ICDS CA SUBODH V SHAH ICDS V TANGIBLE

ICDS CA SUBODH V. SHAH

ICDS V : TANGIBLE FIXED ASSETS CA Subodh V. Shah 2

ICDS V: TANGIBLE FIXED ASSETS • “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 CA Subodh V. Shah 3

ICDS V: TANGIBLE FIXED ASSETS • Thus there is no option to expense off immaterial assets which will result in burdensome compliances and record keeping. CA Subodh V. Shah 4

ICDS V: TANGIBLE FIXED ASSETS • “Fair value” of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. CA Subodh V. Shah 5

ICDS V: TANGIBLE FIXED ASSETS • Stand‐by equipment and servicing equipment are to be capitalised. • Machinery spares shall be charged to the revenue as and when consumed. CA Subodh V. Shah 6

ICDS V: TANGIBLE FIXED ASSETS • When such spares can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, they shall be capitalised. • AS 10 allows us to allocate such total cost on a systematic basis over a period not exceeding useful life of the asset. CA Subodh V. Shah 7

ICDS V: COMPONENTS OF ACTUAL COST • Purchase price • Import duties • Other taxes excluding recoverable • Direct expenditure • Trade discounts / rebates to be reduced CA Subodh V. Shah 8

ICDS V: COMPONENTS OF ACTUAL COST • Actual cost may change due to • price adjustment, changes in duties or similar factors • exchange fluctuation CA Subodh V. Shah 9

ICDS V: COMPONENTS OF ACTUAL COST • Administration and other general overhead expenses are to be excluded if they do not relate to a specific tangible fixed asset CA Subodh V. Shah 10

ICDS V: COMPONENTS OF ACTUAL COST • Costs will include – Expenses on start up & commissioning – Expenses on test runs • Expenses after the plant has begun commercial production shall be treated as revenue CA Subodh V. Shah 11

ICDS V: COMPONENTS OF ACTUAL COST • Thus expenses after the project is ready to commence commercial production but before it actually commences commercial production will also have to be capitalised. • In AS 10 we have to write off such expenditure as revenue CA Subodh V. Shah 12

ICDS V: NON MONETORY CONSIDERATION • The fair value of a tangible fixed asset acquired in exchange for shares or other securities or another asset shall be its actual cost. CA Subodh V. Shah 13

ICDS V: NON MONETORY CONSIDERATION • In AS 10 the fair value of the asset acquired or the asset given up whichever is more evident is to be taken. CA Subodh V. Shah 14

ICDS V: IMPROVEMENTS AND REPAIRS • An Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost CA Subodh V. Shah 15

ICDS V: IMPROVEMENTS AND REPAIRS • Any extension to existing asset which becomes integral part of such asset to be capitalised. • If such addition / extension has a separate identity and can be used separately then treat as separate asset CA Subodh V. Shah 16

ICDS V: JOINT OWNERSHIP • Jointly owned tangible fixed assets shall be proportionately grouped with similar fully owned tangible fixed asset. • Where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis CA Subodh V. Shah 17

ICDS V: TANGIBLE FIXED ASSETS • The ICDS also provides that depreciation on such assets and income arising on transfer of such assets shall be computed in accordance with the provisions of the Income tax Act, 1961 CA Subodh V. Shah 18

ICDS V: TANGIBLE FIXED ASSETS • ICDS prescribes disclosure requirement similar to requirement of Tax Audit Report. • Even the persons not subject to tax audit have to comply with such disclosure requirement. CA Subodh V. Shah 19

ICDS V: REVALUATION • Revaluation is not permitted by the ICDS. • Income / expense is to be recognised only on actual realisation. CA Subodh V. Shah 20

ICDS IX : BORROWING COST CA Subodh V. Shah 21

ICDS IX: BORROWING COSTS • It deals with borrowing cost • It does not deal with the actual or imputed cost of owners’ equity and preference share capital. 22

ICDS IX: BORROWING COSTS DEFINITION • “Borrowing costs” are interest and other costs incurred by a person in connection with the borrowing of funds and include: • (i) commitment charges on borrowings; • (ii) amortised amount of discounts or premiums relating to borrowings; • (iii) amortised amount of ancillary costs incurred in connection with the arrangement of borrowings; • (iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements. 23

ICDS IX: QUALIFYING ASSET DEFINITION • “Qualifying asset” means: • (i) land, building, machinery, plant or furniture, being tangible assets; • (ii) know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; • (iii) inventories that require a period of twelve months or more to bring them to a saleable condition. 24

ICDS IX: RECOGNITION • Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. • Other borrowing costs shall be recognised in accordance with the provisions of the Act. 25

ICDS IX: RECOGNITION GENERAL BORROWING • To the extent the funds are borrowed generally and utilised for the purposes of acquisition, • construction or production of a qualifying asset, the amount of borrowing costs to be capitalised • shall be computed with the following formula: 26

ICDS IX: RECOGNITION GENERAL BORROWING • Ax. B C • Where • A = borrowing costs incurred during the previous year except on borrowings directly relatable to specific purposes; 27

ICDS IX: RECOGNITION GENERAL BORROWING • B = (i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the first day and the last day of the previous year; • (ii) in case the qualifying asset does not appear in the balance sheet of a person on the first day, half of the cost of qualifying asset; or 28

ICDS IX: RECOGNITION GENERAL BORROWING • (iii) in case the qualifying asset does not appear in the balance sheet of a person on the last day of the previous year, the 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, as the case may be, • excluding the extent to which the qualifying assets are directly funded out of specific borrowings 29

ICDS IX: RECOGNITION GENERAL BORROWING • C = the average of the amount 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 assets to the extent they are directly funded out of specific borrowings 30

ICDS IX: RECOGNITION GENERAL BORROWING • For the purpose of this paragraph, a qualifying asset shall be such asset that necessarily require a period of twelve months or more for its acquisition, construction or production 31

ICDS IX: RECOGNITION GENERAL BORROWING • The revised formula for general borrowing seeks for capitalisation of interest cost, irrespective whether such borrowing has been utilized for acquisition of asset. • For the purpose of computing the borrowing cost eligible for capitalisation in relation to general borrowing, only the amount of qualifying asset, to the extent, it is funded out of specific borrowing is to be reduced, as against the full value of such asset as per the erstwhile ICDS. 32

ICDS IX: BORROWING COSTS • No minimum period for classification of an asset as QA unlike AS 16 except for Para 6 • As per AS 16, “qualifying asset” has been defined to mean an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (12 months) 33

ICDS IX: BORROWING COSTS • Commencement of capitalisation from the date of borrowing irrespective of commencement of construction – Borrowing cost may have to be capitalised from the date of borrowing irrespective of its use for acquisition, etc of QA. 34

ICDS IX: BORROWING COSTS • Treatment of income earned from temporary investment of borrowed funds • AS 16 permits such income to be reduced from the borrowing costs incurred • ICDS will treat this as income. 35

ICDS IX: BORROWING COSTS • Suspension of capitalization of borrowing costs • AS 16 permits suspension of capitalization of borrowing costs during extended periods in which active development is interrupted. ICDS IX does not permit suspension of capitalization of borrowing costs in such cases. • This deviation between AS 16 and ICDS IX would result in inflation in the cost of the QA. 36

• ICDS-IX- Borrowing Cost • In connection with the borrowing costs eligible for capitalisation, it has now been provided that such cost shall only be capitalised till the date when the asset is first put to use and in case of inventory, when substantially all the activities necessary to prepare such inventory for its intended sale are complete CA Subodh V. Shah 37

CIRCULAR 10/2017 • Question 20: There are specific provisions in the Act read with Rules under which a portion of borrowing cost may get disallowed under sections like 14 A, 43 B, 40(a)(i), 40(a)(ia), 40 A(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 such specific provisions CA Subodh V. Shah 38

CIRCULAR 10/2017 • 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. CA Subodh V. Shah 39

CIRCULAR 10/2017 Q 21 • Whether bill discounting charges and other similar charges would fall under the definition of borrowing cost? • • Answer: The definition of borrowing cost is an inclusive definition. Bill discounting charges and other similar charges are covered as borrowing cost. CA Subodh V. Shah 40

CIRCULAR 10/2017 Q 22 • How to allocate borrowing costs relating to general borrowing as computed in accordance with formula provided under Para 6 of ICDS-IX to different qualifying assets? • • Answer: The capitalization of general borrowing cost under ICDS IX shall be done on asset by asset basis. CA Subodh V. Shah 41

THANK YOU CA Subodh V. Shah