Section 145(2) empowers the Central Government to notify in
the Official Gazette from time to time, Income computation and disclosure
standards (ICDS) to be followed by any class of assessees or in respect of any
class of income, Accordingly, the Central Government has, in exercise of the
powers conferred under section 145(2), notified ten income computation arid
disclosure standards (ICDS,) to be followed by ALL ASSESSEES, FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, FOR THE
PURPOSES OF COMPUTATION OF INCOME CHARGEABLE TO INCOME-TAX UNDER THE HEAD
“PROFIT AND GAINS OF BUSINESS OR PROFESSION” OR “INCOME FROM OTHER SOURCES”.
This notification shall come into force with effect from 1st April, 2015, and
shall accordingly apply to the A.Y. 2016-17 and subsequent assessment years.
IN THE CASE OF CONFLICT BETWEEN THE PROVISIONS OF THE INCOME-TAX
ACT, 1961 AND THE NOTIFIED ICDSs, THE PROVISIONS OF THE ACT SHALL PREVAIL TO
THAT EXTENT.
Salient Features of ICDS:-
ü ICDS I :- Accounting Policies
o
This
ICDS deals with significant accounting policies.
o
While
it recognise the fundamental accounting assumptions of Going Concern,
Consistency & accrual, it does not recognise the concepts of Materiality
& prudence, in select ion of accounting policies.
o
Treatment
& presentation of transactions are to be governed by their substance not
form.
o
Marked
to market loss or an expected loss is not be recognised unless recognition of
loss in accordance with the provisions of any other ICDS.
ü ICDS II :- Valuation of Inventories
o
Inventories
has been defined to mean assets held for:-
§ Sale in the ordinary course of
business;
§ In production process for such sale;
§ In form of materials or supplies to
be consumed in the production process or in the rendering of services.
o
This
ICDS requires inventory to be valued at cost or NRV whichever is lower
o
This
ICDS requires disclosure of accounting policies adopted in measuring inventories
including the cost formulae used and
total carrying amount of inventories and its classification to the appropriate
person.
ü ICDS III :- Construction Contracts
o
This
ICDS is required to be applied in determination of income for a construction
contract of a contractor.
o
It
recognises percentage of completion Method (POCM) for recognizing the contract
revenue & contract cost associated
with the construction Contracts.
o
This
ICDS also contains certain disclosures requirements , like amount of contract
revenue recognised as revenue during the
period, the methods used to determine the stage of completion of contracts in
progress etc.
ü ICDS IV :- Revenue Recognition
o
This ICDS deals with the bases for recognition of revenue arising in the course
of ordinary activities of a person from –
§ The Sale of goods;
§ The rendering of services;
§ The use by others of the person’s
resources yielding interest, dividends or royalities.
o
It does not deal, however, with the aspects of
revenue recognition which are dealt with by other ICDSs.
o
Revenue & is the gross inflow of cash,
receivables or other consideration arising in
the course of the ordinary activities of a person from the sale of goods, from the rendering of
services, or from the use by others of the person’s resources yielding
interest, royalties or dividends. In an agency relationship, the revenue is the
amount of commission and not the gross inflow of cash, receivables or other
consideration.
o
This ICDS also contains a provision wherein
the revenue from sale of goods could be recognized when there is reasonable
certainty of its ultimate collection.
o
However,
“reasonable certainty for ultimate collection” is not a criterion for recognition
of revenue from rendering of services or use by others of person’s resources
yielding interest, royalties or dividends.
o
This
ICDS contains certain disclosure requirements, like the amount of revenue from
service transactions recognized as revenue during the previous year, the method
used to determine the stage of completion of service transactions in progress,
information relating to service transactions in progress at the end of the
previous year etc.
ü ICDS V: Tangible Fixed Assets:-
o
This
ICDS deals with the treatment of tangible fixed assets.
o
It
contains the definition of tangible fixed assets which also provides the criteria
for determining whether an item is to be classified as a tangible fixed asset.
o
“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.
o
This
ICDS provides the components of actual cost of such assets and valuation of
such assets in special cases.
o
The
fair value of a tangible fixed asset acquired in exchange for shares or other
securities or another asset shall be its actual cost.
o
The
ICDS also provides that depreciation on such assets and income arising on
transfer of such assets shall be computed in accordance with the provisions of
the Income-tax Act, 1961.
o
The
ICDS also contains disclosure requirements in respect of such assets, like the
description of asset or block of assets, rate of depreciation, actual cost or
written down value, as the case may be, etc.
ü ICDS VI: The Effects of changes in
foreign exchange rates
o
This
ICDS deals with treatment of transactions in foreign currencies, translating
the financial statements of foreign operations and treatment of foreign
currency transactions in the nature of forward exchange contracts.
o
This
ICDS requires exchange differences arising on settlement of monetary items or
conversion thereof at last day of the previous year to be recognized as income
or as expense in that previous year.
o
In respect of non-monetary items, exchange differences arising on conversion thereof as at the last day of the
previous year shall not be recognized as income or as expense in that previous
year.
o
The
ICDS contains provisions for initial recognition, conversion at the last date
of the previous year and recognition of exchange differences. These provisions
shall be subject to the provisions of section 43A of the Income-tax Act, 1961
and Rule 115 of the Income-tax Rules, 1962.
o
The
ICDS requires classification of a foreign operation as an integral foreign
operation or a non-integral foreign operation.
ü ICDS VII: Government Grants
o
This
ICDS deals with the treatment of government grants. It recognizes that
government grants are sometimes called by other names such as subsidies, cash
incentives, duty drawbacks etc.
o
This
ICDS does not deal with Government assistance other than in the form of
Government grants and Government participation in the ownership of the enterprise.
o
It
requires recognition of Government Grants when there is a reasonable assurance
that (h. person shall comply with the conditions attached to them and the
grants shall be received. However, it also states that recognition of
Government grant shall not be postponed beyond the date of actual receipt.
o
This
ICDS requires Government grants relatable to depreciable fixed assets to be
reduced from actual cost/WDV, It further provides that where the Government
grant is not directly relatable to the asset acquired, then a pro-rata
reduction of the amount of grant should be made in the same proportion as such
asset bears to all assets with reference to which the Government grant is so
received.
o
The
standard requires grants relating to non-depreciable fixed assets to be recognized
as income over the same period over which the cost of meeting such obligations
is charged to income.
o
The
standard also requires Government grants 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 will no further related costs to be
recognized as income of the period in which it is receivable.
o
All
other Government Grants have to be recognized as income over the periods
necessary to match them with the related costs which they are intended to
compensate.
o
The
standard contains certain disclosure requirements, like nature and extent of
Government grants recognized during the previous year as income , nature and
extent of Government grants not recognised during the previous year as income
and reasons thereof etc.
ü ICDS VIII: Securities
o
This
ICDS deals with securities held as stock-in-trade.
o
It
requires securities to be recognized at actual cost on acquisition, which shall
comprise of its purchase price and include acquisition charges like brokerage, fees,
tax, duty or cess.
o
The
actual cost of a security acquired in exchange for other securities or another
asset shall be the fair value of the security so acquired.
o
Subsequently,
at the end of any previous year, securities held as stock-in-trade have to be
valued at actual cost initially recognized or net realizable value at the end
of that previous year, whichever is lower.
o
It
goes on to provide that such comparison of actual cost initially recognized and
net realizable value has to be done category-wise and not for each individual
security.
ü ICDS IX: Borrowing Costs
o
This
ICDS deals with the treatment of borrowing costs. It does not deal with the
actual or imputed cost of owners’ equity and preference share capital.
o
It
requires borrowing costs which are directly attributable to the acquisition,
construction or production of a qualifying asset to be capitalized as part of
the cost of that asset. Other borrowing costs have to be recognized in
accordance with the provisions of the Act.
o
Qualifying
asset has been defined to mean –
§ land, building, machinery, plant or
furniture, being tangible assets;
§ know-how, patents, copyrights, trade-marks,
licences, franchises or any other business or commercial rights of similar
nature, being intangible assets;
§ inventories that require a period of
twelve months or more to bring them to a saleable condition.
o
This
ICDS requires capitalization of specific borrowing costs and general borrowing
costs.
o
This
ICDS provides the formula for capitalization of borrowing costs when funds are
borrowed generally and used for the purpose of acquisition, construction or
production of a qualifying asset.
o
It
also provides as to when capitalization of borrowing costs would commence and
cease.
o
It
requires disclosure of the accounting policy adopted for borrowing costs and
the amount of borrowing costs capitalized during the year.
ü ICDS X: Provisions. Contingent
Liabilities and Contingent Assets
o
This
ICDS deals with Provisions, Contingent Liabilities and Contingent Assets.
However, it does not deal with provisions, contingent liabilities and
contingent assets -
o
resulting
from financial instruments,
o
resulting
from executory contracts,
o
arising
in insurance business from contracts with policyholders and
o
covered
by another ICDS.
It also does
not deal with recognition of revenue dealt with by ICDS on Revenue Recognition.
o
The
ICDS specifies the conditions for recognition of a provision, namely, existence
of a present obligation as a result of a past event, reasonable certainty that
outflow of resources embodying economic benefits will be required to settle the
obligation and making a reliable estimate of the amount of the obligation.
o
It provides that a person shall not recognize
a contingent liability or a contingent asset However, it requires contingent
assets to be assessed continually. When it becomes reasonably certain that
inflow of economic benefit will arise, the asset and related income have to be
recognized in the previous year in which the change occurs.
o
It contains provisions for measurement and
review of a provision and asset and related income.
o
It also provides that a provision shall be
used only for expenditures for which the provision was originally recognized.
o
The
ICDS also contains specific disclosure requirements in respect of each class of
provision, asset and related income recognized.
