The Central Government has vide Notification No. 32/2015 [F. No. 134/48/2010-TPL] dated 31st March, 2015 notified ten ICDS under section 145(2) of the Income-tax Act, 1961 (‘the Act’). These ICDS supersede two standards notified vide S.O 69(E) dated the 25th January, 1996, viz. Accounting Standard I (Disclosure of accounting policies) and Accounting Standard II (Disclosure of prior period and extraordinary items and changes in accounting policies).

Following are ten notified ICDS and the corresponding existing Accounting Standards (AS):

Main features

1. ICDS applies with effect from 1st day of April, 2015, accordingly it shall apply to the assessment year 2016-17 and all the subsequent assessment years;
2. It applies to all assessees (whether resident or non-resident) following the mercantile system of accounting;
3. It is applicable while computing income chargeable under the heads ‘Profits and gains of business or profession’ or ‘Income from other sources’;
4. There is no income or turnover criterion for applicability of ICDS;
5. The ICDS is to be applied only for the purpose of computation of income. It is not required to be applied for the purposes of maintenance of books of account;
6. Taxable profits would be determined after making appropriate adjustments to the financial statements, which may have been prepared under AS / Ind AS, to bring them in conformity with ICDS;
7. All ICDS, except on Securities, provide for transitional provisions to facilitate first time adoption and consideration of the resultant impact;
8. In case of conflict between the provisions of the Act and ICDS, the provisions of the Act shall prevail to that extent;
9. Words and expressions used and not defined in ICDS but defined in the Act shall have the meaning assigned to them in the Act.
10. Revenue or expenses on which there is no ICDS will continue to be governed by existing AS e.g. leases, prior period items;
11. ‘Book profit’ for the purpose of MAT will continue to be computed as per the Accounts prepared as per existing AS / Ind AS;
12. The ICDS in general do not have prudence as a fundamental assumption except where it is specifically provided so in the respective ICDS. It may result in earlier recognition of income or gains or later recognition of expenses as compared to the Account prepared under the existing AS;
13. Section 145(3) as amended by the Finance (No. 2) Act, 2014 empowers the Assessing office to make assessment in the manner provided under section 144 if there is a failure to compute income according to ICDS;

The ICDS are largely derived from the existing AS with specific deviations. However, explanations and examples given in AS are not included in ICDS. The following is a brief synopsis highlighting the significant differences between the ICDS and the existing AS:

1. ICDS I relating to accounting policies

The major considerations governing selection and application of accounting policies are ‘prudence’, ‘substance over form’ and ‘materiality’. The ICDS does not consider ‘prudence’ and ‘materiality’ as the major consideration in selection and application of accounting policies;

The ICDS permits recognition of expected losses or mark to market losses only when the same is in accordance with the provisions of the ICDS;

Change in accounting policies is not permitted without reasonable cause;

Where there is a change in accounting policy 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 ICDS requires disclosure of such change 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.

2. ICDS II relating to Valuation of Inventories:

The scope of the standard and the meaning of term inventory used in ICDS are the same as in the existing AS;

With respect to the measurement principles the ICDS differs from the AS in the following manner:

• Unlike AS, the ICDS does not exclude from the Cost of Purchase duties and taxes which are subsequently recoverable by the assessee from the taxing authorities e.g. CENVAT credit;
• Under AS as well as under ICDS the allocation of fixed production overheads for the purpose of their inclusion in the cost of conversion is based on the normal capacity of the production facilities. When actual level of production approximates to normal capacity, the existing AS gives option to the assessee to use actual level of production as the normal capacity of the production facilities. The ICDS does not give such option and it requires the assessee to adopt the actual level of production as the normal capacity;
• The ICDS does not permit use of standard cost method as the technique for the measurement of cost;

The ICDS specifically provides that the value of the opening inventory shall be the value of the inventory as on the close of the immediately preceding previous year;

The ICDS does not permit change in the method of valuation of inventories without reasonable cause.

In case of dissolution of a partnership firm or association of person or body of individuals, as per ICDS, the inventory is to be valued at the net realisable value, irrespective of the fact whether the business is discontinued or not.

In case where the cost of the opening inventory as on the 1st day of April, 2015 includes 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 of the ICDS II, the same shall still be taken into account for valuation of the inventory if such inventory remains part of inventory as on the close of the year.

3. ICDS III relating to Construction Contracts

This ICDS applies in determination of income for a construction contract of a contractor. It recognises only the percentage completion method for determination of contract revenue and contract costs of a construction contract;

Contract revenue is defined to include amongst others, Retention money also.

Contract cost is defined to include:

• Costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract;
• Costs incurred for securing the contract – provided the costs can be separately identified and it is probable that contract will be obtained;
• Allocated borrowing costs in accordance with the ICDS on Borrowing Costs;
• Contract cost that relates to future activity on the contract is to be recognised as an asset and is to be expensed out when corresponding revenue is recognized. Under the existing AS the recognition of asset is subject to its probability of earning of future revenue;

Unlike the existing AS the ICDS does not permit:

• Adjustment of incidental income in the nature of interest, dividends or capital gains from contract cost; or
• Recognition of foreseeable or expected loss as contract cost till such losses are actually incurred.

The existing AS requires provision to be made for the expected losses on onerous construction contract immediately on signing the contract. Under the ICDS, such loss is allowed only in proportion to the stage of its completion.

Stage of completion of a 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 cannot extend beyond 25% of the stage of completion.
• As per ICDS progress payments and advances received from customers are not determinative of the stage of completion of a contract;

Transitional Provisions

Contract revenue and contract costs associated with the construction contract, which commenced on or before 31st March, 2015 but not completed by the said date, shall be recognised as revenue and costs respectively in accordance with the provisions of this standard. The amount of contract revenue, contract costs or expected loss, if any, recognised for the said contract for any previous year commencing on or before 1st April, 2014 shall be taken into account for recognising revenue and costs of the said contract for the previous year commencing on 1st April, 2015 and subsequent previous years.

4. ICDS IV relating to Revenue Recognition

This ICDS deals with the bases for recognition of revenue arising from sale of goods, rendering of services and use by others of the assessee’s resources yielding interest, royalties or dividend.

As per the existing AS the revenue is recognised when it is measurable and it is not unreasonable to expect its ultimate collection. As per ICDS revenue shall be recognised as under:

• Revenue from sale of goods is recognised when there is reasonable certainty of its collection;
• Revenue from rendering of service is recognised as per principles laid down in ICDS III on Construction Contract. The “completed contract method” is not recognised;
• Interest income shall accrue on the time basis determined by the amount outstanding and the rate applicable. Discount or premium on debt securities is recognised over the period to maturity;
• Royalties income shall accrue in accordance with the terms of the relevant agreement; and
• Dividend income is recognised in accordance with the provisions of the Act.

Disclosures

• Sale of goods: amount not recognised as revenue during the previous year due to lack of certainty of its ultimate collection along with nature of uncertainty;
• Rendering of service: Amount of revenue recognized;
• Method used to determine the stage of completion of service transactions in progress; and
• For service transactions in progress at the end of previous year:
  • Costs incurred;
  • Recognised profits / losses upto end of previous year;
  • Advances received; and
  • Retentions amount.

Transitional provisions

• In case of rendering of service – the corresponding provisions of ICDS III on Construction Contract shall mutatis mutandis apply to recognition of revenue and the associated costs for a service transactions undertaken on or before the 31st day of March, 2015 but not completed by the said date;
• In case of transactions other than above undertaken on or before the 31st day of March, 2015 but not completed by the said date shall be recognised as per this ICDS.

5. ICDS V relating to tangible fixed assets

The ICDS applies to the specified tangible fixed asset viz., land, building, machinery, plant or furniture;

As per ICDS an item is classified as a tangible fixed asset when it is held with the intention of it being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. However, like the existing AS, the ICDS does not permit assessee to expense an item, which otherwise could have been classified as fixed assets, when the amount of expenditure is not material.

When the cost of assets undergoes change on account of exchange fluctuation, the ICDS permits to make change in the cost of assets of an amount equal to the sum computed as per ICDS VI on the effects of changes in foreign exchange rates;

In case the interval between the date a project is ready to commence commercial production and the date at which commercial production actually began is prolonged, as per ICDS, the expenses incurred during this period cannot be charged to statement of profit and loss.

In case of exchange of assets – as per AS the cost is ascertained by reference to Fair Market Value of the asset given or Fair Market Value of the asset acquired, whichever is more. As per ICDS, it shall be equal to the Fair Value of the asset acquired.

Where several assets are purchased for a consolidated price, as per ICDS, the total consideration paid is to be apportioned to various assets on a fair basis. AS requires the apportionment on a fair basis as determined by a competent valuer.

As per ICDS depreciation on a tangible fixed asset and income arising on transfer of a tangible fixed asset is to be computed in accordance with the provisions of the Act.

Following disclosure shall be made in respect of tangible fixed assets, namely:

• Description of asset / block of assets;
• Rate of depreciation;
• Actual cost or written down value, as the case may be;
• 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:
  • Central Value Added Tax credit claimed and allowed under the CENVAT Credit Rules, 2004;
  • Change in value on account of change in rate of exchange of currency;
  • Subsidy or grant or reimbursement, by whatever name called;
• Depreciation allowable; and
• Written down value at the end of year.

Transitional Provisions : The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before 31st March, 2015 but not completed by the said date, shall be recognised in accordance with this ICDS. The amount of actual cost, if any, recognised for the said assets for any previous year commencing on or before the 1st April, 2014 shall be taken into account for recognising actual cost of the said assets for the previous year commencing on the 1st April, 2015 and subsequent previous years.

6. ICDS VI relating to the effects of changes in foreign exchange rates

This ICDS deals with:

• Treatment of transactions in foreign currencies;
• Translating the financial statements of a foreign operation; and
• Treatment of foreign currency transactions in the nature of forward exchange contracts. However, unlike AS, this ICDS:
  • Does not exclude from its scope exchange differences arising on forward exchange contracts entered into to hedge the foreign currency risks of future transactions in respect of which firm commitments are made or which are highly probable forecast transactions;
  • Specifically includes and treats a foreign currency option contract and a financial instrument of a similar nature as a forward exchange contracts;

Subject to provisions of section 43A of the Income-tax Act, 1961 or Rule 115 of Income-tax Rules, 1962, as per the ICDS:

• Initial recognition of a foreign currency transaction shall be at the foreign currency exchange rate on the date of transaction. The ICDS permits applying a weekly or a monthly average rate, if fluctuation during the period is not significant;
• At last day of each previous year:
  • Foreign currency monetary items shall be converted into reporting currency by applying the closing rate, unless there are restrictions on remittances or it is not possible to effect an exchange of currency at that rate. In the latter case it should be accounted at realisable rate in reporting currency. The exchange difference arising therefrom shall be recognised as income/expense;
  • Non-monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction.

All exchange differences relating to integral foreign operations will be treated as mentioned above. The exchange differences relating to non-integral foreign operations will be treated as under:

• The assets and liabilities, both monetary and non-monetary, will be translated at the closing rate;
• Items of profit and loss statement will be translated at exchange rates at the dates of the transactions; and
• All resulting exchange differences shall be recognised as income or as expenses in that

previous year (as per AS 11, it is accumulated in the reserve account until the disposal of the net investment).

The ICDS does not recognise optional treatment available under Paragraph 46A of AS-11 where under the assessee can recognise Exchange differences qua the long term foreign currency monetary items under “Foreign Currency Monetary Item Translation Difference Account (FCMITDA)” and amortise the same over the balance period of such long-term asset or liability. As per ICDS the profit/(loss) arising at the year end on reinstatement of monetary items, including the long-term monetary items, is to be recognised as income or expense.

In respect of forward exchange contracts entered into for trading, speculation, firm commitment or highly probable forecast transaction, under the existing AS, marked to market gains or losses is recognised in profit and loss statement. Under ICDS such gains or losses is recognised in income computation only on settlement. In respect of forward exchange contracts of the nature other than above, say pure hedge contract, the ICDS recognises gain or loss in the same year.

Premium or discount arising at the inception of a forward exchange contract is treated as under:

• In case of a forward exchange contract that are intended for trading or speculation purposes or is entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction – to be recognised at the time of settlement;
• In case of forward exchange contracts of the nature other than above - to be amortised as expense or income over the life of the contract.

Transitional Provisions

Exchange differences arising in respect of monetary items or non‐monetary items, on the settlement thereof during the previous year commencing on the 1st day of April, 2015 or on conversion thereof at the last day of the previous year commencing on the 1st day of April, 2015, shall be recognised in accordance with the provisions of this ICDS after taking into account the amount recognised on the last day of the previous year ending on the 31st March, 2015 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, 2015 shall be translated using the principles and procedures specified in this ICDS after taking into account the amount recognised on the last day of the previous year ending on the 31st March, 2015 for an item, if any, which is carried forward from said previous year.

All forward exchange contracts existing on the 1st day of April, 2015 or entered on or after 1st day of April, 2015 shall 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, 2015.

7. ICDS VII relating to Government grants

The definition of ‘government grants’ as per ICDS is the same as is given in the existing AS. The difference is in the examples of different forms of government grant as given in the Standard. As per ICDS it includes not only the subsidies, cash incentives, duty drawbacks (which are also given in the existing AS) but also ‘waiver’, ‘concessions’ and ‘reimbursements’. The other notable exception is that the existing AS specifically excludes from its scope government assistance which are not in the form government grants. The ICDS does not do so.

Recognition and Treatment of Government grant

• Both the Standards require that the Government grant should be recognised when there is reasonable assurance about the ability of the assessee to comply with the conditions attached and that the grants shall be received;
• ICDS additionally provides that the recognition of grant shall not be postponed beyond the date of actual receipt (irrespective of whether the conditions attaching to the grant have been or will be fulfilled);
• Both the Standards require that the Grants receivable as compensation for losses/expenses incurred in earlier years or given for financial support with no further related cost should be recognised as income of the period in which it is receivable;
• Grants relating to a depreciable fixed asset should be deducted from its actual cost or written down value of block of assets;
• Grant relating to a non-depreciable asset requiring fulfilment of certain obligations shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income;
• Grants of the nature other than above shall be recognised as income over the periods necessary to match them with the related costs which it is intended to compensate.
• Grants in the form of non-monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost.

Refund of Government Grants

• Grants relating to depreciable fixed assets on becoming refundable are recorded by increasing the actual cost or written down value of block of assets by the amount refunded. Any such increase in the value of the asset shall be depreciated prospectively at the prescribed rate;
• In other cases when grant is refundable, it should be first adjusted against unamortised deferred credit balance of the grant and the balance should be charged to the Profit and Loss Statement.

Disclosures

• Nature and extent of grants recognised during the previous year:
  • By way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year;
  • As income.
• Nature and extent of grants not recognised during the previous year:
  • By way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year; and / or
  • As income;

  and reasons thereof.

8. ICDS VIII relating to Securities:

This ICDS deals with securities held as stock-in-trade;

‘Securities’ has the meaning assigned to it in Section 2(h) of the Securities Contract (Regulation) Act, 1956 other than Derivatives referred to in Section 2(h) (1a) of that clause.

Recognition and Initial Measurement of Securities

• A security on acquisition is recognised at actual cost which comprises of its purchase price and includes acquisition charges such as brokerage, fees, tax, duty or cess;
• In case of a security acquired in exchange for other security / another asset, the cost of acquisition is the fair value of the security / asset acquired;
• In case of cum- interest securities, the accrued interest is deducted from the actual cost of the securities.

Subsequent Measurement of Securities

• At the end of the previous year, securities which is listed on a recognised stock exchange and is quoted with regularity from time to time, and which is held as stock-in-trade is valued at actual cost initially recognised or net realisable value at the end of that previous year, whichever is lower;
• Other securities is 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 is determined on the basis of first-in-first-out method;
• Comparison of actual cost initially recognised and net realisable value is done category-wise and not for each individual security. For this purpose, securities is classified into the following categories:
  • Shares;
  • Debt securities;
  • Convertible securities;
  • Securities other than above.
• The value of opening stock-in-trade shall be the value of the stock-in-trade as on the close of the immediately preceding previous year.

9. ICDS IX relating to Borrowing Costs

Unlike the existing AS, the exchange differences arising from foreign currency borrowings to the extent they are treated as an adjustment to the interest cost are not considered as borrowing cost under ICDS. The same will be treated as laid down in ICDS on ‘The Effect of Changes in Foreign Exchange Rate’.

The existing AS treats only those assets as qualifying asset that takes “substantial period of time” (period of twelve months or more) to get ready for its intended use or sale. The ICDS treats all assets (excluding inventory), tangible or intangible as the qualifying assets irrespective of the time require to get it ready for its intended use or sale. The inventory is considered as qualifying assets only when it requires a period of twelve months or more to bring them to a saleable condition.

Borrowing costs that are directly attributable to the acquisition, construction or production of any qualifying asset is capitalized. In cases where funds are borrowed generally and utilised for the purposes of acquisition, construction or production of qualifying asset, this ICDS prescribes formula for capitalization of borrowing costs which involves allocating the total general borrowing cost incurred in the ratio of average cost of qualifying assets on the first day and last day of the previous year and the average cost of total assets on the first day and last day of the previous year (other than those assets which are directly funded out of specific borrowings).

As per ICDS, income earned on temporary investment of funds borrowed specifically for qualifying assets cannot be reduced from borrowing cost to be capitalised.

As per ICDS, capitalisation of borrowing cost should commence from:

• In case of a specific borrowing, the date of the borrowing; and
• In case of general borrowing, from the date of the utilization of funds.

Unlike the existing AS the ICDS does not permit suspension of capitalisation of borrowing cost during extended periods in which active development of qualifying assets is interrupted.

The ICDS provides that capitalisation of borrowing cost shall cease:

• In case of inventories – when substantially all the activities necessary to prepare the inventory for its intended sale are complete;
• In case of other assets - when the asset is first put to use.

As per AS the capitalisation of borrowing cost qua all the items of qualifying asset ceases when substantially all the activities necessary to prepare for its intended use or sale are complete.

All the borrowing costs incurred on or after 1-4-2015 shall be capitalized in the previous year commencing on or after 1-4-2015 in accordance with this ICDS after taking into account the amount of borrowing costs capitalised, if any, for the same borrowing in any previous year ending on or before 31-3-2015.

Disclosure

• Accounting policies adopted for borrowing costs;
• Amount of borrowing costs capitalized during the previous year.

10. ICDS X relating to provisions, contingent liabilities and contingent assets

This ICDS deals with provisions, contingent liabilities and contingent assets except those:

• Resulting from financial instruments, whether the same is carried at fair value or not;
• Resulting from executory contracts, including where the contract is onerous;
• Arising in insurance business from contracts with policy holders; and
• Covered by another ICDS.

Provisions which are adjustments to the carrying amount of assets are not covered under this ICDS;

As per ICDS the provision is recognised when it is reasonably certain that an outflow of resources will be required to settle the obligation. Under the existing AS the provision is recognised when it is probable (i.e. more likely than not).

The existing AS requires the recognition of a contingent asset when it is virtually certain that there will be inflow of resources. As per ICDS a contingent asset is recognized when it is reasonably certain that inflow of resources will arise.

In cases where expenditure incurred to settle the obligation is expected to be reimbursed by another party the ICDS recognises reimbursement when it is reasonably certain that it would be received. While under the AS the said reimbursement is recognised only when there is virtually certainty that it will be received on settlement of the obligation.

Unlike AS this ICDS does not permit recognition of expected losses on onerous contracts.

Unlike AS, the ICDS does not provide specific guidance on obligation arising from normal business practice, custom and a desire to maintain good business relations or to act in an equitable manner.

All the provisions or assets and related income shall be recognised in 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 recognised in any previous year ending on or before 31st day of March, 2015.