ICDS ABOUT Sectin 145(2) was amended with effect frm AY 2015-16 by replacing wrd f Accunting Standard with ICDS ICDS is applicable fr incme chargeable under the head Incme frm business Prfessin Sectin 28 Incme frm Other Surces Sectin 56 10 ICDS have been ntified vide ntificatin 87/2016 dated 29th September, 2016 ICSD is applicable frm the AY 2017-18 ICDS are applicable t all the assessee fllwing mercantile system f accunting except Individual and HUF wh des nt fall under sectin 44AB 2
ICDS ABOUT Q.3 f CBDT Circular N. 10 f 2017 dated 23 rd March 2017 Questin 3: Des ICDS apply t nn-crprate taxpayers wh are nt required t maintain bks f accunt and/r thse wh are cvered by presumptive scheme f taxatin like sectins 44AD, 44AE, 44ADA, 44B, 44BB, 44BBA, etc. f the Act? Answer: ICDS is applicable t specified persns having incme chargeable under the head `Prfits & gains f business r prfessin r `Incme frm ther surces. Therefre, the relevant prvisins f ICDS shall als apply t persns cmputing incme under the relevant presumptive taxatin scheme. E.g., fr cmputing presumptive incme f a partnership firm u/s 44AD f the Act, the prvisins f ICDS n Cnstructin Cntract r Revenue recgnitin shall apply fr determining receipts r turnver, as the case may be. Individual/HUF falling under presumptive tax nt subject t audit u/s 44AB ut f ICDS by virtue f ntificatin If pting ut f Sectin 44AD, S. 44AB applicable ICDS applicable Des ICDS III / ICDS IV apply t cmpute grss receipts and turnver fr purpse f determining eligibility under presumptive tax scheme? Whether pssible t apply ICDS fr determining whether ICDS applicable? Circular reference fr individuals/hufs Partnership firms, AOP, BOI under presumptive tax scheme - ICDS may apply fr determinatin f turnver/receipts 3
ICDS ABOUT Nt applicable fr maintenance f bks f accunts Parallel bks f accunts / final accunts necessary t keep track f adjustments. Frm 3CD amended t disclse the adjustments required t be made t prfit r lss under ICDS ITR Frms 3, 5 & 6 amended t make adjustment in the taxable incme 4
ICDS ABOUT Obligatins f Tax Auditr Certifying crrectness f particulars in Frm 3CD including adjustments required by ICDS Onerus respnsibility Needs t understand accunting standards being fllwed, tax law and ICDS prvisins Identify differences in AS and ICDS/tax law ICDS wise Pay particular attentin t changes in accunts n accunt f changes in AS/adptin f Ind AS Ensure that tax aspects f each difference is prperly cnsidered Insist n parallel final accunts under ICDS/tax laws t ensure that all effects f adjustments prperly captured and given full effect t 5
INCOME COMPUTATION DISCLOSURE STANDARD I Accunting Plicies III Cnstructin Cntracts V Tangible Fixed Assets VII Gvernment Grants XI Brrwing Csts II Valuatin f Inventries IV Revenue Recgnitin VI Effects f Changes in Freign Exchange Rates VIII - Securities X Prvisins, Cntingent Liability and Cntingent Assets 6
ICDS ABOUT ICDS expected in the future fr Revenue Recgnitin by Real Estate Develpers (draft f Real Estate Transactins put up fr public cmment n 11 th May 2017) Leases Intangible Assets Share based Payment Service Cncessin Arrangements Explratin fr and Evaluatin Of Mineral Resurces 7
ICDS I ACCOUNTING POLICIES 8
ICDS I : ACCOUNTING POLICIES Deals with significant accunting plicies applied while cmputing incme under the head Prfits and gains f business r prfessin r Incme frm ther surces. Des nt deal with maintenance f bks f accunt. ICDS - cncerned with applicatin f accunting plicies and assumptins while cmputing incme fr the purpses f incme-tax. Fundamental accunting assumptins Ging Cncern Cnsistency Accrual Prudence and materiality are nt stated as fundamental accunting assumptins 9
ICDS I : ACCOUNTING POLICIES Expected Lsses r Mark t Market Lsses shall nt be recgnized unless permitted by ther ICDS. Substance ver frm principal Passing f risk and reward ver transfer f legal title Finance lease is t be treated as lan and assets by leasee Recgnizing revenue nly when the risk and reward is transferred Plicies shuld nt be changed unless a reasnable cause. Disclsure Requirements Significant Accunting plicies adpted by the cncern Nte if fundamental accunting assumptins are nt fllwed Any change in accunting plicy have material impact 10
ICDS I : ACCOUNTING POLICIES Other Accunting Plicies Methds f depreciatin, depletin and amrtisatin Treatment f expenditure during cnstructin Cnversin r translatin f freign currency items Valuatin f inventries Treatment f gdwill Valuatin f investments Treatment f retirement benefits Recgnitin f prfit n lng-term cntracts Valuatin f fixed assets Treatment f cntingent liabilities. 11
ICDS II VALUATION OF INVENTORY 12
ICDS II : VALUATION OF INVENTORIES Scpe: ICDS II shall be applied fr valuatin f inventries, except: Inventries cvered by ther ICDS ( Cnstructin Cntracts, Securities) Inventries f livestck, agriculture and frest prducts, mineral ils, res and gases (valued at NRV) Machineries spares use in tangible fixed assets and nt regular in use (Tangible Fixed Assets) Inventries are Assets: Held fr sale in rdinary curse f business In the prcess f prductin f such sale In the frm f material t be cnsumed in prductin prcess Inventry culd be land held fr trading purpse, sftware etc. 13
ICDS II : VALUATION OF INVENTORIES Cst f inventries: Cst f purchase, cst f service, cst f cnversin and ther cst incurred in bringing the inventries t their present lcatin. Cst f material purchased with taxes and duties Cst f service includes transpiratin cst, labur and ther services Cst f cnversin includes direct cst, fixed & variable cst allcated t each unit Other Cst incurred like packing and finishing, interest nly if allwed under ICDS n brrwing cst. Inventries are t be valued at : Specific Identificatin cst (nt rdinarily interchangeable, prduced fr specific purpse) First in First Out Methd (FIFO), r Weighted Average Methd Retail csting fr the retail gds ( Selling price Average Margin ) Each item is t be valued separately 14
ICDS III CONSTRUCTION CONTRACTS 15
ICDS III : CONSTRUCTION CONTRACTS Scpe: ICDS III shall be applied in determinatin f incme frm cnstructin cntract f a cntractr : Cntract fr cnstructin f an asset r grup f assets Cntract fr rendering f services which is directly related t cnstructin f an asset (Prject manager, architect) Cntract fr destructin r restratin f asset Cntract value includes: Initial agreed value Retentin revenue Claims and incentives payments Netting allwed fr ther incidental incme except interest, dividend and capital gain 16
ICDS III : CONSTRUCTION CONTRACTS Cntract revenue recgnitin: Recgnize revenue as per stage f cmpletin f the prject ( If it is pssible t realize is remved) If in early stage utcme f the cntract is nt certain, d nt recgnize (shuld nt extend beynd 25%) If the revenue is nt recverable which is recgnized earlier, reversal f such incme shall nt be allwed unless it is written f frm bks f accunts sectin 36(1)(vii) Cst nt recverable may be allwed under the prvisins f the Incme-tax Act Expected lsses frm the cntract shall be recgnized in prprtin t percentage f cmpletin. Future r anticipated lsses shall nt allwed unless actually incurred ( Cntrary t AS7) 17
ICDS III : CONSTRUCTION CONTRACTS Cntract revenue already recgnized as incme and subsequently written f in bks shall be recgnized as expenses and nt an adjustment frm cntract revenue. When cntract cvers number f assets, each asset is t be treated as separate cntract if: Separate prpsal has been submitted fr each asset; Each assets was separately negtiated and bth parties can accept r reject cntract relating t each asset; AND Cst and revenue f each asset can e identified independently. 18
ICDS III : CONSTRUCTION CONTRACTS Grup f cntacts, whether with single custmer r with several shuld be treated single cnstructin cntract when The grup f cntract is negtiated as a single package; The cntracts are s clsely interrelated hat they are in effect, part f a single prject with an verall prfit margin; AND The cntracts are perfrmed cncurrently r in a cntinuus sequence Cnstructin f additinal asset r amended at the ptin f the custmer shall be treated as separate cntract when: The asset defer significantly in design, technlgy r functin frm the riginal asset; OR The price f the asset is negtiated withut having regards t riginal price 19
ICDS III : CONSTRUCTION CONTRACTS Cntract cst includes : Cst that relate directly t the specific cntract; Cst that are attributable t the cntract (engineer, managers, administrative etc.); Such ther cst specifically chargeable t custmer AND Allcated brrwing cst as per ICDS Determinatin f stage f cmpletin : The prprtin that cntract cst incurred t the ttal estimated cst; OR Survey f wrk perfrmed: OR Cmpletin f physical prprtin f the cntract wrk 20
ICDS IV REVENUE RECOGNITION 21
ICDS IV : REVENUE RECOGNITION Scpe: ICDS IV - shall apply fr determinatin f revenue arising in the curse f nrmal activities f a persn frm : The sale f gds The rendering f services The use by thers f a persn s resurces yielding interest, ryalties r dividend 22
ICDS IV : REVENUE RECOGNITION Revenue frm sale f gds: When wnership in gds is transferred When risk and rewards are transferred Revenue is t be recgnized when cllectin f amunt is reasnably certain If reasnable certainty is lacking, pstpne t the extent f uncertainty invlved Revenue frm rendering f services: T be recgnized n percentage cmpletin methd resulting int marching with cst incurred till stage f cmpletin In case f cntract perid f less than 90 days, revenue is t be recgnized when cntract is cmpleted r substantially cmpleted (Cmpleted Cntract Methd) In case f cntract perid f mre than 90 days, percentage cmpletin methd 23
ICDS IV : REVENUE RECOGNITION Recgnitin f dividend: As per the prvisin f Incme tax Act Recgnitin f ryalty: Accrue in accrdance with the terms f relevant agreement unless having regards t the substance f the transactin, it is mre apprpriate t recgnize n sme ther basis Recgnitin f interest: Shall accrue n time basis applying rate t the amunt Interest n refund f tax, duty r cess t be recgnized in the year f receipt. Pstpnement f revenue: Even due t lack f reasnable uncertainty f cllectin exist, revenue can be pstpned nly t claim price escalatin and exprt incentives. Barter Transactin: N specific cnditin 24
ICDS V TANGIBLE FIXED ASSETS 25
ICDS V : TANGIBLE FIXED ASSETS Scpe: ICDS V applies t all Tangible Fixed Assets It exclude Intangible Fixed Assets Tangible Fixed Assets are Assets: Being land, building, machinery, plant r furniture Held with intentin f being used in nrmal curse f business Nt held fr sale, like Inventries (ICDS-II : Valuatin f Inventries) Used fr purpse f prducing r prviding gds r services Tangible Fixed Assets exclude Tangible Fixed Assets kept fr dispsal, Cpyrights, Trademarks etc. Machinery spares used in regular peratins are charged t revenue. Machinery spares which are expected t irregularly used r a stand-by equipments are t be capitalized. 26
ICDS V : TANGIBLE FIXED ASSETS Cst Cmpnents fr Capitalizatin: Actual cst include purchase price, imprt duties, nn recverable taxes and ther directly attributable expenditure Trade discunt and rebates shall be deducted. Start-up and cmmissining expenses including test run and experimental prductin are required t be capitalized. Administratin & ther verheads which d nt relate t specific Tangible Fixed Asset is excluded frm the Actual cst f asset. In case f Self-Cnstructed Tangible Fixed Assets same principles shall be applied and internal prfits shall be excluded. Capitalizatin - Expenditure t be added t Actual cst f an existing Tangible Fixed Asset Increases future benefits beynd previusly assessed standard perfrmance Cst f additin/extensin which is Capital in nature and becmes integral part Nn-Mnetary Cnsideratin: In case f Exchange Fair Market Value f Tangible Fixed Asset acquired Fair Market Value Arm s Length Transactin between knwledgeable, willing parties 27
ICDS VI GOVERNMENT GRANTS 28
ICDS VII : GOVERNMENT GRANTS Scpe: ICDS IV deals with gvernment grants in the nature f subsidies, cash incentives, duty drawback, waiver, cncessin etc. The ICDS des nt deal with Gvernment assistance ther than in the frm f grant Gvernment participatin in the wnership f enterprise Recgnitin f grnats: Grant shall nly be recgnized when there is reasnable assurance that All the cnditins shall be cmplied; and The grant shall be received 29
ICDS VII : GOVERNMENT GRANTS Treatment f grants : If grant relates t a depreciable fixed asset r asset f a persn shall be reduced frm cst f the assets r blck f the assets. If grant is in the nature f prmter s cntributin can nt be directly related t any asset, shall be deducted frm all the assets in prprtin r shall be reduced frm blck f assets. If the grant relates t nn-depreciable assets requiring fulfillment f certain bligatins, it shall be recgnised as incme ver the perid in which cst meeting such bligatin is incurred If grant relates t cmpensatin fr expenses r lsses incurred, shall be recgnised as incme f the perid in which it is receivable. Other grants shall be recgnised as revenue ver the perid matching with the related cst intended t cmpensate. 30
ICDS IX BORROWING COSTS 31
ICDS XI : BORROWING COSTS Scpe: Brrwing csts are interest and ther cst incurred in cnnectin with the brrwing f funds and include: Cmmitment charges Amrtized amunt f discunts / premiums relating t brrwings Amrtized amunt f ancillary cst in cnnectin with arrangement Financial charges under financial lease and similar arrangements It exclude actual r imputed cst f wner s equity and preference share capital. Qualifying Assets: Tangible Fixed Assets - Land, building, machinery, plant r furniture Intangible Fixed Assets Knw-hw, Cpyrights, Trademarks, franchises etc. Inventries - Inventries that require a perid f 12 mnths r mre t bring them t a saleable cnditin. 32
ICDS XI : BORROWING COSTS Capitalizatin Principles : Brrwing csts that are directly attributable t the acquisitin, cnstructin r prductin f a qualifying asset shall be capitalized as part f the cst f that asset. Capitalizatin ut f specific lans and ut f general lans Perid fr capitalizatin Type f Lan Start Perid End Perid Specific Lans At time f brrwing Inventry Cmpletin f substantially General Lans At time f utilizatin all the activities necessary t prepare such inventry fr it s intended sale Fixed Asset First put t use Incme n temprary investment f brrwed fund shall be taxed as ther incme and shall nt be allwed t net ff. 33
ICDS XI : BORROWING COSTS Brrwing Csts fr Capitalizatin: Specific Lans Actual interest incurred during the perid General Lans Amunt f Interest = ( A x B) / C A = B = C = Actual Interest incurred during the perid n General Lans Qualifying asset appearing n first and last day f balance sheet Qualifying asset des nt appear n first day f balance sheet Qualifying asset des nt appear n last day f balance sheet Average Cst f Qualifying Asset as appearing in balance sheet Half f Cst f Qualifying Asset Average Cst f Qualifying Asset as appearing f first day and date f put use r cmpletin Average f Ttal Assets as per last and previus year balance sheet. Ttal Assets excludes assets which are directly funded ut f Specific Lans 34
ICDS X PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS 35
ICDS X : PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSET Scpe: ICDS X cvers fllwing: Prvisins recgnized when Present bligatin as a result f Past Events Reasnably Certain that an utflw f resurces embdying Ecnmic Benefits will be required t be settle the bligatin (As per AS 29 wrd is Prbable ) Reliable Estimate can be made f amunt f the bligatin Cntingent Liability Pssible bligatin arises frm past events and existence f which will be cnfirmed ONLY by ccurrence r nn-ccurrence f ne r mre Uncertain Events, Nt whlly within the cntrl Present Obligatin arises frm Past Events but is nt recgnized because: Nt Reasnably Certain that an utflw f resurces embdying Ecnmic Benefits will be required t be settle the bligatin Reliable Estimate can nt be made f amunt f bligatin Cntingent Asset Pssible Asset arises frm past events and existence f which will be cnfirmed ONLY by ccurrence r nn-ccurrence f ne r mre Uncertain Events, Nt whlly within the cntrl 36
ICDS X : PROVISIONS, CONTINGENT LIABILITY AND CONTINGENT ASSET Scpe: ICDS X des nt deal with prvisins, cntingent liabilities and cntingent assets: Resulting frm financial instruments Resulting frm Executry Cntracts Arising in Insurance Business frm Cntracts with Plicyhlders Cvers by ther ICDS Review: Prvisins are t be reviewed at end f each year and adjusted t reflect best estimate. If prvisins are n lnger reasnably certain then shuld be reversed. Cntingent Asset are t be review at end f each year and adjusted t reflect best estimate. If Cntingent Asset are n lnger reasnably certain then asset and related incme shuld be reversed. 37
ICDS X : PROVISIONS, CONTINGENT LIABILITY AND CONTINGENT ASSET Understanding f Imprtant wrds Examples Present Obligatin Reasnably Certain Reliable Estimate Warranty fr manufacturing defects given by supplier f machinery Agreement indicates that temprary erectins, structures etc. fr 100 wrkers n site t be remved after cmpletin f cntract t setup a clny Replacement f machinery within 12 mnths in case f defects Clearing f site n cmpletin which is arising frm past event that is signing f cnstructin cntract Past experience shws with reasnable certainty that there wuld be few claims fr defects Reasnably certain that withut incurring the cst fr arrangement f 100 wrkers can nt be made n site and the cnstructin wrk cannt be cmpleted Prvisins t be recgnized based n best estimates wrked n scientific basis The estimated cst f making arrangement f 100 wrkers, shall be added t the cst f the prject and will be claimed as expenditure n percentage cmpletin basis. 38
ICDS X : PROVISIONS, CONTINGENT LIABILITY AND CONTINGENT ASSET Understanding f Imprtant wrds Examples Guarantee given fr financial perfrmance (repayment f lan) f an assciate Curt case claiming damages fr defects in cnstructin which is strngly disputed by the cntractr defending it is n accunt f defective design. Present Obligatin Reasnably Certain Reliable Estimate Guarantr n accunt f signing f guarantee dcuments Claim fr damages n accunt f undertaking f cnstructin cntract On failure t repay lan, fllwed by declaratin f inslvency, there surce utflw is reasnably certain. Until clsure f lan it is Cntingent liability. Based n the advise f the Advcate, the defense is very strng. Thus there is n reasnable certainty that a claim wuld arise under the cntract. Best estimate f the shrt fall in settling the unpaid balance cnsidering the recvery frm the Assciate. N prvisin can be recgnized till the curt rders the claim against the cntractr. Till that time, it will appear as cntingent liability. 39
ICDS DISCLOSURE IN ITR & TAX AUDIT REPORT Amendment t Return Frms 3,5,6 40
ICDS DISCLOSURE IN ITR & TAX AUDIT REPORT Only net effect under each ICDS required t be disclsed Amendment t Frm 3CD Clause 13 (d) Whether any adjustment is required t be made t the prfits r lss fr cmplying with the prvisins f incme cmputatin and disclsure standards ntified under sectin 145(2)? (e) If answer t (d) abve is in the affirmative, give details f such adjustments: (f) disclsure as per ICDS ICDS I Accunting Plicies ICDS II Valuatin f Inventries ICDS III Cnstructin Cntracts ICDS IV Revenue Recgnitin ICDS V - Tangible fixed Assets ICDS VII - Gvernment Grants ICDS IX - Brrwing Cst ICDS X Prvisins, Cntingent Liabilities and Cntingent Assets 41
ICDS DISCLOSURE IN ITR & TAX AUDIT REPORT 42
Questins? CA Abbas Gulamhusainwala 609/A, Atlantis Heights, Sarabhai Main Rad, Near Genda Circle, Vaddara. 390 023 29 June, 2017 91 265 2329099 91 9099977868 abbas@aimsassciates.c.in www.aimsassciates.c.in 43