1. Income Computation and Disclosure Standards (ICDS)
By CA Ayush Goel , FCA, DISA
BAS & Co. LLP

2. Contents 1.ICDS IX: Borrowing Costs
2.ICDS X: Provisions, Contingent Liabilities & Assets

3. General Principles
ICDS are applicable for computation of income chargeable under the head “profits and gains of business or profession” and “income from other sources” only.
Assessee’s need not maintain Separate Books of Accounts for the purpose of ICDS
These ICDS are applicable from the Assessment Year onwards.
Applicable for Tax payers Computing Income under Presumptive Taxation Scheme.
Not require for Individuals and HUF whose Books of accounts are not audited.
Provisions of Income-tax Act, 1961 (the Act) and Income-tax Rules 1962 (the Rules) override ICDS
Mandatory disclosures in Tax Audit Report

4. Title of ICDS with its Corresponding AS & IND AS
ICDS No
ICDS Title
Equivalent AS Issued by ICAI
AS Title
IND AS I
Accounting Policies 1
Disclosure of Accounting Policies
IND AS 8 II
Valuation of Inventories 2
IND AS 2
III
Construction Contract 7
Construction Contracts
IND AS 115 IV
Revenue Recognition 9 V
Tangible Fixed Asset 10
Accounting for Fixed Assets
IND AS 16

5. Title of ICDS with its Corresponding AS & INDAS
ICDS No
ICDS Title
Equivalent AS Issued by ICAI
AS Title
IND AS VI
Effects of Changes in foreign exchange rates 11
IND AS 21
VII
Government Grants 12
Accounting For Government Grants
IND AS 20
VIII
Securities 13
Accounting for Investments
IND AS 109 IX
Borrowing Costs 16
IND AS 23 X
Provisions, Contingent Liabilities and Contingent Assets 29
IND AS 37

6. ICDS IX – Borrowing Costs

7. Definition of Borrowing Cost:
Borrowing Cost as per AS-16
Interest & Commitment charges
Amortization of ancillary costs
Amortization of Discounts or Premiums
Finance charges in respect of Assets acquired under Finance Lease
Exchange differences arising from Foreign Currency Borrowings
However ICDS does not recognize, Exchange differences arising from Foreign Currency Borrowings which are adjusted to Interest costs, as a component of Borrowing cost.

8. Definition of Qualifying Asset:
Qualifying Assets (QA) as per ICDS:
Tangible assets
Intangible assets
Inventories that require more than 12 months to bring them to a saleable condition
AS definition of qualifying asset refers to an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (ordinarily 12 months) where as ICDS is silent on period of time except in case of inventories.
For Example-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

9. Case study – Qualifying assets for capitalization
Facts
A is engaged in manufacturing business
It desires to replace its IT infrastructure at its Head office with new IT infrastructure system at total cost of $1 million
A places order with vendor on 1st April and pays advance
Vendor supplies and installs all the computers by 31 August 2018 (i.e. within five months)
A pays balance amount to vendor on 31 August 2018
A has made specific borrowing from bank for the project. The payments to Vendors are made out of borrowed funds A
Specific Borrowing
Bank
Payment from Borrowed Funds
Vendor of Computers
IT Infrastructure
Acquisition & Installation completed in five months

10. Case study – Qualifying assets for capitalization
Book Treatment as per ICAI AS-16
IT infrastructure is not a ‘qualifying asset’ (as it does not take substantial period (> 1 Year as a benchmark rule) to be ready for use).
AS-16, therefore, does not require capitalization of interest in present case
Tax Treatment pre ICDS
A can claim full deduction for interest u/s36(1)(iii)
Arguably, interest not required to be capitalized in absence of ‘extension to business’
PRE ICDS
Tax Treatment post ICDS
ICDS regards all fixed assets as ‘qualifying assets’ warranting capitalization of interest regardless of ‘substantial period’ for being ready to use as a pre-condition
ICDS will, therefore, require A to capitalise interest from the date of specific borrowing even if pending utilisation, the funds may have been kept in short term income yielding investment
In view of amendment, A cannot argue that proviso/ICDS is not applicable in absence of ‘extension to business’
Income earned from short term deployment of specific borrowed funds is to be offered to tax on gross basis
POST
ICDS

11. Recognition of Borrowing Cost
Borrowing cost directly attributable for acquisition, construction or production of QA – capitalized to cost of assets.
The amount of Borrowing cost eligible for capitalization should be determined in accordance with this Income Computation & Disclosure Standard.
As per ICDS, other Borrowing costs should be recognized in accordance with the provisions of the Act.
However in AS, other borrowing costs should be expensed off in the period in which they are incurred.
For the purpose of this ICDS, ‘Capitalization’ in the context of Inventory means addition of Borrowing cost to the cost of Inventory.

12. Borrowing cost eligible for Capitalization (Specific Borrowings)
As per AS-16, Funds that are borrowed specifically for the purpose of obtaining a Qualifying Asset are to be capitalized in the following manner:
However as per ICDS, reducing income from Temporary Investments from the cost of borrowings is not prescribed. The income from temporary deployment of unutilised funds from specific loans shall be taxable as Income from other sources under the ICDS.
Actual Borrowing Cost incurred
Less: Any income on the Temporary Investment

13. Borrowing cost eligible for Capitalization (General Borrowings)
As per AS-16, in case of General Borrowings, the amount of Borrowing costs eligible for Capitalization should be determined as follows:
By applying a Capitalization rate to the expenditure of that asset.
Capitalization rate should be the Weighted Average of the Borrowing Costs applicable to the Borrowings that are outstanding during the period, other than Specific Borrowings.
However, the amount of Borrowing Costs capitalized should not exceed the amount of Borrowing costs incurred.

14. PRACTICAL EXAMPLE:
The Borrowings Profile of A Ltd. Set up for the manufacture of antibiotics is as under:
Date
Description
Amt Borrowed
Purpose of Borrowings
Incidental Exps
1st Jan
15% Demand Loan
Rs Lakhs
Acquisition of FA
8.33%
1st July
14.5% Term Loan
Rs Lakhs
Acquisition of P&M
5.00%
1st Oct
14% Bonds
Rs Lakhs
8.00%
The Incidental Expenses consist of Commission & Service charges for arranging the loans
Fixed Assets considered as Qualifying Assets are as under:
Sterile Manufacturing Shed- Rs Lakhs
Plant & Machinery (Total) Rs Lakhs
Other Fixed Assets Rs Lakhs
The Project is completed on 31st December, and is ready for commercial production. Show the capitalization of Borrowing Costs.

15. Solution: 1. Computation of Total Borrowing Cost (Rs. In Lakhs)
Loan Type
Amt
O/s Period
Interest
Incidental Cost
Total Cost
15% Demand Loan
60.00
12 months
60*12/12*15%= 9.00
60*8.33% = 5.00
14.00
14.5% Term Loan
40.00
6 months
40*6/12*14.5%= 2.90
40*5% = 2.00
4.90
14% Bonds
50.00
3 months
50*3/12*14%= 1.75
50*8% = 4.00
5.75
Total
24.65
Note: Incidental Expenses are in the nature of Financing/Interest Cost, and is hence eligible for capitalization under AS-16
2. Computation of Capitalization Rate
(i) Computation of Weighted Average General Borrowings
Loan Type
Date
Amount
Cumulative Amount
Period O/s
Product
15% Demand Loan
1st Jan
60.00
9 months
540.00
14% Bonds
1st Oct
50.00
110.00
3 months
330.00
Total
870.00

16. Weighted Average General Borrowings= 870 Lakhs/12 months= Rs. 72
Weighted Average General Borrowings= 870 Lakhs/12 months= Rs Lakhs
(ii) Capitalization Rate= Borrowing Cost on General Borrowings = Rs Lakhs-4.90 Lakhs = 27.24%
Weighted Average General Borrowings Rs Lakhs
3. Computation of Borrowing Costs to be capitalized
Asset
Amount Spent
Nature of Borrowing
Borrowing Cost
Total Borrowing Cost
Specific
General
Sterile Mfg Shed
Rs L -
10L*27.24%= 2,72,400
2,72,400
P&M
Rs L
Rs L
Rs L
Rs. 4.90L
50L*27.24%= 13,62,000
18,52,000
Other FA
Borrowing Cost Capitalized
23,96,800

17. Borrowing cost eligible for Capitalization (General Borrowings)
As per ICDS, General Borrowings are to be capitalized with the following formula: A x B C
Where,
General Borrowing Costs incurred
(i) The average of costs of QA on the first & last day of the Balance Sheet of the PY.
(ii) In case the QA does not appear in the BS on the First or both on the first & Last day of PY- Half the cost of QA
(iii) In case the QA does not appear in the BS on the last day of PY, the average of Costs of QA as appearing in the BS on the First Day of the PY and on the Date of Completion.
The average of the amounts of Assets funded by General Borrowings as on First & Last day of PY. A=
However, in case of borrowing costs not attributable to specific QA different formula is prescribed by ICDS.
Accounting Standard prescribes to apply weighted avg of borrowing costs shall be applied in such siuations. B= C=

18. PRACTICAL EXAMPLE: Description Amt Borrowed Purpose of Borrowings
15% Demand Loan
Rs Lakhs
Acquisition of FA
14% Bonds
Rs Lakhs
The cost of fixed Assets considered as Qualifying Assets as on 1st April, 2015 are as under:
Sterile Manufacturing Shed- Rs Lakhs
Plant & Machinery Rs Lakhs
Other Fixed Assets Rs Lakhs
The cost of fixed Assets considered as Qualifying Assets as on 31st March, 2016 are as under:
Sterile Manufacturing Shed- Rs Lakhs
Plant & Machinery Rs Lakhs
Other Fixed Assets Rs Lakhs
Total assets as per Balance Sheet as on 1st April, 2015 and 31st March, 2016 are Lakhs & Lakhs respectively.
Show the capitalization of Borrowing Costs.

19. Solution: Loan Type Amt Interest 15% Demand Loan 60.00 60*15%= 9.00
(1) Computation of Total Borrowing Costs:
Loan Type
Amt
Interest
15% Demand Loan
60.00
60*15%= 9.00
14.5% Term Loan
40.00
40*14.5%= 5.80
14% Bonds
50.00
50*14%= 7
Total
21.80
Out of which General Borrowing Cost= 9+7= 16 (A)
(2) Average of Costs of QA on 1st April, 2015 & 31st March, 2016= ( )+( )/2
= /2
= (B)
(3) Average of Costs of Total Assets as on 1st April, 2015 & 31st March, 2016= /2
= 250 (C)
Therefore Interest to be capitalized with the following formulae:
=A*B/C
=16.00*177.50/250
=11.36

20. Commencement of Capitalisation
As per ICDS- IX
As per AS- 16
1. Funds borrowed specifically for the purpose of acquisition of QA
Date on which funds borrowed.
2. Funds borrowed generally and utilized for the purpose of acquisition of a qualifying asset
Date on which funds were utilized.
Capitalisation of borrowing costs should commence when all the following conditions are satisfied:
Expenditure on the asset has been incurred,
Borrowing costs are being incurred,
Activities that are necessary to prepare the asset for its intended use or sale are in progress.
Impact: The capitalisation period starts early under the ICDS as compared to AS-16.

21. Case study – Methodology of Capitalization Financial Institution
Facts
B is engaged in manufacturing business
B sets up new unit for manufacturing
B unit admittedly represents extension of business
The investment in new unit is financed from
Specific term loans from financial institutions for plant and machinery
Cash credit facility for working capital;
Unsecured loans from group companies
The new unit is treated as qualifying asset under AS-16 and borrowing cost is captalised in books as per capitalization norms provided under AS-16.
Group
Companies
Financial Institution
Term loan
Unsecured Loan
Cash Credit B
Bank
Qualifying asset
(New unit)

22. Case study – Methodology of Capitalization
Particular
ICAI AS-16
ICDS
Specific Borrowing
General Borrowing
Commencement date of capitalization
Fulfillment of all three conditions viz. incurrence of capex, incurrence of borrowing costs and construction activity is in progress
From date of borrowing once borrowing is for fixed asset
Date of utilization of borrowed funds
Method of Capitalization
Borrowing costs directly attributable to qualifying asset from date of fund deployment to date of asset being ready for use
Weighted average cost of borrowing applied to capex from date of capex to date of asset being ready for use
Borrowing costs from date of borrowing till date of asset first put to use (Proviso to s.36(1)(iii)
Pro-rata borrowing cost allocation as per normative formula (Refer illustration in subsequent slides)
Capitalization triggered w.r.t. 50% cost irrespective of whether the asset remains under construction for 1 or 364 days
Suspension of capitalization if unexpected interruption in project?
Yes No

23. Cessation and Suspension of Capitalisation
As per ICDS, till the QA is put to use or all the activities necessary to prepare such an inventory for its intended sale are complete capitalization shall be continued.
On the other hand AS prescribes capitalization up to substantial completion of activities.
Cessation
Concept of suspension of capitalization in case of interruption in development is provided in AS .
However, ICDS is silent on this matter.
Suspension

24. Clarification issued by CBDT FAQs
How to allocate borrowing costs relating to general borrowing as computed in accordance with formula provided to different qualifying assets?
The capitalization of general borrowing cots under ICDS shall be done on asset-by-asset basis.
Whether bill discounting charges and other similar charges would fall under the definition of borrowing costs?
The definition of the borrowing costs is an inclusive definition. Bill discounting charges and other similar charges are covered as borrowing costs
There are specific provisions in the Act read with Rules under which a portion of borrowing costs may get disallowed. Whether borrowing costs to be capitalized under ICDS to extent it being disallowed?
Since specific provisions of the Act overrides provisions of ICDS –said costs will be excluded for purpose of capitalization under the ICDS.

25. ICDS 9 vs. AS 16 Exchange Difference
Basis
AS-16
ICDS 9
Exchange Difference
Borrowing cost includes exchange differences arising from foreign currency borrowings to the extent they are an adjustment to interest cost.
Does not include exchange differences.
Qualifying Asset
Asset that takes substantial period of time to get ready for its intended use.
It means:  Tangible Assets - land, plant, etc. Intangible Assets - patents, licenses, etc. Inventories - that require 12 months or more to bring them in saleable condition.

26. Basis
AS-16
ICDS 9
Method of Capitalization: Specific Borrowing
Actual borrowing costs incurred on the borrowing during the period less any income from temporary investment of those borrowings.
Actual borrowing costs incurred during the period on the funds borrowed.
Actual borrowing costs incurred on the borrowing during the period less any income from temporary investment of those borrowings
Actual borrowing costs incurred during the period on the funds borrowed
Commencement of Capitalization   
The date of fulfilment of three conditions viz. incurrence of capex, incurrence of borrowing costs and preparatory activities are in progress.
Specific borrowings - date on which funds were borrowed.
Suspension of Capitalization
During extended periods in which active development of the asset is interrupted.
No such provision.
Cessation of Capitalisation 
When substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete.
Qualifying Asset - when such asset is first put to use. Inventory - when substantially all activities necessary to prepare it for its intended use is complete.

27. (a) The accounting policy adopted for borrowing costs.
Disclosure
(a) The accounting policy adopted for borrowing costs.
(b) The amount of borrowing costs capitalised during the period.

28. ICDS-X: Provisions, Contingent Liabilities and Contingent Assets

29. Scope
ICDS X deals with provisions, contingent liabilities and contingent assets except those:
resulting from financial instruments;
resulting from executory contracts;
arising in insurance business with contracts with policy holders; and
covered by any other ICDS
ICDS X does not deal with recognition of revenue which is dealt with by ICDS IV on revenue recognition
The term used in context of items such as depreciation, impairment of assets and doubtful debts are adjustments to carrying amount of assets; these are also not covered by this ICDS

30. Definitions
“Provision” is a liability which can be measured only by using a substantial degree of estimation.
“Obligating event” is an event that creates an obligation that results in a person having no realistic alternative to settling that obligation.
“Contingent liability” is:
(i) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the person; or
(ii) a present obligation that arises from past events but is not recognised because:
(A) it is not reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(B) 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 nonoccurrence of one or more uncertain future events not wholly within the control of the person.
“Present obligation” is an obligation if, based on the evidence available, its existence at the end of the previous year is considered reasonably certain

31. Recognition of provisions
A provision should be recognised 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
Provision should not be recognised for costs that need to be incurred to operate in the future
Provisions are recognised only for those obligations arising from past events that exist independently of the assessee’sfuture actions
An obligation, for which a person is jointly and severally liable, is a contingent liability to the extent it is expected that the obligation will be settled by other parties

32. Measurement of provisions, impact of reimbursement and use of provisions
The best estimate of the expenditure required to settle the present obligation at the end of the previous year will be recognised as provision
The amount of provision shall not be discounted to its present value
Obligation for proposed law arises only when the legislation is actually enacted
Impact of reimbursements
Reimbursement shall be recognised when it is reasonably certain that reimbursement will be received if the person settles the obligation; the amount recognised as reimbursement shall not exceed the amount of provision
Where a person is not liable for payment of costs in case the third party fails to pay, no provision shall be made for those costs
Use of provisions
provision shall be used only for expenditures for which the provision was originally recognised

33. Contingent liabilities and contingent assets
Contingent liabilities should not be recognised
Contingent assets
Contingent assets should not be recognised
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 recognised in previous year in which the change occurs.

34. Disclosures
Following disclosure shall be made in respect of each class of provision, namely:‐
A brief description of the nature of the obligation;
The carrying amount at the beginning and end of the previous year;
Additional provisions made during the previous year, including increases to existing provisions;
Amounts used, that is incurred and charged against the provision, during the previous year;
Unused amounts reversed during the previous year; and
The amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.
Following disclosure shall be made in respect of each class of contingent asset and related income recognised, namely:‐
A brief description of the nature of the asset and related income;
the carrying amount of asset at the beginning and end of the previous year;
additional amount of asset and related income recognised during the year, including increases to assets and related income already recognised; and
amount of asset and related income reversed during the previous year

35. Recognition of provisions
Impact:
Provision for Warranty is allowed as an expenditure upholding the test of ‘probable’ warranty obligation in the following judgments.
Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) (extract on next slide)
Himalaya Machinery (P) Limited v DCIT 334 ITR 64
CIT vs. Luk India P. Ltd. 52 DTR 117.
Siemens Public communication Networks Limited v CIT
CIT v Indian Transformer Limited. 270 ITR 259

36. Clarification issued by CBDT FAQs
Question 23: What is the impact of Para 20 of ICDS X containing transitional provisions?
Answer: Para 20 of ICDS Xprovides that all the provisions or assets and related income shall be recognised for the previous year commencing on or after 1stday of April 2016 in accordance with the provisions of this standard after taking into account the amount recognised, if any, for the same for any previous year ending on or before 31stMarch The intent of transitional provision is that there is neither ‘double taxation’ of income due to application of ICDS not there should be escape of any income due to application of ICDS from a particular date. This explained as under: I
Provision required as per ICDS on 31stMarch 2017 for items brought forward from 31st day of March 2016…(A)
INR 3 Crores
Provisions as per ICDS for FY (B)
NR 5 Crores
Total gross provision…( C) = (A) + (B)
INR 8 Crores
Less: Provision already recognised for computation of taxable income in FY or earlier…(D)
INR 2 Crores
Net provisions as per ICDS in FY to be recognised as per transition provision…( E)= ( C) –(D)
INR 6 Crores

37. Question 24: Expenditure on most post-retirement benefits like provident fund, gratuity, etc. are covered by specific provisions. There are post-retirement benefits offered by companies like medical benefits. Such benefits are covered by AS –15 for which no parallel ICDS has been noticed. Whether provision of these liabilities are excluded from scope of ICDS X?
Answer: It is clarified that provisioning for employee benefit which are otherwise covered by AS 15 shall continue to be governed by specific provisions of the Act and are not dealt with by ICDS-

38. ICDS 10 vs. AS 29
AS - 29
ICDS
Provisions shall be recognised if it is probable that outflow of economic resources will be required.
Provision is not discounted to NPV
Provisions shall be recognised if it is reasonably certain that outflow of economic resources will be required.
Impact:
The criteria for recognition of provisions on the basis of the test of ‘probable’ (i.e. more likely than not criteria) replaced with the requirement of ‘reasonably certain’.
In the absence of definition and scope of ‘reasonably certain’ criteria, an ambiguity would arise on assessment of ‘reasonably certain’ criteria.
In the Act, there is no specific provision for recognition of provisions. However, provisions are allowed based on accrued liabilities as per ordinary principles of commercial accounting.

39. AS - 29
ICDS
Contingent assets/ reimbursement claims are recognized if inflow of economic benefits/ reimbursement is “virtually certain”.
Contingent assets/ reimbursement claims to be recognized if inflow of economic benefits/ reimbursements is “reasonably certain”.
Impact:
Revenue authorities may contend that ‘reasonably certain’ is a lower threshold than ‘virtually certain’.
It is not made clear whether transitional provision requires recognition of all past accumulated contingent assets in F.Y