3. PRUDENCE??...... As per AS-1
O“In view of uncertainty attached to
future events,
Oprofits are not anticipated but
recognized only when realized
OProvision is made for all known
liabilities and losses
4. PRUDENCE??.................. Notification No.
9949, dated 25/01/1996
O“Provision is made for all known liabilities and
losses
Oeven though the amount cannot be determined
with certainty
Oand represents only a best estimate in the light
of available information.”
5. PRUDENCE…… AS PER ICDS
OICDS-1 states “marked to market
loss*
Oor an expected loss shall not be
recognized
Ounless the recognition of such loss is
in accordance with the provisions of
any other ICDS.”
6. MARKED TO MARKET LOSSES
OA loss generated through an
accounting entry
Orather than the actual sale of a
security
7. The Concept of Prudence is En
Masse Absent in ICDS
OExpresso Unis Exclusion Alterious
Meaning express mention of one thing
excludes all others.
The phrase indicates that items not on
the list are assumed not to be covered
by the statute.
8. SO WHAT CAN WE
DEDUCE FROM THE
DEFINITION OF
PRUDENCE AS PER
ICDS
10. Considering Golden rule of
interpretation and RBI master
circular, banks should not book
interest income on any NPA unless it
is actually received.
11. O XYZ LTD is a construction firm. It enters into a 2 year fixed price contract for the
construction of a building for one of its customers. Prices of construction raw
materials have increased significantly since the start of the contract due to
unforeseeable factors. XYZ Ltd. estimates stage of completion on the basis of
cost. Following information is available in respect of the contract at the end of
first year:
Whether expected/future losses on construction contracts should
be recorded?
PARTICULARS AMOUNT
Total Contract Price 20,00,000/-
Total Expected Cost 25,00,000/-
Cost Incurred to Date 15,00,000/-
Amount Billed to Customer 9,00,000/-
12. OAs per AS-7
If a loss is expected in respect of a construction
contract, the entire loss is recognized immediately
in the income statement.
OAs per ICDS
ICDS – 3 (Construction Contracts), is silent on the
same. And, ICDS – 1 clearly states that an
expected loss shall not be recognized, it can be
concluded that future losses are not allowable as
per ICDS.
13. OGADA Electronics sells electronic
items. Total sales for the F.Y. 2014-15
is Rs. 10,00,000. Historically, it has
experienced a warranty cost of 1% of
revenues, and so records a warranty
expense based on that information.
What should be the treatment as per
AS 1 and ICDS-1?
14. As per AS-1,
Provision for warranty will be recorded in the books of accounts.
Warranty Expenses Dr.
10,000
To Provision for Warranty/Accrued Warranty Liability
10,000
Also, as per Hon’ble Supreme Court judgment in the case of
Rotork Controls India Pvt. Ltd. vs. CIT (SC) [314 ITR 62], it was
held that reliable estimate of the expenditure towards such
warranty was allowable as business expenditure u/s 37(1).
15. As per ICDS – 10,
OA provision shall be recognised when:
Oa person has a present obligation as a result
of a past event;
Oit is reasonably certain that an outflow of
resources embodying economic
Obenefits will be required to settle the
obligation; and
Oa reliable estimate can be made of the
amount of the obligation.
16. OABC Ltd has sold machinery to XYZ Ltd for Rs.
10,00,000 on 1st March, 2015. As per terms of
agreement, 90% payment will be made instantly;
remaining 10% payment will be made after 3
months if the specified quality conditions are
fulfilled. (Assume that there are no past trends
available with the company) What would be the
treatment of this amount as per the concept of
prudence and as per ICDS?
17. As per AS-9 and Concept of Prudence
Sales of only Rs. 9,00,000 should be recorded in financial
year 2014-15 and the remaining amount of Rs. 1,00,000
should be recorded in financial year 2015-16 if the specified
conditions are fulfilled.
As per ICDS
Goods have been sold for 100% amount, so 100% amount i.e.
Rs. 10,00,000/- should be recorded in F.Y 2014-15 only.
Therefore, as per ICDS-1, entire amount of Rs. 10,00,000
should be recorded as sales.
18. EXPERTS OPINION
[2015] 56 taxmann.com 471 (Article)
SALE OF GOODS
AS-9 provides that revenue shall be
recognized when:
ICDS
All significant risks and rewards are
transferred
All significant risks and rewards are
transferred
Seller doesn't retain any control over goods
sold
Seller doesn't retain any control over goods
sold
No significant uncertainty exists
regarding the amount of the consideration
that will be derived from the sale of the
goods
Reasonable certainty of its
ultimate collection.
Comment: The notified standard is now in line with AS- 9 – Revenue
Recognition
19. CONCLUSION
O Diluting Provisions of Section 145 of Income-tax Act,
1961:
Since ICDS is not permitting recognition of provisions and it
also seems to result in recognition of expected income
which may not be certain, it can be inferred that ICDS is
diluting the provisions of Section 145 of Income Tax Act.
This will certainly result in a lot of litigations.
20. CONCLUSION
O Earlier Recognition of Income:
Although because of ICDS, there would be earlier
recognition of income, but with the help of provsio to
Section 37(1)(vii) of I.T. Act, 1961, no effect would happen
on the ultimate tax payment by the tax payer (leaving
aside timing difference).
For example in case of Retained Earnings in
Construction Contracts or interest on NPA.
21. PROVISO TO SECTION 37(i)(vii)
O The debt has been taken into account for computing the
income due to application of ICDS.
O No accounting entry was made in respect of such debt in
the books of account
O It is eligible for deduction as bad debt when it
becomes irrecoverable without any write off in the
books of account of the taxpayer.
O Thus, a mere claim of bad debt is the requirement for
allowing the deduction.
