The document provides an overview of the key Income Computation and Disclosure Standards (ICDS) introduced by the Central Board of Direct Taxes effective from Assessment Year 2017-18. It summarizes 10 ICDS covering topics such as accounting policies, inventories, construction contracts, revenue recognition, tangible assets, foreign exchange rates, government grants, securities and borrowing costs. For each ICDS, it highlights significant deviations from existing Accounting Standards in areas like recognition of losses, valuation of inventories, and measurement of contract revenue and borrowing costs. The document also notes that in cases of conflict, provisions of the Income Tax Act will prevail over the ICDS.

1.
Income computation and
disclosure standards
[ECA Corporate Partners]

2. A. B a c k g r o u n d
The Central Board of Direct Taxes (‘CBDT’) vide Notification No. 33/2015 dated 31-03-2015 as
notified 10 Income Computation and Disclosure Standards (‘ICDS’) effective from 01-04-2015,
applicable from Assessment Year 2017-18 onwards.
B. S c o p e
1.0 ICDS have been issued for the purpose of computation of income chargeable
under the head “Profit and Gains of Business or Profession (‘PGBP’)” or
“Income from Other Sources (‘IOS’)” and not for the purpose of maintenance of
books of accounts. ICDS are to be followed by all the assesses following the
mercantile system of accounting.
2.0 In case of conflict between the Act and ICDS, provisions of the Act shall prevail
to that extent.
3.0 Transitional provisions have been inserted in all ICDS except ICDS on
Securities. Income, expense, loss or provision existing or entered into on or after
01-04-2015 are to be recognized as per ICDS. However Income, expense, loss
or provision, if any, recognized before 31-03-2015 shall be taken into account
for recognizing the same for the period commencing on 01-04-2015 to avoid
double taxation/non-taxation in pre and post ICDS period.
C. Summary of significant deviations of ICDS from AS
issued by ICAI
1.0 ICDS I relating to Accounting Policies
The significant deviations from AS - 1 (Disclosure of Accounting Policies) are as under:-
 Marked to Market Loss or an expected loss shall not be recognised unless the
recognition of such loss is in accordance with the provisions of any other ICDS.
 Accounting policies shall not be changed without reasonable cause.
Observations
The term ‘reasonable cause’ has not been defined under ICDS. Hence the same may be subject
matter of dispute.

3. 2.0 ICDS II relating to Valuation of Inventories
The significant deviations from AS-2 (Valuation of Inventories) are as under:-
 Unlike AS-2, Standard Costing method has not been prescribed to measure cost.
 ICDS provides for valuation of inventories in the case of service provider.
Inventories in the case of service providers are materials or supplies to be consumed
in rendering of services.
 Method of valuation of inventory once adopted cannot be changed, unless there is
reason-able cause for doing so.
 In case of dissolution of a partnership firm or Association of Persons (‘AOP’) or
Body of Individuals (‘BOI’), value of inventories shall be the net realizable value on
the date of dissolution.
Observations
Many companies follow standard costing method to measure cost of inventories. Non-
inclusion of said method in ICDS will cause undue hardship to such companies as they
have to value inventories separately for Income Tax purpose.
3.0 ICDS III relating to construction contracts
The significant deviations from AS-7 (Construction Contracts) are as under:-
• Contract revenue is to be recognized when there is reasonable certainty of its
ultimate collection.
• Contract revenue shall comprise of (a) initial amount of revenue agreed in the
contract including retentions and (b) variations in contract work, claims and
incentive payments if it can be measured reliably.
• Contract revenue already recognized as income is to be written off as bad debt (and
not as an adjustment of the amount of contract revenue) if the collection of that
revenue later becomes uncollectible.
• Contract costs shall not be reduced by any incidental income being in the nature of
interest, dividend and capital gains (that is not included in contract revenue). The
same shall be separately chargeable to tax.
• In case of early stages of contract (i.e upto 25% of the stage of completion), where
the outcome of the contract cannot be estimated reliably contract revenue is to be
recognised only to the extent of cost incurred. In other words, when a contract
crosses 25% of the completion stage, the revenue in respect of such contract shall be
required to be recognised.

4. 4.0 ICDS IV relating to Revenue Recognition
The significant deviations from AS-9 (Revenue Recognition) are as under:-
• Revenue from service contract only to be recognized on percentage completion
method as against AS-9 (Revenue Recognition) where both ‘completed service
contract method’ and ‘percentage completion method’ is permitted for recognition
of revenue from service contract.
• Disclosure requirements similar to construction contract have been prescribed for
service contracts.
Observations
Many companies recognise revenue from service contract as per completed contract method.
Non-inclusion of said method in ICDS will cause undue hardship to such companies as they
have to separately compute revenue from service contract as per percentage completion
method for Income Tax purpose.
5.0 ICDS V relating to Tangible fixed assets
The significant deviations from AS-10 (Accounting for Fixed Assets) are as under:-
• In case of acquisition of a tangible fixed asset in exchange for another asset, shares
or other securities, the fair value of the tangible fixed asset so acquired shall be its
actual cost.
• There is no concept of revaluation of asset in the ICDS. The same is in conformity
with the provision of the Act wherein also the concept of revaluation of assets is not
recognised.
• ICDS prescribes disclosure requirement similar to requirement of Tax Audit Report.
Even the persons not subject to tax audit have to comply with such disclosure
requirement.
6.0 ICDS VI relating to Effects of change in Foreign Exchange Rate
The significant deviations from AS- 11 (The Effects of change in Foreign Exchange
Rate) are as under:-
• Paragraph 46A of AS-11 grants an option to recognize exchange difference arising
on rein-statement of long term foreign currency monetary items under “Foreign
Currency Mon-etary Item Translation Difference Account (FCMITDA)” and
amortize the same over the balance period of such long term asset or liability
whereas ICDS provides that profit/(Loss) arising at the year end on reinstatement of
monetary items shall be recognised as income or expense.

5. • Marked to market gains or losses are unrealized in nature. All gains or losses on
forward exchange or similar contracts entered into for trading or speculation
contracts shall be recognized only on settlement.
7.0 ICDS VII relating to Government Grants
The significant deviations from AS-12 (Government Grants) are as under:-
• Grant in respect of depreciable fixed assets is to be reduced from actual cost of such
assets. This treatment is similar to Explanation 10 to Sec 43(1). However, AS – 12
(Government Grants) prescribes that the same may either be adjusted with the value
of assets or recog-nised as income on reasonable basis over a period of time.
• Additional disclosures are required to be made for each previous year which inter-
alia includes nature & extent of grants reduced from the block of asset, grants not
reduced from the block of assets with reasons & grants not recognised as income
with reasons.
8.0 ICDS VII relating to Securities [held as Stock in trade]
Salient feature of the ICDS:
• This ICDS deals with securities held as stock-in-trade and not for securities held as
invest-ment.
• Where a security is acquired in exchange for another security, cost shall be fair
value of the security acquired.
• Securities listed on a recognized stock exchange shall be valued at actual cost as
initially recognized or net realizable value, whichever is lower.
• Securities not listed on a recognized stock exchange shall be valued at actual cost as
initially recognized.
9.1 ICDS IX relating to Borrowing Costs
The significant deviations from AS- 16 (Borrowing Costs) are as under:-
• This ICDS deals with borrowing cost other than relating to exchange differences
arising from foreign currency borrowings. The same will be treated in terms of
ICDS on ‘The Effect of Changes in Foreign Exchange Rate’.
• Borrowing Cost in respect of borrowings partly used for acquisition of the
qualifying asset to be capitalized in accordance with the following formula:
(A)* (B)/(C)
(A) Borrowing cost except directly relatable to specific purpose
(B) Average cost of qualifying asset at the first day and last day of the previous
year and

6. (C) Average cost of asset at the first day and last day of the previous year.
• Unlike AS -16, suspension of capitalization of borrowing cost is not covered in the
ICDS.
10.0 ICDS X relating to Provisions, Contingent Liabilities & Contingent Assets
The significant deviations from AS-29 (Provisions, Contingent Liabilities & Contingent
Assets) are as under:-
• AS-29 requires the recognition of a provision when it is ‘probable’ that there will be
outflow of resource. However, under ICDS provision is to be recognized when there
is ‘reasonable certainty’ (more likely than not) for the outflow of resources.
D i s c l a i m e r
This material and the information contained herein prepared by ECA Corporate Partners Private Limited
(‘ECA’) is intended to provide general information on a particular subject or subjects and is not an
exhaustive treatment of such subject(s).