ICDS - Ca Parivaar · 2018. 7. 23. · The Central Government has notiﬁed Income Tax Computation...

A Quick Reference Guideto

ICDS (Income Computa�on and

Disclosure Standards)

CA. (Dr.) Sanjeev Kumar SinghalChartered Accountant

FCA, PhD

ForewordDr. Girish Ahuja

MessageCA Amarjit Chopra

“I would like to congratulate Sanjeev Singhal, my student at SRCC, for his book on ICDS. The book has very well captured the key highlights of ICDS and would be beneficial for professionals in understanding the impact of ICDS on the company's tax liability.” Dr. Ravi Gupta, Faculty, SRCC

“ICDS is one of the major direct-tax reform in India and will have significant impact on computation of taxes. I am convinced that the book authored by CA. Sanjeev Kumar Singhal will help the members in industry and profession to get an insight into the subject of ICDS.” CA. Sandeep Dinodia, Partner, S.R. Dinodia and Co. LLP

ICDS is likely to attract significant attention of the professionals in the near future. The book by CA (Dr.) Sanjeev Kumar Singhal is likely to provide necessary guidance to the professionals in a simple and lucid manner.

CA Parveen Kumar, Partner and National Head Assurance, ASA & Associates LLP

“With the Finance Act, 2018, ICDS has been provided the legality especially considering the number of concerns on the constitutional validity of ICDS following the Delhi High Court decision. In this regard, some good literature on ICDS was much needed for tax-practitioners around India. The efforts of our very own Dr. Sanjeev Singhal in bringing the book on ICDS are highly commendable and I am sure that his book will be well appreciated by all the members.” CA. Prakash Bisht, CFO, Jubilant Foodworks

“Income Computation and Disclosure Standards have been in news for quite long time now. Recently, with the Finance Act, 2018, the doubts on legality of ICDS have been put to rest. The professional will need to prioritise their ICDS conversion efforts. I am happy that CA. Sanjeev Kumar Singhal has come up with this book for members in industry and profession. I am sure that the readers will find the book useful.” CA. B R Goyal, Partner, KN Gutgutia & Co.

Testimonials

The Central Government has notified Income Tax Computation & Disclosure Standards (ICDS) effective financial year 2016–17. ICDS will affect the compliance requirements for all taxpayers following the mercantile system of accounting for computing income chargeable to income tax under the heads 'profits and gains of business or profession'and 'income from other sources'.

The ICDS were effectively struck down by the Delhi High Court last year. However, through the Finance Act, 2018, the Government has put to rest all questions on the validity of ICDS.

Given that these are the initial years of applicability, there could be transitional concerns on income computation, as well as disclosure under the ICDS vis-à-vis current established practices. Differences in the two practices could have significant tax impact. It is critical for all stakeholders to understand the applicability of new tax standards and its various practical application issues.

In this regard, the book by CA Sanjeev Kumar Singhal, my student at SRCC, is highly appreciated. The book provides an insight into the Income Computation and Disclosure Standards. The book covers the key features of ICDS, differences with Accounting Standards, and ICDS disclosure checklists.

I would like to congratulate CA Sanjeev Kumar Singhal for this book and I believe that he will come up with more knowledge sharing publications for members in industry and profession in coming years.

Foreword

“ICDS are intended to introduce accounting standards for tax compliance under the income tax laws in India, harmonize the treatment for accounting and tax reporting purposes and deal with the issue of tax impact arising from the introduction of Indian Accounting Standards (Ind AS) in India.

In this direction, CA. Sanjeev Kumar Singhal, through this book has taken an excellent initiative to provide an insight into the ICDS in an easy and a lucid manner. The publication highlights the provisions of the ICDS, the high-court decision and the amendments made in the Finance Act, 2018 for giving a constitutional power to ICDS by aligning the relevant provisions under the Income-tax Act, 1961 to ICDS. It also captures the key differences between ICDS and existing Accounting Standards.

The work done by CA. Sanjeev Kumar Singhal is highly commendable and I believe the readers will find the book very useful.”

Message

ForewordMessage

Dr.GirishAhujaCAAmarjitChopra

AQuickReferenceGuideto

ICDS(IncomeComputationandDisclosureStandards)

CA(Dr.)SanjeevKumarSinghal

ii

FirstEdition2018

Price-INR300/-

©Author

PUBLICATIONRIGHTSOFSUBSEQUENTEDITIONSWITHTHE

AUTHORNOPARTOFTHISBOOKMAYBEREPRODUCEDINANY

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Whileeveryefforthasbeentakentoavoiderrors,theauthors,

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iii

AQuickReferenceGuideto

ICDS(IncomeComputationandDisclosureStandards)

CA(Dr.)SanjeevKumarSinghal

PrefacetotheFirstEdition

TodealwithtaxissuesthatmayariseonIndASadoption(especially

onaccountofIndASbeinglargelydrivenby'fairvalue'concept),the

Central Board of Direct Taxes has decided to prescribe a separate

frameworkforcomputationoftaxableincome,toensurethatthesame

is kept independent of the accounting framework followed by the

companies under Ind AS. In this regard, the Ministry of Finance

published12draftICDS,outofwhich10ICDSwerenoti�iedbythe

governmenton31March2015whichweretobefollowedbyallthe

assessesfollowingmercantilesystemofaccountingforthepurposeof

computationofincomechargeabletotaxunderthehead“pro�itand

gainsfrombusinessorprofession”or“incomefromothersources”.

Thereafter in July2016, in response to the representation �iledby

Chamberof tax consultants, governmentpermittedadefermentof

oneyearfromthedateofimplementationofthesestandards,i.e.,the

noti�iedICDSwillbeapplicablefromthe�inancialyear2016-17.On

September29,2016CBDTcameupwithupdated10ICDS.ICDSwere

issued with the aim of bringing uniformity in accounting policies

governing computation of income in accordance with tax related

provisions,andalsoreducing the irregularitiesamongst them.The

ICDSweredevelopedusingGenerallyAcceptedAccountingPrinciples

(GAAPs)withassistancefromtheInstituteofCharteredAccountants

ofIndia. TheForm3CD(taxauditreport)hasalsobeenrevisedfor

making mandatory disclosures to ensure compliance with ICDS.

Further,theCBDThasalsoissuedacircularinMarch2017containing

clari�icationsoncertainmattersofICDS.

InNovember2017,theconstitutionalvalidityofICDSwaschallenged

beforeDelhiHighCourtwhereinitwasheldthatICDSiscontraryto

thesettledjudicialpositionssinceitsimplementationwouldnullify

the judgments of the Supreme Court and the High Courts and

therefore,ICDSisliabletobestruckdown.Inthelightoftheabove

HighCourtdecision,ourHon'bleFinanceMinisterSh.ArunJaitley,in

his budget speech (now Finance Act, 2018), proposed various

retrospective amendments to Income-tax Act, 1961 for adopting

severalprovisionsofIncomeComputationandDisclosureStandards

(ICDS)andthesamehavebeendulyenactednow.

iv

v

ThepublicationcoversthekeyprovisionsunderICDS,highlightingthe

provisionswhichwerecoveredbytherulingofDelhiHighCourtand

relevantamendmentsintheFinanceAct,2018.Italsoincorporates

comparisonwith Accounting Standards, ICDS disclosure checklists

andsampleICDSdisclosuresintaxauditreports.

I thank CA. Akshat Kedia and CA. Gaurav Gupta for their useful

suggestions. I hope that youwill �ind the publication useful. Your

suggestions for improvement of the publication shall be highly

appreciated.

Emailyoursuggestionat-

[email protected]

CA.SanjeevKumarSinghal

June16,2018

vi

Bookon'AQuickReferenceGuidetotheCompanies(Amendment)Act,

2017'

byCA(Dr.)SanjeevKumarSinghalavailable!

Forafreesoftcopy,[email protected]

RequestforsoftcopyofbookonCompaniesAmendmentAct,2017

Withtheblessingsof

ShriBankeyBihariandKhatuShyamBaba

Dedicatedto

OurgreatCAprofession

vii

AbouttheAuthor

EducationalBackground

· FCAwith20yearsofexperience

· P hD i n i n t e r n a t i o n a l F i n a n c e f r om

FacultyofManagementStudies,Delhi

· Certi�icatecourseonIFRSfromICAI

· M Com., Department of Commerce, Delhi

SchoolofEconomics

· B.Com. (Hons.) from Shri Ram College of Commerce, Delhi

UniversityTopper

· Received more than 100 merit certi�icates for academic

achievementsandextra-curricularactivitiesinschoolandcollege

Books&Papers

· Has over 14 books published by leading publishers including

BharatLawHouse,CCH,LexisNexis,Bloomsburyetc.,onIndAS,

IGAAP,CompaniesAct,2013,revisedScheduleVI,etc.tohiscredit;

hasalsopublishedseveralresearchpaperspublishedinleading

journalsandICAIpublications

ProfessionalExperience

· WorkedasManagementTraineeatSIDBI;VicePresident,Finance

atCyberMedia;ExecutiveVicePresident,FinanceatReligare,and

VicePresidentatJubilantLifeSciences,etc.

· WorkedasPartnerwithBLAggarwalSohwasiaandCo.

· WorkedasanassociateprofessoratFORESchoolofManagement

andhelpedshapelivesofthousandsofstudents

Awards

· CA Professional Achievement Award 2014 for outstanding

contributiontoindustry

· NIRCBestFacultyAward

· WinnerofProfABGhoshPrizeforhighestmarksinEconomics

GroupPapers

· Delhi University Topper; received Prof Jai Naraian Vaish Gold

MedalAward

viii

ContributiontoProfession

· GovernmentNomineeatNACAS

· SpecialInvitee,BoardofStudiesandhavecontributedextensively

fordevelopmentofstudymaterialfornewcourse

· Contributed as Special invitee on Ind AS implementation

committeeandITFGofICAI&actedastheresourcepersonfor

preparationofbackgroundmaterialonseveralIndAS

· ContributedasCIInomineeonAuditingandAssuranceStandards

Board of ICAI & acted as the resource person for developing

severalguidancenotes

· Contributed as Special invitee, Research Committee, ICAI &

specialinvitee,CorporateLawsCommittee,ICAI

· Contributed as Member, CII, National Financial Reporting

Committee&Chairman,CIISubGrouponAccounting&Auditing

Standards

· Hasbeen theCo-optedmember/Special inviteeofAccounting

Standards Board of ICAI and acted as the resource person for

developingIndAS

· Addressedmorethan450seminarsonaccountingstandards,Ind

AS, IFRS, IPSAS, revised Schedule VI, Schedule II, Companies

Act,2013, Auditing Standards, etc. across India, Bhutan, Nepal,

Bangkok,Dubai,etc.

· HassuccessfullytakenupvariousissuesinIndAS,IndianGAAP,

Companies Act, 2013 with various regulators and has a deep

insightintoindustryrequirements

ContributiontoSocietyatlarge

· Volunteerat'CanSupport'workingforCancer-affectedpeople

· Trustee at Shri Krishna Ayurvedic Hospital, Charkhi Dadri,

Haryana&ShriVaishyaVikasParishad,Delhi

· TrusteeandVolunteerattheBlindAshram,Ghevra,Delhi

· InstitutedseveralscholarshipsatSBMSchool,Delhi

· AssociatedwithEkalVidalaya

ix

OtherpublicationsbytheAuthor

· Simpli�ied Approach to Accounting Standards for CA IPCC

students

· AComprehensiveGuidetoAccountingStandardsforCAFinal

Students

· AQuickReferenceGuidetoInd-ASconvergedwithIFRS

· Practical Guide to Accounting Policies (co-authoredwith Sh.

ManoharLalSinghal)

· QuickReferenceGuidetoFirstTimeAdoptionofIFRS:Indian

Context(co-authoredwithCA.KrishanKantTulshan)

· Quali�ications in Auditor's Report & Disclosures on

Accounting Standards (co-authored with CA. Krishan Kant

Tulshan)

· Practical Guide to IFRS (co-authored with CA. Krishan Kant

Tulshan)

· Trends, Techniques & Tips in Financial Reporting (co-

authoredwithCA.RSankaraiah)

· APractical Guide to Cost Accounting Standards, Rules and

Audit(co-authoredwithCA.RSankaraiah)

· APracticalGuidetoDepreciationunderCompaniesAct,2013

(co-authoredwithCA.RSankaraiah)

· APracticalGuidetoConsolidatedFinancialStatementsunder

CompaniesAct,2013(co-authoredwithCA.RSankaraiah)

· ManualofFinancialAccounting&Reporting(2volumes)(co-

authoredwithCA.RSankaraiah)

· AnInsightintoIndianAccountingStandards(2volumes)(co-

authoredwithCA.AmarjitChopra)

xi

List of Contributors

CA.AbhineetJain

CA.AvinashAgarwal

CA.GirishSinghania

CA.AnkitGarg

CA.AtulSeksaria

CA.BhaskarSuri

CA.GauravAggarwal

CA.VijayGupta

CA.KhushbooJain

CA.MinalAgarwal

CA.O.P.Jain

CA.PoojaGoel

CA.PraveenKumar

CA.RajivSingh

CA.SandhyaKapur

CA.ShiwaliShukla

CA.SunilGarg

CA.UmaShankar

Gupta

CA.RuchiGupta

CA.SangamSaini

CA.AnshulArora

CA.AdityaSinghal

CA.AmitKabra

CA.AnkurSood

CA.B.L.Aggarwal

CA.DevenderGupta

CA.Saurabh

Aggarwal

CA.K.K.Jain

CA.KimiMittal

CA.MohitSinghal

CA.P.L.Gupta

CA.PradeepPalChadha

CA.R.A.Garg

CA.SahilMangla

CA.SanjayBachchani

CA.SimranKaur

CA.SureshGarg

CA.VaibhavBhatnagar

CA.TarunThawani

CA.ManishJain

CA.AkshayUppal

CA.AmitYadav

CA.AshishBhalla

CA.B.R.Goel

CA.DharamRaj

CA.HarishGupta

CA.KamalKhanna

CA.KomalAgarwal

CA.NarenderSinghania

CA.PankajSarogi

CA.PrakashBisht

CA.SandeepGarg

CA.SanjayVij

CA.SreevatsGopalakrishnan

CA.SushilKumar

CA.VaibhavJain

CA.VikasMehra

CA.DeepakGupta

CA.AnilGupta

CA.AshwaniSinghal

CA.BajrangSoni

CA.DivyaMathur

CA.HarmeetSingh

CA.KapilKedar

CA.ManojGupta

CA.NehaGarg

CA.ParulKansal

CA.PranavPuliani

CA.RajatMehra

CA.SandeepSharma

CA.ShaliniGupta

CA.SubhashGupta

CA.TwinkleGarg

CA.VijayAggarwal

CA.YogeshMidha

CA.VineetGupta

xii

Table of contents

Contents

Preface to the First Edition .................................................................... iv

About the Author .................................................................................... viii

Other publications by the Author ......................................................... xi

List of contributors ................................................................................. xii

Income Computation and Disclosure Standards ............................... 1

1.1�Background and Journey of Income Computation and

Disclosure Standards (ICDS)............................................ 1

1.1.1Convergence with International Financial reporting

Standards (IFRS): Harmonising of ICDS ............................. 2

1.2�List of Notified ICDS................................................................. 4

1.2.1 The Delhi High Court decision ....................................... 5

1.2.2 Amendments made in Income Tax Act,1961 through

Finance Act,2018 to nullify the impact of High Court

decision ....................................................................................... 5

1.3�General Features of ICDS......................................................... 6

1.4�Key Features of ICDS and comparison with the

corresponding Accounting Standards .................................... 7

1.4.1�ICDS-I on 'Accounting Policies' .................................... 7

1.4.1.1�Key Features ........................................................... 7

1.4.1.2�Key Differences from AS 1 on 'Disclosure of

Accounting Policies' .......................................................... 12

1.4.1.3 Relevant disclosure checklist ............................... 13

1.4.2� ICDS-II on 'Valuation of Inventories' .......................... 14

1.4.2.1�Scope ....................................................................... 14

1.4.2.2�Key Features .......................................................... 14

1.4.2.3�Key Differences from AS 2 on 'Valuation of

Inventories' ........................................................................ 20

1.4.2.4 Relevant disclosure checklist .............................. 21

1.4.3��ICDS-III on 'Construction Contracts' ......................... 21

xiii

1.4.3.1�Key Features .......................................................... 21

1.4.3.2�Key Differences from AS 7 on 'Construction

Contracts' ....................................................................... 27

1.4.3.3. Relevant disclosure checklist ......................... 29

1.4.4�ICDS-IV on'Revenue Recognition' ........................... 30

1.4.4.1�Key Features ...................................................... 30

1.4.4.2�Key Differences from AS 9 on 'Revenue

Recognition' ................................................................... 34

1.4.4.3. Relevant disclosure checklist .......................... 35

1.4.5�ICDS-V on 'Tangible Fixed Assets' ............................ 36

1.4.5.1�Key Features ....................................................... 36

1.4.5.2�Key Differences from AS 10 on 'Property,

Plant and Equipment” .................................................. 40

1.4.5.3. Relevant disclosure checklist .......................... 41

1.4.6�ICDS-VI on 'The Effects of Changes in Foreign

Exchange Rates' ............................................................. 42

1.4.6.1�Scope ................................................................... 42

1.4.6.2�Key Features ...................................................... 42

1.4.6.3�Key Differences from AS 11 on 'The Effects of

Changes in Foreign Exchange Rates' .......................... 47

1.4.7�ICDS-VII on 'Government Grants' ............................. 48

1.4.7.1�Key Features ......................................................... 48

1.4.7.2�Key Differences from AS 12 on 'Accounting

for Government Grants' ................................................. 53

1.4.7.3. Relevant disclosure checklist ............................ 54

1.4.8�ICDS-VIII on 'Securities' .............................................. 55

1.4.8.1�Key Features ......................................................... 55

1.4.8.2�Key Differences from AS 13 on 'Accounting

for Investments' ............................................................... 59

1.4.9�ICDS-IX on 'Borrowing Costs' ..................................... 60

1.4.9.1�Key Features ......................................................... 60

1.4.9.2�Key Differences from AS 16 on

xiv

‘Borrowing Costs' ............................................................ 63

1.4.9.3. Relevant disclosure checklist ....................... 68

1.4.10�ICDS-X on 'Provisions, Contingent Liabilities and

Contingent Assets' ....................................................... 68

1.4.10.1�Key Features .................................................... 68

1.4.10.2�Key Differences from AS 29 on 'Provisions,

Contingent Liabilities and Contingent Assets' ....... 71

1.4.10.3. Relevant disclosure checklist ....................... 72

1.5 Sample ICDS disclosures in tax audit report ................... 73

xv

Income Computation and

Disclosure Standards

Ministry of Finance notified updated Income Computation and

Disclosure Standards on September 29, 2016 which are to be

followed by all the assesses (except Individuals and a Hindu

undivided family who is not required to get his accounts of the

previous year audited in accordance with the provisions of section

44AB of the Income Tax Act, 1961) following the mercantile system

of accounting, for the purposes of computation of income

chargeable to income-tax under the head “Profits and gains of

business or profession” or “Income from other sources” with effect

from April 1, 2016. In the paras that follow , we have discussed the

key features of these ICDS, clarifications provided by CBDT

through FAQs, how do the ICDS compare with the existing

Accounting Standards, Delhi High Court Ruling on constitutional

validity of ICDS and amendments made in the Act through

Finance Act,2018 to preserve the legitimacy of ICDS.

1.1� Background and Journey of Income Computation and

Disclosure Standards (ICDS)

Section 145(2) of the Income Tax Act, 1961 laid the foundation for

introduction of Accounting Standards in the Income Tax Act. It

provides that the Central Government may notify in the Official

Gaze�e from time to time accounting standards to be followed by

any class of assesses or in respect of any class of income.

thThrough Notification No. 9949 dated 25 January 1996, the

Government notified two Tax Accounting Standards on 'Disclosure

of Accounting Policies' and 'Disclosure of Prior Period Items and

Extraordinary Items and Changes in Accounting Policies'.

¹These Standards have been superseded now

1

The foundation for introduction of these Standards was laid down

by the then Finance Minister Dr. Manmohan Singh in the

Memorandum to the Finance Bill, 1995. The Memorandum to the

Finance Bill stated that:

"The existing section 145(1) of the Income-tax Act, 1961 provides

for computation of income from business or profession or income

from other sources in accordance with the method of accounting

regularly employed by the assessee. Income is generally computed

by following one of the three methods of accounting, namely, (i)

cash or receipt basis, (ii) accrual or mercantile basis, and (iii)

mixed or hybrid method which has elements of both the aforesaid

methods. It has been noticed that many assessees are following the

hybrid method in a manner that does not reflect the correct

income. It is proposed to amend section 145 to provide that income

chargeable under the head "Profits and gains of business or

profession" or "Income from other sources" shall be computed

only in accordance with either the cash or the mercantile system of

accounting, regularly employed by an assessee."

1.1.1� Convergence with International Financial reporting

Standards (IFRS): Harmonising of ICDS

In 2010, Ministry of Corporate Affairs started taking steps towards ndconvergence with IFRS. It issued a press release No. 2/2010 on 22

January, 2010 specifying the roadmap of Ind AS implementation for

companies other than banking, insurance and non-banking finance

companies. The roadmap gave the phased manner in which the

companies other than banking, insurance and non-banking finance

companies were required to apply the converged Accounting

Standards, i.e., Indian Accounting Standards (Ind AS). A Press Release

No.3/2010 related to the roadmap for the application of the converged

Indian Accounting Standards by the Banking companies, Insurance

companies and Non- Banking finance companies was issued on 31st

March, 2010.

In view of such significant developments,in December 2010, Central

government constituted a commi�ee to:

2

� harmonise the Accounting Standards issued by ICAI with the

provisions in the Income Tax Act

� suggest the Accounting Standards for tax compliances under

the Income Tax Act

� suggest appropriate amendments to the Income Tax Act in

view of transition to the Ind AS regime

� deal with the issues arising out of tax impacts of convergence

to IFRS

In August 2012, the commi�ee issued draft of 14 tax accounting

standards which were issued for public comments and after revisions,

in January 2015, Central Government published revised drafts of 12

ICDS for public comments.

With the notification of Companies (Indian Accounting Standards)

Rules, 2015, Ind AS became a reality in India. On February 16, 2015,

MCA notified 39 converged Indian Accounting Standards (Ind AS).

In pursuant to the announcement in the budget speech by the Hon'ble

Finance Minister Sh. Arun Jaitley in July, 2014, Central Board of Direct

Taxes vide its Notification No. 33/2015 dated 31-03-2015 notified 10

ICDS which were to be followed by all assesses following mercantile

system of accounting for the purpose of computation of income

chargeable to income tax under the head “profit and gains of business

or profession” or “ income from other sources”. Thereafter in

December 2015, representation was filed with CBDT by the Chamber

of Tax Consultants (CTC), requiring clarification, guidance or

dispensation of specific provisions of ICDS. In January 2016, the

Income Tax Simplification Commi�ee (ITSC) chaired by Justice

Easwar recommends that ICDS should be deferred in light of other

impending regulatory changes and that a detailed study of ICDS

implications was required before its implementation. Hence in July

2016, CBDT deferred applicability of ICDS to 1 April, 2016. On

September 29, 2016 CBDT came up with updated 10 ICDS vide

Notification No. 87/2016 which were applicable to all the assesses

following mercantile system of accounting (except Individual or a

Hindu undivided family who is not required to get his accounts of the

3

previous year audited in accordance with the provisions of section

44AB of the Income Tax Act, 1961) with effect from April 1, 2016. In

March 2017, CBDT issued Circular No. 10/2017 providing 25 FAQs

for clarifications on implementation or applicability of the ICDS.

1.2� List of Notified ICDSList of ten ICDS which have been notified by the Central Government

along with the corresponding Ind AS and AS numbers are as under:

1 Name Equivalent

Accounting

Standard

No.

Equivalent

Ind ASNo.

I. Accounting Policies 1 1 & 8

II . Valuation of Inventories 2 2

III . Construction Contract 7 115

IV. Revenue Recognition 9 115

V. Tangible Fixed Asset 10 16

VI. Effects of changes in foreign

exchange rates

11 21

VII. Government Grants 12 20

VIII. Securities 13 3 2 , 1 0 7 &

109

IX. Borrowing Costs 16 23

X. Provisions, Contingent

Liabilities and Contingent

Assets

29 37

4

1.2.1 The Delhi High Court decision

In light of the provisions of the updated ICDS and clarifications issued

by the CBDT, the Chamber of Tax Consultants (CTC) filed a writ

petition before the Delhi HC challenging the constitutional validity of

ICDS itself and many of its provisions which were contradicting

rationale laid down by the se�led judicial precedents.

Contentions of CTC before the Delhi High Court

1. The central government cannot be conferred with such

unfe�ered powers to notify ICDS modifying the basis of

taxation. Any modification in chargeability and computation

of taxable income can be done only by the Parliament by

making amendments to the provisions of the Act.

2. ICDS is contrary to the se�led judicial positions since its

implementation would nullify the judgments of the Supreme

Court and the High Courts and therefore, ICDS is liable to be

struck down.

3. ICDS is violative of several Articles of the Constitution of

India.

To the extent of specific ICDS provision discussed in relevant sections

below, the ICDS notification read with circular have been struck down

by Delhi High Court. In effect, the high court has reiterated that

principles of chargeability to tax and ascertainment of total income

under section 4 and 5 of the IT Act will prevail over other provisions.

The power to overrule se�led principles under the IT Act and judicial

precedents can only be exercised by the parliament and not by

delegated legislation.

1.2.2 Amendments made in Income Tax Act,1961

through Finance Act, 2018 to nullify the impact of

High Court decision

As mentioned above Constitutional validity of ICDS was challenged

before the Delhi High Court in the case of Chamber of Tax Consultants

vs Union of India. The Delhi High Court held that the powers conferred

in section 145(2) of the Act have to be read down to restrict the power of

the Central Government to notify ICDS that sought to override

5

binding judicial precedents or the provisions of the Act.

In the light of above circumstances, the Finance Act,2018 made

retrospective amendments to Income-tax Act, 1961 to nullify the

impact of Delhi High Court decision.

These amendments apply retrospectively with effect from 1st April,

2017, i.e., the date on which the ICDS was made effective and will,

accordingly, apply in relation to assessment year 2017-18 and

subsequent assessment years

The amendments made in Income Tax Act in line with ICDS have been

discussed in relevant ICDS exhibited below.

1.3� General Features of ICDS

� � The effective date of ICDS is 1st April, 2016, i.e., ICDS will

apply to the Assessment Year 2017-18 and subsequent

assessment years.

� ICDS will be applicable to all assesses (other than individual

or a Hindu undivided family who is not required to get his

accounts of the previous year audited in accordance with the

provisions of section 44AB of the Income Tax Act, 1961)

following the mercantile system of accounting, irrespective of

the accounting standards adopted by companies i.e. either

Accounting Standards or Ind-AS , for the purposes of

computation of income chargeable to income-tax under the

head “Profits and gains of business or profession” or “Income

from other sources”.

� There is no income or turnover threshold limit for triggering

applicability of ICDS.

� ICDS is not likely to have any impact on MAT applicable in

case of corporate assesses. But ICDS will have impact on

AMT calculated as per section 115JC of the Act since it is

derived from adjusted total income.

� ICDS are applicable for computation of income chargeable

under the head "Profits and gains of business or profession"

6

or "Income from other sources" and not for the purpose of

maintenance of books of accounts.

� In the case of conflict between the provisions of the Income-

tax Act, 1961 and ICDS, the provisions of the Act will prevail

to that extent.

The general provisions of ICDS shall apply to all persons

unless there are sector specific provisions contained in the

ICDS or the Act.

The ICDS have been notified after due deliberation and after

examining judicial views for bringing certainty on the issues

covered by it. Certain judicial pronouncements were

pronounced in the absence of authoritative guidance on these

issues under the Act for computing Income under the head

“Profits and gains of business or profession” or Income from

other sources. Since certainty is now provided by notifying

ICDS under section 145(2), the provisions of ICDS shall be

applicable to the transactional issues dealt therein in relation

to assessment year 2017-18 and subsequent assessment years.

The relevant provisions of ICDS shall also apply to the

persons computing income under the relevant presumptive

taxation scheme.

In case of conflict, if any, between the provisions of Rules and

ICDS, the provisions of Rules, which deal with specific

circumstances, shall prevail.

1.4� Key Features of I C D S and comparison with the

corresponding Accounting Standards

1.4.1� ICDSI on 'Accounting Policies'

1.4.1.1� Key Features

ICDS-I on 'Accounting Policies' requires the following:

(a)� All significant accounting policies adopted in the preparation

and presentation of financial statements should be disclosed.

Further, the disclosure should form part of the financial

statements and the significant accounting policies should

7

normally be disclosed at one place.

(b)� In case of a change in an accounting policy having a material

effect in the relevant previous year or in the subsequent

previous years, the following should be disclosed:

(i)� the change;

(ii)� the impact of, and the adjustments resulting from,

such change, if material.

The above information should be disclosed in the tax audit

report Form 3CD of the period in which the change is made.

If, however, the effect of such change is not ascertainable,

wholly or in part, then the fact that the effect cannot be

ascertained, should be disclosed. If the change has no

material impact on the financial statements for the previous

year, but it is reasonably expected to have a material impact in

any year subsequent to previous year, the fact of such a

change requires appropriate disclosure in the previous year

in which the change is adopted and also in the previous year

in which such change has material effect for the first time.

(c)�Accounting policies adopted by an assessee should be such so

as to represent a true and fair view of the state of the affairs of

the business, profession or vocation. For this purpose,

(i)� the treatment and presentation of transactions and

events should be governed by their substance and not

merely by the legal form; and

(ii)� marked to market loss or an expected loss should not

be recognised unless the recognition of such loss is in

accordance with the provisions of any other ICDS.

8

Points

Challenged

Contrary To

Judicial

Precedents

Observation And Ruling

Of High Court

Concept of

prudence is done

away from ICDS

CIT v. Triveni

Engineering &

Industries Ltd

(2011) 49 DTR

253 (Del)

CIT v.

Advance

Construction

Co. Pvt. Ltd.

(2005) 275 ITR

30 (Guj)

The concept of prudence is

embedded in Section 37 (1)

of the Act which allows

deduction in respect of

expenses “laid out” or

“expended” for the purpose

of business. It was held that

ICDS I which does away

w i t h t h e c o n c e p t o f

'prudence' is contrary to the

Act and binding judicial

precedents and is therefore

unsustainable in law.

Relevant judicial pronouncement

Amendments made in Income-tax Act,1961 through Finance

Act,2018

Section 36(1)(xviii)

Deduction for marked to market loss or other expected loss shall be

allowed in accordance with ICDS.

Section 40A(13)

No deduction shall be allowed for marked to market loss or expected

loss except as allowable under section 36(1)(xviii).

9

Case study – Disclosure of change in accounting policy

Fact pa�ern

ICo. makes provision for warranty claims based on estimated

costs of material and labour

ICo. proposes to change its policy in FY 2016-17 to include

overheads in additions to costs of material and labour while

estimating costs for servicing warranty claims

Change of policy of ICo. to include overheads does not have

significant impact in FY 2016-17. However, it may impact future

accounting periods where there may be higher provisioning for

warranty claims

Treatment as per ICDS

If the change has no material impact on the financial statements

for the previous year, but it is reasonably expected to have a

material impact in any year subsequent to previous year, the fact

of such a change requires appropriate disclosure in the previous

year in which the change is adopted i.e. 2016-17

And also in the previous year in which such change has material

effect for the first time i.e. the previous year when there may be

high provisioning for warranty claim.

(d)� An accounting policy should not be changed without reasonable

cause.

(e)� There are basically three fundamental accounting assumptions

that underlie the preparation and presentation of financial

statements, viz:

(i)� Going concern

"Going concern" refers to the assumption that the person has

neither the intention nor the necessity of liquidation or of

curtailing materially the scale of the business, profession or

vocation and intends to continue his business, profession or

vocation for the foreseeable future.

10

(ii)�Consistency

"Consistency" refers to the assumption that accounting

policies are consistent from one period to another.

(iii)� Accrual

"Accrual" refers to the assumption that revenues and costs

are accrued, that is, recognised as they are earned or

incurred (and not as money is received or paid) and

recorded in the previous year to which they relate.

ICDS-I requires that if any of these three fundamental

accounting assumptions have not been followed in the

financial statements then this fact should be disclosed.

(f)� Disclosure of accounting policies or of changes therein cannot

remedy a wrong or inappropriate treatment of the item.

(g)�Transitional Provisions: All contract or transaction existing on

the 1st day of April, 2016 or entered into on or after the 1st 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, recognised in respect of the

said contract or transaction for the previous year ending on or

before the March 31,2016

. Clarification provided by CBDT through FAQ

ICDS is not meant for maintenance of books of accounts

or preparing financial statements. Persons are required to

maintain books of accounts and prepare financial statements

as per accounting policies applicable to them. The accounting

policies mentioned in ICDS-I being fundamental in nature

shall be applicable for computing income under the heads

“Profits and gains of business or profession” or “Income from

other sources”.

ICDS-I provides that an accounting policy shall not be

changed without 'reasonable cause'. CBDT clarified that

'reasonable cause' is an existing concept and has evolved well

over a period of time conferring desired flexibility to the tax

payer in deserving cases.

11

Net effect on the income due to application of ICDS is to

be disclosed in the Return of income. The disclosures

required under ICDS shall he made in the tax audit report

in Form 3CD. However, there shall not be any separate

disclosure requirements for persons who are not liable to

tax audit.

Same 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.

1.4.1.2� Key Differences from AS 1 on 'Disclosure of Accounting

Policies'

(a)� Based on the concept of prudence, AS 1 precludes

recognition of anticipated profit and requires recognition

of expected losses. However, ICDS-I provides that

expected losses or mark-to-market losses should not be

recognised unless permi�ed by any other ICDS.

(b)� AS 1 recognises the concept of materiality for selection of

accounting policies. Since Income Tax Act, 1961 does not

recognise the concept of materiality for the purpose of

computation of taxable income, the same has not been

incorporated in the ICDS-I.

(c)� AS 1 read with AS 5 provides that accounting policies

may be changed if it is considered that the change would

result in a more appropriate presentation. I C D S -I

provides that accounting policies should not be changed

without a reasonable cause. The term “reasonable cause“

has not been defined and would involve exercise of

judgement by management and tax authorities.

12

1.4.1.3� Relevant disclosure checklist

Para Ref Standard's disclosure requirements

6 All significant accounting policies

adopted in the preparation and

presentation of financial statements

should be disclosed.

7 Any change in an accounting policy

which has a material effect shall be

disclosed. The amount by which any

item is affected by such change shall

also be disclosed to the extent

ascertainable. Where such amount is

not ascertainable, wholly or in part,

the fact shall be indicated.

If a change is made in the accounting

policies which has no material effect

for the current previous year but

which is reasonably expected to have

a material effect in later previous

years, the fact of such change shall be

appropriately disclosed in the

previous year in which the change is

adopted and also in the previous year

in which such change has material

9 If the fundamental accounting

assumptions of Going Concern,

C o n s i s t e n c y a n d A c c r u a l a r e

followed, specific disclosure is not

r e q u i r e d . I f a f u n d a m e n t a l

accounting assumption is not

followed, the fact shall be disclosed.

10 Transitional Provisions: All contracts stor transactions existing on the 1 day

of April, 2016 or entered into on or

Yes No N/a

13

Para Ref Standard's disclosure requirements

st after the 1 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, recognised in

respect of the said contract or

transaction for the previous year stending on or before the 31 March,

2016.

Yes No N/a

1.4.2� ICDS-II on 'Valuation of Inventories'

1.4.2.1� Scope

ICDS II should be applied for valuation of inventories, except:

(a)� Work-in-progress arising under 'construction contract'

including directly related service contract which is dealt with

by the Income Computation and Disclosure Standard on

construction contracts;

(b)� Work-in-progress which is dealt with by other Income

Computation and Disclosure Standard;

(c)� Shares, debentures and other financial instruments held as

stock-in-trade which are dealt with by the Income

Computation and Disclosure Standard on securities;

(d)� Producers' inventories of livestock, agriculture and forest

products, mineral oils, ores and gases to the extent that they

are measured at net realisable value;

(e)� Machinery spares, which can be used only in connection with

a tangible fixed asset and their use is expected to be irregular,

shall be dealt with in accordance with the Income

Computation and Disclosure Standard on tangible fixed

assets.


(a)�'Inventories' are assets:

14

� held for sale in the ordinary course of business;

� in the process of production for such sale; or

� in the form of materials or supplies to be consumed in

the production process or in the rendering of services.

(b)�Net Realisable Value (NRV) is the estimated selling price in

the ordinary course of business less estimated costs of

completion less estimated costs necessary to make the sale.

(c)� Inventories should be wri�en down to net realisable value on

an item-by-item basis. Where 'items of inventory' relating to

the same product line having similar purposes or end uses and

are produced and marketed in the same geographical area and

cannot be practicably evaluated separately from other items in

that product line, such inventories should be grouped

together and wri�en down to NRV on an aggregate basis.

(d)�Net realisable value should be based on the most reliable

evidence available at the time of valuation. The estimates of

net realisable value should also take into consideration.

� the purpose for which the inventory is held,

� fluctuations of price or cost directly relating to events

occurring after the end of previous year to the extent that

such events confirm the conditions existing on the last day

of the previous year.

Materials and other supplies held for use in the production of

inventories shall not be wri�en down below the cost, where the

finished products in which they are incorporated are expected to be

sold at or above the cost. Where there has been a decline in the price of

materials and it is estimated that the cost of finished products will

exceed the net realizable value, value of materials shall be wri�en

down to net realizable value which shall be the replacement cost of

such materials.

(e)�Inventories should be valued at lower of 'Cost' or NRV'.

(f)�Cost of inventories comprises the following:

� All costs of purchase

15

� Costs of services

� Costs of conversion

� Other costs incurred in bringing the inventories to their

present condition and location

(g)� Costs of purchase consists of the following:

� purchase price including duties and taxes;

� freight inwards; and

� other expenditure directly a�ributable to the acquisition.

Trade discounts, rebates and other similar items should be

deducted in determining the costs of purchase.

(h)� The costs of services should consist of labour and other costs of

personnel directly engaged in providing the service

including supervisory personnel and a�ributable overheads.

(i)��The costs of conversion of inventories include costs directly

related to the units of production and a systematic allocation

of fixed and variable production overheads that are incurred

in converting materials into finished goods.

The allocation of fixed production overheads should be based

on the normal capacity of the production facilities.

Normal capacity shall be the production expected to

be achieved on an average over a number of periods or

seasons under normal circumstances, taking into

account the loss of capacity resulting from planned

maintenance. The actual level of production shall be

used when it approximates to normal capacity

Amendment made in Income-tax Act,1961 through Finance

Act,2018

Section 145A

The valuation of purchases, sales of goods or services and inventory

shall be adjusted to include the amount of any tax, duty or cess or fee

actually paid or incurred by the assesse to bring the goods to the

present location and condition as on valuation date

16

The amount of fixed production overheads allocated

to each unit of production shall not be increased as a

consequence of low production or idle plant.

Unallocated overheads shall be recognised as an

expense in the period in which they are incurred.

In periods of abnormally high production, the

amount of fixed production overheads allocated to

each unit of production is decreased so that

inventories are not measured above the cost.

Variable production overheads should be assigned to

each unit of production on the basis of the actual use of

the production facilities.

(j)� Where a production process results in more than one product

being produced simultaneously and the costs of conversion

of each product are not separately identifiable, the costs

should be allocated between the products on a rational and

consistent basis. Where by-products, scrap or waste material

are immaterial, they should be measured at net realisable

value and this value should be deducted from the cost of the

main product.

(k)� Other costs should be included in the cost of inventories only

to the extent that they are incurred in bringing the inventories

to their present location and condition.

(l)� Interest and other borrowing costs should not be included in

the costs of inventories, unless they meet the criteria for

recognition of interest as a component of the cost as specified

in the ICDS on 'borrowing costs'.

(m) Costs to be excluded from the cost of inventories:

abnormal losses;

storage costs, unless these costs are necessary in the

production process prior to a further production stage;

administrative overheads that do not contribute to bringing

the inventories to their present location and condition; and

selling costs.

17

(n)� Following cost formulas are permi�ed in ICDS-II :

Specific Identification Method

FIFO

Weighted Average

Retail Method

Standard Cost Method

(o)� The value of the inventory as on the beginning of the previous

year should be

� the cost of inventory available, if any, on the day of the

commencement of the business when the business has

commenced during the previous year; and

the value of the inventory as on the close of the

immediately preceding previous year, in any other

case.

(p)� The method of valuation of inventories once adopted by a

person in any previous year should not be changed without

reasonable cause.

(q)� 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 should be valued at the net realisable value.

18

Points Challenged Contrary To

Judicial

Precedents

Observation And Ruling

Of High Court

V a l u a t i o n o f

inventories at net

realisable value in

case of dissolution

o f p a r t n e r s h i p ,

body of individuals

or association of

persons, not with

standing whether

b u s i n e s s i s

continued or not

Shakti Trading

Co. 250 I T R

871 (SC)

It fails to acknowledge that

the valuation of inventory

at market value upon

se�lement of accounts of

the outgoing partner is

distinct from valuation of

the inventory in the books

of the business which is

continuing. I C D S I I is

held to be ultra vires the Act

and struck down as such.


(r)� Transitional Provisions: Interest and other borrowing costs,

which do not meet the criteria for recognition of interest as a

component of the cost, but included in the cost of the opening

inventory as on the 1st day of April, 2016, should be taken into

account for determining cost of such inventory for valuation

as on the close of the previous year beginning on or after 1st

day of April, 2016 if such inventory continue to remain part of

inventory as on the close of the previous year beginning on or

after 1st day of April, 2016.


Act,2018

Section 145A

The valuation of inventory shall be made at lower of actual cost or

NRV whichever is lower computed in accordance with ICDS.

19

The above transitional provision has no adverse impact for the

taxpayer, it merely enables continuance of same cost for inventory

carried forward from Financial Year 2015-16.Amended Section

145A(1) requires inventory to be valued at lower of cost or NRV

whichever is lower computed in accordance with ICDS. This will

have prospective application and will not impact valuation till

March 31, 2016.

1.4.2.3� Key Differences from AS 2 on 'Valuation of Inventories'

(a)� A S 2 has not prescribed any method of valuation of

inventories in the case of a service provider. In the Indian

Economy, service sector plays a vital role. As per ICDS II ,

inventory of services is also to be valued at cost or net

realisable value whichever is lower.

(c)� According to ICDS-II , the value of the inventory of a

business as on the beginning of a previous year should be the

same as the value of inventory at the end of the immediately

preceding previous year. AS 2 is silent on this aspect.

(d)� AS 2 read with AS 5 provides that the method of valuation of

inventories may be changed if it is considered that the change

would result in a more appropriate presentation. ICDS-II

provides that the method of valuation of inventory once

adopted by a person in any previous year should not be

changed without a reasonable cause.

(e)� AS 2 is silent on the valuation of inventory at the time of

dissolution of a partnership firm, association of persons and

body of individuals. ICDS-II provides that the inventory on

the date of dissolution should be valued at the net realisable

value regardless of whether business is discontinued or not.

20

Para ref Standard's disclosure requirements

25 Transitional Provisions: Interest and other

borrowing costs, which do not meet the

criteria for recognition of interest as a

component of the cost as per para 11, but

included in the cost of the opening stinventory as on the 1 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 1st day of April, 2016 if such

inventory continue to remain part of

inventory as on the close of the previous

26 Following aspects shall be disclosed:

(a) the accounting policies adopted in

measuring inventories, including the

cost formula used. Where Standard

C o s t i n g h a s b e e n u s e d a s a

measurement of cost, details of such

inventories and a confirmation of the

fact that standard cost approximates

the actual cost; and

(b) the tota l carrying amount of

inventories and its classification

appropriate to a person.

1.4.2.4 �Relevant disclosure checklist

Yes No N/a

1.4.3� ICDS-III on 'Construction Contracts'

1.4.3.1��Key Features

(a)� 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

21

use and includes:

(i)� contract for the rendering of services which are directly

related to the construction of the asset, e.g., those for the

services of project managers and architects;

(ii)� contract for destruction or restoration of assets, and the

restoration of the environment following the demolition

of assets.

(b)� Types of contracts based on contract price:

1.� Cost plus contracts

Contractor is reimbursed of costs incurred plus a mark-up

on these costs or a fixed fee.

2.� Fixed price contracts

Contractor agrees to a fixed contract price or fixed rate per

unit of output which may be subject to cost escalation

clauses.

(c) Combining and Segmenting Construction Contracts

1. The requirements of this ICDS shall be applied separately

to each construction contract except as provided in points

2, 3 and 4. For reflecting the substance of a contract or a

group of contracts, where it is necessary, ICDS should be

applied to the separately identifiable components of a

single contract or to a group of contracts together.

2. Where a contract covers a number of assets, the

construction of each asset should be treated as a separate

construction contract when:

(a) Separate proposals have been submi�ed for each asset

(b) Each asset has been subject to separate negotiation and

the contractor and customer have been able to accept

or reject that part of the contract relating to each asset;

and

(c) The costs and revenues of each asset can be identified.

3. A group of contracts, whether with a single customer or

with several customers, should be treated as a single

22

construction contract when:

(a) The group of contracts is negotiated as a single package

(b) The contracts are so closely interrelated that they are, in

effect, part of a single project with an overall profit margin;

and

(c) The contracts are performed concurrently or in a

continuous sequence

4. Where a contract provides for the construction of an

additional asset at the option of the customer or is

amended to include the construction of an additional

asset, the construction of the additional asset should be

treated as a separate construction contract when:

(a) The asset differs significantly in design, technology or

function from the asset or assets covered by the original

contract; or

(b) The price of the asset is negotiated without having regard

to the original contract price.

(d)� Contract revenue comprises the following:

(i)� the initial amount of revenue agreed in the contract,

including retentions; and


CIT v. Simplex

Concrete Piles

India (P) Ltd

(1988) 179 ITR

8 CIT v. P & C

Constructions

(P) Ltd (2009)

318 ITR 113

23

(ii)� variations in contract work, claims and incentive payments:

(i)� to the extent that it is probable that they will result in revenue;

and

(ii)� they are capable of being reliably measured.

(e)� contract revenue should be recognised when there is

reasonable certainty of its ultimate collection.

(f)� where contract revenue already recognised as income is

subsequently wri�en off in the books of accounts as

uncollectible, the same should be recognised as an expense

and not as an adjustment of the amount of contract revenue.

(g)� contract costs comprises the following:

� costs that relate directly to the specific contract;

� costs that are a�ributable to contract activity in

general and can be allocated to the contract;

� such other costs as are specifically chargeable to the

customer under the terms of the contract; and

� allocated borrowing costs in accordance with the

ICDS on 'Borrowing Costs'.

These costs should be reduced by any incidental income, not being in

the nature of interest, dividends or capital gains, that is not included in

contract revenue.

(h)� Costs that cannot be a�ributed to any contract activity or

cannot be allocated to a contract should be excluded from the

costs of a construction contract.

(i)� Contract costs include the costs a�ributable to a contract for


Act,2018

Section 43CB

Contract revenue shall include retention money and contract cost

shall not be reduced by incidental income in the nature of interest,

dividend or capital gain.

24

the period from the date of securing the contract to the final

completion of the contract. Costs that are incurred in securing

the contract are also included as part of the contract costs,

provided

� they can be separately identified; and

� it is probable that the contract will be obtained.

(j)� When costs incurred in securing a contract should be

recognised as an expense in the period in which they are

incurred, they should not be included in contract costs when

the contract is obtained in a subsequent period.

(k)� Contract costs that relate to future activity on the contract are

recognised as an asset. Such costs represent an amount due

from the customer and are classified as contract work in

progress.

(l)� Recognition of contract revenue and costs:

� Contract revenue and contract costs associated with

the construction contract should be recognised as revenue and

expenses respectively by reference to the stage of completion

of the contract activity at the reporting date, i.e., percentage of

completion method. Under this method, contract revenue is

matched with the contract costs incurred in reaching the stage

of completion, resulting in the reporting of revenue, expenses

and profit which can be a�ributed to the proportion of work

completed.

The stage of completion of contract shall be determined with reference

to

1. The proportion that contract costs incurred for work

performed upto the reporting date bear to the

estimated total contract costs, or

2. Survey of work performed, or

3. The completion of physical proportion of the contract

work

Progress payments and advances received from customers are not

determinative of the stage of completion of a contract

25

When the stage of completion is determined by reference to the

contract costs incurred upto the reporting date, only those contract

costs that reflect work performed are included in costs incurred upto

the reporting date. Contract costs which are excluded are:

1) Contract costs that relate to future activity on the contract:

and

2) Payment made to subcontractors in advance of work

performed under the sub contract

� During the early stages of a contract, where the outcome of the

contract cannot be estimated reliably, contract revenue is recognised

only to the extent of costs incurred. The early stage of a contract should

not extend beyond 25 % of the stage of completion.

(m)� The percentage of completion method is applied on a

cumulative basis in each previous year to the current estimates

of contract revenue and contract costs. Where there is change

in estimates, the changed estimates should be used in

determination of the amount of revenue and expenses in the

period in which the change is made and in subsequent periods.

Case study - loss in contract

Facts

X Ltd. entered into construction contract at beginning of

year 1 for Rs. 100 Cr. Estimating profit margin of 10%

Prices of construction material suddenly shot up towards

the end of year 1

Contract had reached 10% completion stage at end of year 1

and is expected to be completed in year 4

X Ltd. is negotiating for escalation in contract price with

customer but negotiations are not likely to be concluded

upto year 4. Outcome is not estimable

X Ltd. proposes to book foreseeable loss of Rs. 20 Cr. on the

contract in year 1

26

Also evaluate if customer accepts escalation of Rs. 33 cr. in

year 4 which wipes off the impact of rise in price and project

ends in profit


Contract revenue and contract costs associated with the

construction contract should be recognised as revenue and

expenses respectively by reference to the stage of

completion of the contract activity at the reporting date, i.e.,

percentage of completion method.

In the year 1, given 10% work completion, loss of 2 Cr can be

recognized based on cost incurred (assumed to be 10% of

total cost). No impact of escalation claim made as there is no

'reasonable certainty' of its Realization

In the year 4, profit Rs.33 Cr shall be recognised (Profit Rs. 13 Cr +

reversal of loss Rs. 20 Cr)

(n)� � Transitional Provisions: Contract revenue and contract costs

associated with the construction contract, which commenced on

or before the 31st day of March, 2016 but not completed by the

said date, should be recognised as revenue and costs respectively

in accordance with method regularly followed by the person

prior to the previous year beginning on the 1st day of April, 2016.

Contract revenue and contract costs associated with the construction

contract, which commenced on or after 1st day of April, 2016 shall be

recognised in accordance with the provisions of this standard.

1.4.3.2� Key Differences from AS 7 on 'Construction Contracts'

(a)�AS 7 is silent about treatment of accrual of income in respect of

ICDS-III provides for 'grandfathering' of contracts commenced on

or before March 31, 2016. Thus, if taxpayer followed completed

contract method for construction contracts prior to Financial Year

2016-17, he can follow the same for incomplete contracts as on April

1, 2016.

27

t h e r e t e n t i o n m o n e y . T h e r e a r e s o m e j u d i c i a l

pronouncements holding that the retention money is not

deemed to have accrued for tax purposes. To overcome this

unintended meaning, ICDS-III specifically provides that the

retention money should accrue to the person for computing

revenue based on the percentage of completion method.

(b)� Under ICDS-III , pre-construction income in the nature of

interest, dividend and capital gains should not be reduced

from the cost of construction.

(c)� As per AS 7, contract revenues are recognised if it is possible

to reliably measure the outcome of a contract. This issue being

subjective in nature has resulted in litigation. Therefore, this

condition has been removed in I C D S -I I I . I C D S -I I I

provides that contract revenue should be recognised when

there is reasonable certainty of its ultimate collection.

(d)� AS 7 provides that the losses including the probable/ expected

losses should be recognized fully and not in proportion to the

percentage of completion. This amounts to differential

treatment of recognition of income and losses. This

differential treatment is accordingly removed in ICDS-III ,

and, therefore, the losses incurred should also be allowed

only in proportion to the stage of completion. Future or

anticipated losses should not be allowed unless such losses

are actually incurred.

(e)� AS 7 provides that revenue should not be recognized during

early stages of contract. As early stage of a contract is an

uncertain and undefined concept, it leads to ambiguity and

litigation. For providing certainty in this respect, ICDS-III

provides that once a contract crosses 25 % of stage of

completion, the revenue in respect of such contact should be

recognized.

28

1.4.3.3. �Relevant disclosure checklist


22.1 Transitional Provisions: Contract revenue and

contract costs associated with the construction stcontract, which commenced on or after 1 day

of April, 2016 shall be recognized in

accordance with the provisions of this ICDS

22.2 Transitional Provisions: Contract revenue and

contract costs associated with the construction

contract, which commenced on or before the st31 day of March, 2016 but not completed by

the said date, shall be recognized based on the

method regularly followed by the person stprior to the previous year beginning on the 1

day of April, 2016

23 A person shall disclose:

(a) the amount of contract revenue

recognised as revenue in the period; and

(b) the methods used to determine the stage

of completion of contracts in progress.

24 A person shall disclose the following for

contracts in progress at the reporting date,

namely:-

(a) amount of costs incurred and recognised

profits (less recognised losses) upto the

reporting date;

(b) the amount of advances received; and

(c) the amount of retentions.

Yes No N/a

29

1.4.4� ICDS-IV on 'Revenue Recognition'


(a)� Revenue is the gross inflow of cash, receivables or other

consideration arising in the course of the ordinary activities

from the sale of goods, rendering of services, and the use by

others of enterprise resources yielding interest, royalties and

dividends. In an agency relationship, the revenue is the

amount of commission and not the gross inflow of cash,

receivables or other consideration

(b)�Criteria for revenue recognition

S.No. Revenue from Recognition criteria

1. Sale of goods a) P r o p e r t y i n g o o d s h a v e b e e n

transferred

b) Significant risks and rewards have been

transferred

c) Reasonable certainty of ultimate

collection

Note: Where the ability to assess the

ultimate collection with reasonable

certainty is lacking at the time of raising any

claim for escalation of price and export

incentives, revenue recognition in respect

of such claim should be postponed to the

extent of uncertainty involved.

2. Rendering of

services

Revenue from service transactions shall be

recognised by the percentage of completion

method.

When services are provided by an

indeterminate number of acts over a

specific period of time, revenue may be

recognised on a straight line basis over the

specific period.

30

S.No. Revenue from Recognition criteria

Revenue from service contracts with

duration of not more than ninety days may

be recognised when the rendering of

services under that contract is completed or

substantially completed.

3. Interest Interest shall accrue on the time basis.

Interest on refund of any tax, duty or cess

shall be deemed to be the income of the

previous year in which such interest is

received

4. Royalty Accrual basis (consider terms of agreement)

5. Dividend In accordance with the provisions of

Income Tax Act, 1961

Points Challenged C o n t r a r y

To Judicial

Precedents

Observation And Ruling Of

High Court

Income from export

incentive should be

recognized in year of

making claim if there

is reasonable certainty

of collection.

CIT v.

Excel

Industries

Limited

(2015) 358

ITR 295

(SC)

This is contrary to the decision

of the Supreme Court in Excel

Industries (supra), and is,

therefore, ultra vires the Act



31

Points Challenged C o n t r a r y

To Judicial

Precedents

Observation And Ruling Of

High Court

I C D S - I V permi t s

only percentage of

completion method

for service transaction

subject to exceptions

CIT v.

Bilhari

Investment

Pvt. Ltd.

(2008) 299

ITR 1 (SC).

T h e p r o p o r t i o n a t e

completion method as well as

the contract complet ion

method have been recognized

as valid method of accounting

under the mercantile system

of accounting by the Supreme

Court and therefore ICDS-IV

held to be ultra vires the Act



Act,2018

Section 43CB

The profits and gains arising from a construction contract or a

contract for providing services shall be determined on the basis of

percentage of completion method in accordance with the ICDS,

other than

Service contract with duration less than 90 days

(determinable on the basis of project completion method)

Service contract with indeterminable number of acts over

specified period of time (determinable on the basis of

straight line method)

Section 145B

The interest received by assessee on any compensation or

enhanced compensation as the case may be shall be deemed

to be the income of the previous year in which it is received

Any claim for escalation of price in a contract or export

incentive shall be deemed to be the income of the previous

year in

32

Case Study- Revenue for Service

Facts

A Co. entered in an IT contract service to provided

customization and implementation of software for the client

for 10 lacs. Cost of completing the contract is 6 lacs.

As per the agreement, payment for the project will only be

made by the customer when the implementation is

successfully completed, else no payment will be made.

Till year end Co. has incurred cost of 4.5 lac. It is assumed

that the company will be able to complete the project and

collect the amount from the client.


Revenue from service transactions shall be recognised by

the percentage of completion method.

A Co will have to recognize revenue using POCM method. If

company uses input method, stage of completion will be 75% (4.5 /

6). Hence company will recognize 75% of the total revenue i.e. 7.5 lac.

(c)� Transitional Provisions:

The transitional provisions of ICDS on 'construction

contract' will mutatis mutandis apply to the recognition of

revenue and the associated costs for a service transaction

undertaken on or before the 31st day of March, 2016 but not

completed by the said date.

Revenue for a transaction, other than a service transaction

referred to above para, undertaken on or before the 31st day

of March, 2016 but not completed by the said date should be

recognised in accordance with the provisions of ICDS-IV

for the previous year commencing on the 1st day of April,

2016 and subsequent previous year. The amount of

revenue, if any, recognised for the said transaction for any

previous year commencing on or before the 1st day of April,

2015 shall be taken into account for recognising revenue for

33

the said transaction for the previous year commencing on

the 1st day of April, 2016 and subsequent previous years.

Clarification provided by CBDT through FAQ

According to ICDS-IV 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) of Income Tax Act, 1961.

ICDS are also 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.

1.4.4.2� Key Differences from AS 9 on 'Revenue Recognition'

(a)� AS 9 recognises “proportionate completion method” or

“completed service contract method” for recognition of

revenue from service transactions. ICDS-IV provides that

revenue from service transactions should only be recognised

by following the “percentage completion method” (except in

case of service transaction having duration of not more than

90 days and when services are provided by indeterminate

acts over specified period of time)

(b)� Where the ability to assess the ultimate collection with

reasonable certainty is lacking, A S 9 provides for

postponement of recognition of revenue in relation to any

claim. The postponement of revenue due to uncertainty is

restricted to claims for price escalation and export incentives

in ICDS-IV.

(c)� As the Income Tax Act, 1961 contains specific provisions

relating to recognition of income in the nature of dividends,

the provisions of AS 9 relating to recognition of dividend has

not been incorporated in the ICDS-IV.

(d)� AS 9 requires an enterprise to disclose the circumstances in

which revenue recognition has been postponed pending the

resolution of significant uncertainties. ICDS-IV requires an

34

entity to disclose in a transaction 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



11 Transitional Provisions: The transitional

provisions of I C D S on construction

contract shall mutatis mutandis apply to the

recognition of revenue and the associated

costs for a service transaction undertaken on stor before the 31 day of March, 2016 but not

completed by the said date.

12 Revenue for a transaction, other than a

service transaction referred to in Para 10, stundertaken on or before the 31 day of

March, 2016 but not completed by the said

date shall be recognised in accordance with

the provisions of this standard for the stprevious year commencing on the 1 day of

April, 2016 and subsequent previous year.

The amount of revenue, if any, recognised

for the said transaction for any previous year stcommencing on or before the 1 day of April,

2015 shall be taken into account for

recognising revenue for the said transaction stfor the previous year commencing on the 1

day of April, 2016 and subsequent previous

years.

Yes No N/a

35

13 Following disclosures shall be made in

respect of revenue recognition, namely:—

(a) in a transaction 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;

(b) the amount of revenue from service

transactions recognised as revenue

during the previous year;

(c) the method used to determine the

stage of complet ion of service

transactions in progress; and

(d) for service transactions in progress at

the end of previous year:

(i) amount of costs incurred and

recognised profits (less recognised

losses) upto end of previous year;

(ii) the amount of advances received;

and

(iii) the amount of retentions

Para ref Standard's disclosure requirements Yes No N/a

1.4.5� ICDS-V on 'Tangible Fixed Assets'

1.4.5.1��Key Features

(a)� 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.

(b)� 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.

36

(c)� Stand-by equipment and servicing equipment are to be

capitalised. Machinery spares should be charged to the

revenue as and when consumed. 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 should be

capitalised.

(d)��The actual cost of an acquired tangible fixed asset should

comprise its

� purchase price,

� import duties,

� other taxes , excluding those subsequently

recoverable,

� directly a�ributable expenditure on making the asset

ready for its intended use.

Any trade discounts and rebates should be deducted in arriving at the

actual cost.

e) The cost of a tangible asset may undergo changes subsequent to its

acquisition or construction on account of

Price adjustment, changes in duties or similar factors; or

Examples of directly a�ributable cost Expenditure on start-up and commissioning and on test

runs and experimental production such as

Site preparation , Initial delivery and handling costs

Installation cost, such as special foundations for plant and

Professional fees, for example fees for architects/engineers

Specifically a�ributable administration and general

overheads

Borrowing costs (ICDS-IX)

The expenditure incurred after the plant has begun commercial

production, that is, production intended for sale or captive

consumption shall be treated as revenue expenditure.

37

Exchange fluctuation as specified in ICDS on the effects of

changes in foreign exchange rates

(f)� Administration and other general overhead expenses are to

be excluded from the cost of tangible fixed assets if they do

not relate to a specific tangible fixed asset. Expenses which are

specifically a�ributable to construction of a project or to the

acquisition of a tangible fixed asset or bringing it to its

working condition, should be included as a part of the cost of

the project or as a part of the cost of the tangible fixed asset.

(g)� The expenditure incurred on start-up and commissioning of

the project, including the expenditure incurred on test runs

and experimental production, should be capitalised. The

expenditure incurred after the plant has begun commercial

production, i.e., production intended for sale or captive

consumption, should be treated as revenue expenditure.

(h) In arriving at the actual cost of self-constructed tangible fixed

assets, the same principles shall apply as those described in

points (d) to (g). Any internal profits shall be eliminated in

arriving at such costs.

(i)� When a tangible fixed asset is acquired in exchange for

another asset/ shares/ securities, the fair value of the tangible

fixed asset so acquired should be taken as its actual cost.

Case study: Exchange of assetsA ship charterer owns a building which is carried in its statement of

financial position at an aggregate carrying amount of Rs 10 million

but which have a fair value of Rs 15 million (certified by valuer). It

exchanges the building for a ship, which has a estimated fair value of

Rs 17 million and pays an additional Rs 3 million cash.

Treatment as per ICDS-V

Actual cost shall be Fair Market Value of asset acquired.

Accordingly, Ship acquired shall be recognized at FMV of Rs 17

million.

38

(j)� Improvements and Repairs

� An expenditure that increases the future benefits from

the existing asset beyond its previously assessed

standard of performance should be added to the actual

cost.

� The cost of an addition or extension to an existing

tangible fixed asset which is of a capital nature and which

becomes an integral part of the existing tangible fixed

asset is to be added to its actual cost. Any addition or

extension, which has a separate identity and is capable of

being used after the existing tangible fixed asset is

disposed of, should be treated as separate asset.

(k)� Depreciation on a tangible fixed asset should be computed in

accordance with the provisions of the Act.

(l)� Income arising on transfer of a tangible fixed asset should be

computed in accordance with the provisions of the Act.

(m) Where a person owns tangible fixed assets jointly with others,

the proportion in the actual cost, accumulated depreciation

and wri�en down value is grouped together with similar

fully owned tangible fixed assets. .

(n)� Where several assets are purchased for a consolidated price,

the consideration should be apportioned to the various assets

on a fair basis.

(o)� Transitional Provisions: The actual cost of tangible fixed assets,

acquisition or construction of which commenced on or before

the 31st day of March, 2016 but not completed by the said

date, should be recognised in accordance with ICDS-V. The

amount of actual cost, if any, recognised for the said assets for

any previous year commencing on or before the 1st day of

April, 2015 should be taken into account for recognising

actual cost of the said assets for the previous year

commencing on the 1st day of April, 2016 and subsequent

previous years.

39

1.4.5.2� Key Differences from AS 10 on 'Property, Plant and

Equipment”

(a)� In the case of acquisition of an asset in exchange for another

asset, shares or other securities, AS 10 provides that the fair

value of the asset/securities given up or fair value of the asset

acquired, whichever is more clearly evident, should be

recorded as actual cost. ICDS-V provides that fair value of

the tangible fixed asset so acquired will be the actual cost.

(b)� AS 10 provides guidance for revaluation of assets. As the

Income Tax Act, 1961 does not recognise the concept of

revaluation of assets, the portion of AS 10 relating to

revaluation of assets has been omi�ed in ICDS-V.

(c)� AS 10 provides guidance on retirement and disposal of assets.

Under ICDS-V, income arising on transfer of a tangible fixed

asset should be computed in accordance with the Income Tax

Act, 1961.

(d)� Under ICDS, stand-by equipment and servicing equipment

should be capitalised and machinery spares should be

charged to the revenue as and when consumed. 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

should be capitalised.

However, as per AS 10, spares, standby and servicing

equipments should be recognised as items of PPE when they

meet the definition of property, plant and equipment.

Otherwise, such items should be classified as inventory.

(e)� Under the income tax provisions, depreciation rates for

various items have been provided. Further, depreciation is

computed on the block of assets for the purpose of income tax.

However, Schedule II to the Companies Act, 2013 prescribes

the useful lives instead of depreciation rates. Depreciation is

computed on the basis of components of assets rather than

block of assets for the purpose of accounting.

40

1.4.5.3. R� elevant disclosure checklist


16 Transitional Provisions: The actual cost of

tangible fixed assets, acquisition or

construction of which commenced on or stbefore the 31 day of March, 2016 but not

completed by the said date, shall be

recognised in accordance with the

provisions of this standard.

The amount of actual cost, if any, recognised

for the said assets for any previous year stcommencing on or before the 1 day of April,

2015 shall be taken into account for

recognising actual cost of the said assets for

19 Following disclosure shall be made:

(a) description of asset or block of assets;

(b) rate of depreciation;

(c) actual cost or wri�en down value, as

the case may be;

(d) additions or deductions during the

year with dates; in the case of any

addition of an asset, date put to use;

including adjustments on account of—

(i) Central Value Added Tax credit

claimed and allowed under the

CENVAT Credit Rules, 2004;

(ii) change in rate of exchange of

currency;

(iii) s u b s i d y o r g r a n t o r

reimbursement, by whatever name

called;

(e) depreciation Allowable; and wri�en

down value at the end of year.

Yes No N/a

41

1.4.6� ICDS-VI on 'The Effects of Changes in Foreign Exchange Rates'

1.4.6.1� Scope

ICDS -VI deals with:

(a) � treatment of transactions in foreign currencies;

(b) � translating the financial statements of foreign operations;

(c) � treatment of foreign currency transactions in the nature of

forward exchange contracts.

1.4.6.2�Key Features

(a) � Foreign currency transaction is a transaction which is

denominated in or requires se�lement in a foreign

currency, including transactions arising when a person:

(i) � buys or sells goods or services whose price is denominated

in a foreign currency; or

(ii) � borrows or lends funds when the amounts payable or

receivable are denominated in a foreign currency; or

(iii)� becomes a party to an unperformed forward exchange

contract; or

(iv) � otherwise acquires or disposes of assets, or incurs or se�les

liabilities, denominated in a foreign currency.

(b)��Initial recognition of foreign currency transactions

A foreign currency transaction should be recorded, on initial

recognition in the reporting currency, by applying to the foreign

currency amount the exchange rate between the reporting currency

and the foreign currency at the date of the transaction.

Note: An average rate for a week or a month that approximates the

actual rate at the date of the transaction may be used for all transaction

in each foreign currency occurring during that period. If the exchange

rate fluctuates significantly, the actual rate at the date of the transaction

should be used.

(c) Conversion at last date of previous year

At last day of each previous year,

42

1.� Foreign currency monetary items should be converted into

reporting currency by applying the closing rate.

Note: Where the closing rate does not reflect with reasonable

accuracy, the amount in reporting currency that is likely to be

realised from or required to disburse, a foreign currency

monetary item owing to restriction on remi�ances or the

closing rate being unrealistic and it is not possible to effect an

exchange of currencies at that rate, then the relevant monetary

item should be reported in the reporting currency at the

amount which is likely to be realised from or required to

disburse such item at the last date of the previous year.

2.� Non-monetary items in a foreign currency should be

converted into reporting currency by using the exchange rate

at the date of the transaction

3. Non-monetary item being inventory which is carried at net

realisable value denominated in a foreign currency shall be

reported using the exchange rate that existed when such value

was determined.

(d) Recognition of Exchange Differences

In respect of monetary items, exchange differences arising on

the se�lement thereof or on conversion thereof at last day of

the previous year should be recognised as income or as

expense in that previous year. However, in respect of non-

monetary items, exchange differences arising on conversion

thereof at the last day of the previous year should not be

recognised as income or as expense in that previous year.

(e) Exceptions to (b), (c) and (d)

Initial recognition, conversion and recognition of exchange

difference should be subject to provisions of section 43A of the

Act or Rule 115 of Income-tax Rules, 1962, as the case may be.

(g) Translation of financial statements of foreign operations

The financial statements of a foreign operation should be

translated using the principles and procedures in points (b) to

43

(e)as if the transactions of the foreign operation had been

those of the person himself.

(i) Forward exchange contracts

Contract not intended for trading or speculation purposes and

entered into to establish the amount of the reporting currency

required or available at the se�lement date of the transaction.

Any premium or discount arising at the inception of a forward

exchange contract should be amortised as expense or income

over the life of the contract. Exchange differences should be

recognised as income or as expense in the previous year in

which the exchange rates change. Any profit or loss arising on

cancellation or renewal should be recognised as income or as

expense for the previous year.

Note: This requirement will not apply to the contract that is entered into

to hedge the foreign currency risk of a firm commitment or a highly

probable forecast transaction. For this purpose, firm commitment,

shall not include assets and liabilities existing at the end of the previous

year.

Recognition and measurement of premium or discount arising in

forward contracts

The premium or discount that arises on the contract is

measured by the difference between the exchange rate at the

date of the inception of the contract and the forward rate

specified in the contract. Exchange difference on the contract is

the difference between:

the foreign currency amount of the contract translated at the

exchange rate at the last day of the previous year, or the

se�lement date where the transaction is se�led during the

previous year; and

the same foreign currency amount translated at the date of

inception of the contract or the last day of the immediately

preceding previous year, whichever is later.

44

Contracts intended for trading or speculation purposes, or entered

into to hedge the foreign currency risk of a firm commitment or a

highly probable forecast transaction

Premium, discount or exchange difference on contracts that

are intended for trading or speculation purposes, or that are

entered into to hedge the foreign currency risk of a firm

commitment or a highly probable forecast transaction should

be recognised at the time of se�lement.

(j) � Transitional provisions

� All foreign currency transactions undertaken on or after

1st day of April, 2016should be recognised in accordance

with the provisions of this standard.

� Exchange differences arising in respect of monetary items

or non-monetary items, on the se�lement thereof during

the previous year commencing on the 1st day of April,

2016 or on conversion thereof at the last day of the

previous year commencing on the 1st day of April, 2016,

should be recognised in accordance with the provisions of

this standard after taking into account the amount

recognised on the last day of the previous year ending on

the 31st March,2016 for an item, if any, which is carried

forward from said previous year.

� The financial statements of foreign operations for the

previous year commencing on the 1st day of April,

2016should be translated using the principles and

procedures specified in this standard after taking into

account the amount recognised on the last day of the

previous year ending on the 31st March, 2016 for an item, if

any, which is carried forward from said previous year.

Treatment as prescribed by transitional provision has been clarified

by CBDT FAQ which states that Foreign Currency Translation

Reserve balance as on April 1, 2016 pertaining to monetary items for

non-integral foreign operations shall be recognised in financial year

2016-17 to the extent not recognised in the income computation in

the past, thereby leading upfront taxation.

45

� All forward exchange contracts existing on the 1st day of

April, 2016 or entered on or after 1st day of April,

2016should be dealt with in accordance with the

provisions of this standard after taking into account the

income or expenses, if any, recognised in respect of said

contracts for the previous year ending on or before the 31st

March, 2016.


I C D S –V I 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-1 would apply.

Foreign Currency Translation Reserve balance as on 1

April 2016 pertaining to exchange differences on monetary

items for non-integral operations, shall be recognised in

the previous year relevant for assessment year 2017-18 to

the extent not recognised in the income computation in the

past.


Points Challenged O b s e r v a t i o n A n d

Ruling Of High Court

In the FAQs released by

CBDT it was clarified that

F o r e i g n C u r r e n c y

T r a n s l a t i o n R e s e r v e

balance as on 1 April 2016 ,

shall be recognised in the

previous year relevant for

assessment year 2017-18 to

the extent not recognised

i n t h e i n c o m e

computation in the past

Delhi High Court held

that such losses/gains

arising by valuation of

monetary assets and

liabilities of the foreign

operations as at the end

of the year cannot be

treated as real income.

Such hypothetical or

notional income cannot

otherwise be subjected to

tax

Contrary To

J u d i c i a l

Precedents

-

46

Points Challenged O b s e r v a t i o n A n d

Ruling Of High Court

Contrary To

J u d i c i a l

Precedents

M a r k e d t o m a r k e t

loss/gain in case of foreign

currency derivatives held

for trading or speculation

purposes are not to be

allowed

Sutlej

Co�on

Mills

Limited v.

CIT

(1979) 116

ITR 1

(SC)

It is not in consonance

with the ratio laid down

by the Supreme Court

and is, therefore, held to

be ultra vires the Act and

struck down as such.

1.4.6.3� Key Differences from AS 11 on 'The Effects of Changes in

Foreign Exchange Rates'

(a)� A S 11 provides guidance on initial and subsequent

recognition of foreign currency transactions and the resultant

exchange differences. The ICDS expressly provides that

these provisions will be subject to Section 43A of the Act and

Rule 115 of the Income-tax Rules, 1962.

(b)� A S 11 provides that exchanges differences arising on

translation of the financial statements of non-integral foreign

operations should be accumulated in a foreign currency

translation reserve in the balance sheet. ICDS provides that

such exchange differences should be recognised as income or

expense for the purpose of computation of income.

(c) AS 11 provides for different translation principles for integral


Act,2018

Section 43AA

Any gain or loss arising on account of any change in foreign

exchange rates shall be treated as income or loss, as the case may be,

and such gain or loss shall be computed in accordance with the

ICDS (subject to section 43A)

47

and non-integral foreign operations, such principles are not

prescribed under current ICDS.

(d)� AS 11 provides that forward exchange or similar contracts

entered into for trading or speculation purposes should be

mark-to-market at each balance sheet date and the resultant

exchange differences should be recorded in profit or loss.

ICDS provides that all gains or losses on such contracts

should be recognised on se�lement.

(e)� Under ICDS, accounting treatment in case of forward

contracts not intended for trading or speculation purposes

and entered into to establish the amount of the reporting

currency required or available at the se�lement date of the

transaction will not apply to the contract that is entered into to

hedge the foreign currency risk of a firm commitment or a

highly probable forecast transaction. This clarification is not

there in AS 11.

1.4.7� ICDS-VII on 'Government Grants'


(a)� Government grants are assistance by Government in cash or

kind to a person for past or future compliance with certain

conditions.

Note: Following are excluded:

� Forms of Government assistance which cannot have a

value placed upon them;

� Transactions with Government which cannot be

distinguished from the normal trading transactions of the

person

(b)� Government grants should not be recognised until there is

reasonable assurance that

(i) � the person will comply with the conditions a�ached to

them, and

(ii) �the grants will be received.

48

(c)�Recognition of Government grant should not be postponed

beyond the date of actual receipt.

Points Challenged Observation And Ruling Of High

Court

I t p r o v i d e s t h a t

r e c o g n i t i o n o f

government grants

cannot be postponed

beyond the date of

actual receipt

It is in conflict with the accrual system of

accounting. To that extent it is held to be

ultra vires the Act and struck down as

such.


Act,2018

Section 145B

The income referred in section 2(24)(xviii) shall be deemed to be the

income of the year in which it is received, if not charged to income

tax in any earlier previous year

Note: Section (24)(xviii) includes assistance in the form of a subsidy

or grant or cash incentive or duty drawback or waiver or concession

or reimbursement (by whatever name called) by the Central

Government or a State Government or any authority or body or

agency in cash or kind to the assesse, other than

the subsidy or grant or reimbursement which is taken into

account for determination of the actual cost of the asset in

accordance with the provisions of Explanation 10 to clause (1) of

section 43

the subsidy or grant by the Central Government for the

purpose of the corpus of a trust or institution established by the

Central Government or a State Government


49

(d)� Grant relating to depreciable fixed asset: Grant should be

deducted from the actual cost of the asset or assets concerned

or from the wri�en down value of block of assets to which

concerned asset or assets belonged to.

The amount refundable, if any, in respect of a Government grant

related to a depreciable fixed asset or assets should be recorded by

increasing the actual cost or wri�en down value of block of assets by

the amount refundable. Where the actual cost of the asset is increased,

depreciation on the revised actual cost or wri�en down value should be

provided prospectively at the prescribed rate.

Case study- Grant related to depreciable fixed assetCo. A has received grant of Rs. 10 crore from Rajasthan Government

to procure a plant worth Rs. 25 Crores to be used in manufacturing

unit based in Alwar. How this plan should be recognized as per

ICDS.


Balance sheet

Asset 25 Crore

Grant -10 Crore

Net Amount to be shown as per ICDS 15 Crore

Case study- Refund – Depreciable assetOn 1 April 2015, Co. A has received conditional grant of Rs. 10 crore

from Rajasthan Government to procure a plant worth Rs. 25 Crores

to be used in manufacturing unit based in Alwar. Life of the plant is

10 years.

There was no certainty of the conditions being fulfilled and in the

2nd year Co. A failed to satisfy the condition. 9 crore out 10 has been

refunded to the Government

How this plan should be recognized as per ICDS.

50


2015

Grant will be recognized since it cannot be postponed beyond

receipt.

2016

Asset 13.5 Crore

Grant Refund 9 Crore

Asset after refund 22.5 Crore

(e) Grant relating to non-depreciable fixed asset or assets of a person

requiring fulfillment of certain obligations: Grant should be

recognised as income over the same period over which the cost of

meeting such obligations is charged to income.


should be applied first against any unamortised deferred credit

remaining in respect of the Government grant. To the extent that the

amount refundable exceeds any such deferred credit, or where no

deferred credit exists, the amount should be charged to profit and loss

statement.

Case study- Grant related to non-depreciable fixed

assetCo. A has received grant of Rs. 10 crore from Rajasthan Government

to procure land worth Rs. 25 Crores on which A will construct the

plant.

As condition, Company needs to keep 1,000 local work force for next

5 years, else government will ask for refund of the grant on pro-rata

basis

How this plan should be recognized as per ICDS.


Grant of Rs. 10 Crore should be recognized as income in Profit and

Loss Account over the period of 5 years.

51

(f)� Government grant is of such a nature that it cannot be directly relatable to

the asset acquired: So much of the amount which bears to the total

Government grant, the same proportion as such asset bears to all

the assets in respect of or with reference to which the Government

grant is so received, should be deducted from the actual cost of the

asset or shall be reduced from the wri�en down value of block of

assets to which the asset or assets belonged to.

(g)� Grant that is receivable as compensation for expenses or losses incurred in

a previous financial year or for the purpose of giving immediate financial

support to the person with no further related costs:

Grant should be recognised as income of the period in which it is

receivable.



remaining in respect of the Government grant. To the extent that

the amount refundable exceeds any such deferred credit, or where

no deferred credit exists, the amount should be charged to profit

and loss statement.

(h)� Grants other than covered in (d) to (g) above: Such grants should be

recognised as income over the periods necessary to match them

with the related costs which they are intended to compensate.



remaining in respect of the Government grant. To the extent that

the amount refundable exceeds any such deferred credit, or where

no deferred credit exists, the amount should be charged to profit

and loss statement.

(i)� Government grants in the form of non-monetary assets, given at a

concessional rate, should be accounted for on the basis of their

acquisition cost.

52

Case study- Non Monetary grantsCompany A has received the land worth Rs. 50 lac from the

Government by just paying Rs. 30 Lac only. This will be used for the

construction of new plant which will ultimately generate jobs in the

society.

How this grant will be recognized as per ICDS?


Balance sheet

Asset 50 lac

Grant -20 Lac

Net Amount to be shown as per ICDS 30 Lac

Accounted for on the basis of their acquisition cost

(j)� Transitional Provisions: All the Government grants which meet the

recognition criteria on or after 1st day of April, 2016 should be

recognised for the previous year commencing on or after 1st day of

April, 2016 in accordance with the provisions of this standard after

taking into account the amount, if any, of the said Government

grant recognised for any previous year ending on or before 31st

day of March, 2016.


st Subsidy received prior to 1 day of April 2016 but not

recognised in the books pending satisfaction of related

conditions and achieving reasonable certainty of receipt

shall be recognized as per the law prevailing prior to that

date.

1.4.7.2� Key Differences from AS 12 on 'Accounting for Government

Grants’

(a) AS 12 has adopted two broad approaches for the

accounting treatment of Government grants. The first

approach is the 'Capital Approach' under which, a

Government grant is treated as a part of shareholders'

funds and the second approach is the 'Income approach'

53

under which, a government grant is taken to income

over one or more periods. To reduce litigation and to

give a certainty, I C D S V I I provides that the

government grants should be treated either as revenue

receipt or they should be reduced from the cost of fixed

assets based on the purpose for which such grant or

subsidy is given.

(b) AS 12 provides that mere receipt of a grant is not

necessarily conclusive evidence that the conditions

a�ached to the grant have been or will be fulfilled.

ICDS VII provides that recognition of Government

grant should not be postponed beyond the date of

actual receipt.


Para ref Standard's disclosure requirements Yes No

13 T r a n s i t i o n a l P r o v i s i o n s : A l l t h e

Government grants which meet the strecognition criteria of para 4 on or after 1

day of April, 2016 shall be recognised for

thestprevious year commencing on or after 1

day of April, 2016 in accordance with the

provisions of this standard after taking into

account the amount, if any, of the said

Government grant recognised for any

14 Following disclosure shall be made in

respect of government grants:

(a) nature and extent of Government

grants recognised dur ing the

previous year by way of deduction

from the actual cost of the asset or

assets or from the wri�en down value

of block of assets during the previous

year;

N/a

54


14 (b) nature and extent of Government

grants recognised dur ing the

previous year as income;

(c) nature and extent of Government

grants not recognised during the

previous year by way of deduction

from the actual cost of the asset or

assets or from the wri�en down value

of block of assets and reasons thereof;

and

(d) nature and extent of Government

grants not recognised during the

previous year as income and reasons

thereof.

Broadly, there are two variants of grants

deliberated in the ICDS. One which requires to

be reduced from actual cost or wri�en down

value of asset and other which requires

recognition of grants as income for a year.

N/a

1.4.8� ICDS-VIII on 'Securities'


(a)� Securities have the meaning assigned to it in clause (h) of

Section 2 of the Securities Contract (Regulation) Act, 1956

(42 of 1956), other than Derivatives referred to in sub-clause

(ia) of that clause. It shall also shall include share of a

company in which public are not substantially interested.

Section 2(h) of the Securities Contract (Regulation) Act, 1956 provides

that securities include:

(i) � shares, scrips, stocks, bonds, debentures, debenture

stock or other marketable securities of a like nature in or

of any incorporated company or other body corporate;

55

(ii) � derivative

(iii) � units or any other instrument issued by any collective

investment scheme to the investors in such schemes

(iv) � security receipt as defined in clause (zg) of section 2 of

the Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002

(v) � units or any other such instrument issued to the

investors under any mutual fund scheme

(vi) � Government securities;

(vii) � such other instruments as may be declared by the

Central Government to be securities; and

(viii) �rights or interest in securities.

(b)� Recognition and initial measurement

1.� A security on acquisition should be recognised at actual

cost.

2.� The actual cost of a security should comprise of its

purchase price and include acquisition charges such as

brokerage, fees, tax, duty or cess.

3.� Where a security is acquired in exchange for another

asset or other securities, the fair value of the security so

acquired should be its actual cost.

4.� Where unpaid interest has accrued before the acquisition

of an interest-bearing security and is included in the price

paid for the security, the subsequent receipt of interest is

allocated between pre-acquisition and post-acquisition

periods; the pre-acquisition portion of the interest is

deducted from the actual cost.

(c)� Subsequent Measurement of Securities

1.� At the end of any previous year, securities held as stock-

in-trade should be valued at actual cost initially

recognised or net realisable value at the end of that

previous year, whichever is lower.

56

Note: Comparison of actual cost initially recognised and net realisable

value should be done category-wise and not for each individual

security. For this purpose, securities should be classified into the

following categories:

(a) � shares;

(b) � debt securities;

(c) � convertible securities; and

(d) � any other securities not covered above.

Amendment made in Income-tax Act,1961 through Finance Act,

2018

Section 145A

The inventory being securities not listed on recognised stock

exchange or listed but not quoted with regularity shall be valued

at cost initially recognised

Other securities shall be valued at cost or NRV whichever is

lower in accordance with ICDS on category wise basis

The inventory being securities held by scheduled banks or public

financial institution shall be valued in accordance with ICDS

after taking into account guidelines of RBI in this regard.

Points Challenged Observation And Ruling Of High

Court

Valuation of securities

under 'bucket approach'

(comparison of cost and

NRV for all categories of

s e c u r i t i e s t a k e n

together).

It was held that such entities will be

required to maintain separate records

for income tax purposes for every year

since the closing value of the securities

would be valued separately for income

tax purposes and for accounting

purposes and therefore to this extent

ICDS VIII is held to be ultra vires the

Act and is struck down as such


57

2.� The value of securities held as stock-in-trade of a business

as on the beginning of the previous year should be:

(a) � the cost of securities available, if any, on the day of the

commencement of the business when the business has

commenced during the previous year; and

(b) �the value of the securities of the business as on the close of

the immediately preceding previous year, in any other case.

Notes:

� At the end of any previous year, securities not listed on a

recognised stock exchange; or listed but not quoted on a

recognised stock exchange with regularity from time to time,

should be valued at actual cost initially recognised.

Where the actual cost initially recognised cannot be

ascertained by reference to specific identification, the cost of

such security should be determined on the basis of first-in-first-

out method or weighted average cost formulae.

Case study - Bucket approachFacts

ICo is a stock broking company also engaged in trading in

shares & securities

ICo values its portfolio of securities at lower of cost or NRV

on individual scrip wise basis

Comparative valuation between individual scrip wise

approach and bucket approach is depicted in table below


Sr.

No.

Cost

NRV

Lower of

cost or NRV Value as per

ICDS

1 100

20

20

2 100 20 20

3 100 20 20 4 100 20 20 5 100 400 100 Total

500

480

180

480

58

(d) Securities held by a scheduled bank or public financial

institutions formed under a Central or a State Act or so

declared under the Companies Act, 1956 (1 of 1956) or the

Companies Act, 2013 (18 of 2013)

Securities shall be classified, recognised and measured in

accordance with the extant guidelines issued by the Reserve

Bank of India in this regard and any claim for deduction in

excess of the said guidelines shall not be taken into account.

To this extent, the provisions of ICDS VI on the effect of

changes in foreign exchange rates relating to forward

exchange contracts shall not apply.

1.4.8.2��Key Differences from AS 13 on 'Accounting for Investments'

(a)� AS 13 deals with accounting for current investments, long

term investments and investment property but excludes

shares, debentures or other securities held as stock-in-trade

from the definition of investments. Since the ICDSdeal with

computation of income under the head “Profits and gains of

business” or “profession or Income from other sources”,

ICDSonly deals with securities held as stock-in-trade.

(b)� Under AS 13,

� Carrying amount for current investments is the lower of

cost and fair value

� Valuation of current investments should be done at lower

of cost or fair value determined either on an individual

basis or by category of investments but not on overall (or

global) basis.Long-term investments are usually carried

at cost. However, when there is a decline, other than

temporary, in the value of a long term investment, the

carrying amount is reduced to recognise the decline

However, under ICDS,

� The securities are not distinguished as current and long

term securities.

� Securities held as stock-in-trade should be valued at

59

actual cost initially recognised or net realisable value at

the end of that previous year, whichever is lower.

� Comparison of actual cost initially recognised and net

realisable value should be done category-wise and not for

each individual security

(c)��Under AS 13, if an investment is acquired in exchange, or part

exchange, for another asset, the acquisition cost of the

investment is determined by reference to the fair value of the

asset given up or the fair value of the investment acquired

whichever is more clearly evident. However, Under ICDS,

where a security is acquired in exchange for another asset or

other securities, the fair value of the security so acquired

should be taken as its actual cost.

1.4.9� ICDS-IX on 'Borrowing Costs'


(a) 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.

(b) 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.

60

(c) �Borrowing costs that are directly a�ributable to the

acquisition, construction or production of a qualifying asset

should be capitalised as part of the cost of that asset.

(d) �The amount of borrowing costs eligible for capitalisation

should be determined in accordance with this ICDS. Other

borrowing costs should be recognised in accordance with the

income tax provisions.

(e)� Computation of borrowing costs eligible for capitalisation

Specific Borrowings

To the extent the 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 should be the actual borrowing costs

incurred during the period on the funds so borrowed.

Note: The capitalisation of borrowing costs will commence

from the date on which funds were borrowed.

General Borrowings

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 should be computed in accordance with the

following formula:

A x (B÷C)

� Where,

A = borrowing costs incurred during the previous year except

on borrowings directly relatable to specific purposes;

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; (in) in case the qualifying asset does not appear in the

balance sheet of a person on the last day of previous year, the

61

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

, other than those qualifying assets which are directly funded

out of specific borrowings; or

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 those assets which are

directly funded out of specific borrowings;

Note 1: The capitalisation of borrowing costs will commence

from the date on which funds were utilized.

Note 2: For the purpose of above point, a qualifying asset shall

be such asset that necessarily require a period of twelve

months or more for its acquisition, construction or

Qualifying Asset When will the capitalisation

of borrowing costs cease?

(i) land, building, machinery,

plant or furniture, being

tangible assets

Assets are first put to use(ii) k n o w - h o w , p a t e n t s ,

copyrights , t rademarks ,

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.

Substantially all the activities

necessary to prepare such

inventory for its intended

sale are complete

62

production.

(f) Cessation of Capitalisation

(g) �Transitional Provisions: All the borrowing costs incurred on

or after 1st day of April, 2016 should be capitalised for the

previous year commencing on or after 1st day of April, 2015

in accordance with the provisions of this standard after

taking into account the amount of borrowing costs

capitalised, if any, for the same borrowing for any previous

year ending on or before 31st day of March, 2016


The definition of borrowing cost is an inclusive

definition. Bill discounting charges and other similar

charges are covered as borrowing cost

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.

The capitalization of general harrowing cost under

ICDS-IX shall he done on asset-by-asset basis.

1.4.9.2� Key Differences from AS 16 on 'Borrowing Costs'

(a)�� AS 16 provides that borrowing costs may include exchange

differences arising from foreign currency borrowings to the

extent they are regarded as an adjustment to interest costs. To

63

Case study : Illustrating impact of treatment of foreign

exchange fluctuation

XYZ Ltd. has taken a loan of USD 10,000 on April 1 2016, for a

specific project at an interest rate of 5% p.a. payable annually. On

April 1 2016, the exchange rate between the currency was Rs. 45 per

USD. The exchange rate, as at 31 March 2017, is Rs. 48 per USD. The

corresponding amount could have been borrowed by XYZ Ltd. in

local currency at an interest rate of 11% per annum as on April 1 2016.

Solution

Financial year 2016-17

Increase in liability towards

principal (Foreign fluctuation on

principal) (A)

$10000*(48-45) = Rs 30000

Interest for the period (B) $10000*5%*48 = Rs 24000

Interest that would have resulted

if loan was taken in Indian

currency (C)

$10000*45*11% = Rs 49500

Difference between interest on

local currency and foreign

currency (D) = (C) – (B)

Rs 49500 – Rs 24000 = Rs 25500

Out of Rs. 30,000 (increase in liability), Rs. 25,500 will be considered

as borrowing cost

Amount of Interest to be

capitalized as per AS – 16 (E) =

(D) + (B)

Rs 24000 + Rs 25500 = Rs 49500

Amount to be treated as foreign

exchange difference as per AS –

11

Rs 4500 (Rs 30000 – Rs 25500)

Amount of interest to be treated

as borrowing cost- ICDS

Rs 24000

64

(b)� As per AS 16, a Qualifying Asset is an asset that necessarily

takes a substantial period of time to get ready for its

intended use or sale. To align with the income tax

provisions, the definition of Qualifying Asset in the

ICDShas been modified and is restricted to specific assets a

discussed in point 1.4.9.1 (b) above.

(c)� AS 16 provides that the borrowing costs on Qualifying

Assets should be capitalised when it is probable that they

will result in future economic benefits and can be reliably

measured. To achieve alignment with the Act, this

provision is removed from the ICDS.

(d)� A S 16 provides that judgment should be used for

determining whether general borrowings have been

utilised to fund Qualifying Assets. ICDS provides a

specific formula for capitalising borrowing costs relating to

general borrowings.

(e)� As per AS 16 income on temporary investments of funds

borrowed should be reduced from borrowing costs eligible

for capitalisation. To align with judicial precedents, this

provision has been removed from ICDS.

(f)� In the ICDS, the conditions relating to commencement and

cessation have been aligned to the provisions of the Income

Tax Act, i.e., specific rules have been given based on the

category of qualifying asset, and the concept of suspension

has not been given.

65

ICDS AS 16

Commence

-ment of

capitalisati

on

Commencement of

c a p i t a l i s a t i o n o f

borrowing costs will

commence from the

date on which funds

are borrowed in case of

specific borrowings

and from the date of

utilisation of funds in

c a s e o f g e n e r a l

borrowings.

The capitalisation of

borrowing costs as part

of the cost of a qualifying

asset should commence

when all the following

conditions are satisfied:

(a) expenditure for the

acquisition, construction

o r p r o d u c t i o n o f a

qualifying asset is being

incurred;

(b) borrowing costs are

being incurred; and

(c) activities that are

necessary to prepare the

asset for its intended use

or sale are in progress.

Cessation of

capitalisation

A. Capitalisation of


c e a s e w h e n t h e

following assets are

first put to use:

l a n d , b u i l d i n g ,

machinery, plant or

f u r n i t u r e , b e i n g

tangible assets; &

know-how, patents,

c o p y r i g h t s ,

trademarks, licences,

f ranchises or any

other business or

commercial rights of

similar nature, being

intangible assets

C a p i t a l i s a t i o n o f

borrowing costs should

cease when substantially

all the activities necessary

to prepare the qualifying

asset for its intended use

or sale are complete.

66

Suspension

of

capitalisation

N o C o n c e p t o f

s u s p e n s i o n o f

capitalisation is there

under ICDS

C a p i t a l i s a t i o n o f

borrowing costs should

be suspended during

e x t e n d e d p e r i o d s i n

w h i c h a c t i v e

d e v e l o p m e n t i s

interrupted

ICDS AS 16

B . I n c a s e o f

i n v e n t o r i e s t h a t

require a period of

twelve months or

more to bring them to

a saleable condition,

c a p i t a l i s a t i o n o f


c e a s e w h e n

substantially all the

activities necessary to

p r e p a r e s u c h

i n v e n t o r y f o r i t s

intended sa le are

complete.

67

1.4.9.3. R� elevant disclosure checklist

Para ref Standard's disclosure requirements No

10 Transitional Provisions: All the borrowing stcosts incurred on or after 1 day of April,

2016 shall be capitalised for the previous styear commencing on or after 1 day of

April, 2016 in accordance with the

provisions of this standard after taking into

account the amount of borrowing costs

capitalised, if any, for the same borrowing

for any previous year ending on or before st31 day of March, 2016.

11 The following disclosure shall be made in

respect of borrowing costs, namely: -

(a) the accounting policy adopted for

borrowing costs; and the amount of

borrowing costs capitalised during

the previous year.

Yes N/a

1.4.10� ICDS-X on 'Provisions, Contingent Liabilities

and Contingent Assets'


(a) � Provisions

1.� is a liability which can be measured only by Provision

using a substantial degree of estimation.

2.� is a present obligation of the person arising Liability

from past events, the se�lement of which is expected to

result in an outflow from the person of resources

embodying economic benefits.

3.� A provision should be recognised when:

� a person has a present obligation as a result of a past

event;

68

� it is reasonably certain that an outflow of resources

embodying economic benefits will be required to

se�le the obligation; and

� a reliable estimate can be made of the amount of the

obligation.

4.� No provision should be recognised for costs that need to

be incurred to operate in the future.

5. It is only those obligations arising from past events existing

independently of a person's future actions, that is the

future conduct of its business, that are recognized as

provisions.

6.� Where details of a proposed new law have yet to be

finalised, an obligation arises only when the legislation is

enacted.

7.� The amount recognised as a provision should be the best

estimate of the expenditure required to se�le the present

obligation at the end of the previous year.

8.� The amount of a provision should not be discounted to its

present value.

9.� A provision should be used only for expenditures for

which the provision was originally recognised.

10.� Where some or all of the expenditure required to se�le a

provision is expected to be reimbursed by another party,

the reimbursement should be recognised when it is

reasonably certain that reimbursement will be received if

the person se�les the obligation. The amount recognised

for the reimbursement should not exceed the amount of

the provision.

11.� Where a person is not liable for payment of costs in case

the third party fails to pay, no provision should be made

for those costs.

12.� An obligation, for which a person is jointly and severally

liable, is a contingent liability to the extent that it is

expected that the obligation will be se�led by the other

69

parties.

13.� Provisions should be reviewed at the end of each

previous year and adjusted to reflect the current best

estimate. If it is no longer reasonably certain that an

outflow of resources embodying economic benefits will

be required to se�le the obligation, the provision should

be reversed.

(b)�Contingent Assets and Liabilities

1. � Contingent liability is:

(i)� a possible obligation that arises from past events and

the existence of which will be confirmed only by the

occurrence or nonoccurrence of one or more

uncertain future events not wholly within the control

of the person; or

(ii) �a present obligation that arises from past events but is

not recognised because:

� it is not reasonably certain that an outflow of

resources embodying economic benefits will be

required to se�le the obligation; or

� a reliable estimate of the amount of the obligation

cannot be made.

2. � Contingent asset is a possible asset that arises from past

events the existence of which will be confirmed only by

the occurrence or nonoccurrence of one or more

uncertain future events not wholly within the control of

the person.

3. � Contingent liabilities and assets should not be

recognised.

4. � Contingent assets are assessed continually and when it

becomes reasonably certain that inflow of economic

benefit will arise, the asset and related income are

recognised in the previous year in which the change

occurs.

5. � The amount recognised as asset and related income

70

should be the best estimate of the value of economic

benefit arising at the end of the previous year. The

amount and related income should not be discounted to

its present value.

6. � Asset and the related income should be reviewed at the

end of each previous year and adjusted to reflect the

current best estimate. If it is no longer reasonably certain

that an inflow of economic benefits will arise, the asset

and related income should be reversed.

(c)� Transitional Provisions:All the provisions or assets and

related income should be recognised for the previous

year commencing on or after 1st day of April, 2016 in

accordance with the provisions of ICDS X after taking

into account the amount recognised, if any, for the same

for any previous year ending on or before 31st day of

March, 2016.


It is clarified that provisioning for employee benefit

which are otherwise covered by AS 15 shall continue to

be governed by specific provisions of the Act and are not ydealt with b ICDS-X.

1.4.10.2� Key Differences from AS 29 on 'Provisions, Contingent

Liabilities and Contingent Assets'

1.� AS 29 inter-alia stipulates recognition of a provision when it

is probable that an outflow of economic resources will be

required to se�le an obligation. ICDS has replaced the

condition of “probable” with “reasonably certain” for

recognising a provision.

2.� AS 29 provides for recognition of a contingent asset when the

realisation of related income is virtually certain. ICDS has

replaced the condition of “virtually certain” with “reasonably

certain” for recognition of income and the related asset.

3.� As there are specific provisions in the Income Tax laws for

restructuring expenses, the provisions of AS 29 relating to

restructuring costs have not been incorporated in ICDS.

71

1.4.10.3. Relevant disclosure checklist


20 Transitional Provisions: All the provisions

or assets and related income shall be

recognised for the prev ious year stcommencing on or after 1 day of April,

2016 in accordance with the provisions of

this standard after taking into account the

amount recognised, if any, for the same for stany previous year ending on or before 31

day of March, 2016

21.1 Following disclosure shall be made in

respect of each class of provision, namely:-

(a) a brief description of the nature of the

obligation;

(b) the carrying amount at the beginning

and end of the previous year;

(c) additional provisions made during

the previous year, including increases

to existing provisions;

(d) amounts used, that is incurred and

charged against the provision, during

the previous year;

(e) unused amounts reversed during the

previous year; and

(f) t h e a m o u n t o f a n y e x p e c t e d

reimbursement, stating the amount of

any asset that has been recognised for

that expected reimbursement.

N/a

72

1.5 Sample ICDS disclosures in tax audit report

Clause 13 (a) : Method of accounting employed in the previous year (b)

Whether there had been any change in the method of accounting

employed vis-à-vis the method employed in the immediately

preceding previous year (c) If answer to (b) is in the affirmative, give

details of such change, and the effect thereof on the P&L

Query

stIf the Company has adopted Ind-AS w.e.f. 1 April, 2016 with sttransition date of 1 April, 2015, whether the adoption of Ind-AS would

need to be disclosed as changes in accounting policies?

Author's view

As per following extracts from technical guidance notes of ICAI, the

disclosure under clause 13(b)/(c) is applicable only if there is a change

in method of accounting from mercantile to cash and vice versa. The

change in accounting policy is not required to be disclosed under

clause 13 (b)/(c). Refer following extracts from ICAI's Guidance Note

on Tax Audit (2014 Edition):

“A change in an accounting policy will not amount to a change in the

method of accounting and hence such change in the accounting policy

need not be mentioned under sub-clause (b). This is due to the fact that

as per the requirements of AS-1 and AS (IT)-1 such changes and the

impact of such changes will be disclosed in the financial statements. It

may be noted that a change in the method of valuation of stock will

amount only to a change in an accounting policy and hence such a

change need not be mentioned under sub-clause 13(b) but should be

mentioned in the financial statements.”

Refer following extracts from ICAI's Technical Guidance on ICDS:

“An accounting method is different from an accounting policy. A

change in accounting method itself does not amount to a change in

accounting policy, but is a change in method itself.”

Since switchover from IGAAP to Ind-AS does not result in change in

'mercantile' method of accounting, technically, there is no incremental

reporting requirement under clause 13(b)/(c) of Form No. 3CD.

However, given that purpose of Form No. 3CD is to give relevant

73

information to the tax authorities to make proper determination of

taxable income, the taxpayer and tax auditor may consider the

disclosure below.

“While there is no change in mercantile method of accounting followed by the

assessee-company, pursuant to Notification No. GSR 111(E) dated 16

February 2015 issued by Ministry of Corporate Affairs called 'Companies

(Indian Accounting Standards) Rules, 2015', the assessee-company has

adopted Indian Accounting Standards (Ind AS) for preparation and

presentation of financial statements for the previous year under reference.

However, for tax computation under normal provisions of the Act, the

assessee-company shall apply the provisions of the Act, Income tax Rules and

Income Computation & Disclosure Standards (ICDS) notified under section

145(2) of the Act which are applicable from assessment year 2016-17 onwards.

The minimum alternate tax (MAT) computation under section 115JB will be

made as per provisions of s.115JB as amended by Finance Act 2017 in respect

of which the assessee-company shall obtain separate report under Form 29B.”

Clause 13(f)

Disclosure are required for following ICDS under the clause 13(f):

i. ICDS-I – Accounting policies

ii. ICDS-II – Valuation of inventories

iii. ICDS-III – Construction contracts

iv. ICDS-IV – Revenue recognition

v. ICDS-V – Tangible fixed assets

vi. ICDS-VII – Government grants

vii. ICDS-IX – Borrowing costs

viii. ICDS-X – Provisions, contingent liabilities and contingent

assets

Para 6 of ICDS I states that 'All significant accounting policies adopted

by a person shall be disclosed'. Para 7 further requires disclosure of

change in accounting policy.

In this regard, the guidance provided by ICAI in its Technical Guide

on ICDS is as follows:-

74

“3.4. Since ICDS is not applicable for the purposes of maintenance of

books of account, a question arises as to what is the purpose and ambit

of ICDS I on Accounting Policies. One view is that ICDS I should be

regarded merely as a disclosure Standard and not a computation

Standard. The other view is that it is a Standard relevant for

computation of income as certain provisions in ICDS I relate to

computation. The ICDS is not a mere disclosure Standard because it

requires income computation to factor in the elements of this Standard

viz accrual, going concern and consistency.

3.5. For example, the prescription that the treatment and presentation

of transactions and events shall be governed by their substance and not

merely by their legal form, and that mark-to-market loss or an expected

loss shall not be recognised unless the recognition of such loss is in

accordance with any other ICDS - relate to computation of income,

and not disclosure.

3.6. The term “accounting policies” in ICDS I should be read as

“computation policies”. This would make the provisions of ICDS I

relating to substance over form and non-recognition of mark-to-

market losses, applicable only for computation of income, and not for

accounting purposes. Such an interpretation would also mean that the

“accounting policies” required to be disclosed by this ICDS are the

policies followed in the computation of income, and not those followed

for the purposes of maintenance of books of account.

3.7. In this respect, a reference may be made to the clarifications on

ICDS contained in Circular no. 10/2017, dated 23rd March 2017

issued by the CBDT. Question no. 1 and answer thereto are

reproduced below:

Question 1: Preamble of ICDS-I states that this ICDS is applicable for

computation of income chargeable under the head “Profits and gains of

business or profession” or “Income from other sources” and not for the

purposes of maintenance of books of accounts. However, Para 1 of

ICDS-I states that it deals with significant accounting policies.

Accounting policies are applied for maintenance of books of accounts

and preparing financial statements. What is the interplay between

ICDS-I and maintenance of books of accounts?

75

Answer: As stated in the Preamble, ICDS is not meant for maintenance

of books of accounts or preparing financial statements. Persons are

required to maintain books of accounts and prepare financial

statements as per accounting policies applicable to them. For example,

companies are required to maintain books of account and prepare

financial statements as per requirements of Companies Act 2013. The

accounting policies mentioned in ICDS-I being fundamental in nature

shall be applicable for computing income under the heads “Profits and

gains of business or profession” or “Income from other sources”.

Having regard to above guidance, it is possible for the taxpayer to

adopt a view that disclosure under para 6 of ICDS I is restricted to

those items which impact the computation of taxable income.

However, a number of Ind-AS adjustments are such that it requires a

corresponding adjustment in computation of total income even if the

adjustment is merely to arrive at the income or expenditure as per

IGAAP/ICDS. Unfortunately, ICAI's Technical Guide does not

provide guidance on how disclosure should be made under paras 6

and 7 of ICDS when the company shifts from IGAAP to Ind-AS

regime. Taxpayers may consider the following practical approach for

compliance in Tax Audit Report. Also, to protect against penalty risk,

the taxpayer may like to make a disclosure on tax positions adopted

(e.g. real income theory, ICDS cannot override ss.4/5, etc.)

The taxpayer may draw a�ention to disclosure made against clause

13(b) above regarding Ind-AS adoption. An illustrative reporting

under clause 13(f) is as follows:-

“Kindly refer particulars provided at clause 13(b) above regarding adoption of

Ind-AS for preparation and presentation of financial statements for the

previous year under reference. The accounting policies adopted under Ind-AS

are available at Note …. to the audited financial statements. The same may be

treated as compliance of paras 6 and 7 of ICDS I in respect of disclosure of

significant accounting policies and any change in accounting policy.

As per para 3.6 of ICAI's Technical Guide on ICDS, the 'accounting

policies' in ICDS I should be read as “computation policies”. For tax

computation under normal provisions of the Act, the assessee-company shall

apply the provisions of the Act, Income tax Rules and ICDS and make

necessary adjustments to computation of taxable income. The disclosures

76

required under ICDS II to X are separately reported under clauses 13(f)(ii) to

(viii) below.

On principles, the assessee believes that ICDS being a method of computation

of income cannot override scope and ambit of 'total income' as per s.4 and 5 of

the Act. It is well se�led that taxation can only be of income which has become

'due' to the assessee and which answers to the test of 'real income' (Refer, for

instance, Excel Industries (2013)(358 ITR 295)). Reference may also be made

to paras 6.4 and 6.5 at page 71 of ICAI Technical Guide on ICDS which

supports this principle. Accordingly, the assessee has applied the above

principles while computing taxable income from profit/loss as per P&L A/c

prepared as per Ind-AS in the light of provisions of Act, Rules and ICDS by

ignoring notional incomes and expenses and fair valuation adjustments.

Para 4(ii) of ICDS-I provides that marked to market (MTM) loss or an

expected loss shall not be recognised unless the recognition of such loss is in

accordance with the provisions of any other ICDS. FAQ 8 of CBDT

Circular No. 10/2017 dated 23 March 2017 clarifies that same principle shall

apply mutatis mutandis to MTM gains or an expected profit. Accordingly,

the assessee - company has exc luded M T M ga in / loss o f Rs .

……………………on derivatives recognised in Profit & Loss as per Ind-AS

109 / ICAI Guidance Note on Derivatives (May 2015) which are not covered

by ICDS-VI (viz. commodity futures). Also refer Note … of Notes to

Accounts for accounting treatment adopted in respect of such derivatives.

With adoption of Ind-AS, the assessee-company has changed its method of

computing taxable income in respect of items which are not governed by

specific provisions of the Act, Rules & ICDS and thus governed by method of

accounting regularly adopted by the assessee. The same are listed below along

with quantum of change in total income pursuant to change in computational

policy…….”

The taxpayer may then list out items of incomes and expenses which

are impacted by Ind-AS adoption. For example, ESOP cost which was

recognised under IGAAP as per intrinsic value method is recognised

under Ind-AS as per fair value method resulting in higher/lower

deduction for ESOP cost (including impact of transitional adjustment

to Retained Earnings) for normal tax computation. The quantum of

change in total income due to such change may also be disclosed.

Just to clarify, for a large number of items, while there may be change in

77

accounting from IGAAP to Ind-AS, there may be no impact on

taxable income since necessary adjustments will be made to

computation of total income to arrive at the ICDS figure (eg.

deferment of revenue by discounting amount receivable after one year

to present value, notional interest income/expenditure, notional

guarantee fee income/expenditure, etc). The same principle also

applies to items which are governed by specific provisions of the Act

like VRS expenditure covered by s.35 DDA, statutory liabilities

covered by s.43B, gratuity covered by s.40A(7), etc. No disclosure is

required for such items under this clause.

It may also be noted that clause 13(f) requires disclosure only for those

ICDS where there is specific disclosure requirement prescribed in the

ICDS. ICDS-VI relating to the effects of changes in foreign exchange

rates and ICDS-VIII relating to securities do not have any disclosure

requirements. Hence they are omi�ed in clause 13(f). It is possible that

taxpayer may adopt a position which is contrary to ICDS having

regard to overriding principles of 'accrual' of income and 'real income'

theory. Disclosure of such positions can be made against respective

ICDS. But since no disclosure is provided under ICDS-VI and ICDS

VIII , disclosure of tax positions adopted under these ICDS may be

made under ICDS-I itself.

Author's view and suggested approach for disclosure in respect of

illustrative items is given below:-

78

ICDS Policy

1. ICDS 1

“Accoun-

ting

Policies”

The accounting policies adopted under Indian

GAAP are available at Note 2.1 to the audited

financial statements.

The same may be treated as compliance of paras 6

and 7 of I C D S I in respect of disclosure of

significant accounting policies and there is no

change in accounting policies regularly employed

by the assessee.

As per para 3.6 of ICAI's Technical Guide on ICDS,

the 'accounting policies' in ICDS I should be read as

“computation policies”.

For tax computation under normal provisions of the

Act, the assessee shall apply the provisions of the

Act, Income tax Rules and ICDS and make

necessary adjustments to computation of taxable

income. The disclosures required under ICDS II to

X are separately reported under clauses 13(f)(1) to

(8) below.

On principles, the assessee believes that ICDS

being a method of computation of income cannot

override scope and ambit of 'total income' as per

Section 4 and 5 of the Act. It is well se�led that

taxation can only be of income which has become

'due' to the assessee and which answers to the test of

'real income' (Refer, for instance, Excel Industries

(2013)(358 ITR 295)). Reference may also be made

to paras 6.4 and 6.5 at page 71 of ICAI Technical

Guide on ICDS which supports this principle.

Accordingly, the assessee has applied the above

principles while computing taxable income from

profit/loss as per Statement of Profit & Loss

prepared as per Indian GAAP in the light of

provisions of Act, Rules and ICDS.

S.

No

A) For Indian GAAP

79

ICDS PolicyS.

No

Para 4(ii) of ICDS I provides that marked to market

(MTM) loss or an expected loss shall not be

recognised unless the recognition of such loss is in

accordance with the provisions of any other ICDS.

Accordingly, the assessee has added net MTM loss

of Rs.100 on derivatives recognised in Profit & Loss

as per IGAAP which are not covered by ICDS VI .

Also refer Note 2.1(s) of Notes to Accounts for

accounting treatment adopted in respect of such

derivatives.

1.

2. ICDS-II

Valuation

of

Inventories

Total carrying amount of inventories and its

classification appropriate to the assessee and the

accounting pol icy adopted in measuring

inventories have been disclosed separately and

forms part of the financial statements and there is no

change in the accounting policies adopted in

measuring inventories. Also refer Note 2.1 (h) of

Notes to Accounts for accounting treatment

adopted in respect of inventories.

3. ICDS-III

Construct

-ion

Contracts

Revenue from construction contracts is recognized

on the percentage of completion method as ICDS -

III "Construction Contracts".

The percentage of completion is determined by the

proportion that contract costs incurred for work

performed up to the balance sheet date bear to the

estimated total contract costs. The early stage of the

contract does not extend beyond 25% of the stage of

completion.

The effect of any adjustment arising from revision to

estimates is included in the statement of profit and

loss of the year in which revisions are made.

Contract revenue earned in excess of billing has

been reflected under “Other assets” and billing in

80

20,00,00,000

1,25,00,00,000

-

1,00,00,000

2,00,00,000

2,10,00,000

Contract revenue recognized during

the period-Clause 38(a)

Aggregate amount of cost incurred and

recognized profit up to the reporting

date on contracts under progress-

Clause 39(a)

Advance received on contract under

progress - Clause 39(b)

Retention amounts on contract under

progress - Clause 39(c)

Gross amount due from customer-

Clause 41(a)

Gross amount due to customer- Clause

41(b)

The above aggregate amount of cost

incurred and recognized profit up to the

reporting date does not include the

p r o v i s i o n f o r f o r e s e e a b l e l o s s

amounting Rs 27,832,050 recognised in

statement of of profit & loss in

accordance with AS – 7 “Construction

Contracts”.

ICDS PolicyS.

No

excess of contract revenuehas been reflected under

“other current liabilities” in the balance sheet.

Revenue recognized is net of taxes.

Also refer Note 2.1(h) and Note 31 of Financial

Statements.

4. ICDS-IV

Revenue

Recogniti

-on

The significant accounting policy adopted for

recognition of revenue forms part and have been

disclosed separately in the financial statements and

there is no change in accounting policy regularly

employed by the assessee. Refer Note 2.1 (i) to the

financial statements for relevant disclosure.

81

ICDS PolicyS.

No

5. ICDS-V

Tangible

Fixed

Assets


'tangible fixed assets' forms part and have been



employed by the assessee.

However, for computation of income, depreciation

on 'tangible fixed assets' has been computed in

accordancewith the provisions of the Income Tax

Act, 1961. For other disclosures as required by

ICDS-V, please refer to clause no 18 of this form.

6. ICDS-VI

Effects of

Changes

in

Foreign

Exchange

Rates


changes in foreign exchange rate have been



employed by the assessee. Refer Note 2.1 (j) to the

financial statement for relevant disclosure except

the adjustments relating the realised and unrelaised

foreign exchange gain on borrowing and liability

relating to fixed assets. The policy is consistant with

section 43A of the Income Tax Act, 1961.

The realised gain arising from the repayment of

borrowing and liability has been decapitalised

during the year.

7. ICDS-VII

Governme

nt Grants


recognition of Government Grants forms part and

have been disclosed separately in the financial

statements and there is no change in accounting

policy regularly employed by the assessee, hence,

there in no impact on ICDS Computation. Refer

Note 2.1 (j) to the financial statement for relevant

disclosure.

82

ICDS PolicyS.

No

9. ICDS-X

Provisions,

Contingent

Liabilities

&

Contingent

Assets

All Provisions are recognised when there is present

obligation arising as a result of past events, if the

liability is considered reasonably certain

and reliably estimated as per management best

estimates of expenditure which is required to se�le

the obligation, otherwise shown

as contingent liability. The accounting policy in

respect of provisions and contingent liabilities have

been disclosed separately

in the financial statement and there is no change in

accounting policies regularly employed by the

assessee. Refer Note 2.1 (o) (p) (q).

8. ICDS-IX

Borrowing

Costs


borrowing costs forms part and have been disclosed

separately in the financial statements and there is no

change in accounting policy regularly employed by

the assessee. Refer Note 2.1 (f) to the financial

statements for relevant disclsures.

83

Nature of Ind-AS adjustment Suggested approach for Tax

Audit reporting in clause

13(f)(i)

Fair valuation of investments

i n p r e f e r e n c e s h a r e s o f

subsidiary company– Under

previous Indian GAAP, the

investments were carried at

cost, whereas in Ind AS, the

same has been carried at fair

value;

No tax impact and hence no

disclosure required

Rent Equalisation (straight

lining) was accounted for in

previous GAAP as per AS –

19, whereas in Ind-AS, no such

straight lining is required in

c a s e e s c a l a t i o n r e fl e c t s

expected inflationary cost

increases;

No tax impact if straight lining

was ignored for tax purposes

u n d e r I G A A P r e g i m e .

T h e r e f o r e n o d i s c l o s u r e

required.

If straight lining was adopted

for tax purposes, disclosure

may be made of such change

Fair valuation of accrued

income expected to be received

after one year from the date of

balance sheet under Ind-AS.

U n d e r p r e v i o u s I n d i a n

GAAP, these service income

were carried at undiscounted

values;


disclosure required

1.

2.

3.

b) For Ind AS

84



13(f)(i)

L i a b i l i t y o f v o l u n t a r y

retirement scheme payable


b a l a n c e s h e e t h a s b e e n

discounted under Ind-AS to

reflect the present value on the

balance sheet, whereas in


s a m e w e r e c a r r i e d a t

undiscounted values;

No tax impact since covered by

specific provisions of Act and

hence no disclosure required. It

will require separate disclosure

under clause 19 which requires

reporting of amount admissible

u/s. 35DDA

Financial guarantees given for

loans taken by subsidiaries

have been fair valued and

recorded in the books on the

balance sheet date whereas in


same were not accounted for;


disclosure required

Loan processing fees paid for

long term borrowings have

been amortised over the

period of loan and accounted

f o r i n a c c o r d a n c e w i t h

Effective Interest Rate method.

U n d e r p r e v i o u s I n d i a n

G A A P , t h e s a m e w e r e

capitalised (depreciated over

the life of the fixed assets)/

charged to statement of profit

and loss on straight line basis;


disclosure required.

In any case, it gets disclosed as

part of disclosure requirement

for ICDS IX under para 11(a)

thereof

4.

5.

6.

85



13(f)(i)

Capitalisation of machinery

spares during the Previous

year 2016-17 (Assessment Year

2017-18), which were classified

as 'Inventory' as of 31st March

2016 under previous GAAP;

Disclosure will be required

only if there is change in tax

computation, for example,

taxpayers adopts alternative

view of treating spares as

c a p i t a l a s s e t a n d c l a i m

depreciation thereon

Recognition of MTM gains/

loss on derivative contracts

a n d n o a m o r t i s a t i o n o f

premium cost. Under previous

GAAP, premium on forward

e x c h a n g e c o n t r a c t w a s

amortised over the period of

t h e f o r w a r d c o n t r a c t .

Derivatives, other than the

forward exchange contract,

taken against the existing

underlying liabilities, which

were Mark-to-market (MTM)

only to recognize losses

whereas gains were ignored as

per the principles of prudence.

Covered as part of disclosure

suggested earlier:

Para 4(ii) of ICDS I provides that

marked to market (MTM) loss or

an expected loss shall not be

recognised unless the recognition of

such loss is in accordance with the

provisions of any other ICDS.

FAQ 8 of CBDT Circular No.

10/2017 dated 23 March 2017

clarifies that same principle shall

apply mutatis mutandis to MTM

gains or an expected profit.

Accordingly, the assessee-company

has excluded MTM gain/loss of Rs.

……………………on derivatives

recognised in Profit & Loss as per

Ind-AS 109 / ICAI Guidance Note

on Derivatives (May 2015) which

are not covered by ICDS VI (viz.

commodity futures). Also refer

Note … of Notes to Accounts for

accounting treatment adopted in

respect of such derivatives.

8.

7.

86



13(f)(i)

Recognit ion of exchange

(gain)/ loss on translation/

s e � l e m e n t o f l o n g t e r m

borrowings are charged off to

the statement of profit and loss

under Ind-A S . Under the

p r e v i o u s G A A P , t h e

exchange (gain)/ loss on long

term borrowings taken for the

acquisition of property, plant

a n d e q u i p m e n t w e r e

capitalised as part of the cost of

assets.

No tax impact in respect of

imported assets covered by

s.43A.

In respect of local assets, if

taxpayer opts to claim forex

g a i n / l o s s a s r e v e n u e

income/deduction (debatable),

it will require disclosure under

this clause since the same

c o n s t i t u t e s c h a n g e i n

c o m p u t a t i o n a l p o l i c y .

Reference may also be made to

FAQ 2 of Circular No. 10/2017

while making such disclosure

Change in the functional

Currency of one of the division

of the Company from Rupee to

USD pursuant to the adoption

of Ind-A S . Under previous

GAAP, the reporting currency

of such division was Rupee;

however under Ind-A S the

functional currency of such

division is determined as USD

and therefore categorised as

foreign operation. The results

and financial position of a

foreign operation that have a

functional currency different

from the presentation currency

a r e t r a n s l a t e d i n t o t h e

presentation currency by

applying the rules given in Ind-

AS 21.

There was no F C T R under

IGAAP regime. There will be

FCTR under Ind AS. There is

no F C T R under I C D S V I

(paragraph 7). Since there is no

change in tax computation no

disclosure is required in 3CD.

Transitional adjustments as per

I C D S V I w i l l r e q u i r e

appropriate disclosure under

clause with cross reference to

FAQ 16 of Circular No. 10/2017

10.

9.

87



13(f)(i)

Fair valuation of long term

s e c u r i t y d e p o s i t s g i ve n

expected to be received after

one year from the date of


Under Indian GAAP, these

deposits were carried at their

undiscounted value;


disclosure required

Fair valuation of long term

security deposits received

expected to be refunded back



Under Indian GAAP, these

deposits were carried at their

undiscounted value.


disclosure required

12

11

The above items are merely illustrative and any other Ind-AS

adjustment will require evaluation of tax impact on case to case basis.

88

Notes :

89

90

Notes :

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