1. INCOME COMPUTATION & DISCLOSURE STANDARDS
PRESENTATION BY
CA. T.K. GUPTA

2. CONTENTS Background General principals ICDS-I : Accounting Policies
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
ICDS-VII : Government Grants
ICDS-VIII : Securities
ICDS-IX : Borrowing Costs
ICDS-X : Provisions, Contingent Liabilities and Contingent Assets

3. BACKGROUND

4. 1995 Sec 145 of the Income Tax Act amended to give power to CG to notify accounting standard
January 1996 CG notified 2 AS
Disclosure of Accounting Policies
Disclosure of Prior Period & Extraordinary items & changes in Accounting policies
December 2010 CG constituted new committee :
To study harmonization of “ICAI AS’’ with the ITA

5. October 2012 Based on report, CG published drafts of 14 standards for public comments
July 2014 Sec 145 (2) amended vide Finance Act 2014 to replace the ‘AS’ with ICDS.
January CG released new draft of 12 revised ICDS.
March 2015 CG notified “10 ICDS’’ for Taxpayers following mercantile system of accounting effective from F.Y

6. GENERAL PRINCIPLES

7. What about other AS ? For computation of taxable income & disclosure
Applicability
All taxpayer except individuals and HUF not covered under tax audit :
Having income changeable under PGBP & other source
Following mercantile method of accounting
For computation of taxable income & disclosure
Provision of ITA would prevail
Undefined words/expression ?
Ruling of SC/HC – FAQ – S.C. ( Sirpur Paper Mills )
Non compliance would result into best judgment assessment
Formation of ICDS as distinct from AS
No explanation or illustration
“Shall’’ not “May’’
No assumption
Previous year not financial year
Preamble
Transitional provision
MAT

8. ICDS-I
ACCOUNTING POLICIES

9. Why Significant Accounting Policies be disclosed ?
Fundamental Accounting assumptions.
Going Concern
Consistency
Accrual
Consideration in the selection of Accounting Policies : True and fair view ?
Prudence – S.C.- 26 ITR 27
Substance over form
Materiality
MTM losses and foreseeable losses ?

10. Inappropriate accounting policy?
Changes in Accounting Policies ?
AS-1
ICDS
Required by statute
compliance with AS
More appropriate presentation
Reasonable cause
Effect of change to be disclosed.
Inappropriate accounting policy?

11. ICDS-II Valuation of Inventories

12. Inventory To Include Not to Include Held for Sale
In the process of production
To be consumed in production process or for rendering service.
Not to Include
WIP under Construction Contracts/ Covered under other ICDS
Shares, debentures & other Financial Instruments held as stock in trade
Inventory of Live Stock, Agriculture, Forest Products, Mineral Oils, Ores & Gases
Machinery Spares
To be valued at cost or NRV, Whichever is lower.

13. Cost of Inventory :-
Cost of Purchase, Cost of Services, Cost of Conversion & other cost incurred for bringing to present location & condition.
Cost of Purchase :-
Purchase price including Duties & Taxes, Freight Inward & Expenses Less Discounts, Rebate & other similar items
Cost of service………… to include labour and other costs of personnel directly engaged in provision of service.

14. Valuation in case of Dissolution of Partnership, AOP, BOI
Method of Valuation
FIFO, Weighted Average, Retail Method or Standard Costing
Standard Costing to be adopted if the results approximate the actual cost . In case of retail method, An average % of each retail Department.
Value of Opening Stock
if business commenced during the year, cost on the day of
commencement, otherwise, the value as on the close of the immediately preceding Previous Year.
Valuation in case of Dissolution of Partnership, AOP, BOI
Net Realizable Value ( S. C- Sakthi Trading Co. )
Transitional provisions
Interest and other borrowing costs

15. Disclosure Accounting Policy & Cost Formula Standard Costing
Classification & its carrying amount

16. ICDS-III Construction Contract

17. Construction Contracts
AS - 7 
ICDS III
To be recognized if it is possible to reliably estimate the outcome of a contract
The Criteria of reliably measure is not there, if there is reasonable certainty of ultimate collection.
No quantitative threshold laid down for the stage of completion until when the outcome of a contract can’t be reliably measured.
It provides early stage of a contract not to exceed 25%. Upto 25 %, if the outcome of construction contract can’t be reliably measured, revenue is recognized to the extent of cost incurred.

18. Terms Used : Fixed Price Contract, Cost plus contract, Retentions, Progress Bills & Advances.
Combining & Segmenting
Income Subsequently written for
Changes in estimate

19. Recognition of Revenue Retention Money
Incentive payments/ claims/Variations
If reliably measurable & probable, it will result in revenue
Cost
Recognition of foreseeable Losses
Incidental Income
Cost of Securing a Contract

20. Transitional Provision
Contract commenced on or before 31/03/2016 but not completed by that date ?
Disclosure
Contract Revenue recognized & method to determine stage of completion.
For contract in progress:
Cost incurred & profit/loss recognized
Advance received
Amount of retention

21. ICDS-IV Revenue Recognition

22. Revenue arising in the ordinary activities from Sale of goods
Rendering of service
Usage of resources yielding interest, Royalties or Dividend.
Sale of Goods
Transfer of goods to buyer for a price with all significant risks & rewards of ownership, seller retains no effective control, reasonable certainty of ultimate collection.
Rendering of Service : POCM & not Completed Service Contract Method
If service is for indeterminate number of acts over specific period of time straight line basis
Service contracts for duration of not more than 90 days-- when completed or substantially completed.

23. Interest - Time proportion basis (Accrual)
- On refund of any tax, duty or cess on receipt basis
Royalties - Terms of relevant agreement
unless there is more appropriate basis
Dividend - As per the provision of the Act.
AS-9-when owner’s right to receive
is established
Persons covered under presumptive tax?
Transitional provisions : service transactions on or before 31st march, 2016,as per regular accounting practice or ICDS IV.

24. Disclosure Amount not recognized for lack of reasonable certainty.
Revenue from Service & Other Disclosure as per ICDS III

25. ICDS-V Tangible Fixed Assets

26. Revised AS- 10
ICDS
To applies Tangible Assets- Held for use in production or supply of goods or services, for rental to other or for Administrative purposes & are expected to be used during more than 12 months.
Non Applicability
Biological assets related to agricultural activity other than bearer plants
Wasting Assets
Tangible Fixed Assets
Held with the intention
of using for
producing/providing
goods or services.

27. Recognition as an asset if & only if:
It is probable that future economic benefits associated with the item will flow to the enterprises &
The cost of item can be measured reliably
Should be measured at cost

28. Cost :
Purchase Price
(amount of cash or cash equivalent)
Costs directly attributable bringing to present location & Condition as intended by management.
Cost of dismantling
Self Constructed Assets- No Profit Element
Components of
Cost
Cost of Assets
largely aligned
with Sec 43(1)
of the Income
Tax Act 1961

29. Improvements, Repairs/Replacements & Inspection Cost
Expenditure incurred
On Start-up & Commissioning, Test Runs and Experimental Production.
After the plant has begun Commercial Production.
Cost of Waste run
Cost of Spares
Improvements, Repairs/Replacements
& Inspection Cost

30. Assets acquired against Non-Monetary consideration
Revised AS- 10
ICDS
When a fixed asset is acquired in exchange or in part exchange for another asset/Shares or Other Securities in the enterprise, the cost of acquired asset should be recorded at FMV of asset given up, unless the FMV of asset received is more clearly evident. In case the FMV of both are not reliably measurable then cost is measured at carrying amount of asset given up.
When a tangible fixed asset is acquired in exchange for Other Asset/Shares or Other Securities of the person, the fair value of the tangible fixed asset so acquired shall be its actual cost 

31. Revaluation
Depreciation on a tangible fixed asset and income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act.
In case of tangible fixed assets jointly held with others to be grouped together with similar fully owned assets.

32. Disclosure
Description of Asset, Rate of Depreciation, addition/deletion during the year, Adjustment for CENVAT, Foreign Exchange, Subsidiary Grant, Depreciation allowable, WDV

33. ICDS-VI Foreign Exchange Fluctuation

34. Conversion on last day of Previous Year
IT Deals with
Treatment of Foreign Currency transaction
Translation of Financial statement of Foreign Operation
Treatment of Foreign Currency transaction in the nature of forward contract.
Initial Recognition
Transaction shall be recorded in the reporting currency by applying to the foreign currency the exchange rate at the date of transaction
Conversion on last day of Previous Year
Monetary Item : By applying the closing rate.
Non Monetary Item: Shall be converted into reporting currency by using the exchange rate at the date of transaction.
Non Monetary Item “Inventory” to be reported by using exchange rate when the value was determined.

35. Recognition of Exchange Difference Monetary Item
Both settlement or conversion to be recognized as Income or Expenditure of Previous Year.
Non-Monetary Item
Exchange Difference on conversion shall not be recognized as Income or Expenditure.
Recognition shall be subject to Sec 43A of ITA & Rule 115.

36. Foreign Operation
ICDS applies same principles as own assets & liabilities subject to Sec 43 A & RULE 115
As per AS11- Exchange difference on account of monetary assets be kept as Foreign Currency Translation Reserve in case of non integral foreign operation.

37. Forex derivatives covered by ICDS
Trading
Speculation or FC risk of firm commitment
Hedging
Premium/Discount to be amortized.
Exchange Difference on MTM Basis
No Differences with AS 11
ICDS recognizes Loss/Gain on actual settlement (Including Premium/Discount)
AS-11 Permits MTM

38. Example
On 1st Jan,2017, a company takes a loan of 1 Lac USD to be repaid on 30/06/2017, on 1st Jan,2017 itself the company hedges the transaction.
Premium of Rs. 3/- shall be amortized.
Foreign currency receivable on MTM.
Foreign Currency Loan on MTM.
In case of Speculation
AS-11
On MTM Basis.
ICDS
Rs. 3/- on settlement.
Spot Rate 45 47 52
Forward Rate for 6 Months 48
Forward Rate for 3 Months 51

39. On 01/01/2017 company entered into a forward exchange _ contract for a contract of purchase of material of USD 1 Lac to be executed on 01/06/2017 & settlement on 30/06/2017
As on 01/06/2017 Sport Rate Rs. 50
01/01/2017
31/01/2017
30/06/2017
Sport Rate 45
47/44 52
ForwardRate for Six months 48
Forward Rate for three months
51/47

40. ICDS- VII Government Grants

41. What is Govt. Grant ? Assistance by Govt.:
“Definition of Income amended to include’’ assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement by Government in cash or in kind except subsidy received considered for reduction for actual cost u/s 43 (1) of ITA, or for the purpose of corpus of trust or institutions established by CG or SG.
What is Govt. Grant ?
Assistance by Govt.:
In cash or in kind to a person
For past or future compliance with certain condition.
What is Government ?
Central Govt., State Govt., Agencies & similar bodies whether local, national or international.
It does not cover ‘Government Assistance’ which can’t be distinguished from the normal trading transactions of the person or which can not have a value placed upon them.

42. Recognition : There should be reasonable certainty
I. That the condition attached to it shall be complied.
II. The grant shall be received
but shall not be postponed beyond actual receipt
Grants :
Relating to Depreciable Fixed Asset/Assets
Relating to Non Depreciable Fixed Asset/ Assets
As compensation for Expenses or Losses or Financial Support with no further related costs
Other Grants
In the form of Non M onetary assets at concessional rate

43. Grant in the nature of Promoters Contribution
AS Credit to Capital Reserve as shareholder fund
ICDS Does not deal
Refund ?
Disclosure
Grants received & its recognition
Grants not recognized with reasons

44. ICDS-VIII Securities

45. AS 13 is not comparable as that applies to Investments .
It covers “Securities held as Stock in Trade”.
Securities defined to have meaning assigned in Sec-2(h) of Securities Contract Regulation Act,1956 except derivatives but shall include shares of companies in which public is not substantially interested.
ICDS Part “A” does not apply to securities held by :
Insurance Companies, Mutual Funds, Venture Capital Fund, Banks & Public Financial Institution.
FIIs & FPIs since their securities are deemed to be capital asset.
ICDS Part “B” deals with securities held by scheduled bank or Public Financial Institutions.
ICDS will illustratively affect
Stock Brokers, NBFCs, others-Trading in securities
Deemed speculation Loss under explanation to Sec 73

46. Cost of Securities Cost to include, Brokerage, Fee, Tax, Duty or Cess
Security acquired in exchange of securities/asset, fair value of Security so acquired
ICDS recognizes prevalent practice & provides for reduction of Pre-acquisition interest from cost of security
Security not listed or listed but not quoted from time to time to be valued at actual cost.
Cost of securities to be determined, when actual cost is not ascertainable by specific identification, on FIFO or weighted average cost.

47. Valuation of Securities : lower of cost or NRV. Bucket Approach
In contrast to AS 13, ICDS mandates ‘Bucket’ approach for valuation of securities at lower of cost or NRV.
Classification of Bucket
Shares, Debt Securities, Convertible Securities, Other Securities.

48. Movement of Share Price Year end conventional valuation
Bucket Approach
Illustration
Cost
Movement of Share Price
Year end NRV
Year end conventional valuation A
100
(80) 20 B C D
Sub Total (A)
400
(320) 80
E (B)
300
Total A+B
500
(20)
480
180

49. ICDS-IX Borrowing Costs

50. Proviso to 36(1) (iii) amended w.e.f. 1.04.2016
The Words “for extension of existing business or profession’’ has been deleted.
BORROWING COST :
Interest
Commitment Charges
Amortized amount of premium
Amortized amount of cost of arrangements
Finance charges under finance lease
QUALIFYING ASSET
Tangible & Intangible Assets & Inventories
Inventories if they require 12 months or more to bring to saleable condition.

51. COMMENCEMENT OF CAPITALIZATION
AS-16
Incurrence of Capital Expenditure
Incurrence of Borrowing Cost &
Activities are in progress
ICDS
Specific Borrowing from the date of borrowing
General Borrowing from the date of utilization
Temporary deployment of fund
Suspension of development

52. Cessation of Capitalization
AS 16
When substantially all activities necessary to prepare for its intended use or sale are complete.
ICDS
Tangible & Intangible Assets
First put to use
Inventory
All activities necessary to prepare for its intended sale are complete.
Capitalization
Specific Borrowings
General Borrowings : if assets require 12 months or more of time for its acquisition, construction, or production, on asset to asset basis.

53. Formula for capitalization of borrowing cost of general borrowings:
Borrowing costs incurred on general borrowing.
(i) The Average of cost of qualifying asset as appearing in the Balance sheet of a person on the first day & on the last day of the previous year.
(ii) In case qualifying asset does not appear in the
Balance sheet of a person on the first day, half of the cost of qualifying asset ; or

54. In case qualifying asset does not appear in the balance sheet of a person on the last day of the Previous year, the average of the cost of qualifying asset as appearing in the balance sheet of a person on the first day of the previous year & on the date of put to use or completion as the case may be,
excluding the extent to which the qualifying assets are directly funded out of specific borrowings;
C. The average of the amount of total assets as appearing in the Balance sheet of a person on first day & the last day of the previous year, other than assets to the extent they are directly funded out of specific borrowings;

55. Impact Particular Amount (Rs.)
Calculation of Interest Expenses in respect of general borrowings :
Particular
Amount (Rs.)
Total Assets appearing in Balance sheet as on
300
Total asset appearing
in Balance sheet as on
( Does not
Consist of under construction assets at the beginning or at the end of the year)
Total Tangible assets acquired during
700
General Borrowing
500
Interest on General Borrowing 50
Specific Borrowing
200
Interest on Specific Borrowing 20

56. Capitalization of General Borrowing
As per ICDS A*B C
50* ( ) /2
( )2 =
As per AS 16
Weighted average borrowing cost is 10 %i.e.(50/500)
Disclosure
Accounting Policy
Borrowing Cost --- Capitalized

57. ICDS-X Provisions, Contingent Liabilities and Contingent Assets

58. It does not deal with-resulting from
Financial Instrument
Executory contracts
Insurance Business for contracts with policyholders
Covered by other ICDS.
Provision for Depreciation, Impairment of assets & doubtful debts- adjustment to carrying amount of assets.
Revenue recognition.

59. Contingent liabilities and contingent assets not to be recognized.
A Provision is recognized when a person
Has Present Obligation
Based on past event
Reasonable certainty of outflow of resource &
A reliable estimate can be made
Provision shall only be used for expenditure for which provision was originally recognized.
Contingent asset to be recognized if inflow of economic benefit is ‘‘Reasonable Certain’’.

60. Additional Provision made Used / Unused Reimbursements
Disclosure
Description
Carrying amount at the beginning and at the close of the Financial Year
Additional Provision made
Used / Unused
Reimbursements
A proviso is inserted in 36(1) (vii) which provides
If an amount has been taken into income as per ICDS without recording in the book of accounts, then the same shall be allowed in the year in which it became ‘irrecoverable’ & shall be deemed as has been written off as irrecoverable in the accounts.

61. Example1 Year Contingent Asset inflow reasonably certain
Income as per books
Computation
Remarks
Income Tax
Books of Accounts 1
= 5000
1000
6000
Income Tax will paid on 6000 2
Actual Income/ (virtual Certainty)= 5000
Income Tax as per MAT on 6000

62. Example 2 Year Provision probable outflow Income as per books
Computation
Remarks
Income Tax
Books of Accounts 1
= (5000)
1000
6000
Income Tax on 6000 2
Reasonablycertain outflow/ Actual Loss= 5000
MAT on 6000

63. Tax Audit Forms have been suitably modified to include:
1. Adjustments pertaining to ICDS The adjustments pertaining to the ICDS shall be mentioned in clause 13 of appendix-II in form 3CD as under: 2. Disclosure The disclosure requirements of each ICDS shall from part of clause 13 (f) of the Form 3CD.
ICDS No.
Name of the ICDS
Increase in profit (Rs.)
Decrease in Profit (Rs.)
Net (Rs.)

64. THANKYOU