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Income Computation and Disclosure Standards (ICDS)Presentation by:
CA. Laxman L Agrawal
Contents:
1) Background2) General Principles3) List of ICDS4) Certain Specific Issues
Background: Section 145(1) of the Income-tax Act, 1961 (Act) stipulates that the method of
accounting for computation of income under the heads “Profits and gains of business or profession” and “Income from other sources” can either be cash or mercantile system of accounting.
Section 145(2) of the Act states that the Central Government notify the accounting standards (now income computation & disclosure standards) to be followed by following class of assesses or in respect of any class of income.
A. Followed by all assesses (other than an individual or A HUF who is not required to get his accounts of the previous year audited in accordance with the provision of section 44AB of the said act) and who is following the mercantile system of accounitng
Accordingly, two tax accounting standards were notified until now:1. Disclosure of accounting policies2. Disclosure of prior period and extraordinary items and changes in
accounting policies
Background: Finance Act, 2014 amended section 145(2) of the Act
to substitute “accounting standards” with “income computation and disclosure standards” (ICDS).
The CBDT constituted the Accounting Standards Committee which had earlier issued draft 14 Tax Accounting Standards in 2012. On the basis of the suggestions and comments received from the stakeholders, CBDT had revised and issued 12 draft ICDS for public comments.
On 31st March, 2015, the Central Government has notified 10 out of the 12 draft ICDS which shall be effective from 1st April, 2015.
The introduction of ICDS may significantly alter the way companies compute their taxable income.
General Principles: HEADS COVERED: ICDS are applicable for computation of income
chargeable under the head “profits and gains of business or profession” and “income from other sources”.
CONFLICT BETWEEN LAW & ICDS: In case of conflict between the provisions of the Act and ICDS, the provisions of the Act shall prevail to that extent.o What if in case of conflict between HC / SC rulings and
ICDS?o The risk of best judgment assessment u/s 144 if positions
adopted as per ICDS which is contrary to rulings. MERCANTILE SYSTEM: ICDS applies only to taxpayers following
‘mercantile system’ of accounting.
General Principles: ICDS are ‘not applicable’ in following circumstances:
a. Where the assessee follows cash system of accountingb. Where income chargeable to tax comprises of income other than ‘profits
and gains of business or profession’ or ‘income from other sources’.c. Where the individuals and HUF are not covered audit us 44AB
Whether ICDS apply in case of presumptive taxation?Since in presumptive taxation mode the assessee does not maintain any set of books of account and there is no applicability of mercantile system of account thus ICDS do not apply in case of presumptive taxation.
ICDS impact over maintenance of books of accounts?ICDS are not supposed to provide the manner of maintenance of
books of accounts they simply provide the income computation and disclosure manner.
General Principles:
Whether ICDS have any impact on Minimum Alternate Taxation?Since ICDS does not apply in maintenance of books of account by an assessee thus ICDS should not have any initial impact on MAT computations.
Whether ICDS have any impact on Alternate Minimum Tax? However the provisions of ICDS shall apply for computation of AMT.
General Principles:
How disclosures under ICDS are to be made or where to be made:All ICDS notified provide for the disclosure requirement. In The CBDT has issued a circulation No. 10/2017 dated 23rd march 2017 on clarification on ICDS in this circulation the CBDT has clarified that disclosures required under ICDS shall be made in the tax audit report in Form no 3CD and no separate disclosure are required for person not liable to tax audit.
Whether ICDS will impact Tax Audit?YES, ICDS are certainly going to impact tax audit, for example, the valuation of closing stock as per ICDS II shall have an impact on 3CD filling. Similarly deviation in value of stock will also form part of 3CD reporting.
General Principles:
Penal Consequences of ICDS non-compliance:There are no specific provisions inserted in the income tax law particularly in Chapter – XXI : “Penalties Imposable” to levy penal consequences for non-compliance of ICDS. However any additions in income due to applicability of ICDS may attract concealment penalty consequences etc.
1) ICDS I: Accounting Policies (AS-1)2) ICDS II: Valuation of Inventories (AS-2)3) ICDS III: Construction Contracts (AS-7)4) ICDS IV: Revenue Recognition (AS-9)5) ICDS V: Tangible Fixed Assets (AS-10)6) ICDS VI: The Effects of Changes in Foreign Exchange Rates (AS-11)7) ICDS VII: Government Grants (AS-12)8) ICDS VIII: Securities (AS-13)9) ICDS IX: Borrowing Costs (A-16)10) ICDS X: Provisions, Contingent Liabilities and Contingent Assets (AS-29)
List of ICDS
Fundamental Accounting Assumptions & Considerations in Selecting Accounting Policies: ICDS-I Major Considerations in Selection of Accounting Policies
Marked to Market losses & expected losses not be recognised unless covered under a specific ICDS
Valuation of Inventories and Value of Opening Stock: ICDS-II How to Determine Cost Valuation of Services: including labour, supervisory & other direct cost +
overheads Conversion of Assets into Stock in Trade: Section 45(2A). Dissolution of Firm / Discontinuance of Business and Valuation of Stock Construction Contracts: Percentage of Completion Method (POCM)
Certain Specific Issues
Recognition of foreseeable losses in case of construction contracts. Conversion of Foreign Currency Transactions for income tax purposes monetary items
and non-monetary items (ICDS-VI). Revenue Non-Monetary Items (like inventory) as well as integral and non-integral operations.
Treatment of Government Grant: Relating to Fixed Assets Valuation of Securities: Category-wise not Script-wise (ICDS-VIII) Example Borrowing Cost: Incurrence of borrowing vs. Utilisation of Funds Introduction of new formula for capitalization of borrowing costs in case of general
purpose borrowing. Borrowing Costs Recognition of a provision when to take place: when “reasonable certainty” of
outflow exists.
Certain Specific Issues
ICDS-I: Accounting Policies
Fundamental Accounting Assumptions◦Going Concern◦Consistency◦Accrual
Change in Accounting Policies: Reasonable Cause Disclosure of Accounting Policies
KEY AREAS
AS – 1 ICDS – Ia.PRUDENCEb.SUBSTANCE OVER FORMc. MATERIALITY
a.SUBSTANCE OVER FORMb.No recognition of Mark-to-
Market losses or an expected loss unless the recognition of such loss is in accordance with the provision of any other ICDS.
Major Considerations in Selection of Accounting Policies
No concept of materiality in ICDS unlike, AS-1. No likely significant tax impact In absence of materiality concept, considerable time and cost will be
involved making trivial adjustments in net profit as per books of accounts to arrive at PGBP since authorities may insist on strict application of ICDS even on small value items.
Materiality
Based upon the concept of ‘prudence’, AS-1 precludes recognition of anticipated profits and requires recognition of expected losses.
However, ICDS provides that expected losses or mark to market losses and MTM gain also shall not be recognized unless permitted by any other ICDS to avoid differential treatment for recognition of income and losses.
Prudence
In the absence of prudence as consideration in selection and change of accounting policy, there could be several situations which could result in earlier recognition of income or gains or later recognition of expenses as compared to that under AS. e.g. provision for warranty expenses on sales made.
Derivatives which are not covered within the scope of ICDS VI (Which deal with accounting for derivative contracts), ICDS- I provisions would apply to such transcation.
Prudence
ICDS-II: Valuation of Inventories
Valuation of InventoriesCost of InventoriesCost of PurchaseCost of ServicesCost of Conversion andOther Cost
Deals With
ICDS –II shall not apply in following cases:a. Work-in-progress arising under ‘construction contracts’b. Work-in-progress which is dealt with by other ICDSc. Share, debentures and other financial instruments held as stock in
trade (dealt under ICDS –VIII)d. Producers’ inventories of livestock, agriculture and forest
products, mineral oils, ores and gases to the extent that they are measured at net realizable value.
e. Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular (covered under ICDS-V)
Does Not Deals With
Value of opening inventory should be same as preceding year’s closing inventory.
In case of a newly commenced business, the value of the opening inventory shall be the cost of the inventory.
Cases of conversion of capital asset into stock-in-trade with intent to commence business may remain unaffected due to overriding provisions of Section 45(2) of the Act.
If business is commenced with acquisition of running business on slump sale, price paid will be ‘cost’ of opening inventory.
If partner takes over running business of firm/LLP, value agreed with other partners for inter-se settlement shall be ‘cost’ for the partner.
Value of Opening Inventory
As per ICDS-II the inventories shall be value at:
◦Cost or◦Net Realizable Value
Whichever is lower.
Valuation Criteria
COST can be determined by either of the following methods:
a. FIFO Methodb. Weighted Average Methodc. Specific Identification of Cost Method ord. Standard Cost Method or Retail Method
How to Determine Cost
Techniques for the measurement of the cost of inventories such as standard cost method or the retail method may be used for convenience if the result approximate the actual cost.
It may not have significant impact to assessee not following standard cost method. The same will have an impact on taxpayers following standard cost method for valuation of
inventory for accounting purpose, who will need to adopt FIFO or weighted average cost formula for tax purposes.
However, Companies Act, 2013 permits Standard cost method under Cost Records rules. Further, as per ICDS, method of valuation once adopted shall not be changed without
reasonable cause. It would not have a significant impact since bonafide change may constitute reasonable cause.
Method of Valuation
AS- 2 ICDS• AS-2 does not include work in progress
(WIP) arising in the ordinary course of business of service providers.
• Specifies that it does not apply to WIP which is dealt with by other ICDS.
Valuation of inventories in case of service providers
• Valuation of service inventory to be the lower of cost or NRV.• Cost to include labor and other costs of personnel directly engaged in providing services
including supervisory personnel and attributable overheads.• Difficulty would arise in case of services whose chargeability depends on the success of
the service.
According to ICDS, in case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realizable value.
This is unfair particularly as there is no specific provision for allowing such NRV as the cost to the successor of the business.
Also this is contrary to law settled by Apex court in the case of Sakthi Trading Co. v. CIT
Valuation of Inventories in case of Firm/AOP/BOI Dissolution
A.L.A. Firm v. CIT [1991] 55 Taxman 497 (SC) / 189 ITR 285In cases of dissolution of firm, the stock-in-trade will have to be valued at the prevailing market price while preparing the accounts if the business of the firm is discontinued. Sakthi Trading Co. v. CIT [2001] 118 Taxman 301 (SC) / 250 ITR 871
If on dissolution of the firm the business is not discontinued, then, the ordinary principle of commercial accounting permitting valuation of stock-in-trade at Cost or Net Realizable value whichever is lower will apply.
Case laws discussed
Interest and other borrowing costs shall not be include in the costs of inventories, unless they meet the creteria for recognition of interest as a component of the cost as specified in the ICDS on borrowing costs.
Followings cost asre not part of cost of inventories : A. Abnormal cost B. Storage Cost (expect those costs which are necessary in production) C. Administrative and Selling Cost.
Other Provision
ICDS-III: Construction Contract
AS - 7 ICDS III Real Estate Developers
It does not deal with recognition of revenue by Real Estate Developers and there is separate Guidance Note on the same issued by the ICAI.
ICDS is not applicable on real Estate Developers.
Contract Cost
Contract Cost includes: - Direct cost - Cost allocated to the contract - Cost specially charged to the customer
under the terms of the contract
The scope of the Contract Cost has been widened to further include “Allocated Borrowing Cost” in accordance with ICDS on Borrowing Cost .
Construction Contracts
AS - 7 ICDS III Recognition of Contract Revenue
Contract revenue to be recognized if it is possible to reliably estimate the outcome of a contract.
The criteria “if it is possible to reliably measure the outcome of a contract” has been omitted.
Contract revenue to be recognized when there is reasonable certainty of its ultimate collection.
Impact: The recognition of contract revenue may increase because many of time certainty of collections are recognized but reliable measure of outcome of a contract is not recognizable.
It lays down the conditions to estimate the outcome of construction contract in case of :-
- Fixed Price Contract- Cost plus Contract
ICDS is silent on the same and further it is cklearify thet if any contract revenue already recognizes as income is subsequently written off in the books of accounts as uncollectible, the same shall be recognised as an expenses and not as an adjustment of the amount of contact revenue.
Construction Contracts
AS-7 ICDS III Situation when outcome of contract cannot be reliably estimatedContract revenue and contract costs to be recognized as revenue or expenses by reference to the POCM if the outcome of the contract can be estimated reliably; else, revenue should be recognized only to the extent of contract costs incurred.
No quantitative threshold laid down for determining the stage of completion, until when, the outcome of a contract cannot be reliably measured.
ICDS provides that early stage of a contract shall not exceed 25% of the stage of completion.
In other words, upto 25% of the stage of completion, if the outcome of construction contract cannot be reliably measured, contract revenue is recognized only to the extent of cost incurred.
Impact: Under ICDS, profit recognition has to start compulsorily once 25% stage is completed but the same is not the case currently under AS – 7.
Construction Contract
AS-7 ICDS III Recognition of foreseeable losses It permits to recognise immediately the foreseeable losses on a contract regardless of commencement or stage of completion of contract.
ICDS does not permit recognition of the foreseeable/expected losses on a contract.
ICDS on accounting policies also does not permit recognition of foreseeable loss.
Impact: ICDS deviates from the present legal settled position in the case of CIT V/s. Triveni Engineering & Industries Ltd (49 DTR 253) (Del) & CIT v. Advance Construction Co. (P) Ltd (275 ITR 30) (Guj)) in which foreseeable losses on construction contracts were allowed as a deduction for tax purpose.
Construction Contract
ICDS requires application of ICDS on construction contracts for recognition of revenue on mutatis mutandis basis.
• Threshold of 25% stage of completion for recognition of income
• No recognition of the foreseeable losses on a contract. However, AS-7 permits immediate recognition of the foreseeable losses on a contract regardless of commencement or stage of completion of contract.
• Stage of completion can be determined with reference to (a) total estimated costs v/s. cost incurred till balance sheet date; or (b) survey of work performed; or (c) completion of physical proportion of work
ICDS-IV: Revenue Recognition
It deals with the basis for recognition of revenue arising in the course of ordinary activities of a person from:
◦The sale of goods◦The rendering of services◦The use by other of the person’s resources yielding interest, royalties
or dividends.
Scope of ICDS-IV
In a transaction involving sale of goods the revenue shall be recognised: When the seller of goods has transferred to the buyer the property in the goods for
a price or All significant risks and rewards of the ownership have been transferred to the
buyer and The seller retains no effective control of the goods transferred to a degree usually
associated with ownership.Thus where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership, revenue in such a situation shall be recognised at the time of transfer of significant risks and rewards of ownership to the buyer. Further revenue shall not be recognised when there is absence of reasonable certainty of its ultimate collection.
What is Sale of Goods
AS – 9 ICDS
It does not apply to companies engaged in insurance business.
ICDS is silent on same.
Revenue from service transactions are recognised as percentage completion method or by the completed service contract method.
ICDS provides only for percentage completion method for recognition of service transactions.
Impact: May have minimal impact since service sector largely follows POCM (% of completion method ) or Cost plus method.
Revenue recognitation in case of Interest, royalties or dividend :
A. Interest shall be accrue on the time basis, royalties shall accrue in accordance with the term or agreements and dividend are recognised in accordance with the provision of act.
B. Interest on refund of any tax, dury or cess shall be deemed to be income of the previous year in which such interest is received.
Other provision
ICDS-V: Tangible Fixed Assets
Cost shall comprise of purchase price, import duties and other taxes, excluding those subsequently recoverable and any directly attributable expenditure on making the asset ready for its intended use. However trade discounts and rebates to be reduced.
Administration and general overheads are to be excluded unless they relate to a specific tangible asset.
Expenditure incurred on start-up and commissioning of the project including expenditure on test runs and experimental production to be capitalized.
Components of Actual Cost
Self Constructed Tangible Fixed Asset: Cost in addition to normal parlance shall also include cost of construction directly related to such asset, however any internal profits to be eliminated.
Asset Acquired for Non-Monetary Consideration: Fair value of tangible fixed asset so acquired shall be the actual cost.
Expenditure that increases the future benefits from existing asset beyond its previously assessed standard of performance is added to the actual cost.
Actual Cost’s Determination
AS- 10 ICDS It applies to tangible fixed assets
as well as goodwill It applies to only tangible fixed
assets. Cost of fixed asset comprises its
purchase price, non refundable taxes and any directly attributable cost of bringing the asset to its working condition for its intended use.
It has similar definition to AS 10 but the words used are actual cost as compared to cost in AS -10.
Impact:The Act provides for the definition of the term ‘actual cost’ and it is again repeated in the ICDS but it does not modify the concept of actual cost. However when there is conflict in interpreting the abovementioned term under ICDS and Act, the Act will prevail over ICDS. Such a narrow definition in ICDS might encourage the taxpayer to contend that expenditure on acquisition which is not part of actual cost should be deductible as revenue instead of capitalising.
AS- 10 ICDS
AS 10 read with guidance note on Machinery for Spares provides for charge to P/L, however spares to specific asset should be capitalised and shall form part of that Asset .
It provides that machinery spares which can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, shall be capitalized. Stand-by equipment and servicing equipment also to be capitalized.
Impact:ICDS specifies that machinery spares dedicated to a tangible fixed asset should be capitalized, it does not provide any further guidance on subsequent treatment that whether it will form part of the block of the asset. However, in absence of such clarification spares would form part of the block and once the principal asset is put to use, the spares shall qualify for the depreciation at the same rate.
AS- 10 ICDS When a fixed asset is acquired in
exchange or in part exchange for another asset, the cost of acquired asset should be recorded either at FMV or NBV of asset given up, adjusted for any balancing payment or receipt of cash or other consideration.
When a tangible fixed asset is acquired in exchange for other asset, the fair value of the tangible fixed asset so acquired shall be its actual cost.
Fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its FMV, or the FMV of the securities issued, whichever is more clearly evident.
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.
Usual Practice: Concept of cost should normally relate to what is given up.
Assets acquired against non-monetary consideration
AS- 10 ICDS
Para 15.3 says that when several assets are purchased for consolidated price, the consideration is apportioned on fair basis as determined by competent valuers.
When several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis.
Impact: In absence of determination by registered valuers in ICDS words “fair basis” becomes subjective and might be prone to litigation.
Assets acquired for a consolidated price
ICDS-VI: The Effects of Changes in Foreign Exchange Rates
AS- 11 ICDS
Reported using the closing rate Exchange difference recognised in
P&L A/c Allowed under the Act also.
Converted into reporting currency by applying the closing rate
Recognised as income or expense subject to provisions of Rule 115
Impact: No change in tax position
Revenue Monetary Items (like trade receivables, payables, bank balance, etc.)
AS- 11 ICDS Impact Which are carried in
terms of historical cost denominated in a FC - Reported using the exchange rate at the date of the transaction
Converted into reporting currency using the exchange rate at the date of the transaction.
No exchange difference would arise under both
No change in the position
Which are carried at fair value or other similar valuation denominated in a FC - Reported using the exchange rates that existed when the values were determined i.e. closing rate.
Converted into reporting currency using the exchange rate at the date of the transaction.
No exchange difference would arise as per ICDS. Hence, the FE gain/loss as per the books of accounts will have to be reduced/ added back respectively while computing the taxable income.
Revenue Non-Monetary Items (like inventory)
The impact of this deviation by ICDS from the provisions of AS may be understood with the help of following illustration:
Revenue Non-Monetary Items (like inventory)
Particulars Amount in Forex
Exchange Rate
Value
Cost $100 55 as on date of acquisition
Rs.5,500
NRV $50 60 closing rate i.e. at B/S date
Rs.3,000
Valuation at lower of cost or NRV ($100 or $50) i.e. $50As per AS 11 Rs.3,000
(50*60)As per ICDS Rs.2,750
(50*55)
This will result into creation of Deferred Tax Liability (DTL) as per AS 22 “Accounting for Taxes on Income” DTL will be created on difference of valuation of Inventory as per Taxation and as per Books of accounts= Rs. 3000 – Rs. 2750 = Rs. 250 * Applicable Tax RateWhen stock will be sold, in that year it will result into reversal of DTL.
Applicability of AS 22
AS- 11 ICDS Requires recognition in P&L A/c. Option of capitalization u/s 211(3C) of
companies Act, 1956 as per which (Para 46 & 46A) exchange differences arising in case of long-term foreign currency monetary items shall be either adjusted to capital asset or accumulated in FCMITDA.
Requires recognition in P&L A/c subject to provisions of Section 43A.
No Para 46 & 46A exists.
Impact: Presently, Section 43A permits capitalization on payment
basis of exchange differences relating to asset acquired from a country outside India.
Hence, there would be no change in the tax position.
Capital Monetary Items – Relating to Imported assets
AS- 11 ICDS Requires recognition in P&L A/c. Option of capitalization u/s 211(3C) of
companies Act, 1956 as per which (Para 46 & 46A) exchange differences arising in case of long-term foreign currency monetary items shall be either adjusted to capital asset or accumulated in FCMITDA.
Requires recognition in P&L A/c subject to provisions of Section 43A.
No Para 46 & 46A exists.
Impact: Section 43A does not apply since it applies only if it relates to the
imported assets. Presently, such FE differences are not recognized for tax purposes i.e.
gain is not taxable, loss is not deductible/ allowable.
Capital Monetary Items – Not relating to Imported assets
Conclusion
Since ICDS requires recognition in P&L A/c subject to provisions of Section 43A and Section 43A applies only if it relates to imported assets, a controversy may arise, whether such exchange fluctuation gain or loss on capital monetary items (not relating to imported assets) would be allowable as an income or expense as per ICDS or not.
May be considered as non-cognizable for tax purposes based on its Capital nature.
It is also arguable that judicial settled position would remain unchanged as the Act shall prevail in case of conflicts with ICDS.
Capital monetary items – Not relating to Imported assets
AS - 11 ICDS Foreign Operation is a
subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting enterprise.
“Foreign operations of a person” is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India.
Impact: The definition of foreign operations given under ICDS does not include a subsidiary, associate or joint venture of the reporting enterprise. Hence, the tax positions will remain the same in the case of foreign operations being a subsidiary, associate or joint venture of the person Integral operations – No change in tax positions
Foreign operations
AS - 11 ICDS Exchange Differences arising on
translating monetary items of non-integral foreign operations shall be transferred to “Foreign Currency Translation Reserve”(FCTR).
Exchange Differences arising on translating of assets and liabilities both monetary and non monetary of non integral foreign operations shall be recognised as “income or expense” in that previous year.
Impact: FE differences arising from the translation of the financials on MTM basis
will have to be considered in Computation of Income Statement. Capital and revenue items are not distinguished in ICDS. MTM to be
recognised even on tangible fixed assets.
Non-integral foreign operations
DTL or DTA will be created as the case may be due to the above difference.E.g. Suppose Exchange Differences arising on translating financial statements of non-integral foreign operations results into FE income.
This will result into creation of DTA subject to condition of AS 22 i.e. consideration of prudence and virtual certainty as to sufficiency of future taxable income in case of unabsorbed depreciation or carry forward of losses under tax laws.On disposal of Net Investment in Non Integral Operation, according to AS 11 the balance in FCTR will be recognized as income which will result into reversal of DTA.
AS 22 Applicability
AS 11 ICDSForeign Currency Translation Reserve (FCTR)
Treated as income for tax purpose
Purpose AS - 11 ICDSOthers (i.e. trading, speculation, firm commitment, highly probable forecast)
Marked to market at each balance sheet date and the gain or loss be recognised in the P&L a/c.
No amortization of premium/ discount.
Premium, discount arising at the inception of a forward contract shall be amortised as expense or income over the life of the contract, exchange differences on such a contract or income over the life of the contract.
Exchange difference on such a contract shall be recognised as income or expenses in the previous year in which the exchange rate change. Any profit or loss on cancelation or renewal shall be recognised as income as expenses for the PY.
Forex Derivatives – Forward Exchange Contracts
ICDS-VII: Government Grants
AS- 12 ICDS VII Recognition of grant• On reasonable assurance of compliance of
attached conditions and reasonable certainty of ultimate collection
• Mere receipt is not sufficient
• On reasonable assurance of compliance of attached conditions and reasonable certainty of ultimate collection
• Recognition cannot be postponed beyond date of actual receipt
Impact: If the grant is recognized on receipt basis, it would create DTA/DTL and MAT mismatch also. Further, an issue may arise whether grants received in earlier years but not recognized pending fulfillment of conditions will require recognition on receipt basis as per ICDS in year of transition.
Grants other than those covered by specific provisions• Revenue grant to be credited as income or
reduced from related expense.• Same as AS-12 but no clarification that it is
restricted only to revenue grants.
Government Grants
AS- 12 ICDS VII
Relatable to depreciable fixed assets
• Requires reduction from the cost of fixed asset or recognition as deferred revenue by systematic credit to P&L A/c.
• Consistent with Explanation 10 to Section 43(1), requires reduction from the cost of fixed asset.
Relatable to non depreciable fixed assets
• To be credited as capital reserve, if no conditions attached to the grant.
• To be credited to P&L A/c over period of incurring cost of meeting conditions of grant.
To be treated as income –
• on an upfront basis, if there are no conditions attached to grant.
• over period over which cost of meeting conditions is incurred.
Government Grants
AS- 12 ICDS VII
Grant in the nature of promoter’s contribution
• To be credited to capital reserve and to be treated as shareholders funds.
• No such clarity for grants in the nature of promoter’s contribution. Therefore, by implication, requires recognition as income.
Compensation for expenses / loss incurred or for giving immediate financial support• To be recognised in P&L A/c in the year in
which it is receivable• Same as AS-12
Disclosure requirement
• No disclosure of unrecognized grants • Disclosure of unrecognized grants
Government Grants
ICDS-VIII – Relating to Securities
AS- 13 ICDS VIII
Applicability
This Standard deals with accounting for investments in the financial statements of enterprises.
Assets held as stock-in-trade are not ‘investments’
This ICDS deals with securities held as stock-in-trade.
Securities
AS- 13 ICDS VIII
Carrying amount
Current investments are valued at lower of cost and fair value.
Securities held as Stock-in-trade shall be valued at actual cost or NRV, whichever is lower. (where the actual cost cannot be ascertained by reference to specific identification, the cost shall be determined on the basis of FIFO.)
Individual Scrip wise Valuation
Category wise Valuation - Classification into four categories namely, (a) shares; (b) debt securities; (c) convertible securities; and (d) any other securities not covered above.
Valuation of unlisted/ thinly traded securities at cost - At the end of any previous year, securities not listed on a recognized stock exchange; or listed but not quoted on a recognized stock exchange with regularity from time to time, shall be valued at actual cost initially recognized.
Securities
Shares Cost NRV
Valuation as per AS 13
Valuation as per ICDS
Lower of cost or NRV - Individual
scrip wise
Lower of cost or NRV - Category
wiseABC Ltd. 100 40 40XYZ Ltd. 200 140 140PQR Ltd. 300 150 150EFG Ltd. 400 250 250LMN Ltd. 100 500 100Total 1100 1080 680 1080Impact: Category wise valuation results into accelerated taxation since appreciation in the value of certain securities will be set off against diminution in the value of other securities.
Example
AS- 13 ICDS VIII
Pre-acquisition Interest
• AS 13 and ICDS on securities both require the pre-acquisition interest to be deducted from the actual cost.
• SC in Vijaya Bank’s case (187 ITR 541) had ruled that pre-acquisition interest paid is part of purchase cost of security.
• But as per the case of American Express International Banking Corpn. v. CIT [2002] 125 Taxman 488 (Bom.), if income from securities is taxed under PGBP, department ought to have taxed interest received from broken period and allow deduction of interest paid for broken period.
• Also the above case is followed as a prevalent practice.
Securities
Interest Bearing Security acquired on 1st February, 2016
Interest rate 12%
Interest Payable Half Yearly (31st Dec & 30th June)
Cost of Interest Bearing Security 1,010 (Rs. 1,000 - Face Value & Cost at which security acquired plus Rs. 10 – Pre-acquisition interest for 1 month)AS 13 & ICDS Prevalent Practice
Cost of Security as on 31-03-2015* 1,010 1,000
Adjustment to P&L for 2015-16 NIL 10 debited as int. exp.
On 30th June, 2016 when int. received
Adjustment to P&L for 2016-17 50 credited as income 60 credited as income
Adjustment in Cost 10 reduced from cost NIL
*NRV is assumed to be higher than cost
Example
AS- 13 ICDS VIIIIf an investment is acquired by the issue of shares or assets, the acquisition cost should be the fair value of the securities issued/fair value of the asset given up. Alternatively, the acquisition cost of the investment may be determined with reference to the fair value of the investment acquired if it is more clearly evident.
Where a security is acquired in exchange for other securities or asset, the fair value of the security so acquired shall be its actual cost.
Usual Practice: Concept of cost should normally relate to what is given up.
Securities
ICDS-IX: Borrowing Cost
Borrowing costs are interest and other costs incurred by a person in connection with the borrowing of funds and include:
oCommitment charges on borrowingsoAmortised amount of discounts or premiums relating to borrowingsoAmortised amount of ancillary costs incurred in connection with the
arrangement of borrowingso Finance charges in respect of assets acquired under finance leases
or under other similar arrangements.
What constitutes as ‘borrowing costs'
AS - 16 ICDS• Method of Capitalisation: Specific Borrowings:
Actual borrowing costs incurred on the borrowing during the period less any income from temporary investment of those borrowings.
Specific Borrowings:Actual borrowing costs incurred during the period on the funds borrowed.
Impact: AS-16 requires income from temporary deployment of unutilised funds to be reduced from borrowing cost. However, ICDS does not provide for the same. The income from temporary deployment of unutilised funds from specific loans shall be taxable as Income from other sources under the ICDS.
SC ruling in Tuticorin Alkali Chemicals (227 ITR 172) requires that interest income earned from temporary deployments of funds has to be offered to tax immediately as IFOS. Hence above deviation has no tax impact.
Borrowing Costs
AS - 16 ICDS
• Commencement of Capitalisation:
The date of fulfilment of three conditions viz. incurrence of capex, incurrence of borrowing costs and preparatory activities are in progress.
a)Specific borrowings – Date on which funds were borrowed
b)General borrowings – Date on which funds were utilised.
Impact: The capitalisation period starts early under the ICDS as compared to AS-16.
Borrowing Costs
The borrowing costs eligible for capitalisation to include: To the extent funds are borrowed specifically for the purposes of
acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalised on that asset shall be the actual borrowing cost incurred.
To the extent funds are borrowed generally and utilised for the purposes of acquition, construction or production of a qualifying asset, the amount of borrowing cost to be capitalised shall be computed in accordance with the formula: A X B / C
Borrowing Costs
AS - 16 ICDS General Borrowings:
Costs determined by applying capitalisation rate to the expenditure incurred on the asset. The rate is weighted average of borrowing costs applicable to the borrowings during the period other than specific borrowings.
General Borrowings:Costs determined by following formula;A * B C
Borrowing Costs
ICDS-X: Provisions, Contingent Liabilities and Contingent Assets
AS - 29 ICDS Provisions shall be recognised if it
is probable that outflow of economic resources will be required.
Provision is not discounted to NPV
Provisions shall be recognised if it is reasonably certain that outflow of economic resources will be required.
Provision is not discounted to NPV
Impact: The criteria for recognition of provisions on the basis of the test of
‘probable’ (i.e. more likely than not criteria) replaced with the requirement of ‘reasonably certain’.
In the absence of definition and scope of ‘reasonably certain’ criteria, an ambiguity would arise on assessment of ‘reasonably certain’ criteria.
In the Act, there is no specific provision for recognition of provisions. However, provisions are allowed based on accrued liabilities as per ordinary principles of commercial accounting.
Recognition of provisions
Impact:
Provision for Warranty is allowed as an expenditure upholding the test of ‘probable’ warranty obligation in the following judgments.
o Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) (extract on next slide)
o Himalaya Machinery (P) Limited v DCIT 334 ITR 64o CIT vs. Luk India P. Ltd. 52 DTR 117.o Siemens Public communication Networks Limited v CITo CIT v Indian Transformer Limited. 270 ITR 259
Recognition of provisions
Rotork Controls India (P.) Ltd. v. CIT [2009] 180 TAXMAN 422 (SC)
A provision to qualify for recognition, there must be a present obligation arising from past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible.
If historical trend indicates that in past large number of sophisticated goods were being manufactured and defects existed in some of items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from gross receipts under section 37(1), provided data is systematically maintained by assessee.
Recognition of provisions
AS - 29 ICDS Contingent assets/
reimbursement claims are recognized if inflow of economic benefits/ reimbursement is “virtually certain”.
Contingent assets/ reimbursement claims to be recognized if inflow of economic benefits/ reimbursements is “reasonably certain”.
Impact: Revenue authorities may contend that ‘reasonably certain’ is a
lower threshold than ‘virtually certain’. It is not made clear whether transitional provision requires
recognition of all past accumulated contingent assets in F.Y. 2015-16.
Contingent assets & reimbursement claims
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