Income Computation and Disclosure Standard (ICDS)

Size: px

Start display at page:

Download "Income Computation and Disclosure Standard (ICDS)"

Blaise Casey
6 years ago
Views:

1 Income Computation and Disclosure Standard (ICDS) ICDS II Valuation of Inventories ICDS III Construction Contracts ICDS IV Revenue Recognition

2 ICDS II Valuation of Inventories Based on AS 2 Scope: Includes WIP of service provider (Not specifically mentioned in scope or definition of Inventories) Excludes Machinery Spares used in connection with tangible fixed assets. Inventories valued at cost or NRV, whichever is lower.

3 ICDS II Valuation of Inventories Cost of Inventories Costs of purchases, Costs of services, Costs of conversion and Measurement of Cost Other costs incurred in bringing the inventories to their present location and condition.

4 ICDS II Valuation of Inventories Costs of Purchases: Recoverable taxes and duties to form part of cost. (Section 145A) Costs of Services (New Insertion) Cost of Conversion: As per AS 2 Other Costs: As per AS 2

5 ICDS II Valuation of Inventories Cost of Services Includes: Labour and other costs of personnel directly engaged in providing services Supervisory personnel Attributable overheads ICDS on Revenue Recognition

6 ICDS II Valuation of Inventories Cost Formulae Permits FIFO and Weighted Average Cost Method Fairest Possible Approximation Is concept of `Materiality built-in? Standard Cost Whether permitted? AS 2 Para 18 Final Report of TAS Committee.

7 ICDS II Valuation of Inventories Net Realisable Value Item by item basis Based on evidence available `at the time of valuation Take into consideration purpose for which inventory is held Events occurring after the end of previous year to the extent that such events confirm conditions existing on the last day of the previous year

8 ICDS II Valuation of Inventories Value of Opening Inventory On Commencement of Business Capital assets converted into stock-in-trade Change in Method of Valuation Reasonable Cause for the purpose of change in method of valuation of inventories.

9 ICDS II Valuation of Inventories Dissolution of Partnership, AOP & BOI Valuation to be done only at Net Realisable Value Impact.

10 ICDS II Valuation of Inventories Transitional Provision Interest & Other Borrowing costs included in cost of inventory as on 1st day of April, 2015 will continue to remain included on 31 st March, 2016 if inventory items remains in stock. Disclosures Correspond to AS 2

11 ICDS III Construction Contracts Based on AS 7 Scope (As per AS 7): To be applied in determination of Income for a construction contract of a contractor Applied separately for each construction contract Combining and Segmenting of contracts

12 ICDS III Construction Contracts Definitions: Construction contract Fixed price contract Cost plus contract Retentions Progress billings Advances Correspond to definitions in AS 7

13 ICDS III Construction Contracts Contract Revenue Recognised when there is reasonable certainty of ultimate collection. Variations in contract work, claims and incentive payment forms part of contract revenue: To the extent it is probable they will result in revenue and can be reliably measured. Can contract revenue be revised Upward or Downward? Revenues once recognised, if not collectible Recognised as an expense and not adjusted against revenue.

14 ICDS III Construction Contracts Contract Revenue Retention Money Whether right to receive the retention money accrues only after the obligations under the contract are fulfilled? Case Law: CIT v. Simplex Concrete Piles (India) Pvt. Ltd (1989) 179 ITR 8 (Cal.) CIT v. Associated Cables (P) Ltd. (2006) 286 ITR 596 (Bom.) CIT v. Ignifuild Boilers (I) Ltd. (2006) 283 ITR 295 (Mad)

15 ICDS III Construction Contracts Contract Costs Include: Costs related directly to the specific contract Costs attributable to contract activity in general that can be allocated Costs specifically chargeable to customers Allocated borrowing costs in accordance with ICDS on Borrowing Costs. (New Insertion)

16 Contract Costs Costs incurred for securing contract Reduced by incidental income Interest, dividend, capital gain not to be reduced from costs Exclude: Costs that cannot be attributed or cannot be allocated Costs relating to future activity and advances to sub-contractors

17 ICDS III Construction Contracts Recognition of Contract Revenues and Expenses Recognised with reference to Stage of Completion of contract Major deviation from AS 7 Condition of ability to estimate reliably the outcome of contract absent (Except in early stages) Expected loss on construction contract cannot be recognised Accounting of actual loss, for example by storm

18 ICDS III Construction Contracts Recognition of Contract Revenues and Expenses Determination of Stage of Completion Proportion of cost incurred to estimated total cost Survey of work Completion of physical work Progress payments and advances not determinative of stage of completion

19 ICDS III Construction Contracts Recognition of Contract Revenues and Expenses Application of Stage of Completion On cumulative basis each year Taking current estimates of contract revenue and contract costs Changed estimates are used

20 ICDS III Construction Contracts Recognition of Contract Revenue and Expenses Early Stage of a contract When outcome of the contract cannot be estimated reliably - Contract Revenue to be recognised only to the extent of costs incurred. Early stage of a contract shall not extend beyond 25% of the stage of the completion. Deviation from AS 7

21 ICDS III Construction Contracts Transitional Provision Contract Revenue and Contract Costs for a contract, which commenced on or before the 31 st day of March, 2015 but not completed by the said date, shall be recognised in accordance with the provisions of ICDS Contract Revenue, Contract Costs or Expected Loss, if any, recognised for any previous year commencing on or before the 1 st day of April, 2014 shall be taken into account for the previous year commencing on the 1 st day of April and subsequent years.

22 ICDS III Construction Contracts Disclosures ICDS omits one disclosure requirement:- The methods used to determine the contract revenue recognised in the period

23 ICDS IV Revenue Recognition Scope Deals with the bases for recognition of revenue arising in the course of the ordinary activities of a person from:- The sale of goods The rendering of services The use by others of the person s resource yielding interest, royalties or dividends Same as per AS 9

24 ICDS IV Revenue Recognition Does not deal with the aspects of revenue recognition which is dealt with by other ICDS s Construction contracts Government grants

25 ICDS IV Revenue Recognition Revenue Definition Omits: Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them.

26 Sale of Goods: ICDS IV Revenue Recognition Recognition Where transfer of property in goods does not coincide with transfer of risks and rewards - revenue recognised at the time of transfer of risks and rewards Revenue recognised when there is reasonable certainty of collection Claim for escalation of price and import incentive recognition postponed to the extent of uncertainty. Finance Leases - Will it be treated as sale if risks and rewards have been transferred?

27 ICDS IV Revenue Recognition Rendering of Services: Recognition of revenue cannot be postponed in case of significant uncertainties? Permits only Percentage of Completion Method. Recognition on straight line method over a period of time not mentioned. Provisions of ICDS on construction contracts made applicable. Completed Service Contract method not permitted.

28 ICDS IV Revenue Recognition The use of Resources by Others yielding Interest, Royalties or Dividends Interest to be recognised on time basis. Interest on Bonds, Debentures, Savings Accounts etc. may create problem. Dividends are recognised in accordance with the provisions of the Act. Revenue from Rental not covered.

29 ICDS IV Revenue Recognition Transitional Provision for Services Shall apply in a manner similar to one explained in ICDS III Construction Contracts

30 Sale of Goods ICDS IV Revenue Recognition Disclosures (Substantially New) Total amount not recognised as revenue due to lack of reasonable certainty of its ultimate collection along with nature of uncertainty Rendering of Services Amount of Revenue from service transactions recognised as revenue. Method used to determine the stage of completion In case of service transactions in progress: Costs incurred and recognised profits (less recognised losses) The amount of advances received The amount of retentions

31 Thank You --

ICDS Basics. - CA.K.Ulaganaathan Shankar

ICDS Basics. - CA.K.Ulaganaathan Shankar ICDS Basics - 2 Applicability General 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