INTRODUCTIONbangaloreicai.org/images/icons/2017/ICDS Student version.pdf · 2018-10-31 · computation and disclosure standards are specified in the Annexure to the said Notification

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INCOME COMPUTATION AND DISCLOSURE

STANDARDS (ICDS)

Notification No.32/2015, F. No. 134/48/2010‐TPL,

dated 31st March, 2015

INTRODUCTION

• Section 145 of the Income-tax Act relates to

method of accounting.

• 145(1): provides that Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

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145(2) and 145(3) prior to amendment by the Finance (No. 2) Act, 2014 - • The provisions contained in 145(2), prior to their

amendment by the Finance (No. 2) Act, 2014 provided that the Central Government may notify in the Official Gazette from time to time, the accounting standards to be followed by any class of assessees or in respect of any class of income.

• 145 (3) provided that where the Assessing Officer is – not satisfied about the correctness or completeness of the

accounts of the assessee, or – where the method of accounting provided in sub-section

(1)or – accounting standards as notified under sub-section (2),

have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.

Amendment by Finance (No. 2) Act, 2014

• The Finance (No. 2) Act, 2014 has amended 145(2) to provide that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income.

• Sub-section (3) has been amended to provide that where the AO is not satisfied – with the correctness or completeness of the accounts of the

assessee, or – Where the method of accounting provided in sub-section (1),

has not been regularly followed by the assessee, or – income has not been computed in accordance with the

standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

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• These amendments take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

Income Computation and Disclosure Standards

(ICDSs) notified by CBDT vide notification S.O.

892(E), dated 31-3-2015

• In exercise of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961 the Central Government has notified the Income Computation and Disclosure Standards (ICDSs) vide Notification S.O. 892(E),dated 31-3-2015. These notified income computation and disclosure standards are specified in the Annexure to the said Notification are required 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 "Profits and gains of business or profession" or "Income from other sources".

• This notification shall come into force with effect from 1st day of April, 2015, and shall accordingly apply to the assessment year 2016-17 and subsequent assessment years.

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The Annexure to the Notification specifies 10 Income

Computation and Disclosure Standards (ICDSs) as under:

ICDS I Accounting Policies

ICDS II Inventories

ICDS III Construction Contracts

ICDS IV Revenue Recognition

ICDS V Tangible Fixed Assets

ICDS VI Effects of Changes in Foreign Exchange Rates

ICDS VII Government Grants

ICDS VIII Securities

ICDS IX Borrowing Costs

ICDS X Provisions, Contingent Liabilities and Contingent

Assets

• The Committee examined all the thirty one Accounting Standards issued by the ICAI and noted that some of the Accounting Standards issued by the ICAI relate to 'disclosure' requirement, whilst some other contain matter that are adequately dealt within the Act. In view of this, the Committee recommended that Tax Accounting Standards need not to be notified in respect of seventeen Accounting Standards issued by the ICAI. The 17 Accounting Standards issued by ICAI in respect of which no TAS was recommended by the Committee as under:

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Indian Accounting standards

(i) AS-3 - Cash Flow Statements

(ii) AS 6 - Depreciation Accounting

(iii) AS-14 - Accounting for Amalgamations

(iv) AS-15 - Employee Benefits

(v) AS-17 - Segment Reporting

(vi) AS-18 - Related Party Disclosures

(vii) AS 20 - Earning Per Share

(viii) AS 21 - Consolidated Financial Statements

(ix) AS 22 - Accounting for Taxes on Income

(x) AS 23 - Accounting for Investments in Associates in

Consolidated Financial Statements

(xi) AS 24 - Discontinuing Operations

(xii) AS 25 - Interim Financial Reporting

(xiii) AS-27 - Financial Reporting of Interests in Joint

Ventures

(xiv) AS 28 - Impairment of Assets

(xv) AS-30 - Financial Instruments : Recognition and

Measurement

(xvi) AS-31 - Financial Instruments : Presentation

(xvii) AS-32 - Financial Instruments : Disclosures

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ICDS applicable to:

• Assesses following mercantile system of accounting

• For income computation, not for maintenance of books of account.

• For computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for other heads of incomes

• Not applicable to Individuals and HUFs who is not required to get his accounts audited under section 44AB

Is ICDS applicable for:

• Computation of MAT?

• Computation of presumptive income u/s 44AD and 44AE ?

• Computation of Income where no Books have been maintained

https://www.taxmann.com/fileopen.aspx?Page=ACT&id=102120000000058099&source=link

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Provisions of Act to prevail in case of conflict with ICDS

• The Preamble to every ICDS provides as under:

• In the case of conflict between the provisions of the Income-tax Act, 1961'the Act' and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.

Income computation and disclosure

standards vis-a-vis accounting standards

• Accounting Standards are applicable to preparation of accounts and maintenance

of books of account. In Gallagher v. Jones [1993] STC 537 CA, Sir Thomas

Bingham MR said at page 555: ".... Subject to any express or implied statutory

rule....... the ordinary way to ascertain the profits or losses of a business is to

apply accepted principles of commercial accountancy".

• Income Computation and Disclosure Standards are '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 purpose of maintenance of books of

account.’ ICDSs have the force of law since they have been issued under section

145(2) of the Act. Therefore, in case of variance between ICDS and AS, ICDS

shall prevail for computation of taxable income under the head "Profits and gains

of business or profession" or "Income from other sources".

• However, where on any point the Income-tax Act, Rules there-under and ICDSs are silent, ASs would apply for computation of income.

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Income Computation and Disclosure Standard I

Accounting policies

ICDS 1 – Accounting Policies

Fundamental Accounting Assumptions

The following are fundamental accounting assumptions, namely:—

(a) 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.

(b) Consistency

“Consistency” refers to the assumption that accounting policies are consistent from one period to another;

(c) 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.

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• If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed.

• Question is where the disclosure of not following an accounting assumption is required to be made? – In the accounts

– or in the return of income? Presumably, the ITR forms will be amended to make provision of disclosure of the same.

Accounting Policies

The accounting policies refer to the specific accounting

principles and the methods of applying those principles

adopted by a person.

Selection of Accounting Policies

Accounting policies adopted by a person shall be such so as to represent

a true and fair view of the state of affairs and income of the business,

profession or vocation. For this purpose,

(i) the treatment and presentation of transactions and events shall

be governed by their substance and not merely by the legal form;

(substance over form)

and

(ii) marked to market loss or an expected loss shall not be

recognised unless the recognition of such loss is in accordance with the

provisions of any other Income Computation and Disclosure Standard.

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ACCRUAL BASIS - COMPULSORY FOR COMPANIES?

• In terms of section 12 of the Companies Act, 2013, it is

obligatory for companies to follow the accrual system of accounting.

• Sec 145 – Income shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

• Will provisions of Companies Act override Sec 145 of Income Tax Act?

• No. As held in: – Pradip Commercial (P) Ltd Vs CIT (Cal HC)

– Stup Consultants P. Ltd, Mumbai Vs DIT (Mum)

– Chennai Finance Co. Ltd. 81 ITD 7 (Hyd.)

Change in accounting policy

• Para 5 of ICDS 1:

An accounting policy shall not be changed without reasonable cause.

• As to what is "reasonable cause" is not clarified.

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Income Computation and Disclosure Standard II

Valuation of Inventories

Scope [Para 1 of ICDS-II] This Income Computation and Disclosure Standard shall be applied for

valuation of inventories, except :

• 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;

• Work-in-progress which is dealt with by other Income Computation and

Disclosure Standard;

• Shares, debentures and other financial instruments held as stock-in-

trade which are dealt with by the Income Computation and Disclosure

Standard on securities;

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• Producers' inventories of livestock, agriculture and forest

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

measured at net realisable value;

• 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.

Sr. No. Points of comparison

ICDS-II Inventories (AS) 2 Valuation of Inventories

1. Applicability This Income Computation and

Disclosure Standard is appli-

cable for computation of in-

come chargeable under the

head "Profits and gains of

business or profession" or

"Income from other

sources" and not for the

purpose of maintenance of

books of account

(AS) 2 applies for the purpose

of preparation of financial

statements

2. Costs of purchase The costs of purchase shall

consist of purchase price in-

cluding duties and taxes,

freight inwards and other

expenditure directly

attributable to the acquisition.

The costs of purchase shall

consist of purchase

price including duties and

taxes (other than those subse-

quently recoverable by the

enterprise from the taxing

authorities), freight inwards

and other expenditure directly

attributable to the acquisition.

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3. Valuation of

inventories of

service provider

The costs of services in the case of a

service provider shall consist of

labour and other costs of personnel

directly engaged in providing the

service including supervisory

personnel and attributable

overheads.

4. Standard cost

method

Not allowed Allowed if the results approximate the actual cost and subject to certain required disclosures in this regard

Allowed if results

approximate the actual

cost

5. Valuation of

inventory on

dissolution of a

partnership firm or

association of

person or body of

individuals

In case of dissolution of a

partnership firm or association of

person or body of individuals, not

withstanding whether business is

discontinued or not, the inventory on

the date of dissolution shall be

valued at the net realisable value.

Value of opening inventory

• The value of the inventory as on the beginning of the previous year shall 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. [Para 22 of ICDS-II]

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Additional points

• Retail Method of valuation: Allowed. However, an average percentage for each retail department is to be used. A global percentage for all retail departments not allowed

ICDS-IV - REVENUE RECOGNITION

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ICDS-IV vs. (AS) 9 Sr. No. Points of comparison ICDS IV : Revenue Recognition (AS) 9 Revenue

Recognition


Disclosure Standard 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 purpose

of maintenance of books of account

(AS) 9 applies for the

purpose of preparation

of financial statements

2. Revenue recognition

from the rendering of

services

Revenue from service transactions shall

be recognised by the percentage

completion method. Income

Computation and Disclosure Standard

on construction contract also requires

the recognition of revenue on this basis.

The requirements of that Standard

shall mutatis mutandis apply to the

recognition of revenue and the

associated expenses for a service

transaction. Unlike (AS) 9, ICDS-IV

does not recognize completed service

contract method

Revenue may be

recognized by

completed service

contract method or

under the proportionate

completion method

whichever relates the

revenue to the work

performed

3. Recognition of dividends Dividends are recognised in

accordance with the provisions of

the Act.

Dividends are recognized

when owner's right to receive

payment is established

4. Recognition of royalties Royalties shall accrue in accordance

with the terms of the relevant

agreement and shall be recognised

on that basis unless, having regard

to the substance of the transaction,

it is more appropriate to recognise

revenue on some other systematic

and rational basis

Royalties shall accrue in

accordance with the terms of

the relevant agreement

5. Revenue from interest on

refund of tax/cess/duty To be recognized in the previous year of receipt on cash basis

Accrual basis

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• Section 145A(1)(b) of the Act provides that interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

• Such interest shall be taxed under the head 'Income from other sources' in the year of receipt irrespective of whether assessee follows mercantile system of accounting or cash system.

• Section 57(iv) allows a deduction of 50% in respect of such interest. ICDS-IV will not apply to interest received by an assessee on compensation or on enhanced compensation since in case of conflict between ICDS and Act shall prevail.

ICDS-IV vs. I.T. Act

• Section 8 of the Act provides that for the purposes of inclusion in the total income of an assessee,— – (a) any dividend declared by a company or distributed or

paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be;

– (b) any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

• ICDS-IV provides that dividend shall be recognized in accordance with the Act i.e. section 8 of the Act.

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OTHER POINTS

• Use of percentage completion method for recognition of revenue from service is mandatory subject to the following two exceptions: – (1) Option to recognize revenue on a straight line

basis over the specific period where services are provided by an indeterminate number of acts over a specific period of time

– (2) Option to recognize revenue when rendering of services is completed or substantially completed in case of service contracts with duration of not more than 90 days

ICDS-VIII - SECURITIES

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Effective date

• ICDS-VIII shall come into force with effect from 1st day of April, 2015, and shall accordingly apply to the assessment year 2016-17 and subsequent assessment years. Unlike other ICDSs, ICDS-VIII has no transitional provisions

Scope

• This Income Computation and Disclosure Standard deals with securities held as stock-in-trade. [Para 1 of ICDS-VIII]

• This Income Computation and Disclosure Standard does not deal with: – (a) the bases for recognition of interest and dividends on

securities which are covered by the Income Computation and Disclosure Standard on revenue recognition;

– (b) securities held by a person engaged in the business of insurance;

– (c) securities held by mutual funds, venture capital funds, banks and public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 or the Companies Act, 2013. [Para 2 of ICDS-VIII]

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Recognition and initial measurement of securities

• A security on acquisition shall be recognised at actual cost. [Para 4 of ICDS-VIII]

• The actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess. [Para 5 of ICDS-VIII]

• Where a security is acquired in exchange for other securities, the fair value of the security so acquired shall be its actual cost. [Para 6 of ICDS-VIII]

• Where a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its actual cost. [Para 7 of ICDS-VIII]

• 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. [Para 8 of ICDS-VIII]

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Subsequent measurement of securities • At the end of any previous year, securities held as

stock-in-trade shall be valued at actual cost initially recognised or net realisable value at the end of that previous year, whichever is lower. [Para 9 of ICDS-VIII]

• The comparison of actual cost initially recognised and net realisable value shall be done category-wise and not for each individual security. For this purpose, securities shall be classified into the following categories, namely:— – (a) shares; – (b) debt securities; – (c) convertible securities; and – (d) any other securities not covered above. [Para 10 of

ICDS-VIII]

• The value of securities held as stock-in-trade of a business as on the beginning of the previous year shall 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. [Para 11 of ICDS-VIII]

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• Notwithstanding anything contained above, 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, shall be valued at actual cost initially recognised. [Para 12 of ICDS-VIII]

• For the purposes of paras 9, 10 and 11 where the actual cost initially recognised cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of first-in-first-out method. [Para 13 of ICDS-VIII]

ICDS-V - TANGIBLE FIXED ASSETS

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ICDS-V vs. (AS) 10 SL No. Points of

comparison ICDS-V Tangible Fixed Assets (AS) 10 Accounting

for Fixed Assets

1. Applicability This Income Computation and Disclosure Standard 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 purpose of maintenance of books of account

(AS) 10 applies for the purpose of preparation of financial statements

SL No.

Points of comparison

ICDS-V Tangible Fixed Assets

(AS) 10 Accounting for Fixed Assets

2. Tangible fixed asset acquired in exchange for another asset

When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost.

When a tangible fixed asset is acquired in exchange for another asset, the cost of the asset acquired should be recorded at fair market value or at net book value of asset given up, adjusted for balance payment or receipt of cash or other consideration. Fair market value may be determined by reference either to the asset given up or to the asset acquired, whichever is more clearly evident

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SL No.


ICDS-V Tangible Fixed Assets

(AS) 10 Accounting for Fixed Assets

3. Tangible fixed asset acquired in exchange for shares or other securities

When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost.

When a fixed asset is acquired in exchange for shares or other securities, it should be recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident.

4. Revaluation of tangible fixed assets

Silent Deals with revaluation in detail

ICDS-IX vs. (AS) 16

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ICDS IX : Borrowing Costs (AS) 16 Borrowing Costs

1. Applicability This Income Computation and Disclosure Standard 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 purpose of maintenance of

books of account

(AS) 16 applies for the purpose of preparation of

financial statements

2. Exchange differences arising

from foreign currency

borrowings to the extent regarded as

interest costs

These are not treated as borrowing costs under ICDS

These are regarded as borrowing costs

3.

Qualifying assets Term expressly includes Know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets;

Term not defined to cover intangible assets

4.

Income on temporary investment of borrowed funds which are specifically borrowed for obtaining a qualifying asset

No netting off from cost of asset. Will be taxed as income

To be netted off from borrowing costs and capitalised

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5.

Commencement of Capitalisation

The capitalisation of borrowing costs shall

commence: (a) in a case referred to in paragraph 5

(funds specifically borrowed for obtaining a qualifying asset), from the date on

which funds were borrowed; (b) in a case

referred to in paragraph 6 (funds borrowed generally and used for obtaining a

qualifying asset), from the date on which funds were

utilised.

The capitalisation of borrowing costs shall

commence from the date all the following conditions

are satisfied (i) expenditure for a

acquisition, construction or production of a

qualifying asset is being incurred;

(ii) borrowing costs are being incurred; and

(iii) activities that are necessary to prepare the asset for its intended use

are in progress

6.

Suspension of capitalization

No suspension of capitalization under any circum stances

Capitalization suspended during extended periods in which active development

is interrupted

7.

Cessation of capitalization

Capitalization of borrowing costs shall cease when asset is

first put to use in case of qualifying asset

other than inventory

Capitalization of borrowing costs shall cease when

substantially all the activities necessary to

prepare such inventory for its intended sale are

complete.

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ICDS-VII - GOVERNMENT GRANTS

ICDS-VII vs. (AS) 12 Sr. No. Points of

comparison

ICDS-VII Government Grants (AS) 12 Accounting for

Government Grants

1.

Applicability This Income Computation and

Disclosure Standard 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


books of account.

(AS) 12 applies for the

purpose of preparation of

financial statements.

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ICDS-VII Government Grants (AS) 12 Accounting for Government Grants

2.

Recognition of Government

Grants

Government grants should not be recognised until there is reasonable assurance that :

(i) the person shall comply with the conditions attached to them, and (ii) the grants

shall be received. Recognition of Government grant shall not be postponed beyond the date of actual receipt.

Government grants should not be

recognised until there is reasonable

assurance that : (i) the person shall comply with the conditions

attached to them, and (ii) the grants shall be

received.

3.

Government grant related to a depreciable

fixed asset

Where the Government grant relates to a depreciable fixed asset or assets of a

person, the grant shall be deducted from the actual cost of the asset or assets

concerned or from the written down value of block of assets to which concerned asset

or assets belonged to. No option to recognize as deferred income over the

useful life

Where the Government grant relates to a

depreciable fixed asset, the same may be

deducted from assets concerned or treated as

deferred income over the useful life on a systematic and a

rational basis

4.

Grant in the nature of

Promoter's contribution

Where the Government grant is of such a nature that it can not 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, shall be

deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset

or assets belonged to.

To be credited to capital reserve

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ICDS-X v. (AS) 29


ICDS-X Provisions, Contingent Liabilities and Contingent

Assets

(AS) 29 Provisions, Contingent Liabilities

and Contingent Assets

1.

Applicability This Income Computation and Disclosure Standard 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

purpose of maintenance of books of account


financial statements.

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2.

Recognition of Contingent

Asset

A person shall not recognise a contingent

asset. 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.

Contingent asset shall not be recognized. Contingent assets are assessed continually and

when it becomes virtually certain that inflow of

economic benefit will arise, the asset and related income

are recognised in the previous year in which the change

occurs

3.

Recognition of reimbursement in respect of a

provision

Where some or all of the expenditure required to settled is expected to be reimbursed by another

party, provision the reimbursement shall be

recognised when it is reasonably certain that

reimbursement will be received if the person settles the obligation.

The amount recognised for the reimbursement

shall not exceed the amount of the provision.

Where some or all of the expenditure required to

settle a provision is expected to be reimbursed

by another party, the reimbursement shall be

recognised when it is virtually certain that reimbursement will be received if the person

settles the obligation. The amount recognised for the reimbursement shall not

exceed the amount of the provision.

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ICDS-III corresponds to (AS) 7. The

differences between ICDS-III and

(AS) 7 are as under:

Sr. No.


ICDS III : Construction Contracts (AS) 7 Construction Contracts

1.

Applicability This Income Computation and Disclosure Standard 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 purpose

of maintenance of books of account


financial statements

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2. Retentions Retentions shall be included in

contract revenue

(AS) 7 silent on retentions

3. Criteria for recognition of variations in contract work,

claims and incentive payments

Not specified in ICDS-III

Recognition criteria specified

in (AS) 7

4.

Recognition of contract costs and contract revenues with reference to

stage of completion of the contract

activity at the reporting date (percentage of

completion method)

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.

ICDS-III does not recognize that the possibility that

outcome of a construction contract

cannot estimated reliably except during early stages of contract - i.e. upto 25%

stage of completion

When the outcome of a construction contract can

be estimated reliably , 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 con-

tract activity at the reporting date. (AS)7 specifies criteria as to

when the outcome of a construction contract can be estimated reliably for fixed price contracts and

cost plus contracts.

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5.

Early stages of completion of

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 shall not extend beyond 25% of the

stage of completion.

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. However, no definition

as to upto what % of completion it can be

considered that contract is at early stage.

6. Netting of costs by incidental income

Netting off allowed for all types of

costs. However, such netting off not allowed if incidental

income is in the nature of interest,

dividends or capital gains

Costs that relate directly to the specific contract shall be reduced by any incidental income that is not included in contract revenue .

Such netting off not allowed from :

(i) costs that are attributable to contract activity in general and

can be allocated to the contract;

(ii) such other costs as are specifically chargeable to the

customer under the terms of the contract

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7. Recognition of expected losses from contract

In proportion to percentage of completion.

To be recognized in full.

ICDS-VI vs. (AS) 11 Sl.

No.

Points of

comparison

ICDS-VI Effect of Changes in

Foreign Exchange Rates

(AS) 11 Effect

of Changes in

Foreign

Exchange

Rates


Disclosure Standard 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


books of account

(AS) 11 applies

for the purpose

of preparation of

financial

statements

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34

2. Scope of

the term

"foreign

operation"

Covers a branch, by

whatever name called, of

that person, the activities of

which are based or

conducted in a country

other than India.

Subsidiary, associate,

Joint Venture or

branch of reporting

enterprise, the

activities of which are

based or conducted in

a country other than

India

1. AS-11 provides guidance on initial and subsequent recognition of foreign currency transactions and the resultant exchange differences. The TAS (FE) expressly provides that these provisions will be subject to section 43A of the Act and Rule 115 of the Income-tax Rules, 1962.

2. AS-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. Since the Act does not provide for a distinction between integral and non-integral foreign operations, the TAS (FE) provides that such exchange differences shall be recognised for the purpose of computation of income.

The Accounting Standards Committee set up in 2010 had recommended

changes vis-à-vis (AS) 11 as under:

"5.2.8 The Tax Accounting Standard for The Effects of Changes in Foreign

Exchange Rates [TAS (FE)] is based on the Accounting Standard-11 (AS-

11) for The Effects of Changes in Foreign Exchange Rates issued by the

ICAI. While recommending the TAS (FE), the Committee made the

following changes in AS-11:

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35

3. 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. Since such mark-to-market gains or losses are unrealised in nature, the TAS (FE) provides that all gains or losses on such contracts shall be recognised on settlement."

Documents

INTRODUCTIONbangaloreicai.org/images/icons/2017/ICDS Student version.pdf · 2018-10-31 · computation and disclosure standards are specified in the Annexure to the said Notification