1. Income Computation and Disclosure Standards
(ICDS)

2. Notified ICDS Below are the notified 10 ICDS
Effects of changes in Foreign Exchange Rates
Accounting Policies
Government
Grants
Borrowing costs
Revenue Recognition
Inventories
Tangible Fixed Assets
Construction Contracts
Securities
Provisions, Contingent Liabilities and Contingent Assets

3. ICDS II – Valuation of Inventories

4. ICDS II – Valuation of Inventories
Deals with valuation of inventory
Inventories defined as assets
Held for sale in ordinary course of business
In process of production for such sale
In forms of materials or supplies to be consumed in production process or rendering of services
Inventories shall be valued at cost or NRV, whichever is lower
FIFO, specific identification, weighted average, standard costing method or retail method – permitted methods for cost measurement
Exclusions
WIP under construction contract / other ICDS
Shares, debentures and Financial instrument held as stock-in-trade
Producer’s Inventories of livestock, agriculture, etc. to the extent measured at NRV
Machinery spares which can be used in connection with Tangible Assets – irregular in use
Overview
Standard costing has not been permitted under the revised ICDS
Primarily in line with AS-2 except that AS-2 specifically exclude WIP for service providers

5. ICDS II – Cost of Inventories
Cost of Purchases
Cost of labour + other personnel cost (directly engaged in providing the service) + attributable overheads
Cost of Services
Cost of Conversion and Other costs
Cost of conversion
Directly attributable cost + allocation of fixed and variable overheads
Unallocated overheads to be recognized as expense
Cost of by products, scrap or waste - to be reduced from main product at NRV
Purchase price + duties / taxes + freight inwards + other expenses directly attributable to the acquisition – trade discounts / rebates
Unlike Indian GAAP, as per ICDS - cost of inventory includes cost of services. Thus, ambiguity still persists.
The previously issued ICDS included the requirement of determining the cost of services in case of a service provider.
- There were concerns with respect to the manner in which cost of services of a service provider should be valued as there was substantial subjectivity on estimation of inventory for professional firms, particularly in case of a fixed price project.
Also, there could be service tax implication on the inventory of a service provider for incomplete work.
It appears that to remove this anomaly, the revised ICDS has omitted words ‘in case of a service provider’ appearing in ICDS II for determining the cost of services. This aligns inventory and revenue accounting for service providers between accounting records and tax computations.
The amended ICDS removes requirement of service inventory for service providers.
Cost of services not specifically provided under AS-2 – whether required??

6. ICDS II – Valuation of Inventories
Areas
Current Accounting practice – Indian GAAP
ICDS
Cost of Purchase
Cost of purchase, inter-alia, consists of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities)
Does not specifically exclude duties and taxes subsequently recoverable – In line with provisions of Section 145A. So there should be no impact
Distribution costs
Distribution costs excluded
Not specifically excluded – Companies do not include distribution costs in valuation of inventory. So there should be no impact.
Cost of Purchase – The issue relating to whether the value of closing stock of the inputs, WIP and finished goods must include the element for which CENVAT Credit is available has been the matter of considerable litigation.
Section 145A (came into force from A.Y ) - provides that the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head PGBP shall be in accordance with:
The method of accounting regularly employed by the assesse, and
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. It further clarifies that 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.
As per the requirements of Section 44AB, auditors are also required to provide details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss in Form 3CD.
The Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 ('the guidance note') has explained the adjustments envisaged by section 145A will not have any impact on the trading account of the assessee.

7. ICDS II – Valuation of Inventories
Areas
Current Accounting practice – Indian GAAP
ICDS
Change in method of valuation
Change in accounting policy should be made only if -
Required by statue
Required by another Accounting Standard
Results in more appropriate presentation of financial statements
Does not permit change in method of valuation without ‘reasonable cause’ - However, ‘Reasonable cause’ not defined
Following could be the illustrative examples of reasonable cause (as per judicial precedents):
To represent true and fair view
To meet statutory requirement
More appropriate preparation and presentation of financial statements
Reasonable person considers just and acceptable under normal circumstances
Commercial or business need which will result into appropriate and fair presentation of transaction
Issue – What is the meaning of the term ‘reasonable cause’?
Position Paper –
The Gujarat HC - ‘Reasonable cause’ means an excuse which a reasonable person considers just and acceptable in the circumstances of the case, that is, which appeals to the reason of a reasonable man.
Various Courts have held that reasonable cause can be reasonably said to be a cause which prevents a man of ordinary prudence, acting under normal circumstances without negligence or inaction or want of bonafide.
The Madras HC - Business exigency can amount to reasonable cause. Also, the genuineness of the transaction to meet the immediate necessity can amount to reasonable cause

8. ICDS II – Change in method of Valuation – Impact on Opening Stock
Tax impact in the year of change of inventory valuation - Value of opening stock to be same as the value of closing stock of the immediate preceding year
Contrary judgements exist:
CIT v. Mahavir Aluminum Ltd. [Delhi HC] – Adjust opening inventory
Melmould Corporation v. CIT [Bombay HC] – Do not adjust opening inventory
DCIT v. Daman Ganga Paper Limited [Mumbai Tribunal] – Adjust opening inventory
Refer illustration in the next slide
Other Key Points
ICDS II specifically provides a rule to ensure that there is continuity in valuation and the value of the closing stock is the value of the opening stock for the subsequent year

9. ICDS II – Change in method of Valuation – Case Study
FIFO Method
Weighted Average Cost Method
Year 1
Particulars
Amount
Opening
Stock
100
Sales
500
Expenses
400
Closing
200
Profit
Total
700
In Year 2, the Method of Valuation is changed from FIFO to weighted average cost.
Lets say, following the weighted average cost method results in increase in the valuation of closing stock by 10%.
Year 2
Particulars
Amount
Opening
Stock
200
Sales
800
Expenses
600
Closing
300
Profit
Total
1,100
Year 2
Particulars
Amount
Opening
Stock
220
Sales
800
Expenses
600
Closing
330
Profit
310
Total
1,130

10. ICDS II – Change in method of Valuation – Case Study
Opening Stock – Not Adjusted
Opening Stock - Adjusted
Year 2
Particulars
Amount
Opening
Stock
200
Sales
800
Expenses
600
Closing
330
Profit
Total
1,130
Year 2
Particulars
Amount
Opening
Stock
220
Sales
800
Expenses
600
Closing
330
Profit
310
Total
1,130
Impact
Closing Stock 30
Opening Stock -
Profit
Impact
Closing Stock 30
Opening Stock 20
Profit 10

11. ICDS II – Ind AS vs. ICDS
Purchase of inventories on deferred settlement terms
Purchase inventories on deferred settlement terms effectively contains a financing element
Under Ind AS - The financing element, i.e. difference between the purchase price for normal credit terms and the amount paid, have to be recognized as interest expense over the period of the financing
Under ICDS / Act – there is no such specific provision
Therefore any difference arising on account of recording of expenses vis-à-vis Ind AS, will require adjustment

12. ICDS V – Tangible Fixed Assets

13. ICDS V – Overview Deals with treatment of tangible fixed assets
Tangible fixed asset defined as
Asset being land, building, machinery, plant or furniture;
Held with the intention of using for producing / providing goods or services; and
Not held for sale in the normal course of business
Depreciation is as per the provisions of the Act
Income arising on transfer of tangible fixed asset shall be computed as per the provisions of the Act

14. ICDS V – Tangible Fixed Assets
Components of cost align largely with definition of actual cost in Section 43(1) of ITA
Cost of fixed asset to include - Purchase prices, duties and taxes, expenses incurred to make the asset ready for intended use. Administration and general overheads not specifically attributable to be excluded – In line with AS-10
Costs to be capitalized – In line with AS-10
Expenditure incurred on start up and commissioning of the project
Expenditure incurred on test runs and experimental production
Expenditure that increases future benefits from existing asset beyond its previously assessed standard of performance (repairs and maintenance)
Machinery spares to be charged to revenue as and when consumed
Exception: Spares used only with tangible fixed asset, with irregular usage of spares – to be capitalized
Capitalization of exchange differences relating to fixed assets shall be in accordance with Section 43A and other similar provisions of the Act – Para 5 and 6 of ICDS VI
Can exchange difference arising on External Commercial Borrowings be claimed as an allowance, if used for acquiring domestic assets?
No significant deviation on costs to be capitalised as per AS-10

15. ICDS V – Tangible Fixed Assets
Several assets purchased for consolidated price - consideration to be apportioned on fair basis (for e.g. slump sale)
‘Fair basis’ not defined – As per AS 10, fair basis as per competent valuer
In absence of valuation for assets purchased for consolidated price, AO may allocate more cost to non-depreciable assets – valuation report is essential
Fixed asset acquired in exchange of another asset or shares:
Particulars
AS 10
ICDS
Fixed asset acquired in exchange for another asset
Recorded either at FMV of asset given up or asset acquired if this is more clearly evident, adjusted for any balancing receipt or payment of cash or other consideration
Recorded at fair value of the tangible fixed asset so acquired
Fixed asset acquired in exchange for shares or other securities
Recorded at FMV of the assets acquired, or the FMV of the securities issued, whichever is more clearly evident

16. ICDS V – Capitalization of cost post Trial run
Construction / acquisition of asset
Trial run – Ready to use
Commercial
Production
Capitalize or Revenue expense ?
Capitalize
Revenue expense
AS-10
ICDS
ICDS V – Capitalization of cost post Trial run
Capitalize
Revenue expense
Asset ready for use – Depreciation can be claimed?

17. Date of borrowing
Start of construction
Date of utilization
Asset ready to use / Asset put to use
Capitalization Period
AS-16
ICDS -General Borrowing
ICDS -Specific Borrowing
ICDS V – Capitalization of Borrowing cost to Qualifying Tangible assets
AS-16 says, date of borrowing or date of construction, whichever is later for both general and specific.
Pre-ICDS amendment, ICDS=36(1)(iii) and different from AS since qualifying asset for tangible assets was not defined. Post ICDS amendment, it is contradictory to 36(1)(iii)
AS-16 and ICDS – Doesn’t cover capitalization of borrowing cost for non-qualifying assets
Under the Act – As per Section 36(1)(iii), interest is required to be capitalised till the date asset is put to use even for non-qualifying asset – would override ICDS?

18. Asset is not a Qualifying Asset as per AS 16 and ICDS
ICDS V – Tangible Fixed Assets Case Study 1A – Capitalization of borrowing cost (Specific Borrowing)
Date
Particulars
Amount
1 April
Borrows funds from 12% p.a.
1,000,000
1 July
Full payment made to the vendor
1 August
The machinery is supplied by vendor to the factory -
31 August
The machinery is installed and put to use
31 December
Loan repaid
ABC Limited
Bank
Loan on 1 April
Exchange of assets
Payment on 1 July
Supply on 1 August
P&M
Vendor
Installation on 31 August
Asset is not a Qualifying Asset as per AS 16 and ICDS

19. Tax Treatment as per Act
ICDS V – Tangible Fixed Assets Case Study 1A – Capitalization of borrowing cost (Specific Borrowing)
Particulars
Treatment under
AS 16
Tax Treatment as per Act
ICDS
(doesn’t cover)
36(1)(iii)
Amount capitalized to fixed asset -
Not applicable
50,000
(1,000,000*12%*5/12)
Period of capitalization
1 April to 31 August
(5 months)
Interest expense charged to P&L a/c
90,000
(1,000,000*12%*9/12)
40,000
(90,000-50,000)
Whether any capitalization required in case of general borrowing since non-qualifying assets are not covered under ICDS - ambiguity under Section 36(1)(iii)

20. Asset is a Qualifying Asset as per AS 16 and ICDS
ICDS V – Tangible Fixed Assets Case Study 1B – Capitalization of borrowing cost (Specific Borrowing)
Year
Date
Particulars
Amount
FY 15-16
1 May 15
Borrows funds from 15% p.a.
1,000,000
1 Aug 15
Construction of assets starts and borrowed funds are utilized
FY 16-17
1 Sept 16
Asset acquired and put to use -
31 Dec 16
Loan repaid
Exchange of assets
Asset is a Qualifying Asset as per AS 16 and ICDS

21. Treatment as per Act read with ICDS
ICDS V – Tangible Fixed Assets Case Study 1B – Capitalization of borrowing cost (Specific Borrowing)
Particulars
Treatment under
AS 16
Treatment as per Act read with ICDS
Period of capitalization
1 Aug 15 to 1 Sept 16
(13 months)
1 May 15 to 1 Sept 16
(16 months)
Total amount capitalized to fixed asset
162,500
(1,000,000*15%*13/12)
200,000
(1,000,000*15%*16/12)
Total interest expense charged to P&L a/c
87,500
(1,000,000*15%*7/12)
1 May 15 to 31 July 15 (3 months)
1 Sept 16 to 31 Dec 16 (4 months)
(total 7 months)
50,000
(1,000,000*15%*4/12)
1 Sept 16 to 31 Dec 16
(4 months)

22. Q & A

23. Thank You Rohit Khandelwal