Objectives & Agenda : To understand the concept of ICDS and the rationale for introducing ICDS, its applicability and its commencement year. To analyse each and every ICDS and draw up a comparative analysis of ICDS and Accounting Standards (AS). Finally, to know the relevant disclosure of ICDS in tax audit report.

1. Income Computation and Disclosure
Standards (ICDS)
CA. Divakar Vijayasarathy

2. Credits and Acknowledgments
Bharathi Priya R D
CA. Jugal Gala

3. Legends Used in the Presentation
PGBP Profit and Gains from Business or Profession
IFOS Income From Other Sources
ICDS Income Computation and Disclosure Standards
CG Central Government
AY Assessment Years
AS Accounting Standard
CBDT Central Board of Direct Taxes
HUF Hindu Undivided Family
PY Previous Year
NRV Net Realisable Value
WIP Work in Progress
WDV Written Down Value
SLM Straight Line Method

4. Presentation Schema
Background Rationale
Method of
Accounting
ICDS Applicability
& Non-
Applicability
Notified ICDS
ICDS I
Accounting
Policies
ICDS II
Valuation of
Inventories
ICDS III
Construction
Contracts
ICDS IV
Revenue
Recognition
ICDS V
Tangible Fixed
Assets
Tax Audit Report
Impact of ICDS on
Tax Audit Report

5. Background
ICDS – Income Computation and Disclosure Standard
CG has power to notify ICDS – Sec 145(2)
CBDT notified ICDS on 31st March, 2015 which shall apply for AY 2016-
17
CBDT notified another ICDS on 29th September, 2016 which shall
replace the earlier notification and shall apply from AY 2017-18 and
subsequent AY

6. Rationale
To bring transparency in computation of total income in respect of “PGBP” and “IFOS”
Therefore, ICDS has been introduced to bring uniformity in computation of income for income tax purposes
Different companies follow different accounting standards for preparation and presentation of financial
statements
Two sets of standards relating to accounting are applicable now – AS and Ind AS

7. Method of Accounting – Sec 145
Taxable income under the heads “PGBP” or “IFOS” computed in accordance with cash or mercantile
system of accounting, being regularly employed
CG may notify ICDS to be followed by any class of assessee’s or in respect of any class of income
If the AO is not satisfied about the correctness or completeness of the accounts, or method of
accounting has not been regularly followed, or income has not been computed in accordance with
ICDS, the AO may make a Best Judgment Assessment (BJA) under Sec 144
At present there are 10 ICDS notified by CBDT which shall be applicable in computing income under the head
“PGBP” or “IFOS”

8. ICDS Applicability & Non-Applicability
Applicability
All assessees following the mercantile system of accounting, for the purpose of
computation of income chargeable to tax under the head “PGBP” or “IFOS”
Non
Applicability
 Individual or a HUF who is not required to get his accounts of the PY audited as per
Sec 44AB
 Cash system of accounting is followed by the assessee
 When income is chargeable under other heads of income other than PGBP or IFOS
 Only for the purpose of maintenance of books of accounts
In the case of conflict between the provisions of the Income-tax Act, 1961 and ICDS the provisions of the
Act shall prevail
Words and expressions used and not defined in ICDS but defined in the Act shall have the meanings
assigned to them in the Act

9. Sec 44AB - Audit of Accounts
Sec 44AD(4) – If an eligible assessee declares income on
presumptive basis in a AY & declares income on normal basis in
any of the 5 succeeding AY – cannot claim benefit under Sec
44AD for next 5 AYs
Every person
Carrying on
business
Carrying on
profession
If total sales, turnover or gross receipts > Rs. 1 Crore
Opting for presumptive taxation under sec 44AE or sec
44BB or sec 44BBB and has claimed income < profits or
gains prescribes under aforesaid sections
Where Sec 44AD(4) is applicable and Total
Income > basic exemption limit
If gross receipts > Rs. 50 Lakh
Opting for presumptive taxation under Sec 44ADA and has
claimed income < profits or gains prescribed under the section
Shall get their
accounts audited
and furnish audit
report duly signed
by accountant
within specified
date

10. Contd.
Sec 44AB shall not apply
To a person who derives income as per Sec
44BB (business of exploration, etc., of mineral
oils) or Sec 44BBA (business of operation of
aircraft in the case of non-residents)
• To a person who declares profits or gains
under Sec 44AD(1)–presumptive taxation
@ 6% or 8% of gross receipts, and
• his total sales, turnover or gross receipts
in the relevant PY <= Rs. 2 Crore
and furnishing a further report by an accountant according to this section shall suffice
Completing audit under such other law and furnishing audit report before due date
For a person who is required to get his accounts audited under any other law (Ex: Companies Act, 2013)

11. Notified ICDS
ICDS Description Relevant AS
I Accounting Policies AS 1
II Valuation of Inventories AS 2
III Construction Contracts AS 7
IV Revenue Recognition AS 9
V Tangible Fixed Assets AS 10
VI Effect of Changes in Foreign Exchange Rates AS 11
VII Government Grants AS 12
VIII Securities
IX Borrowing Costs AS 16
X Provisions, Contingent Liabilities and Contingent Assets AS 29

12. ICDS I – Accounting Policies
Scope ICDS I deals with significant accounting policies
Fundamental
Accounting
Assumptions
Description
Going Concern Person has neither the intention nor the necessity of liquidation or of curtailing
materially the scale of the business, profession or vocation and intends to continue
the same for the foreseeable future
Consistency Accounting policies are consistent from one period to another
Accrual Revenues and costs are recorded on accrual basis and not on receipt basis

13. ICDS I vs AS 1
Points of
Comparison
ICDS I AS 1
Prudence Expected losses shall not be
recognised unless any other
ICDS provides for it
Anticipated profits are not
recognised and the expected
losses are recognised
Materiality Does not recognise the
concept of materiality for
computation of taxable
income
Recognise the concept of
‘materiality’ as important
factor for selecting/ changing
accounting policies
Change in
Accounting Policy
Accounting policy cannot be
changed without reasonable
cause
Flexibility in changing
accounting policy for
appropriate presentation of
accounts

14. Disclosures
All significant accounting policies adopted by a person shall be disclosed
Any change in an accounting policy which has a material effect shall be disclosed
• The amount by which any item is affected by such change shall also be disclosed to the extent
ascertainable
• Where such amount is not ascertainable, wholly or in part, the fact shall be indicated
If a change is made in the accounting policies which has no material effect for the current PY but which is
reasonably expected to have a material effect in later PY, the fact of such change shall be appropriately
disclosed in the PY in which the change is adopted and also in the PY in which such change has material effect
for the first time (Clause 13 of Form No. 3CD)
Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of
the item
If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific
disclosure is not required
If a fundamental accounting assumption is not followed, the fact shall be disclosed

15. ICDS II – Valuation of Inventories
Scope ICDS II shall be applied for valuation of inventories
Except that are dealt in other ICDS
WIP arising under
‘construction
contract’
including directly
related service
contract
WIP Shares, debentures
and other financial
instruments held as
stock-in-trade
Producers’ inventories of
livestock, agriculture and
forest products, mineral
oils, ores and gases to the
extent that they are
measured at NRV
Machinery spares, which
can be used only in
connection with a tangible
fixed asset and their use is
expected to be irregular
Machinery spares, which
can be used only in
connection with a tangible
fixed asset and their use is
expected to be irregular
Machinery spares, which
can be used only in
connection with a tangible
fixed asset and their use is
expected to be irregular
Machinery spares, which
can be used only in
connection with a tangible
fixed asset and their use is
expected to be irregular
Machinery spares, which
can be used only in
connection with a tangible
fixed asset and their use is
expected to be irregular
Inventories shall be valued at cost, or NRV, whichever is lowerMeasurement

16. Inventories and NRV
Held for sale in the ordinary
course of business (Finished
goods)
In the process of production
for such sale (WIP)
In the form of materials or
supplies to be consumed in
the production process or in
the rendering of services
(Raw materials)
Inventories
are assets
Estimated selling price XXX
Less: Estimated cost of completion (XXX)
Less: Estimated costs necessary to make the sale (XXX)
NET REALISABLE VALUE (NRV) XXX

17. Exclusions from the Cost of Inventories
Abnormal amounts of
wasted materials, labour, or
other production costs
Storage costs, unless those costs
are necessary in the production
process prior to a further
production stage
Administrative overheads
that do not contribute to
bringing the inventories to
their present location and
condition
Selling costs
Costs that are excluded and recognised as
expenses of the period in which they are
incurred

18. ICDS II vs AS 2
Points of Comparison ICDS II – Valuation of Inventories AS 2 - Valuation of Inventories
Scope Exceptions
1. WIP arising from construction contracts
2. WIP dealt in other ICDS
3. Shares, debentures and other financial
instruments held as stock-in-trade
4. Product relating to livestock, agriculture and
forest products, mineral oils, ores and gases
5. Machinery spares held as stock in trade
Exceptions
1. WIP arising from construction
contracts
2. WIP relating to service providers
3. Shares, debentures and other
financial instruments held as
stock-in-trade
4. Product relating to livestock,
agriculture and forest products,
mineral oils, ores and gases
Cost of Inventories Includes all costs of purchase, costs of services,
costs of conversion and other cost incurred in
bringing the inventories to the present location
and condition
Cost of services are not included
Other costs Interest and other Borrowing cost are included
only when the meet the criteria for recognising
interest as a component of the cost as specified
in ICDS IX – Borrowing Cost
Interest and other borrowing cost are
usually not included in the cost of
inventories

19. ICDS II vs AS 2
Points of Comparison ICDS II - Inventories AS 2 - Valuation of Inventories
Position of opening
inventory
i. In case of existing business the value of
inventory as on close of last year
ii. In case of new business the cost of inventory
on the day of commencement of business
This matter has not been specifically
discussed
In case of dissolution In case of dissolution of a partnership firm or an
association of persons or body of individuals, the
NRV on the date of resolution shall be
considered
This matter has not been specifically
discussed

20. Disclosures
The accounting policies adopted in measuring inventories including the cost formulae used
Where Standard Costing has been used as a measurement of cost, details of such inventories and a
confirmation of the fact that standard cost approximates the actual cost
The total carrying amount of inventories and its classification appropriate to a person

21. ICDS III – Construction Contracts
Scope ICDS III shall be applied in determination of income for a construction contract of a contractor
Fixed Price Contract
Cost Plus Contract
Construction
Contract
The contractor agrees to receive
fixed rate per unit of output or fixed
price for the whole contract
The cost with a defined percentage
markup on the cost is reimbursed
to the contractor

22. Segmenting and Combining Construction Contract
Where a 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
Costs and revenues of each asset
can be identified
Each asset has been subject to separate
negotiation and the contractor and
customer have been able to accept or
reject that part of the contract relating to
each asset, and
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
Contracts are performed
concurrently or in a continuous
sequence
Contracts are so closely interrelated that
they are, in effect, part of a single project
with an overall profit margin and
• The asset differs significantly in design, technology or function from the
asset or assets covered by the original contract or
• The price of the asset is negotiated without having regard to the
original contract price
Where a contract provides for the
construction of an additional asset at the
option of the customer or is amended to
include the construction of an additional
asset, the construction of the additional
asset should be treated as a separate
construction contract when

23. Contract Revenue and Contract Costs
Recognised when there is reasonable
certainty of its ultimate collection
Contract Revenue
Initial amount of revenue agreed in the contract, including retentions
Variations in contract work, claims and incentive payments:
• To the extent that it is probable that they will result in revenue
• They are capable of being reliably measured
Contract Costs
costs that relate
directly to the
specific contract
costs that are attributable
to contract activity in
general and can be
allocated to the contract
Such other costs as are
specifically chargeable to
the customer under the
terms of the contract
Allocated borrowing costs
in accordance with the ICDS
IX -Borrowing Costs

24. ICDS III Vs AS 7
Points of Comparison ICDS III - Construction Contracts AS 7 - Construction Contracts
Retentions Contract revenue includes retention
money
It does not specifically mention about
retention money as part of contract revenue
Criteria for
recognition of
variations in contract
work, claims and
incentive payments
Not specified i. It is probable that the customer will
approve variation and the amount of
revenue arising from the variation; and
ii. The amount of revenue can be reliably
measured
Early stage of
completion of
contract
Where the outcome of the contract
cannot be estimated reliably contract
revenue is recognised only to the extent
of cost incurred. Early stage of contract
shall not extend beyond 25% of the total
contract completion stage
Where the outcome of the contract cannot
be estimated reliably contract revenue is
recognised only to the extent of cost
incurred that are expected to be recovered
Incidental Income Contract costs shall be reduced by any
incidental income, not being in the nature
of interest, dividends or capital gains
Costs that relate directly to the specific
contract shall be reduced by any incidental
income that is not included in contract
revenue

25. ICDS III vs AS 7
Points of Comparison ICDS III - Construction Contracts AS 7 - Construction Contracts
Recognition of
expected losses from
contract
Expected losses from contract are
recognised in proportion to percentage of
completion
To be recognised in full
Reversal of contract
revenue
Where contract revenue already
recognised as income is subsequently
written off in the books of accounts as
uncollectible, the same shall be
recognised as an expense and not as an
adjustment of the amount of contract
revenue.
Not specifically discussed

26. Disclosures
Amount of contract revenue recognised as revenue in the period
Methods used to determine the stage of completion of contracts in progress
For contracts in progress at the reporting date, the following must be disclosed
• Amount of costs incurred and recognised profits (less recognised losses) upto the reporting date
• Amount of advances received
• Amount of retentions

27. ICDS IV – Revenue Recognition
Scope
ICDS IV deals with the bases for recognition of revenue arising in the course of the ordinary
activities of a person from the
Sale of goods
Use by others of the person’s
resources yielding interest,
royalties or dividends
Rendering of
services
Revenue
Gross inflow
of cash
Receivables or other
consideration arising in
the course of the
ordinary activities
mentioned above
In an agency relationship, the
revenue is the amount of
commission

28. Criteria for Recognising Revenue
Sale of goods
Rendering of
services
i. When the seller of goods has transferred to the
buyer the property in the goods for a price
ii. All significant risks and rewards of ownership
have been transferred to the buyer and the
seller retains no effective control of the goods
transferred
iii. When there is reasonable certainty of its
ultimate collection after transfer
i. Recognised by the percentage completion
method
ii. When services are provided by an indeterminate
number of acts over a specific period of time,
revenue may be recognised on a straight line
basis over the specific period
iii. Revenue from service contracts with duration of
not more than ninety days may be recognised
when the rendering of services under that
contract is completed or substantially completed

29. ICDS IV vs AS 9
Points of Comparison ICDS IV - Revenue Recognition AS 9 - Revenue Recognition
Method of
recognition
Three methods: percentage completion,
straight line and recognition when service
contract is completed or substantially
completed in case of service contract not
more than 90 days.
Two methods: completed service contract
method and proportionate completion
method
Dividend Income On receipt basis Recognised when owner’s right to receive
the payment is established
Recognition of
interest or refund of
any tax
Shall be deemed as the income of the
previous year in which such interest is
received
Interest or any other income arising will be
accrued and recognized on the time basis

30. Disclosures
In a transaction involving sale of good, total amount not recognised as revenue during the PY due to lack of
reasonably certainty of its ultimate collection along with nature of uncertainty
Amount of revenue from service transactions recognised as revenue during the PY
Method used to determine the stage of completion of service transactions in progress
For service transactions in progress at the end of PY
• Amount of costs incurred and recognised profits (less recognised losses) upto end of PY
• Amount of advances received
• Amount of retentions

31. ICDS V -Tangible Fixed Assets
and is not held for
sale in the normal
course of business
held with the intention of being
used for the purpose of producing
or providing goods or services
an asset being land,
building, machinery,
plant or furniture
Tangible Fixed Asset
Scope ICDS V deals with treatment of tangible fixed assets
excluding those
subsequently recoverable
on making the
asset ready for
its intended use

32. Treatment of Expenses and Cost in case of Exchange
the fair value of the tangible
fixed asset so acquired shall
be its actual cost
When a tangible fixed asset
is acquired in exchange
for another asset or for
shares or other securities
Nature Remarks
Admin and other general overhead expenses Capitalised if it relates to a specific asset
Expenses attributable to bringing an asset to working condition Capitalised
Expenditure incurred on start-up and commissioning of the project, including test
runs and experimental production
Capitalised
Expenditure incurred after the plant has begun commercial production Revenue Expenditure
Self-constructed Assets - Costs that are attributable to the construction activity and
can be allocated to specific asset
Capitalised (Internal profits to be ignored)
Expenditure that increases the future benefits beyond previous standards Capitalised
Addition or Extension to existing asset which becomes integral part Added to cost of existing asset
Addition or Extension having separate identity can be used without existing asset Treated as separate asset

33. ICDS V vs AS 10
Points of Comparison ICDS V – Tangible Fixed Assets AS 10 – Accounting for Fixed Assets
Identification Prescribes capitalization of machinery
spares when they are used only in
connection of tangible fixed asset and its
use is irregular
Spares are recognized as asset if their usage
is irregular and the cost should be allocated
over a period
Position of
revaluation of
tangible fixed assets
It does not recognize revaluation of asset Provides revaluation of asset which should
be done regularly in order to ensure that
carrying amount does not differ materially
from fair value at the balance sheet date
Depreciation method WDV basis generally – SLM in specified
scenario
Provides for different types of depreciation
method that can be adopted
Retirement of Assets ICDS does not provides for retirement of
assets
Retiring assets should be stated at the lower
of their carrying amount and net realizable
value

34. Disclosures
Description of asset or block of assets
Rate of depreciation
Actual cost or WDV, as the case may be
Additions or deductions during the year with dates; in the case of any addition of an asset, date put to use;
including adjustments on account of
• CENVAT credit claimed and allowed
• Change in rate of exchange of currency
• subsidy or grant or reimbursement, by whatever name called
Depreciation Allowable
WDV at the end of year

35. Tax Audit Report
Examination or review of accounts of any business or profession
carried out by taxpayers
To ensure correctness of implementation and proper compliance
of tax provisions envisaged under the Act
Enables the tax authority for verification and assessments

36. Impact of ICDS on Tax Audit Report (Form 3CD)
Clause 13
Clause 14
• Method of accounting employed in the PY
• Whether there had been any change in the method of accounting employed
 If there is change, details of such change, and the effect thereof on the profit or loss
• Adjustment required for Income computation and disclosure standards (ICDS) notified
under Sec 145(2)
 Details of such adjustments
• Disclosures as per ICDS
• Method of valuation of closing stock employed in the PY
• In case of deviation from the method of valuation prescribed under Sec 145A (lower
of actual cost or net realisable value), the effect thereof on the profit or loss

37. Clause 13 of Form 3CD

38. Clause 13(f) of Form 3CD

39. Clause 14 of Form 3CD

40. Thank You
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