INCOME COMPUTATION AND DISCLOSURE STANDARDS

ICDS (Income Computation and Disclosure Standards) were issued by the Government of India under Section 145 (2) of The Income Tax Act, 1961. As there was certain tax related disputes and irregularities related to computation of income. To cope up irregularities, on 31st March 2015, Ministry of Finance published 14 drafts ICDS. But out of which the Central Government notified only 10 standards. These standards were issued for computation of taxable income to operationalise the new framework for all assesses in relation to their income that falls under the head of “Profits and Gains from Business or Profession” and “Income from other Sources”. It was supposed that these standards would affect the compliance practice of all the tax payers following the mercantile system of accounting for computing income chargeable.

The main aim for developing ICDS was to minimize irregularities and tax related disputes by bringing greater uniformity in the application of Accounting Principles governing the Income Computation. These standards of ICDS will be applicable from the financial year 2016-17. These standards were developed and based on the GAAP (General Accepted Accounting Principles) assisted by The Institute Of Chartered Accountants of India. The key virtues of ICDS are:-

  1. As ICDS is applicable for computation of income but not for the purpose of maintenance of books of account so there is no need to maintain separate books of accounts for ICDS. This is for Computation of Income only.
  2. In case of conflict between the provision of Income Tax Act, 1961 and ICDS, the provision of the Income Tax Act would prevail to that extent.
  3. ICDS is applicable to all assesses following the Mercantile system of Accounting and chargeable to income tax under the head “Profit and Gains from Business or Profession” and “Income from other Sources”.
  4. This is applicable for all assess irrespective of:-
  • Turnover,
  • Applicability of Tax Audit,

AND

  • Status of Individual (such as AOP, Firm, Resident or Non-Resident etc.)
  1. ICDS does not provide any explanations or illustrations (unlike Accounting Standards) but merely prescribes main principles to be computed while computing income.
  2. All standards of ICDS (except ICDS 8 i.e. Securities) contain transitional provisions which is provided for recognition of outstanding contracts and transactions as on 1st April 2015, with keeping In mind the previously recognized income/ expenditure/ loss in the previous period. Means there is no exemption for outstanding contracts or transactions as on 31st March 2015.
  3. As Non Compliance of ICDS will result in best judgement assessment empowered by the tax authorities, which may lead to protracted legal actions or penalty implications. So here every assesse is required to implement these ICDS.

The List of 10 ICDS (notified from 1st April 2015) and its corresponding Accounting Standards are mentioned below:-

S.NO. ICDS ACCOUNTING STANDARDS (AS)
1. Accounting Policies AS 1
2. Valuation of Inventories AS 2
3. Construction Contracts AS 7
4. Revenue Recognition AS 9
5. Tangible Fixed Assets AS 10
6. The Effect of Changes in Foreign Exchange Rates AS 11
7. Government Grants AS 12
8. Securities AS 13
9. Borrowing Cost AS 16
10. Provisions, Contingent Liabilities and Contingent Assets AS 29

 

Following are the rest 04 drafts of ICDS which were circulated but have not yet been notified.

  1. Events occurring after the end of previous year.
  2. Prior Period Expense
  3. Leases
  4. Intangible Assets

Now, discuss in brief the impacted areas of ICDS over AS :-

  1. ICDS 1(Accounting Policies)
  • Materiality Concept – In ICDS no concept of Materiality is recognized whereas in AS, concept of materiality is considered while selecting and applying accounting policy.
  • MTM (Market to Market Loss) – In ICDS, MTM loss or an expected loss shall not be recognized. Also ICDS is silent on recognition of anticipated gains. Whereas under AS, Provision has been made for all known liabilities and losses. And anticipated gains are not recognized here.
  • Change in Accounting Policy and its Disclosure – In ICDS, Accounting Policies shall not be changed without a reasonable cause. If any change occurs then it is required to disclose the same within a period of change and also required in first year in which change has material effect, if impact is not material at current periods but might be material in later periods. Whereas under AS, change in accounting policies are permitted if 1). Required by Statute. 2). Required for compliance of AS. 3). Changes results in more appropriate presentation of financial statements. If changes made then the disclosure for the same is required within the period of change, if impact is not material at current but might be material in later periods. 
  1. ICDS 2 (Valuation of Inventories)
  • Valuation of Inventory – In ICDS, valuation of inventory is done at cost or net realisable value (whichever is lower) whereas in AS, no such provisions have been made.
  • Opening Inventory – In ICDS, value of opening inventory shall be the same as the value of inventory at the end of the preceding financial year. And in case of Commencement of business, cost of inventory shall be the opening inventory on the day of commencement of business. Whereas in AS, no such provisions have been made.
  • Valuation in Case of Dissolution – Inventory on the date of dissolution shall be valued at Net Realisable Value under Partnership Firm, AOP or BOI. Whereas under AS, no such provisions have been made.
  • Standard Cost Method – Under ICDS, there are only four methods for Inventory Valuation i.e. 1). FIFO (First In First Out), 2). Weighted Average Cost Method, 3). Specific Identification and 4). Retail Method. Whereas in AS, Standard Cost Method is also to be considered including these four methods while inventory Valuation.
  • Changes in the Method of Inventory Valuation – In ICDS, Once adopted, methods of valuation shall not be changed without any reasonable cause. Whereas in AS, Changes are permit table if 1). Required by Statute, 2). Required for compliance, 3). Changes result in appropriate presentation of financial statements.
  1. ICDS 3 (Construction Contracts)
  • Recognition of Contract Revenue – In ICDS, recognition is required if there is reasonable certainty of its ultimate collection. And the”reliable measurement of outcome of the contract” criteria has been omitted. Whereas in AS, contract revenue to be recognised if it is possible to reliable measure the outcome of contract.
  • Retention Money – In ICDS, retention money to be considered as the part of contract revenue. Whereas AS is silent on treatment of accrual income.
  • Incidental Income – Contract Cost may get reduced by any incidental income except interest, capital gains, dividend etc. Whereas in AS, Contract Cost may get reduced by any incidental income which is not included in contract revenue.
  • Allowability and Recognition of Expected Losses – In ICDS, Losses are not allowable unless actual incurred and ICDS does not allow recognition of expected or foreseeable losses. Whereas in AS, Losses are allowable whether commencement, stage of completion expected profits from independent contracts are there.
  • Contract Revenue at Early Stage of Contract – In ICDS, Contract Revenue is recognized only to the extent of its cost, if the outcome cannot be reliably measured (up-to 25% of early stage completion). Whereas in AS, Revenue shall be recognized only to the extent of recoverable cost. Also no profit to be recognized during the early stages of contract.
  1. ICDS 4 (REVENUE RECOGNITION)
  • Methods Of Revenue Recognition For Service Contracts – In ICDS, Percentage Completion Method (PCM) is required for recognition of service transactions. Whereas in AS, Proportionate Completion Method or Completed Service Contract Method is required for recognition of service transactions.
  • Revenue Recognition and Disclosure – In ICDS, revenue is recognized only there is certainty of its ultimate collection from sale of goods rendering of services. Also, in ICDS disclosure of amount not recognized as revenue due to lack of certainty of its ultimate collection. Whereas in AS, Recognition of revenue to be postponed if uncertainty exists on measurability and collect ability of revenue from sale of goods, rendering of services, interest, dividends, etc. Also, In As, Circumstances to be disclosed in which revenue recognition has been postponed pending uncertainties.
  1. ICDS 5 (TANGIBLE FIXED ASSETS)
  • Asset Acquisition Against Non-Monetary Consideration – In ICDS, If a tangible assets are acquired for other asset and for shares or other securities then actual cost of tangible fixed assets shall be recorded at fair value of tangible fixed assets acquired. Whereas in AS, if fixed assets are acquired for other asset and for shares or other securities then cost of asset acquired should be recorded either at fair market value of asset given or shares or securities issued OR at fair market value of asset acquired (whichever is more clear ).
  • Applicability – ICDS applies only to tangible fixed assets like land, building, machinery, furniture etc. Whereas AS applies to fixed assets like land, building, goodwill, trademarks etc.
  • Cost Component – In ICDS, the word “COST” (as defined in AS-10) is used as the word “ACTUAL COST”. Whereas, in AS, The word “COST” is used so that the actual cost should be deductible as revenue instead of capitalizing.
  • Acquiring Of Assets at Consolidate Price – In ICDS, consolidated price to be apportioned to various assets on a fair basis. Whereas in AS, it is to be proportioned to various assets on a fair basis (as determined by the competent valuers).
  • Capitalisation Of Stand-By Equipment and Servicing Equipment – In ICDS, capitalisation of stand-by equipment and servicing equipment is mandatory. Whereas in AS, it is not mandatory.
  • Statutory Requirements – In ICDS, the parameters need to be considered while maintaining the fixes assets register like description of assets, actual cost with respect to adjustment. Whereas in AS, there is not statutory requirements of maintaining fixed asset register for non corporate entities.
  1. ICDS 6 (THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES)
  • Monetary Items – In ICDS, exchange difference shall be recognised as income or expense (arising on settlement or on conversion of monetary items at the last day of previous year by converting into reporting currency by applying the closing date. Whereas In AS, exchange difference recognised in Profit and Loss account.
  • Non-Monetary Items – In ICDS, Non-monetary items can be converted into reporting currency by using the exchange rate at the date of transaction. Whereas In AS, the item carried at historical cost can be reported at the exchange rate at the date of transaction. And the item carried at fair value can be reported at the exchange rate that existed at the time when value was determined.
  • Premium or Discount Arising in Foreign Exchange – In ICDS, premium or discount arising in foreign exchange contract shall be recognized at the time of settlement and shall be amortized over life of contract. Whereas in AS, forward contract shall be restated at the end of year on market basis and difference shall be recognized in Profit and Loss Account. Also there is no amortization of premium or discounts.
  1. ICDS 7 (GOVERNMENT GRANTS)
  • Grant Recognition – In ICDS, recognition of grants cannot be postponed beyond the date of actual receipt. Whereas in AS, mere receipt of grants is not sufficient.
  • Grants Related to Depreciated Fixed Assets – In ICDS, Grants that are related to depreciate fixed assets shall be reduced from the cost of fixed assets. Whereas in AS, the same shall be reduced from the cost or shall be recognized as deferred revenue through systematic credit to profit and loss account.
  • Grants Related to Non – Depreciated Fixed Assets – In ICDS, Grants related to non depreciated fixed assets shall be considered as income , if there are no conditions attached to grant. Whereas, in AS, the same shall be credited as capital reserve, if there is no such conditions attached to grant. 
  1. ICDS 8 (SECURITIES)
  • Applicability and Valuation Of Securities – ICDS applicable to securities which are held as stock-in-trade shall be valued at actual cost or NRV (whichever is lower). Whereas AS applicable to accounting for investments shall be valued at lower of cost of fair value.
  • Value of Opening Inventory – In ICDS, value of opening inventory shall be the same as the value of securities at the end of preceding financial year. Whereas, in AS, no such specific provision is there.
  • Cost Ascertainment – In ICDS, the cost not ascertained by specific identification shall be determined on the basis of First in First Out Method. Whereas In AS, Cost formula are the same as specified in AS 2.               
  1. ICDS 9 (BORROWING COSTS)
  • Exchange Differences – In ICDS, borrowing costs does not include exchange differences arisen from foreign currency borrowings. Whereas in AS, borrowing costs does include exchange difference with extent that they shall be regarded as an adjustment to interest costs.
  • Cessation Of Capitalisation – In ICDS, capitalisation shall induct from date of borrowing of funds and its cessation from the date when the asset is put to use. Whereas in AS, capitalisation shall induct when all these three conditions are satisfied- 1). Incurrence of capital expenditure 2). Incurrence of borrowing costs and 3). Construction activities are in progress and cessation from date when asset is ready to use.
  • Qualifying Assets – In ICDS, Qualifying assets means, an inventory required a 12 month period or more to bring them to sale able condition. Also tangible and intangible assets are qualifying assets regardless of substantial period condition under ICDS, Whereas in AS, qualifying assets means an asset that necessarily takes a substantial, period of time to get ready for its intention-ed use or sale.
  1. ICDS 10 (PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS)
  • Recognition Of Provision – In ICDS, provisions shall be recognised if it is reasonably certain that an outflow of economic resources will be required. Whereas in AS, provisions shall be recognised if it is probable that an outflow of economic resources will be required.
  • Obligations – In ICDS, provisions made on obligations or voluntary obligations are not allowed. Whereas in AS, obligations shall be legally enforceable and may get arise from normal business practices, customs and desire to maintain good business relation etc.
  • Recognition of Contingent Assets and Claims – In ICDS, contingent assets and claims are to be recognised when inflow of economic benefit is “reasonable certain”. Whereas in AS, contingent assets and claims are to be recognised when the realization of related income is “virtually certain”.

 

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