Presentation by CA M.R.HUNDIWALA - Aurangabad ICAIaurangabad-icai.org/wp-content/uploads/2017/04/...Method of Accounting regularly employed by assessee. Substitution by Finance Act

Presentation by

CA M.R.HUNDIWALA

M.R.HUNDIWALA & CO.

CHARTERED ACCOUNTANTSAURANGABAD/PUNE

Synopsis of Contents…………………………

Background of Section 145

Journey of notified standards under Section 145

Notified ICDS

Common Basic Features of ICDS

Consequent Issues that could arise

Typical Features of ten notified ICDS

2

M.R. HUNDIWALA & CO. CHARTERED ACCOUNTANTS AURANGABAD / PUNE

Background of Section 145

For computing income chargeable under “Profits and gains of businessor profession” or “Income from other sources”.

Method of Accounting regularly employed by assessee.

Substitution by Finance Act 1995 : either cash or mercantile.

Central Govt. may notify Accounting Standards.

Notified Accounting Standards not being followed, Assessing Officer

may make best judgment assessment u/s. 144.

3


Journey of notified standards under Section 145

4 Finance Act, 1995empowered theCentral Govt. to issueAccounting Standardsby amending 145(2).

Two Accounting Standards werenotified by notification no. SO 69(E) dt.25-01-1996

•Disclosure of Accounting Policies

•Disclosure of prior period andextraordinary items and changes inaccounting policies

CBDT constitutedcommittee in 2010 tosuggest AccountingStandards for notification.

Final Report submitted in2012 along with 14 DraftTax AccountingStandards.

Finance Act 2014substituted the term“accounting standard” insection 145(2) with “ICDS”.

10 ICDS notified in March, 2015applicable from A.Y. 2016-17by Notification No. 32/2015

F.N0. 134/48/2010-TPL.

Eswar Committee recommended for deferment,applicability postponed to AY 2017-18,Stakeholders comment invited, ITR and Form 3CDamended for disclosures of impact, certain ICDSrevised.

FAQs issued to clarify certainimplementation issues.


5

Income Computation & Disclosure Standards Corresponding

ICAI –AS

ICDS I Accounting Policies AS 1

ICDS II Valuation of Inventories AS 2

ICDS III Construction Contracts AS 7

ICDS IV Revenue Recognition AS 9

ICDS V Tangible Fixed Assets AS 10

ICDS VI Effects of Changes in Foreign Exchange Rates AS 11

ICDS VII Government Grants AS 12

ICDS VIII Securities

ICDS IX Borrowing Costs AS 16

ICDS X Provisions, Contingent Liabilities, Assets AS 29

Notified ICDS ……………………


6

ICDS No. Particulars

Increase

in profit

(Rs.)

Decrease

in profit

(Rs.)

Net effect

(Rs.)

ICDS I Accounting Policies

ICDS II Valuation of Inventories

ICDS III Construction Contracts

ICDS IV Revenue Recognition

ICDS V Tangible Fixed Assets

ICDS VI Change in Foreign Exchange Rates

ICDS VII Government Grants

ICDS VIII Securities

ICDS IX Borrowing Costs

ICDS XProvisions, Contingent Liabilities and

Contingent Assets

Amendments in Form 3CD : clause 13 (d) and (e)

Whether any adjustment is required to be made to the profits or loss for complying

with the provisions of ICDS notified u/s. 145(2)

If answer is affirmative, give details of such adjustments.


7

Sr Particulars

1 ICDS I - Accounting Policies

2 ICDS II - Valuation of Inventories

3 ICDS III - Construction Contracts

4 ICDS IV - Revenue Recognition

5 ICDS V - Tangible Fixed Assets

6 ICDS VII - Government Grants

7 ICDS IX - Borrowing Costs

8 ICDS X - Provisions, Contingent Liabilities and Contingent Assets

Amendments in Form 3CD : clause 13 (f)

Disclosure as per ICDS


Common Basic Features of ICDS

Primarily simplified versions of corresponding AS issued by ICAI.

ICDS are applicable to assesses having “income from business or

profession” and “income from other sources”.

ICDS are applicable to assesses following mercantile system of

accounting. Not applicable in case of cash system.

ICDS are to be complied while computing the income, no books ofaccount are required to be maintained following ICDS.

Where ICDS conflicts with the provisions of IT Act, then the provisions of

IT Act shall prevail.

Expressions used in ICDS but not defined, will have the meaning as

defined in IT Act.

Provision made for transition to ICDS during A.Y. 2017-18.

8


Applicability Of ICDS and Disclosure requirements In Tax Audit Report

9

Sr. Assessee Status ICDSCompliance

Disclosure Disclosure

FORM 3CD ITR

1 All assessees ( Ind., HUF, LLP, Partnership, Co., Others ) following cash system of accounting

Not Required Not Required Not Required

2 All assesses ( Ind., HUF, LLP, Partnership, Co., Others )not

having income from Business/Profession or income from Other Sources


3 Individual /HUF not required to get accounts audited u/s. 44AB


4 Partnership/AOP/LLP/Companies/Others not required to get audited u/s. 44AB

RequiredNot

ApplicableRequired

5 Partnership Firms under Presumptive Taxation 44AD ( Refer Q. 3 of FAQ)

RequiredNot

ApplicableRequired

6 Partners (Ind.) having remuneration and interest from firms and subject to audit u/s. 44AB

Required Required Required

7 Companies subject to MAT provisions ( Refer Q. 6 of FAQ)Not Required

Not Applicable

Not Required

8 Assessees subject to AMT provisions ( Refer Q. 6 of FAQ) Required Required Required


Consequent issues that could arise …………..

When ICDS is in conflict with the Act, the provisions of Act will prevail, then why

ICDS ?

When treatment as per ICDS is at cross purpose with a settled judicial

opinion/interpretation, which will prevail ?

Mismatch between book profits under MAT and income as per ICDS.

Challenge to maintain trail of reconciliations between accounts under AS/Ind.

AS and carrying amounts under various ICDS.

Will ICDS apply to assessees taxed on gross income basis for example under

Sec. 44AD, 44AE, 44D, 44DA etc…..

Can ICDS bring to charge any receipt which is not income as per Sec. 2(24).

Huge responsibility of the auditors to certify compliance and disclosures under

ICDS.

Dual reporting responsibility in case of non corporate assessees under SA 700

and under ICDS.

10


ICDS I : ACCOUNTING POLICIES

11


ICDS I : Relating to Accounting Policies

Generally based on the principles laid in earlier notified AS 1 under

Section 145 , similar to AS 1 of ICAI.

While framing accounting policies, although the concepts of ‘Going

Concern’, ‘Consistency’ and ‘Accrual’ are accepted, the concept of

‘Prudence’ and ‘Materiality’ have been either curtailed or ignored.

Change in accounting policy has to be for a ‘reasonable cause’.What is reasonable cause is not defined.

Disclosure Requirements :

a) All significant accounting policies adopted by a person shall bedisclosed.

b) Any change in an accounting policy which has a material effectshall be disclosed.

c) If a fundamental accounting assumption is not followed, the factshall be disclosed.

12


ICDS II : VALUATION OF INVENTORIES

13


ICDS II : Relating to Valuation of Inventories

Generally aligned to AS 2 issued by ICAI. Except few changes

suggesting very conservative approach. ( gross value of purchases –

inventory of service providers )

ICDS II not applicable to :

* inventory covered by other ICDS ( contracts, securities, etc..)

* inventories of livestock, agriculture produce, mining, mineral oil, oresand gases

* machinery spares of irregular use specific to a tangible fixed asset

Inventories are assets :

* held for sale in the ordinary course of business

* In the process of production for such sale

* In the form of material or supplies to be consumed in the production

process or in rendering of services

14


Inventories are to be valued at lower of cost or net realizable value.

Retail method is also accepted in case of retail trade.

In case of Service Providers, now inventory of “services” will have to

be accounted for at year end.

Method of Valuation of Inventory not to change unless there is a

reasonable cause. What is reasonable cause is not defined.

Taxes, duties, cess, fee that are redeemable not to be reduced from

cost of inventories as suggested in AS 2. Aligned to provisions under

section 145A.

Interest not to form cost of inventory unless ICDS on borrowing cost

permits.

15ICDS II : Relating to Valuation of Inventories


16ICDS II : Inventory Valuation - Goods And Services

Sr. Component Include Exclude

1 Cost of

purchase

Purchase price including duties and

taxes, freight inwards and other

expenditure directly attributable to the

acquisition.

Trade discounts, rebates and other

similar items.

2 Cost of

service

Labour and other costs of personnel

directly engaged in providing the

service including supervisory personnel

and attributable overheads

Abnormal wastage of services.

Storage costs if necessary during

intermediate production process.

3 Cost of

Conversion

Cost directly related, Fixed Cost

allocated to each unit of production

based on normal production capacity,

Variable costs allocated based on

actual production.

Net realisable value of by-

products, scrap or waste material ,

abnormal wastage of material,

4 Other Costs cost incurred in bringing the inventories

to their present location and condition.

Interest and other borrowing cost only if

it is as per ICDS on borrowing costs.

Administration cost that do not

contribute to bringing inventory to

present location or condition.

Selling costs


17ICDS II : Inventory Valuation – Principles of Costing

Specific identification of costs for those items of inventory are not

ordinarily interchangeable.

Goods and Services used for Specific projects to be valued at

specifically identified costs.

General Inventory to be assigned First in First Out formulae or weighted

average costs that fairly approximates to actual costs

Standard costing could be used with a condition that it is periodically

reviewed and adjusted and fairly approximates to actual costs.

Retail costing method could be used in retail trade, with a condition

that average margins for each retail department would be reduced

from selling price of inventory of that department.

Net Realisable Value to ascertained separately for each item ofinventory unless they could be aggregated on account of similar

features like purpose, end use, geographical location etc..


18ICDS II : Inventory Valuation – Principles of Costing

Raw Materials and supplies inventory not to be valued below cost

unless the prices of finished goods are reduced resulting into loss

Value of Opening Stocks to be continued as it is ( even if it does not

comply with ICDS ) in case the material remains in stocks, till it's

disposal.

On dissolution of Firm, AOP or BOI, inventory to be valued at NRV,notwithstanding whether business continued or not. Supreme Court

decision in Shakti Trading Co. overruled. ( capital asset - sec. 45(4))


The following aspects shall be disclosed, namely:—

a) the accounting policies adopted in measuring inventories

including the cost formulae used; and

b) the total carrying amount of inventories and its classification

appropriate to a person.


ICDS III : CONSTRUCTION CONTRACTS

19


20ICDS III : Construction Contract

Sr.Particulars Inclusions Exclusions

1 SCOPE Specifically negotiated contract for construction of an

asset or group of assets.

Contract for rendering of services - directly related

Contract for destruction or restoration of an asset

2 CONTRACT REVENUE

Comprises of : Initially agreed revenue , including retentions revenue

for work variations, claims and incentives when

probable and reliably measurable

Recognition : To be recognised when there is a reasonable certainty

of ultimate collection

To be recognised as per stage of contract completion

on reporting date

Stage of completion to be determined with reference

to proportion of cost incurred to total estimated cost

or survey of work performed or physical completion of

contract.

Early stage of contract not to cross 25% of contract

completion


21ICDS III : Construction Contract

Sr.Particulars Inclusions Exclusions

3CONTRACT COSTS

Directly related costs to a specific

contract Interest, Dividend and Capital Gains

Comprises of : General costs that are attributable

to contract activity and which can

be allocable to contract

Costs not attributable to

construction activity or not allocable

to specific contract

Cost specifically chargeable to

Customer under the Contract

Costs prior to securing of contracts,

that is not allocable to specific

contract

Borrowing costs , if any , as per ICDS

on borrowing costs

Recognition : To be recognised as per stage of

contract completion on reporting

date

Costs related to future activity to be

treated as asset till chargeable as

per contract

The change in estimates of costs to

be recognised in the year of change

and subsequent years


Completed contract method approved by judiciary in case of 334 ITR

194 ( Sai Hotels – Mad.HC ) and 275 ITR 30 ( Advance Construction –

Guj.HC)

Whether applies to real estate developer ?

Retention Money - ratio laid out by Supreme Court in 26 ITR 27

Treatment for unforeseen actual Loss in execution of contract, and

revision in estimates.

Treatment of expenditure on service contracts , the revenue from

which is uncertain or depends on positive outcome.

22ICDS III : Issues that may arise…..


ICDS III : Relating to Construction Contracts (Cont…..)


A person shall disclose:

a) the amount of contract revenue recognized as revenue in the

period; and

b) the methods used to determine the stage of completion of

contracts in progress.

A person shall disclose the following for contracts in progress at the

reporting date, namely:—

a) amount of costs incurred and recognized profits less recognized

losses upto the reporting date;

b) the amount of advances received; and

c) the amount of retentions.

23


ICDS IV : REVENUE RECOGNITION

24


ICDS IV : Relating to Revenue Recognition

Like AS 9, revenues to be recognized in respect of sale of goods,

rendering of services, and income arising due to use of resources by

others. ICDS IV principles would not apply to those streams of income

not covered here.

Concept of transfer of risk and rewards , as stated in AS 9, is fully

recognized by ICDS. Thus passage of risk and rewards is crucial for

recognizing sales, rather than billing of goods.

In respect of revenue from rendering of services, percentage

completion method is required to be adopted for revenue

recognition. ICDS III principles would apply to that extent.

Reasonable certainty of ultimate collection principle is also

recognized. Reference is made specifically in respect of exportincentives and price escalations.

25


26ICDS IV : Revenue Recognition

( arising in the course of ordinary activities of a person )

Sr. Revenue Comprises Of : Criteria Of Recognition

1. Sale of Goods Property in goods is transferred for a price

Significant risks and rewards of ownership is transferred

and

Seller retains no effective control of goods usually

associated with ownership

Revenue to be recognised when there is reasonable

certainty of ultimate collection

When reasonable certainty is lacking, revenue

recognition to be postponed to the extent of

uncertainty involved.

2. Rendering of Services Revenue to be recognised on Percentage Completion

Method

Revenues to be matched to costs keeping stage of

completion in mind.


27ICDS IV : Revenue Recognition

( arising in the course of ordinary activities of a person )

Sr. Revenue Comprises Of : Criteria Of Recognition

2. Rendering of Services Revenue to be offered on straight line Method in case

services are indeterminate over a period.

Short term service contract (90 days ) , revenue to be

offered on completion or substantial completion

3. Use of Resources by

Others (interest, royalty

and dividend)

Interest shall be recognised on time basis, on

outstanding amount at applicable rates

Interest on refund of tax, duty , cess to be recognised

on receipt basis

Royalty to be recognised as per agreement or other

more scientific basis, if any.

Dividend to be recognised as per Income Tax Act.


ICDS IV : Relating to Revenue Recognition (Cont…..)

Disclosure Requirements :Following disclosures shall be made in respect of

revenue recognition, namely:—

a) In a transaction involving sale of good, total amount not recognized

as revenue during the previous year due to lack of reasonably

certainty of its ultimate collection along with nature of uncertainty;

b) The amount of revenue from service transactions recognized as

revenue during the previous year;

c) the method used to determine the stage of completion of service

transactions in progress; and

d) for service transactions in progress at the end of previous year:

i. amount of costs incurred and recognized profits less

recognized losses upto end of previous year;

ii. the amount of advances received; and

iii. the amount of retentions.

28


ICDS V : TANGIBLE FIXED ASSETS

29


ICDS V : Relating to Tangible Fixed Assets

More aligned with AS 10, except that ICDS does not deal with intangible

assets.

Tangible fixed assets comprise of land, building, machinery, plant or furniture

held with the intention of being used for producing, providing goods or

services and not held for sale in normal course of business.

While identifying the items of Fixed Assets, AS 10 recognizes the concept of

materiality, which is missing in ICDS. Thus item of capital nature irrespective it’s

value, useful life etc.. will have to be capitalized.

Expenditures like repairs, replacements of spares to machinery, that increases

the future benefits from the existing asset beyond its previously assessed

standard of performance is to be added to the actual cost.

Para 7 of ICDS states that expenditure which is specifically attributable to the

construction of a project or acquisition of tangible fixed asset shall be included

in it’s actual cost.

When a tangible fixed asset is acquired in exchange for shares or other

securities, the fair value of the tangible fixed asset so acquired shall be its

actual cost.

30


ICDS V : Relating to Tangible Fixed Assets (Cont…..)

Disclosure Requirements : Following disclosure shall be made in respect of

tangible fixed assets, namely:—

a) description of asset or block of assets;

b) rate of depreciation;

c) actual cost or written down value, as the case may be;

d) 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—

i. Central Value Added Tax credit claimed and allowed under the

CENVAT Credit Rules, 2004;

ii. change in rate of exchange of currency;

iii. subsidy or grant or reimbursement, by whatever name called;

e) depreciation Allowable; and

f) written down value at the end of year.

31


ICDS VI

EFFECTS OF CHANGES IN

FOREIGN EXCHANGE RATES

32


ICDS VI : Relating to the effects of changes in Foreign

Exchange Rates

Aligned mostly to AS 11 issued by ICAI. Covers foreign currency

transactions, conversions, and forward exchange contracts.

ICDS approves the treatment of gains or losses to be taken to profit and

loss account when restating the monetary items at Balance Sheet dates.

Section 43A prescribes the currency fluctuation difference to be adjusted

to cost of asset imported from outside India ( on loan or credits ). ICDS also

recommends same treatment.

Foreign Currency Loan for indigenous assets, treatment for currency

fluctuation not defined in the Act ( inc. 43A) . Supreme Court in 231 ITR 285

held that it can not form part of cost ( prior to Sec. 43A). However under

ICDS it is to be taken as expenses or income, this may raise controversy.

Like AS 11, premium and discount on forward exchange contracts to be

amortized over life of contract. Monetary items restated on MTM basis and

difference recognized in Profit & Loss Account.

33


ICDS - VI

Transactions in

foreign currencies

Normal Business

Transactions

Transaction Exposure

Forward Exchange Contracts


Foreign

operations

Integral Foreign

operations


Non-integral foreign

operations


34

ICDS VI: Scope


Tra

nsa

ctio

nBuys or sells goods or

servicesImport/Export

Acquires or disposes off assets or incurs or

settles liabilities

Foreign Assets & Liabilities

Becomes party to unperformed forward exchange contract

Forward Contract

Borrows or lends funds WC/Term Loan

Denominatedin FC

AND / OR

Proposedsettlement in

FC

35

ICDS VI: Foreign Currency Transactions


Initial Recognition criteria

The exchange rate at the date of transaction

Average rate for a week/month approximates rate on date of transaction

Average rate (#)

Spot rate

At time of booking transaction

SPOT RATE MEAN OF PERIODIC RATE

YES

NO

OR

# Do we need to followTransactionapproach or ‘Basket’ approach?

36

ICDS VI: Initial Recognition


Monetary items

Money held and assets to be received or

liabilities to be paid in fixed or determinable amounts of money.

Example: Cash, Trade receivables and Trade

payables

Non-monetary items

Assets and liabilities other than monetary

items.

Example: Fixed assets, Inventories and

Investments in equity shares.

37

ICDS VI: Monetary and Non-Monetary


Fo

reig

n C

urr

en

cy

Tra

nsa

ctio

n

Monetary itemsClosing rate/

Settlement rate

Exchange difference recognized as income/

expense of the PY.

Non Monetary items @ Historic Cost

Exchange rate at the date of the transaction

Ideally, no subsequent recognition – No effect on Computation of income

Conversion Recognition

Accounting principle permit disclosure of Non-monetary items @ Fair Value

38

ICDS VI: Subséquent Recognition


Fo

reig

n O

pe

ratio

ns

of

a

Pe

rso

n*Integral foreign

operation

Foreign operation integral part of the operation of the

Indian person.Liaison office

Non integral foreign operation

Foreign operation not an integral foreign operation

Independent operational Branch

office

*A branch (by whatever name called), of that person, the activities

which are based or conducted in a country other than India.

39

ICDS VI: Conversion of Foreign Operations


Integral Foreign

operations

Monetary Assets

Translated at Closing Rate

Recognition of Income or

expenses

Non-monetary

assets

Translated at rate of date

of transaction

No effect on computation

Non- Integral Foreign

operations

All* Assets & Liabilities

Translated at Closing Rate

Recognition of Income or

expenses

Income and Expenses

items

Translated at rate of date

of transaction

No effect on computation

40

ICDS VI: Translation of Foreign Operations at year end

* Monetary+ Non MonetarySec.43A applicable in both situationsM.R. HUNDIWALA & CO. CHARTERED ACCOUNTANTS AURANGABAD / PUNE

ICDS VII : GOVERNMENT GRANTS

41


ICDS VII : Relating to Government Grants

Very much aligned to AS 12 issued by ICAI.

Para 4.2 clarifies, recognition of Government Grant shall not be

postponed beyond the date of actual receipt.

Section 43(1), Expln. 10 provides that the Govt. grants that directly or

indirectly meet the cost of the fixed assets, should be reduced fromthe cost of the assets. Whereas para 6 of ICDS VII provides that govt.

grants in respect of non depreciable assets should be offered to tax as

income over obligating period.

Controversy arising in case of Subsidy under PSI, on account of

insertion of clause (xviii) to section 2(24) by Finance Act, 2015.

42


ICDS VII

CoversTreatment of Govt. Grants

Subsidy

Does not cover

Govt. Assistance which are not in form of Grants

Tax Holiday or Tax Exemption

Govt. participation in

ownership of enterprise

Promoter’s Contribution

43

ICDS VII: Scope


Go

ve

rnm

en

tIncludes

Central Government

State Governments

Other agencies/similar bodies (National or International) Eg.

Municipality

Excludes

PSUs

Nationalised Banks

44

ICDS VII: Government means


Sec .2(24) (xviii) of IncomeTaxAct amended by finance Act,2015 to cover Grant as income.

45

Covered Not Covered

Subsidies Tax credits

Cash incentives Tax Exemptions / holidays

Packaged schemes Deduction/ Weightage deduction

Duty Drawbacks Government Assistance

Waiver Government Participation as

Promoter/owner

Concessions Donations

Reimbursement of any obligation

ICDS VII: Form of Grants


Particulars Whether ICDS

VII Applicable?

Remarks

Incentives from Government for

developing infrastructureNo

Tax exemptions are not covered.

Cash Incentive for setup in backward

zone in form of reimbursement from

sales tax.

Yes

Cash incentive on meeting of

obligation and compliance of

conditions.

Loan waiver by state Government to

Farmers for losses suffered on drought

condition through special packages.Yes

Compensation for losses

suffered. Question is whether it is

agriculture Income?

Answer – No.

LPG scheme (Jan Dhan Yojana) – Direct

transfer.No

Its not a business receipt.

Loan waiver by Government PSU Bank

to farmers on account of losses suffered

due to drought.

No

PSU banks are not Government.

Concessions by Municipal Corporations

to waste management company for

creating awareness on Swachh

Abhiyan to the extent of spending.

Yes

Concession from local body for

compliance.

ICDS VII: Applicability to different kinds of grants…….


Re

co

gn

itio

n o

f G

ran

tsAS 12

Compliance of conditions + reasonable certainty

about ultimate collection

Recognize grant in books

Postpone recognition

As per ICDS VIICompliance with the

conditions + reasonable assurance of receipt (#)

Recognize Income

Postpone recognition

Y

Y

N

N

# No postponement beyond actual date of receipt

47

ICDS VII: Recognition Criteria


48

Depreciable Asset

Reduction from the cost of fixed asset

OR

Recognition as deferred revenue by systematic credit as income

Deduction from the actual cost of WDV of

block of assets

Non Depreciable Asset

Credit as capital reserve, if no conditions attached to the grant

OR

Consider income over period of incurring cost to meet conditions

of grant

Recognition as income over the same

period of incurring cost

ICDS VII: Treatment of Grants

AS 12 ICDS VII


ICDS VII : Relating to Government Grants (Cont…..)


Following disclosure shall be made in respect of Government grants,

namely:—

a) nature and extent of Government grants recognized during theprevious year by way of deduction from the actual cost of theasset or assets or from the written down value of block of assetsduring the previous year;

b) nature and extent of Government grants recognized during theprevious year as income;

c) nature and extent of Government grants not recognized duringthe previous year by way of deduction from the actual cost of theasset or assets or from the written down value of block of assetsand reasons thereof; and

d) nature and extent of Government grants not recognized duringthe previous year as income and reasons thereof.

49


ICDS VIII : SECURITIES

50


51ICDS VIII : Securities

Part A Principle Remark

Scope Securities held as stock in trade Not held as investments or capital

assets

Any person except …… Persons carrying insurance business,

banks, public financial institutions,

mutual funds, venture capital funds

Applies to Recognition and

valuation of securities

Does’t not apply to interest and

dividend ( ICDS II applies )

Securities as defined under SCRA

( i.e. shares, debt securities,

convertible securities and others)

and shares of companies in

which public is not substantially

interested

Derivatives not covered

Recognition At purchase cost including

brokerage, fee, tax, duty , cess

etc.…

Cost is deemed to be Fair Value of

security acquired when exchanged

for any security or other asset.


52

Part A Principle Remark

Valuation At cost or Net Realisable Value

which ever is lower. In case of

unlisted and listed but not

regularly quoted shares … initially

recognised cost.

Basket valuation for shares, debt

securities, convertible securities,

other securities ( mutual funds

etc.…)

Appropriation cost on the basis of First in First out

or Weighted Average Method

Part B Scheduled Banks and Public

Financial Institutions

Securities shall be classified,

recognised and measured as per

Guidelines of Reserve Bank of

India.

ICDS VIII : Securities


53

ICDS VIII : Securities Valuation at year end

Sr. Particulars COST NRV As per

AS

As per

ICDS

Impa

ct

1 Basket : Shares

A 110 165 110

B 130 70 70

Total 240 235 180 235 55

2 Basket : Debt Securities

A 125 100 100

B 450 375 375

Total 575 475 475 475 0

3

Basket : Convertible

Securities

A 210 100 100

B 375 700 375

Total 585 800 475 585 110

Grand Total (1+2+3) 1400 1510 1130 1295 165


Notes :

1. 165 is additionally

subjected to tax on account

of ICDS valuation .

2. When Shares A in shares

basket are sold subsequently

the cost to be considered is

165 and not 110 , since it's

valuation was made at 165 at

year end earlier. Similarly

share B will have replaced

cost of 70 in place of 130.

ICDS IX : BORROWING COSTS

54


“Borrowing Costs” are interest and other costs incurred by a person in

connection with borrowing of funds and includes :

a) commitment charges on borrowings

b) amortised amount of discounts and premiums relating to borrowings

c) amortised amount of ancillary costs incurred in connection with thearrangment of borrowing

d) Finance charges in respect of assets acquired under finance lease or similar

Qualifying asset means :

a) land, building, machinery, plant or furniture , being tangible assets

b) Know-how, patents, copyrights, trade marks, licenses, franchises or any otherbusiness or commercial rights of similar nature being intangible assets

c) Inventories that require a period of twelve months or more to being them to asaleable condition.

55ICDS IX : Scope and applicability


ICDS IX : Capitalisation Principles

Capitalisation Principles :

Borrowing costs that are directly attributable to the acquisition,

construction or production of a qualifying asset shall be capitalised

as part of the cost of that asset.

Capitalisation out of specific loans and out of general loans-

principle

Period for capitalisation starts : In case of Specific loans : borrowal

and in case of General loans : utilisation of funds .

Period of capitalisation ends : In case of inventory when

substantially all the activities necessary to prepare such inventory for

it’s intended sale are complete. Other assets - first put to use.

M.R. HUNDIWALA & CO., CHARTERED ACCOUNTANTS AURANGABAD / PUNE

56

BALANCE SHEET of ABC BUILDERS AND DEVELOPERS

CAPITAL & LIABILITIES 31/03/

2016

31/03/

2017

31/03/

2018

ASSETS AND PROPERTIES 31/03/

2016

31/03/

2017

31/03/

2018

Capital and Reserves (425) 200 1500 Assets out of specific loan 100 150 200

Specific Loan @ 12% 75 100 150 Inventory out of general loan 400 2000 3150

General Loan @14% 600 600 800

Creditors and

Payables

350 1500 1250 Cash and Bank Balance 100 250 350

Total 600 2400 3700 Total 600 2400 3700

ICDS X : Borrowing Costs --- capitalisation out of general loans

Interest Capitalisation:

On specific loan : Interest on amount borrowed (borrowal date till specific asset is first put to use.)

Remarks : NIL on account of presumption that they were put to use with in 12 months of acquisition

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M.R. HUNDIWALA & CO. CHARTERED ACCOUNTANT AURANGABAD / PUNE

ICDS X : Borrowing costs ---- Capitalisation out of general loans

Interest Capitalisation on Inventory in case of Builder : 2016-17 2017-18

Interest cost on General Loan Liability 85 95

Average cost of inventory ( 400+2000)/2 and

(2000+3150)/2

1200 2575

Average of Total assets as per Balance sheet

( excluding specific funding )

((600-75) + (2400-100)) /2 and ((2400-100) + (3700-200)) /2 1412 2900

Interest to be added to Inventory cost : 85 * 1200/1412

and 95 * 2575/2900

72 84

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M.R. HUNDIWALA & CO. CHARTERED ACCOUNTANT AURANGABAD / PUNE

ICDS IX : Relating to Borrowing Costs

Disclosure Requirements :The following disclosure shall be made inrespect of borrowing costs, namely:—

a) the accounting policy adopted for borrowing costs; and

b) the amount of borrowing costs capitalized during the previousyear

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ICDS X : PROVISIONS, CONTINGENT

LIABILITIES AND

CONTINGENT ASSETS

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ICDS X : Relating to Provisions, Contingent Liabilities and

Contingent Assets

This ICDS is more aligned to AS 29.

A Provision shall be recognized when:

a) a person has a present obligation as a result of a past event;

b) it is reasonably certain that an outflow of resources embodyingeconomic benefits will be required to settle the obligation; and

c) a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognized.

Provisions to be reviewed at the end of each previous year.

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ExamplesPresent Obligation -

Arising from Past EventReasonable Certainty -

Outflow of ResourcesReliable Estimate -

of obligation

Guarantee given for

financial performance (

repayment of loan ) of

an associate

Guarantor : Signing of

guarantee documents

and availment of loan

by the associate

On failure to repay loan,

followed by declaration

of insolvency, the

resource outflow is

reasonably certain. Till

that it is Contingent

liability.

Best estimate of the short

fall in settling the unpaid

balance considering the

recovery from the

Associate.

Court case claiming

damages for defects in

construction which is

vehemently disputed by

the contractor

defending it is on

account of defective

design given by the

contractee.

Claim for damages :

Undertaking the

construction work by

signing the contract

Based on the advise of

the Advocate , the

defence is very strong.

Thus there is no

reasonable certainty that

a claim would arise

under the contract.

No provision can be

recognised till the court

orders the claim against

the contractor. Till that

time, it will appear as

contingent liability

ICDS X : Provisions , Contingent Labilités , Contingent Assets


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ExamplesPresent Obligation -

Arising from Past EventReasonable Certainty -

Outflow of ResourcesReliable Estimate -

of obligation

Warranty for

manufacturing defects

given by Consumer

durable company say

TV

To Replace : Warranty

Card issued along-with

sales invoice to

customer for

replacement with in two

years in case of defects

Past experience shows

with reasonable certainty

that there would few

claims for manufacturing

defects

Provision to be recognised

based on best estimates

worked on scientific basis

Agreement indicates

that temporary

erections, structures

etc.… for 1000 workers

on site to be removed

after completion of

contract to setup a

colony

Clearing the site on

completion : Signing of

Agreement to

undertake construction

contract

Reasonably certain that

without incurring the cost

arrangements for 1000

workers can not be

made on site and the

construction work cannot

be completed.

The estimated Cost of

making arrangement on

site for 1000 workers , shall

be added to the cost of

the project and will be

claimed as expenditure

on percentage

completion basis.

ICDS X : Provisions , Contingent Liabilities , Contingent Assets


ICDS X : Contingent Assets , Contingent Liabilities

Contingent Assets : is a possible asset that arises from past events, the

existence of which will be confirmed only by the occurrence or non

occurrence of one or more uncertain future events not wholly within the

control of the person.

Contingent Liability : is

(1) a possible obligation that arises from past events and the existence of

which will be confirmed only by the occurance or non occurance of

one or more uncertain future events not wholly within the control of

the person or

(2) a present obligation that arises from past events but is not recognised

because :

i. it is not reasonably certain that an outflow of resources

embodying economic benefits will be required to settle the

obligation.

ii. A reliable estimate of the amount of obligation cannot be made.

M.R. HUNDIWALA & CO., CHARTERED ACCOUNTANTS AURANGABAD / PUNE

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ICDS X : Relating to Provisions, Contingent Liabilities and

Contingent Assets (Cont………)

Disclosure requirements : Following disclosure shall be made in respectof each class of provision, namely:‐

a) a brief description of the nature of the obligation;

b) the carrying amount at the beginning and end of the previousyear;

c) additional provisions made during the previous year, includingincreases to existing provisions;

d) amounts used, that is incurred and charged against the provision,during the previous year;

e) unused amounts reversed during the previous year; and

f) the amount of any expected reimbursement, stating the amountof any asset that has been recognized for that expectedreimbursement.

Similar disclosures to be made in respect of each class of contingent

assets and income there from.

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THANK YOU

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Documents

Presentation by CA M.R.HUNDIWALA - Aurangabad ICAIaurangabad-icai.org/wp-content/uploads/2017/04/...Method of Accounting regularly employed by assessee. Substitution by Finance Act