Presentation on ICDS 2, 3, 4 and 9 Anshul Kumar 19 August 2017

Transcription

1 Presentation on ICDS 2, 3, 4 and 9 Anshul Kumar 19 August

2 Contents ICDS II: Valuation of inventories 3 ICDS III: Construction contracts 8 ICDS IV: Revenue recognition 14 ICDS IX: Borrowing costs 19 2

3 ICDS II Valuation of inventories 3

4 ICDS II: Valuation of inventories Scope of ICDS ICDS II shall apply for valuation of inventories except: Work-in-progress arising under construction contracts dealt with by ICDS III on construction contracts; Work-in-progress which is dealt with by other ICDS; Shares, debentures and other financial instruments which is held as stock-in-trade dealt with by ICDS VIII on securities; Producers inventories of livestock, agriculture, forest products, mineral oil, ores and gases to the extent they are measured at NRV; Machinery spares which can only be used in connection with tangible fixed assets dealt with by ICDS V on tangible fixed assets. 4

5 ICDS II: Valuation of inventories Definition Inventories are assets: Held for sale in the ordinary course of business (finished goods); In the process of production for such sale (work-in-progress); and, In the form of materials or supplies to be consumed in the production process or in rendering of services (stores, consumables etc.). 5

6 ICDS II: Valuation of inventories Valuation Inventories shall be valued at cost or net realisable value ( NRV ), whichever is lower. Cost of inventories to include: Cost of purchase; Cost of services; Cost of conversion; and, Other costs incurred in bringing the inventory to its present location and condition. Exclusions from cost of inventories: Abnormal amounts of wasted materials, labour or other production costs; Storage costs; Administration overheads; and, Selling costs. Identified valuation methodologies: First-in-first out method; Weighted average cost method; Retail method; and, Standard costing method. 6

7 ICDS II: Valuation of inventories General principles and disclosures Method of inventory valuation once adopted in any year shall not be changed without a reasonable cause. Value of opening inventory shall be the value of inventory as on the close of the immediately preceding previous year. Disclosure requirements: The accounting policies adopted in measuring inventories including the cost formulae used; The total carrying amount of inventories and its classification appropriate to a person; Details of inventories measured at standard cost; and, Confirmation that standard cost approximates the actual cost. 7

8 ICDS III Construction contracts 8

9 ICDS III: Construction contracts Scope of ICDS ICDS III is applicable in determination of income for a construction contract of a contractor. 9

10 ICDS III: Construction contracts Definition Construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes: Contract for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; Contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets. Retentions are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified 10

11 ICDS III: Construction contracts Recognition Revenue (including retentions) and costs (i.e. direct cost, allocated cost, borrowing cost as per specific ICDS and other cost specifically chargeable to customer) from construction contracts shall be recognized by reference to the stage of completion of the contract. During the early stages of a contract, where the outcome of the contract cannot be estimated reliably, contract revenue must be recognized only to the extent of costs incurred. The early stage of a contract shall not extend beyond 25% of the stage of completion. 11

12 ICDS III: Construction contracts Disclosure Disclosure requirements: The amount of contract revenue recognised as revenue in the period; and The methods used to determine the stage of completion of contracts in progress. A person shall disclose the following for contracts in progress at the reporting date, namely: amount of costs incurred and recognised profits (less recognised losses) upto the reporting date; the amount of advances received; and the amount of retentions. 12

13 ICDS III: Construction contracts FAQs issued by CBDT Whether the recognition of retention money, receipt of which is contingent on the satisfaction of certain performance criterion is to be recognized as revenue billing? Retention money, being part of overall contract revenue, shall be recognized as revenue subject to reasonable certainty of its ultimate collection condition contained in para 9 of ICDS III on Construction contracts. Since there is no specific scope exclusion for real estate developers and Build-Operate- Transfer (BOT) projects from ICDS IV on Revenue Recognition, please clarify whether ICDS III and ICDS IV should be applied by real estate developers and BOT operators. Also, whether ICDS is applicable for leases? At present there is no specific ICDS notified for real estate developers, BOT projects and leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as may be applicable. 13

14 ICDS IV Revenue recognition 14

15 ICDS IV: Revenue recognition Scope of ICDS ICDS IV deals with the bases of recognising revenue arising in the course of ordinary activities from: Sale of goods; Rendering of services; and, Use by others of the person s resources yielding interest, royalties or dividends. 15

16 ICDS IV: Revenue recognition Recognition Revenue from sale of goods Revenue to be recognised when: Performance of the seller s part of the bargain is complete The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer, and The seller retains no effective control of the goods transferred to a degree usually associated with ownership Measurability of revenue is certain Reasonable certainty of ultimate collection of revenue Revenue from rendering of services Revenue to be recognised by percentage completion method: Recognized by reference to the stage of completion of the service at the reporting date Revenue from the service transaction is to be matched with the costs incurred in reaching the stage of completion When services are provided by an indeterminate number of acts over a period of specific time, revenue may be recognized on straight line basis over specific period Revenue of service contracts with duration of not more than 90 days may be recognized when contract is completed/ substantially completed Revenue from use by others of the person s resources Interest shall accrue on time basis determined by the amount outstanding and the rate applicable Interest on taxes to be recognised in the year it is received Dividends shall be recognised in accordance with the provisions of the Income-tax Act, 1961 Royalty shall accrue as per the terms of the relevant agreement 16

17 ICDS IV: Revenue recognition Disclosures Disclosure requirements: In transactions involving sale of good, total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty. Amount of revenue from service transactions recognised as revenue during the previous year. Method used to determine the stage of completion of service transactions in progress. For service transactions in progress at the end of previous year: Amount of costs incurred and recognised profits (less recognised losses) upto end of previous year; Amount of advances received; and Amount of retentions. 17

18 ICDS IV: Revenue recognition FAQs issued by CBDT The condition of reasonable certainty of ultimate collection is not laid down for taxation of interest, royalty and dividend. Whether the taxpayer is obliged to account for such income even when the collection thereof is uncertain? As a principle, interest accrues on time basis and royalty accrues on the basis of contractual terms. Subsequent non recovery in either cases can be claimed as deduction in view of amendment to Section 36(1)(vii). Further, the provision of the Act (e.g. Section 43D) shall prevail over the provisions of ICDS. Whether ICDS is applicable to revenues which are liable to tax on gross basis like interest, royalty and fees for technical services for non-residents u/s 115A of the Act? Yes, the provisions of ICDS shall also apply for computation of these incomes on gross basis for arriving at the amount chargeable to tax. 18

19 ICDS IX Borrowing costs 19

20 ICDS IX: Borrowing costs Scope of ICDS ICDS-IX deals with the treatment of borrowing costs and excludes actual or imputed cost of owner s equity and preference share capital. 20

21 ICDS IX: Borrowing costs Definition Borrowing costs is defined as interest and other costs incurred by a person in connection with the borrowing of funds and include: Commitment charges on borrowings; Amortised amount of discounts or premiums relating to borrowings; Amortised amount of ancillary costs incurred in connection with the arrangement of borrowings; Finance charges in respect of assets acquired under finance leases or under other similar arrangements. Qualifying asset means: Land, building, machinery, plant or furniture, being tangible assets; Know how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; Inventories that require a period of twelve months or more to bring them to a saleable condition. 21

22 ICDS IX: Borrowing costs Treatment of specific borrowing cost In case of funds borrowed specifically for acquisition, construction or production of a qualifying asset, the amount of borrowing cost to be capitalised shall be the actual borrowing costs incurred during the period on the funds so borrowed. Further, the capitalization of specific borrowing cost shall commence from the date on which funds were borrowed and cease: when such asset was first put to use - in case of tangible and intangible assets; when substantially all activities necessary to prepare such inventory for its intended sale are complete in case of inventory 22

23 ICDS IX: Borrowing costs Treatment of general borrowing cost In case of funds borrowed generally and utilised for acquisition, construction or production of a qualifying asset, the amount of borrowing cost to be capitalised shall be computed in accordance with the following formula: A * B / C Where A = borrowing costs incurred during the previous year except directly related to specific borrowings B = (i) average of costs of qualifying asset as appearing in balance sheet of a person on the first day and the last day of the previous year (i.e. average of opening and closing capital work in progress); (ii) in case qualifying asset does not appear in the balance sheet of a person on the first day or both on the first day and the last day of previous year, half of the cost of qualifying asset (i.e. half of additions made during the year); (iii) in case qualifying asset does not appear in the balance sheet of a person on the last day of previous year, average of the costs of qualifying asset as appearing in the balance sheet of a person on the first day of the previous year and on the date of put to use or completion [i.e. average of opening capital work in progress + additions made during the year (if put to use)]. other than those qualifying assets which are directly funded out of specific borrowings; or C = average of total assets as appearing in the balance sheet of a person on the first day and the last day of the previous year, other than those assets which are directly funded out of specific borrowings. 23

24 ICDS IX: Borrowing costs Treatment of general borrowing cost Capitalization of general borrowing cost shall commence from the date on which funds were utilised and cease: when such asset was first put to use - in case of tangible and intangible assets; when substantially all activities necessary to prepare such inventory for its intended sale are complete in case of inventory The above capitalisation cessation principles shall also apply to the construction of a qualifying asset which is completed in parts and a completed part is capable of being used while construction for the other part continues. FAQs issued by CBDT 24

25 ICDS IX: Borrowing costs Disclosures Disclosure requirements: The accounting policy adopted for borrowing cost; and The amount of borrowing costs capitalised during the year. 25

26 ICDS IX: Borrowing costs FAQs issued by CBDT There are specific provisions in the Act read with Rules under which a portion of borrowing cost may get disallowed under sections like 14A, 43B, 40(a)(i), 40(a)(ia), 40A(2)(b), etc. of the Act. Whether borrowing costs to be capitalized under ICDS IX should exclude portion of borrowing costs which gets disallowed under specific provisions? Since specific provisions of the Act override the provisions of ICDS, it is clarified that borrowing costs to be considered for capitalization under ICDS IX shall exclude those borrowing costs which are disallowed under specific provisions of the Act. Capitalization of borrowing cost shall apply for that portion of the borrowing cost which is otherwise allowable as deduction under the Act. Whether bill discounting charges and other similar charges would fall under the definition of borrowing cost? The definition of borrowing cost is an inclusive definition. Bill discounting charges and other similar charges are covered as borrowing cost. How to allocate borrowing costs relating to general borrowings as computed in accordance with formula prescribed under Para 6 of ICDS IX to different qualifying assets? The capitalization of general borrowing cost under ICDS IX shall be done on asset-by-asset basis. 26

27 This material is prepared for the purpose of seminar conducted by Northern India Regional Council of India on 19 August 2017 for the reference of its members. The information contained herein is meant for general purposes and is also not an exhaustive treatment of such subject(s) and accordingly is not intended to constitute any kind of professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. By using any part of the information in this material the user accepts that none of the author, presenter or any organization with which she or he may be associated, shall be liable to the user for any decisions made or reliance placed on such information. 27