Treatment of income-tax expense under accounting standards
AS-3 and AS-22 provides for the accounting treatment of income-tax expense. In particular, AS-22 on “Accounting for taxes on income” is very important in this regard and hence has been discussed in some length. Let us try to understand the accounting treatment of income – tax expense as per these Standards.
(1) AS 3 [Cash flow statement]: As per this Standard, cash flow on account of income-tax has to be shown as an operating activity unless it can be specifically identified with an investing or financing activity. If income-tax paid is segregated between these activities, then total tax paid should also be disclosed. Income-tax paid should be shown net of TDS.
(2) AS 22 [Accounting for taxes on income]: Accounting for taxes on income should be in accordance with AS 22, irrespective of whether such taxes are imposed by an Indian law or by the law of a foreign country. Prior to AS 22, corporates were making a provision for the actual tax liability calculated in accordance with the Income-tax Act, 1961 (i.e., current tax). The accounting effect for differences between taxable income and accounting income was not given. In the case of a loss-making entity, no provision for taxation was made. Neither was any entry passed for accounting for tax savings as a result of the loss. However, such treatment is not permitted under AS 22. As per AS 22, the amount to be included in respect of income-tax in the profit and loss account should be the current tax plus or minus the deferred tax.
Current tax is the tax determined in accordance with the provisions of the Income-tax Act, 1961. Deferred tax is the tax effect of timing differences. There is always a difference between the accounting income and the taxable income. AS 22 requires classification of these differences into permanent differences and timing differences.
Permanent differences: Permanent differences are those differences which originate in one period and do not reverse subsequently. These differences will not at all reverse in subsequent periods. These differences do not result in deferred tax assets (DTAs) or deferred tax liabilities (DTLs). Such differences are on account of –
(i) Recognition of revenues/gains/expenses/loses in the profit and loss account but not for income-tax computation. One example is goodwill, which is amortised in accounts. However, the same is not a deductible expense while computing income-tax. Another example is unrealised exchange gain, which is credited to profit and loss account but not taxed as income.
(ii) Recognition of revenues/gains/expenses/losses for income-tax purposes but not in the profit and loss account for accounting purposes. One example is expenditure in respect of which weighted deduction is allowable under the Income-tax Act, 1961, namely, contribution made for research in social science or statistical research or any other research, which is eligible for a deduction of 125% under section 35 of the Income-tax Act, 1961. The excess deduction of 25% is not recognized in the profit and loss account but considered for computation of taxable income.
It may be noted that no accounting adjustments are necessary for tax effects of permanent differences.
Timing differences: Timing differences are the differences between the accounting income and the taxable income that originate in one period and are capable of reversal in one or more subsequent periods. The words „capable of reversal‟ means that there are chances of reversal, however good or remote they may be. It does not, however, indicate 100% certainty of reversal.
Timing differences arise only in respect of incomes/expenses which are considered both in the profit and loss account as well as for computation of taxable income, although, in different periods. Some examples of timing differences are given below –
(1) Expenses debited to profit and loss account but allowed for tax purposes in subsequent years, for example –
(i) Expenditure covered by section 43B of the Income-tax Act, 1961, which are allowed only in the year of actual payment. However, in the previous year in which the expenditure is incurred, it can be claimed as deduction, provided it is paid on or before the due date for filing the return of income.
(ii) Any interest, royalty, fees for technical services payable outside India or in India to a non-resident, on which tax has not been deducted at source and hence, disallowed during the previous year. However, the same has been allowed for tax purposes in the subsequent year when such tax is deducted and paid.
(iii) Any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, on which tax has not been deducted at source and hence, 30% of such expenditure is disallowed during the previous year. However, the same would be allowed in the subsequent year when such tax is deducted and paid.
(iv) Provisions made for liabilities in the books of account. However, deduction is allowed under the Income-tax Act, 1961 in the subsequent years when the liability crystallizes e.g., provision for warranties.
(v) Preliminary expense written off completely in the year in which they are incurred as per AS 26 but allowed to be amortised over 5 years for tax purposes as per section 35D.
(2) Difference between depreciation as per books of account and depreciation allowable for tax purposes under section 32.
(3) A deduction which is allowed for tax purposes on the basis of a deposit made, for example, tea/coffee/rubber development account scheme under section 33AB and site restoration fund under section 33ABA. The withdrawal from such deposit is debited to the profit and loss account in the subsequent years.
(4) Income credited to profit and loss account in a particular year but brought to tax in a later year. For example, where a capital asset is converted into stock in trade, the capital gains would be charged to tax only in the previous year in which the stock in trade is sold.
A timing difference may result in a deferred tax asset or a deferred tax liability.
A deferred tax asset arises on account of –
(i) Recognition of revenue/gain in an earlier period for tax purpose, but in a later period for accounting purpose.
e.g. operating lease rentals, in a case where the amount received in an earlier year is high, the same would be recognized as income for tax purpose. However, for accounting purpose, the recognition would be deferred since such lease rentals are recognized on a straight line basis as per AS-19.
(ii) Recognition of expenses/losses in an earlier period for accounting purpose, but in a later period for tax purpose.
e.g. (i) Expenditure in relation to which section 43B applies, in respect of which payments have not been made on or before the due date for filing the return of income. Such expenditure will be allowed for tax purposes in the year of actual payment.
(ii) Preliminary expenses written off during the year in the profit and loss account but deferred over a period of 5 years for tax purposes as per section 35D.
A deferred tax liability arises on account of –
(i) Recognition of revenue/gain in an earlier period for accounting purpose, b ut in a later period for tax purpose –
e.g. conversion of a capital asset into stock-in trade – recognized in the year of conversion for accounting purpose but only in the year of sale of stock-in-trade for tax purpose.
(ii) Recognition of expenses/losses in an earlier period for tax purpose, but in a later period for accounting purpose –
e.g. Depreciation, since the tax depreciation is higher than the depreciation as per accounting books on account of the higher rates of depreciation under the Income-tax Act.
The tax effect of timing difference i.e. deferred tax should be treated in the following manner –
(i) the deferred tax should form part of the tax expenses in the profit and loss account; and
(ii) it should be accounted as a deferred tax asset (DTA) /deferred tax liability (DTL) in the balance sheet.
The criteria for recognizing DTAs are –
(i) In a case where there are unabsorbed losses/deprecation under the tax laws – DTA should be recognized only to the extent there is virtual certainty supported by convincing evidence that adequate future taxable income will be available against which DTAs can be realised. Virtual certainty means certain for all practical purposes. Mere forecasts of performance would not satisfy this criterion. Further, virtual ce rtainty is not a matter of perception. It has to be backed up by convincing evidence i.e. evidence available at the reporting date in concrete form e.g. a profitable binding export order, cancellation of which would attract high penalty in the hands of the defaulting person. Future profitability projections would not, in isolation, be taken as convincing evidence, even though they may be submitted to an outside agency like a bank and accepted by them.
(ii) In any other case (i.e. where there are no unabsorbed losses/depreciation under tax laws) – DTA should be recognized and carried forward only to the extent there is reasonable certainty that adequate future taxable income would be available against which DTAs can be realised.
Accounting treatment for DTA
The accounting treatment for DTA is as shown hereunder –
(i) Entry to be passed in the year in which timing difference originates –
DTA A/c Dr.
To Profit and Loss A/c
(This is the entry to be passed when the DTA is recognized on meeting the virtual certainty/reasonable certainty criteria, as the case may be. The amount to be debited to the DTA a/c and credited to the profit and loss A/c is the amount arrived at by multiplying the timing difference with the tax rate applicable for the year )
(ii) Entry to be passed in the subsequent years –
The carrying amount of DTAs has to be reviewed at each balance sheet date. The carrying amount of a DTA has to be written down to the extent that it is no longer reasonably certain or virtually certain, as the case may be, that adequate future taxable income would be available to realize the DTA. Reversal of a previous write-down may be done to the extent it becomes reasonably certain or virtually certain, as the case may be, adequate future taxable income would be available.
Therefore, in the subsequent years, there should be a review as to whether the recognition criteria is met. If the same is not met, the entire balance should be written off. If the recognition criteria is met, the closing balance of DTA has to be valued applying the tax rate for that year on the unreversed timing difference. The unreversed timing difference is the difference between the timing difference at the beginning of the financial year and the reversal during the year.
Profit and Loss A/c Dr.
To DTA A/c
(This is the entry to be passed in the subsequent years to account for the difference between the opening and closing balance in the DTA a/c which represents reversal of timing difference during the year)
Let us understand these entries with the help of an example –
XYZ Ltd., a domestic company, prepares its accounts on 31st March every year. The company has incurred a loss of Rs 5,00,000 during the year ended 31.3.2014 and made profits of Rs 3,00,000 and Rs 3,50,000 during the years 2014-15 and 2015-16, respectively. The rate of income-tax applicable to the company for all the three assessment years (i.e. A.Y.2014-15, A.Y.2015-16 & A.Y.2016-17) is 30% plus education cess@2% plus secondary and higher education cess@1%. Surcharge is not applicable since the total income does not exceed Rs 1 crore. The business loss can be carried forward for 8 years. On 31.3.2014, it was virtually certain, supported by convincing evidence, that the company would have adequate taxable income in the future years against which unabsorbed losses can be set-off. You are required to pass accounting entries, assuming that there is no other difference between taxable income and accounting income.
Draft Profit and loss account for the years ended
| Particulars | 31.3.2014 | 31.3.2015 | 31.3.2016 |
| Profit/Loss before giving effect to tax | (5,00,000) | 3,00,000 | 3,50,000 |
| Current tax @ 30.9% of Rs 1,50,000 | (46,350) | ||
| Deferred tax | |||
| – Tax effect of timing differences originating during the year [5,00,000 × 30.9%] | 1,54,500 | ||
| – Tax effect of timing differences reversing during the year ending – | |||
| 31.3.2014 – [3,00,000 × 30.9%] | (92,700) | ||
| 31.3.2015 – [2,00,000 × 30.9% | (61,800) | ||
| Profit/Loss after giving effect to tax | (3,45,500) | 2,07,300 | 2,41,850 |
Entry to be passed for the year ending 31.3.2014
| DTA A/c Dr | 1,54,500 | |
| To Profit and loss A/c | 1,54,500 |
(DTA on account of tax saving due to carry forward of losses)
Entry to be passed for the year ending 31.3.2015
| Profit and loss A/c Dr | 92,700 | |
| To DTA A/c | 92,700 |
(Reversal of DTA on account of set-off of brought forward loss against current year income)
Entry to be passed for the year ending 31.3.2016
| Profit and loss A/c Dr | 61,800 | |
| To DTA A/c | 61,800 |
(Reversal of DTA on account of set-off of brought forward loss against current year income)
Accounting treatment for DTL
The accounting treatment for DTL is as shown hereunder –
(i) Entry to be passed in the year in which timing difference originates –
Profit and Loss A/c Dr.
To DTL A/c
(This is the entry to be passed when the DTL is recognized. The amount to be credited to the DTL A/c and debited to the profit and loss account is the amount arrived at by multiplying the timing difference with the tax rate applicable for the year)
(ii) Entry to be passed in the subsequent years –
DTL A/c Dr.
To Profit and Loss A/c
(This is the entry to be passed in the subsequent years to account for the difference between the opening and closing balance in the DTL A/c which represents reversal of timing difference during the year. For arriving at the closing balance, the unreversed timing difference should be multiplied by the tax rate applicable for that year)
ANNEXURE
I Salient Features of ICDSs
| ICDS I: Accounting Policies
► This ICDS deals with significant accounting policies. ► While it recognizes the fundamental accounting assumptions of going concern, consistency and accrual, it does not recognize the concepts of “materiality” and “prudence” in selection of accounting policies. ► Treatment and presentation of transactions have to be governed by their substance and not form. ► Marked to market loss or an expected loss is not to be recognized unless recognition of such loss is in accordance with the provisions of any other ICDS. ICDS II :Valuation of Inventories ► “Inventories” has been defined to mean assets held for – o sale in the ordinary course of business; o in the process of production for such sale; o in the form of materials or supplies to be consumed in the production process or in the rendering of services. ► This ICDS requires inventory to be valued at cost or net realizable value, whichever is lower. ► This ICDS requires disclosure of the accounting policies adopted in measuring inventories including the cost formulae used and the total carrying amount of inventories and its classification appropriate to a person. ICDS III: Construction Contracts ► This ICDS is required to be applied in determination of income for a construction contract of a contractor. ► It recognizes percentage of completion method (POCM) for recognizing contract revenue and contract costs associated with a construction contract. ► This ICDS also contains certain disclosure requirements, like the amount of contract revenue recognized as revenue in the period, the methods used to determine the stage of completion of contracts in progress etc. ICDS IV: Revenue Recognition ► This ICDS deals with the bases for recognition of revenue arising in the course of the ordinary activities of a person from – o the sale of goods; o the rendering of services; o the use by others of the person‘s resources yielding interest, royalties or dividends. ► It does not, however, deal with the aspects of revenue recognition which are dealt with by other ICDSs. ► “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. ► 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. ► 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. ► 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. ICDS V: Tangible Fixed Assets ► This ICDS deals with the treatment of tangible fixed assets. ► 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. ► “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. ► This ICDS provides the components of actual cost of such assets and valuation of such assets in special cases. ► The fair value of a tangible fixed asset acquired in exchange for shares or other securities or another asset shall be its actual cost. ► 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. ► 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. ICDS VI: The Effects of changes in foreign exchange rates ► 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. ► 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. ► 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. ► 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. tax Act, 1961 and Rule 115 of the Income-tax Rules, 1962. ► The ICDS requires classification of a foreign operation as an integral foreign operation or a non-integral foreign operation. ICDS VII: Government Grants ► 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. ► 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. ► It requires recognition of Government Grants when there is a reasonable assurance that the 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. ► 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. ► 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. ► 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. ► 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. ► 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 recognized during the previous year as income and reasons thereof etc. ICDS VIII: Securities ► This ICDS deals with securities held as stock-in-trade. ► 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. ► 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. ► Subsequently, at the end of any previous year, securities held as stock -intrade have to be valued at actual cost initially recognized or net realizable value at the end of that previous year, whichever is lower. ► 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. ICDS IX: Borrowing Costs ► 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. ► 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. ► Qualifying asset has been defined to mean – o land, building, machinery, plant or furniture, being tangible assets; o know‐how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; o inventories that require a period of twelve months or more to bring them to a saleable condition. ► This ICDS requires capitalization of specific borrowing costs and general borrowing costs. ► 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. ► It also provides as to when capitalization of borrowing costs would commence and cease. ► It requires disclosure of the accounting policy adopted for borrowing costs and the amount of borrowing costs capitalized during the year. ICDS X: Provisions, Contingent Liabilities and Contingent Assets ► 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. ► 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 wil l be required to settle the obligation and making a reliable estimate of the amount of the obligation. ► 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. ► It contains provisions for measurement and review of a provision and asset and related income. ► It also provides that a provision shall be used only for expenditures for which the provision was originally recognized. ► The ICDS also contains specific disclosure requirements in respect of each class of provision, asset and related income recognized. |
II. Text of ICDSs
ICDS I – Accounting Policies
| Content heading | Para | Content |
| Scope | 1 | This ICDS deals with significant accounting policies. |
| Fundamental Accounting Assumptions | 2 | “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.
“Consistency” refers to the assumption that accounting policies are consistent from one period to another; “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. |
| Accounting Policies | 3 | The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by a person. |
| Considerations in the Selection and Change of Accounting Policies | 4 | 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; 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.
|
| 5 | An accounting policy shall not be changed without reasonable cause. | |
| Disclosure of Accounting Policies | 6 | All significant accounting policies adopted by a person shall 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 effect for the first time. | |
| 8 | Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item. | |
| 9 | 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. | |
| Transitional Provisions | 10 | All contract or transaction existing on 1st April, 2015 or entered into on or after the 1st April, 2015 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 31st March, 2015. |
ICDS II – Valuation of Inventories
| Content heading | Para | Content |
| Scope | 1 | This ICDS shall 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 ICDS on construction contracts; (b) Work‐in‐progress which is dealt with by other ICDS; (c) Shares, debentures and other financial instruments held as stock‐in‐trade which are dealt with by the ICDS 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 ICDS on tangible fixed assets. |
| Definitions | 2(1)(a) | “Inventories” are assets:
(i) held for sale in the ordinary course of business; (ii) in the process of production for such sale; (iii) in the form of materials or supplies to be consumed in the production process or in the rendering of services. |
| 2(1)(b) | “Net realisable value” is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. | |
| 2(2) | Words and expressions used and not defined in this ICDS but defined in the Act shall have the meanings assigned to them in that Act. | |
| Measurement | 3 | Inventories shall be valued at cost, or net realisable value, whichever is lower. |
| Cost of Inventories | 4 | Cost of inventories shall comprise of all costs of purchase, costs of services, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. |
| Costs of Purchase | 5 | The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase. |
| Costs of Services | 6 | 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. |
| Costs of Conversion | 7
|
The costs of conversion of inventories shall 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. Fixed production overheads shall be those indirect costs of production that remain relatively constant regardless of the volume of production. Variable production overheads shall be those indirect costs of production that vary directly or nearly directly, with the volume of production. |
| 8 | The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion shall 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. 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 shall be assigned to each unit of production on the basis of the actual use of the production facilities. | |
| 9 | 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 shall be allocated between the products on a rational and consistent basis. Where by‐products, scrap or waste material are immaterial, they shall be measured at net realisable value and this value shall be deducted from the cost of the main product. | |
| Other Costs | 10 | Other costs shall 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. |
| 11 | Interest and other borrowing costs shall 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 IX on borrowing costs. | |
| Exclusions from the Cost of Inventories | 12 | In determining the cost of inventories in accordance with paragraphs 4 to paragraphs 11, the following costs shall be excluded and recognised as expenses of the period in which they are incurred, namely:—
(a) Abnormal amounts of wasted materials, labour, or other production costs; (b) Storage costs, unless those costs are necessary in the production process prior to a further production stage; (c) Administrative overheads that do not contribute to bringing the inventories to their present location and condition; (d) Selling costs. |
| Cost Formulae | 13
|
The Cost of inventories of items
(i) that are not ordinarily interchangeable; and (ii) goods or services produced and segregated for specific projects shall be assigned by specific identification of their individual costs. |
| 14 | ‘Specific identification of cost‘ means specific costs are attributed to identified items of inventory. | |
| 15 | Where there are a large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs shall not be made. | |
| First–in Firstout and Weighted Average Cost Formula | 16 | Cost of inventories, other than the inventory dealt with in paragraph 13, shall be assigned by using the First‐ in First‐out (FIFO), or weighted average cost formula. The formula used shall reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. |
| 17 | The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average shall be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances. | |
| Retail Method | 18 | Where it is impracticable to use the costing methods referred to in paragraph 16, the retail method can be used in the retail trade for measuring inventories of large number of rapidly changing items that have similar margins. The cost of the inventory is determined by reducing from the sales value of the inventory, the appropriate percentage gross margin. The percentage used takes into consideration inventory, which has been marked down to below its original selling price. |
| Net Realisable Value | 19 | Inventories shall be written 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 shall be grouped together and written down to net realisable value on an aggregate basis.
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| 20 | Net realisable value shall be based on the most reliable evidence available at the time of valuation. The estimates of net realisable value shall also take into consideration the purpose for which the inventory is held. The estimates shall take into consideration 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. | |
| 21 | Materials and other supplies held for use in the production of inventories shall not be written down below the cost, where the finished products in which they shall be 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 realisable value, the value of materials shall be written down to net realisable value which shall be the replacement cost of such materials. | |
| Value of Opening Inventory | 22 | The value of the inventory as on the beginning of the previous year shall be –
(i) 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 (ii) the value of the inventory as on the close of the immediately preceding previous year, in any other case. |
| Change of Method of Valuation of Inventory | 23 | The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause. |
| Valuation of Inventory in case of certain dissolutions | 24 | 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 shall be valued at the net realisable value. |
| Transitional Provisions | 25 | 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 inventory as on the 1st April, 2015, 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 April, 2015 if such inventory continue to remain part of inventory as on the close of the previous year beginning on or after 1st April, 2015. |
| Disclosure | 26 | The following aspects shall be disclosed, namely:—
(a) the accounting policies adopted in measuring inventories including the cost formulae used; and (b) the total carrying amount of inventories and its classification appropriate to a person. |
ICDS III – Construction Contracts
| Content heading | Para | Content | |
| Scope | 1 | This ICDS should be applied in determination of income for a construction contract of a contractor. | |
| 2(1) | (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 use and includes :
(i) contract for the rendering of services which are directly related to the construction of the asset, for example, 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)
|
“Fixed price contract” is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which may be subject to cost escalation clauses. | ||
| (c) | “Cost plus contract” is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a mark up on these costs or a fixed fee. | ||
| (d) | “Retentions” are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified. | ||
| (e) | “Progress billings” are amounts billed for work performed on a contract whether or not they have been paid by the customer. | ||
| (f)
|
“Advances” are amounts received by the contractor before the related work is performed. | ||
| 2(2) | Words and expressions used and not defined in this ICDS but defined in the Act shall have the meaning respectively assigned to them in the Act. | ||
| 3 | A construction contract may be negotiated for the construction of a single asset. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. | ||
| 4 | Construction contracts are formulated in a number of ways which, for the purposes of this ICDS, are classified as fixed price contracts and cost plus contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example, in the case of a cost plus contract with an agreed maximum price. | ||
| Combining and Segmenting Construction Contracts | 5 | The requirements of this ICDS shall be applied separately to each construction contract except as provided for in paragraphs 6, 7 and 8 herein. For reflecting the substance of a contract or a group of contracts, where it is necessary, the ICDS should be applied to the separately identifiable components of a single contract or to a group of contracts together. | |
| 6 | 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 submitted 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.
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| 7 | A group of contracts, whether with a single customer or with several customers, should be treated as a single 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. |
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| 8 | 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. |
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| Contract
Revenue |
9 | Contract revenue shall be recognised when there is reasonable certainty of its ultimate collection. | |
| 10 | Contract revenue shall comprise of:
(a) the initial amount of revenue agreed in the contract, including retentions; and (b) 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. |
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| 11 | Where contract revenue already recognised as income is subsequently written off in the books of accounts as uncollectible, the same shall be recognised as an expense and not as an adjustment of the amount of contract revenue. | ||
| Contract Costs | 12 | Contract costs shall comprise of :
(a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; (c) such other costs as are specifically chargeable to the customer under the terms of the contract; and (d) allocated borrowing costs in accordance with the ICDS on Borrowing Costs. These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue. |
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| 13 | Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract. | ||
| 14 | Contract costs include the costs attributable to a contract for 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
(a) they can be separately identified; and (b) it is probable that the contract shall be obtained. When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period. |
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| 15 | 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. | ||
| Recognition of Contract Revenue and Expenses | 16 | 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. | |
| 17 | The recognition of revenue and expenses by reference to the stage of completion of a contract is referred to as the 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 attributed to the proportion of work completed. | ||
| 18
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The stage of completion of a contract shall be determined with reference to:
(a) the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or (b) surveys of work performed; or (c) completion of a physical proportion of the contract work. Progress payments and advances received from customers are not determinative of the stage of completion of a contract. |
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| 19 | When the stage of completion is determined by reference to the contract costs incurred up to the reporting date, only those contract costs that reflect work performed are included in costs incurred up to the reporting date. Contract costs which are excluded are:
(a) contract costs that relate to future activity on the contract; and (b) payments made to sub-contractors in advance of work performed under the subcontract. |
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| 20 | 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. | ||
| Changes in
Estimates |
21 | 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 shall be used in determination of the amount of revenue and expenses in the period in which the change is made and in subsequent periods. | |
| Transitional
Provisions |
22 | 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 the 1st April, 2015 and subsequent previous years. | |
| Disclosure | 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. |
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ICDS IV- Revenue recognition
| Content heading | Para | Content |
| Scope | 1 | This ICDS deals with the bases for recognition of revenue arising in the course of the ordinary activities of a person from
(i) the sale of goods; (ii) the rendering of services; (iii) the use by others of the person‘s resources yielding interest, royalties or dividends. |
| 1(2) | This ICDS does not deal with the aspects of revenue recognition which are dealt with by other Income Computation and Disclosure Standards. | |
| Definitions | 2(1) | “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 |
| 2(2) | Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act | |
| Sale of Goods | 3 | In a transaction involving the sale of goods, the revenue shall be recognised when the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. In a situation, where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership, revenue in such a situation shall be recognised at the time of transfer of significant risks and rewards of ownership to the buyer. |
| 4 | Revenue shall be recognised when there is reasonable certainty of its ultimate collection | |
| 5 | 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 shall be postponed to the extent of uncertainty involved. | |
| Rendering of Services | 6 | Revenue from service transactions shall be recognized by the percentage completion method. Under this method, revenue from service transactions is matched with the service transactions costs incurred in reaching the stage of completion, resulting in the determination of revenue, expenses and profit which can be attributed to the proportion of work completed,. Income Computation and Disclosure Standard on construction contract also requires the recognition of revenue on this basis. The requirements of that Standard shall mutantis mutandis apply to the recognition of revenue and the associated expenses for a service transaction. |
| The Use of Resources by Others Yielding Interest, Royalties or Dividends | 7 | Interest shall accrue on the time basis determined by the amount outstanding and the rate applicable. Discount or premium on debt securities held is treated as though it were accruing over the period to maturity. |
| 8 | 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. | |
| 9 | Dividends are recognised in accordance with the provisions of the Act. | |
| Transitional Provisions | 10 | The transitional provisions of ICDS on construction contract shall mutatis mutandis apply to the recognition of revenue and the associated costs for a service transaction undertaken on or before the 31st March, 2015 but not completed by the said date. |
| 11 | Revenue for a transaction, other than a service transaction referred to in Para 10, undertaken on or before the 31st March, 2015 but not completed by the said date shall be recognised in accordance with the provisions of this standard for the previous year commencing on the 1st April, 2015 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 April, 2014 shall be taken into account for recognising revenue for the said transaction for the previous year commencing on the 1st April, 2015 and subsequent previous years | |
| Disclosure | 12 | 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 completion 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. |
ICDS-V : Tangible fixed assets
| Content heading | Para | Content |
| Scope | 1 | This ICDS deals with the treatment of tangible fixed assets. |
| Definitions | 2 (1) | (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. |
| 2(2) | Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act. | |
| Identification of Tangible Fixed Assets | 3 | The definition in clause (a) of sub‐paragraph (1) of paragraph 2 provides criteria for determining whether an item is to be classified as a tangible fixed asset. |
| 4 | Stand‐by equipment and servicing equipment are to be capitalised. Machinery spares shall 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 shall be capitalised. | |
| Components of Actual Cost | 5 | The actual cost of an acquired tangible fixed asset shall comprise its purchase price, import duties and other taxes, excluding those subsequently recoverable, and any directly attributable expenditure on making the asset ready for its intended use. Any trade discounts and rebates shall be deducted in arriving at the actual cost. |
| 6 | The cost of a tangible fixed asset may undergo changes subsequent to its acquisition or construction on account of
(i) Price adjustment, changes in duties or similar factors; or (ii) exchange fluctuation as specified in Income Computation and Disclosure Standard on the effects of changes in foreign exchange rates. |
|
| 7 | 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 attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to its working condition, shall be included as a part of the cost of the project or as a part of the cost of the tangible fixed asset | |
| 8 | The expenditure incurred on start‐up and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalised. The expenditure incurred after the plant has begun commercial production, that is, production intended for sale or capt ive consumption, shall be treated as revenue expenditure | |
| Selfconstructed Tangible Fixed Assets | 9 | In arriving at the actual cost of self‐constructed tangible fixed assets, the same principles shall apply as those described in paragraphs 5 to 8. Cost of construction that relate directly to the specific tangible fixed asset and costs that are attributable to the construction activity in general and can be allocated to the specific tangible fixed asset shall be included in actual cost. Any internal profits shall be eliminated in arriving at such costs. |
| Non Monetary Consideration | 10 | 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. |
| 11 | 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. | |
| Improvements and Repairs | 12 | An expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost. |
| 13 | 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, shall be treated as separate asset. | |
| Valuation of Tangible Fixed Assets in Special Cases | 14 | Where a person owns tangible fixed assets jointly with others, the proportion in the actual cost, accumulated depreciation and written down value is grouped together with similar fully owned tangible fixed assets. Details of such jointly owned tangible fixed assets shall be indicated separately in the tangible fixed assets register. |
| 15 | Where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis. | |
| Transactional Provisions | 16 | The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before the 31st March, 2015 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 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. |
| Depreciation | 17 | Depreciation on a tangible fixed asset shall be computed in accordance with the provisions of the Act. |
| Transfers | 18 | Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act. |
| Disclosures | 19 | Following disclosure shall be made in respect of tangible fixed assets, namely:-
(a) description of asset or block of assets; (b) rate of depreciation; (c) actual cost or written down value, as the case may be: (d) addition or deductions during the year with dates; in the case of any addition of an assets, 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) Subsidy or grant or reimbursement, by whatever name called; (e) depreciation allowable; and (f) written down value at the end of year; |
ICDS-VI : Effects of changes in foreign exchange rates
| Content heading | Para | Content |
| Scope | 1 | This ICDS 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 |
| Definitions | 2(1)
|
(a) “Average rate” is the mean of the exchange rates in force during a period.
(b) “Closing rate” is the exchange rate at the last day of the previous year (c) “Exchange difference” is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates. (d) “Exchange rate” is the ratio for exchange of two currencies. (e) “Foreign currency” is a currency other than the reporting currency of a person. (f) “Foreign operations of a person” is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India. (g) “Foreign currency transaction” is a transaction which is denominated in or requires settlement 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 settles liabilities, denominated in a foreign currency: (h) “Forward exchange contract” means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature; (i) “Forward rate” is the specified exchange rate for exchange of two currencies at a specified future date; (j) “Indian currency” shall have the meaning as assigned to it in section 2 of the Foreign Exchange Management Act, 1999; (k) “Integral foreign operation” is a foreign operation, the activities of which are an integral part of the operation of the person; (l) “Monetary items” are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables, and payables are examples of monetary items; (m) “Non-integral foreign operation” is a foreign operation that is not an integral foreign operation; (n) “Non-monetary items” are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non‐monetary items; (o) “Reporting currency” means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out. |
| 2(2) | Words and expressions used and not defined in this ICDS but defined in the Act shall have the meaning assigned to them in the Act. | |
| Foreign Currency Transactions | ||
| Initial Recognition | 3(1) | A foreign currency transaction shall 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 |
| 3(2) | 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 shall be used. | |
| Conversion at Last Date of Previous Year | 4 | At last day of each previous year:-
(a) foreign currency monetary items shall be converted into reporting currency by applying the closing rate; (b) 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 remittances 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 shall 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; and (c) non‐monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction |
| Recognition of Exchange Differences | 5 | (i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year.
(ii) In respect of non‐monetary items, exchange differences arising on conversion thereof at the last day of the previous year shall not be recognised as income or as expense in that previous year. |
| Exception to Paragraphs 3,4, and 5 | 6 | Notwithstanding anything contained in paragraph 3, 4 and 5; initial recognition, conversion and recognition of exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of Income‐ tax Rules, 1962, as the case may be. |
| Financial Statements of Foreign Operations | ||
| Classification of Foreign Operations | 7(1) | The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to a person. For this purpose, foreign operations are classified as either “integral foreign operations” or “non‐integral foreign operations”. |
| 7(2) | The following are indications that a foreign operation is a non‐ integral foreign operation rather than an integral foreign operation:—
(a) while the person may control the foreign operation, the activities of the foreign operation are carried out with a significant degree of autonomy from the activities of the person; (b) transactions with the person are not a high proportion of the foreign operation‘s activities; (c) the activities of the foreign operation are financed mainly from its own operations or local borrowings; (d) costs of labour, material and other components of the foreign operation‘s products or services are primarily paid or settled in the local currency; (e) the foreign operation‘s sales are mainly in currencies other than Indian currency; (f) cash flows of the person are insulated from the day‐ to‐day activities of the foreign operation; (g) sales prices for the foreign operation‘s products or services are not primarily responsive on a short‐ term basis to changes in exchange rates but are determined more by local competition or local government regulation (h) there is an active local sales market for the foreign operation‘s products or services, although there also might be significant amounts of exports.
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| Integral Foreign Operations | 9(1)
|
In translating the financial statements of a non‐ integral foreign operation for a previous year, the person shall apply the following, namely:—
(a) the assets and liabilities both monetary and non‐monetary, of the non‐ integral foreign operation shall be translated at the closing rate; (b) income and expense items of the non‐ integral foreign operation shall be translated at exchange rates at the dates of the transactions; and (c) all resulting exchange differences shall be recognised as income or as expenses in that previous year. |
| 9(2) | Notwithstanding anything stated in sub‐paragraph 1, translation and recognition of exchange difference in cases referred to in section 43A of the Act or Rule 115 of Income‐tax Rules, 1962 shall be carried out in accordance with the provisions contained in that section or that rule, as the case may be. | |
| Change in the Classification of a Foreign Operation | 10(1) | When there is a change in the classification of a foreign operation, the translation procedures applicable to the revised classification should be applied from the date of the change in the classification. |
| 10(2) | The consistency principle requires that foreign operation once classified as integral or non‐ integral is continued to be so classified. However, a change in the way in which a foreign operation is financed and operates in relation to the person may lead to a change in the classification of that foreign operation. | |
| Forward Exchange Contracts | 11(1) | Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall 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 shall be recognised as income or as expense for the previous year. |
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11(2) | The provisions of sub‐para 1 shall apply provided that the contract –
(a) is not intended for trading or speculation purposes; And (b) is entered into to establish the amount of the reporting currency required or available at the settlement date of the transaction. |
| 11(3) | The provisions of sub‐para 1 shall 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 | |
| 11(4)
|
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:
(a) the foreign currency amount of the contract translated at the exchange rate at the last day of the previous year, or the settlement date where the transaction is settled during the previous year; and (b) 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.
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| 11(5)
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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 shall be recognised at the time of settlement. | |
| Transitional Provisions | 12(1)
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All foreign currency transactions undertaken on or after 1st April, 2015 shall be recognised in accordance with the provisions of this standard. |
| 12(2)
|
Exchange differences arising in respect of monetary items or non‐monetary items, on the settlement thereof during the previous year commencing on the 1st April, 2015 or on conversion thereof at the last day of the previous year commencing on the 1st April, 2015, shall 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,2015 for an item, if any, which is carried forward from said previous year | |
| 12(3) | The financial statements of foreign operations for the previous year commencing on the 1st April, 2015 shall 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, 2015 for an item, if any, which is carried forward from said previous year | |
| 12(4) | All forward exchange contracts existing on the 1st April, 2015 or entered on or after 1st 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. | |
ICDS-VII : Government grants
| Content heading | Para | Content |
| Scope | 1 | This ICDS deals with the treatment of Government grants. The Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc. |
| 2 | This ICDS does not deal with:—
(a) Government assistance other than in the form of Government grants; and (b) Government participation in the ownership of the enterprise |
|
| Definitions | 3(1) | (a) “Government” refers to the Central Government, State Governments, agencies and similar bodies, whether local, national or international.
(b) “Government grants” are assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot have a value placed upon them and the transactions with Government which cannot be distinguished from the normal trading transactions of the person. |
| 3(2) | Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act. | |
| Recognition of Government Grants | 4(1) | 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. |
| 4(2) | Recognition of Government grant shall not be postponed beyond the date of actual receipt. | |
| Treatment of Government Grants | 5 | 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. |
| 6 | Where the Government grant relates to a non‐depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income | |
| 7
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Where the 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, 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.
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| 8 | The Government 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, shall be recognised as income of the period in which it is receivable. | |
| 9 | The Government grants other than covered by paragraph 5, 6, 7, and 8 shall be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate. | |
| 10 | The Government 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 | 11 | The amount refundable in respect of a Government grant referred to in paragraphs 6, 8 and 9 shall 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 shall be charged to profit and loss statement. |
| 12 | The amount refundable in respect of a Government grant related to a depreciable fixed asset or assets shall be recorded by increasing the actual cost or written 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 written down value shall be provided prospectively at the prescribed rate | |
| Transitional Provisions | 13 | All the Government grants which meet the recognition criteria of para 4 on or after 1st April, 2015 shall be recognised for the previous year commencing on or after 1st April, 2015 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 March, 2015. |
| Disclosures | 14 | Following disclosure shall be made in respect of Government grants, namely :-
(a) nature and extent of Government 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; (b) nature and extent of Government grants recognised during 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 written 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. |
ICDS VIII – Securities
| Content heading | Para | Content |
| Scope | 1 | This ICDS deals with securities held as stock‐ in‐ trade. |
| 2 | This ICDS 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. |
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| Definitions | 3(1) | (a) “Fair value” is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm‘s length transaction.
(b) “Securities” shall 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 (1a) of that clause. |
| 3(2) | Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning respectively assigned to them in the Act. | |
| Recognition and Initial Measurement of Securities | 4 | A security on acquisition shall be recognised at actual cost. |
| 5 | The actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess. | |
| 6 | Where a security is acquired in exchange for other securities, the fair value of the security so acquired shall be its actual cost. | |
| 7 | 7 Where a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its actual cost. | |
| 8 | 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. | |
| Subsequent Measurement of Securities | 9 | 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. |
| 10
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For the purpose of para 9, the comparison of actual cost initially recognised and net realisable value shall be done categorywise 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. |
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| 11 | 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. |
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| 12 | Notwithstanding anything contained in para 9, 10 and 11, 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. | |
| 13 | For the purposes of para 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. |
ICDS IX – Borrowing Costs
| Content heading | Para | Content | ||
| Scope | 1(1) | This ICDS deals with treatment of borrowing costs. | ||
| 1(2) | This ICDS does not deal with the actual or imputed cost of owners‘ equity and preference share capital. | |||
| Definitions | 2(1) | (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. |
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| 2(2) | Words and expressions used and not defined in this ICDS but defined in the Act shall have the meaning assigned to them in the Act. | |||
| Recognition
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3 | Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation shall be determined in accordance with this ICDS. Other borrowing costs shall be recognised in accordance with the provisions of the Act. | ||
| 4 | For the purposes of this ICDS, “capitalisation” in the context of inventory referred to in item (iii) of clause (b) of sub‐paragraph (1) of paragraph 2 means addition of borrowing cost to the cost of inventory. | |||
| Borrowing Costs eligible for Capitalisation | 5 | 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 shall be the actual borrowing costs incurred during the period on the funds so borrowed. | ||
| 6 | 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 shall be computed in accordance with the following formula, namely :—
A x B/C Where |
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| A =
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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 or both on the first day and the last day of the previous year, half of the cost of the qualifying asset; | |||
| (iii) | In case the qualifying asset does not appear in the balance sheet of a person on the last day of previous year, the 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; | |||
| Commencement of Capitalisation | 7 | The capitalisation of borrowing costs shall commence:
(a) in a case referred to in paragraph 5, from the date on which funds were borrowed; (b) in a case referred to in paragraph 6, from the date on which funds were utilised. |
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| Cessation of Capitalisation | 8 | Capitalisation of borrowing costs shall cease:
(a) in case of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub‐paragraph (1) of paragraph 2, when such asset is first put to use; (b) in case of inventory referred to in item (iii) of clause (b) of sub‐paragraph (1) of paragraph 2, when substantially all the activities necessary to prepare such inventory for its intended sale are complete. |
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| 9 | When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to a part shall cease:—
(a) in case of part of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub‐paragraph (1) of paragraph 2, when such part of a qualifying asset is first put to use; (b) in case of part of inventory referred to in item (iii) of clause (b) of sub‐paragraph (1) of paragraph 2, when substantially all the activities necessary to prepare such part of inventory for its intended sale are complete. |
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| Transitional Provisions | 10 | All the borrowing costs incurred on or after 1st April, 2015 shall be capitalised for the previous year commencing on or after 1st 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 March, 2015. | ||
| Disclosure | 11 | The following disclosure shall be made in respect of borrowing costs, namely:—
(a) the accounting policy adopted for borrowing costs; and (b) the amount of borrowing costs capitalised during the previous year. |
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ICDS X – Provisions, contingent liabilities and contingent assets
| Content heading | Para | Content |
| Scope | 1 | This ICDS deals with provisions, contingent liabilities and contingent assets, except those:
(a) resulting from financial instruments; (b) resulting from executory contracts (c) arising in insurance business from contracts with policyholders; and (d) covered by another ICDS |
| 2 | This ICDS does not deal with the recognition of revenue which is dealt with by ICDS Revenue Recognition. | |
| 3 | The term ‘provision‘ is also used in the context of items such as depreciation, impairment of assets and doubtful debts which are adjustments to the carrying amounts of assets and are not addressed in this ICDS. | |
| Definitions | 4(1) | (a) “Provision” is a liability which can be measured only by using a substantial degree of estimation.
(b) “Liability” is a present obligation of the person arising from past events, the settlement of which is expected to result in an outflow from the person of resources embodying economic benefits. (c) “Obligating event” is an event that creates an obligation that results in a person having no realistic alternative to settling that obligation. (d) “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 (A) it is not reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; or (B) a reliable estimate of the amount of the obligation cannot be made. (e) “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. (f) “Executory contracts” are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. (g) “Present obligation” is an obligation if, based on the evidence available, its existence at the end of the previous year is considered reasonably certain. |
| 4(2) | Words and expressions used and not defined in this Income Computation and disclosure Standard but defined in the Act shall have the meaning respectively assigned to them in the Act. | |
| Recognition | ||
| Provisions | 5 | A provision shall be recognised when
(a) a person has a present obligation as a result of a past event (b) it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision shall be recognized |
| 6 | No provision shall be recognised for costs that need to be incurred to operate in the future. | |
| 7 | 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 recognised as provisions | |
| 8 | Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is enacted. | |
| Contingent Liabilities | 9 | A person shall not recognise a contingent liability |
| 10 | A person shall not recognise a contingent asset. | |
| 11 | 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 occur | |
| Measurement | ||
| Best Estimate | 12 | The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the previous year. The amount of a provision shall not be discounted to its present value. |
| 13 | The amount recognised as asset and related income shall be the best estimate of the value of economic benefit arising at the end of the previous year. The amount and related income shall not be discounted to its present value. | |
| Reimbursements | 14 | 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 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. |
| 15 | 15 Where a person is not liable for payment of costs in case the third party fails to pay, no provision shall be made for those costs. | |
| 16 | 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 settled by the other parties. | |
| Review | 17 | Provisions shall 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 settle the obligation, the provision should be reversed. |
| 18 | An asset and related income recognised as provided in para 11 shall 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 shall be reversed. | |
| Use of Provisions | 19 | A provision shall be used only for expenditures for which the provision was originally recognised |
| Transitional Provisions | 20 | All the provisions or assets and related income shall be recognised for the previous year commencing on or after 1st April, 2015 in accordance with the provisions of this standard after taking into account the amount recognised, if any, for the same for any previous year ending on or before 31st March, 2015. |
| Disclosure | 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 provisions, during the previous year; (e) unused amounts reversed during the previous year; and (f) the amount of any expected reimbursement, stating the amount of any asset that has been recognized for that expected reimbursement. |
| 21(2) | Following disclosure shall be made in respect of each class of asset and related income recognized as provided in para 11, namely:-
(a) a brief description of the nature of the asset and related income; (b) the carrying amount of asset at the beginning and end of the previous year; (c) addition amount of asset and related income recognized during the year; including increased to assets and related income already recognized: and (d) amount of asset and related income reversed during the previous year. |
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