Income Computation and Disclosure Standards (ICDS)

Background

Section 145(1) of the Income-tax Act, 1961 provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

Sub-section (2) of the said section before the amendment by the Finance (No. 2) Act, 2014 provided that the Central Government may notify in the Official Gazette from time to time Accounting Standards to be followed by any class of assessee or in respect of any class of income. In pursuance to that the Central Government vide Notification No. 9949 [F.No. 132/7/95. TPL] dated January 01,1996 had notified two Accounting Standards viz., (1) Disclosure of Accounting Policies and (2) Disclosure of Prior period and extraordinary items and changes in accounting policies. Now, in supersession of the said notification, the Central Government has notified ten “Income computation and disclosure standards” on March 31, 2015, which are effective from assessment year 2016-17, to be followed by any class of assessee or in respect of any class of income.

Sub-section (3) of section 145 provides that if the Assessing Officer is not satisfied about correctness or completeness of the accounts of the assessee or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

Basics

These Standards have to be followed by all persons following mercantile system of accounting. Thus, they are not applicable to a person who are following cash system of accounting.
The Income Computation and Disclosure Standards are applicable for computation of income chargeable under the heads “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account.
Further, in case of conflict between the provisions of Income-tax Act, 1961 and these Computation and Disclosure Standards, the provision of the Act shall prevail to that extent.
Words and expression used and not defined in these ICDSs shall have the meanings assigned to them in the Income- tax Act, 1961.

ICDS 1 – Accounting policies

Salient features

Certain fundamental accounting assumption underlie the preparation and presentation of financial statement, viz: (a) Going Concern (b) Consistency and (c) Accrual remains. When the fundamental accounting assumption are followed, specific disclosure is not required, if a fundamental accounting assumption is not followed, the facts to be disclosed.
The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by a person.
Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation.
However, for this purpose:

The treatment and presentation of transactions and events shall be governed by their substance and not by the legal form; and

Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other ICDS

An accounting policy shall not be changed without reasonable clause.

Disclosure:

All significant accounting policies adopted by a person shall be disclosed. However, it is not clear, where to disclose in return of income.
Any change in an accounting policy which has a material effect shall be disclosed. The amount by which any item is effected by such change shall also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect for the current previous year but which is reasonably expected to have a material effect in later previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted and also in the previous year in which such change has material effect for the first time.

Thus, from the above, it is clear that major considerations governing the selection and application of accounting policies are substance over form and materiality have been incorporated in these ICDS except “prudence.”

Disclosure of accounting policies or changes therein cannot remedy a wrong or inappropriate treatment of the item.

ICDS II – Valuation of inventories

Scope

This Standard does not apply to:

Work-in-progress (WIP) arising under “Construction Contract” including directly related service contract which has been dealt with ICDS on construction contract.
WIP which has been dealt by the other ICDS.
Shares, debentures and other financial instruments held as stock-in-trade which has been dealt with by ICDS on securities.
Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and gases, if they are measured at net realisable value.
Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular and dealt with ICDS on tangible fixed assets.

Definitions:

For the purpose of this Standard.

i) “Inventories” are assets:

Held for sale in ordinary course of business i.e. finished goods;
In the process of production for such sale, i.e. WIP
In the form of materials or supplies to be consumed in the production process or in the rendering of services, i.e. raw materials and other consumable items.

ii) Net realisable value (NRV) is estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale.

Measurement

Inventories shall be valued at cost or net realisable value (NRV), whichever is lower.

Cost of inventories

Cost of inventories would include all costs of purchase, cost of services, cost of conversion and other costs incurred in brining the inventories to their present location and condition. Thus, costs of service are specifically included while determining the cost of inventory. So, now, the costs of uncompleted services have to be valued and shown as WIP.

Cost of purchase

The same would consist of purchase price, including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items be deducted in determining the costs of purchase.

Cost of services

In case of service provider, the costs of services would consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.

Cost of conversion

The costs would include costs directly related to the units of production and a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remains relatively constant regardless of volume of the production. Variable production overheads are those indirect costs of production that vary directly or indirectly with the volume of production. The allocation of fixed production overheads for the purpose of inclusion in the costs of conversion be determined on the basis of normal capacity of the production facility. For this purpose, normal capacity would be determined on an average over a number of periods or seasons under normal circumstances, after considering loss of capacity resulting from planned maintenance. The fixed overheads allocable to each unit of production should not be increased as a consequence of low production or ideal plant. Unallocable such overheads be recognised as an expense in the period in which they are incurred. In case of abnormally high production, the fixed production overheads allocated to each unit of production be decreased so that inventories are not measured above the cost.

Cost of joint production

If a production process results in more than one product and cost of conversion of each product are not separately identifiable, then, the costs shall be allocated between the products on a rational and consistent basis. Generally, by products, scrap or waste do not have significant value be measured at NRV and be deducted from the cost of main product.

Other costs

The same shall be includible in cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition.

Interest and other borrowings costs shall not be includible unless they meet the criteria for recognition of interest as component of the cost as specified in ICDS on borrowing cost.

Exclusion from the cost of inventories

The following costs shall not be included while valuing the inventory and shall be recognised as expenses of the period in which they are incurred.

Abnormal amounts of wasted materials, labour or other production costs;
Storage costs, unless those are necessary in the production process prior to a further production stage;
Administrative overheads which do not contribute to bringing the inventories to their present location and condition; and
Selling costs.

Cost formula

The cost of inventories of items that are not ordinarily interchangeable and goods and services produced and segregated for a “specific projects” should be assigned by specific identification of their individual costs. “Specific identification cost” means specific costs are attributed to identified items of inventory.

The cost of inventories, other than the above mentioned inventories, be valued using the First-in-First out (FIFO) or weighted average cost (WEC). The value should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition.

The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first and consequently the items of remaining inventory at the period are those most recently purchased or produced.

Under WEC formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and cost of similar items purchased or produced during the period. The average be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances.

Retail method

In this method, the cost of inventory is determined by reducing from the sales value of the inventory, the appropriate percentage of gross margin. The percentage used takes into consideration inventory, which has been marked down to below its original selling price.

Net realizable value

Inventories are written down to NRV on an item by item basis. Where ‘items of inventory’ relating to the same product line having similar purpose or end use and are produced and marketed in the same geographical area and cannot be practicably evaluated separately from other items in that product line, such inventories are grouped together and written down to NRV on aggregate basis. NRV should be based on most realisable evidence available at the time of valuation. While estimating the NRV the purpose for which inventory is held to be considered. The estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of previous year to the extent such events confirm the conditions existing on the last day of previous year

Materials and other supplies held for use in the production of inventories need not be written down below cost, if finished products in which they shall be incorporated are expected to be sold at or above cost. However, they should be written down where there has been decline in the price of materials and it is estimated the cost of finished product will exceed its NRV but not cost e.g. if cost of raw material say is Rs 175/- but NRV is say ` 145/-. If cost of finished good is say ` 250/- and sale value of the same is more than ` 250/-, then raw material be valued at its cost i.e. ` 175/- but if sale value of finished good is less than the cost of finished goods the remaining raw material be valued at ` 145/-.

Value of opening inventory

The value of the inventory as at the beginning of the previous year shall be:

The cost of inventory at the commence of the business if the business has commenced during the previous year; and
The value of the inventory as on the close of the immediate preceding previous year; in any other case (Chainrup Sampatram v. ITO [24 ITR 481 (SC)].

Valuation of inventory in case dissolution

In case of dissolution of a firm or AOP or BOI, irrespective of whether business is discontinued or not the inventory on the date of dissolution shall be valued at NRV [ALA Firm Vs. CIT 189 ITR 285(SC)].

Transitional provisions

Interest and other borrowing costs, which do not meet criteria for recognition of interest as a component of cost but included in the opening inventory as on April 1, 2015 shall be taken into account for determining cost of such inventory for valuation as at the cost of the previous year.

Disclosure:

The accounting policies adopted in measuring inventories including the cost formulae used; and
The total carrying amount of inventories and its classification.

ICDS III – Construction contracts

Applicability

This ICDS is applicable to a Construction Contract of a Contractor. Thus, this standard is not applicable to builder or developer.

Definition

“Construction contract” is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely inter-related or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes (i) contract for the rendering of services which are directly related to the construction of the asset e.g. services of project managers and architect and (ii) contract for destruction or restoration of assets and the restoration of the 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, 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

Contract revenue

Be recognised when there is a reasonably certainty of its ultimate collection.
Contract revenue shall comprise:

Initial amount of revenue agreed in the contract including retentions.

Variations in contract work, claims and incentive payments, to the extent it is probable that they will result in revenue and they are capable of being measured

If contract revenue is already recognised as income and is subsequently written off in the books of account as uncollectible the same shall be recognised as an expense and not to be adjusted against contract revenue. Further retention amount if already accounted in the sale price, it need not be added again e.g. say contract value is ` 100/-, which is already credited to P & L A/c and offered for tax, then retention amount say of ` 10/-, need not be added while computing the income of the contractor, otherwise it would be taxing the same income twice. When retention amount is not recoverable due to non fulfilment of the conditions the same should be written off in the books of account and the contractor can claim deduction while computing the income under proviso to section 36(1)(vii) of the Act.

• Contract Costs Shall comprise of :

Costs that are directly relatable to the specific contract;
Costs that are attributable to the contract;
Other costs that are specifically chargeable to the customer; and
Allocated borrowing costs in accordance with ICDS on borrowing costs.

• These costs would be reduced by any incidental income, not being interest, dividend or capital gains. So, only income explicitly relatable or connected with the costs be reduced [CIT v. Bokaro Steel Ltd. 231 ITR 315 (SC)].

• The cost which cannot be attributable to any contract activity be excluded from the costs of construct contract.

• Costs that are incurred for securing the contract are included, if they can be separately identifiable and it is probable that the contract shall be obtained. If costs incurred in securing a contract are recognised as an expense in the period in which they are incurred and the contract is obtained.

• Contract costs attributable to a contract be includible from the date of securing the contract to the final completion of contract.

• Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due fom customer and are classified as work-in-progress (WIP).

Recognition of contract revenue and expenses

• Be recognized as revenue and expenses by reference to the stage of completion of the contract activity at the reporting date; i.e. on the percentage of completion method. Under this method contract revenue is matched with the contract costs incurred in reaching the stage of completion.

• The stage of completion shall be determined:

The proportion of the contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs; or
Surveys of work performed; or
Completion of a physical proportion of the contract work.

So, progressive payments and advances received from customers are not determinative of the stage of completion of a contract.

• While determining the stage of completion, only contract costs that reflect the work performed of a contract are included. Therefore, the following costs are excluded:

Contract costs that relate to future activity on the contract, and
Payments made to sub contractors in advance for work to be performed under sub-contract.

• Where the outcome of the contract cannot be estimated reliably, the contract revenue could be recognised only to the extent of costs incurred. The early stage of a contract shall not extend beyond 25% of the stage of completion

Change 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. If there is change in estimates, the changed estimate shall be used in determination of the amount of revenue and expenses in which the change is made and subsequent periods.

Non recognition of expected losses

Unlike para 35 of AS 7 – “Construction Contracts”. This ICDS does not recognize, the expected losses i.e. when it is probable that contract costs shall exceed the total contract revenue.

Disclosure:

The following disclosures be made:

The amount of contract revenue recognised as revenue.
The method used to determine the stage of completion contracts in progress
The amount of costs incurred and recognised profit (less recognised losses) up to the reporting date
The amount of advances received and
The amount of retentions.

ICDS – IV Revenue recognition

Scope

This ICDS deals with bases for recognition of revenue arising in the course of 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

This ICDS does not deal with the aspect of revenue recognition dealt with other ICDS e.g. ICDS III, deals with construction contract.
Therefore, this ICDS would apply to builders and developers to whom ICDS III does not appl

Revenue

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 the agency relationship, the revenue is the amount of commission and not the gross inflow of cash receivable or other consideration.

Sale of goods

The revenue shall be recognised when the seller of goods has transferred to the buyer, the property in the goods for a price along with all significant risks and rewards of ownership and seller retains no effective control of the goods. In a case, where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership, revenue in such situation shall be recognised at the time of transfer of risks and rewards of ownership to buyer.
Revenue shall be recognised when there is reasonable certainty of its ultimate collection.
In case of escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved i.e. to be recognised only when they are sanctioned / approved.

Rendering of services

In such case, revenue shall be recognised by the percentage of completion method. Under this method, revenue from service transactions is matched with the cost of service. Transactions costs incurred in reaching the stage of completion, resulting in the determination of revenue, expenses and profit which can be attributed to the proportion of work completed.

Thus this ICDS does not recognise the completed service contract method.

Use of resources

Interest shall accrue on the time basis determined by the amount outstanding and the rate applicable.
Discount or premium on debt securities held is treated as if it were accruing over the period to maturity [see Madras Industrial Investment Corp. Vs. CIT 9225 ITR 8002 (SC)]
Royalties shall accrue in accordance with the terms of the relevant agreement and shall be recognised on that basis unless having regard to the substance of the transaction.
Dividends are recognised in accordance with the provisions of section 8 of the Act, i.e. on declaration, distribution or paid basis; as the case may be

Disclosure:

The following disclosures are required to be made:

In a transaction involving sale of goods, total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty.
The amount of revenue from service transactions recognised as revenue.
The method used to determine the stage of completion of service transactions in progress and
For service transactions in progress at the end of previous year:

Amount of costs incurred and recognized profit (less recognised losses) up to end of the previous year;

The amount of advances received; and

The amount of retentions

ICDS V – Tangible fixed assets

Scope

This ICDS deal with the treatment of tangible fixed assets.

Definition

“Tangible Fixed Asset” is an asset being land, building, machinery, plant or furniture held with 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 (FV) of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

Identification of tangible fixed assets

Stand by equipment and servicing equipment are to be capitalised.
Machinery spares to be charged to the revenue as and when consumed.
When such spares can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, they shall be capitalised.

Components of actual cost

The actual cost shall comprise of its purchase price, import duties and other taxes (excluding those subsequently recoverable) and any directly attributable expenditure. Any trade discounts and rebates shall be deducted in arriving at the actual cost.
The cost of an asset may undergo changes subsequent to its acquisition or construction on account of:

Price adjustment, changes in duties or similar factors; or

Exchange fluctuation as specified in ICDS VI on the effects of changes in foreign exchange rate

Administrative and other general overhead expenses are to be excluded unless they relate to asset. Expenses attributable to construction of a project or to the acquisition of an asset or bringing it to its working conditions be included as a part of the cost of the project or part of the asset.
The expenditure incurred on start up and commissioning of the project, including the expenditure incurred on test runs and experimental production be capitalised. The expenditure incurred after the plant has begun commercial production i.e. production intended for sale or captive consumption be treated as revenue expenditure.
Similar principle would apply to set self constructed asset. However, any internal profits be eliminated from such costs.

Non monetary consideration

When a fixed asset is acquired in exchange for another asset, the (FV) of the tangible fixed asset so acquired shall be its actual cost.
When fixed asset is acquired in exchange for shares or securities, the FV of the fixed asset so acquired shall be its actual cost.

Improvement and repairs

An expenditure that increases the future benefit from the existing asset beyond its previously assessed standard of performance be added to actual cost.
The cost of an addition or extension to an existing fixed asset which is of a capital nature and which becomes an integral part of existing fixed asset is to be added to its actual cost.
Any addition or extension, which has a separate identity and is capable of being used, after the existing tangible fixed asset is disposed of, shall be treated as separate asset.

Valuation of jointly owned asset

When a person owns fixed asset jointly with others, the proportion in the actual cost, accumulated depreciation and WDV is grouped together with similar fully owned asset. Details of such jointly owned asset shall be indicated separately in the fixed assets register

Consolidated price

Where several assets are purchased for a consolidated price the consideration shall be apportioned to the various assets on a fair basis.

Depreciation

Depreciation is to be calculated as per section 32 of the Income Tax Act, 1961 r.w. Rule 5 of the Income tax Rules, 1962.

Capital Gains

Long term / short term gains on transfer of a fixed asset shall be computed in accordance with the provisions of the Act.

Disclosure:

Following disclosures be made:

Description of asset or block of assets;
Rate of depreciation
Actual cost or WDV as the case may be;
Additions or deductions during the year with dates. The addition to a fixed asset should indicate the date on which it was put to use including adjustment of CENVAT claimed and allowed under CENVAT Credit Rules, change in rate of exchange or currency, subsidy or grant or imbursement, by whatever named called.
Depreciation allowable; and
WDV at the year end.

CDS VI – Effects of changes in foreign exchange rate

Scope:

This ICDS 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.

A) Transactions in foreign currencies

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 foreign currency at the date of transaction.
An average rate for a week or month that approximates the actual rate at the date of transaction may be used for all transaction in each foreign currency accruing during the period.
If the exchange rate fluctuates significantly the actual rate at the date of transaction be used.

Conversion at last day of previous year

At last day of previous year:

Foreign currency monetary items like cash, receivable and payable, shall be converted into reporting currency by applying the closing rate.
If the closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realised or disbursed.
In case of non-monetary items like fixed assets, inventories and investments in equity shares in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of transaction.

Recognition of exchange differences:

In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at the last day of the previous year shall be recognised as income or expenses of the previous year.
In case of non-monetary items, there will not be any difference on last day of previous year as they are recorded at exchange rate at the date of the transaction i.e. initial recognition except when section 43A is applicable.
In case of non-monetary items, initial recognition, conversion and recognition of exchange difference be subject to the provisions of section 43A of the Act, r.w. rule 115 of Rules, 1962.

B) Financial statement of foreign operations

The foreign operations are classified as either “integral foreign operations” or “non–integral foreign operations”.
The following are inter alia indications that a foreign operation is non-integral:

The activities of the foreign operation are carried out with a significant degree of autonomy.

Transactions with the person (who controls the foreign operation) are not in high proportion.

The activities of the foreign operation are financed mainly from its own operational activities.

The foreign operation’s sales are mainly in currencies other than Indian currency.

Cost of labour, material and other components of foreign operation’s products or services are primarily paid or settled in the local currency i.e. other than Indian currency.

Cash flows of the person are insulated from the day-to-day activities of foreign operation.

Sales prices for the foreign operation’s products or services are determined by the local competition or local government regulation etc.

The “Integral foreign operation” is a foreign operation, where the activities are an integral part of the operation of the person. The financial statement of integral operation shall be translated using the principles and procedures mentioned above, as if the transactions of foreign operation had been of those person himself.

Translation of non-integral foreign operations

In translating the financial statement of a non – integral foreign operation for a previous year, the person shall apply the following:

Income and expense items of the non-integral foreign operation shall be translated at exchange rates at the date of transaction;
The assets and liabilities, both monetary and non-monetary of the non-integral foreign operation be translated at closing rate; and
All resulting exchange differences shall be recognised as income or as expenses in that previous year instead of “foreign currency translation reserve” as per AS-11 “Effects of changes in foreign exchange rates”.

Change in classification of foreign operation

The consistency principle requires that foreign operation once classified as integral or non-integral be 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.
When there is a change in the classification of a foreign operation, the translation procedures applicable to the revised classification shall be applied from the date of the change in the classification.

C) Forward exchange contract

It means an agreement to exchange different currencies at a forward rate and includes a foreign currency option contract or another financial instrument of similar nature.
Forward rate is the specified exchange rate for exchange of two currencies at specified future date.
Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expenses or income over the life of the contract.
Exchange differences on such contract shall be recognised as income or as expenses in the year in which the exchange rates change
Any profit or loss arising on cancellation or renewal of such contract shall be recognised as income or as expenses for the previous year.
The above provisions shall apply, if the contract is not intended for trading or speculation purposes and is entered into for the amount of the reporting currency required or available at the settlement date of transaction.
The above provisions shall not apply to the contract which is entered into hedge the foreign currency risk of a firm commitment or highly probable forecast transaction. For this purpose, firm commitment shall not include assets and liabilities existing at the end of the previous year.
The premium or discount that arises on the contract is measured by difference between the exchange rate at the date of inception of the contract and forward rate specified in the contract
Premium, discount or exchange difference on contracts intended for trading or speculation or to hedge the foreign currency risk of a firm commitment or highly probable forecast transaction shall be recognised at the time of settlement.

ICDC VII – Government grants

Scope

This Standard deals with the treatment of Government grants. They can also be called by other names viz.; subsidies, cash incentive, duty drawbacks, waiver, concessions, reimbursement etc.
This Standard does not deal with

Government assistance other than in the form of Government grants and

Government participation in the ownership of the enterprise.

Terms

For the purpose of this ICDS:

“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 can not be distinguished from normal trading transactions of the person.

Recognition

Government grants shall not be recognised unless there is reasonable assurance that:

The person shall comply with the conditions attached to them, and

The grants shall be receive

Despite this ICDS provides that recognition of Government grants shall not be postponed beyond the date of actual receipt. This is contra to (i) of this paragraph because a mere receipt of grant is not necessarily a conclusive evidence that conditions attaching to the grant have been or will be fulfilled. Again Government grant on a receipt basis is not in accordance with AS 12 – Accounting for Government grants.

Treatment of Government grants:

Where the Government grant relate to depreciable asset, the grant shall be deducted from the actual cost of the asset or from the WDV of block of assets to which concerned asset or assets belong to.
When it relates to a non depreciable asset or assets of a person requiring fulfilment of certain obligation, the grant shall be recognised as income over the same period over which the cost of meeting such obligation is charged to income.
Where the Government grant is of such nature that it cannot be directly relatable to asset acquired, so much of the amount which bears to the total Government grant, the same proportion as such asset bears to all the assets in respect of or with reference to which the Government grant is so received shall be deducted from the actual cost of the asset or shall be reduced from the WDV of block of assets to which asset or assets belong to.
The Government grant is receivable as compensation for expenses or losses incurred in previous financial year or for the purpose of giving immediate financial support to the person with no further related costs shall be recognised as income of the period in which it is receivable.
Other than above, the Government grants shall be recognised as income over the periods necessary to match them with related costs which they are intended to compensate.
The Government grants, in the form of non-monetary assets, given at concessional rate, shall be accounted for on the basis of their acquisition cost.
It seems that this ICDS does not deal with Government grants of the nature of promoters’ contribution. As per para 16 of AS 12 – Accounting for Government grants the same should be credited to capital reserve and treated as a part of shareholders fund. This grant cannot be considered as other Government grant as there is no cost, hence it cannot be debited to profit and loss statement to match the income to be credited to profit and loss account. So it seems that such grant on receipt the Department would try to tax.

Refund of Government grants

The amount refundable in respect of Government grant shall be applied first against any unamortised deferred credit remaining in respect of Government grant. To the extent that the amount refundable exceeds any such deferred credit of where no deferred credit exists, the amount shall be charged to profit and loss statement.
If Government grant refundable in respect of depreciable fixed asset or assets shall be recorded by increasing the actual cost or WDV of block of assets. Therefore depreciation on the revised actual cost or WDV shall be provided prospectively at the prescribe rate.

Disclosure:

The following disclosures be made:

Nature and extent of Government grants recognised during the previous year by way of deduction from the actual cost of asset or from the WDV of block of assets during the previous year.
Nature and extent of Government grants recognised during the previous year
Nature and extent of Government grants not recognised during the previous year by way of deduction from the actual cost of the asset or WDV or of block of assets and reason thereon; and
Nature and extent of Government grants not recognised during the previous year as income and reasons thereof.

ICDS VIII – Securities

Applicability

This ICDS is applicable, if securities are held as stock-in-trade.
This ICDS does not deal with:

The recognition of interest and dividends on securities, which is dealt by ICDS IV.

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.

Meanings

“Fair Value” (FV) is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in arm’s length transaction.
“Securities” shall have meanings assigned to in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956, other than Derivatives referred to in sub-clause (ia) of that clause.

Recognition and initial measurement of securities

On acquisition shall be recognized at actual cost. The actual cost shall comprise of its purchase price and include acquisition charges such as brokerage, fee, tax, duty or cess.
If a security is acquired in exchange for other securities the FV of the security so acquired shall be its actual cost.
If a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its actual cost.
Where unpaid interest has accrued before the acquisition of an interest-bearing securities and is included in the price paid for the security, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods. The pre-acquisition portion of interest is deducted from the actual cost.

Subsequent measurement

At the end of the year, securities held as stock-in-trade shall be valued at actual cost or NRV, whichever is lower; category- wise and not for each individual security. For this purpose, the securities to be classified as under: a) shares; b) debt securities; c) convertible securities and d) any other securities not covered above.
The value of securities held as stock-in-trade of a business:

The cost of securities available on the day of the commencement of a business and

In any other case, the value of the securities of the business as on the close of the immediately preceding the previous year.

The value of securities not listed on a recognised stock exchange or listed but not quoted on a regularly shall be valued at actual cost initially recognised.
If, the actual cost initially recognised cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of FIFO method.

Disclosure

This ICDS does not provide for any disclosure however, disclosures be made as per ICDS II.

ICDS IX – Borrowing costs

Scope

This ICDS deals with treatment of borrowing costs. However, it does not deal with actual cost or imputed cost of owners’ equity and preference shares capital.

Meanings

“Borrowing costs” are interest and other costs incurred by a person in connection with the borrowing funds and include:

Commitment charges on borrowings.

Amortised amount of discounts or premiums relating to borrowings.

Amortised amount of ancillary costs incurred in connection with the arrangement of borrowings.

Finance charges in respect of assets acquired under finance leases or other similar arrangements.

“Qualifying asset” means:

Land building, plant or furniture, being tangible assets;

Know-how, patents, copyrights, trade marks, licences, 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 that are directly attributable to the acquisition, construction or production of a qualifying asset be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation shall be determined with this ICDS.

Eligible for capitalisation

To the extent the funds are borrowed specifically for the purpose of acquisition, construction or production of qualifying asset the amount of borrowing costs to be capitalised on that asset shall be the actual borrowing costs incurred during the period on the funds as borrowed.
To the extent the funds are borrowed generally and utilised for the purpose of acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalised shall be computed as per para 6 of ICDS. Generally, the borrowing costs incurred during the previous year (excluding borrowing costs relatable to specific purpose) to average cost of qualifying asset on first and last day of the previous year by the average amount of the total asset on first and last day of previous year i. e. Borrowing cost x average cost of qualifying asset / average amount of total assets

Commencement of capitalisation

The capitalisation of borrowing cost shall commence:

If funds are specifically borrowed for the purpose of acquisition, construction or production of qualifying asset, the capitalisation would commence from the date on which funds were borrowed.
In case funds were borrowed generally and utilised for the purpose of acquisition, construction or production of qualifying asset from the date on which the funds were utilised.

Cessation of capitalisation

In case of qualifying asset, tangible or intangible when such asset if first put to use.

In case of qualifying inventory, when substantially all activities necessary to prepare such inventory for its intended sales are complete.

In case qualifying asset is completed in parts and completed part is capable of being used while construction continues for other parts, the capitalisation of borrowing costs shall cease when such part of qualifying asset is first put to use.

In case a qualifying asset is inventory which is complete in part, and substantially all the activities necessary to prepare such part of inventory for its intended sale are complete.

Disclosure:

The following disclosures be made:

The accounting policy adopted for borrowing costs; and
The amount of borrowing costs capitalised during the previous year.

ICDS X – Provisions, contingent liabilities and contingent assets

Scope

This ICDS does not deal with provisions, contingent liabilities and contingent assets arising as a result of:

Financial instruments;

Executory contracts

Insurance business from contracts with policy holders; and

Covered by other ICDS.

The term ‘provision’ is also used in the context of depreciation impairment of assets and doubtful debts which are adjustments to the carrying amounts of assets, has not been address by this ICDS.

Recognition

A provision shall be recognised, when:

A person has a present obligation as a result of 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 amount of obligation.

If these conditions are not met, no provision shall be recognised.

No provision shall be made for costs that need to be incurred to operate in the future.
No provision shall be made in respect of proposed new law yet to be enacted, as obligation arises only when the legislation is enacted

Contingent liabilities

Shall not be recognised.

Contingent assets

Shall not be recognised.
Contingent assets are assessed continually. When it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income are recognised in the year in which the change occurs.

Measurement:

The amount of provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the year. The amount of a provision shall not be discounted to its present value.
Similarly, the amount recognised an asset and related income shall be best estimate of the value of economic benefit arising at the end of the year. The amount and related income shall not be discounted to its present value.

Reimbursement

Where some of the expenditure expected to be reimbursed by another party, the reimbursement shall be recognised when it is reasonably certain that reimbursement will be received if the person settles the obligation. The amount of reimbursement shall not exceed the amount of provision.
If a person is not liable for payment of costs, if third party fails to pay no provision shall be made for such costs.
An obligation, for which a person is jointly and severally liable is a cogent liability to the extent that it is expected that the obligation will be settled by other party.

Review of provisions

Provision shall be reviewed at the end of the 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.

Disclosure

The following disclosures be made in respect of provision:

A brief description of the nature of obligation

The carrying amount at the beginning and end of previous year;

Additional provision made during the year;

The amounts charged against the provision;

Un-used amount of provision reversed during the year; and

The amount of any expected reimbursement

Following disclosures be made in respect of each class of asset and related income recognised; viz.

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 already recognised; and

Amount of asset and related income reversed during the previous year

Points to be noted

From reading the aforesaid Standards, it is clear that:

These standards are applicable to all persons as defined under section 2(31) of the Act.
The one of the major consideration for selection and application of the accounting policy viz., prudence has not been followed. Therefore, marked to market loss or expected loss in case of a contractor has not been considered in these Standards.
Now, service providers have to account for services rendered on percentage basis even though services are not completed at the end of the financial year. Services not completed but costs of services have been incurred, have to be accounted as WIP at the end of the financial year.
In case of contractor expected loss on contract shall not be considered and retention charges though not received have to be taxed, if not taxed earlier, i.e. when the sales are accounted on mercantile basis.
The ICDS V shall apply only to tangible fixed assets and not to intangible assets, though borrowing costs of intangible assets have to be capitalised.
In case on non-integrated foreign operations, the assets and liabilities, both monetary and non-monetary to be translated at the closing rate at the end of the year and difference to be recognised as income or expenses of the previous year instead of crediting to “Foreign Currency Translation Reserve” as per AS-11 “Foreign currency translation reserve account”. As per AS 11, such reserve could be considered as income or expense when net investment in the said operation is disposed of.
The ICDS VII does not provide for Government grants in the nature of promoters’ contribution and therefore may be taxable on receipt basis.
Though contingent assets is not to be considered but disclosure in respect of which has to be made, so as to keep track on accrual of income.

Conclusion

Thus reading the aforesaid Standards, it is clear that in most of the cases there would be preponment of income and therefore it would be necessary to a person to account for deferred tax assets / liabilities in the books of account as per AS 22. "Accounting for Taxes on Income."