CA Shashank AGRAWAL mail@shashankagrawal.com www.dda-co.com Income Computation And Disclosure Standards (ICDS) CA Shashank AGRAWAL mail@shashankagrawal.com www.dda-co.com

ICDS

Contents Background General principles ICDS I: Accounting Policies – No revision ICDS II: Valuation of Inventories ICDS III: Construction Contracts ICDS IV: Revenue Recognition ICDS V: Tangible Fixed Assets ICDS VI: The effects of changes in foreign exchange rates {No disclosures} ICDS VII: Government Grants – No revision ICDS VIII: Securities {No Disclosures} ICDS IX: Borrowing Costs ICDS X: Provisions, Contingent liabilities and Contingent assets – No revision

Method of accounting in certain cases 145A Method of accounting in certain cases 145A. Notwithstanding anything to the contrary contained in section 145,— (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be— (i) in accordance with the method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation.—For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.

Background Section 145 Income from PGBP/other sources – cash or mercantile (exception 1) subject to SS (2) Powers of CG for notify AS (2014 ICDS) for any class of assessee or income. AO not satisfied with (1) or (2), may make assessment u/s 144. Notified on January 25, 1996 (AY 1997-98) Disclosure of accounting policies Disclosure of prior period and extraordinary items and changes in accounting policies – no equivalent ICDS

Background The CBDT constituted ASC in 2010 14 TAS (Draft) in August 2012 Finance Act, 2014 -Section 145(2) “Accounting Standards” – ICDS 12 draft ICDS in January 2015 –Events after BS & Prior period 10 ICDS -31.03.2015 -Leases & I/Assets Not. 86/87/88 dt. 29/09/2016 (Ind/HUF -44AB)

Background Section 145 - (2x2) AS/IND AS Vs. ICDS-Q5 Assessee V. Income Valuation of purchase/sale of goods & inventory -145A V Net method Cash or Mercantile Capital Vs. Revenue Q15 Books of Accounts V. Computation of Income Should V. Shall Framework V. ??

FAQ Section 145/115 JB What is the treatment for interest received on compensation – 145 A(b)? What is the treatment of Book profit u/s 115JB? Q6 N? What is the treatment of adjusted total income u/s 115JC? Q6 Y? Whether provisions shall apply to banks, NBFC, power sector etc? Q 7 Whether ICDSs are applicable on presumptive taxation? Q3-Revenue/Cons contract What is fate of ICDS if inconsistent with the specific rules of the Act? Q4 What is the fate of ICDS if inconsistent with judicial precedents? Q2. Whether ICDS are applicable for Real Estate Developers or BOT? Q12

Assessee/class of assessee Exception –Ind/HUF -44AB All -Mercantile Basis ICDS (New) Old AY 2017-18 2016-17 Assessee/class of assessee Exception –Ind/HUF -44AB All -Mercantile Place of disclosures ITR /3CD -13 (d) (e) (f) N Inventory – Standard cost Y Service Provider -%tage method Exceptions Straight line basis –indeterminate On completion if 90 days Mandatory for ALL services Foreign operations No such classification Integral V non integral Closely held company share as stock Yes (Citadell (2007) nullified Instruction02/05/16- capital Securities held by banks/Fis Yes (measure /classify per RBI) Borrowings costs threshold period- general -12M

IT ACT 1961 IT RULES 1962 ICDS AS

RELATING TO ACCOUNTING POLICIES DISCLOSURE OF ACCOUNTING POLICIES ICDS -1 RELATING TO ACCOUNTING POLICIES Vs. DISCLOSURE OF ACCOUNTING POLICIES

Prudence Materiality reasonable cause AP, change in accounting estimates & errors ICDS -1 AP AS- 1-Disclosure of AP AS-5 Net profit/loss for the period, PPI, change in AP IndAs-1, Presentation of FSs 8- AP, change in estimates & errors Basis of selection in AP T&F view of State of Affairs and income of business/profession Substance over form Mark to market /expect loss X X T&F of FSs Prudence Materiality Same Fundamental Accounting Assumptions Going Concern Consistency Accrual Change in AP Shall not be changed without reasonable cause Required by statute Compliance of AS More appropriate - presentation Compliance of INDAS Reliable and more relevant information

Changes in Accounting Estimates & AP, change in accounting estimates & errors ICDS -1 AP AS- 1-Disclosure of AP AS-5 Net profit/loss for the period, PPI, change in AP IndAs-1, Presentation of FSs 8- AP, change in estimates & errors Changes in Accounting Estimates & Errors (Prior period) ? Revision Principles laid down Disclose separately Correct retrospectively Periodicity Previous year Period Transitional provisions Paragraph -10 for contracts & transaction existing on 01/04/2016 No Ind AS 101 GC Fact must be disclosed Along with Fact basis of FSs and reason to be disclosed Similar

Valuation of Inventories

Relating to valuation of Inventories Valuation of Inventories ICD II Relating to valuation of Inventories AS 2 Valuation of Inventories Ind AS 2 Scope – Inclusions/Exclusions WIP – dealt by other ICDS Machinery Spares –ICDS No specific clarification No such category Not specific to capital asset having >12m,asset Service provided excluded More detailed exclusions with regard to classification and measurement Cost of purchase Including duties and taxes even if recoverable (per 145A) excluded Similar to AS Change in AP Reasonable cause Statute AS More appropriate present.. X Ind AS Same Reversal of write down Not dealt with No specific guidance in AS 2 but permitted as per AS 5 Specifically covered in Ind AS 2

Builders developing properties on their own account?XXIII.98 ISSUES Builders developing properties on their own account?XXIII.98 Empties – Whether inventories? IV.8.RNV Physician samples? VIII.13 no, cost Materials given on loan? XII.44 L&A Surplus material & supplies (in excess of production requirement) General principle of cost V NRV When NRV is negative? VIII.3 export order

RELATING TO CONSTRUCTION CONTRACTS ICDS -3 RELATING TO CONSTRUCTION CONTRACTS (SCOPE: INCOME FOR CONSTRUCTION CONTRACT OF A CONTRACTOR)

Construction Contracts ICD III AS 7 Ind AS 11 Retention (s) Shall be included in Revenue sub to reasonable certainty of collection Silent Percentage completion method- early stage Shall not extend beyond 25% No such percentage Specified the criteria for outcome of contracts Netting of incidental income Interest, dividend and capital gains cannot be netted off Incidental income except: Costs attributable to contract Costs specifically chargeable Similar Expected losses Proportionately Fully recognized Contract costs relating to future activity Always treated as an asset An asset, if it is probable that costs are recoverable

Construction Contracts ICD III AS 7 Ind AS 11 Service Concessionaire agreements Not covered Covered Contract revenue Condition removed Recognized if possible to reliably measure the outcome of contract Similar Costs not allocable to contracts Covered like general admin, selling costs, R & D, depreciation on idle PM

Revenue Recognition

Revenue Recognition ICD IV AS 9 Ind AS 18 In case of rendering of services % completion excepts: Indeterminate no. of acts over specified period Not more than 90 days contracts Completed contract method may be followed Similar Dividend As per provisions of the Act Right to receive is established Interest Interest on refund of taxes to be recognized on receipt basis On accrual basis Illustrations Dropped 6 Illustrations No

Revenue Recognition ICD IV AS 9 Ind AS 18 Dropped No significant uncertainty exists for amount of consideration Similar Barter Transactions Not covered Covered Interest Rate Documented rate Effective interest method Customer loyalty programs Not covered except AS 29 Taxes Silent. !45A(1)(a) –applicable for sale of goods not services Exclude Excise duty is included not other taxes collected on behalf of third parties

RELATING TO TANGIBLE FIXED ASSETS ICDS – 5 RELATING TO TANGIBLE FIXED ASSETS (SCOPE: TREATMENT OF TANGIBLE FIXED ASSETS)

Tangible Fixed Assets (TFA) ICD V AS 10 Ind AS 16 Definition Land, building, machinery, plant or furniture …. PPE are tangible items ….. Similar Exchange with another assets FV of the TFA so acquired – Actual cost FV or net book value given FV may be determined for asset given or acquired –more clear evidence Exchange for shares or other securities FV of TFA or securities issued –more clear evidence Revaluation of TFA Silent Deals Cost of major inspections Depreciation Per Income tax rules Per Schedule II to CA 2013 Per useful life

Tangible Fixed Assets (TFA) ICD V AS 10 Ind AS 16 Cost of dismantling and removing and restoring Silent Deals Similar Purchase for consolidated price FV to be ascertained and apportioned FV to be ascertained and apportioned by competent valuer Threshold for expense off NIL Permitted (10.9) Machinery spares Used for TFA irregularly to be capitalized Revenue costs to be capitalized Expenses during ready to commence and actually commencement of plant Expensed off May not be capitalized

Tangible Fixed Assets (TFA) ICD V AS 10 Ind AS 16 Compensation for impairment Silent Compensation is offset towards replaced PPE Similar Residual Value Reviewed at year end Re-assessment of useful life and depreciation Annual Assessment Depreciation Method WDV/SLM WDV/SLM/unit of production Change in method Unless there is reasonable cause Change in accounting estimate and prospective

Tangible Fixed Assets (TFA) ICD V AS 10 Ind AS 16 Actual cost Per Sec 43(1) with 15 explanations Payment > 10 K -April 17 Accounting Principles Similar Exclusions/Inclusions (E & I) No E-Biological assets E-Wasting assets I- AS 19 & 13 Similar + 105

ICDS-VI: The Effects of Changes in Foreign Exchange Rates

ICD VI AS 11 Ind AS 21 Foreign Operation A branch by whatever name called Subsidiary, associates, joint ventures or branch Similar Translation of foreign operations Without classification into Integral V. Non-integral Integral V. Non integral No classification Forward exchange contract On settlement Mark to market Covered under Ind AS 39 Exchange difference on long term monetary items Silent P & L Irrevocable option directly to equity and amortize FCTR for non integral operations Accumulated in FCTR until disposal of investment

ICD VI AS 11 Ind AS 21 Period end non monetary foreign currency items Transaction date rates except inventory NRV (valuation date) Transaction date rate or FV –the valuation date rate Similar Monetary items Closing rates P & L Section 43A & R 115 Functional currency Not covered Not dealt with though reason is required Covered with reason, fact and date Capital Monetary items Through P & L subject to Sec 43A P & L or Capitalization 46 or 46A Capital Monetary items not related to assets P & L subject to Sec 43A Accumulated in FCMITDA

ICDS-VII: Government Grants

Not expressly dealt with Govt. Grants/ Assistance ICD VII AS 12 Ind AS 20 Recognition Reasonable assurance: The person shall comply with the conditions and Grant shall be received But not beyond receipt Both the conditions must be satisfied. Not linked with receipt Similar Related to depreciable FA Deduct from the assets or block of assets Deduct form the asset OR Treat as deferred income over the useful life Related to non depreciable FA Over the period costs are incurred Promoter Contribution Not expressly dealt with capital reserve Capital reserve Non Monetary assets Acquisition cost Acquisition cost/nominal value (free of cost) FV

ICDS-VIII – Relating to Securities

Securities ICD VIII AS 13 Ind AS 109 Scope Securities held as stock in trade Securities held as stock in trade are outside the scope except principles apply to current investments Deals with FI. Scope is broader. Exchange Security is acquired in exchange of other security or asset, FV of the acquired security FV of the acquired security or asset given up which is more clearly evident Similar Pre-acquisition interest Pre-acquisition interest is deducted from actual cost Such income is deducted from cost (same) Subsequent measurement Lower of cost or NRV (category wise, not individual) Current Investment to be valued at lower of cost or FV Initial and subsequent at amortized cost or FV as per BM & CCFC

ICDS-IX: Borrowing Cost

Borrowing costs (BC) ICD IX AS 16 Ind AS 23 Exchange difference to the extent reg. as borrowing costs Not treated as BC Treated as BC Similar Intangible Assets Also covered Not covered Covered Qualifying assets Inventories & others ≥ 12 M Unless specific BC It can be lesser than 12 months also Investment properties No Qualifying Temporary investments of borrowed funds No netting off from cost of asset. taxable Netting off from BC

Borrowing costs (BC) ICD IX AS 16 Ind AS 23 Commencement of capitalization Specific – date of loan Others – use of funds More detailed conditions: Incurrence of capex, BC and preparatory activities Similar Suspension of capitalization Not allowed Suspended during extended period of interruption Cessation of capitalization Assets is first put to use When assets is ready to use

ICDS-X: Provisions, Contingent Liabilities and Contingent Assets

Outflow of resources to settle the obligation is reasonable certain Provisions, Cont. L&A ICD X AS 29 Ind AS 37 Provision Outflow of resources to settle the obligation is reasonable certain Outflow of resources is probable. Similar Contingent assets - Recognition Reasonably certain Virtually certain Re-imbursement in respect of provision --Do-- Onerous contracts Excluded Included Restructuring provisions Not covered Covered

Impacts - Material Power of AO u/s 144 if income not computed in accordance with ICDS -General Increasing impact of Section 145A –Inventory, Revenue Service providers to follow percentage completion method - Revenue+ Inventory Materiality and Prudence dropping might increase litigation – General Retentions are almost includible –III.9 Incidental income in the form of interest, dividend & capital gain taxable III.12 –netting X Expected losses cannot be accounted for fully –III Revenue has to be recognized at 25% stage -costs incurred or survey or physical proportion Widening the GAP between depreciation/amortization V Immaterial capital expenses have to be adjusted if expensed off for PPE Distorting the concept of Revenue V. Capital –capitalization/BC delayed Mark to market losses not allowed Capital grants likely be treated as income

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