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Salient features of the notified ICDSs

 
 

Income computation and Disclosure standards (ICDSs)

Section 145(1) requires income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” to be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee, subject to the provisions of section 145(2). Under  section  145(2),  the  Central Government is empowered to notify in the Official Gazette from time to time, Income computation and Disclosure standards (ICDSs) to be followed by any class of assessees or in respect of any class of  income.

 

Accordingly, the Central Government , in exercise of the powers conferred by section 145(2), notified ten income computation and disclosure standards (ICDSs) 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”.

 

The newly notified ICDSs have to be followed by all assessees (other than an 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) 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”, from A.Y.2017-18

 

ICDS I : Accounting Policies

(1)       Non-consideration of the concepts of Prudence and  Materiality

ICDS I on Accounting Policies, while recognizing the fundamental accounting assumptions of going concern, consistency and accrual, does not recognize the concepts of “materiality” and “prudence” in selection and application of accounting policies.

The concept of prudence requires that provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of  available information. Non-consideration of  prudence  in selection and application of accounting policies may have the impact of earlier  recognition of income and gains or later recognition of expenses or losses for tax computation.

 

 

(2)       Requirement of “reasonable cause” for change in accounting policy AS 5 vis-à-vis ICDS I

AS 5 which deals with changes in accounting policies, permits change in  accounting policies if adoption of different accounting policies is required by   -

i.statute; or

ii.for the purpose of compliance with an accounting standard;   or

iii.if such change results in a more appropriate presentation of financial statements.

                     ICDS I, however, states that an accounting policy should not be changed without any  ‘reasonable cause’.

The term “reasonable cause” has not been defined and would involve exercise  of  judgment by management and tax authorities.

 

ICDS II : Valuation of  Inventories

Valuation of inventory on the date of dissolution of a firm, where the business is continued by a partner(s)

In case of dissolution of a partnership firm or association  of  persons  or  body  of individuals, Paragraph 24 of ICDS II on Valuation of Inventories requires the inventory on the date of dissolution to be valued at the net realisable value,  notwithstanding whether business is discontinued or  not.

 

 

ICDS III: Construction Contracts

 

AS 7 permits recognition of expected loss on construction contract as well as contract  costs, recovery of which is not probable, as an expense immediately. It also permits recognition of expected loss immediately as an expense, when it is probable that total contract costs will exceed total contract  revenue.

The absence of specific requirement in ICDS III to recognize such expected losses on construction contracts immediately as expense represents a significant deviation from AS   7 as well as judicial rulings permitting immediate recognition of  such losses  as  long as  the same are in accordance with the accounting standard or justified by the principle of prudence or by the nature and circumstances of the   contract.

By implication, such losses are also to be recognized on Percentage of  Completion  Method as per ICDS III. Consequently, recognition of losses for tax purposes  is  postponed.

 

AS 7 permits decrease in contract revenue  as  a  result  of  penalties arising from delays caused by the contractor in the completion of the contract. However, ICDS III does not permit such reduction in contract  revenue.

ICDS III requires retention money to be treated as part of  contract  revenue  and recognized on percentage of completion method As per ICDS III,  “Contract Revenue” shall comprise of the initial amount of  revenue  agreed  in  the  contract, including retentions.

However, as per AS 7, contract revenue should comprise the initial amount of revenue agreed in the contract. While there is a specific requirement in ICDS III to include retentions, there is no such requirement in AS  7.

 

ICDS VII: Government Grants

AS 12 provides that Government Grants should not be recognized until there is a reasonable assurance that the enterprise will comply with the conditions attached to them and the grants will be  received.

ICDS VII also provides that Government Grants should not be recognized until there is a reasonable assurance that the enterprise will comply with the conditions attached to them and the grants will be received. This requirement is in line with AS 12. However, ICDS VII goes on to provide that recognition of government grant shall not be postponed beyond the date of actual receipt

Therefore, as per ICDS VII, initial recognition of government grants cannot be postponed beyond the date of actual receipt even in a case where all the recognition conditions in accordance with AS 12 are not  met.

 

ICDS VIII: Securities

ICDS VIII requires securities held as stock-in-trade to be valued at lower of actual cost initially recognized or net realizable value at the end of the year, whichever is lower. Further, such comparison has to be done category-wise and not for each individual security.

The requirement in ICDS VIII to compare the actual cost and net realizable value category-wise, in effect, results in recognition of anticipated profits since rise in value of some securities will absorb the decrease in value of the remaining securities in the same category.

ICDS IX: Borrowing Costs

AS 16 permits income earned on temporary investment of  borrowed  funds pending their expenditure on the qualifying asset to be deducted from borrowing costs incurred.  ICDS IX however, does not permit such reduction from borrowing   costs

This deviation would result in increase in taxable income

 

Paragraph 17 of AS 16 permits suspension of capitalization of borrowing costs during extended periods in which active development is interrupted. ICDS IX does not permit suspension of capitalization of borrowing costs in such  cases.

This deviation would result in increase in taxable income.

ICDS X: Provisions, Contingent Liabilities & Contingent  Assets

AS 29 requires recognition of a provision when it is probable  that  an  outflow  of  resources embodying economic benefits will be required to settle the   obligation.

ICDS X requires recognition of a provision only when it is reasonably certain that an outflow of resources embodying economic benefits will  be  required  to  settle  the obligation.

The requirement of “reasonable certainty” in ICDS X to recognize a provision is more  stringent as compared to the requirement of “probability” in AS 29. This  will have the   effect of postponing the recognition of provision for  tax  purposes  and  consequently,  result in earlier payment of  taxes.

Both AS 29 and ICDS X provide that a contingent asset should not be recognized. Further, both AS 29 and ICDS X require contingent assets to be assessed continually.

Thereafter, recognition of contingent assets and related income is required in – AS 29, if inflow of economic benefits is “virtually   certain”;

ICDS X, if inflow of economic benefits is “reasonably   certain”.

The requirement of “reasonable certainty” in ICDS X to recognize a contingent asset and the related income is more stringent as compared to the requirement of “virtual certainty”   in AS 29. This deviation between AS 29 and ICDS X would have the effect of advancing recognition of income for tax purposes and consequently, result in  earlier payment  of taxes.