ICDS-II Valuation of Inventory

This presentation is on ICDS II issued by CBDT for computation of income under head PGBP and Other sources under Income Tax Act, 1961.

Disclaimer: The above presentation is published for the basic understanding of the ICDS II..
Please read the statue for better understanding & conceptual clarity.

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1. Income Computation And Disclosure Standard Valuation of Inventories (ICDS-II) - By Vikas Dubey 1 E-mail - [email protected]

2. Applicability 3 Scope 4 Definitions 5 Measurement 6-8 Cost formulae & Techniques 9 Net Realisable Value 10 Value of Opening Stock & Change in Method 11 Valuation in case of Dissolution 12 Disclosures 13 Controversies 14 2 E-mail - [email protected] Contents

3. 3 E-mail - [email protected] ICDS II: Valuation of Inventories - Applicability Computation of income chargeable under head “PGBP” OR Computation of income chargeable under head “ Other Sources” ICDS are not issued for the purpose of maintenance of books of accounts. In case of conflict between the provisions of Income tax, 1961 and this ICDS, the Provision of the act shall prevail.

4. 4 E-mail - [email protected] ICDS II: Valuation of Inventories - Scope This ICDS shall be applied for valuation of inventories, except: WIP arising under ‘ construction contract ’; WIP which is dealt with by other ICDS; Shares, debentures and other financial instruments held as s tock in trade ; Inventories of livestock, agriculture & forest products, mineral oils; ores and gases provided they are measured at NRV ; Machinery Spares.

5. 5 E-mail - [email protected] ICDS II: Valuation of Inventories - Definitions “Inventories” are assets h eld for sale in the ordinary course of business; i n the process of production of such sale i n the form of material or supplies to be consumed in the production process or in the rendering of services. “Net Realisable Value” Estimated selling price XXX Less: Estimated cost of completion & estimated cost XXX necessary to make the sale. Net Realisable Value XXX

6. 6 E-mail - [email protected] ICDS II: Valuation of Inventories - Measurement Cost of Inventories It shall include; Costs of purchase; Costs of services; Cost of conversion; Other costs incurred in bringing the inventories to their present location & condition. Valuation Net Reliasable Value OR Cost whichever is lower

7. 7 E-mail - [email protected] ICDS II: Valuation of Inventories - Measurement Cost of Purchase Cost of Services Cost of Conversion Labour cost & other cost of personnel directly engaged in providing the service . Cost directly attributable to units of production & a systematic allocation of fixed and variable overheads (incurred in converting materials into finished goods). Purchase price (including duties & taxes) + freight + other expenditure directly attributable to acquisition reduced by trade discounts & rebates etc. Other Costs It shall be included in the cost only to the extent that they are incurred in bringing the inventories to their present location and condition.

8. 8 E-mail - [email protected] ICDS II: Exclusions from the Cost of Inventories Abnormal amounts of wasted material, labor or other production costs; Storage costs, unless necessary in the production process; Administrative overheads; Selling cost; Interest & other borrowing cost, unless they meet the criteria for recognition as specified in ICDS on borrowing costs. The following costs shall be excluded and recognized as expense of the period in which they are incurred:

9. 9 E-mail - [email protected] ICDS II: Cost Formulae & Techniques Formulae Specific Identification Applicable where items are not interchangeable Used for specific Projects FIFO & Weighted Average Most acceptable method if specific identification method fails. It shows the most fairest possible approximation of the cost. Techniques Standard Cost Method It takes into account normal levels of consumption of materials & supplies, labor, efficiency & capacity utilization. Reviewed regularly &, if necessary, revised in the light of the current conditions Retail Method Where it is impracticable to used FIFO/ Weighted Average cost, retail method could be used. Cost = Sales – Gross Profit Margin

10. 10 E-mail - [email protected] ICDS II: Net Realisable Value Inventories shall be written down to NRV on an item by item basis. If practically not possible then such inventories shall be grouped together and written down to NRV. NRV will be bases on the most reliable evidence available at the time of valuation. Materials and other supplies held for use in the production of inventories shall not be written down below the cost, where the finished products in which they shall be incorporated are expected to be sold at or above the cost.

11. The value of inventory shall be; the cost of inventory available, on the day of commencement of business (if any); and The value of inventory as on the close of the immediately preceding previous year, in any other case. 11 E-mail - [email protected] ICDS II: Value of Opening Stock & Change in Method Opening Stock Change in Method The method of valuation of inventories once adopted by an assesse in any previous year shall not be changed without reasonable cause.

12. 12 E-mail - [email protected] ICDS II: Inventory valuation in case of dissolution In case of dissolution of a partnership firm or association of persons 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. ”

13. The accounting policies adopted 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 13 E-mail - [email protected] ICDS II:Transitional Provisions & Disclosures required Disclosures Transitional Provision Interest and other borrowing costs included in the cost of the opening inventory, shall be taken into account for determining cost of such inventory for valuation.

14. 14 E-mail - [email protected] ICDS II: Controversies Q. Whether inventory has to be valued at NRV in case of dissolution of a firm even though the business is continued by any other partner, as required by ICDS? Ans. Judicial Pronouncement: Shakthi Trading (SC)- Regular method of accounting to be followed, hence inventory to be valued at cost or NRV, which ever is lower. Possible view: Central Government can not overrule the judgments given by court by merely issuing a notification. It can only be done by passing a legislation in the Parliament. Therefore, inventory will continue to be valued at cost or NRV, which ever is lower in case business is continued even after dissolution of firm.

15. 15 E-mail - [email protected] ICDS II: Controversies cont. Q. Whether ICDS on inventory has any relevance? Ans. ICDS are issued by a notification issued under section 145 of the I ncome T ax act 1961. But , Section 145A of the Act says, Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be—  (a)  in accordance with the method of accounting regularly employed by the assessee; and  (b)  further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Possible View: As the ICDS preamble states that in case of conflict between the Act and ICDS, Act will prevail. Therefore, ICDS II has no relevance for inventory.

16. 16 E-mail - [email protected] Thank You