1. Income Computation and Disclosure Standards VI & VIII
1 April 2017

2. ICDS VI - Foreign exchange fluctuations

3. Foreign exchange fluctuations
Forex fluctuations
Revenue
Related to
imported assets
Non-cognizable for tax purposes; on capital account*
S.43A
(Capitalization on payment basis)
Current tax position
ICDS
Subject to S.43A , Gain or loss to be recognized as income/expense on MTM basis
Transitional provision grandfathers amount recognized till 31 March 2016
Capital
Others
No change in position
Gain or loss on MTM basis
MTM not allowed on non-monetary items [Under AS – 11, Assets which are to be carried at historical cost (for eg. FA) – no MTM permitted. For assets to be carried at fair value such as current investments and inventory MTM permitted]
*ICDS treatment is in conflict with SC decisions, however for the tax year and onwards provisions of ICDS shall be applicable even if inconsistent with judicial precedents

4. Foreign exchange fluctuations
Forex derivatives covered by ICDS
Forward Contracts
Foreign Currency option
ICDS makes no distinction between capital and revenue
Trading
Speculation
Firm commitments*
Hedging Contracts
ICDS allows loss/gain on MTM basis
Premium/discount to be amortised over contract life
(Same as AS)
ICDS recognises loss/gain on actual settlement basis (including premium/discount)
AS permits MTM
So long as derivative transactions covered above, are for hedging or carried out on stock exchange [which is specifically excluded from the scope of speculation under 43(5)], MTM should be permitted
May have significant impact for banks!!
* ICAI AS- 11 excludes these contracts. ICDS explains firm commitment to mean assets/liabilities which exists by end of previous year

5. Forex derivatives : Overview from ICDS perspective
(not covered by ICDS)
Forex derivatives like cross currency swaps, futures, interest rate swaps, exotic products
ICDS is silent
Committee had recommended formulation of separate ICDS1
Principle contained in ICDS-I relating to the MTM Losses or expected losses shall apply to mutatis mutandis to MTM gains or expected gains2
1 ICAI recommends recognition of MTM loss and ignoring of MTM gain
2CBDT circular no 10/2017 dated 23 March 2017

6. Foreign Exchange Transactions
Translating the financial statements of foreign operations (Integral as well as non-integral)
The financial statements shall be translated using the principles and procedures as if the transactions of foreign operation had been those of the person himself
Taxation of Foreign Currency Translation Reserve (FCTR) balance:
Opening balance as on 1 April 2016 in FCTR relating to monetary items for non-integral foreign operations needs to be recognized in the tax year to the extent that is not recognized as income in past years

7. Case Study
ABC Limited has bought L&T futures on 25 March 2016 (which is to be settled in June 2016). On 31 March 2016, it recorded the unrealised gain of Rs 50,000 in its books. Which of the following statement is true.
A: ABC Limited is required to offer to tax Rs 50,000 while computing income for the year ended 31 March 2016.
B: ABC Limited is not required to offer to tax Rs 50,000 while computing income for the year ended 31 March 2016.
C: Had it been an unrealised loss of Rs 50,000, ABC Limited could have claimed a deduction for the same, following the concept of prudence.
D: None of the above B

8. Case Study
Mr S has bought futures of A Limited for hedging its risk on equity portfolio. Which of the following statement is true:
A: Unrealised loss on futures contract can be claimed as a tax deduction as the contract is for hedging purpose.
B: Unrealised loss on futures contract cannot be claimed as a tax deduction.
C: Unrealised loss on futures contract could have been claimed if the contract was entered for trading purposes.
D: None of the above B

9. Accounting Entries for forward contract
ABC Limited has a trade payable of USD 1,000. To hedge the liability, it enters into a forward contract with a bank to receive USD 10,000 at forward rate of Rs 55 per USD. Further information is as follows: Spot rate : 1 USD = Rs 50 Forward rate : 1 USD = Rs 55 Rate as on balance sheet date : 1 USD = Rs 60 On the date of transaction Purchase A/c …….Dr Rs 50,000 To Trade Payable Rs 50,000 (USD 1,000) Forward Contract Receivable From Bank…….Dr Rs 50,000 (USD 1,000) Premium on Forward Contract …….Dr Rs 5,000 To Fixed Liability Rs 55,000

10. Accounting Entries for forward contract
Last date of the balance sheet Unrealised loss on trade payable [USD 1000*(60-50)] Profit and Loss A/c …….Dr Rs 10,000 To Trade Payable Rs 10,000 Profit and Loss A/c …….Dr Rs 2,500 To Premium on Forward Contract Rs 2,500 Unrealised gain on forward contract [USD 1000*(60-50)] Forward Contract Receivable From Bank…….Dr Rs 10,000 To Profit and Loss A/c Rs 10,000

11. Accounting Entries for forward contract
In case of forward contract held for trading (to receive bank USD 1,000)
Spot rate 1 USD = Rs 50
Forward Contract Receivable From Bank…….Dr Rs 50, To Forward Contract payable to Bank Rs 50,000
Rate as on Balance Sheet 1 USD = Rs 60
Profit and Loss A/c …….Dr Rs 10, To Forward Contract payable to Bank Rs 10,000
Settlement Rate 1 USD = Rs 70
Profit and Loss A/c …….Dr Rs 10, To Forward Contract payable to Bank Rs 10,000
Forward Contract payable to Bank…… Dr Rs 70,000
To Forward Contract Receivable From Bank Rs 50,000
To Bank Rs 20,000

12. ICDS VIII - Securities

13. ICDS – Securities - Part A
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) and shall include share of a company in which public are not substantially interested
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 u/s 2(14) of Income Tax Act
Coverage of ICDS will illustratively affect
Stock-Brokers; NBFCs; Others engaged in securities trading

14. Bucket Approach
In contrast with ICAI AS, ICDS mandates ‘bucket’ approach for valuation of security at lower of cost or NRV
The cost of such security shall be determined on the basis of FIFO method or weighted average formula
Securities to be classified into following buckets
Shares; Debt Securities; Convertible Securities; Any Other Securities
Unlisted securities and thinly traded securities to be valued at cost only regardless of NRV
Slide 106 and 107 on treatment of convertible debentures

15. Bucket approach for lower of cost or NRV
Illustrative impact
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.
Cost
Movement of share price
Year end NRV
Year end conventional valuation 1.
100
(-80) 20 2. 3. 4.
Subtotal (A)
400
320 80
5. (B)
+300
Total (A+B)
500
(-20)
480
180
Can one contest bucket approach on the basis of 145A (ie follow the earlier method which is regularly followed)?
Stock value on Bucket valuation
Itemised valuation

16. Reduction of Pre-acquisition Interest from Cost
SC in Vijaya Bank’s case (187 ITR 541) had ruled that pre-acquisition interest paid is part of purchase cost of security
Above ruling was distinguished by Bombay HC in American Express Bank’s case (258 ITR 601) which held that SC ruling does not apply to business head of income, if securities are held as stock in trade.
As per prevalent practice in finance sector, purchase price is split up into two components at inception of deal. Broken period interest cost is netted against interest income.
ICDS recognizes prevalent practice and provides for reduction of pre-acquisition interest from cost of security

17. ICDS – Securities Part B
Inserted by the CBDT through its Notification no. 86/2016 rescinded the ICDS issued vide notification no 32/2015 on 29 September 2016
Part –B deals with the “Securities held by scheduled bank or public financial institutions”
Securities shall be classified, recognized and measured in accordance with the existing guidelines issued by the Reserve Bank of India in this regard and any claim for deduction in excess of the guidelines shall not be taken into account
To this extent, the provisions of ICDS VI (Effect of changes in foreign exchange rates) relating to forward exchange contracts shall not apply

18. ICDS - Securities
While ICDS VIII – Part B permits valuation of securities (including derivatives) to a bank/ PFI in accordance with the RBI guidelines, given the restrictive definition of ‘Derivative’ under SCRA, it would hardly provide any relief. This is because majority of contracts dealt by banks/PFIs would include Over the-Counter (OTC) derivatives such as: - Foreign Currency Forward Contract;, - Foreign Currency Option Contract; - Currency Swaps, - Currency Futures, - Interest rate swaps and Cross Currency Interest Rate Swaps, etc
Clause 3 of ICDS VIII – Part B clearly indicates that banks and PFIs would not be governed by ICDS VI in relation to effect of changes in forward exchange rates on forward contracts and option contracts (and would be allowed to undertake valuation as per RBI guidelines).

19. Case Study
Mr A has bought convertible debentures of B Limited for trading purposes. Under which of the following bucket, such shares are to be valued under ICDS VIII:
A: Shares
B: Debt securities
C: Any other securities
D: None of the above
Answer: B

20. Case Study
Revenant Limited has bought equity shares of L&T Limited in the month of March 2016 at a price of Rs 1,500 with the intention to sell in the year On 31 March 2016, the listed price of the said shares is Rs 1,600. Which of the following statement is true.
A: Revenant Limited has to offer the unrealised gain of 100 to tax during the year ended 31 March 2016.
B: Revenant Limited is not required to offer the unrealised gain of 100 to tax
during the year ended 31 March 2016.
C: For tax purposes, Revenant Limited can offer the unrealised gain of Rs 100
over a period of 3 years in equal installments.
D: None of the above
Answer: B- Revenant Limited is not required to offer the unrealised gain of 100 to tax
during the year ended 31 March 2016.

21. Case Study
XYZ has bought equity shares of ABC Limited at a price of Rs 100 per share on 25 March 2016 with the intention of selling them in the month of June On 31 March 2016, the net realizable value was Rs 80. Which of the following statement is true.
A: XYZ can claim the unrealised loss of Rs 20 for tax purposes. B: XYZ cannot claim the unrealised loss of Rs 20 for tax purposes
C: None of the above
Answer- B-XYZ can claim the unrealised loss of Rs 20 for tax purposes

22. Annexure
“Securities” shall have the meaning assigned to it in clause (h) of Section 2 of the Securities Contract (Regulation) Act, 1956 (42 of 1956) and shall include share of a company in which public are not substantially interested”.
securities" include—
(i) 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;
(ia) derivative;
……………………………………..
Derivative” includes—
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security:
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
Answer- B-XYZ cannot claim the unrealised loss of Rs 20 for tax purposes

23. Annexure
43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment— (a)  towards the whole or a part of the cost of the asset; or (b)  towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any,
……………………………………..

24. Thank you “
Bombay HC decision in Aditya Birla Nuvo case