Income Computation and Disclosure Standards (ICDS)

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

5. Background

6. Rationale

7. Method of Accounting – Sec 145 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

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

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 lower Measurement

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 WIP arising from construction contracts WIP dealt in other ICDS Shares, debentures and other financial instruments held as stock-in-trade Product relating to livestock, agriculture and forest products, mineral oils, ores and gases Machinery spares held as stock in trade Exceptions WIP arising from construction contracts WIP relating to service providers Shares, debentures and other financial instruments held as stock-in-trade 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 In case of existing business the value of inventory as on close of last year 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

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

23. Contract Revenue and Contract Costs Recognised when there is reasonable certainty of its ultimate collection Contract Revenue 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 It is probable that the customer will approve variation and the amount of revenue arising from the variation; and 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

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 When the seller of goods has transferred to the buyer the property in the goods for a price All significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred When there is reasonable certainty of its ultimate collection after transfer Recognised by the percentage completion method 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 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

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

35. Tax Audit Report

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

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