INCOME COMPUTATION AND DISCLOSURE STANDARDS
INTRODUCTION CBDT notified 10 Income Computation and Disclosure Standards vide notification no : 32/2015 dated 31.03.2015. It is the new framework for computation of Income under Income Tax Act,1961. The standards are notified under section 145 (2) of the Income Tax Act, 1961. The standards have been subject to a lot of criticism due its ambiguity and its incongruousness with AS and Ind-AS.
APPLICABILITY ICDS is applicable only to those who follow mercantile system of accounting and have income under the heads Profits and Gains from Business or Profession and Other Sources. It shall apply to all assesses, both corporates and non corporates. It is effective from 1 April, 2015. There is no income or turnover threshold for applicability of ICDS. An Entity is not required to maintain separate books of accounts for ICDS.
ACCOUNTING POLICIES AS 1 ICDS 1 As per the principle of prudence, expected losses are recognised. Accounting Policies can be changed if the same would result in more appropriate presentation. Accounting policies to be selected in accordance with the concept of materiality. Expected losses or mark to market losses shall be recognised only if permitted by any other ICDS. Accounting Policies cannot be changed without a reasonable cause. The concept of materiality has been eliminated.
VALUATION OF INVENTORY AS - 2 ICDS - 2 No valuation of inventory for service provider. No method prescribed for valuation of inventory at the time of dissolution of a partnership firm, AOP or BOI. Retail and standard costing methods are prescribed as techniques for measurement of cost. Inventory to be valued by service provider at cost plus overheads related to the service. Inventory to be valued at net realisable value on the date of dissolution irrespective of whether the business is continued or not. Standard costing method has been eliminated under ICDS.
CONSTRUCTION CONTRACTS AS - 7 ICDS - 3 The concept of accrual for retention money does not exist. Probable / expected losses shall be recognised in full. Pre construction income like interest, dividend and capital gains shall be reduced from cost of construction. Revenue shall not be recognised during early stages of the contract. Retention money becomes taxable on accrual basis based on percentage of completion method. Losses incurred shall be allowed in proportion to stage of completion. Anticipated losses shall not be allowed unless it is actually incurred. Preconstruction income like interest, dividend and capital gains shall not be reduced from cost of construction and taxed as income in accordance with applicable provisions of the act. Revenue shall be recognised once the contract is completed to the extent of 25%.
REVENUE RECOGNITION AS - 9 ICDS - 4 Methods adopted are proportionate completion method and completed service contract method for recognition of service contracts. Unless the right to receive the payment is established, dividends are not recognised. Recognition of revenue is postponed where there exists uncertainty about its ultimate collection. Only proportionate completion method is recognised. The same is recognised according to the provisions of the IT act. The postponement of recognition of revenue is allowed only for price escalation and export incentives.
TANGIBLE FIXED ASSETS AS - 10 ICDS - 5 Revaluation of assets is allowed. In case of exchange of two assets, fair value of assets given up or acquired, whichever is higher to be recorded as actual cost. It covers accounting for all fixed assets except forest, wasting assets and livestock. The concept of revaluation is not recognised. In case of exchange of two assets, fair value of the assets acquired shall be recorded as actual cost. It covers only tangible fixed assets being the block of assets covered under the IT act.
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES AS - 11 ICDS - 6 Provides guidance on initial and subsequent recognition of foreign currency transactions and the resultant exchange differences. Forward exchange contracts entered into for trading purposes should be mark to market at each balance sheet date and the resultant exchange differences should be recorded in Profit and Loss account. Exchange differences arising on translation of financial statement of non integral foreign operations to be accumulated in a foreign currency translation reserve in the balance sheet. It provides that such transactions would be subject to Section 43A of IT act and Rule 115 of IT Rules. MTM gains and losses are unrealised in nature and shall be recognised only on settlement. Exchange differences shall be included for computation of income, since there is no difference between integral and non integral operations as per IT Act.
GOVERNMENT GRANTS AS - 12 ICDS - 7 Two approaches where government grant treated as shareholder fund under Capital Approach and the other treated as income. Supports that mere receipt of grant does not necessarily mean that conditions attached to the grant has been fulfilled. It should either be treated as revenue receipt or should be reduced from cost of fixed asset. Supports that recognition of government grant shall not be postponed beyond the actual date of receipt.
SECURITIES AS - 13 ICDS - 8 Securities valued at cost or net realisable value whichever is lower. Valuation is based on individual securities. Securities thinly traded shall be valued at actual cost initially recognised. Valuation on category wise basis of securities. Note : Only securities held as stock in trade is covered under ICDS.
BORROWING COSTS AS - 16 ICDS - 9 Definition of qualifying assets states that substantial time taken to get the asset ready for use / sale. Substantial period of time is referred to as 12 months. Income on temporary investments of funds borrowed should be reduced from borrowing costs eligible for capitalisation. Judgement to be exercised for capitalisation of general borrowings for a qualifying asset. Borrowing costs suspended from capitalisation during the period in which development is interrupted. Qualifying assets are modified to include tangible, intangible assets and inventories. The twelve months criteria is affixed only to the inventory. Such income shall not be set off and the whole of interest to should be capitalised. Formula under paragraph 6 has been given for capitalisation of general borrowings for qualifying assets. Borrowing costs to be capitalised even during the period in which development is interrupted.
PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS AS - 29 ICDS - 10 It advocates accounting for a provision when it is probable that an outflow of economic resources would be involved to settle an obligation. Clarifies that recognition of contingent asset when realisation of it is virtually certain. Here, the term probable has been changed to reasonably certain. The term virtually certain has been replaced with reasonably certain.
ISSUES The term Reasonable Cause has not been defined. The freedom to interpret by management and tax officials would lead to litigation. Since no separate books of accounts needs to be maintained, the place where these accounting policies needs to be disclosed is still unknown. The main concepts of materiality and prudence has been eliminated. Difficulty in valuation of inventories. Tedious reconciliation for adherence with ICDS. The differential treatment to capitalisation of specific borrowing and general borrowing along with borrowings in relation to land has been subject to a lot of debate. Eventually the tax impact, compliance and management of cashflow would be the major challenges to both corporates and non corporates.