INCOME COMPUTATION AND DISCLOSURE STANDARDS (ICDS) Notification No.32/2015, F. No. 134/48/2010 TPL, dated 31st March, 2015 INTRODUCTION

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1 INCOME COMPUTATION AND DISCLOSURE STANDARDS (ICDS) Notification No.32/2015, F. No. 134/48/2010 TPL, dated 31st March, 2015 INTRODUCTION Section 145 of the Income-tax Act relates to method of accounting. 145(1): 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.

2 145(2) and 145(3) prior to amendment by the Finance (No. 2) Act, The provisions contained in 145(2), prior to their amendment by the Finance (No. 2) Act, 2014 provided that the Central Government may notify in the Official Gazette from time to time, the accounting standards to be followed by any class of assessees or in respect of any class of income. 145 (3) provided that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1)or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. Amendment by Finance (No. 2) Act, 2014 The Finance (No. 2) Act, 2014 has amended 145(2) to provide that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. Sub-section (3) has been amended to provide that where the AO is not satisfied with the 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.

3 These amendments take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year and subsequent years. Income Computation and Disclosure Standards (ICDSs) notified by CBDT vide notification S.O. 892(E), dated In exercise of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961 the Central Government has notified the Income Computation and Disclosure Standards (ICDSs) vide Notification S.O. 892(E),dated These notified income computation and disclosure standards are specified in the Annexure to the said Notification are required to be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head "Profits and gains of business or profession" or "Income from other sources". This notification shall come into force with effect from 1st day of April, 2015, and shall accordingly apply to the assessment year and subsequent assessment years.

4 The Annexure to the Notification specifies 10 Income Computation and Disclosure Standards (ICDSs) as under: ICDS I ICDS II ICDS III ICDS IV ICDS V ICDS VI ICDS VII ICDS VIII ICDS IX ICDS X Accounting Policies Inventories Construction Contracts Revenue Recognition Tangible Fixed Assets Effects of Changes in Foreign Exchange Rates Government Grants Securities Borrowing Costs Provisions, Contingent Liabilities and Contingent Assets The Committee examined all the thirty one Accounting Standards issued by the ICAI and noted that some of the Accounting Standards issued by the ICAI relate to 'disclosure' requirement, whilst some other contain matter that are adequately dealt within the Act. In view of this, the Committee recommended that Tax Accounting Standards need not to be notified in respect of seventeen Accounting Standards issued by the ICAI. The 17 Accounting Standards issued by ICAI in respect of which no TAS was recommended by the Committee as under:

5 Indian Accounting standards (i) AS-3 - Cash Flow Statements (ii) AS 6 - Depreciation Accounting (iii) AS-14 - Accounting for Amalgamations (iv) AS-15 - Employee Benefits (v) AS-17 - Segment Reporting (vi) AS-18 - Related Party Disclosures (vii) AS 20 - Earning Per Share (viii) AS 21 - Consolidated Financial Statements (ix) AS 22 - Accounting for Taxes on Income (x) AS 23 - Accounting for Investments in Associates in Consolidated Financial Statements (xi) AS 24 - Discontinuing Operations (xii) AS 25 - Interim Financial Reporting (xiii) AS-27 - Financial Reporting of Interests in Joint Ventures (xiv) AS 28 - Impairment of Assets (xv) AS-30 - Financial Instruments : Recognition and Measurement (xvi) AS-31 - Financial Instruments : Presentation (xvii) AS-32 - Financial Instruments : Disclosures

6 ICDS applicable to: Assesses following mercantile system of accounting For income computation, not for maintenance of books of account. For computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for other heads of incomes Not applicable to Individuals and HUFs who is not required to get his accounts audited under section 44AB Is ICDS applicable for: Computation of MAT? Computation of presumptive income u/s 44AD and 44AE? Computation of Income where no Books have been maintained

7 Provisions of Act to prevail in case of conflict with ICDS The Preamble to every ICDS provides as under: In the case of conflict between the provisions of the Income-tax Act, 1961'the Act' and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. Income computation and disclosure standards vis-a-vis accounting standards Accounting Standards are applicable to preparation of accounts and maintenance of books of account. In Gallagher v. Jones [1993] STC 537 CA, Sir Thomas Bingham MR said at page 555: "... Subject to any express or implied statutory rule... the ordinary way to ascertain the profits or losses of a business is to apply accepted principles of commercial accountancy". Income Computation and Disclosure Standards are 'applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not for the purpose of maintenance of books of account. ICDSs have the force of law since they have been issued under section 145(2) of the Act. Therefore, in case of variance between ICDS and AS, ICDS shall prevail for computation of taxable income under the head "Profits and gains of business or profession" or "Income from other sources". However, where on any point the Income-tax Act, Rules there-under and ICDSs are silent, ASs would apply for computation of income.

8 Income Computation and Disclosure Standard I Accounting policies ICDS 1 Accounting Policies Fundamental Accounting Assumptions The following are fundamental accounting assumptions, namely: (a) Going Concern Going concern refers to the assumption that the person has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future. (b) Consistency Consistency refers to the assumption that accounting policies are consistent from one period to another; (c) Accrual Accrual refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the previous year to which they relate.

9 If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed. Question is where the disclosure of not following an accounting assumption is required to be made? In the accounts or in the return of income? Presumably, the ITR forms will be amended to make provision of disclosure of the same. Accounting Policies The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by a person. Selection of Accounting Policies 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. For this purpose, (i) the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form; (substance over form) and (ii) 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 Income Computation and Disclosure Standard.

10 ACCRUAL BASIS - COMPULSORY FOR COMPANIES? In terms of section 12 of the Companies Act, 2013, it is obligatory for companies to follow the accrual system of accounting. Sec 145 Income shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Will provisions of Companies Act override Sec 145 of Income Tax Act? No. As held in: Pradip Commercial (P) Ltd Vs CIT (Cal HC) Stup Consultants P. Ltd, Mumbai Vs DIT (Mum) Chennai Finance Co. Ltd. 81 ITD 7 (Hyd.) Change in accounting policy Para 5 of ICDS 1: An accounting policy shall not be changed without reasonable cause. As to what is "reasonable cause" is not clarified.

11 Income Computation and Disclosure Standard II Valuation of Inventories Scope [Para 1 of ICDS-II] This Income Computation and Disclosure Standard shall be applied for valuation of inventories, except : Work-in-progress arising under 'construction contract' including directly related service contract which is dealt with by the Income Computation and Disclosure Standard on construction contracts; Work-in-progress which is dealt with by other Income Computation and Disclosure Standard; Shares, debentures and other financial instruments held as stock-intrade which are dealt with by the Income Computation and Disclosure Standard on securities;

12 Producers' inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that 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, shall be dealt with in accordance with the Income Computation and Disclosure Standard on tangible fixed assets. Sr. No. Points of comparison ICDS-II Inventories (AS) 2 Valuation of Inventories 1. Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of busi- ness or profession" or "Income from other sources" and not for the purpose of maintenance of books of account 2. Costs of purchase The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. (AS) 2 applies for the purpose of preparation of financial statements The costs of purchase shall consist of purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expendi- ture directly attributable to the acquisition.

13 3. Valuation of inventories of service provider The costs of services in the case of a service provider shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads. 4. Standard cost method Not allowed Allowed if the results approximate the actual cost and subject to certain required disclosures in this regard 5. Valuation of inventory on dissolution of a In case of dissolution of a partnership firm or association of person or body of individuals, not partner- ship firm or withstanding whether business is association of person or body of individuals discontinued or not, the inventory on the date of dissolution shall be valued at the net realisable value. Allowed if results approximate the actual cost Value of opening inventory The value of the inventory as on the beginning of the previous year shall be : the cost of inventory available, if any, on the day of the commencement of the business when the business has commenced during the previous year; and the value of the inventory as on the close of the immediately preceding previous year, in any other case. [Para 22 of ICDS-II]

14 Additional points Retail Method of valuation: Allowed. However, an average percentage for each retail department is to be used. A global percentage for all retail departments not allowed ICDS-IV - REVENUE RECOGNITION

15 ICDS-IV vs. (AS) 9 Sr. No. Points of comparison ICDS IV : Revenue Recognition (AS) 9 Revenue Recognition 1. Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not for the purpose of maintenance of books of account (AS) 9 applies for the purpose of preparation of financial statements 2. Revenue recognition from the rendering of services Revenue from service transactions shall be recognised by the percentage completion method. Income Computation and Disclosure Standard on construction contract also requires the recognition of revenue on this basis. The requirements of that Standard shall mutatis mutandis apply to the recognition of revenue and the associated expenses for a service transaction. Unlike (AS) 9, ICDS-IV does not recognize completed service contract method Revenue may be recognized by completed service contract method or under the proportionate completion method whichever relates the revenue to the work performed 3. Recognition of dividends Dividends are recognised in accordance with the provisions of the Act. Dividends are recognized when owner's right to receive payment is established 4. Recognition of royalties 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, it is more appropriate to recognise revenue on some other systematic and rational basis Royalties shall accrue in accordance with the terms of the relevant agreement 5. Revenue from interest on refund of tax/cess/duty To be recognized in the previous year of receipt on cash basis Accrual basis

16 ICDS-IV vs. I.T. Act Section 145A(1)(b) of the Act provides that interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. Such interest shall be taxed under the head 'Income from other sources' in the year of receipt irrespective of whether assessee follows mercantile system of accounting or cash system. Section 57(iv) allows a deduction of 50% in respect of such interest. ICDS-IV will not apply to interest received by an assessee on compensation or on enhanced compensation since in case of conflict between ICDS and Act shall prevail. Section 8 of the Act provides that for the purposes of inclusion in the total income of an assessee, (a) any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or subclause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be; (b) any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it. ICDS-IV provides that dividend shall be recognized in accordance with the Act i.e. section 8 of the Act.

17 OTHER POINTS Use of percentage completion method for recognition of revenue from service is mandatory subject to the following two exceptions: (1) Option to recognize revenue on a straight line basis over the specific period where services are provided by an indeterminate number of acts over a specific period of time (2) Option to recognize revenue when rendering of services is completed or substantially completed in case of service contracts with duration of not more than 90 days ICDS-VIII - SECURITIES

18 Effective date ICDS-VIII shall come into force with effect from 1st day of April, 2015, and shall accordingly apply to the assessment year and subsequent assessment years. Unlike other ICDSs, ICDS-VIII has no transitional provisions Scope This Income Computation and Disclosure Standard deals with securities held as stock-in-trade. [Para 1 of ICDS-VIII] This Income Computation and Disclosure Standard does not deal with: (a) the bases for recognition of interest and dividends on securities which are covered by the Income Computation and Disclosure Standard on revenue recognition; (b) securities held by a person engaged in the business of insurance; (c) 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, [Para 2 of ICDS-VIII]

19 Recognition and initial measurement of securities A security on acquisition shall be recognised at actual cost. [Para 4 of ICDS-VIII] The actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess. [Para 5 of ICDS-VIII] Where a security is acquired in exchange for other securities, the fair value of the security so acquired shall be its actual cost. [Para 6 of ICDS-VIII] Where a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its actual cost. [Para 7 of ICDS-VIII] 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. [Para 8 of ICDS-VIII]

20 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. [Para 9 of ICDS-VIII] The comparison of actual cost initially recognised and net realisable value shall be done category-wise and not for each individual security. For this purpose, securities shall be classified into the following categories, namely: (a) shares; (b) debt securities; (c) convertible securities; and (d) any other securities not covered above. [Para 10 of ICDS-VIII] The value of securities held as stock-in-trade of a business as on the beginning of the previous year shall be: (a) the cost of securities available, if any, on the day of the commencement of the business when the business has commenced during the previous year; and (b) the value of the securities of the business as on the close of the immediately preceding previous year in any other case. [Para 11 of ICDS- VIII]

21 Notwithstanding anything contained above, 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, shall be valued at actual cost initially recognised. [Para 12 of ICDS- VIII] For the purposes of paras 9, 10 and 11 where 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 first-in-first-out method. [Para 13 of ICDS-VIII] ICDS-V - TANGIBLE FIXED ASSETS

22 SL No. Points of comparison ICDS-V vs. (AS) 10 ICDS-V Tangible Fixed Assets 1. Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not for the purpose of maintenance of books of account (AS) 10 Accounting for Fixed Assets (AS) 10 applies for the purpose of preparation of financial statements SL No. Points of comparison 2. Tangible fixed asset acquired in exchange for another asset ICDS-V Tangible Fixed Assets When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost. (AS) 10 Accounting for Fixed Assets When a tangible fixed asset is acquired in exchange for another asset, the cost of the asset acquired should be recorded at fair market value or at net book value of asset given up, adjusted for balance payment or receipt of cash or other consideration. Fair market value may be determined by reference either to the asset given up or to the asset acquired, whichever is more clearly evident

23 SL No. Points of comparison 3. Tangible fixed asset acquired in exchange for shares or other securities ICDS-V Tangible Fixed Assets When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost. (AS) 10 Accounting for Fixed Assets When a fixed asset is acquired in exchange for shares or other securities, it should be recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident. 4. Revaluation of tangible fixed assets Silent Deals with revaluation in detail ICDS-IX vs. (AS) 16

24 Sr. No. Points of comparison ICDS IX : Borrowing Costs (AS) 16 Borrowing Costs 1. Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or (AS) 16 applies for the purpose of preparation of financial statements profession" or "Income from other sources" and not for the purpose of maintenance of books of account 2. Exchange differences arising from foreign currency borrowings to the extent regarded as interest costs These are not treated as borrowing costs under ICDS These are regarded as borrowing costs 3. Qualifying assets Term expressly includes Know Term not defined how, patents, copyrights, trade to cover intangible marks, licences, franchises or assets any other business or commercial rights of similar nature, being intangible assets; 4. Income on temporary No netting off from cost of investment of asset. Will be taxed as income borrowed funds which are specifically borrowed for obtaining a qualifying asset To be netted off from borrowing costs and capitalised

25 5. Commencement of Capitalisation The capitalisation of borrowing costs shall commence: (a) in a case referred to in paragraph 5 (funds specifically borrowed for obtaining a qualifying asset), from the date on which funds were borrowed; (b) in a case referred to in paragraph 6 (funds borrowed generally and used for obtaining a qualifying asset), from the date on which funds were utilised. The capitalisation of borrowing costs shall commence from the date all the following conditions are satisfied (i) expenditure for a acquisition, construction or production of a qualifying asset is being incurred; (ii) borrowing costs are being incurred; and (iii) activities that are necessary to prepare the asset for its intended use are in progress 6. Suspension of capitalization No suspension of capitalization under any circum stances Capitalization suspended during extended periods in which active development is interrupted 7. Cessation of capitalization Capitalization of borrowing costs shall cease when asset is first put to use in case of qualifying asset other than inventory Capitalization of borrowing costs shall cease when substantially all the activities necessary to prepare such inventory for its intended sale are complete.

26 ICDS-VII - GOVERNMENT GRANTS ICDS-VII vs. (AS) 12 Sr. No. Points of comparison ICDS-VII Government Grants (AS) 12 Accounting for Government Grants 1. Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not for the purpose of maintenance of books of account. (AS) 12 applies for the purpose of preparation of financial statements.

27 Sr. No. Points of comparison ICDS-VII Government Grants (AS) 12 Accounting for Government Grants 2. Recognition of Government Grants Government grants should not be recognised until there is reasonable assurance that : (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received. Recognition of Government grant shall not be postponed beyond the date of actual receipt. Government grants should not be recognised until there is reasonable assurance that : (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received. 3. Government grant related to a depreciable fixed asset Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to. No option to recognize as deferred income over the useful life Where the Government grant relates to a depreciable fixed asset, the same may be deducted from assets concerned or treated as deferred income over the useful life on a systematic and a rational basis 4. Grant in the nature of Promoter's contribution Where the Government grant is of such a nature that it can not be directly relatable to the 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 written down value of block of assets to which the asset or assets belonged to. To be credited to capital reserve

28 ICDS-X v. (AS) 29 Sr. No. 1. Points of comparison ICDS-X Provisions, Contingent Liabilities and Contingent Assets Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not for the purpose of maintenance of books of account (AS) 29 Provisions, Contingent Liabilities and Contingent Assets (AS) 29 applies for the purpose of preparation of financial statements.

29 2. Recognition of Contingent Asset A person shall not recognise a contingent asset. 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. Contingent asset shall not be recognized. Contingent assets are assessed continually and when it becomes virtually certain that inflow of economic benefit will arise, the asset and related income are recognised in the previous year in which the change occurs 3. Recognition of reimbursement in respect of a provision Where some or all of the expenditure required to settled is expected to be reimbursed by another party, provision the reimbursement shall be recognised when it is reasonably certain that reimbursement will be received if the person settles the obligation. The amount recognised for the reimbursement shall not exceed the amount of the provision. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when it is virtually certain that reimbursement will be received if the person settles the obligation. The amount recognised for the reimbursement shall not exceed the amount of the provision.

30 ICDS-III corresponds to (AS) 7. The differences between ICDS-III and (AS) 7 are as under: Sr. No. 1. Points of comparison Applicability ICDS III : Construction Contracts (AS) 7 Construction Contracts This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources and not for the purpose of maintenance of books of account (AS) 7 applies for the purpose of preparation of financial statements

31 2. Retentions Retentions shall be included in contract revenue (AS) 7 silent on retentions 3. Criteria for recognition of variations in contract work, claims and incentive payments Not specified in ICDS-III Recognition criteria specified in (AS) 7 4. Recognition of contract costs and contract revenues with reference to stage of completion of the con- tract activity at the reporting date (percentage of completion method) Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the re- porting date. ICDS-III does not recognize that the possibility that out- come of a construction contract cannot estimated reliably except during early stages of contract - i.e. upto 25% stage of completion When the outcome of a construction contract can be estimated reliably, Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. (AS)7 specifies criteria as to when the outcome of a construction contract can be estimated reliably for fixed price contracts and cost plus contracts.

32 5. Early stages of completion of contract During the early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognised only to the extent of costs incurred. The early stage of a contract shall not extend beyond 25% of the stage of completion. During the early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognised only to the extent of costs incurred. However, no definition as to upto what % of completion it can be considered that contract is at early stage. 6. Netting of costs by incidental income Netting off allowed for all types of costs. However, such netting off not allowed if incidental income is in the nature of interest, dividends or capital gains Costs that relate directly to the specific contract shall be reduced by any incidental in- come that is not included in contract revenue. Such net- ting off not allowed from : (i) costs that are attributable to contract activity in general and can be allocated to the con- tract; (ii) such other costs as are specifically chargeable to the customer under the terms of the contract

33 7. Recognition of expected losses from contract In proportion to To be recognized in percentage of completion. full. Sl. No. Points of comparison ICDS-VI vs. (AS) 11 ICDS-VI Effect of Changes in Foreign Exchange Rates 1. Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not for the purpose of maintenance of books of account (AS) 11 Effect of Changes in Foreign Exchange Rates (AS) 11 applies for the purpose of preparation of financial statements

34 2. Scope of the term "foreign operation" Covers a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India. Subsidiary, associate, Joint Venture or branch of reporting enterprise, the activities of which are based or conducted in a country other than India The Accounting Standards Committee set up in 2010 had recommended changes vis-à-vis (AS) 11 as under: "5.2.8 The Tax Accounting Standard for The Effects of Changes in Foreign Exchange Rates [TAS (FE)] is based on the Accounting Standard-11 (AS- 11) for The Effects of Changes in Foreign Exchange Rates issued by the ICAI. While recommending the TAS (FE), the Committee made the following changes in AS-11: 1. AS-11 provides guidance on initial and subsequent recognition of foreign currency transactions and the resultant exchange differences. The TAS (FE) expressly provides that these provisions will be subject to section 43A of the Act and Rule 115 of the Income-tax Rules, AS-11 provides that exchanges differences arising on translation of the financial statements of non-integral foreign operations should be accumulated in a foreign currency translation reserve in the balance sheet. Since the Act does not provide for a distinction between integral and non-integral foreign operations, the TAS (FE) provides that such exchange differences shall be recognised for the purpose of computation of income.

35 3. AS-11 provides that forward exchange or similar contracts entered into for trading or speculation purposes should be mark-to-market at each balance sheet date and the resultant exchange differences should be recorded in profit or loss. Since such mark-to-market gains or losses are unrealised in nature, the TAS (FE) provides that all gains or losses on such contracts shall be recognised on settlement."

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