Malad Goregaon Study Circle - January2016 CA Ravi Tela

Malad Goregaon Study Circle - January2016 CA Ravi Tela
Overview of ICDS Malad Goregaon Study Circle - January2016 CA Ravi Tela

Salient features of ICDS notified by CBDT
CBDT vide notification S.O. 892(E) dated has notified 10 ICDS Applicable w.e.f April 1, 2015 and will accordingly apply to AY Applicable to all assesses following mercantile system of accounting To be used for the purpose of computation of income chargeable to tax under the head “Profits and gains of business or profession” or “Income from other sources” Not for maintenance of books of accounts Not applicable for computation of MAT Provisions of Income Tax Act, 1961, to prevail in case of conflict with ICDS Transitional provisions

ICDS notified by CBDT ICDS Name of ICDS I Accounting Policies II
Inventories III Construction Contracts IV Revenue Recognition V Tangible Fixed Assets VI Effects of changes in Foreign Exchange Rates VII Government Grants VIII Securities IX Borrowing Cost X Provisions, Contingent Liabilities and Contingent Assets

ICDS I – Accounting Policies
Salient Features Based on Accounting Standard (‘AS’) -1 for disclosure of accounting policies Recognizes three accounting concepts – going concern, consistency and accrual Accounting policies must be chosen to represent true and fair view of state of affairs and income The treatment of transactions will be governed by their substance and not legal form Mark-to-market or expected loss shall not be recognized unless provided by other ICDS Accounting policy cannot be changed without reasonable cause. However reasonable cause is not defined All significant accounting policies adopted shall be disclosed Any change in accounting policy which has material effect shall be disclosed If fundamental accounting assumptions are not followed, the fact shall be disclosed

ICDS I – Accounting Policies Comparison ICDS I v/s AS 1/ Ind AS 1
Sr No Point of Comparison ICDS I AS 1/ Ind AS 1 1 Concept of prudence – Expected Profits No clarity Precludes recognition of anticipated profit 2 Concept of prudence – Expected losses Expected losses or MTM losses not to be recognized Recognition of expected losses 3 Concept of materiality Does not recognize concept of materiality Recognizes concept of materiality 4 Change in accounting policies Not allowed without a reasonable cause Allowed if the change would result in more appropriate presentation

ICDS II – Valuation of Inventories
Salient Features Based on AS-2 for Valuation of inventories Applicable for valuation of inventories except - WIP arising under construction contract - WIP dealt with by other ICDS - Shares, debentures and other financial instruments held as stock in trade which is dealt by ICDS on securities - Producers’ inventories of livestock, agriculture and forest products to the extent they are measured at net realizable value - Machinery spares dealt with ICDS on tangible fixed assets Recording of inventory is now required for service providers

Definitions “Inventories” are assets - held for sale in ordinary course of business - in the process of production for such sale - in the form of materials or supplies to be consumed in the production process or in the rendering of services “Net realizable value” is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale

Measurement Inventories shall be valued at cost or net realizable value whichever is lower Cost of inventories shall comprise of all costs of purchase + cost of services + costs of conversion + other cost incurred in bringing the inventories to their present location Specific identification of cost is required for goods that are not interchangeable ICDS has identified the following three valuation methods - First in First Out - Weighted average cost formula - Retail method The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause Disclosure of the carrying amount, classification and method of valuation of inventories

ICDS II – Valuation of Inventories Comparison ICDS II v/s AS 2/ Ind AS 2
Point of Comparison ICDS II AS 2/ Ind AS 2 Cost of purchase Purchase price includes duties and taxes in line with Sec 145A Purchase price including duties and taxes (other than ones recoverable from tax authorities) Valuation of inventory of service provider To consist of labour and other costs of personnel directly engaged in providing the service Not Covered Standard cost method Not allowed Allowed if results approximates actual cost Valuation of inventory on dissolution of partnership firm / AOP / BOI To be valued at the net realizable value Not covered/ Silent

ICDS II – Valuation of Inventories Comparison ICDS II v/s Ind AS 2
Point of Comparison ICDS II Ind AS 2 Valuation of opening stock The value of the inventory as on the beginning of the previous year shall be (i) the cost of inventory available, if any, on the day of commencement of business during when the business has commenced during the previous year; and (ii) the value of the inventory as on the close of the immediately preceding previous year, in any other case. Ind AS 2 silent on the valuation of opening stock

ICDS III – Construction Contracts
Definitions “Construction contract” is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes: Contract for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; Contract for destruction or restoration of assets, and the restoration ofthe environment following the demolition of assets. “Fixed price contract” is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which may be subject to cost escalation clauses.

“Cost plus contract” is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a mark up on these costs or a fixed fee. “Retentions” are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified. “Progress billings” are amounts billed for work performed on a contract whether or not they have been paid by the customer. “Advances” are amounts received by the contractor before the related work is performed

Contract revenue shall be recognised when there is reasonable certainty of its ultimate collection. Contract revenue shall comprise of: the initial amount of revenue agreed in the contract, including retentions; and variations in contract work, claims and incentive payments: to the extent that it is probable that they will result in revenue; and they are capable of being reliably measured. Where contract revenue already recognised as income is subsequently written off in the books of accounts as uncollectible, the same shall be recognised as an expense and not as an adjustment of the amount of contract revenue

Contract costs shall comprise of : costs that relate directly to the specific contract; costs that are attributable to contract activity in general and can be allocated to the contract; such other costs as are specifically chargeable to the customer under the terms of the contract; and allocated borrowing costs in accordance with the ICDS on Borrowing Costs These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue. Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract

Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. Costs that are incurred in securing the contract are also included aspart of the contract costs, provided they can be separately identified; and it is probable that the contract shall be obtained When costs incurred in securing a contract are recognised as an expensein the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due from the customer and are classified as contract work in progress

Contract revenue and contract costs are required to be recognised on POCM basis. The manner of determining the stage of completion for recognition of contract revenue / contract costs is also provided. Once a contract crosses 25% of the completion stage, the profit in respect of such contract is required to be recognized Retention money – Retention money is considered as part of contract revenues and hence, shall be recognized on POCM basis Contract Costs – ICDS also provides as to what constitutes contract costs which even includes allocated borrowing costs. Pre-construction income in the nature of interest, dividend and capital gains is specifically not allowed to be reduced from the cost of construction

Treatment of losses – Losses incurred on a contract are allowed only in proportion to the stage of completion. Further, any future or anticipated losses are not considered allowable, unless actually incurred. Combination / Segmentation of Contracts – ICDS provides the manner of combining and segmenting the construction contracts in varied situations similar to the current AS-7. Changes in Estimates The percentage of completion method is applied on a cumulative basis in each previous year to the current estimates of contract revenue and contract costs. Where there is change in estimates, the changed estimates shall be used in determination of the amount of revenue and expenses in the period in which the change is made and in subsequent periods.

ICDS III – Construction Contracts Comparison ICDS III v/s AS 7
Point of Comparison ICDS III AS-7 Retention money Recognised on POCM basis Silent; Recognised only when right to receive such sum established Revenue recognition during early stage of contract Revenue to be recognised once contract crosses 25% stage of completion No guidance; Most contractors apply POCM from day 1 Recognition of actual losses Allowed on POCM basis Recognised fully upfront Provision for anticipated losses Not allowed (unless actually incurred) Recognised fully Pre-construction income (interest, dividend, capital gains) Not allowed to be reduced from the cost of construction Reduced from the cost of construction

ICDS III – Construction Contracts Comparison ICDS III v/s AS 7
Point of Comparison ICDS III AS-7 Contract costs relating to future activity Recognised as asset irrespective of recovery probability Recognised as asset if it is probable that such costs are recoverable Detailed explanations / illustrations No detailed explanations / illustrations provided Detailed explanations / illustrations included to explain the provisions of AS-7

Key Issues Applicability Threshold for Revenue Recognition Service Concession Arrangements Recognition of Retention Money on POCM basis Provision for anticipated Loss Pre-construction income in the nature of interest, dividend or capital gains not to be reduced from cost of construction Capitalisation of borrowing costs related to construction contracts No guidance regarding decrease in contract revenue due to damages, variations etc

ICDS IV – Revenue Recognition
Salient Features Based on AS-9 for Revenue recognition Deals with the bases for recognition of revenue arising in the course of the ordinary activities of a person from - the sale of goods; - the rendering of services; - the use by others of the person’s resources yielding interest, royalties or dividends Does not deal with the aspects of revenue recognition which are dealt with by other ICDS Definition “Revenue” is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of a person from the sale of goods, from the rendering of services, or from the use by others of the person’s resources yielding interest, royalties or dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration

ICDS IV – Revenue Recognition
Sale of goods shall be recognized when all significant risks and rewards of ownership are transferred. Claims for escalation of price and export incentives can be postponed to the extent of uncertainty involved Revenue from service transactions will be recognized as per percentage completion method. Completed service contract method permissible under AS-9, not available Revenue can be possibly deferred if the stage of completion does not exceed 25% where the outcome cannot be reliably estimated Interest to be recognized on time basis Dividend to be recognized as per provisions of the Act; and Royalty to be recognized as per terms of the relevant agreement. Discount or premium on debt securities held should be accrued over the period to maturity Disclosure of the revenue recognised, method adopted to determine POC, costs incurred for WIP, for service contracts

ICDS IV – Revenue Recognition Comparison ICDS IV v/s AS 9
Point of Comparison ICDS IV AS 9 Revenue Recognition from rendering of services Recognized by the percentage completion method Recognized by completed service contract method or under proportionate completion method whichever relates the revenue to the work performed Recognition of dividends In accordance with provision of the Act [section 8 of the IT Act] Dividends are recognized when owners right to receive payment is established Recognition of royalties In accordance with the terms of the relevant agreement unless it is more appropriate to recognize revenue on some other systematic and rational basis In accordance with the terms of the relevant agreement

ICDS IV – Revenue Recognition Comparison ICDS IV v/s Ind AS 115
Point of Comparison ICDS IV Ind AS 115 Revenue Recognition from rendering of services Recognized by the percentage completion method Five step model for revenue recognition; 1.Identify the contract 2.Identify performance obligations 3.Satisfaction of performance obligation 4.Determining the transaction price 5.Allocating the transaction price to performance obligations Recognition of Interest Income Recognised on Time basis Interest income would be recognised using the EIR method

ICDS V – Tangible Fixed Assets
Salient Features Based on AS-10 for Fixed Assets Definitions “Tangible fixed asset” is an asset being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. “Fair value” of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

ICDS V – Tangible Fixed Assets
Measurement Tangible fixed asset shall be recorded at actual cost including purchase price, taxes (excluding those that are recoverable) and other expenditure for bringing the asset to workable condition. Administration and general overheads shall be excluded from actual cost if not relating to specific asset. Expenditure on start-up and commissioning of a project shall be capitalized while expenditure post commencement of commercial production shall be expensed. Tangible asset shall be recorded at its fair value if acquired for non-monetary consideration. Consolidated price for acquiring group of assets shall be apportioned on fair basis. Depreciation and income on transfer of asset will be as per the Act. Disclosure of the description, rate of dep, actual cost/ WDV, additions made, depreciation and WDV at the end of year

ICDS V – Tangible Fixed Assets Comparison ICDS V v/s AS 10/ Ind AS 16
Point of Comparison ICDS V AS 10/ Ind AS 16 Tangible Fixed Assets acquired in exchange for another asset The fair value of the tangible fixed asset so acquired shall be its actual cost The cost of the asset acquired should be recorded at fair market value or at net book value given up Tangible Fixed Assets acquired in exchange for shares or other securities Recorded at the fair value of the tangible fixed asset so acquired or the fair market value of the securities issued whichever is more clearly evident Revaluation of tangible fixed assets Not covered Covered in detail

ICDS V – Tangible Fixed Assets Comparison ICDS V v/s Ind AS 16
Point of Comparison ICDS V Ind AS 16 Cost of major inspection Not covered Capitalised with consequent derecognition of any remaining carrying amount of the cost of the previous inspection Cost of dismantling Requires that the initial estimate of the said cost be included in the fixed asset

ICDS VI – Effects of changes in foreign exchange rates
Salient Features Based on AS-11 for the effects of changes in foreign exchange rates Deals with: - treatment of transactions in foreign currencies; - translating the financial statements of foreign operations; - treatment of foreign currency transactions in the nature of forward exchange contracts

Definitions ‘Average rate’ is the mean of the exchange rates in force during a period ‘Closing rate’ is the exchange rate at the last day of the previous year ‘Exchange difference’ is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates ‘Exchange rate’ is the ratio for exchange of two currencies ‘Foreign currency’ is a currency other than the reporting currency of a person ‘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

Definitions Foreign currency transaction’ is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when a person - Buys or sells goods or services whose price is denominated in a foreign currency; or - Borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or - Becomes a party to an unperformed forward exchange contract; or - Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. ‘Forward exchange contract’ means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature;

Definitions ‘Forward rate’ is the specified exchange rate for exchange of two Currencies at a specified future date; ‘Indian currency’ shall have the meaning as assigned to it in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999) ‘Integral foreign operation’ is a foreign operation, the activities of which are an integral part of the operation of the person; ‘Monetary items’ are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables, and payables are examples of monetary items; ‘Non-integral foreign operation’ is a foreign operation that is not an integral foreign operation ‘Non‐monetary items’ are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non‐monetary items; ‘Reporting currency’ means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out.

Initial Recognition A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used for all transaction in each foreign currency occurring during that period. If the exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used

Recognition at last day of each previous year Foreign currency monetary items shall be converted into reporting currency by applying the closing rate; Where the closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realised from or required to disburse, a foreign currency monetary item owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realised from or required to disburse such item at the last date of the previous year; and Non‐monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction

Recognition of Exchange Differences In respect of monetary items Exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year In respect of non‐monetary items Exchange differences arising on conversion thereof at the last day of the previous year shall not be recognised as income or as expense in that previous year Initial recognition, conversion and recognition of exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of Income‐tax Rules, 1962, as the case may be

Financial Statements of Foreign Operations - Classification of Foreign Operations The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to a person. For this purpose, foreign operations are classified as either “integral foreign operations” or “non‐integral foreign operations”. The following are indicators of a non‐integral foreign operation: While the person may control the foreign operation, the activities of the foreign operation are carried out with a significant degree of autonomy from the activities of the person; Transactions with the person are not a high proportion of the foreign operation’s activities; The activities of the foreign operation are financed mainly from its own operations or local borrowings;

Financial Statements of Foreign Operations - Classification of Foreign Operations Cost of labour, material and other components of the foreign operation’s products or services are primarily paid or settled in the local currency The foreign operation’s sales are mainly in currencies other than Indian currency; Cash flows of the person are insulated from the day‐to‐day activities of the foreign operation; Sales prices for the foreign operation’s products or services are not primarily responsive on a short‐term basis to changes in exchange rates but are determined more by local competition or local government regulation; There is an active local sales market for the foreign operation’s products or services, although there also might be significant amounts of exports.

Integral Foreign Operations & Non‐integral Foreign Operations The financial statements of an integral foreign operation shall be translated using the principles and procedures in above paragraphs as if the transactions of the foreign operation had been those of the person himself. In translating the financial statements of a non‐integral foreign operation for a previous year, the person shall apply the following, namely The assets and liabilities, both monetary and non‐monetary, of the non‐integral foreign operation shall be translated at the closing rate; Income and expense items of the non‐integral foreign operation shall be translated at exchange rates at the dates of the transactions; and All resulting exchange differences shall be recognised as income or as expenses in that previous year. Notwithstanding anything stated in sub‐paragraph 1, translation and recognition of exchange difference in cases referred to in section 43A of the Act or Rule 115 of Income‐tax Rules, 1962 shall be carried out in accordance with the provisions contained in that section or that Rule, as the case may be

Change in the Classification of a Foreign Operation When there is a change in the classification of foreign operation, the translation procedures applicable to the revised classification should be applied from the date of the change in the classification. The consistency principle requires that foreign operation once classified as integral or non‐integral is continued to be so classified. However, a change in the way in which a foreign operation is financed and operates in relation to the person may lead to a change in the classification of that foreign operation.

Forward Exchange Contracts Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall be recognised as income or as expense in the previous year in which the exchange rates change. Any profit or loss arising on cancellation or renewal shall be recognised as income or as expense for the previous year. The above provisions shall apply provided that the contract: is not intended for trading or speculation purposes; and is entered into to establish the amount of the reporting currency required or available at the settlement date of the transaction

Forward Exchange Contracts The premium or discount that arises on the contract is measured by the difference between the exchange rate at the date of the inception of the contract and the forward rate specified in the contract. Exchange difference on the contract is the difference between: The foreign currency amount of the contract translated at the exchange rate at the last day of the previous year, or the settlement date where the transaction is settled during the previous year; and The same foreign currency amount translated at the date of inception of the contract or the last day of the immediately preceding previous year, whichever is later. Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement.

ICDS VI – Effects of changes in foreign exchange rates Comparison ICDS VI v/s AS 11
Point of Comparison ICDS VI AS 11 Scope of term “foreign operation” Covers a branch, the activities of which are based or conducted in a country other than India Covers subsidiary, associate, joint venture or a branch, the activities of which are based or conducted in a country other than India Exchange difference arising on translation of Non-Integral foreign operation To be recognized as income or expense in the previous year To be accumulated in ‘Foreign Currency Translation account’ Exchange difference on Trading/ speculation contracts To be recognized at the time of settlement Difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate to be recognized as gain or loss

ICDS VI – Effects of changes in foreign exchange rates Comparison ICDS VI v/s Ind AS 21
Point of Comparison ICDS VI Ind AS 21 Forward exchange contracts Covered Not covered. Covered under Ind AS 39 Exchange difference on certain long term monetary items To be recognised in profit and loss account immediately. Option is provided to recognise the same to equity directly and systematically recognise it to profit and loss account over the life of the monetary item

ICDS VII – Government Grants
Scope The ICDS deals with the treatment of Government grants such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc. The ICDS does not deal with:— Government assistance other than in the form of Government grants; and Government participation in the ownership of the enterprise eg PPP model Definitions “Government” refers to the Central Government, State Governments, agencies and similar bodies, whether local, national or international. “Government grants” are assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot have a value placed upon them and the transactions with Government which cannot be distinguished from the normal trading transactions of the person

Recognition Government grants should not be recognised until there is reasonable assurance that The person shall comply with the conditions attached to them, and The grants shall be received Recognition of Government grant shall not be postponed beyond the date of actual Receipt Implications on mercantile accounting Dilutes concept of ‘Real Income’

ICDS VII – Government Grants - Treatment
Grant to be deducted from the actual cost of the asset or assets concerned or from the WDV of block of assets to which concerned asset or assets belonged to Would result in reduced depreciation Which relate to a Depreciable asset Grant to be recognised as income over the same period over which the cost of meeting such obligations is charged to income. Which relate to a non-depreciable asset Grant to be proportionately reduced from the cost/ WDV of the asset based on ratio of value of the asset to total assets Which cannot be directly related to the asset acquired

ICDS VII – Government Grants - Treatment
To be recognised as income of the period in which it is receivable Which is receivable as compensation for expenses or losses incurred or as financial support To be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate Which is in any other form To be accounted for on the basis of their acquisition cost Which is in the form of non‐monetary assets, given at a concessional rate

Refunds Related to depreciable fixed asset or assets To be recorded by increasing the actual cost or WDV of block of assets by the amount refundable Depreciation on the revised actual cost or written down value to be provided prospectively at the prescribed rate Related to a non-depreciable fixed asset or compensation for expenses/ losses or any other form To be applied first against any unamortised deferred credit remaining in respect of the Government grant To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be charged to profit and loss statement

Disclosures Nature and extent of Government grants recognised during the previous year By way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year; or as income; Nature and extent of Government grants not recognised during the previous year with reasons thereof By way of deduction from the actual cost of the asset or assets or from the written down value of block of assets; or as income

ICDS VII – Government Grants Comparison ICDS VII v/s AS 12
Point of Comparison ICDS VII AS 12 Capitalisation of grants Not possible Possible Recognition of grant Cannot be postponed beyond actual receipt Actual receipt not a conclusive evidence for recognition Disclosure of grants not recognised Required Not required Deferral of grants received for depreciable assets Not permissible Permissible Reflecting value of assets in case grant equals the cost of asset Not at nominal value At nominal value

ICDS VIIII – Securities
Salient Features Based on AS-13 for Accounting for Investments Deals with securities held as stock-in‐trade. Does not deal with: - the bases for recognition of interest and dividends on securities which are covered by the Income Computation and Disclosure Standard on revenue recognition; - securities held by a person engaged in the business of insurance; - securities held by mutual funds, venture capital funds, banks and public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 or the Companies Act, 2013

ICDS VIII – Securities Definitions
“Fair value” is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction.

ICDS VIII – Securities Definitions
“Securities” shall have the meaning assigned to it in clause (h) of Section 2 of the Securities Contract (Regulation) Act, 1956, other than Derivatives referred to in sub‐clause (1a) of that clause. – Securities include the following: Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate Derivative Units or any other instrument issued by any collective investment scheme to the investors in such schemes Security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Units or any other such instrument issued to the investors under any mutual fund scheme Government securities Such other instruments as may be declared by the Central Govt to be securities and Rights or interest in securities

ICDS VIII – Securities Recognition and Initial Measurement
On Purchase – At actual cost The actual cost shall comprise of purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess In exchange of other securities / asset – Fair value of the security acquired Broken period interest – To be deducted from the actual cost of security on receipt on interest Would result into timing difference on taxability of interest

ICDS VIII – Securities Recognition and Subsequent Measurement At the end of any previous year, securities held as stock-in-trade shall be valued at actual cost initially recognized or net realizable value at the end of that previous year, whichever is lower. The comparison of actual cost initially recognized and net realizable value shall be done category wise namely shares, debt securities, convertible securities and any other securities and not for each individual security by specific identification or FIFO method. The value of securities held as stock-in-trade of a business as on the beginning of the previous year shall be : - The cost of securities available, if any, on the day of the commencement of the business - The value of securities of the business as on the close of the immediately preceding in any other case 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

ICDS VIII – Securities Comparison ICDS VIII v/s AS 13/ AS 2/ Ind AS 109
Point of Comparison ICDS VIII AS 13 / AS 2/ Ind AS 109 Scope Deals only with securities held as stock-in-trade and not as investments Deals with long term and current investments Valuation Valuation at each category level at cost or Net Realizable Value, whichever is lower Valuation at individual security level at cost or market value / fair value Fair Valuation of securities acquired in exchange of other securities Based on securities acquired Based on securities issued

ICDS VIII – Securities Example
Scrip Cost NRV Book Valuation 1 100 80 2 150 170 3 200 210 Total 450 460 430 More profit could get taxed under ICDS

Impact on Derivatives FY 2015 FY 2016 FY 2017 Particulars Returned
Amt in Rs Cr FY 2015 FY 2016 FY 2017 Particulars Returned Recomputed (ICDS) Returned (ICDS) Profit before tax 1,000 Add : MTM Loss of CY - 130 140 150 Add : Unrealised gain of PY 160 180 200 Less : Unrealised gain of CY (180) (200) (210) Less : MTM loss of PY (140) Total 980 1,110 1,120 % 333 377 381 339 Impact : Increased tax rate in FY 16 will be equalised in next year because of timing difference

ICDS IX – Borrowing Cost
Salient Features Based on AS-16 for Borrowing Cost Does not deal with the actual or imputed cost of owners’ equity and preference share capital. Definitions “Borrowing costs” are interest and other costs incurred by a person in connection with the borrowing of funds and include: - commitment charges on borrowings; - amortized amount of discounts or premiums relating to borrowings; - amortized amount of ancillary costs incurred in connection with the arrangement of borrowings; - finance charges in respect of assets acquired under finance leases or under other similar arrangements.

Definitions “Qualifying asset” means: - land, building, machinery, plant or furniture, being tangible assets; - know‐how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets; - inventories that require a period of twelve months or more to bring them to a saleable condition.

Recognition Borrowing costs (including interest, commitment charges, premium, etc.) shall be capitalized in case of tangible and intangible assets to the extent provided in the standard. With respect to inventory, they shall be added to cost only if inventory takes twelve months or more for bringing to saleable condition. The period of capitalization starts from the date when specific borrowings have been taken and ends on the date when asset is first put to use (in case of inventory, capitalization ends when substantially all the activities necessary to prepare such inventory for its intended sale are complete). In case, asset is not put to use, capitalization under ICDS will be higher than that under AS-16 which stops capitalization when all activities to prepare asset for its use are complete. ICDS provides a specific formula for capitalizing borrowing costs relating to general borrowings based on the ratio of qualifying assets to total assets. Also, the capitalization will begin from date of utilization of funds

ICDS IX – Borrowing Cost Comparison ICDS IX v/s AS 16/ Ind AS 23
Point of Comparison ICDS IX AS 16/ Ind AS 23 Exchange differences arising from foreign currency borrowing to the extent regarded as interest cost Not treated as borrowing cost under ICDS (would be covered under ICDS VI) Treated as borrowing cost Qualifying assets Term expressly includes know how, patents, copy rights, being intangible assets and inventories that require a period of twelve months or more to bring them to a saleable condition Term not defined to include intangible assets. QA defined as asset which take substantial period of time to get ready for its intended use or sale Income on temporary investment of borrowed funds which are specifically borrowed for obtaining qualifying assets No netting off from cost of asset. Will be taxed as income To be netted off from borrowing costs and capitalized

ICDS IX – Borrowing Cost Comparison ICDS IX v/s AS 16/ Ind AS 23
Point of Comparison ICDS IX AS 16/ Ind AS 23 Commencement of capitalization In case where funds are specifically borrowed for obtaining qualifying asset, from the date on which funds were borrowed. In case where funds are generally borrowed for obtaining qualifying asset, From the date on which funds were utilized Will commence when the following conditions are satisfied: 1. Expenditure for acquisition, construction or production of qualifying asset is incurred 2.Borrowing cost are being incurred 3. Activities that are necessary to prepare the asset for its intended use are in progress Suspension of capitalization No suspension of capitalization under any circumstances Capitalization suspended during extended periods in which active development is interrupted Cessation of capitalization When asset is first put to use in case of qualifying asset other than inventory When substantially all the activities necessary to prepare such inventory for its intended sale are complete

ICDS X – Provisions, Contingent Liabilities and Contingent Assets
Based on AS-29 for Provisions, Contingent Liabilities and Contingent Assets Deals with provisions, contingent liabilities and contingent assets, except those: - resulting from financial instruments; - resulting from executory contracts; - arising in insurance business from contracts with policyholders; and - covered by another ICDS. ICDS X does not deal with the recognition of revenue which is dealt with by ICDS IV ‐ Revenue Recognition. The term ‘provision’ is also used in the context of items such as depreciation, impairment of assets and doubtful debts which are adjustments to the carrying amounts of assets and are not addressed in this ICDS.

Definitions “Provision” is a liability which can be measured only by using a substantial degree of estimation. “Liability” is a present obligation of the person arising from past events, the settlement of which is expected to result in an outflow from the person of resources embodying economic benefits. “Contingent liability” is: a possible obligation that arises from past events and 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; or a present obligation that arises from past events but is not recognized because: - it is not reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; or - a reliable estimate of the amount of the obligation cannot be made. “Contingent asset” 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.

Recognition A provision should be recognized when a person has a present obligation as a result of a past event; it is ‘reasonably certain’ that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the obligation amount. However, as per AS-29, provision is recognized when outflow of resources is ‘probable’ and not when it is ‘reasonably certain’. Contingent asset must be assessed continually and if it becomes ‘reasonably certain’ that inflow of economic benefit will arise, the asset and the income are recognized in previous year in which the change occurs. However, as per AS-29, contingent asset is recognized when inflow of resources is ‘virtually certain’ and not when it is ‘reasonably certain’. Contingent Liabilities are not to be recognized

Best Estimate The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the previous year. The amount of a provision shall not be discounted to its present value. The amount recognized as asset and related income shall be the best estimate of the value of economic benefit arising at the end of the previous year. The amount and related income shall not be discounted to its present value. Review Provisions shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed. An asset and related income recognized shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an inflow of economic benefits will arise, the asset and related income shall be reversed

Disclosure Provisions Brief description of nature of obligation Carrying amounts at beginning and end of the year Additional provisions made during the year Amounts used against the provisions Unused amounts reversed Amount of expected reimbursement Contingent assets Brief description of nature of assets and related income Additional amount of asset and income recognised during the year Amount of asset and related income reversed during the year

ICDS X – Provisions, Contingent Liabilities and Contingent Assets Comparison ICDS X v/s AS 29
Point of Comparison ICDS X AS 29 Recognition of reimbursement in respect of a provision Expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognized when it is reasonably certain that the reimbursement will be received. The amount recognized for reimbursement shall not exceed the amount of provision Expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognized when it is virtually certain that the reimbursement will be received. The amount recognized for reimbursement shall not exceed the amount of provision Restructuring provisions Not covered under ICDS Covered under AS 29

ICDS X – Provisions, Contingent Liabilities and Contingent Assets Comparison ICDS X v/s AS 29
Point of Comparison ICDS X AS 29 Recognition of contingent asset Contingent assets shall not be recognized. Contingent assets are assessed continually and when it becomes reasonably certain that the inflow of economic benefit will arise, the asset and related income are recognized Contingent assets shall not be recognized. Contingent assets are assessed continually and when it becomes virtually certain that the inflow of economic benefit will arise, the asset and related income are recognized Onerous contracts Not covered under ICDS Covered under AS 29 Recognition of Provision Only when ‘reasonably certain’ Even if it is ‘Probable’

Impact of ICDS on Current Tax
Name of ICDS Impact on Current tax I Accounting Policies (Non provisioning of MTM losses) II Inventories (Due to inventorisation of services) III Construction Contracts IV Revenue Recognition (CCM not allowed) V Tangible Fixed Assets VI Effects of changes in Foreign Exchange Rates (Non integral foreign operations, Fx diff on Trading contracts) VII Government Grants (Treatment of capital grants) VIII Securities (Non-inclusion of derivatives) IX Borrowing Cost (Cessation/Suspension of capitalization) X Provisions, Contingent Liabilities and Contingent Assets (‘Reasonable certainty’ for reimbursement of provision)

Open Points – Illustrative list
Mode of disclosure of accounting standards in ICDS I not prescribed – Whether in tax return/ tax audit report? No clarity on taxation of MTM gains Which ICDS would govern derivatives held as stock in trade? Determination of gains/ losses of derivatives – whether individual contract-wise or at category level? Which ICDS would govern securities held by banks as stock in trade? Settled judicial pronouncements – Now unsettled? Recognition of Interest income on NPAs by Banks/ NBFCs Recognition of unrealised management fees by ARCs Definition of ‘Forward Exchange Contracts’ under ICDS VI

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Malad Goregaon Study Circle - January2016 CA Ravi Tela

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Malad Goregaon Study Circle - January2016 CA Ravi Tela

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