BDO INDIA – INCOME COMPUTATION DISCLOSURE STANDARDS (ICDS)

CONTENTS Page 2 A. Applicability B. ICDS III – Construction Contracts C. ICDS IV – Revenue Recognition D. ICDS VIII – Securities E. ICDS X – Provisions, Contingent Liabilities and Contingent Assets.

Applicability Client name - Event - Presentation title Page 3

APPLICABILITY Reframed as “Income Computation & Disclosure Standards” Applicable to all the assessees following mercantile system of accounting No separate books of accounts required to be maintained. To be followed in computation of income & disclosure purpose In case of conflict between Act or ICDS, Act will prevail Applicable with effect from 1 st day of April, Applicability to assessee covered by presumptive taxation? 10 Transitional Provisions – Applicability to all transactions existing as on 01 April 2015.

ICDS III – Construction Contracts Client name - Event - Presentation title Page 5

ICDS III- Construction Contracts Applies to a fixed price, cost plus, or to a hybrid of fixed & cost plus contract Mandates recognition of revenue under Percentage of Completion Method (POCM) Mandatory to recognize profit/loss on POCM basis beyond 25% Foreseeable losses Future/anticipated losses are not allowed Contract cost relatable to proportion of work completed are allowed Page 6 Not applicable to real estate developers

ICDS III: Construction Contracts ParticularsImplications as per Accounting Standards Implications as per Tax Accounting Standards 1. Definition of construction contract “A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely related or interdependent in terms of their design, technology and function or their ultimate purpose or use Contract for rendering of services directly related to the construction of asset; Contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets. 2. Methods of Accounting for Construction Contracts AS-7 provides for two methods – i. Percentage completion method. ii. Completed contract method Revenue is to be recognized on Percentage completion method only. Page 7

ICDS III: Construction Contracts ParticularsImplications as per Accounting Standards Implications as per Tax Accounting Standards 3.Recognition of expected losses To be recognized fully and not in proportion to percentage completion method Future losses shall not be allowed unless actually incurred. Further, the losses incurred shall be allowed only as per percentage completion method. 4.Treatment of incidental income Incidental income like Interest, dividends or capital gains are deducted from cost of contract. Such income shall be treated and taxed in accordance with the applicable provisions of Act. Page 8

ICDS III: Construction Contracts ParticularsImplications as per Accounting Standards Implications as per Tax Accounting Standards 5.Reversal of revenue AS-7 provides for reversal of revenue on account of uncertainty arising on realisability of contract revenue already recognized. Such recognized income shall be recorded as expense and not as an adjustment to contract revenue. 6.Recognition of incentive payments and claims Only when i.) Contract is sufficiently advanced and ii.) the claim and incentive can be reliably measured. ICDS omits the requirement that the contract is sufficiently advanced that the claim or incentive will be recognized. Page 9

ICDS III- Construction Contracts Page 10 Taxpayer ends up paying tax in two years on income of INR 12,000 where as actual income is INR 2,000. There is no carry back of losses or MAT credit. YearContractUnrelated Income Total Income Computation Remarks Income as per ICDS Book profit as per AS 1 (<25% work) Foreseeable Loss (10,000) 6,000 (4,000) Foreseeable loss of contract is not allowed as deduction in Year 1 2Contract concludes on Loss 6,000(4,000)6,000Actual loss of (5,000) of contract will be admitted as deduction in normal computation whereas MAT will not permit carry forward of and set off of loss if the same is lower than depreciation loss

ICDS III- Construction Contracts Components of revenue recognition on POCM basis Contract revenue to be recognised if there is reasonable certainty of ultimate collection Reconcilable with real income theory as per present position Retention money to be included as part of contract revenue Page 11

ICDS IV – Revenue Recognition Client name - Event - Presentation title Page 12

ICDS IV- Revenue recognition ICDS on revenue recognition will not cover revenues dealt by other ICDS; say, -Construction contracts, -Government grants, -Foreign exchange fluctuation, -Contingent Assets Whether ICDS on Revenue recognition applicable to Leases, BOT projects, Real estate development? Revenue from sale of goods recognised upon transfer of property or upon transfer of significant risk/rewards of ownership to buyer. -Sale of immovable - Controversy in VAT and service tax. Service sector following mercantile method to recognise revenue on POCM basis -No need to recognise profit if stage of completion < 25% -Foreseeable loss may also be on POCM basis. -Valuation of inventory of service covered by ICDS on valuation of inventory Page 13

ICDS-4: Revenue Recognition ParticularsImplications as per Accounting Standards Implications as per Tax Accounting Standards 1.Recognition of revenue from service transactions AS-9 recognizes both the ‘proportionate completion method’ and ‘completed service contract method’ for recognition of revenue from service transactions. Revenue from service transactions to be recognized only on ‘percentage completion method’. 2.Recognition of expected losses To be recognized fully and not in proportion to percentage completion method Future losses shall not be allowed unless actually incurred. Further, the losses incurred shall be allowed only as per percentage completion method. Page 14

ICDS IV- Revenue recognition Revenue to be recognised only if there is reasonable certainty of its ultimate collection. -ICDS not materially different from AS-9 -ICDS is in line with current judicial thinking which aligns also with real income theory! But ICDS is ambiguous whether condition of reasonable certainty of ultimate collection applies also to interest and royalty income Page 15

ICDS VIII – Securities Client name - Event - Presentation title Page 16

ICDS VIII- Securities Deals with securities held as stock-in-trade Currently, ICAI AS-13 principles on “current investments” apply to securities held as stock-in-trade ‘Securities’ defined to have meaning assigned in S.2(h) of SCRA except derivatives referred in S.2(h)(1a) ICDS does not apply to securities held by Insurance Companies; Mutual Funds; Venture Capital Funds; Banks; Public Financial Institutions FIIs/FPIs, since securities are deemed to be capital assets in their hands Coverage of ICDS will illustratively affect Stock-Brokers; NBFCs; Others engaged in securities trading Computation of ‘deemed speculation’ loss under Explanation to s.73 Page 17

ICDS VIII- Securities Page 18 ParticularsImplications as per Accounting Standards Implications as per Tax Accounting Standards 1.Valuation of securities acquired in exchange AS-13 provides that if an investment is acquired in exchange of another issue of shares or another asset, the acquisition cost shall be the fair value of asset given up or securities issued as the case maybe. The fair value of stock acquired shall be its cost 2.Provision of NRV The Provision for valuation of investment at end of previous year to be done for individual securities. Such provision is made for a group of securities together. Securities to be classified in shares, debt securities, convertible securities & any other security. (Bucket Approach) Securities to be classified into following buckets Shares; Debt Securities; Convertible Securities; Any Other Securities

ICDS VIII- Securities Page 19 Impact analysis Bucket approach virtually results in accelerated taxation with reference to the security (at item (5) above) which appreciates in value May also create mismatch with MAT Sr No.CostYear end NRVYear end conventional valuation Subtotal (A) (B) Total (A+B) Stock value on Bucket valuation Itemised Valuation

ICDS X – Provisions, Contingent Liabilities and Contingent Assets Client name - Event - Presentation title Page 20

ICDS X - Provisions, Contingent liabilities and Contingent assets Unlike existing AS, ICDS requires recognition of provisions only if it is ‘reasonably certain’. It excludes from its ambit onerous contracts. In addition, ICDS also requires recognition of contingent assets when the inflow of economic benefits is reasonably certain. These changes are presumably made with the intention to bring in consistency to the tax treatment of losses and gains. Reasonably certain As per dictionary/judicial exposition - fair and reasonable; being free from reasonable doubt Yardstick of ‘reasonable certainty’ needs to be uniform in case of provision for liability as also asset, but, is prone to subjective considerations by different assessees in identically placed situation In either case, opinion of experts and events after balance sheet date may be relied upon by Tax Authority Page 21

ICDS X - Provisions, Contingent Assets and Contingent Liabilities ParticularsImplications as per Accounting Standards Implications as per Tax Accounting Standards Recognition of contingent assets AS-29 provides for recognition of a contingent asset when the realization of related income is virtually certain. This ICDS replaces the condition of ‘virtually certain’ with ‘reasonably certain’ for recognition of income and related asset. Page 22

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