effective fom 1st April,2016.
Background

Reporting Requirement
 It should be noted that the Tax Auditor auditing accounts under sec.
44AB is not computing the Income but is (a) reporting on accounts &
(b) reporting on the relevant information furnished in Form No.: 3CD.
 Now, the revised Form No.3CD vide cause 11(d) requires reporting
of the details of deviation, if any, in the method of accounting
employed in the previous year from “Income Computation and
Disclosure Standards” prescribed under section 145 and the effect
thereof on the profit or loss.

Reporting Requirement
 Net effect on the income due to application of ICDS is to be disclosed in
the return of income.
 However there shall not be any separate disclosure requirements for
persons who are not liable to tax audit.

Penal Consequences
Penal Consequences of ICDS non-compliance:
 There are no specific provisions inserted in the income tax law
particularly in Chapter – XXI : “Penalties Imposable” to levy penal
consequences for non-compliance of ICDS. However any additions in
income due to applicability of ICDS may attract concealment penalty
consequences etc

AS AS Name ICDS ICDS Name
1 Disclosure of Accounting
Policies
1 Disclosure of Accounting
Policies
2 Valuation of Inventories 2 Valuation of Inventories
3 Construction Contracts 3 Construction Contracts
9 Revenue Recognition 4 Revenue Recognition
10 Property, Plant &Equipment 5 Tangible Fixed Assets
LIST OF ICDS

AS AS Name ICDS ICDS Name
11 The effects of changes in
foreign exchange rates
6 The effects of changes in foreign
exchange rates
12 Accounting for Government
Grants
7 Government Grants
13 Accounting for Investments 8 Securities
16 Borrowing Cost 9 Borrowing Cost
29 Provisions, Contingent
Liabilities and Contingent
Assets
10 Provisions, Contingent Liabilities
and Contingent Assets
LIST OF ICDS

Subject AS 1: Disclosure of Accounting
Policies
ICDS I: Disclosure of
Accounting Policies
Expected
losses
Will be recognized-concept of
prudence is followed
Will not be recognized-Concept
of prudence is absent.
Materiality Considered Omitted
Change in
Accounting
policy
AS-5 criteria Will not be changed unless there
is a reasonable cause*
Prior period
items
Will be included in P&L a/c Does not consider
ICDS I v/s AS 1
*Reasonable cause is not defined.

Subject AS : 2 Valuation of
Inventories
ICDS II: Valuation of Inventories
Inventory
services
Only the value of Stores, Raw
material etc. included while
providing services
Includes the labour cost ,cost of
personnel, supervisory and other
overheads
Opening
inventory
No any specific point is
mentioned
Opening inventory value should be
the value of closing inventory of the
PY
Standard
cost method
No any specific confirmation
disclosure
Disclose the confirmation of the fact
that standard cost approximates the
actual cost of inventory
Taxes,duties,
cess
Shall be included in cost of
inventory if not Cen vatable.
Shall not be included in cost of
inventory even if Cen vatable
ICDS II v/s AS 2

Subject AS : 2 Valuation of
Inventories
ICDS II: Valuation of Inventories
Inventory
incase of
dissolution of
PF/AOP/BOI
Cost or NRV (Under going
concern assumption)
At NRV* (whether business is
discontinued or not)
ICDS II v/s AS 2
*This is contrary to law settled by Apex court in the case of Sakthi Trading Co. v. CIT.
If on dissolution of the firm the business is not discontinued, then, the ordinary principle of
commercial accounting permitting valuation of stock-in-trade at Cost or Net Realizable
value whichever is lower will apply.
If actual cost is less than NRV that will result in the taxation of notional profits the
assessee has not realized

Subject AS : 7 Construction Contracts ICDS III: Construction Contracts
Real Estate
Developers
It does not deal with
recognition of revenue by Real
Estate Developers and there is
separate Guidance Note on the
same issued by the ICAI.
ICDS is not applicable on real Estate
Developers
 Retention
Money
Contract revenue shall
comprise: The initial amount
of revenue agreed in the
contract
Contract revenue shall comprise:
The initial amount of revenue agreed
in the contract, including retentions
ICDS III v/s AS 7

Subject AS : 7 Construction Contracts ICDS III: Construction Contracts
 Incidental
income
Any incidental income, not
included in the contract
revenue, shall be deducted
while computing construction
cost.
Incidental income being in the
nature of interest ,dividend and
capital gain shall not be deducted
from the contract cost and taxed as
income separately under the Act.
ICDS III v/s AS 7

Subject AS 7: Construction Contracts ICDS III: Construction Contracts
Contract Cost Contract Cost includes:
-Direct cost
-Cost allocated to the contract
-Cost specially charged to the
customer under the terms of
the contract
The scope of the Contract Cost has
been widened to further include
“Allocated Borrowing Cost” in
accordance with ICDS on Borrowing
Cost.
 Recognition
of Contract
Revenue
Contract revenue to be
recognized if it is possible to
reliably estimate the outcome
of a contract.
Contract revenue to be recognized
when there is reasonable certainty of
its ultimate collection.
ICDS III v/s AS 7

Conditions
to estimate the
outcome
It lays down the conditions
(para 22&23) to estimate the
outcome of construction
contract in case of :-
-Fixed Price Contract
-Cost plus Contract
ICDS is silent on the same*
ICDS III v/s AS 7
*It is clarify that if any contract revenue already recognizes as income is subsequently
written off in the books of accounts as uncollectible, the same shall be recognised as an
expenses and not as an adjustment of the amount of contact revenue.

Situation
when
outcome
of contract
cannot be
reliably
estimated
Contract revenue and contract costs
to be recognized as revenue or
expenses by reference to the POCM
if the outcome of the contract can
be estimated reliably; else, revenue
should be recognized only to the
extent of contract costs incurred.
No quantitative threshold laid down
for determining the stage of
completion, until when, the
outcome of a contract cannot be
reliably measured.
Under ICDS, profit recognition has
to start compulsorily once the stage
of completion is more than 25%.
ICDS III v/s AS 7

Recognition
of foreseeable
losses
It permits to recognize
immediately the foreseeable
losses on a contract regardless
of commencement or stage of
completion of contract.
ICDS does not permit recognition of
the foreseeable/expected losses on a
contract.
ICDS-I on accounting policies also
does not permit recognition of
foreseeable loss.
 Contract cost
relating to
future
activity(WIP)
Shall be recognized as an asset
only if these costs are
recoverable.
Shall be recognized as an asset.
(No specification about
recoverability)
ICDS III v/s AS 7

Disclosure
relating to
transaction
involving sale
of goods
No equivalent disclosure
requirement
Transaction involving sale of good,
total amount not recognised as
revenue during the previous year
due to lack of reasonably certainty
of its ultimate collection along with
nature of uncertainty
ICDS III v/s AS 7

Subject AS 9: Revenue recognition ICDS IV: Revenue recognition
Revenue
from Service
transactions
Shall be recognized on
proportionate completion basis
or completed service contract
method.
Shall be recognized by following
only "percentage of completion
method“. However when services are
provided by an indeterminate
number of acts over a specified
period of time, revenue may be
recognized on straight line basis
over the specified period.
 Interest on
refund of
any tax, duty
or cess
Shall be recognized on accrual
basis.
Shall be deemed to be income of
the previous year in which such
interest is received
ICDS IV v/s AS 9

Subject AS 10: Property , Plant &
Equipment
ICDS V: Tangible Fixed Assets
 Cost of fixed
asset
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.
ICDS V v/s AS 10

Equipment
Impact:
The Act (Section -43) 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.
ICDS V v/s AS 10

Equipment
machinery
spares
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.
Stand-by equipment and servicing
equipment also to be capitalized
ICDS V v/s AS 10
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.

Equipment
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.
 The fair value of the tangible fixed asset
so acquired shall be its actual cost.
Fixed asset
acquired in
exchange for
shares and
securities
 Recorded at its FMV, or the FMV
of the securities issued,
whichever is more clearly
evident.
 The fair value of the tangible fixed asset
so acquired shall be its actual cost.
ICDS V v/s AS 10

Equipment
When several
assets are
purchased for
consolidated price
Para 15.3: the consideration is
apportioned on fair basis
as determined by
competent valuers.
The consideration shall be
apportioned to the various assets
on a fair basis.
ICDS V v/s AS 10
Impact: In absence of determination by registered valuers in ICDS words “fair
basis” becomes subjective and might be prone to litigation.

Subject AS 11: The effects of changes
in foreign exchange rates
ICDS VI: The effects of changes in
 Assets which
are carried at
fair value or
other similar
valuation
denominated
in a foreign
currency
Reported using the exchange
rates that existed when the
values were determined i.e.
closing rate
Converted into reporting currency
using the exchange rate at the date of
the transaction
ICDS VI v/s AS 11

Subject AS 11: The effects of changes in
 Capital
Monetary
Items- not
relating to
Imported
goods
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:
Presently, 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
ICDS VI v/s AS 11

 Capital
Monetary
Items-
relating to
Imported
goods
Same treatment as if not
relating to Imported Goods
Requires recognition in P&L A/c
subject to provisions of Section 43A
Actually Section 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.
ICDS VI v/s AS 11

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.
ICDS VI v/s AS 11

 Foreign
operation
definition
Foreign Operation is a
subsidiary, associate, joint
venture or branch of the
reporting enterprise, the
activities of which are based or
conducted in a country other
than the country of the
reporting enterprise.
“Foreign operations of a person” is
a branch, by whatever name called,
of that person, the activities of which
are based or conducted in a country
other than India
ICDS VI v/s AS 11
Impact: 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.

 Monetary
items of non
integral
foreign
operations
Exchange Differences arising
on translating monetary
items and non monetary
items of non-integral foreign
operations shall be transferred
to “Foreign Currency
Translation Reserve”(FCTR).
Exchange Differences arising on
translating of assets and liabilities
both monetary and non monetary
of non integral foreign operations
shall be recognized as “income or
expense” in that previous year.
ICDS VI v/s AS 11
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
recognized even on tangible fixed assets.

 Subject  AS 12: Government
Grants
 ICDS VII: Government Grants
 Recognition of
Grant
 On reasonable assurance
of compliance of
attached conditions and
reasonable certainty of
ultimate collection
 Mere receipt is not
sufficient(FAQ 27)
 On reasonable assurance of
compliance of attached conditions
and reasonable certainty of
ultimate collection
 Recognition cannot be postponed
beyond date of actual receipt
 Grants relating
to depreciable
fixed asset
 Grant can be reduced
from fixed asset or
treated as deferred
income in P&L A/c
 The grant shall be deducted from
the actual cost of the asset or
assets concerned or from the
written down value of block of
assets as the case may be
ICDS VII v/s AS 12

Grants
 Grants relating
to non-
depreciable
asset or assets
and which are
not attached to
conditions
 Credited to capital
reserve.
 No specific guidelines
 But as a residuary (Para-9), shall
be recognised as income over the
periods necessary to match them
with the related costs which they
are intended to compensate
 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.
ICDS VII v/s AS 12

Grants
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
Disclosure
requirement
 No disclosure of
unrecognized grants
 Disclosure of unrecognized grants
ICDS VII v/s AS 12

 Subject  AS 13:Accounting for
Investments
 ICDS VIII: Securities
Applicability This Standard deals with
accounting for investments
in the financial statements
of enterprises.
Assets held as stock-in-
trade are not ‘investments’
This ICDS deals with securities held
as stock-in-trade.
ICDS VIII v/s AS 13

Investments
Carrying amount  Current investments are
valued at lower of cost
and fair value
Securities held as Stock-in-trade
shall be valued at actual cost or NRV,
whichever is lower. (where the actual
cost cannot be ascertained by
reference to specific identification,
the cost shall be determined on the
basis of FIFO.)
ICDS VIII v/s AS 13

Investments
Carrying
amount
Individual Scrip wise
Valuation
Category wise Valuation -
Classification into four categories namely, (a)
shares; (b) debt securities; (c) convertible
securities; and (d) any other securities not
covered above.
Valuation of unlisted/ thinly traded securities at
cost - At the end of any previous year, securities
not listed on a recognized stock exchange; or
listed but not quoted on a recognized stock
exchange with regularity from time to time,
shall be valued at actual cost initially
recognized.
ICDS VIII v/s AS 13

Investments
 Where a
security
is
acquired
in
exchange
for
securities
or asset
If an investment is acquired by
the issue of shares or assets, the
acquisition cost should be the
fair value of the securities
issued/fair value of the asset
given up. Alternatively, the
acquisition cost of the
investment may be determined
with reference to the fair value
of the investment acquired if it
is more clearly evident.
Where a security is acquired in
exchange for other securities or asset,
the fair value of the security so
acquired shall be its actual cost
ICDS VIII v/s AS 13

 Subject  AS 16:Borrowing Cost  ICDS IX: Borrowing Cost
 Income
from
temporary
deployme
nt of un
utilised
funds
To be reduced from borrowing
cost
Shall be taxable as Income from other
sources under the ICDS.
SC ruling in Tuticorin Alkali Chemicals
(227 ITR 172) requires that interest
income earned from temporary
deployments of funds has to be offered
to tax immediately as IFOS. Hence
above deviation has no tax impact
ICDS IX v/s AS 16

 Commenc
ement of
Capitalisa
tion:
 The date of fulfilment of
three conditions viz.
incurrence of capital
expense, incurrence of
borrowing costs and
preparatory activities are in
progress.
 Specific borrowings – Date on which
funds were borrowed
 General borrowings – Date on which
funds were utilized
ICDS IX v/s AS 16

 General
Borrowings
 Costs determined by
applying capitalisation rate
to the expenditure incurred
on the asset. The rate is
weighted average of
borrowing costs applicable
to the borrowings during
the period other than
specific borrowings
 General Borrowings:
Costs determined by following
formula; A *B
C
ICDS IX v/s AS 16

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 OR
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 IX v/s AS 16

 Subject  AS29:Provisions,Conting
ent liabilities and
Contingent Assets
 ICDS X: Provisions,Contingent
liabilities and Contingent Assets
 Provisions  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
ICDS X v/s AS 29
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.

ent liabilities and
Contingent Assets
Provision for Warranty is allowed as an expenditure upholding the test of ‘probable’
warranty obligation in the following judgments.
oRotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) (extract on next slide)
oHimalaya Machinery (P) Limited v DCIT 334 ITR 64
oCIT vs. Luk India P. Ltd. 52 DTR 117.
oSiemens Public communication Networks Limited v CIT
oCIT v Indian Transformer Limited. 270 ITR 259
ICDS X v/s AS 29

ent liabilities and
Contingent Assets
Rotork Controls India (P.) Ltd. v. CIT [2009] 180 TAXMAN 422 (SC)
A provision to qualify for recognition, there must be a present obligation arising from
past events, settlement of which is expected to result in an outflow of resources and in
respect of which a reliable estimate of amount of obligation is possible.
If historical trend indicates that in past large number of sophisticated goods were
being manufactured and defects existed in some of items manufactured and sold, then
provision made for warranty in respect of army of such sophisticated goods would be
entitled to deduction from gross receipts under section 37(1), provided data is
systematically maintained by assessee.
ICDS X v/s AS 29

ent liabilities and
Contingent Assets
 Contingent
assets/
reimburse
ment
claims
 Contingent assets/
reimbursement claims are
recognized if inflow of
economic benefits/
reimbursement is “virtually
certain”.
Contingent assets/ reimbursement
claims to be recognized if inflow of
economic benefits/ reimbursements
is “reasonably certain”.
ICDS X v/s AS 29
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.

A STUDY on ICDS Reporting Requirements

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