Income Computation and Disclosure Standards ICDS An Overview

Income Computation and Disclosure Standards (ICDS) - An Overview Presentation by: CA Ayush Goel Designated Partner B A S & Co. LLP

Contents: 1) Background 2) General Principles 3) List of ICDS 4) ICDS details 5) Overview of the FAQs

Background: v Section 145(1) of the Income-tax Act, 1961 (Act) stipulates that the method of accounting for computation of income under the heads “Profits and gains of business or profession” and “Income from other sources” can either be cash or mercantile system of accounting. v Section 145(2) of the Act states that the Central Government may notify the accounting standards (now income computation & disclosure standards w. e. f Finance Act 2014) to be followed by any class of assesses or in respect of any class of income.

Background: v On 31 st March, 2015, the Central Government notified 10 ICDS which was initially effective from 1 st April, 2015. v Vide announcement dated 6 th July 2016, the Applicability of ICDS was deferred to be now applicable from F. Y. 2016 -17 v Vide Notification No. 87/2016, the previous set of ICDS notified was replaced by New Set of said 10 ICDS v First set of clarifications in FAQ format was issued rd

General Principles: HEADS COVERED: ICDS are applicable for computation of income chargeable under the head “profits and gains of business or profession” and “income from other sources”. v ASSESSEES COVERED: ICDS applies to all taxpayers (NO TURNOVER LIMIT). Exemption now provided for Individual and HUF not Having Tax Audit v CONFLICT BETWEEN LAW & ICDS: In case of conflict between the provisions of the Act and ICDS, the provisions of the Act shall prevail to that extent. o What if in case of conflict between HC / SC rulings or Income Tax Rules and ICDS? v v MERCANTILE SYSTEM: ICDS applies only to taxpayers following ‘mercantile system’ of accounting.

General Principles: v ICDS are ‘not applicable’ in following circumstances: a. Where the assessee follows cash system of accounting b. Where income chargeable to tax comprises of income other than ‘profits and gains of business or profession’ or ‘income from other sources’. v Whether ICDS apply in case of presumptive taxation? ICDS is applicable for Provisions of Presumptive Taxation. How? v ICDS impact over maintenance of books of accounts? ICDS are not supposed to provide the manner of maintenance of books of accounts they simply provide the income computation and disclosure manner.

General Principles: v Whether ICDS have any impact on Minimum Alternate Taxation? Since ICDS does not apply in maintenance of books of account by an assessee thus ICDS should not have any initial impact on MAT computations. v Whether v ICDS have any impact on Alternate Minimum Tax? What are the consequences of ICDS non-compliance? ICDS non-compliance, as per the provisions of section 145(3) shall enable the Assessing Officer to make an assessment in the manner provided under section 144 of the Income Tax Act 1961. However there is no specific penal provision inserted in the law regarding noncompliance of ICDS.

General Principles: v How disclosures under ICDS are to be made or where to be made: All ICDS notified provide for the disclosure requirement and the Impact Analysis shall be notified in the revised format of 3 CD as notified on 29 th Sept 2016 v Penal Consequences of ICDS non-compliance: There are no specific provisions inserted in the income tax law particularly in Chapter – XXI However any additions in income due to applicability of ICDS may attract concealment penalty consequences etc.

List of ICDS 1) ICDS I: Accounting Policies (AS-1) 2) ICDS II: Valuation of Inventories (AS-2) 3) ICDS III: Construction Contracts (AS-7) 4) ICDS IV: Revenue Recognition (AS-9) 5) ICDS V: Tangible Fixed Assets (AS-10) 6) ICDS VI: The Effects of Changes in Foreign Exchange Rates (AS-11) 7) ICDS VII: Government Grants (AS-12) 8) ICDS VIII: Securities (AS-13*) 9) ICDS IX: Borrowing Costs (A-16) 10) ICDS X: Provisions, Contingent Liabilities and Contingent Assets (AS -29)

ICDS-I: Accounting Policies

KEY AREAS �Fundamental Accounting Assumptions ◦ Going Concern ◦ Consistency ◦ Accrual �Change in Accounting Policies: Reasonable Cause �Disclosure of Accounting Policies

Major Considerations in Selection of Accounting Policies AS – 1 a. PRUDENCE b. SUBSTANCE OVER FORM c. MATERIALITY ICDS – I a. SUBSTANCE OVER FORM b. No recognition of Mark-to. Market losses or an expected loss unless the recognition of such loss is in accordance with the provision of any other ICDS.

Materiality �No concept of materiality in ICDS unlike, AS-1. �No likely significant tax impact �In absence of materiality concept, considerable time and cost will be involved making trivial adjustments in net profit as per books of accounts to arrive at PGBP since authorities may insist on strict application of ICDS even on small value items.

Prudence �Based upon the concept of ‘prudence’, AS-1 precludes recognition of anticipated profits and requires recognition of expected losses. �However, ICDS provides that expected losses or mark to market losses shall not be recognized unless permitted by any other ICDS to avoid differential treatment for recognition of income and losses. �What about MTM Gain? ?

Transitional Provisions All contracts or transactions existing on 1 st day of April, 2016 or entered into on or after the 1 st day of April, 2016 shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognized in respect of the said contract or transaction for the previous year ending on or before the 31 st March, 2016. Disclosures • Disclosures of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item. • If the fundamental accounting assumptions of Going Concern, Consistency and accrual are followed, specific disclosures is not required. If a fundamental accounting assumptions is not followed, the fact shall be disclosed.

ICDS-II: Valuation of Inventories

Deals With �Valuation of Inventories �Cost of Purchase �Cost of Conversion and �Other Cost

Does Not Deals With �ICDS –II shall not apply in following cases: a. Work-in-progress arising under ‘construction contracts’ b. Work-in-progress which is dealt with by other ICDS c. Share, debentures and other financial instruments held as stock in trade (dealt under ICDS –VIII) d. Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realizable value. e. Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular (covered under ICDS-V)

Value of Opening Inventory �Value of opening inventory should be same as preceding year’s closing inventory. �In case of a newly commenced business, the value of the opening inventory shall be the cost of the inventory. �Cases of conversion of capital asset into stock-in-trade with intent to commence business may remain unaffected due to overriding provisions of Section 45(2) of the Act. �If business is commenced with acquisition of running business on slump sale, price paid will be ‘cost’ of opening inventory. �If partner takes over running business of firm/LLP, value agreed with other partners for inter-se settlement shall be ‘cost’ for the partner.

Valuation Criteria As per ICDS-II the inventories shall be value at: ◦ Cost or ◦ Net Realizable Value Whichever is lower.

How to Determine Cost COST can be determined by either of the following methods: a. FIFO Method b. Weighted Average Method c. Specific Identification of Cost Method or d. Retail Method e. Standard Cost

Valuation of Inventories in case of Firm/AOP/BOI Dissolution �According to ICDS, in case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realizable value. �This is unfair particularly as there is no specific provision for allowing such NRV as the cost to the successor of the business. �Also this is contrary to law settled by Apex court in the case of Sakthi Trading Co. v. CIT

Case laws discussed �Sakthi Trading Co. v. CIT [2001] 118 Taxman 301 (SC) / 250 ITR 871 If on dissolution of the firm the business is not discontinued, then, the ordinary principle of commercial accounting permitting valuation of stock-in-trade at Cost or Net Realizable value whichever is lower will apply.

Transitional Provisions • Interest and other borrowing costs, which do not meet the criteria for recognition of interest as a component of the cost per para 11, but included in the cost of inventory as on the 1 st day of April, 2016, shall be taken into account for determining cost of such inventory for valuation as on the close of the previous year beginning on or after 1 st day of April, 2016 if such inventory continue to remain part of inventory as on the close of the previous year. Disclosures The following aspects shall be disclosed, namely: a) the accounting policies adopted in measuring inventories including the cost formulae used, and b) the total carrying amount of inventories and its classification appropriate to a person.

ICDS-III: Construction Contract

Construction Contracts AS - 7 ICDS III v Real Estate Developers It does not deal with recognition of revenue by ICDS is silent whether the same is applicable to Real Estate Developers and there is separate Real Estate Developers or not. Guidance Note on the same issued by the ICAI. Clarification is brought by FAQ v Contract Cost includes: The scope of the Contract Cost has been - Direct cost widened to include “Allocated Borrowing Cost” - Cost allocated to the contract in accordance with ICDS on Borrowing Cost. - Cost specially charged to the customer under the terms of the contract

Construction Contracts AS - 7 ICDS III v Recognition of Contract Revenue Contract revenue to be recognized if it is The criteria “if it is possible to reliably measure the possible to reliably estimate the outcome of a contract” has been omitted. a contract. Contract revenue to be recognized when there is reasonable certainty of its ultimate collection. v Impact: The recognition of contract revenue may preponed under ICDS

Construction Contract AS-7 ICDS III v Situation when outcome of contract cannot be reliably estimated Contract revenue and contract costs to be recognized as revenue or expenses by reference to the POCM if the outcome of the contract can be estimated reliably; else, revenue should be recognized only to the extent of contract costs incurred. ICDS provides that early stage of a contract shall not exceed 25% of the stage of completion. In other words, upto 25% of the stage of completion, if the outcome of No quantitative threshold laid down for determining construction contract cannot be reliably the stage of completion, until when, the outcome of a measured, contract revenue is recognized contract cannot be reliably measured. only to the extent of cost incurred. Impact: Under ICDS, profit recognition has to start compulsorily once 25% stage is completed but the same is not the case currently under AS – 7.

Construction Contract AS-7 ICDS III Contract revenue shall comprise: The initial amount of revenue agreed in the contract, including retentions. v Retention Money Impact Analysis: There are various judicial precedents like Angelique International Ltd. vs Department of Income Tax [ITA No. 4085/DEL/2011] which does not recognize retention money as income for tax purpose if there is no enforceable debt. ICDS leads to deviation from the settled judicial position. v Incidental Income Any incidental income, not included in the contract revenue, shall be deducted while computing construction cost. Contract cost shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in the contract revenue. Therefore, those interest income, dividend income and capital gains shall be taxed as income in accordance with the applicable provisions of the Act.

Construction Contract AS-7 ICDS III v Recognition of foreseeable losses It permits to recognise immediately the ICDS does not permit recognition of the foreseeable losses on a contract regardless of foreseeable/expected losses on a contract. commencement or stage of completion of contract. ICDS on accounting policies also does not permit recognition of foreseeable loss. Impact: ICDS deviates from the present legal settled position in the case of CIT V/s. Triveni Engineering & Industries Ltd (49 DTR 253) (Del) & CIT v. Advance Construction Co. (P) Ltd (275 ITR 30) (Guj)) in which foreseeable losses on construction contracts were allowed as a deduction for tax purpose.

ICDS requires application of ICDS on construction contracts for recognition of revenue on mutatis mutandis basis. • Threshold of 25% stage of completion for recognition of income • No recognition of the foreseeable losses on a contract. However, AS-7 permits immediate recognition of the foreseeable losses on a contract regardless of commencement or stage of completion of contract. • Stage of completion can be determined with reference to (a) total estimated costs v/s. cost incurred till balance sheet date; or (b) survey of work performed; or (c) completion of physical proportion of work

Transitional Provisions • Contract revenue and contract costs associated with the construction contract, which commenced on or after 1 st day of April, 2016 shall be recognized in accordance with the provisions of this standard. • Contract revenue and contract costs associated with the construction contract, which commenced on or after before the 31 st day of March, 2016 but not completed by the said date, shall be recognized based on the method regularly followed by the person prior to the previous year beginning on the 1 st day of April, 2016.

Disclosures A person shall disclose: a) The amount of contract revenue and, b) The methods used to determine the stage of completion of contracts in progress.

ICDS-IV: Revenue Recognition

Scope of ICDS-IV It deals with the basis for recognition of revenue arising in the course of ordinary activities of a person from: ◦ The sale of goods ◦ The rendering of services ◦ The use by other of the person’s resources yielding interest, royalties or dividends.

What is Sale of Goods In a transaction involving sale of goods the revenue shall be recognised: �When the seller of goods has transferred to the buyer the property in the goods for a price or �All significant risks and rewards of the 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. Thus where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership, revenue in such a situation shall be recognised at the time of transfer of significant risks and rewards of ownership to the buyer. Further revenue shall not be recognised when there is absence of reasonable certainty of its ultimate collection.

AS – 9 ICDS v It does not apply to companies v. ICDS is silent on same. engaged in insurance business. v. Revenue from service transactions v. ICDS provides only for percentage are recognised as percentage completion method for completion method or by the recognition of service transactions. completed service contract method. v. Exemptions now available Exemption provided for Interest on Tax, Duty, Cess

Transitional Provisions • The transitional provisions of ICDS on construction contract shall mutatis mutandis apply to the recognition of revenue and the associated costs for service transaction undertaken on or before the 31 st day of March, 2016 but not completed by the said date. • Revenue for a transaction, other than a service transaction referred to in Para 10, undertaken on or before the 31 st day of March, 2016 but not completed by the said date shall be recognized in accordance with the provisions of this standard for the previous year commencing on the 1 st day of April, 2016 and the subsequent previous year.

Disclosures Following disclosures shall be made in respect of revenue recognition, namely: a) A transaction involving sale of good, total amount not recognized as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty; b) The amount of revenue from service transactions recognized as revenue; c) The method used to determine the stage of completion of service transaction; d) For service transactions in progress at the end of the previous year; e) Amount of costs incurred and recognized profits (less recognized losses) upto the end of previous year; f) Amount of advances received and; g) the amount of retentions.

ICDS-V: Tangible Fixed Assets

Components of Actual Cost � Cost shall comprise of purchase price, import duties and other taxes, excluding those subsequently recoverable and any directly attributable expenditure on making the asset ready for its intended use. However trade discounts and rebates to be reduced. � Administration and general overheads are to be excluded unless they relate to a specific tangible asset. � Expenditure incurred on start-up and commissioning of the project including expenditure on test runs and experimental production to be capitalized.

Actual Cost’s Determination � Self Constructed Tangible Fixed Asset: Cost in addition to normal parlance shall also include cost of construction directly related to such asset, however any internal profits to be eliminated. � Asset Acquired for Non-Monetary Consideration: Fair value of tangible fixed asset so acquired shall be the actual cost. � Expenditure that increases the future benefits from existing asset beyond its previously assessed standard of performance is added to the actual cost.

AS- 10 ICDS v It applies to tangible fixed assets as v It applies to only tangible fixed assets. well as goodwill v Cost of fixed asset comprises its v It has similar definition to AS 10 but purchase price, non refundable taxes the words used are actual cost as and any directly attributable cost of compared to cost in AS -10. bringing the asset to its working condition for its intended use. Impact: The Act provides for the definition of the term ‘actual cost’ and it is again repeated in the ICDS but it does not modify the concept of actual cost. However when there is conflict in interpreting the abovementioned term under ICDS and Act, the Act will prevail over ICDS. Such a narrow definition in ICDS might encourage the taxpayer to contend that expenditure on acquisition which is not part of actual cost should be deductible as revenue instead of capitalising.

AS- 10 ICDS v AS 10 read with guidance note on v It provides that machinery spares Machinery for Spares provides for which can be used only in charge to P/L, however spares to connection with an item of tangible specific asset should be capitalised fixed asset and their use is and shall form part of that Asset. expected to be irregular, shall be capitalized. Stand-by equipment and servicing equipment also to be capitalized. Impact: ICDS specifies that machinery spares dedicated to a tangible fixed asset should be capitalized, it does not provide any further guidance on subsequent treatment that whether it will form part of the block of the asset. However, in absence of such clarification spares would form part of the block and once the principal asset is put to use, the spares shall qualify for the depreciation at the same rate.

Assets acquired against non-monetary consideration AS- 10 ICDS v When a fixed asset is acquired in v When a tangible fixed asset is exchange or in part exchange for acquired in exchange for other another asset, the cost of acquired asset, the fair value of the tangible should be recorded either at FMV or fixed asset so acquired shall be its NBV of asset given up, adjusted for any actual cost. balancing payment or receipt of cash or other consideration. v Fixed asset acquired in exchange for v When a tangible fixed asset is shares or other securities in the acquired in exchange for shares enterprise should be recorded at its or other securities, the fair value of FMV, or the FMV of the securities the tangible fixed asset so issued, whichever is more clearly evident. acquired shall be its actual cost. Usual Practice: Concept of cost should normally relate to what is given up.

Assets acquired for a consolidated price AS- 10 ICDS v Para 15. 3 says that when several assets v When several assets are purchased for consolidated price, the purchased for a consolidated consideration is apportioned on fair basis price, the consideration shall be apportioned to the various assets as determined by competent valuers. on a fair basis. Impact: In absence of determination by registered valuers in ICDS words “fair basis” becomes subjective and might be prone to litigation.

Transitional Provisions • The actual cost of tangible fixed assets, acquisitions or construction of which commenced on or before the 31 st day of March, 2016 but not completed by the said date, shall be recognized in accordance with the provisions of this standard. Disclosures Following disclosures shall be made in respect of tangible fixed assets, namely: a) Description of asset or block of asset; b) Rate of depreciation; c) Actual cost or written down value, as the case may be; d) Additions or deductions made during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of • CENVAT credit claimed and allowed under the CENVAT Credit rules, 2004; • Change In rate of exchange of currency; • Subsidy or grant or reimbursement, by whatever name called; • Depreciation allowable; and • WDV at the end of year.

ICDS-VI: The Effects of Changes in Foreign Exchange Rates

Revenue Monetary Items (like trade receivables, payables, bank balance, etc. ) AS- 11 ICDS v Reported using the closing rate v Converted into reporting currency v Exchange difference recognised in P&L by applying the closing rate A/c v Recognised as income or expense v Allowed under the Act also. subject to provisions of Rule 115 Impact: No change in tax position

Revenue Non-Monetary Items (like inventory) AS- 11 v Which are carried in terms of historical cost denominated in a FC Reported using the exchange rate at the date of the transaction v Which are carried at fair value or NRV or other similar valuation denominated in a FC Reported using the exchange rates that existed when the values were determined i. e. closing rate. ICDS Impact Converted into No exchange difference would reporting currency arise under both using the exchange rate at No change in the position the date of the transaction. Converted into reporting currency using the exchange rate at the date of the transaction. No exchange difference would arise as per ICDS. Hence, the FE gain/loss as per the books of accounts will have to be reduced/ added back respectively while computing the taxable income.

Capital Monetary Items – Relating to Imported assets AS- 11 ICDS v Requires recognition in P&L A/c. v Requires recognition v Option of capitalization u/s 211(3 C) of companies in P&L A/c subject to Act, 1956 as per which (Para 46 & 46 A) exchange provisions of Section differences arising in case of long-term foreign 43 A. currency monetary items shall be either adjusted v No Para 46 & 46 A exists. to capital asset or accumulated in FCMITDA. Impact: v Presently, Section 43 A permits capitalization on payment basis of exchange differences relating to asset acquired from a country outside India. v Hence, there would be no change in the tax position.

Capital Monetary Items – Not relating to Imported assets AS- 11 ICDS v Requires recognition in P&L A/c. v Requires recognition in v Option of capitalization u/s 211(3 C) of companies P&L A/c subject to Act, 1956 as per which (Para 46 & 46 A) exchange provisions of Section differences arising in case of long-term foreign 43 A. currency monetary items shall be either adjusted v No Para 46 & 46 A exists. to capital asset or accumulated in FCMITDA. Impact: v Section 43 A does not apply since it applies only if it relates to the imported assets. v Presently, such FE differences are not recognized for tax purposes i. e. gain is not taxable, loss is not deductible/ allowable.

Capital monetary items – Not relating to Imported assets Conclusion Since ICDS requires recognition in P&L A/c subject to provisions of Section 43 A and Section 43 A applies only if it relates to imported assets, a controversy may arise, whether such exchange fluctuation gain or loss on capital monetary items (not relating to imported assets) would be allowable as an income or expense as per ICDS or not. May be considered as non-cognizable for tax purposes based on its Capital nature. It is also arguable that judicial settled position would remain unchanged as the Act shall prevail in case of conflicts with ICDS.

Forex Derivatives – Forward Exchange Contracts Purpose Others (i. e. trading, speculation, firm commitment, highly probable forecast) AS - 11 ICDS Marked to market at each balance sheet date and the gain or loss be recognised in the P&L a/c. Premium, discount or exchange difference on contracts be recognised at the time of settlement only. No amortization of premium/ discount.

Transitional Provisions • All foreign currency transactions undertaken on or after 1 st day of April, 2016 shall be recognized in accordance with the provisions of this standards. • Exchange differences arising in respect of monetary items or non-monetary items, on the settlement thereof during the previous year, shall be recognized in accordance with the previous year ending on the 31 st March, 2016. • The financial statements of foreign operations for the previous year commencing on the 1 st day of April, 2016 shall be translated using the principles and procedures specified in this standard after taking into account the amount recognized on the last day of the previous year ending on the 31 st March, 2016.

ICDS-VII: Government Grants Government

Government Grants AS- 12 ICDS VII v Recognition of grant • On reasonable assurance of compliance of attached conditions and reasonable certainty attached conditions and reasonable of ultimate collection certainty of ultimate collection • Mere receipt is not sufficient • Recognition cannot be postponed beyond date of actual receipt Impact: If the grant is recognized on receipt basis, it would create DTA/DTL and MAT mismatch also. Further, an issue may arise whether grants received in earlier years but not recognized pending fulfillment of conditions will require recognition on receipt basis as per ICDS in year of transition. v Grants other than those covered by specific provisions • Revenue grant to be credited as income or • Same as AS-12 but no clarification that it is reduced from related expense. restricted only to revenue grants.

Government Grants AS- 12 ICDS VII v Relatable to depreciable fixed assets • Requires reduction from the cost of fixed asset or recognition as deferred revenue by systematic credit to P&L A/c. • Consistent with Explanation 10 to Section 43(1), requires reduction from the cost of fixed asset. v Relatable to non depreciable fixed assets • To be credited as capital reserve, if no conditions attached to the grant. To be treated as income – • on an upfront basis, if there are no • To be credited to P&L A/c over period of conditions attached to grant. incurring cost of meeting conditions of grant. • over period over which cost of meeting conditions is incurred.

Government Grants AS- 12 ICDS VII v Grant in the nature of promoter’s contribution • To be credited to capital reserve and to be • No such clarity for grants in the nature of treated as shareholders funds. promoter’s contribution. Therefore, by implication, requires recognition as income. v Compensation for expenses / loss incurred or for giving immediate financial support • To be recognised in P&L A/c in the year in • Same as AS-12 which it is receivable v Disclosure requirement • No disclosure of unrecognized grants • Disclosure of unrecognized grants

Transitional Provisions • All the Government grants which meet the recognition criteria of para 4 on or after 1 st day of April, 2016 shall be recognized for the previous year commencing on or after 1 st day of April, 2016 in accordance with the provisions of this standard. Disclosures Following the disclosures shall be made in respect of Government Grants, namely: a) Nature and extent of Government Grants. b) Nature and extent of Government Grant Income. c) Nature and extent of Government Grant not recognized. d) Reasons for not recognizing, thereof.

ICDS-VIII – Relating to Securities

Securities AS- 13 ICDS VIII v Applicability This Standard deals with accounting for investments in the financial statements of enterprises. This ICDS deals with securities held as stock-intrade. Assets held as stock-in-trade are not ‘investments’ *** As per ICDS VIII value of Private Co. Shares and Not Actively traded shares are to be valued at COST

Securities AS- 13 ICDS VIII v Carrying amount Current investments Securities held as Stock-in-trade shall be valued at actual cost or NRV, are valued at lower of whichever is lower. (where the actual cost cannot be ascertained by cost and fair value. reference to specific identification, the cost shall be determined on the basis of FIFO. ) Individual Scrip wise Valuation Category wise Valuation Classification into four categories namely, (a) shares; (b) debt securities; (c) convertible securities; and (d) any other securities not covered above. Valuation of unlisted/ thinly traded securities at cost - At the end of any previous year, securities not listed on a recognized stock exchange; or listed but not quoted on a recognized stock exchange with regularity from time to time, shall be valued at actual cost initially recognized.

Example Valuation as per AS 13 Shares Cost NRV Valuation as per ICDS Lower of cost or NRV Lower of cost or - Individual scrip NRV - Category wise A Ltd. 100 60 60 B Ltd. 200 140 C Ltd. 800 10 10 D Ltd. 400 250 E Ltd. 200 450 200 Total 1700 910 660 910 Impact: Category wise valuation results into accelerated taxation since appreciation in the value of certain securities will be set off against diminution in the value of other securities.

Securities AS- 13 ICDS VIII v Pre-acquisition Interest • AS 13 and ICDS on securities both require the pre-acquisition interest to be deducted from the actual cost. • SC in Vijaya Bank’s case (187 ITR 541) had ruled that pre-acquisition interest paid is part of purchase cost of security. • But as per the case of American Express International Banking Corpn. v. CIT [2002] 125 Taxman 488 (Bom. ), if income from securities is taxed under PGBP, department ought to have taxed interest received from broken period and allow deduction of interest paid for broken period. • Also the above case is followed as a prevalent practice.

Example Interest Bearing Security acquired on 1 st February, 2016 Interest rate 12% Interest Payable Half Yearly (31 st Dec & 30 th June) Cost of Interest Bearing Security 1, 010 (Rs. 1, 000 - Face Value & Cost at which security acquired plus Rs. 10 – Pre-acquisition interest for 1 month) AS 13 & ICDS Prevalent Practice Cost of Security as on 31 -03 -2015* 1, 010 1, 000 Adjustment to P&L for 2015 -16 NIL 10 debited as int. exp. Adjustment to P&L for 2016 -17 50 credited as income 60 credited as income Adjustment in Cost 10 reduced from cost NIL On 30 th June, 2016 when int. received *NRV is assumed to be higher than cost

Securities AS- 13 ICDS VIII If an investment is acquired by the issue of shares or assets, the acquisition cost should be the fair value of the securities issued/fair value of the asset given up. Alternatively, the acquisition cost of the investment may be determined with reference to the fair value of the investment acquired if it is more clearly evident. Where a security is acquired in exchange for other securities or asset, the fair value of the security so acquired shall be its actual cost. Usual Practice: Concept of cost should normally relate to what is given up.

ICDS-IX: Borrowing Cost

What constitutes as ‘borrowing costs' Borrowing costs are interest and other costs incurred by a person in connection with the borrowing of funds and include: o Commitment charges on borrowings o Amortised amount of discounts or premiums relating to borrowings o Amortised amount of ancillary costs incurred in connection with the arrangement of borrowings o Finance charges in respect of assets acquired under finance leases or under other similar arrangements.

Borrowing Costs AS - 16 ICDS • Method of Capitalisation: v Specific Borrowings: Actual borrowing costs incurred on the Actual borrowing costs borrowing during the period less any income incurred during the period from temporary investment of those borrowings. on the funds borrowed. Impact: AS-16 requires income from temporary deployment of unutilised funds to be reduced from borrowing cost. However, ICDS does not provide for the same. The income from temporary deployment of unutilised funds from specific loans shall be taxable as Income from other sources under the ICDS. SC ruling in Tuticorin Alkali Chemicals (227 ITR 172) requires that interest income earned from temporary deployments of funds has to be offered to tax immediately as IFOS. Hence above deviation has no tax impact.

Borrowing Costs AS - 16 ICDS • Commencement of Capitalisation: The date of fulfilment of three conditions viz. incurrence of capex, incurrence of borrowing costs and preparatory activities are in progress. a) Specific borrowings – Date on which funds were borrowed b) General borrowings – Date on which funds were utilised. Impact: The capitalisation period starts early under the ICDS as compared to AS-16.

Borrowing Costs The borrowing costs eligible for capitalisation to include: �To the extent funds are borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalised on that asset shall be the actual borrowing cost incurred. �To the extent funds are borrowed generally and utilised for the purposes of acquition, construction or production of a qualifying asset, the amount of borrowing cost to be capitalised shall be computed in accordance with the formula: AXB/C

Borrowing Costs AS - 16 ICDS v General Borrowings: Costs determined by applying capitalisation Costs determined rate to the expenditure incurred on the asset. following formula; The rate is weighted average of borrowing A* B costs applicable to the borrowings during the C period other than specific borrowings. by

Transitional Provisions All the borrowing costs incurred on or after 1 st April, 2016 shall be capitalized for the previous year commencing on or after 1 st day of April, 2016 in accordance with the provisions of this standard after taking into account the amount of borrowing costs capitalized, if any, for the same borrowing for any previous year ending on or before 31 st day of March, 2016. Disclosure s The following disclosures shall be made in respect of borrowing costs: a) The accounting policy adopted for borrowing costs; and b) The amount of borrowing costs capitalized during the previous year.

ICDS-X: Provisions, Contingent Liabilities and Contingent Assets

Recognition of provisions AS - 29 ICDS v Provisions shall be recognised if it is probable that outflow of economic reasonably certain that outflow of resources will be required. economic resources will be required. v Provision is not discounted to NPV Impact: v The criteria for recognition of provisions on the basis of the test of ‘probable’ (i. e. more likely than not criteria) replaced with the requirement of ‘reasonably certain’. v In the absence of definition and scope of ‘reasonably certain’ criteria, an ambiguity would arise on assessment of ‘reasonably certain’ criteria. v In the Act, there is no specific provision for recognition of provisions. However, provisions are allowed based on accrued liabilities as per ordinary principles of commercial accounting.

Contingent assets & reimbursement claims AS - 29 v Contingent assets/ reimbursement claims are recognized if inflow of economic benefits/ reimbursement is “virtually certain”. ICDS v Contingent assets/ reimbursement claims to be recognized if inflow of economic benefits/ reimbursements is “reasonably certain”. Impact: v Revenue authorities may contend that ‘reasonably certain’ is a lower threshold than ‘virtually certain’. v It is not made clear whether transitional provision requires recognition of all past accumulated contingent assets in F. Y. 2015 -16.

Transitional Provisions All provisions or assets and related income shall be recognized for the previous year commencing on or after 1 st day of April, 2016 in accordance with the provisions of this standard after taking into account the amount recognized , if any, for the same for any previous year ending on or before 31 st day of March, 2016. Disclosures Following disclosure shall be made in respect of class of provision , namely: a) a brief description of the nature of the obligation; b) the carrying amount

Overview of FAQs S. NO. 1. FAQs What is the interplay between maintenance of books of accounts? Answers/Clarifications ICDS-I and ICDS is not meant for maintenance of books of accounts or preparing financial statements. The accounting policies mentioned in ICDS-I shall be applicable for computing income under the heads “PGBP” or “IFOS. ” 2. Whether inconsistent judicial precedents shall prevail The ICDS have been notified after due deliberation and over ICDS? after examining judicial view for bringing certainty on the issues covered by it. Since certainty is now provided by notifying ICDS, the provisions of ICDS shall be applicable to the transactional issues dealt therein in relation to AY 2017 -18 and subsequent AYs. 3. Does ICDS apply to non-corporate taxpayers that are not required to maintain books of account and/ or those are covered by presumptive scheme of taxation? ICDS shall also apply to persons computing income under the relevant presumptive taxation scheme, as ICDS are applicable to specified persons having income chargeable under the head “PGBP” or “IFOS. ” If there is a conflict between ICDS and other specific provisions of the Income-tax rules, 1962 (the Rules), which provisions shall prevail? How will ICDS apply to companies that adopted Ind. AS? The provisions of Rules, which deal with specific circumstances, shall prevail. 4. 5. ICDS shall apply irrespective of the accounting standards adopted by companies i. e. , either Accounting Standards (ASs) or Ind-AS.

Overview of FAQs S. NO. 6. 7. 8. 9. 10. FAQs Answers/Clarifications Whether ICDS shall apply to computation of Minimum Alternate Tax (MAT) under section 115 JB of the Act or Alternate Minimum Tax (AMT) under section 115 JC of the Income-tax Act, 1961 (the Act)? Whether the provisions of ICDS shall apply to banks, non-banking financial institutions, insurance companies, powersector, etc. ? ICDS shall not apply for computation of MAT. However, ICDS shall apply to AMT, as AMT is computed on adjusted total income, which is derived by making specified adjustment to total income computed as per normal provisions of the Act. The general provisions of ICDS shall apply to all persons, unless there are sector specific provisions contained in the ICDS or the Act. Whether similar principles as contained in ICDS-I related to Market (MTM) loss or an expected loss applies to recognition of MTM gain or expected incomes? ICDS-I provides that an accounting policy shall not be changed without “reasonable cause. ” The term “reasonable cause” is not defined. Which ICDS would govern derivative instruments? The principle as contained in ICDS-I relating to MTM losses or an expected loss shall apply mutatis Mutandis to MTM gains or an expected profit. Under the Act, “reasonable cause” is an existing concept and has evolved well over a period conferring desired flexibility to the taxpayer in deserving cases. ICDS-VI provides guidance on accounting for derivative contracts, such as forward contracts and other similar contracts. For derivatives not within the scope of ICDS-VI, provisions of ICDS-I would apply.

Overview of FAQs S. NO. FAQs Answers/Clarifications 11. Whether the recognition of retention money, the receipt of which is contingent on the satisfaction of certain performance criterion is to be recognized as revenue on billing? Retention money, being part of the 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. 12. 13. 14. 15. Whether ICDS-III and ICDS-IV should be applied by At present there is no specific ICDS notified for real estate developers and BOT operators. In developers, BOT projects and leases. Therefore, the addition, whether ICDS is applicable for leases? relevant provisions of the Act and ICDS shall apply to these transactions as may be applicable. The condition of reasonable certainty of ultimate As a principle, interest accrues on time basis and royalty collection is not laid down for taxation of interest, accrues on the basis of contractual terms. royalty and dividend. Is the taxpayer obliged to Subsequent non-recovery in either cases can be claimed as account for such income even when the collection deduction in view of section 36 (1) (vii) of the Act. thereof is uncertain? Is ICDS applicable to revenues that are liable to tax on YES gross basis for non-residents under section 115 A of the Act? What shall be the treatment of expense incurred It shall be treated as capital expenditure as per para 8 of after the conduct of test runs and experimental ICDS -V. production but before commencement of commercial production?

Overview of FAQs S. NO. 16. 17. FAQs Answers/Clarifications What is the taxability of opening balance as on 1 It shall be recognized in the previous year relevant for April, 2016 of Foreign Currency Translation assessment year 2017 -18 to the extent not recognized in Reserve (FCTR) relating to non-integral foreign the income computation in the past. operation, if any, recognized as per AS-11? For subsidy received prior to 1 April, 2016 but not recognized in the books pending satisfaction of related conditions and achieving reasonable certainty of receipt, how shall the same be recognized under ICDS on or after 1 April, 2016? Government grants received on or after 1 April, 2016 and for which recognition criteria are also satisfied thereafter, the same shall be recognized as per the provisions of ICDSVII. However, if the subsidy is already received prior to 1 April, 2016, ICDS-VII shall not apply and it shall continue to be recognized as per the law prevailing prior to that date. YES 18. Whether the taxpayer shall be permitted to claim deduction of interest on security offered to tax on accrual basis but not received while computing the capital gain? 19. How the securities held as stock in trade shall be For the measurement of securities held as stock in trade, valued “category wise” under ICDS-VIII? the securities are to be first aggregated category wise. The aggregate cost and net realizable value (NRV) of each category of security is compared and the lower of the two is to be taken as carrying value as per ICDS-VIII.

Overview of FAQs S. NO. 20. 21. 22. 23. 24. 25. FAQs Answers/Clarifications Whether borrowing costs to be capitalized under Borrowing costs shall exclude those borrowing costs that ICDS-IX should exclude portion of borrowing costs are otherwise not allowable under the specific provisions that is disallowed under specific provisions such as of the Act. 14 A, 43 B, 40(a) and 40 A(2)(b)? Whether bill discounting charges and other similar charges would fall under the definition of borrowing cost? How to allocate borrowing costs relating to general borrowing to different qualifying assets? What is the impact of Para 20 of ICDS-X containing transitional provisions? Yes, as the definition of “borrowing cost” is an inclusive definition. On asset-by-asset basis. Para 20 of ICDS-X provides that provisions or assets and related income shall be recognized for the year commencing on or after 1 April, 2016 in accordance with this ICDS after taking into account amount recognized, if any, for the same in any previous year ending on or before March 2016. Whether provisions for employee benefits such as Provisions for employee benefits that are otherwise provident fund, gratuity etc. , are excluded from the covered by AS 15 shall continue to be governed by specific scope of ICDS-X? provisions of the Act and are not dealt with by ICDS-X. Where is the taxpayer required to make disclosures Disclosures shall be made in the tax audit report in Form specified in ICDS? 3 CD. However, there shall not be any separate disclosure requirement for persons that are not liable to tax audit.

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