Icds (after 23rd march notification)

Income
Computation and
Disclosure
Standards (ICDS)
Presentation by:
CA. Laxman L
Agrawal

1) Background
2) General Principles
3) List of ICDS
4) Certain Specific Issues

 Section 145(1) of the Income-tax Act, 1961 (Act) stipulates that the method of
accounting for computation of income under the heads “Profits and gains of
business or profession” and “Income from other sources” can either be cash or
mercantile system of accounting.
 Section 145(2) of the Act states that the Central Government notify the accounting
standards (now income computation & disclosure standards) to be followed by
following class of assesses or in respect of any class of income.
A. Followed by all assesses (other than an individual or A HUF who is not
required to get his accounts of the previous year audited in accordance with the
provision of section 44AB of the said act) and who is following the mercantile
system of accounitng
 Accordingly, two tax accounting standards were notified until now:
1. Disclosure of accounting policies
2. Disclosure of prior period and extraordinary items and changes in accounting
policies

 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 shall be
effective from 1st April, 2015.

 HEADS COVERED: ICDS are applicable for computation of income
chargeable under the head “profits and gains of business or
profession” and “income from other sources”.
 CONFLICT BETWEEN LAW & ICDS: In case of conflict between the
provisions of the Act and ICDS, the provisions of the Act shall prevail
to that extent.
o What if in case of conflict between HC / SC rulings and ICDS?
o The risk of best judgment assessment u/s 144 if positions
adopted as per ICDS which is contrary to rulings.
 MERCANTILE SYSTEM: ICDS applies only to taxpayers following
‘mercantile system’ of accounting.

 ICDS are ‘not applicable’ in following circumstances:
a. Where the assessee follows cash system of accounting
b. Where income chargeable to tax comprises of income other than ‘profits
and gains of business or profession’ or ‘income from other sources’.
c. Where the individuals and HUF are not covered audit us 44AB
 Whether ICDS apply in case of presumptive taxation?
Since in presumptive taxation mode the assessee does not maintain any set
of books of account and there is no applicability of mercantile system of
account thus ICDS do not apply in case of presumptive taxation.
 ICDS impact over maintenance of books of accounts?
ICDS are not supposed to provide the manner of maintenance
of books of accounts they simply provide the income computation
and disclosure manner.

 Whether ICDS have any impact on Minimum Alternate Taxation?
Since ICDS does not apply in maintenance of books of account by an
assessee thus ICDS should not have any initial impact on MAT
computations.
 Whether ICDS have any impact on Alternate Minimum Tax?
However the provisions of ICDS shall apply for computation of AMT.

 How disclosures under ICDS are to be made or where to be
made:
All ICDS notified provide for the disclosure requirement. In The CBDT has
issued a circulation No. 10/2017 dated 23rd march 2017 on clarification on
ICDS in this circulation the CBDT has clarified that disclosures required
under ICDS shall be made in the tax audit report in Form no 3CD and no
separate disclosure are required for person not liable to tax audit.
 Whether ICDS will impact Tax Audit?
YES, ICDS are certainly going to impact tax audit, for example, the
valuation of closing stock as per ICDS II shall have an impact on 3CD
filling. Similarly deviation in value of stock will also form part of 3CD
reporting.

 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.

1) ICDS I: Accounting Policies (AS-1)
2) ICDS II: Valuation of Inventories (AS-2)
3) ICDS III: Construction Contracts (AS-7)
4) ICDS IV: Revenue Recognition (AS-9)
5) ICDS V: Tangible Fixed Assets (AS-10)
6) ICDS VI: The Effects of Changes in Foreign Exchange Rates (AS-11)
7) ICDS VII: Government Grants (AS-12)
8) ICDS VIII: Securities (AS-13)
9) ICDS IX: Borrowing Costs (A-16)
10) ICDS X: Provisions, Contingent Liabilities and Contingent Assets (AS-29)

 Fundamental Accounting Assumptions & Considerations in Selecting
Accounting Policies: ICDS-I Major Considerations in Selection of Accounting
Policies
 Marked to Market losses & expected losses not be recognised unless covered
under a specific ICDS
 Valuation of Inventories and Value of Opening Stock: ICDS-II How to
Determine Cost
 Valuation of Services: including labour, supervisory & other direct cost +
overheads
 Conversion of Assets into Stock in Trade: Section 45(2A).
 Dissolution of Firm / Discontinuance of Business and Valuation of Stock
 Construction Contracts: Percentage of Completion Method (POCM)

 Recognition of foreseeable losses in case of construction contracts.
 Conversion of Foreign Currency Transactions for income tax purposes
monetary items and non-monetary items (ICDS-VI). Revenue Non-Monetary
Items (like inventory) as well as integral and non-integral operations.
 Treatment of Government Grant: Relating to Fixed Assets
 Valuation of Securities: Category-wise not Script-wise (ICDS-VIII) Example
 Borrowing Cost: Incurrence of borrowing vs. Utilisation of Funds
 Introduction of new formula for capitalization of borrowing costs in case of
general purpose borrowing. Borrowing Costs
 Recognition of a provision when to take place: when “reasonable certainty” of
outflow exists.

 Fundamental Accounting Assumptions
◦ Going Concern
◦ Consistency
◦ Accrual
 Change in Accounting Policies: Reasonable Cause
 Disclosure of Accounting Policies

AS – 1 ICDS – I
a. PRUDENCE
b.SUBSTANCE OVER FORM
c. MATERIALITY
a. SUBSTANCE OVER FORM
b.No recognition of Mark-to-
Market losses or an expected
loss unless the recognition of
such loss is in accordance with
the provision of any other ICDS.

 No concept of materiality in ICDS unlike, AS-1.
 No likely significant tax impact
 In absence of materiality concept, considerable time and cost will be
involved making trivial adjustments in net profit as per books of
accounts to arrive at PGBP since authorities may insist on strict
application of ICDS even on small value items.

 Based upon the concept of ‘prudence’, AS-1 precludes
recognition of anticipated profits and requires recognition of
expected losses.
 However, ICDS provides that expected losses or mark to
market losses and MTM gain also shall not be recognized
unless permitted by any other ICDS to avoid differential
treatment for recognition of income and losses.

 In the absence of prudence as consideration in selection and change of
accounting policy, there could be several situations which could result in
earlier recognition of income or gains or later recognition of expenses as
compared to that under AS. e.g. provision for warranty expenses on
sales made.
 Derivatives which are not covered within the scope of ICDS VI (Which
deal with accounting for derivative contracts), ICDS- I provisions would
apply to such transcation.

Valuation of Inventories
Cost of Inventories
Cost of Purchase
Cost of Services
Cost of Conversion and
Other Cost

 ICDS –II shall not apply in following cases:
a. Work-in-progress arising under ‘construction contracts’
b. Work-in-progress which is dealt with by other ICDS
c. Share, debentures and other financial instruments held as stock in
trade (dealt under ICDS –VIII)
d. Producers’ inventories of livestock, agriculture and forest
products, mineral oils, ores and gases to the extent that they are
measured at net realizable value.
e. Machinery spares, which can be used only in connection with a
tangible fixed asset and their use is expected to be irregular
(covered under ICDS-V)

 Value of opening inventory should be same as preceding year’s
closing inventory.
 In case of a newly commenced business, the value of the
opening inventory shall be the cost of the inventory.
 Cases of conversion of capital asset into stock-in-trade with
intent to commence business may remain unaffected due to
overriding provisions of Section 45(2) of the Act.
 If business is commenced with acquisition of running business on
slump sale, price paid will be ‘cost’ of opening inventory.
 If partner takes over running business of firm/LLP, value agreed

As per ICDS-II the inventories shall be value at:
◦ Cost or
◦ Net Realizable Value
Whichever is lower.

COST can be determined by either of the following
methods:
a. FIFO Method
b. Weighted Average Method
c. Specific Identification of Cost Method or
d. Standard Cost Method or Retail Method

 Techniques for the measurement of the cost of inventories such as standard cost method
or the retail method may be used for convenience if the result approximate the actual cost.
 It may not have significant impact to assessee not following standard cost method.
 The same will have an impact on taxpayers following standard cost method for valuation of
inventory for accounting purpose, who will need to adopt FIFO or weighted average cost
formula for tax purposes.
 However, Companies Act, 2013 permits Standard cost method under Cost Records rules.
 Further, as per ICDS, method of valuation once adopted shall not be changed without
reasonable cause. It would not have a significant impact since bonafide change may
constitute reasonable cause.

AS- 2 ICDS
• AS-2 does not include work in progress
(WIP) arising in the ordinary course of
business of service providers.
• Specifies that it does not apply to WIP
which is dealt with by other ICDS.
• Valuation of service inventory to be the lower of cost or NRV.
• Cost to include labor and other costs of personnel directly engaged in providing services
including supervisory personnel and attributable overheads.
• Difficulty would arise in case of services whose chargeability depends on the success of
the service.

 According to ICDS, in case of dissolution of a partnership firm or
association of person or body of individuals, notwithstanding whether
business is discontinued or not, the inventory on the date of dissolution
shall be valued at the net realizable value.
 This is unfair particularly as there is no specific provision for allowing such
NRV as the cost to the successor of the business.
 Also this is contrary to law settled by Apex court in the case of Sakthi
Trading Co. v. CIT

 A.L.A. Firm v. CIT [1991] 55 Taxman 497 (SC) / 189 ITR 285
In cases of dissolution of firm, the stock-in-trade will have to be valued at the
prevailing market price while preparing the accounts if the business of the
firm is discontinued.
 Sakthi Trading Co. v. CIT [2001] 118 Taxman 301 (SC) / 250 ITR 871
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.

 Interest and other borrowing costs shall not be include in the
costs of inventories, unless they meet the creteria for
recognition of interest as a component of the cost as specified
in the ICDS on borrowing costs.
 Followings cost asre not part of cost of inventories : A.
Abnormal cost B. Storage Cost (expect those costs which are
necessary in production) C. Administrative and Selling Cost.

AS - 7 ICDS III
 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.
 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 .

AS - 7 ICDS III
 Recognition of Contract Revenue
Contract revenue to be recognized if it is
possible to reliably estimate the outcome of
a contract.
The criteria “if it is possible to reliably measure the
outcome of a contract” has been omitted.
Contract revenue to be recognized when there is
reasonable certainty of its ultimate collection.
 Impact: The recognition of contract revenue may increase because many of time certainty of
collections are recognized but reliable measure of outcome of a contract is not recognizable.
It lays down the conditions to estimate the
outcome of construction contract in case of
:-
- Fixed Price Contract
- Cost plus Contract
ICDS is silent on the same and further it is cklearify thet 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.

AS-7 ICDS III
 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.
ICDS provides that early stage of a
contract shall not exceed 25% of the stage
of completion.
In other words, upto 25% of the stage of
completion, if the outcome of
construction contract cannot be reliably
measured, contract revenue is recognized
only to the extent of cost incurred.
Impact: Under ICDS, profit recognition has to start compulsorily once 25% stage is completed but
the same is not the case currently under AS – 7.

AS-7 ICDS III
 Recognition of foreseeable losses
It permits to recognise 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 on accounting policies also does not
permit recognition of foreseeable loss.
Impact: ICDS deviates from the present legal settled position in the case of CIT V/s. Triveni
Engineering & Industries Ltd (49 DTR 253) (Del) & CIT v. Advance Construction Co. (P) Ltd (275 ITR
30) (Guj)) in which foreseeable losses on construction contracts were allowed as a deduction for
tax purpose.

ICDS requires application of ICDS on construction contracts for
recognition of revenue on mutatis mutandis basis.
• Threshold of 25% stage of completion for recognition of income
• No recognition of the foreseeable losses on a contract. However, AS-7
permits immediate recognition of the foreseeable losses on a contract
regardless of commencement or stage of completion of contract.
• Stage of completion can be determined with reference to (a) total
estimated costs v/s. cost incurred till balance sheet date; or (b) survey
of work performed; or (c) completion of physical proportion of work

It deals with the basis for recognition of revenue arising in the course of
ordinary activities of a person from:
◦ The sale of goods
◦ The rendering of services
◦ The use by other of the person’s resources yielding interest, royalties
or dividends.

In a transaction involving sale of goods the revenue shall be recognised:
 When the seller of goods has transferred to the buyer the property in the
goods for a price or
 All significant risks and rewards of the ownership have been transferred to
the buyer and
 The seller retains no effective control of the goods transferred to a degree
usually associated with ownership.
Thus where transfer of property in goods does not coincide with the transfer
of significant risks and rewards of ownership, revenue in such a situation
shall be recognised at the time of transfer of significant risks and rewards of
ownership to the buyer. Further revenue shall not be recognised when there
is absence of reasonable certainty of its ultimate collection.

AS – 9 ICDS
 It does not apply to companies
engaged in insurance business.
ICDS is silent on same.
Revenue from service transactions
are recognised as percentage
completion method or by the
completed service contract
method.
ICDS provides only for percentage
completion method for
recognition of service
transactions.
Impact: May have minimal impact since service sector largely follows
POCM (% of completion method ) or Cost plus method.

 Revenue recognitation in case of Interest, royalties or dividend
:
A. Interest shall be accrue on the time basis, royalties shall
accrue in accordance with the term or agreements and
dividend are recognised in accordance with the provision of
act.
B. Interest on refund of any tax, dury or cess shall be
deemed to be income of the previous year in which such
interest is received.

 Cost shall comprise of purchase price, import duties and other
taxes, excluding those subsequently recoverable and any directly
attributable expenditure on making the asset ready for its intended
use. However trade discounts and rebates to be reduced.
 Administration and general overheads are to be excluded unless
they relate to a specific tangible asset.
 Expenditure incurred on start-up and commissioning of the project
including expenditure on test runs and experimental production to
be capitalized.

 Self Constructed Tangible Fixed Asset: Cost in addition to normal
parlance shall also include cost of construction directly related to
such asset, however any internal profits to be eliminated.
 Asset Acquired for Non-Monetary Consideration: Fair value of
tangible fixed asset so acquired shall be the actual cost.
 Expenditure that increases the future benefits from existing asset
beyond its previously assessed standard of performance is added
to the actual cost.

AS- 10 ICDS
 It applies to tangible fixed assets
as well as goodwill
 It applies to only tangible fixed
assets.
 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.
Impact:
The Act 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.

AS- 10 ICDS
 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.
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.

AS- 10 ICDS
 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.
 When a tangible fixed asset is
acquired in exchange for other
asset, the fair value of the
tangible fixed asset so
acquired shall be its actual
cost.
 Fixed asset acquired in exchange for
shares or other securities in the
enterprise should be recorded at its
FMV, or the FMV of the securities
issued, whichever is more clearly
evident.
 When a tangible fixed asset is
acquired in exchange for
shares or other securities, the
fair value of the tangible fixed
asset so acquired shall be its
actual cost.

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

AS- 11 ICDS
 Reported using the closing rate
 Exchange difference recognised in
P&L A/c
 Allowed under the Act also.
 Converted into reporting
currency by applying the
closing rate
 Recognised as income or
expense subject to provisions
of Rule 115
Impact: No change in tax position

AS- 11 ICDS Impact
 Which are carried in
terms of historical cost
denominated in a FC -
Reported using the
exchange rate at the
date of the transaction
Converted into
reporting
currency using
the exchange
rate at the date
of the
transaction.
No exchange difference would
arise under both
No change in the position
 Which are carried at fair
value or other similar
valuation denominated
in a FC - 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.
No exchange difference would
arise as per ICDS. Hence, the
FE gain/loss as per the books
of accounts will have to be
reduced/ added back
respectively while computing
the taxable income.

The impact of this deviation by ICDS from the provisions of AS may be
understood with the help of following illustration:
Particulars Amount in
Forex
Exchange Rate Value
Cost $100 55 as on date of
acquisition
Rs.5,500
NRV $50 60 closing rate
i.e. at B/S date
Rs.3,000
Valuation at lower of cost or NRV ($100 or $50) i.e.
$50
As per AS 11 Rs.3,000
(50*60)
As per ICDS Rs.2,750

This will result into creation of Deferred Tax Liability (DTL) as per AS 22
“Accounting for Taxes on Income”
DTL will be created on difference of valuation of Inventory as per Taxation and
as per Books of accounts
= Rs. 3000 – Rs. 2750 = Rs. 250 * Applicable Tax Rate
When stock will be sold, in that year it will result into reversal of DTL.

AS- 11 ICDS
 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.

AS- 11 ICDS
 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:
 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.

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.
 May be considered as non-cognizable for tax purposes based on its Capital
nature.
 It is also arguable that judicial settled position would remain unchanged as the
Act shall prevail in case of conflicts with ICDS.

AS - 11 ICDS
 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.
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
 Integral operations – No change in tax positions

AS - 11 ICDS
 Exchange Differences arising on
translating 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 recognised as “income or
expense” in that previous year.
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
recognised even on tangible fixed assets.

DTL or DTA will be created as the case may be due to the above difference.
E.g. Suppose Exchange Differences arising on translating financial statements
of non-integral foreign operations results into FE income.
This will result into creation of DTA subject to condition of AS 22 i.e.
consideration of prudence and virtual certainty as to sufficiency of future
taxable income in case of unabsorbed depreciation or carry forward of losses
under tax laws.
On disposal of Net Investment in Non Integral Operation, according to AS 11
the balance in FCTR will be recognized as income which will result into reversal
of DTA.
AS 11 ICDS
Foreign Currency Translation Reserve (FCTR) Treated as income for tax
purpose

Purpose AS - 11 ICDS
Others (i.e.
trading,
speculation,
firm
commitment
, highly
probable
forecast)
Marked to market at each
balance sheet date and the
gain or loss be recognised
in the P&L a/c.
No amortization of
premium/ discount.
Premium, discount arising at
the inception of a forward
contract shall be amortised
as expense or income over
the life of the contract,
exchange differences on such
a contract or income over the
life of the contract.
Exchange difference on such a contract shall be recognised as income or
expenses in the previous year in which the exchange rate change. Any
profit or loss on cancelation or renewal shall be recognised as income as
expenses for the PY.

AS- 12 ICDS VII
 Recognition of grant
• On reasonable assurance of compliance of
attached conditions and reasonable certainty
of ultimate collection
• Mere receipt is not sufficient
• On reasonable assurance of compliance of
attached conditions and reasonable
certainty of ultimate collection
• Recognition cannot be postponed beyond
date of actual receipt
Impact: If the grant is recognized on receipt basis, it would create DTA/DTL and MAT mismatch
also. Further, an issue may arise whether grants received in earlier years but not recognized
pending fulfillment of conditions will require recognition on receipt basis as per ICDS in year of
transition.
 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.

AS- 12 ICDS VII
 Relatable to depreciable fixed assets
• Requires reduction from the cost of fixed
asset or recognition as deferred revenue by
systematic credit to P&L A/c.
• Consistent with Explanation 10 to Section
43(1), requires reduction from the cost of
fixed asset.
 Relatable to non depreciable fixed assets
• To be credited as capital reserve, if no
conditions attached to the grant.
• To be credited to P&L A/c over period of
incurring cost of meeting conditions of grant.
To be treated as income –
• on an upfront basis, if there are no
conditions attached to grant.
• over period over which cost of meeting
conditions is incurred.

AS- 12 ICDS VII
 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.
 Compensation for expenses / loss incurred or for giving immediate financial support
• To be recognised in P&L A/c in the year in
which it is receivable
• Same as AS-12
 Disclosure requirement
• No disclosure of unrecognized grants • Disclosure of unrecognized grants

AS- 13 ICDS VIII
 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.

AS- 13 ICDS VIII
 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.)
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.

Shares Cost NRV
Valuation as per AS
13
Valuation as per
ICDS
Lower of cost or
NRV - Individual
scrip wise
Lower of cost or
NRV - Category
wise
ABC Ltd. 100 40 40
XYZ Ltd. 200 140 140
PQR Ltd. 300 150 150
EFG Ltd. 400 250 250
LMN Ltd. 100 500 100
Total 1100 1080 680 1080
Impact: Category wise valuation results into accelerated taxation since
appreciation in the value of certain securities will be set off against

AS- 13 ICDS VIII
 Pre-acquisition Interest
• AS 13 and ICDS on securities both require the pre-acquisition interest to be deducted from the
actual cost.
• SC in Vijaya Bank’s case (187 ITR 541) had ruled that pre-acquisition interest paid is part of
purchase cost of security.
• But as per the case of American Express International Banking Corpn. v. CIT [2002] 125 Taxman
488 (Bom.), if income from securities is taxed under PGBP, department ought to have taxed
interest received from broken period and allow deduction of interest paid for broken period.
• Also the above case is followed as a prevalent practice.

Interest Bearing Security acquired on 1st February, 2016
Interest rate 12%
Interest Payable Half Yearly (31st Dec & 30th June)
Cost of Interest Bearing Security 1,010 (Rs. 1,000 - Face Value & Cost at which security
acquired plus Rs. 10 – Pre-acquisition interest for 1 month)
AS 13 & ICDS Prevalent Practice
Cost of Security as on 31-03-2015* 1,010 1,000
Adjustment to P&L for 2015-16 NIL 10 debited as int. exp.
On 30th June, 2016 when int. received
Adjustment to P&L for 2016-17 50 credited as income 60 credited as income
Adjustment in Cost 10 reduced from cost NIL
*NRV is assumed to be higher than cost

AS- 13 ICDS VIII
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.
Usual Practice: Concept of cost should normally relate to what is given up.

Borrowing costs are interest and other costs incurred by a
person in connection with the borrowing of funds and include:
o Commitment charges on borrowings
o Amortised amount of discounts or premiums relating to borrowings
o Amortised amount of ancillary costs incurred in connection with the
arrangement of borrowings
o Finance charges in respect of assets acquired under finance leases or
under other similar arrangements.

AS - 16 ICDS
• Method of Capitalisation:
 Specific Borrowings:
Actual borrowing costs incurred on the
borrowing during the period less any income
from temporary investment of those borrowings.
 Specific Borrowings:
Actual borrowing costs
incurred during the period
on the funds borrowed.
Impact: AS-16 requires income from temporary deployment of unutilised funds to be
reduced from borrowing cost. However, ICDS does not provide for the same. The income
from temporary deployment of unutilised funds from specific loans 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.

AS - 16 ICDS
• Commencement of Capitalisation:
The date of fulfilment of three
conditions viz. incurrence of capex,
incurrence of borrowing costs and
preparatory activities are in progress.
a)Specific borrowings – Date on
which funds were borrowed
b)General borrowings – Date on
which funds were utilised.
Impact: The capitalisation period starts early under the ICDS as compared to
AS-16.

The borrowing costs eligible for capitalisation to include:
 To the extent funds are borrowed specifically for the purposes
of acquisition, construction or production of a qualifying
asset, the amount of borrowing costs to be capitalised on that
asset shall be the actual borrowing cost incurred.
 To the extent funds are borrowed generally and utilised for
the purposes of acquition, construction or production of a
qualifying asset, the amount of borrowing cost to be
capitalised shall be computed in accordance with the formula:
A X B / C

AS - 16 ICDS
 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

AS - 29 ICDS
 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
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.

Impact:
 Provision for Warranty is allowed as an expenditure upholding the test of
‘probable’ warranty obligation in the following judgments.
o Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) (extract on next
slide)
o Himalaya Machinery (P) Limited v DCIT 334 ITR 64
o CIT vs. Luk India P. Ltd. 52 DTR 117.
o Siemens Public communication Networks Limited v CIT
o CIT v Indian Transformer Limited. 270 ITR 259

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.

AS - 29 ICDS
 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”.
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.

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