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Transcript of An Overview of Income Computation and Disclosure Standards (ICDS) A Lecture meeting organized by...
An Overview of Income Computation and Disclosure Standards (ICDS)
A Lecture meeting organized by
AMTOI
14 October 2015PHD & AssociatesChartered Accountants
BackgroundBackground
Section 145 of the Income-tax Act, 1961 provides for the method of
accounting for computation of income under the head "Profits and gains
of business or profession" and "Income from other sources“
Method can either be the cash or mercantile system of accounting
Under the Finance Act, 1995, Central Government is empowered to notify
Accounting Standards (AS) for any class of assessee or for any class of
income
The provision was introduced because it was perceived that there was
flexibility in the standards issued by the ICAI which makes it possible for an
assessee to avoid the payment of correct taxes by following a particular
system
14 October 2015 2CA Hetan Patel
BackgroundBackground
12 Draft Income computation and disclosure standard (ICDS) were released in
January 2015 for comments of the stakeholders.
By Notification No.32/2015, F. No. 134/48/2010-TPL dated 31st March 2015, the 10
ICDS have been notified without any changes to the draft released in January 2015 .
Also the earlier notified 2 accounting standards u/s 145(2) withdrawn.
The notification shall come into force with effect from 1st day of April, 2015 and shall
accordingly apply to the assessment year 2016-17 and subsequent assessment
years.
Transitional provisions are incorporated in the ICDS such that partially completed
transactions/ positions as on 31st March 2015 are subject to the notified ICDS for the
period 1.4.2015 and onwards after due consideration of the income/effects already
considered for tax purposes on or before 31.03.2015.
The Tax returns for assessment year 2015-16 shall not be affected by the ICDS.
14 October 2015 4CA Hetan Patel
Comparative Analysis Comparative Analysis
14 October 2015 5CA Hetan Patel
Sr. No.
AS Notified by MCA Notified as ICDS
1 Disclosure of accounting policies Accounting policies
2 Valuation of Inventories Valuation of Inventories
3 Cash Flow No
4 Contingencies and events occurring after the
balance sheet date
It was proposed in 2012 Draft but dropped in Jan 2015 Draft
5 Net profit or loss for the period, prior period
items, and changes in the accounting policies
It was proposed in 2012 Draft but dropped in Jan 2015 Draft
6 Depreciation accounting No
7 Construction contracts Construction Contracts
8 ____________________ --------------------------
9 Revenue recognition Revenue Recognition
10 Accounting for fixed assets Tangible Fixed Assets
Comparative Analysis Comparative Analysis
14 October 2015 6CA Hetan Patel
Sr. No.
AS Notified by MCA Notified as ICDS
11 The effects of changes in foreign exchange
rates
The effects of changes in foreign exchange
rates
12 Accounting for government grants Government Grants
13 Accounting for investments Securities
14 Accounting for amalgamations No
15 Employees benefit (revised 2005) No
16 Borrowing costs Borrowing Costs
17 Segment reporting No
18 Related party disclosures No
19 Leases It was proposed in 2012 and Jan 2015 draft but dropped in notification of 31.03.2015
20 Earning Per Share No
21 Consolidated financial statements No
22 Accounting for Taxes on income No
Comparative Analysis Comparative Analysis
14 October 2015 7CA Hetan Patel
Sr. No.
AS Notified by MCA Notified as ICDS
23 Accounting for investment in associates in
consolidated financial statements
No
24 Discontinuing operations No
25 Interim financial report No
26 Intangible assets It was proposed in 2012 and Jan 2015 draft but dropped in notification of 31.03.2015
27 Financial reporting of interest in Joint Ventures No
28 Impairments of assets No
29 Provisions, contingent liabilities and contingent
assets
Provisions, contingent liabilities and
contingent assets
30 Financial instruments; recognition and
measurements (issued by ICAI not notified by
MCA)
No
31 Financial Instruments; presentation (issued by
ICAI not notified by MCA)
No
32 Financial Instruments; disclosures(issued by ICAI
not notified by MCA)
No
All ‘assessees’ following the mercantile system of accounting shall follow the ICDS
ICDS refers to ‘person’ instead of ‘assessee’
Preamble to each ICDS clarify that:
The ICDS apply to the computation of business income and income from
other sources
In case of conflict with provisions of the ITA, the provisions of the Act shall
prevail to that extent
ICDS not to affect maintenance of books of account
Select disclosures are prescribed:
Disclosure in Return of Income?
Overlap with AS disclosures?
The structure and the language of ICDSs have been substantially modified from the
AS from which it is derived even where the underlying principles are not amended.
ICDS – Basic Features ICDS – Basic Features
14 October 2015 8CA Hetan Patel
Scope of the delegated legislation u/s 145(2)
Is concept of income modified by ICDS?
Relevance of the notified ICDS
The provisions of the Income Tax Act to prevail over the ICDS
The substantive matters for which ICDS is not prescribed – will continue to
be governed by the ICAI notified standards ( the judicial view on AS)
The book profit tax computation will not be affected by the ICDS
The ICDS are derived from the ICAI/MCA Accounting Standards
The language is modified even when principles are adopted
Explanations and examples of AS not incorporated in ICDS
The interpretation issued by ICAI / EAC opinions may still have persuasive value
ICDS – BasicsICDS – Basics
14 October 2015 9CA Hetan Patel
Second Proviso to section 36(1)(vii) reads as :
“Provided further that where the amount of such debt or part thereof has
been taken into account in computing the income of the assessee
of the previous year in which the amount of such debt or part thereof becomes
irrecoverable or
of an earlier previous year
on the basis of income computation and disclosure standards notified under sub-
section (2) of section 145 without recording the same in the accounts, then,
such debt or part thereof shall be allowed in the previous year in which such debt or
part thereof becomes irrecoverable and it shall be deemed that such debt or part
thereof has been written off as irrecoverable in the accounts for the purposes of
this clause.”
ICDS related amendment by Finance Act 2015ICDS related amendment by Finance Act 2015
14 October 2015 10CA Hetan Patel
Fundamental accounting assumptions:
Going Concern:
“Going concern” refers to the assumption that the 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 his business, profession or vocation
for the foreseeable future.
Consistency:
“Consistency” refers to the assumption that accounting policies are consistent from
one period to another;
Accrual:
“Accrual” refers to the assumption that revenues and costs are accrued, that is,
recognised as they are earned or incurred (and not as money is received or paid)
and recorded in the previous year to which they relate.
The Notification dated 31/3/2015 states that the ICDS shall be followed by all
assessees following mercantile system of accounting.
The assessees following cash system of accounting are outside the purview of ICDS
ICDS – Accounting PoliciesICDS – Accounting Policies
14 October 2015 12CA Hetan Patel
Accounting Policies:
The accounting policies refer to the specific accounting principles and the methods of
applying those principles adopted by a person.
Considerations in selection and change of Accounting Policies
Accounting policies adopted by a person shall be such so as to represent a true and fair
view of the state of affairs and income of the business, profession or vocation. For this
purpose,
the treatment and presentation of transactions and events shall be governed by
their substance and not merely by the legal form; and
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.
An accounting policy shall not be changed without reasonable cause.
ICDS – Accounting PoliciesICDS – Accounting Policies
14 October 2015 13CA Hetan Patel
Disclosure
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 previous year but which is reasonably expected to have a material effect
in later previous years, the fact of such change shall be appropriately disclosed:
in the previous year in which the change is adopted and also
in the previous year in which such change has material effect for the first
time.
ICDS – Accounting PoliciesICDS – Accounting Policies
14 October 2015 15CA Hetan Patel
Disclosure (Contd.)
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.
Transitional provisions
All contract or transaction existing on 01st April 2015 or entered into on or after 01st April
2015 shall be dealt with in accordance with the provisions of this standard after taking into
account the income, expense or loss, if any, recognized in respect of the said contract or
transaction for the previous year ending on or before 31st March 2015.
ICDS – Accounting PoliciesICDS – Accounting Policies
14 October 2015 16CA Hetan Patel
Inventories defined as assets
Held for sale in ordinary course of business
In process of production for such sale
In form of materials or supplies to be consumed in production process or rendering
of services
Scope Exclusions
Work in progress arising in construction contract including directly related service
contract
Work in progress dealt by other ICDS (AS-2 refers to exclusion of WIP of service
provider)
Shares, debentures and other financial instruments held as stock in trade
Producers inventories of livestock, agriculture and forest products, mineral oils, ores
and gases
Machinery spares
ICDS – InventoriesICDS – Inventories
14 October 2015 18CA Hetan Patel
Measurement
Valuation at cost , or net realisable value, whichever is lower
Cost of Inventories shall comprise of :
costs of purchase,
costs of services,
costs of conversion, and
other costs incurred in bringing the inventories to their present location and condition
Cost of Purchase shall consist of :
purchase price including duties and taxes, freight inwards and other expenditure directly attributable
to the acquisition.
Trade discounts, rebates and other similar items shall be deducted in determining the costs of
purchase [ Duty drawbacks (AS-2) is omitted in view of Section 145A]
ICDS – InventoriesICDS – Inventories
14 October 2015 19CA Hetan Patel
In the previous draft, it also read that “ in the case of service provider, the inventories of services shall be valued at cost”.
Cost of Services in the case of Service Provider shall consist of :
labour and other costs of personnel directly engaged in providing the service
including supervisory personnel and attributable overheads.
Cost of conversion :
Overheads to be included
Similar to AS -2 except that examples given in AS-2 are omitted in the ICDS
Implications of omission of the examples ?
Other Costs :
shall be included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location
and condition.
Interest and other borrowing costs shall not be included in the costs of inventories,
unless they meet the criteria for recognition of interest as a component of the cost as specified in the ICDS on borrowing costs.
ICDS – InventoriesICDS – Inventories
14 October 2015 20CA Hetan Patel
ICDS – InventoriesICDS – Inventories
14 October 2015 21CA Hetan Patel
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 [(AS-2) also refers to distribution costs]
Cost formulae
Specific identification of cost
FIFO or weighted average cost
continues to be the prescribed formula as laid down in AS 2
The option of standard cost method as a technique for the measurement of cost as per
paragraph 18 of AS 2 has not been provided in the ICDS
The option of Retail method as a technique for the measurement of cost as per
paragraph 19 of AS 2 has been permitted subject to the conditions that:
It is to be used only when it is impracticable to use the other prescribed methods
the option of department-wise average percentage is not permitted
Net Realisable Value (NRV)
Inventories shall be written down to NRV on an item-by-item basis.
Items of inventory relating to the same product line, having similar purposes or end uses
and are produced and marketed in the same geographical area and cannot be
practicably evaluated separately from other items in that product line, such inventories
shall be grouped together and written down to NRV on an aggregate basis.
NRV shall be based on the most reliable evidence available at the time of valuation.
The estimates of NRV shall also take into consideration the purpose for which the
inventory is held.
ICDS – InventoriesICDS – Inventories
14 October 2015 22CA Hetan Patel
Net Realisable Value (NRV) (Cont..)
The estimates shall take into consideration fluctuations of price or cost directly relating
to events occurring after the end of previous year to the extent that such events confirm
the conditions existing on the last day of the previous year.
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. Where there has been a
decline in the price of materials and it is estimated that the cost of finished products will
exceed the net realisable value, the value of materials shall be written down to net
realisable value which shall be the replacement cost of such materials.
ICDS – InventoriesICDS – Inventories
14 October 2015 23CA Hetan Patel
Principles relating to NRV in the ICDS are similar to those prescribed in AS-2 subject to language modifications and omission of examples.
Value of Opening Inventory
As on the beginning of the previous year shall be :
The cost of inventory available, if any, on the day of the commencement of the business
(when the business has commenced during the previous year); and
the value of the inventory as on the close of the immediately preceding previous year, in
any other case.
ICDS – InventoriesICDS – Inventories
14 October 2015 24CA Hetan Patel
This is not prescribed in AS-2.
The purpose is to address the issues arising in a situation where the department may change the valuation principles for closing inventories without corresponding effect on the opening inventories.
Valuation of inventory in case of certain dissolutions
In case of partnership firm, AOP or BOI inventory on the date of dissolution shall be
valued at the net realisable value, whether or not business is discontinued
The rule is intended to settle the ratios laid down in various court judgements
The rule does not take companies within its sweep, whether on amalgamation or
otherwise
Of course, AS 2 is silent on this rule
Transitional Provisions
Interest and other borrowing costs, which don't meet criteria for its recognition as a
component of cost, but included in the cost of opening inventory as on 01-04-2015,
shall be taken into account for determining cost of such inventory for valuation as on
close of previous year beginning on or after 01-04-2015 if such inventory continue to
remain part of inventory as on close of the previous year beginning on or after 01-
04-2015
ICDS – InventoriesICDS – Inventories
14 October 2015 25CA Hetan Patel
Disclosure
the accounting policies adopted in measuring inventories including the cost formulae used;
and
the total carrying amount of inventories and its classification appropriate to a person.
Significant Issues
Inventories valuation in the case of Service Providers contemplated ?
No recognition to the concept of materiality – overheads computations may be challenging
Retail method of valuation cannot be applied in a routine manner.
Is inventory of Real Estate Developer (ready flats /units) covered by this ICDS?
If yes, the treatment of borrowing cost ?
ICDS – InventoriesICDS – Inventories
14 October 2015 26CA Hetan Patel
Scope of the ICDS
Determination of income for a construction contract of a ‘contractor’
Is it applicable to a developer of real estate or other assets ??
CBDT report had recommended issue of separate ICDS for determination of
income in the case of developers, etc.
In line with revised AS 7, ICDS recognizes only the percentage completion
method
Contract revenue
It is defined to include retentions which is defined in the ICDS as the amount of
progress billings which are not paid until the satisfaction of contract conditions or
till rectification of defects
The rule has been incorporated to overcome judicial decisions which held that as
per the concept of real income; the retentions set apart in the progressive
billings, depending upon the terms of the construction contract, need not be
recognised as revenue
ICDS – Construction ContractsICDS – Construction Contracts
14 October 2015 28CA Hetan Patel
Contract Revenue (Cont..)
In line with AS 7, revenue on account of variations in contract work, claims and
incentive payments to be recognised only to the extent that it is possible that
they will result in revenue and they are capable of being reliably measured
Contract cost shall comprise of:
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; and
allocated borrowing costs in accordance with the ICDS on Borrowing Costs
These costs shall be reduced by any incidental income, not being in the nature of
interest, dividends or capital gains, that is not included in contract revenue
ICDS – Construction ContractsICDS – Construction Contracts
14 October 2015 29CA Hetan Patel
Costs that cannot be attributed to any contract activity or cannot be
allocated to a contract shall be excluded from the costs of a construction
contract
Claim for deduction of such excluded expenses under ITA
Contract cost that relate to future activity on the contract to be recognised
as an asset i.e. to be expensed out when corresponding revenue is
recognised
The corresponding AS 7 contains a caveat that recognition of asset is
subject to probability of earning of future revenue – which is not
incorporated in ICDS
ICDS – Construction ContractsICDS – Construction Contracts
14 October 2015 30CA Hetan Patel
Contract cost may include the costs incurred in securing a contract, subject
to such cost being separately identifiable and there is a probability of
contract being obtained.
It implies that the pre commencement cost incurred for securing the
contracts which are not identifiable with a specific contract will have to be
claimed as deduction under general provisions of the ITA. However, in the
case of newly commenced contract business, it may be characterized as pre
business commencement expenses which cannot be allowed as deduction.
For the on going business, the taxpayer may be on a better footing claiming
of the expenditure
ICDS – Construction ContractsICDS – Construction Contracts
14 October 2015 31CA Hetan Patel
Recognition of contract revenue, expenses and profits
Unless outcome of a contract, during the early stages of the contract, cannot be
estimated reliably, the contract revenue must be recognised as per the stage of
completion of work.
In case if outcome cannot be estimated reliably during the early stage of the
contract, the contract revenue shall be the same as the contract cost
Notwithstanding that the outcome of a contract may not be estimated reliably,
when the contract completion achieves the bench mark of more than 25%, the
contract revenue and contract expenses must be recognised to the extent of
stage of completion reached (the percentage completion method)
Pursuant to this method the proportionate profits or loss will be determined for
taxation purpose on actual basis
Unlike AS 7 whereby an estimated/anticipated loss is required to be recognised in
full at any stage of completion, ICDS does not take cognizance of such loss at all
ICDS – Construction ContractsICDS – Construction Contracts
14 October 2015 32CA Hetan Patel
Changes in Estimates
The percentage of completion method is applied on a cumulative basis in
each accounting period to the current estimates of contract revenue and
contract costs. Where there is change in estimates, the changed estimates
shall be used in determination of the amount of revenue and expenses in
the period in which the change is made and in subsequent periods.
If the revised estimates of cost and revenue in the subsequent period are
pessimistic to the previous estimates, there could be a reversal of revenue
and profits recognised in the earlier year/s. Will department refund the tax?
Or will find fault with estimates? Where will the tax auditor stand? – the
breeding ground for litigation
ICDS – Construction ContractsICDS – Construction Contracts
14 October 2015 33CA Hetan Patel
Determination of stage of completion
The stage of completion of a contract shall be determined with reference to:
The proportion that contract costs incurred for work performed up to the
reporting date bear to the estimated total contract costs; or
surveys of work performed; or
completion of a physical proportion of the contract work.
Unconditional choice of method? As per AS 7, choice should be befitting the
nature of contract
Progress payments and advances received from customers are not
determinative of the stage of completion of a contract.
ICDS – Construction ContractsICDS – Construction Contracts
14 October 2015 34CA Hetan Patel
When the stage of completion is determined by reference to the contract costs
incurred method, only those contract costs that reflect work performed are included in
costs incurred up to the reporting date. Contract costs which are excluded are:
contract costs that relate to future activity on the contract; and
payments made to subcontractors in advance of work performed under the subcontract
The ICDS uses the phrase ‘reporting date’ at various places – which is inconsistent
with the underlying concept that ICDS has no bearing on the books of account. Ideally
therefore the phrase should be replaced with ‘end of previous year’
ICDS – Construction ContractsICDS – Construction Contracts
14 October 2015 35CA Hetan Patel
Disclosure :
Amount of revenue recognized during the period, and
the methods used to determine the stage of completion of contracts in progress
For contracts in progress:
Amount of costs incurred and recognized profits ( less recognized losses)
Advances received,
retention amount
Transitional Provisions
Revenue and costs associated with construction contract, which commenced on
or before 31st March 2015 but not completed by the said date, shall be
recognised as revenue and costs in accordance with this standard. The amount of
contract revenue, contract costs or expected loss, if any, recognised for the said
contract for any previous year commencing on or before 01st April 2014 shall be
taken into account for recognizing revenue and costs of the said contract for
previous year commencing on 01st April 2015 and subsequent previous years.
ICDS – Construction ContractsICDS – Construction Contracts
36CA Hetan Patel 14 October 2015
Definition of Revenue (AS 9)
Revenue is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of an enterprise from the sale of goods, from the
rendering of services, and from the use by others of enterprise resources yielding
interest, royalties and dividends. Revenue is measured by the charges made to
customers or clients for goods supplied and services rendered to them and by the
charges and rewards arising from the use of resources by them. In an agency
relationship, the revenue is the amount of commission and not the gross inflow of cash,
receivables or other consideration
Definition of revenue (ICDS)
“Revenue” is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of a person from the sale of goods, from the rendering of
services, or from the use by others of the person’s resources yielding interest, royalties
or dividends. In an agency relationship, the revenue is the amount of commission and
not the gross inflow of cash, receivables or other consideration
ICDS – Revenue RecognitionICDS – Revenue Recognition
14 October 2015 38CA Hetan Patel
Revenue recognition
AS-9 considers measurability of revenue and its ultimate
collectability as a criteria for revenue recognition.
The ICDS omits the test of:
measurability of the revenue in the case of sale of goods
ultimate collectability in the case of revenue recognition in the case of
Rendering of services
Interest, royalties or dividend income
Unlike AS 9, choice of completed contract method is withdrawn in
ICDS. Only proportionate completion method (PCM) to be followed
All the principles of PCM under ICDS on construction contracts shall
apply mutatis mutandis
ICDS – Revenue RecognitionICDS – Revenue Recognition
14 October 2015 39CA Hetan Patel
Revenue recognition in rendering of services
Revenue from service transactions is to be recognised by the
percentage completion method (PCM) where revenue from service
transaction is matched with the service transaction cost incurred in
reaching the stage of completion.
Stage of Completion is determined based on the cost incurred as a
proportion to the total estimated cost
Advance payment for services yet to be carried out have to be excluded
in computation of cost.
Where proportionate completion method is followed in the books, no
further adjustment maybe required for ICDS - IV
ICDS – Revenue RecognitionICDS – Revenue Recognition
14 October 2015 40CA Hetan Patel
When service contract is in its early stage (up to 25%) and the outcome of the
contract cannot be reliably estimated, revenue is recognised only to the extent of the
cost incurred
Percentage completion method is on the basis of current estimates of total revenue
and total costs. When estimates undergo a change, revised estimates can be
considered.
Issues
Transaction costs – whether restricted to cost pertaining to the Indian company or to
include costs of the overseas counterpart ?
Jobs with nil costs
ICDS – Revenue RecognitionICDS – Revenue Recognition
14 October 2015 41CA Hetan Patel
Disclosure:
In sale of goods transaction, total amount not recognized as revenue due
to lack of certainty of ultimate collection and nature of uncertainty.
the methods used to determine stage of completion of service
transactions in progress.
Amount of revenue recognized from service transactions.
For service transactions in progress:
Advances received
retention amount
costs incurred
recognized profits and losses
ICDS – Revenue RecognitionICDS – Revenue Recognition
14 October 2015 42CA Hetan Patel
Transitional Provisions
The transitional provisions of Standard on construction contract shall apply mutatis
mutandis to the recognition of revenue and the associated costs for a service
transaction undertaken on or before 31st March 2015 but not completed by the said
date.
Revenue for a transaction, other than a service transaction referred above,
undertaken on or before the 31st day of March, 2015 but not completed by the said
date shall be recognised in accordance with the provisions of this standard for the
previous year commencing on the 1st day of April, 2015 and subsequent previous
year. The amount of revenue, if any, recognised for the said transaction for any
previous year commencing on or before the 1st day of April, 2014 shall be taken
into account for recognising revenue for the said transaction for the previous year
commencing on the 1st day of April, 2015 and subsequent previous years.
ICDS – Revenue RecognitionICDS – Revenue Recognition
14 October 2015 43CA Hetan Patel
Scope of ICDS
Unlike AS 10 which applies to any fixed asset, the ICDS applies to the
specified asset being land, building, machinery, plant or furniture only
Exchange of Assets
As per AS 10 the cost is to be ascertained by reference to FMV of the
asset given or FMV of asset acquired whichever is more clearly evident
As per ICDS it should be capitalized at the Fair Value of the asset
acquired
Improvements and Repairs
In the previous Draft certain deviations from the principles laid down in
AS-10 were proposed
Fortunately, those deviations seem to have been dropped in the notified
ICDS
ICDS – Tangible Fixed AssetsICDS – Tangible Fixed Assets
14 October 2015 45CA Hetan Patel
Disclosure
Description of asset or block of asset
Rate of depreciation and depreciation allowable
Actual cost or Written down value of asset
Additions or deductions during the year with dates. In case of addition, adjustment
of CENVAT claimed and allowed, change in exchange rates of currency, Subsidy or
grant.
Written down value at end of the year. Transitional Provisions
The actual cost of tangible fixed assets, acquisition or construction of which
commenced on or before 31st March 2015 but not completed by said date, shall be
recognized in accordance with this standard. The amount of actual cost, if any,
recognized for the said assets for any previous year commencing on or before the 01 st
April 2014 shall be taken into account for recognizing actual cost of the said assets for
previous year commencing on 01st April 2015 and subsequent previous years.
ICDS – Tangible Fixed AssetsICDS – Tangible Fixed Assets
14 October 2015 46CA Hetan Patel
CA Hetan Patel 4714 October 2015
ICDS - VIICDS - VI
THE EFFECTS OF CHANGES IN THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES FOREIGN EXCHANGE RATES
Scope
This Tax Accounting Standard deals with:
treatment of transactions in foreign currencies
translating the financial statements of foreign operations of a branch office
treatment of foreign currency transactions in the nature of forward exchange contracts.
Definitions – new/modified
“foreign currency transaction” is a transaction which is denominated in or requires
settlement in a foreign currency, including transactions arising when a person:
buys or sells goods or services whose price is denominated in a foreign currency; or
borrows or lends funds when the amounts payable or receivable are denominated in
a foreign currency; or
becomes a party to an unperformed forward exchange contract; or
Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated
in a foreign currency
ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates
14 October 2015 48CA Hetan Patel
“Indian currency” shall have the meaning as assigned to it in section 2 of the Foreign
Exchange Management Act, 1999 (42 of 1999)
“reporting currency” means Indian currency except for foreign operations where it shall
mean currency of the country where the operations are carried out
Initial Recognition
Transaction to be recorded at the exchange rate prevailing on the date of the transaction
The option of adopting weekly/monthly rate is available if there is no significant
fluctuations in the exchange rates
No guidance as to source of the rate to be adopted. Currently, on the materiality ground,
varied practices are followed. For ITA in the wake of materiality concept, unproductive
administrative hassles likely to emerge
This rule likely to create more difficulties in the translation of statements of foreign
operations where the taxpayer has little control over the accounting practice followed
overseas
ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates
14 October 2015 49CA Hetan Patel
Conversion at Last Date of Previous Year
At last day of each previous year:
Foreign currency monetary items shall be converted into reporting currency
by applying the closing rate
where closing rate does not reflect with reasonable accuracy, the amount in
reporting currency that is likely to be realized from or required to disburse, a
foreign currency monetary item, owing to restriction on remittances or the
closing rate being unrealistic and it is not possible to effect an exchange of
currencies at that rate, then the relevant monetary item shall be reported in
the reporting currency at the amount which is likely to be realized from or
required to disburse such item at the last date of the previous year.
Non-monetary items in a foreign currency shall be converted into reporting
currency by using the exchange rate at the date of the transaction
ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates
14 October 2015 50CA Hetan Patel
Recognition of Exchange differences (ED) [other than forward
contracts]
For monetary items, ED on conversion or settlement to be recognised as
income or expense of the year
ED arising on conversion of non-monetary items shall not be recognised
as income or expense of the year
This is however, subject to over-riding provisions of section 43A of ITA or
Rule 115 of IT Rules.
Exchange difference in case of capital assets acquired within India ??
ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates
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Integral Foreign Operations
It shall comprise of branch only
The FS of an integral foreign operation shall be translated using the same
principles and procedures applicable to own transactions
Non-integral Foreign Operations
It shall comprise of branch only
The assets and liabilities, both monetary and non-monetary, of the non-integral
foreign operation shall be translated at the closing rate;
Income and expense items of the non-integral foreign operation shall be
translated at exchange rates at the dates of the transactions; and
All resulting exchange differences shall be recognised as income or as expenses
in that previous year (as per AS 11, it is accumulated in the reserve account until
the disposal of the net investment)
ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates
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Forward Exchange Contracts
ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates
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Nature of Forward
Contracts
Speculative /Trading
Firm Commitment /Highly probable
forecast transaction
Others – say pure Hedge
Expenses/ loss/gains Basis of Recognition
Discount or
Premiums
On settlement On settlement Amortized over contract
life
Mark to market
recognition
No No Yes
Transitional Provisions
All foreign currency transactions existing on 01st April 2015 or
undertaken on or after 01st April 2015 shall be recognized in
accordance with provisions of this standard.
Exchange differences arising in respect of monetary items or non-
monetary items, on the settlement thereof during the previous year
commencing on the 1st day of April, 2015 or on conversion thereof
at the last day of the previous year commencing on the 1st day of
April, 2015, shall be recognised in accordance with the provisions of
this standard after taking into account the amount recognised on
the last day of the previous year ending on the 31st March,2015 for
an item, if any, which is carried forward from said previous year.
ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates
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Transitional Provisions (Cont..)
The financial statements of foreign operations for the previous year
commencing on the 1st day of April, 2015 shall be translated using
the principles and procedures specified in this standard after taking
into account the amount recognised on the last day of the previous
year ending on the 31st March, 2015 for an item, if any, which is
carried forward from said previous year.
All forward exchange contracts existing on the 1st day of April, 2015
or entered on or after 1st day of April, 2015 shall be dealt with in
accordance with the provisions of this standard after taking into
account the income or expenses, if any, recognised in respect of
said contracts for the previous year ending on or before the 31st
March, 2015.
ICDS – ICDS – The Effects of Changes in Foreign Exchange The Effects of Changes in Foreign Exchange RatesRates
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Scope of the Standard
Deals with the treatment of Government Grants
Subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements etc
Exclusions from the Scope
Government assistance which is not in the form of Government Grants
Government participation in the ownership of the enterprise
Definitions
“Government” refers to the Central Government, State Government, agencies and similar
bodies, whether local, national or international
“Government Grants” are assistance by government
In cash or kind
For past or future compliance with certain conditions
Excludes
the assistance in a form which cannot be valued
Normal trading transactions with government
ICDS – ICDS – Government GrantsGovernment Grants
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Recognition of Government Grants
It is subject to reasonable assurance as to compliance with conditions attached to the
grant and that the grants shall be received
However, recognition shall not be postponed beyond the date of actual receipt
Treatment of Government Grants
AS-12 specifies Capital Approach and Income Approach.
Grants given with reference to investment or part contribution towards total capital outlay
without obligation to repay, are required to be credited to shareholder’s funds.
Grants relating to revenue are recognised in the P/L on rational basis over one or more period
ICDS – ICDS – Government GrantsGovernment Grants
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As per ICDS :
In the case of depreciable fixed assets
Deduct from the WDV of Block of Assets to which the asset belonged
Impliedly, recognized as income in the same pattern as depreciation claimed
In the case of non depreciable fixed assets (subject to obligations to be fulfilled)
Recognized as income over the same period over which the cost of meeting
such obligations is charged to income
The ICDS is silent in the case of non depreciable fixed asset which is not
subject to obligations
In the case a grant which is not directly relatable to the asset acquired,
proportionate adjustment prescribed
ICDS – ICDS – Government GrantsGovernment Grants
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In the case of grant:
received as compensation for expenses or losses incurred in Previous
Financial Year or
for giving immediate financial support to person with no further related costs
To be recognized as income of the period in which it is receivable
Other Government Grants not dealt with herein above
Recognized as income over the period necessary to match them with related
costs which they are intended to compensate
Impliedly, the ICDS suggest that a non depreciable asset ( with no obligations
attached ) should be recognized as income in the year of recognition of the
Grant
In the case of non monetary assets given at a concessional rate
To be accounted for on the basis of acquisition cost
ICDS – ICDS – Government GrantsGovernment Grants
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The Definition of Income under section 2(24) of the Act has been amended by Finance Act
2015 to insert clause xviii which reads as:
“assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver
or concession or reimbursement (by whatever name called) by the Central Government or
a State Government or any authority or body or agency in cash or kind to the assessee
other than the subsidy or grant or reimbursements which is taken into account for
determination of the actual cost of the asset in accordance with the provisions of
Explanation 10 to clause (1) of section 43.”
The purpose of this amendment seems to be to bring to tax even those Government
Grants which are in the nature of non taxable capital receipts.
Section 28 of the IT Act : the following income shall be chargeable to income tax under
the head ‘Profits or gain of business and profession’, -
(iiib) cash assistance (by whatever name called) received or receivable by any
person against export under any scheme of the Government of India.
Government Grants – Amendments by Finance Act Government Grants – Amendments by Finance Act 20152015
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Important Deviations from the AS 12
Grants related to non depreciable assets (without requiring fulfillment of obligations)
should be credited to capital reserve . The ICDS does not recognize this principle.
Government Grants of the nature of promoters contribution to be credited to capital
reserve and treated as part of shareholders fund. The ICDS is silent on this.
Significant Issues
The Government Grants - the purpose test for treating as capital receipt is made
redundant?
A Grant given as an incentive for set up of new industries - merely because
computed with reference to the value of investment in assets will considered as a
grant related to the asset?
Section 145(2) is a computation provision – ICDS a delegated legislation – cannot
override the concept of income ?
ICDS – ICDS – Government GrantsGovernment Grants
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Refund of Government Grants
Refund of Government Grant referred in Para 6,8 and 9
First apply against any unamortized deferred credit
Refund in excess of the above to be charged to Profit & Loss A/c
Refund of Government Grant related to a depreciable fixed asset
Increase the WDV of block of assets
Depreciation prospectively on the revised WDV of the block of assets
Transitional Provisions
All the Government grants that meets with the recognition criteria of the ICDS on or
after 1st day of April and relates to any period ending 31st March 2015 or before
shall be recognized for the financial year commencing on or after 1st April 2015
after taking into account the said Government grant recognized for any period
ending on or before 31st March 2015.
ICDS – ICDS – Government GrantsGovernment Grants
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Disclosures
nature and extent of Government grants recognised during the previous
year by way of deduction from the actual cost of the asset or assets or from the
written down value of block of assets during the previous year
nature and extent of Government grants recognised during the previous
year as income
nature and extent of Government grants not recognised during the
previous year by way of deduction from the actual cost of the asset or
assets or from the written down value of block of assets and reasons
thereof; and
nature and extent of Government grants not recognised during the previous
year as income and reasons thereof
ICDS – ICDS – Government GrantsGovernment Grants
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Some of the Important Judicial Precedents
Ponni Sugars & Chemicals Ltd (306 ITR 0392 ) – SC
Test to be applied for determining the nature of subsidy is purpose test
If the object of the subsidy scheme was to enable the assessee to run the business more
profitably then the receipt is on revenue account
On the other hand, if the object of the assistance under the subsidy scheme was to enable the
assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy
was on capital account
Form or the mechanism through which the subsidy is given is irrelevant.
As the assessee was obliged to utilize the subsidy only for repayment of term loans
undertaken by the assessee for setting up new units/expansion of existing business, the same
was capital in nature
Fact that the subsidy was routed through the mechanism of price and duty differentials is
immaterial
ICDS – ICDS – Government GrantsGovernment Grants
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Some of the Important Judicial Precedents (Cont..)
Reliance Industries Ltd. (339 ITR 0632)- Bombay HC
Object of subsidy being to set up new units in backward area, the same is a capital receipt
Sahani Steels (228 ITR 253) - SC
Subsidy from public funds granted by Government by way of refund of sales-tax, etc. on
purchase of machinery etc. after commencement of production to enable the assessee to
run the business more profitably, and not for setting up of the industry, is operational
subsidy and hence, a revenue receipt.
What is material is the purpose for which it is granted and not the source of grant—If the
purpose is to help the assessee to set up its business or complete a project, the monies
must be treated as to have been received for capital purpose but if monies are given to the
assessee for assisting him in carrying out the business operation and the money is given
only after and conditional upon commencement of production, such subsidies must be
treated as assistance for the purpose of the trade and revenue in nature
ICDS – ICDS – Government GrantsGovernment Grants
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Recent Bombay High Court decision on SFIS – 17 August 2015
Bombay High Court upholds the order passed by the Government of India
that the assessee promoting foreign brand ‘Thyssenkrupp’ and hence not
entitled to duty credit script under SFIS ; accepts the contention that the
intention behind the scheme is to encourage the Indian brand and the whole
purpose is to accelerate growth in export of services to create powerful and
unique ‘Served from India’ brand instantly recognised and respected world
over.
Rejects assessee’s contention that the ultimate objective is augmentation of
foreign exchange reserve by export of goods and services and the presence
of shareholder or controlling interest of foreign entity is inconsequential.
Government Grants – Amendments by Finance Act 2015Government Grants – Amendments by Finance Act 2015
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Practically an independent standard adopting the principles of accounting
for current investments under AS 13
It is comparable to ICDS on Valuation of Inventories
Scope
Applies to securities held as stock-in-trade
Does not affect the basis for recognition of dividend/interest dealt with by ICDS on
revenue recognition
Does not apply to securities held by insurance companies, mutual funds, venture capital
funds, banks and public financial institution, etc.
Definitions
The following terms are used in ICDS with the meanings specified:
“Securities” shall have the meaning assigned to it in clause (h) of Section 2 of the
Securities Contract (Regulation) Act, 1956, other than Derivatives referred to in sub-
clause (1a) of that clause
ICDS – ICDS – SecuritiesSecurities
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Subsequent measurement of securities
At the end of any previous year, securities held as stock-in-trade shall be valued
at actual cost initially recognised or net realisable value at the end of that
previous year, whichever is lower. (applies only for the listed securities which are
regularly quoted)
The comparison of actual cost initially recognised and net realisable value shall
be done category wise and not for each individual security. For this purpose,
securities shall be classified into the following categories:
Shares;
Debt securities;
Convertible securities; and
Any other securities not covered above
The above valuation rules are intended to set off unrealized losses against
unrealized gains contrary to the GAAP
ICDS – ICDS – SecuritiesSecurities
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In case of unlisted securities or the listed securities not quoted regularly, the valuation
shall be at the actual cost initially recognized
Technique of ascertaining cost
Normally, specific identification method should be followed
If not possible, FIFO method to be followed
Also refer Circular no. 786 dated 24-06-1998 – of course, its in the context of capital gains
Valuation of opening and closing securities
As on the beginning of the previous year shall be :
The cost of securities available, if any, on the day of the commencement of the business (when the business
has commenced during the previous year); and
the value of the securities as on the close of the immediately preceding previous year, in any other case.
No Transitional Provisions prescribed
`
ICDS – ICDS – SecuritiesSecurities
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Qualifying Asset
Land, building, machinery, plant or furniture, being tangible assets
Know-how, patents, copyrights, trade marks, licences, franchises or any other
business or commercial rights of similar nature, being intangible assets
Inventories that require a period of twelve months or more to bring them to a
saleable condition
It means that except in the case of inventories, for all other assets, borrowing cost
incurred before the asset is put to use should be capitalized even though there is
smaller time gap between the acquisition of the asset and it being put to use.
Borrowing cost
The exchange differences arising from foreign currency borrowings to the extent
regarded as an adjustment to the interest cost [paragraph 4(e) of AS 16] is
excluded from the scope. It means that such portion of the exchange difference
will not form part of the borrowing cost which need be considered for
capitalization
ICDS – ICDS – Borrowing CostBorrowing Cost
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Unlike AS 16, income earned on the temporary investment out of the borrowed funds
will not be allowed to be reduced from the aggregate amount of borrowing cost eligible
for capitalization. The modification to the standard has been made to address the
litigation issue as to whether such income during construction period is liable to tax as
an independent income
Commencement/Suspension of capitalization
As per AS 16, capitalization should not be commenced unless the activities necessary to
prepare the asset for its intended use/sale are in progress
Also, as per AS 16, capitalization of borrowing cost should be suspended after
commencement if the activities for preparation of the asset are interrupted
The above rules are not incorporated in the ICDS
Cessation of Capitalization
As per AS 16, capitalization should cease upon substantial completion of activities
necessary to prepare the asset for its intended use
The benchmark for the cessation under ICDS is stated as date on which the asset is put
to use
ICDS – ICDS – Borrowing CostBorrowing Cost
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General Borrowing Cost
To the extent the funds are borrowed generally and utilized for the purpose of acquisition
of a qualifying asset, the attribution of the borrowing cost to be computed as per
prescribed formula
The formula is:
A * B/C
where,
A = borrowing cost (other than specific purpose borrowings)
B = (i) average cost of qualifying assets on first day and last day of P.Y (other
than QA financed by specific borrowings)
(ii) QA not appearing in the balance sheet on first day or both first
and last day of P.Y, 50% of cost of QA
(iii) QA not appearing in the balance sheet on last day of P.Y, average
of cost of QA on first day of P.Y and on date on completion
C = average of total assets as per the balance sheet
ICDS – ICDS – Borrowing CostBorrowing Cost
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The average to be calculated as value appearing in the balance sheet as on the first
and the last date of the year.
The formula is defective, likely to create litigation similar to Rule 8D and section
14A
Transitional Provisions
All the borrowing costs incurred on or after 1st April 2015 shall be
capitalized for the previous year commencing on or after 1st April 2015 in accordance
with the provisions of this standard after taking into account the amount of
borrowing costs capitalized, if any, for the same borrowing for any previous year
ending on or before 31st March 2015.
Disclosure:
Accounting policies adopted for borrowing costs.
Amount of borrowing costs capitalized during the previous year.
ICDS – ICDS – Borrowing CostBorrowing Cost
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ICDS – XICDS – X
PROVISIONS, PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT LIABILITIES AND CONTINGENT ASSETSCONTINGENT ASSETS
Scope
Unlike AS 29, all executory contracts (including onerous contracts) are scoped out in
ICDS
As per AS 29, provision is recognized if the liability is considered probable. In ICDS,
the condition of ‘probable’ is replaced with ‘reasonable certainty’
Similarly , under AS 29 contingent assets or reimbursement claims are recognised on
the test of virtual certainty. In ICDS the test is ‘reasonable certainty’, bringing
uniformity of test for the provisions and the assets
Unlike AS 29, guidance by examples are not provided. But the guidance provided in As
29 may have persuasive value. The interpretation of the term ‘reasonably certain’ is
likely to be subjective, prone to litigation.
Transitional Provisions
All the provisions or assets and related income shall be recognised for the previous year
commencing on or after 1st April 2015 in accordance with the provisions of this standard after
taking into account the amount recognised, if any, for the same for any previous year ending
on or before 31st March2015.
ICDS – ICDS – Provisions, contingent liabilities and contingent Provisions, contingent liabilities and contingent assetsassets
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Disclosure for each class of provision:
A brief description of the nature of the obligation
the carrying amount at the beginning and end of the previous year
Additional provisions made during the previous year, including increases to
existing provisions.
Amounts incurred and charged against provision
Unused amounts reversed during the previous year
Amount of any expected reimbursement, stating the amount of asset that has
been recognized for that expected reimbursement.
For all class of assets: Brief description of nature of asset and related income,
carrying amount of asset at beginning and end of the year, additional amount of
asset and related income, additional amount of asset and related amount reversed
during previous year.
ICDS – ICDS – Provisions, contingent liabilities and contingent Provisions, contingent liabilities and contingent assetsassets
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Some of the Important Judicial Precedents for reference
Bharat Earth Movers (245 ITR 428) (SC)
Rotark Controls India (314 ITR 62) (SC)
Metal Box Co. of India Ltd (73 ITR 53) (SC)
ICDS – ICDS – Provisions, contingent liabilities and contingent Provisions, contingent liabilities and contingent assetsassets
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Taxes will be levied on income which may not have been actually earned.
Deduction for expenses/losses to be denied contrary to the age old
accounting principles of prudence /conservatism
Increased gap between book profits and taxable profits may cause deferred
tax assets or reduce deferred tax liabilities
Though ICDS does not mandate separate books of account, detailed
reconciliations between the book profit and taxable income will have to be
maintained increasing the compliance cost and at times leakage of revenue
for the tax department
Additional burden on tax auditors – more onerous responsibilities
Increased litigation and uncertainties contrary to the stated objectives
MAT liability will not be affected directly but the MAT credit will be impacted
Impact of ICDSImpact of ICDS
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