Demystifying ICDS. NIRC Workshop, May 11,2018. CA (Dr) Sanjeev Kumar Singhal. Page 1

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1 Demystifying ICDS NIRC Workshop, May 11,2018 CA (Dr) Sanjeev Kumar Singhal Page 1

2 Background ICDS notified by Central Government (CG) as a delegated legislation u/s 145(2) w.e.f. AY Applicable for computation under the heads PGBP and IFOS Applicable to all taxpayers following mercantile method of accounting Not applicable to individuals and HUFs not liable to tax audit Revised ICDS notified in September 2016 and FAQs released by the CBDT in March The Delhi HC in The Chamber of Tax Consultants 3 read down power granted to notify ICDS u/s.145(2) to preserve constitutional validity and struck down several contentious ICDS provisions (refer next slide) Finance Act 2018 (FA 2018) In order to provide legitimacy and bring certainty, new provisions inserted in the Act, in line with ICDS Retrospective amendment from AY to regularize compliance by large number of taxpayers and to prevent any further inconvenience to them 1. Postponed by one year from AY in view of implementation difficulties faced by taxpayers 2. Circular No. 10/ 2017 dt 23 Mar (2017) 159 DTR 313 (Del) Page 2

3 Bird s eye view of ICDS amendments in FA 2018 Section 36(1)(xviii) Provision Marked to market (MTM) loss/ expected loss will be allowed as deduction only to the extent permissible under the ICDS 40A(13) 43AA Any MTM loss/ expected loss not to be allowed as deduction, except as specified u/s.36(1)(xviii) Foreign exchange fluctuation gain or loss in respect of specified foreign currency transactions shall be treated as income or loss and computed in accordance with ICDS (subject to s.43a) 43CB Profit arising from construction contracts and service contracts shall be computed as per Percentage of Completion Method (POCM) in accordance with ICDS, except: Service contract with duration < 90 days (completed contract method) Service contract where indeterminate acts are performed (SLM basis) For POCM purposes, contract revenue includes retention money and contract cost shall not be reduced by incidental income in the nature of interest, dividends or capital gains Page 3

4 Bird s eye view of ICDS amendments in FA 2018 Section Provision 145A Inventory shall be valued at lower of actual cost or NRV computed in accordance with ICDS subject to addition of any tax, duty, cess etc. Inventory being unlisted securities, or listed securities but not quoted with regularity, shall be valued at actual cost initially recognised in accordance with ICDS Other listed securities shall be valued at lower of actual cost or NRV in accordance with ICDS on a category-wise basis Inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with ICDS after taking into account extant RBI Guidelines in this regard 145B Export incentives or claims for price escalation shall be taxable in the year in which reasonable certainty of its realisation is achieved Subsidy/ grants received from Government shall be taxed on receipt basis, if not charged to tax in any earlier tax year Notable items on which no amendments made (since not directly dealt by Delhi HC) Treatment of expenses between trial run and commercial production To be treated as capital expenditure as per CBDT FAQ 15 Taxation of contingent assets on reasonable certainty basis Page 4

5 Tangible Fixed Assets ICDS-V

6 Scope & Identification principle This standard deals with treatment of Tangible fixed assets. Treatment of fixed assets Identification Components of costs Improvements Non monetary consideration Depreciation Income/loss arising on transfer ICDS Covered under Income Tax Act, 1961 ( the Act ) What are 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 Page 6 ICDS V - Tangible fixed assets

7 Key differences: Identification Concepts ICDS AS 10 (Revised)* Ind AS- 16 Immaterial expenditurewhether treated as fixed assets No option of expensing off of immaterial assets resulting in onerous compliances and record keeping Option to expense off an item if the amount of the expenditure is not material Identification principles are similar to AS. However, does not prescribe expensing off immaterial items. * On 30 th March 2016, MCA notified Companies (Accounting Standards) Amendment Rules, 2016, for amending Indian GAAP. The amendment rules have replaced AS 10 and AS 6, with a new AS 10 Property, Plant and Equipment. The amendment rules are applicable for accounting periods beginning on or after 1 April Page 7 ICDS V - Tangible fixed assets

8 Case study I: Identification- Immaterial expenditure XYZ Ltd makes following purchases in their ordinary course of business during the year It contains Chairs (3)- Small tables (3)- Rs. 250 each Rs. 600 each Almirah- Rs. 15,000 Assets base shall be as under IGAAP Asset Furniture Rs. 15,000 Chairs, small tables being immaterial items are expensed off ICDS Asset Furniture Rs. 17,550 Breakup Chairs Rs. 750 Small tables Rs. 1,800 Almirah Rs. 15,000 Capital asset is defined under the Act and inter-alia includes all property other than stock in trade, consumable stores or raw material. Practically, pre and post ICDS position are consistent, however, tax authorities may be more stringent post ICDS when dealing with immaterial items. Page 8 ICDS V - Tangible fixed assets

9 Capitalisation Methodology-Components of Cost Acquired tangible fixed assets Purchase price Import duties & other taxes (not recoverable) Directly attributable expense on making asset ready for its intended use Rebates Discounts Refunds Govt grants Actual Cost Examples of directly attributable costs are: Expenditure on start-up and commissioning and on test runs and experimental production such as Site preparation, Initial delivery and handling costs Installation cost, such as special foundations for plant and Professional fees, for example fees for architects/engineers Specifically attributable administration and general overheads Borrowing costs (ICDS IX.) The expenditure incurred after the plant has begun commercial production, that is, production intended for sale or captive consumption shall be treated as revenue expenditure Self constructed fixed assets Costs shall computed following the same principals (directly attributable construction costs ) as mentioned above. Any internal profits are eliminated in arriving at such costs Non monetary consideration The cost of Tangible fixed asset may change subsequent to acquisition or construction on account of Price adjustment, change in duties or similar factors Exchange fluctuation (ICDS VI- Effect of changes in foreign exchange rates) Cost shall be fair value of the tangible fixed assets acquired ( in exchange of other asset or securities). Page 9 ICDS V - Tangible fixed assets

10 Examples- Directly attributable costs Which of the following costs will be considered in the total cost of a factory? Test run expenditure Yes Professional fees paid to consultants Experimental production cost Expenditure incurred on production intended for captive consumption after plant has commenced commercial production Salary of Human resource staff Borrowing costs Cost of relocating staff who will work at the newly constructed factory Salary of top management Yes Yes No No Yes No No Yes (if attributable) Page 10 ICDS V - Tangible fixed assets

11 Key differences: Capitalisation methodology Concepts ICDS AS 10 (Revised) Ind AS- 16 Costs incurred before commercial production or costs incurred in certain intervals ICDS while setting out principles of capitalization ( i.e.. capitalizing all directly attributable expenditure on making asset ready for its intended use) also provides that: -Expenses incurred after the plant has started commercial production (for sale or captive consumption) would be treated as revenue expenditure. Similar to Ind AS 16 Directly attributable costs may be capitalised only until the asset is capable of operating in the manner intended by management. If an asset is purchased or constructed and can operate in that manner immediately, costs incurred whilst the asset is standing idle may not be capitalised. Page 11 ICDS V - Tangible fixed assets

12 Key differences: Capitalisation methodology Concepts ICDS AS 10 (Revised) Ind AS- 16 Asset acquired on exchange of another asset Dismantling or restoration costs- whether treated as fixed assets Actual cost shall be FMV of asset acquired Similar to Ind AS 16 The cost is measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. Not considered in ICDS Similar to Ind AS 16 The initial estimate of such costs is required to be included in the cost of the respective item of property, plant and equipment Page 12 ICDS V - Tangible fixed assets

13 Case study: Exchange of assets A ship charterer owns a building which is carried in its statement of financial position at an aggregate carrying amount of Rs 10 million but which have a fair value of Rs 15 million (certified by valuer). It exchanges the building for a ship, which has a estimated fair value of Rs 17 million and pays an additional Rs 3 million cash. Pre ICDS Tax treatment pre ICDS No specific provision under the Act. However based on judicial inference, FMV of the asset given would be regarded as cost of asset acquired Post ICDS Tax treatment post ICDS Actual cost shall be FMV of asset acquired. Accordingly, Ship acquired shall be recognized at FMV of Rs 17 million. Page 13 ICDS V - Tangible fixed assets

14 Other Key differences: ICDS, AS and Ind AS Concepts ICDS AS 10 (Revised) Ind AS- 16 Replacement cost Cost of major inspections Generally expensed off when incurred Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is capitalised Similar to Ind AS 16 If replacement meets the recognition criteria: -replacement cost is capitalised The carrying amount of those parts that are replaced is derecognised in accordance with the de-recognition provisions Not considered in ICDS Similar to Ind AS 16 If recognition criteria satisfied: -cost of major inspections is recognised in the carrying amount of property, plant and equipment as a replacement. Any remaining carrying amount of the cost of previous inspection derecognised Page 14 ICDS V - Tangible fixed assets

15 Other Key differences: ICDS, AS and Ind AS Concepts ICDS AS 10 (Revised) Ind AS- 16 Depreciation & componentization Depreciation computed in accordance with the provisions of the Act and the Rules. ICDS does not recognize Componentization Similar to Ind AS 16. Further, Schedule II of Cos Act, 2013 mandates fixed assets to be componentised for depreciation purposes. Schedule II to the Cos Act, 2013 sets out the useful lives based on the nature of assets and the useful life should not ordinarily be different from the life specified in the Schedule. Property, plant and equipment are componentised and are depreciated separately. No concept of minimum statutory depreciation. Revaluation of Assets No provision for revaluation of fixed assets Similar to Ind AS 16 Revaluation permitted. Page 15 ICDS V - Tangible fixed assets

16 Disclosures Following disclosure shall be made in respect of tangible fixed assets, namely: a. description of asset or block of assets; b. rate of depreciation; c. actual cost or written down value, as the case may be; d. additions or deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of i. Central Value Added Tax credit claimed and allowed under the CENVAT Credit Rules, 2004; ii. change in rate of exchange of currency; iii.subsidy or grant or reimbursement, by whatever name called; e. depreciation Allowable; and f. written down value at the end of year. Page 16 ICDS V - Tangible fixed assets

17 ICDS VI Effects of changes in foreign exchange rates Page 17 'ICDS Bridging GAAP with Tax'

18 Background - Coverage 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 Difference in foreign exchange rates are accounted in the books of account as per AS 11 and now, taxability on the same will be governed by ICDS VI Page 18 ICDS VI- Effects of changes in foreign exchange rates

19 Scope ICDS governs taxability of foreign exchange differences arising on account of fluctuation in foreign exchange rates. Provisions of the Income-tax Act, 1961 (Act) which override the provisions of ICDS: Section 43A of the Act Requires capitalisation of exchange differences arising on a liability on imported asset (i.e. on the amount payable to the seller of the asset or on the foreign currency loan acquired for that purpose) to the cost of the asset at the time of payment Rule 115 of the Income-tax Rules, 1962 Prescribes the rate of exchange to be considered for expressing foreign currency income into rupees Page 19 ICDS VI- Effects of changes in foreign exchange rates

20 Key differences- Scope Scope Issue ICDS IGAAP Ind AS There is no scope exception for exchange differences arising from foreign currency borrowings which may be regarded as an adjustment to interest costs. There is exception for exchange differences arising from foreign currency borrowings to the extent considered as an adjustment to interest costs Similar to Indian GAAP Page 20 ICDS VI- Effects of changes in foreign exchange rates

21 Key definitions Monetary items are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables and payables are examples of monetary items Non monetary items are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non monetary items Foreign operation is a branch, by whatever name called, the activities of which are based or conducted in a country other than India. Forward exchange contract means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature Page 21 ICDS VI- Effects of changes in foreign exchange rates

22 Key differences - Definition Definition Issue ICDS IGAAP Ind AS Foreign currency is a currency other than the reporting currency. Reporting currency means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out Foreign currency is a currency other than the reporting currency which is the currency in which financial statements are presented. There is no concept of functional currency Functional currency is the currency of the primary economic environment in which the entity operates. Foreign currency is a currency other than the functional currency. Presentation currency is the currency in which the financial statements are presented. Page 22 ICDS VI- Effects of changes in foreign exchange rates

23 Key differences- Definition (Contd.) Issue ICDS IGAAP Ind AS Definition (Contd.) Foreign operation is a branch, by whatever name called, the activities of which are based or conducted in a country other than India. Forward exchange contract includes a foreign currency option contract or another financial instrument of a similar nature. (Scope of derivatives) Foreign operation is a subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting enterprise. Applicable to exchange differences on all forward exchange contracts including those to hedge the foreign currency risk of existing assets / liabilities and is not applicable to the exchange difference arising on forward exchange contracts entered into to hedge the foreign currency risks of future transactions in respect of which firm commitments are highly probable forecast transactions. Foreign operation is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity. Foreign currency derivatives that are not within the scope of Ind AS 109 (e.g. some foreign currency derivatives that are embedded in other contracts) are within the scope of Ind AS 21. In addition, IndAS 21 applies when an entity translates amounts relating to derivatives from its functional currency to its presentation currency Page 23 ICDS VI- Effects of changes in foreign exchange rates

24 Supreme Court ruling of Woodward Governor (312 ITR 254) As per the landmark decision of Supreme Court in the case of Woodward Governor and other judicial precedents, any MTM foreign exchange fluctuation arising on a revenue account is allowed as a deduction/ to be offered to tax under the provisions of the Act Any MTM foreign exchange fluctuation arising on a capital account is not allowed as deduction/ not to be offered to tax Page 24 ICDS VI- Effects of changes in foreign exchange rates

25 Key differences- Initial Recognition Issue ICDS IGAAP Ind AS Initial Recognition Initial recognition of transaction in foreign currency at the rate prevailing on the date of transaction. An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used for all transaction in each foreign currency occurring during that period. If the exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used. A foreign currency transaction should be 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. (Para 9) A foreign currency transaction shall be recorded, in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. Page 25 ICDS VI- Effects of changes in foreign exchange rates

26 Key differences- Conversion at the Balance Sheet Date Issue ICDS IGAAP Ind AS Conversion at the balance sheet date Monetary items are to be converted at the rate prevailing on the balance sheet date Same as ICDS. However There is an exception to the above that there is a limited period irrevocable option for corporate entities to capitalise exchange differences on long-term foreign currency monetary items incurred for acquisition of depreciable capital assets and to amortise exchange differences on other longterm foreign currency monetary items over the life of such items but not beyond the stipulated date. (Para 11a, 46) Same as ICDS Page 26 ICDS VI- Effects of changes in foreign exchange rates

27 Key differences- Conversion at the Balance Sheet Date Issue ICDS IGAAP Ind AS Conversion at the balance sheet date All non-monetary items to be converted at the rate prevailing on the date of transaction Non-monetary item being inventory which is carried at NRV denominated in foreign currency to be converted at the rate existing at the NRV date Non-monetary foreign currency items which are carried in terms of historical cost denominated in a foreign currency are reported using the exchange rate at the date of the transaction; Those which are carried at fair value or other similar valuation denominated in a foreign currency are reported using the exchange rates that existed when the values were determined. (Para 11b and c) Similar to IGAAP Page 27 ICDS VI- Effects of changes in foreign exchange rates

28 Key differences- Recognition of exchange differences Issue ICDS IGAAP Ind AS Recognition of exchange differences Exchange differences arising on monetary items shall be recognized as income or expenses of that year Exchange differences arising on translation or settlement of foreign currency monetary items are recognised in profit or loss in the period in which they arise. (para 13) Exchange differences arising on translation or settlement of foreign currency monetary items are recognised in profit or loss in the period in which they arise Page 28 ICDS VI- Effects of changes in foreign exchange rates

29 Key differences- Recognition of exchange differences Issue ICDS IGAAP Ind AS Recognition of exchange differences Under ICDS, there cannot be any exchange difference arising on non monetary items as both the initial recognition and subsequent conversion at balance sheet are made at the rate prevailing on the date of transaction. Having said the above, ICDS VI lays down that any exchange difference in respect of a non monetary item shall not be recognized as income or expenses. Non-monetary items are translated at historical rate if they are valued at cost. Non-monetary items which are carried at fair value or other similar valuation are reported using the exchange rates that existed when the values were determined. Similar to IGAAP Page 29 ICDS VI- Effects of changes in foreign exchange rates

30 Key differences- Translating the financial statements of foreign operations Issue ICDS IGAAP Ind AS Translating the financial statements of foreign operations There is no classification of operations as integral or non-integral. Translation of financial statements of a foreign operation to the reporting currency of the parent/investor depends on the classification of that operation as integral or non-integral. Same as ICDS Page 30 ICDS VI- Effects of changes in foreign exchange rates

31 Key differences- Translating the financial statements of foreign operations Issue ICDS IGAAP Ind AS Translating the financial statements of foreign operations Financial statements of a foreign operation shall be translated as if the transactions of the foreign operation had been those of the person himself, hence, same tax treatment In the case of an integral foreign operation, monetary assets are translated at closing rate. Non-monetary items are translated at historical rate if they are valued at cost. Nonmonetary items which are carried at fair value or other similar valuation are reported using the exchange rates that existed when the values were determined. Income and expense items are translated at historical/average rate. Exchange differences are taken to the statement of profit and loss. (Para 8-16,21) Assets and liabilities should be translated from functional currency to presentation currency at the closing rate at the date of the balance sheet; income and expenses at actual/average rates for the period; exchange differences are recognised in other comprehensive income and accumulated in a separate component of equity. These are reclassified from equity to profit or loss when the gain or loss on disposal is recognised Page 31 ICDS VI- Effects of changes in foreign exchange rates

32 Key differences- Translating the financial statements of foreign operations Issue ICDS IGAAP Ind AS Translating the financial statements of foreign operations For non-integral foreign operations, closing rate method should be followed (i.e. all assets and liabilities are to be translated at closing rate while profit and loss account items are translated at actual/average rates). The resulting exchange difference is taken to reserve (Para 24) and is recycled to profit and loss on the disposal of the nonintegral foreign operation. (Para 31) Page 32 ICDS VI- Effects of changes in foreign exchange rates

33 Key differences- Forward exchange contracts Issue ICDS IGAAP Ind AS Hedging contracts Forward exchange contracts (foreign currency forward contract and foreign currency option contract) Exchange difference on both underlying and forward exchange contract is recognised in P & L account. Exchange gain/loss on underlying will get offset by exchange loss/gain on forward exchange contract. Premium/ discount on forward exchange contract shall be amortized over the life of the contract. Similar treatment under IGAAP (Para 36) Accounted for as a derivative under Ind AS 109. Page 33 ICDS VI- Effects of changes in foreign exchange rates

34 Key differences- Forward exchange contracts Issue ICDS IGAAP Ind AS Other contracts Trading Speculation Contracts to hedge foreign currency risk on firm commitments or a highly probable forecast transaction MTM gain or loss to be recognized as income or expense (including premium or discount) only at the time of settlement Forward exchange contract intended for trading or speculation purposes: The premium or discount on the contract is ignored and at each balance sheet date, the value of the contract is marked to its current market value and the gain or loss on the contract is recognised. (Para 39) Accounted for as a derivative under Ind AS 109. Page 34 ICDS VI- Effects of changes in foreign exchange rates

35 Summary: Accounting for Foreign Currency Derivatives Accounting for Foreign Currency Derivatives Forward contracts for hedging/ trading/ speculation Other derivatives. Covered by AS -11 GN on Derivatives Restatement on MTM basis at year end for trading/speculation Recognize MTM loss/gain Hedge accounting (optional) Exchange difference on both underlying and forward exchange contract is recognised in P & L account Page 35 ICDS VI- Effects of changes in foreign exchange rates

36 Summary: Derivatives covered by ICDS VI Foreign currency forward and option contracts ICDS makes no distinction between capital and revenue Hedging Contracts Trading Speculation Firm commitments* Highly probable forecast* Exchange difference on both underlying and forward exchange contract is recognised in P & L account Premium/discount to be amortised over contract life (Same as ICAI) ICAI AS -11 permits MTM gain/loss May have significant impact May result in MAT mismatch Taxpayers also need to guard against characterization as speculative * ICAI AS- 11 excludes these contracts. ICDS explains firm commitment to mean assets/liabilities which exists by end of previous year ICDS recognises loss/gain on actual settlement GN on Derivatives MTM Loss or Gain Hedge Accounting (Optional) Page 36 ICDS VI- Effects of changes in foreign exchange rates

37 Forex derivatives : Overview from ICDS perspective Forex derivatives (not covered by ICDS) Forex derivatives like cross currency swaps, futures, interest rate swaps, exotic products Committee had recommended formulation of separate ICDS 1 ICDS is silent! But, ICDS on accounting policies prohibits MTM or expected loss!! 1 GN on Derivatives recommends recognition of MTM Page 37 ICDS VI- Effects of changes in foreign exchange rates

38 Disclosure requirements ICAI AS 11 Amount of exchange differences in the net profit or loss for the year Current Tax Position No specific provisions ICDS No disclosure requirements Amount of exchange difference accumulated in foreign currency translation reserve Page 38 ICDS VI- Effects of changes in foreign exchange rates

39 Transitional Provisions 1.All foreign currency transactions undertaken on or after 1st day of April, 2016 shall be recognised in accordance with the provisions of this standard. 2. Exchange differences arising in respect of monetary items or non monetary items, on the settlement thereof during the previous year commencing on the 1st day of April, 2016 or on conversion thereof at the last day of the previous year commencing on the 1 st day of April, 2016, 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 the 31st March, 2016 for an item, if any, which is carried forward from said previous year. Page 39 ICDS VI- Effects of changes in foreign exchange rates

40 Transitional Provisions 3. The financial statements of foreign operations for the previous year commencing on the 1st day of April, 2016 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 the 31st March, 2016 for an item, if any, which is carried forward from said previous year. 4. All forward exchange contracts existing on the 1st day of April, 2016 or entered on or after 1st day of April, 2016 shall be dealt with in accordance with the provisions of this standard after taking into account the income or expenses, if any, recognised in respect of said contracts for the previous year ending on or before the 31st March, Page 40 ICDS VI- Effects of changes in foreign exchange rates

41 Treatment of MTM loss/ expected loss [s. 36(1)(xviii), 40A(13)] Page 41

42 Treatment of MTM loss/ expected loss prior to FA 2018 Pre-amendment position Nature of income/ expense Book treatment Tax position prior to ICDS Treatment as per ICDS Delhi HC ruling MTM loss on derivatives (not covered by ICDS VI) As per ICAI Guidance of March , MTM loss is recognised but MTM gain is ignored Allowable as per SC ruling in Woodward Governor s case (312 ITR 254) Not allowable as deduction (ICDS I) Prudence is inherent in s.37 of the Act 1 Accounting is different under ICAI s revised GN issued in May 2015 Page 42

43 Treatment of MTM loss/ expected loss [s. 36(1)(xviii), 40A(13)] [w.r.e.f AY ] S. 36(1)(xviii): marked to market loss or other expected loss as computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 S. 40A(13): No deduction or allowance shall be allowed in respect of any marked to market loss or other expected loss, except as allowable under clause (xviii) of sub-section (1) of section 36 ICDS I prohibits MTM/ expected loss, unless permitted by any other ICDS Once MTM loss is disallowed, loss to be claimed on actual settlement u/s 37(1) At par with MTM loss, arguably, MTM gains not chargeable to tax Page 43

44 Treatment of forex fluctuation on capital monetary items [s. 43AA] Page 44

45 Treatment of forex fluctuation on capital monetary items Pre-amendment position Nature of income/ expense Forex gain/ loss on borrowings for domestic capital assets Book treatment Tax position prior to ICDS Requires recognition in P&L A/c One-time irrevocable option of capitalization provided u/s. 211(3C) of Cos Act 1956 Neither taxable nor deductible Cannot be adjusted against cost of asset Treatment as per ICDS To be treated as gain/ loss on MTM basis (ICDS VI) Delhi HC ruling No specific observation on this issue Page 45

46 Taxation of foreign exchange fluctuation not governed by s. 43A [s. 43AA] [w.r.e.f AY ] S. 43AA. (1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. (2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to (i) monetary items and non-monetary items; (ii) translation of financial statements of foreign operations; (iii) forward exchange contracts; (iv) foreign currency translation reserves. Page 46

47 Taxation of foreign exchange fluctuation not governed by s. 43A [s. 43AA] [w.r.e.f AY ] Subject to s.43a, any forex gain/ loss arising on all the following foreign currency transactions shall be treated as income or loss and computed in accordance with ICDS: Monetary and non-monetary items Translation of financial statements of foreign operations Forward exchange contracts Foreign currency translation reserve Whether forex gain/ loss on loans related to domestic assets taxable/ deductible on MTM basis? Page 47

48 Government grants ICDS VII

49 Scope This ICDS deals with the treatment of Government Grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements etc. [para 1] ICDS VII covers Related to depreciable fixed assets; Related to non-depreciable fixed assets; Not directly related to any asset; Grants given to provide immediate financial support; Grants given in the form of nonmonetary assets ; and Any other grant Doesn t deal with Government assistance other than in the form of government grants; (Technical or marketing advice) and Government participation in the ownership of the enterprise Page 49 ICDS VII Government grants

50 Definitions Government refers to the Central Government, State Government, 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 Transactions with Government which cannot be distinguished from the normal trading transactions of the person Page 50 ICDS VII Government grants

51 Recognition criteria Reasonable assurance that the person shall comply with the conditions attached to them and the grants shall be received Recognition of government grant shall not be postponed beyond the date of actual receipt Grant may be recognized earlier as Income under ICDS (upon receipt) than under Ind AS or Indian GAAP (when grant conditions are met subsequent to receipt of grant) Page 51 ICDS VII Government grants

52 Key difference recognition criteria ICDS VII AS 12 Ind AS 20 Lower threshold- Higher threshold- Same as IGAAP Reasonable assurance required for a.conditions of grant to be met and : b.grant shall be received: or Reasonable assurance required for a.conditions of grant to be met and b.reasonable certainty for receipt of grant. c. Grant is received Recognition cannot be postponed beyond receipt. Page 52 ICDS VII Government grants

53 Treatment of government grants Related to depreciable fixed asset(s) Related to non-depreciable asset deducted from actual cost/ WDV of the asset(s) With Condition recognised as income over the same period over which the cost of meeting such obligations is charged to income. Without condition recognized as income over periods necessary to match them with related costs which they are intended to compensate Compensation for past expenses or giving immediate financial support Shall be recognized as income of the period in which it is receivable Not directly relatable to a single asset Proportionate amount to be reduced from actual cost/written down value Non-monetary grants at concessional rate Accounted for on the basis of their acquisition cost Other government grants recognized as income over periods necessary to match them with related costs which they are intended to compensate Page 53 ICDS VII Government grants

54 Key difference: Treatment of Government Grants Concept ICDS AS-12 Ind AS 20 Grant for assets but not directly related to any particular asset So much of the amount which bears to the total grant, the same proportion as such asset bears to all the assets for which grant is received, shall be reduced from actual cost Does not specifically cover this Both grant and asset are accounted for at fair value Grants in the form of nonmonetary assets given at concessional rates To be recorded at acquisition cost To be recorded at acquisition cost Both grant and asset are accounted for at fair value Page 54 ICDS VII Government grants

55 Treatment of Government Grants (Cont.) Concept ICDS AS-12 Ind AS 20 Monetary grants related to depreciable assets Shall be deducted from the cost of assets/ WDV of the block of assets No option to recognize as deferred revenue Either deducted from gross value of the asset or treated as deferred income and recognised in P&L on a systematic basis over the useful life of assets Grant shall be set up as deferred income and recognised in P&L on a systematic basis over the useful life of assets Page 55 ICDS VII Government grants

56 Case study- Grant related to depreciable fixed asset Co. A has received grant of Rs. 10 crore from Rajasthan Government to procure a plant worth Rs. 25 Crores to be used in manufacturing unit based in Alwar. How this plan should be recognized as per ICDS. Balance sheet Asset Grant Net Amount to be shown as per ICDS 25 Crore -10 Crore 15 Crore No difference in Pre and Post ICDS implication subsidy will be reduced from the cost of asset Page 56 ICDS VII Government grants

57 Case study- Grant related to non depreciable fixed asset Co. A has received grant of Rs. 10 crore from Rajasthan Government to procure land worth worth Rs. 25 Crores on which A will construct the plant. As condition, Company needs to keep 1,000 local work force for next 5 years, else government will ask for refund of the grant on pro-rata basis How this plan should be recognized as per ICDS. Balance sheet Asset Land Liabilities Grant 25 Crore 10 Crore Grant of 10 crore will be recognized as income in Profit & Loss Account over the period of 5 years. Pre ICDS grant would be regarded as capital receipt Page 57 ICDS VII Government grants

58 Case study- Non Monetary grants Company A has received the land worth Rs. 50 lac from the Government by just paying Rs. 30 Lac only. This will be used for the construction of new plant which will ultimately generate jobs in the society. How this grant will be recognized as per ICDS Balance sheet Asset Grant Net Amount to be shown as per ICDS Accounted for on the basis of their acquisition cost 50 lac -20 Lac 30 Lac No difference in Pre and Post ICDS implication Page 58 ICDS VII Government grants

59 Refund of government grant Depreciable assets Refund recorded by increasing the actual cost or WDV of the block of assets Depreciation provided prospectively at the prescribed rate Other than depreciable assets Refund shall be first applied towards any unapplied deferred credit and then charged to profit and loss account Page 59 ICDS VII Government grants

60 Treatment of Refunds Concept ICDS AS-12 Ind AS 20 Related to specific fixed assets Increasing actual cost/written down value of asset Increasing book value of asset or reducing capital reserve/deferred income To be applied first against any unamortized deferred credit. Any excess to be charged to P&L account Page 60 ICDS VII Government grants

61 Case study- Refund Depreciable asset On 1 April 2015 Co. A has received conditional grant of Rs. 10 crore from Rajasthan Government to procure a plant worth Rs. 25 Crores to be used in manufacturing unit based in Alwar. Life of the plant is 10 years. There was no certainty of the conditions being fulfilled and in the 2 nd year Co. A failed to satisfy the condition. 9 crore out 10 has been refunded to the Government How this plan should be recognized as per ICDS. Pre ICDS Since there was no certainty that the conditions would be fulfilled, grant should not be recognized in year 1 as it can be argued that there was no reasonable assurance that the A will comply with the conditions attached. Post ICDS 2015 Grant will be recognized as it can not be postponed beyond receipt. 1 st April Asset Grant Refund Asset after refund 13.5 Crore 9 Crore 22.5 Crore Page 61 ICDS VII Government grants

62 Disclosures Nature and Extent of Government Grants Recognized during the previous year as income Not recognized during the previous year as income and reasons thereof Recognized by way of deduction from actual cost/written down value of assets Not recognized by way of deduction from actual cost/written down value Page 62 ICDS VII Government grants

63 Transitional provisions All the Government grants which meet the recognition criteria on or after 1st day of April, 2016 shall be recognised for the previous year commencing on or after 1st day of April, 2016 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 31st day of March, Page 63 ICDS VII Government grants

64 Practical issues A. Sales tax exemption As sales tax exemption is not an assistance in cash or kind, the same cannot be regarded as Government grant Accordingly, ICDS VII shall not apply to sales tax exemption [similar view has been expressed in compendium of opinions, Volume XX] B. Assistance that cannot reasonably have a value placed upon them Such grants are not covered by ICDS VII Accordingly, ICDS VII shall not apply to such grants Examples - free technical or market advice, provision of guarantees etc. Page 64 ICDS VII Government grants

65 Practical issues (cont.) C. Procurement policy Government s procurement policies in the form of purchase preference, price preference, reservation policies etc. may benefit a company immensely and account for huge chunk of its business However, ICDS VII does not cover transactions with Government which cannot be distinguished from the normal trading transactions of the person Such procurement policy is an assistance which cannot be distinguished from normal trading operations of the company and hence, is not a Government grant Page 65 ICDS VII Government grants

66 Taxation of Government grant [s. 145B] [w.r.e.f AY ] Pre-amendment position Nature of income/ expense Government grants received pending compliance of attached conditions Book treatment Recognition of government grants on reasonable certainty of fulfilment of attached conditions Tax position prior to ICDS Taxable only upon fulfilment of attached conditions as per SC ruling in Excel Industries Treatment as per ICDS Recognition of government grants cannot be postponed beyond date of actual receipt (ICDS VII) Delhi HC ruling ICDS VII is ultra vires the Act on this aspect and hence struck down FA 2018 amendment S. 145B(3). The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year. As per s. 145B(3), government grant shall be deemed to be taxable on receipt basis, if not charged to tax in earlier years Reference to in accordance with ICDS missing in s. 145B(3) Page 66 K&S Technical Guidance Finance Act, 2018

67 Securities ICDS VIII

68 Background Prior to ICDS, no comparable AS, but IGAAP - AS 13 clarifies that principles applicable to current investment can apply to securities held as stock-in-trade Unlike IGAAP - AS 13, ICDS mandates bucket approach for valuation of securities Securities to be valued at lower of cost or Net Realizable Value (NRV) Characterization of investments as capital asset or stock-in-trade to be determined independent of ICDS Unlike other ICDS no transitional provisions prescribed Page 68 ICDS VIII- Securities

69 Scope ICDS deals with securities held as stock-in-trade ICDS should not apply to Foreign Portfolio Investors (FPIs), since securities are deemed to be capital assets in their hands ICDS deals with securities held by a scheduled bank or public financial institutions formed under a Central or a State Act or so declared under the Companies Act ICDS does not deal with: Recognition of interest and dividends on securities which are covered by ICDS IV - Revenue recognition Securities held by person engaged in business of insurance Securities held by mutual funds, venture capital funds, banks and public financial institutions Coverage of ICDS will illustratively affect Page 69 Stock brokers; NBFCs; Others engaged in securities trading ICDS VIII- Securities

70 Key differences- Scope Issue ICDS IGAAP Ind AS Scope ICDS VIII is applicable to securities held as stock-in-trade ICDS VIII is also applicable to securities held by a scheduled bank or public financial institution Securities held as stock-intrade are outside the scope of AS 13. However, provisions of AS 13 relating to current investments are applicable to securities held as stock-intrade with suitable modifications. AS 13 scopes out: retirement benefit plans and life insurance enterprises; mutual funds and venture capital funds and/ or the related asset management companies banks and public financial institutions formed under a Central or State Government Act or so declared under the Companies Act, Ind AS 109 prescribes the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items by all entities. Its scope is very vast in comparison to AS 13 and ICDS VIII. Page 70 ICDS VIII- Securities

71 Definitions Part A Securities shall have the meaning assigned to it in section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) and shall include share of a company in which public are not substantially interested but shall not include derivatives referred in section 2(h)(1a) 1. Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in a arm s length transaction 1 SCRA defines securities to include: (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate (ia) Derivative (ib) Units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia)such other instruments as may be declared by the Central Government to be securities (iii) Rights or interest in securities. Page 71 ICDS VIII- Securities

72 Definitions Part B Securities shall have the meaning assigned to it in section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) and shall include share of a company in which public are not substantially interested. Scheduled Bank shall have the same meaning assigned to it in clause (ii) of the Explanation to Sec. 36(1)(viia) to the Income tax Act 1 SCRA defines securities to include: (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate (ia) Derivative (ib) Units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia)such other instruments as may be declared by the Central Government to be securities (iii) Rights or interest in securities. Page 72 ICDS VIII- Securities

73 Key differences- Definition Issue ICDS IGAAP Ind AS Definition Securities shall have the meaning assigned to it in section 2(h) of the SCRA, (including shares of a private company but excludes derivatives) Securities definition for a scheduled bank or a public financial institution does not exclude derivatives Fair value is defined as the amount for which an asset could be exchanged between a knowledgeable, willing buyer and knowledgeable, willing seller in an arm s length transaction AS 13 defines investments as assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm s length transaction. Market value or NRV provides an evidence of fair value IND AS is very broad based and hence has definitions for financial instruments, financial assets and financial liabilities. Financial assets include investments IND AS 113 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Page 73 ICDS VIII- Securities

74 Key differences- Recognition and measurement Issue ICDS IGAAP Ind AS Recognition and initial measurement ICDS VIII akin to AS 13 Where a security is acquired in exchange for other securities or another asset, the fair value of the security so acquired shall be its actual cost Where broken period interest is included in the price paid for the security, subsequent receipt of interest is allocated between preacquisition and postacquisition period; preacquisition portion is deducted from cost RBI guidelines to be followed by Scheduled Banks and Public Financial Institutions The cost of an investment includes acquisition charges such as brokerage, fees and duties. If an investment is acquired in exchange, or part exchange, for another asset, the acquisition cost of the investment is determined by reference to the fair value of the asset given up. The treatment of broken period interest is similar to ICDS An entity should recognise a financial asset or a financial liability in its balance sheet when, and only when, the entity becomes party to the contractual provisions of the instrument. All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability Page 74 ICDS VIII- Securities

75 Key differences- Recognition and measurement Issue ICDS IGAAP Ind AS Subsequent measurement Miscellaneous Securities shall be valued at cost or NRV whichever is lower, akin to AS 13. If securities are not quoted then ICDS requires subsequent measurement at cost only Where actual cost initially recognized cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of FIFO or weighted average method Long-term investments are carried at cost less provision for diminution in value, which is other than temporary. Current investments are carried at lower of cost and fair value All financial assets are classified as measured at amortised cost or measured at fair value. Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss (FVTPL), or recognised in other comprehensive income (FVTOCI) Page 75 ICDS VIII- Securities