ICDS Basics. - CA.K.Ulaganaathan Shankar

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1 ICDS Basics -

2 2 Applicability General

3 3 Applicability All assessees (other than an individual or a HUF who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the said Act) following the accounting, mercantile system of for the purposes of computation of income chargeable to income-tax under the head Profits Shankar and gainsca.k.ulaganaathan of business or profession or

4 4 Effective Date As per Notification No.87/2016, these ICDS apply to the assessment year and subsequent assessment years. As per ICDS I: - All contract or transaction existing on the or entered into on or after the shall be dealt with in accordance with the provisions of ICDS after taking into account the income, expense or loss, if any, Shankar recognised in respect CA.K.Ulaganaathan of the said contract or transaction for the previous year ending on or before

5 5 Conflict with Act In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard ( the ICDS ), the provisions of the Act shall prevail to that extent.

6 6 Significant Accounting Policies ICDS-I

7 7 Accounting Policies The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by a person. All significant accounting policies adopted by a person shall be disclosed. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item.

8 8 Fundamental Accounting Assumptions Fundamental Accounting Assumptions are: - Going Concern - person has neither the intention nor the necessity of liquidation or of curtailing materially the scale of operations Consistency followed consistently from one period to another Accrual - revenues and costs are accrued, i.e., recognised as they are earned or incurred (and not as money is received or paid) and recorded CA.K.Ulaganaathan in the previous year to which they relate Shankar If fundamental accounting assumption is not

9 9 Adoption of Accounting Policies Accounting policies adopted are such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose, the treatment and presentation of transactions and events are governed by their substance and not merely by the legal form; and marked to market loss or an expected loss are CA.K.Ulaganaathan Shankar recognised unless the recognition of such loss is in accordance with the provisions of any

10 10 Change in Accounting Policy An accounting policy shall not be changed without reasonable cause. Disclosure of change in an accounting policy: Changes having a material effect Amount by which any item is affected by such change 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.

11 11 Transitional Provisions All contract or transaction existing on the or entered into on or after the shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognised in respect of the said contract or transaction for the previous year ending on or before the

12 12 Valuation of Inventories ICDS-II

13 13 Applicability Applied for valuation of inventories, except : Work-in-progress arising under construction contract Work-in-progress which is dealt with by other ICDS; Shares, debentures and other instruments held as stock-in-trade; Producers inventories of livestock, agriculture and forest products, mineral oils, ores and CA.K.Ulaganaathan Shankar gases to the extent that they are measured at net realisable value; and financial

14 14 Definition Inventories are assets: held for sale in the ordinary course of business; in the process of production for such sale; in the form of materials or supplies to be consumed in the production process or in the rendering of services.

15 15 Measurement Inventories shall be valued at Cost, or Net Realisable Value, whichever is lower. Cost of Inventories comprises of Costs of purchase (inclusive of tax method), Costs Costs of services (Labour + Expenses), of conversion (Fixed Expenses on Normal production),

16 16 Cost Formulae Sl. No. Nature of Inventory Cost Formulae 1. Specifically identified for a project and Specific not interchangeable Identification 2. General Inventories FIFO or Weighted Average 3. For convenience Standard Cost, if it approximates actual cost 4. Large number of rapidly changing items Retail Method that have similar margins and impracticable to use other methods

17 17 Net Realisable Value NRV to be determined on item-by-item basis. Items relating to same product line having similar purposes / end uses and are produced / marketed in the same geographical area and cannot be practicably evaluated separately from other items in that product line, such inventories shall be grouped together Materials and other supplies held for use in the production of inventories shall not be

18 18 Miscellaneous Opening balance of Inventory New business as on commencement of business In other cases Closing value of preceding previous year Dissolution of Firm / AoP / BoI Valuation at NRV Change in method of valuing inventory only for reasonable cause.

19 19 Disclosure Accounting Policies including cost formulae Standard costing Details of Inventories & Declaration Total carrying amount of Inventory and Classification

20 20 Transitional Provisions Interest and other borrowing costs, which do not meet the criteria for recognition of interest as a component of the cost, but included in the cost of the opening inventory as on , shall be taken into account for determining cost of such inventory for valuation as on the close of the previous year beginning on or after if such inventory continue to remain part of inventory as on the close of the previous year beginning on or after

21 21 Construction Contracts ICDS-III

22 22 Construction contract Construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes: contract for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; contract for destruction or restoration of assets,

23 23 Recognition Percentage of completion method. To be estimated each year and change in estimate to be effected prospectively. Stage of completion to be determined: - the proportion that 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

24 24 Recognition Upto 25% completion revenue can be cost incurred Retentions should form part of revenue in the year of accrual Variations / claims, if certain, recognised Write-off of revenue to be charged off and not reduced from the revenue

25 25 Contract Cost Contract costs comprises of: Direct costs of specific contract; General costs allocated; Specific costs chargeable under contract; Borrowing costs allocated as per ICDS IX; and Cost of securing contract, if it is identifiable and probable contract can be obtained. attributable to contract

26 26 Contract Costs Costs are reduced by any incidental income, not being in the nature of interest, dividends or capital gains, which is not included in contract revenue. Costs relating to future activity on the contract are recognised as Contract WIP.

27 27 Disclosure A person shall disclose: the amount of contract revenue recognised as revenue in the period; and the methods used to determine the stage of completion of contracts in progress. A person shall disclose the following for contracts in progress at the reporting date, namely: CA.K.Ulaganaathan Shankar amount of costs incurred and recognised profits (less recognised losses) upto the reporting date;

28 28 Transitional Provisions Contract revenue and contract costs associated with the construction contract, which commenced on or after shall be recognised in accordance with the provisions of this standard. Contract revenue and contract costs associated with the construction contract, which commenced on or before the but not completed by the said CA.K.Ulaganaathan Shankar date, shall be recognised based on the method regularly followed by the person

29 29 Revenue Recognition ICDS-IV

30 30 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 CA.K.Ulaganaathan yielding interest, royalties or dividends. Shankar In an agency relationship, the revenue is the

31 31 Sale of Goods Recognised, when there is Transfer in Property, or Significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership Reasonable certainty collection required of its ultimate

32 32 Rendering of Services Percentage Service of completion method revenue matched with service costs Principles of construction contracts to apply mutatis mutandis Indeterminate number of acts over a specific period of time revenue can be recognised on a straight line basis over the specific period Service contracts with duration of not

33 33 Others Ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives revenue recognition postponed

34 34 Interest, Royalty or Dividend Interest Generally on time basis determined by the amount outstanding and the rate applicable On refund of any tax, duty or cess receipt basis Being discount or premium on debt securities - accruing over the period to maturity Royalties Normally, as per terms of agreement

35 35 Disclosure Sale of goods total amount not recognised as revenue during the previous year due to lack of reasonable certainty of its ultimate collection along with nature of uncertainty Rendering of Services method used to determine the stage of completion of service transactions in progress; Services in Progress at end of the previous year; amount of costs incurred and recognised profits (less recognised losses) upto end of previous year

36 36 Transitional Provisions ICDS on construction contract shall mutatis mutandis apply to the recognition of revenue and the associated costs for a service transaction undertaken on or before the but not completed by the said date. Other revenue for a transaction, undertaken on or before the but not completed by the said date shall be CA.K.Ulaganaathan Shankar recognised in accordance with the provisions of this standard for the previous year

37 37 Tangible Fixed Asset ICDS-V

38 38 Tangible Fixed Asset Tangible fixed asset is an asset being land, building, machinery, plant or furniture held with the 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.

39 39 Cost of Tangible Fixed Asset Actual cost of an acquired tangible fixed asset comprises its purchase price, import duties and other taxes, excluding those subsequently recoverable, and any directly attributable expenditure on making the asset ready for its intended use. Any trade discounts and rebates are

40 40 Actual Cost Expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production are capitalised. Expenditure incurred after the plant has begun commercial production, that is, production intended for sale or captive consumption, are treated as revenue expenditure. Any internal profits are eliminated in arriving at cost of tangible fixed assets.

41 41 Other Actual Costs Tangible fixed asset is acquired in exchange of a tangible fixed asset or in exchange for shares or other securities the Fair Value of the tangible fixed asset so acquired is taken as its actual cost. Where the tangible fixed asset is owned jointly with others the proportion in the actual cost is grouped with the fully owned tangible fixed assets. Where several assets are purchased for a consolidated price, the consideration is

42 42 Standby & Servicing Equipment / Machinery Stand-by equipment and servicing equipment Spares are capitalised. Machinery spares Normally charged to the revenue as and when consumed. Such spares that can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular capitalised.

43 43 Improvements & Repairs An Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost. The cost of an addition or extension to an existing tangible fixed asset which is of a capital nature and which becomes an integral part of the existing tangible fixed asset is added to its actual cost. Any addition or extension, which has a separate identity and is capable of being used

44 44 Depreciation & Transfer Depreciation on a tangible fixed asset shall be computed in accordance with the provisions of the Act. Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act.

45 45 Disclosures Following disclosure shall be made in respect of tangible fixed assets, namely: description of asset or block of assets; rate of depreciation; actual cost or written down value, as the case may be; additions or deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on CA.K.Ulaganaathan Shankar account of

46 46 Transitional Provisions The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before but not completed by the said date, shall be recognised in accordance with the provisions of this standard. The amount of actual cost, if any, recognised for the said assets for any previous year commencing on or before shall be CA.K.Ulaganaathan Shankar taken into account for recognising actual cost of the said assets for the previous year

47 47 Effects of changes in Foreign Exchange Rates ICDS-VI

48 48 Statutory Warning Initial recognition, conversion and recognition of exchange difference provided in this ICDS is subject to provisions of section 43A of the Act or Rule 115 of Income-tax Rules, 1962, as the case may be.

49 49 Initial Recognition A foreign currency transaction is recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction An average rate for the week / month that approximates the actual rate at the date of the transaction is used for all transaction in each CA.K.Ulaganaathan Shankar/ foreign currency occurring during that week month.

50 50 Conversion or Recognition at the end of the previous year Nature of Item Exchange Rate to be adopted Effect of conversion is Monetary Assets Closing rate Income or Expense of the Previous Year Monetary Assets (where closing rate is not fair) At the value likely to be realised / disbursed Income or Expense of the Previous Year Non-Monetary Assets Date of Transaction Not as an Income or Expense of the Previous Year Inventory at NRV) Date of Valuation Not as an Income or Expense of the Previous Year (reported

51 51 Foreign Operations Initial recognition, conversion and recognition of exchange difference is translated using the same principles and procedures above as if the transactions of the foreign operation had been those of the person himself.

52 52 Non Speculative & Non Hedge Forward Contracts: Premium or discount arising at the inception of this forward exchange contract (entered into to establish the amount of the reporting currency required or available at the settlement date of the transaction) is amortised as expense or income over the life of the contract. Exchange difference on such a contract is recognised as income or as expense in the previous year in whichca.k.ulaganaathan the exchangeshankar rates change.

53 53 Other Forward Contracts Forward contracts that is entered into to hedge the foreign currency risk of a firm commitment (For this purpose, firm commitment, shall not include assets and liabilities existing at the end of the previous year) or a highly probable forecast transaction (or) intended for trading or speculation purposes: Premium, discount or exchange difference on contracts that are intended for trading CA.K.Ulaganaathan Shankar or speculation purposes, or that are entered into to hedge the foreign currency

54 54 Transitional Provisions All foreign currency transactions undertaken on or after shall be recognised in accordance with the provisions of this standard. Exchange differences arising in respect of monetary items or non-monetary items, on the settlement thereof during the previous year commencing on or on conversion thereof at the last day of the previous year commencing on , shall be recognised in accordance with the provisions of this standard after taking into account the amount recognised on the last day of the previous year ending on for an item, if any, which is carried forward from said previous year.

55 55 Transitional Provisions The financial statements of foreign operations for the previous year commencing on shall be translated using the principles and procedures specified in this standard after taking into account the amount recognised on the last day of the previous year ending on for an item, if any, which is carried forward from said previous year. All Shankar forward exchange CA.K.Ulaganaathan contracts existing on or entered on or after

56 56 Government Grants ICDS-VII

57 57 Government Grants 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 CA.K.Ulaganaathan the transactions with Government which Shankar cannot be distinguished from the normal trading transactions of the person.

58 58 Recognition of Government Grants Government grants are not to be recognised until there is reasonable assurance that the conditions attached to them can be complied with, and the grants will be received. Recognition of Government grant is not postponed beyond the date of actual receipt.

59 59 Capital Grants Nature of Grant Accounting Treatment Grants relating to a depreciable Deducted from the actual cost fixed asset or assets or from the WDV of block of assets, concerned. Grant is of such a nature that it Asset value divided by Total is not directly relatable to the Asset Value multiplied by asset acquired Government grant, to which it relates Grants in the form of non- Accounted for on the basis of monetary assets, given at a their acquisition cost concessional rate

60 60 Revenue Grants Nature of Grant Accounting Treatment Grants relating to a depreciable fixed asset or assets with obligations to be fulfilled Income over the same period over which the cost of meeting such obligations is charged. Receivable as compensation for expenses or losses incurred in a previous financial year or receivable for the purpose of giving immediate financial support with no further related costs Income of the period in which it is receivable Other Grants Income over the periods necessary to match them with the related costs which they are intended to compensate

61 61 Refund of Government Grants The amount refundable in respect of a Government grant referred to above is applied: first against any unamortised deferred credit remaining in respect of the Government grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged to profit and loss statement. Shankar CA.K.Ulaganaathan The amount refundable in respect of a

62 62 Disclosures Nature and extent of Government grants recognised by way of deduction from the actual cost/wdv of Assets; recognised as income; not recognised by way of deduction from the actual cost/wdv of Assets and reasons thereof; and not recognised as income and reasons thereof.

63 63 Transitional Provisions All the Government grants which meet the recognition criteria on or after shall be recognised for the previous year commencing on or after in accordance with the provisions of this standard after taking into account the amount, if any, of the said Government grant recognised for any previous year ending on or before

64 64 Securities ICDS-VIII

65 65 Securities Securities shall have the meaning assigned to it in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 and shall include share of a company in which public are not substantially interested but shall not include derivatives referred to in sub-clause (ia) of that clause (h).

66 66 Recognition and Initial Measurement of Securities A security on acquisition shall be recognised at actual cost. Actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess. Where a security is acquired in exchange for other securities, or 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 security 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 the interest is deducted from the actual cost.

67 67 Subsequent Measurement of Securities At the end of any previous year, securities held as stock-in-trade shall be valued at actual cost initially recognised or net realisable value at the end of that previous year, whichever is lower. Comparison of actual cost initially recognised and net realisable value shall be done categorywise and not for each individual security. Securities shall be classified into the following categories, namely:-

68 68 Listed Securities At the end of any previous year, securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, are valued at actual cost initially recognised under specific identification method. Where the actual cost initially recognised CA.K.Ulaganaathan Shankar cannot be ascertained by reference to specific identification method, the cost of such security

69 69 In the case of Banks Securities shall be classified, recognised and measured in accordance with the extant guidelines issued by the Reserve Bank of India in this regard and any claim for deduction in excess of the said guidelines shall not be taken into account. To this extent, the provisions of Income Computation and Disclosure Standard VI on the effect of changes in foreign exchange rates relating to forward exchange contracts shall not apply.

70 70 Borrowing Costs ICDS-IX

71 71 Borrowing Costs Borrowing costs are interest and other costs incurred by a person in connection with the borrowing of 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; CA.K.Ulaganaathan Shankar finance charges in respect of assets acquired under finance leases or under other similar arrangements.

72 72 Qualified Asset Qualifying asset means: land, building, machinery, 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.

73 73 Recognition Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset is capitalised as part of the cost of that asset or added to the cost of inventory. Other borrowing costs are recognised in accordance with provisions of the Act.

74 74 Measurement Funds borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset - actual borrowing costs incurred during the period on the funds so borrowed. In respect of other general borrowings, if any, the amount of borrowing costs to be capitalised is computed in accordance with the formula BC(GB) X (ABQA / ABTA) BC(GB) Borrowing Cost of General Borrowings ABQA Average Balance of Qualifying Assets ABTA Average Balance of Total Assets For this purpose of general borrowings, a qualifying asset shall be such asset that necessarily requires a period of 12 months or more for its acquisition, CA.K.Ulaganaathan Shankar construction or production.

75 75 Period of Capitalisation Nature of Loan Commencement Capitalisation of Specifically From the date on borrowed for which funds were Qualifying borrowed Asset Other General From the date on Loans which funds were utilised Cessation of Capitalisation Qualifying asset is Qualifying asset is completed completed & ready for use in Parts and such completed parts are ready for use Tangible & Intangible Assets Inventories Tangible & Intangible Assets Inventories when such asset is first put to use when substantially all the activities necessary to prepare such inventory for its intended sale are complete when such part of qualifying asset is first put to use when substantially all the activities necessary to prepare such part of inventory for its intended sale are complete

76 76 Disclosure Accounting policy adopted for borrowing costs; and Amount of borrowing costs capitalised during the previous year.

77 77 Transitional Provision All the borrowing costs incurred on or after shall be capitalised for the previous year commencing on or after in accordance with the provisions of this standard after taking into account the amount of borrowing costs capitalised, if any, for the same borrowing for any previous year ending on or before

78 78 Provision, Contingent Liabilities & Contingent ICDS-X Assets

79 79 Definitions Provision is a liability which can be measured only by using a substantial degree of estimation. Contingent liability is: a possible obligation that arises from past events & the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within control of the person; or a present obligation that arises from past events but is not recognised because: it is not reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; or 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 CA.K.Ulaganaathan by the occurrence or non-occurrence Shankar of one or more uncertain future events not wholly within the control of the person.

80 80 Provisions A provision is recognised only when the following conditions are met: 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 amount of the obligation. It is only those obligations arising from past events existing independently of a person s future actions, that is the future conduct of its business, that are recognised as provisions. The amount recognised as a provision is arrived based on the best estimate of the expenditure required to settle the present obligation at the end of the previous year. CA.K.Ulaganaathan Shankar The amount of a provision is not discounted to its present value.

81 81 Provisions Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognised when it is reasonably certain that reimbursement will be received if the person settles the obligation. The amount recognised for the reimbursement does not exceed the amount of the provision. Provisions are reviewedca.k.ulaganaathan at the end ofshankar each previous year and adjusted to reflect the

82 82 Contingent Assets Contingent Assets are not recognised. However, contingent assets are assessed continually and when it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income are recognised in the previous year in which the change occurs. The amount recognised as asset and related income is arrived based on the best estimate of the value of economic benefit arising at the end of the previous year. Amount & related income is not discounted to its present value. An asset and related income recognised is reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an inflow of economic benefits will arise, the asset and related income is reversed.shankar CA.K.Ulaganaathan

83 83 Contingent Liability & Other Items Not Recognised Contingent liabilities are not recognised. An obligation, for which a person is jointly and severally liable, is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties. No provision is recognised for costs that need to be incurred to operate in the future. Where details of a proposed new law are yet CA.K.Ulaganaathan to be finalised, an obligation arises onlyshankar when the legislation is enacted.

84 84 Disclosures - Provisions Brief description obligation; of the nature of 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

85 85 Disclosures Contingent Asset Brief description of the nature of the asset and related income; 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 CA.K.Ulaganaathan Shankar of asset and related income reversed during the previous year.

86 86 Transitional Provisions All the provisions or assets and related income shall be recognised for the previous year commencing on or after 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

87 87 Queries

88 Thank You 88 CA.K.Ulaganaathan Shankar