Professional Documents
Culture Documents
Lakshit Desai
27 June 2015
Agenda
Background
ICDS overview
ICDS analysis
Questions
2
Background
Journey so far..
Jan Central Board of Direct Taxes (CBDT) notified 2 Accounting Standards (AS) under
1996 section 145(2) of the Income-tax Act, 1961 (Act) [existing tax AS]
Jul - Finance Bill (No 2) 2014 amended section 145 (2) and (3)
2014 - ICDS substituted for AS
5
ICDS overview
List of ICDS
I Accounting policies
II Valuation of inventories
III Construction contracts
IV Revenue recognition
V Tangible fixed assets
VI Changes in foreign exchange rates
VII Government grants
VIII Securities
IX Borrowing costs
X Provisions, contingent liabilities and contingent assets
ICDS not notified are: Event Occurring after the Previous Year; Prior Period
items; Leases and Intangible assets
7
Salient features of ICDS
8
Some key questions (1)
9
Some key questions (2)
10
Some key questions (3)
Is ICDS mandatory?
11
Some key questions (4)
Prospective or retrospective?
Prospective
Effective from assessment year 2016-17 and subsequent
years and therefore prospective
Impact on ongoing transactions
Transitional provisions provided
Objective of ICDS
True and fair view for tax purposes to differ from true and fair
view for accounting purposes
Is it merely to cover timing difference? Is it worth the efforts?
Reduce litigation or furtherance thereto
12
ICDS analysis
ICDS I Accounting Policies
Highlights
Accounting assumptions
Going concern;
Consistency; and
Accrual
Accounting policies
Treatment and presentation to be governed by substance and merely by
legal form
Marked-to-market (MTM) or expected loss shall not be recognized unless
provided by other ICDS
Materiality and prudence are absent as considerations for selection of
accounting policies
Accounting policy can be changed if there is reasonable cause to do so
Disclosure of change in accounting policy in the year of change and in the year
in which change has material effect 14
ICDS I Accounting Policies
Disclosures
Particulars
All significant accounting policies adopted by the tax payer
Where such amount is not ascertainable, wholly or in part, the fact shall
be indicated
15
ICDS I Accounting Policies
Key departures from ICAI AS
Issue ICAI AS
Selection of accounting Materiality and prudence specifically included
policies in considerations for selection of accounting
policies
Change in accounting Only if it is required by statute or for
policy compliance with an AS or if it is considered that
the change would result in a more appropriate
presentation of the financial statements
Disclosure of a change, having material effect
in later years, required only in the year in which
the change is adopted
16
ICDS I Accounting Policies
Impact on MTM losses
17
ICDS I Accounting Policies
Key questions
Absence of materiality and prudence as considerations for selection of
accounting policies. Tax impact?
ICDS silent on MTM gain
Meaning of expected loss?
Meaning of reasonable cause?
18
ICDS II Valuation of Inventories
Highlights
Work in progress (WIP) of service providers not excluded from scope
Inventories to be valued at cost or net realizable value (NRV), whichever is lower
Cost of inventories to inter alia include
costs of services;
duties and taxes subsequently recoverable from tax authorities;
Interest and other borrowing costs if they meet recognition criteria under ICDS-IX
Specific identification of cost is required for goods that are not interchangeable
Costing methods / techniques recognized for interchangeable inventory
First-in first-out (FIFO);
Weighted average cost; and
Retail method.
Method of valuation not to be changed without reasonable cause
Inventory in case of certain dissolutions to be valued at NRV notwithstanding
whether business is discontinued or not
19
ICDS II Valuation of Inventories
Disclosures
Particulars
The accounting policies adopted in measuring inventories including the
cost formulae used; and
20
ICDS II Valuation of Inventories
Key departures from ICAI AS
Issue ICAI AS
Specific exclusions Does not apply to WIP arising in the ordinary
course of business of service providers
Cost of inventory Does not include :
costs of services
duties and taxes subsequently recoverable
from tax authorities
Interest / other borrowing costs
Techniques for Recognises standard costing as a technique
measurement of cost for measurement of cost
Value of opening inventory AS is silent
Valuation in case of certain As is silent
dissolutions
21
ICDS II Valuation of Inventories
Interplay between ICDSs
Not applicable to:
ICDS III Construction Contracts
(Work in progress)
ICDS V Tangible fixed assets
(Machinery spares)
ICDS VIII Securities
22
ICDS II Valuation of Inventories
Key questions
Applicability to service providers
Cost of inventories include cost of services
Inventories defined as assets:
held for sale in the ordinary course of business;
in the process of production for such sale;
in the form of materials or supplies to be consumed in the production process
or in the rendering of services
Cost of services explained only with reference to a service provider
Valuation of opening inventory
Rationale for clarification?
What if the assessing officer makes an adjustment to closing inventory?
23
ICDS II Valuation of Inventories
Key potential impact on tax computation
Summary
Adjustment to cost of inventory where standard costing method
followed for accounting purposes
24
ICDS III Construction Contracts
Highlights
Applicable in determination of income for a construction contract of a
contractor
Contract revenue to be recognised when there is reasonable certainty of its
ultimate collection
Contract revenue and contract costs to be recognized by reference to the stage
of completion of the contract activity
Relaxation in case of early stages of contract
The early stage of a contract shall not extend beyond 25% of the stage of
completion
Contract revenue to include retentions and variations
Definition does not seem to cover downward variations
Contract costs to include allocated borrowing cost in accordance with ICDS-IX
To be reduced by incidental income other than interest, dividend and capital
gain
25
ICDS III Construction Contracts
Disclosures
Particulars
The amount of contract revenue recognised as revenue in the period;
26
ICDS III Construction Contracts
Key departures from ICAI AS
Issue ICAI AS
Contract revenue Does not include retentions
Clarifies that variation may lead to an increase
or decrease in contract revenue
Recognition of contract Contract revenue to be recognised when the
revenue outcome can be estimated reliably
Recognition of contract Does not restrict to early stages of contract
revenue to the extent of
costs incurred (when
outcome cannot be
estimated reliably)
Contract costs Does not specifically include allocated
borrowing costs
Expected loss Allows recognition as an expense immediately
27
ICDS III Construction Contracts
Key questions
Reasonable certainty of collection vs. Reliable estimate of outcome
3 criteria prescribed for determining the stage of completion
Does taxpayer have the option to select the most beneficial criteria?
Can retention money be taxed in absence of right to receive?
Real income concept
Can it be argued that there is no reasonable certainty of its ultimate
collection?
Subsequent non-recovery
Expected loss not to be recorded as expenses Impact?
28
ICDS III Construction Contract
Impact
Illustration: disallowance of expected loss
Contract revenue 100 Cost incurred during year 2 90
Contract cost originally estimated 80 Percentage of completion at end of year 2 100%
Revised probable estimated contract cost 130
Cost incurred during year 1 40
Percentage of completion at end of year 1 ~30% (40 of 130)
Year 1 Books ICDS
Revenue 100 x 30% 30 30
Less: Cost incurred during the year (40) (40)
Less: Provision for expected loss on construction contracts (30) NIL
Net profit (40) (10)
Can upfront provision of expected loss be made based on following Supreme Court cases?
Metal Box Co. of India Ltd. V. Their Workmen
Rotork Controls India (P.) Ltd.
30
ICDS IV Revenue Recognition
Highlights
Income Recognition
Sale of goods When all significant risks and rewards of
ownership are transferred
Rendering of services As per percentage completion method (ICDS
on construction contracts to apply)
Interest On time basis
Royalty As per the terms of the relevant agreement
(unless substance of transaction warrants
some other basis)
Dividend In accordance with the provisions of the Act
Discount / premium on debt To be accrued over the period of maturity
securities held
Does not deal with the aspects of revenue recognition dealt with by other
ICDS
31
ICDS IV Revenue Recognition
Discount / premium
32
ICDS IV Revenue Recognition
Disclosures
Particulars
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;
34
ICDS IV Revenue Recognition
Interplay between ICDSs
35
ICDS IV Revenue Recognition
Key questions
Sales of Goods Revenue to be recognized when significant risks and rewards
of ownership are transferred. Impact?
Can royalty income be altered based on substance of agreement?
36
ICDS IV Revenue Recognition
Key potential impact on tax computation
Summary
Recognition of revenue on sale of goods when significant risks and
rewards of ownership are transferred to the buyer
37
ICDS V Tangible Fixed Assets
Highlights
Actual cost of a tangible fixed asset to comprise -
purchase price,
import duties and other taxes (excluding those subsequently recoverable); and
any expenditure specifically / directly attributable to bringing the asset to
workable condition
Expenditure on start-up and commissioning of a project (including test run) to be
capitalized
Expenditure post commencement of commercial production to be expensed
Tangible asset to be recorded at its fair value if acquired for non-monetary
consideration
Consolidated price for acquiring group of assets to be apportioned on fair basis
Depreciation and income on transfer of asset will be as per the Act
38
ICDS V Tangible Fixed Assets
Disclosures
Particulars
Description of asset or block of assets;
Rate of depreciation;
Additions or deductions during the year with dates; in the case of any
addition of an asset, date put to use; including adjustments on account
of
a) Central Value Added Tax credit claimed and allowed under the
CENVAT Credit Rules, 2004;
b) Change in rate of exchange of currency;
c) Subsidy or grant or reimbursement, by whatever name called;
Trial run
ready to use
40
ICDS V Tangible Fixed Assets
Key departures from ICAI AS
Issue ICAI AS
Applicability Applies to all fixed assets
Materiality Allows non-material items to be expensed out
If commercial production is Expenses incurred between the date the
prolonged project is ready to commence commercial
production and the date of actual
commencement of commercial production are
charged to P&L Account
Cost of asset purchased for FMV of asset purchased or given up whichever
non-cash consideration is more clearly evident
Purchase of several assets Fair basis for apportionment of consideration to
for a consolidated price be determined by competent valuer
41
ICDS V Tangible Fixed Assets
Interplay between ICDSs
NA
42
ICDS V Tangible Fixed Assets
Key questions
Actual Cost Impact to provisions of section 43(1) of the Act?
What method may constitute as fair basis for apportionment of assets
purchased at consolidated price?
Treatment on assets purchased on hire purchase basis not clarified
Determination of fair value in case of asset purchased with non-monetary
consideration
43
ICDS V Tangible Fixed Assets
Key potential impact on tax computation
Summary
Expenditure between the period project ready for commencement and
actual commencement may have to be capitalized
44
ICDS VI Effects of Changes in Foreign
Exchange Rates
Highlights
Deals with:
Treatment of transactions in foreign currencies;
Translating the financial statements of foreign operations; and
Treatment of forward exchange contracts
Treatment of foreign currency transactions and translation of financial
statements of foreign operations to be subject to provisions of section 43A and
Rule 115
Initial recognition of foreign currency transactions to be at the exchange rate at
the date of transaction
45
ICDS VI Effects of Changes in Foreign
Exchange Rates
Conversion at the last date of year
Conversion
Non-monetary Non-monetary
Monetary items carried items carried
items at at
historical cost fair value
Rate on the
Date of Date of
Closing date date of
transaction transaction
valuation
46
ICDS VI Effects of Changes in Foreign
Exchange Rates
Exchange differences- Monetary items
Section 43A To be
adjusted to actual cost on ITA
payment
Imported assets
To be recognized as ITA
income or expense
Others
47
ICDS VI Effects of Changes in Foreign
Exchange Rates
Foreign operations
Integral Non-integral
48
ICDS VI Effects of Changes in Foreign
Exchange Rates
Forward exchange contracts
Particulars Forward contracts Forward contracts Forward contracts for
other than (B) and for trading or firm commitment,
(C) speculation Highly probable
purposes forecast
(A) (B) (C)
Premium / Discount
As per ICDS Amortized over Allowed at the time Allowed at the time
contract life of settlement of settlement
As per ICDS Allowed on MTM Allowed at the time Allowed at the time
basis of settlement of settlement
50
ICDS VII Government grants
Highlights
Nature of grant Recognition / treatment
Grants relating to depreciable To be reduced from actual cost or written
asset down value
51
ICDS VII Government grants
Highlights..
Government grants to be recognized when
there is reasonable certainty that related conditions will be complied with; and
it is reasonably certain that ultimate collection will be made
Recognition cannot be postponed beyond the date of actual receipt
52
ICDS VII Government grants
Disclosures
Particulars
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;
53
ICDS VII Government grants
Amendment to definition of income
54
ICDS VII Government Grants
Key departures from ICAI AS
Issue ICAI AS
Recognition Mere receipt of a grant is not necessarily a
conclusive evidence that conditions attaching
to the grant have been or will be fulfilled
Grants related to non- Permits credit to capital reserve
depreciable assets
Grants of the nature of Treated as capital reserve
promoters contribution
55
ICDS VIII Securities
Highlights
Issue Treatment
Applicability Deals with securities held as stock-in-trade
Derivatives excluded from the definition of securities
Does not apply to securities held by insurance companies,
mutual funds, VCFs, banks and public financial institutions
56
ICDS VIII Securities
Illustration
Valuation of securities : Individual vs. Category
57
ICDS VIII Securities
Key questions
Valuation of securities held by insurance companies, banks, mutual funds and
venture capital funds
Whether any impact on FPIs?
Valuation of securities being derivatives
Rationale for category wise comparison of actual cost and net realisable value
58
ICDS VIII Securities
Key departures from ICAI AS
Issue ICAI AS - 13
Applicability Applies to investments
Cost of security purchased FMV of the asset given up / security issued
for non-cash consideration
Year end valuation Recommends individual valuation
59
ICDS IX Borrowing costs
Highlights
Deals with capitalization of borrowing costs incurred for qualifying assets
Borrowing Costs defined as interest and other costs incurred in connection with
the borrowing of funds
Qualifying assets to mean
specified tangible and non-tangible assets (in line with section 32(1)); and
inventories that require a period of twelve months or more to bring them to a
saleable condition
ICDS covers capitalization of both specific as well as general borrowing cost
60
ICDS IX Borrowing costs
Disclosures
Particulars
The accounting policy adopted for borrowing costs; and
61
ICDS IX Borrowing costs
Manner of capitalisation
Particulars Specific borrowing General borrowing
63
ICDS IX Borrowing costs
Illustration
Calculation of interest expense in respect of general borrowings (refer formula on next slide)
64
ICDS IX Borrowing costs
Key departures from ICAI AS
Issue ICAI AS
Qualifying asset An asset that necessarily takes a substantial period
of time to get ready for its intended use or sale. [As
per explanation, twelve months ordinarily considered
as substantial period of time]
Borrowing cost May include exchange differences arising from
foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs
Capitalization of specific To be reduced by the income on temporary
borrowings investment of those borrowings
Capitalization of general Weighted average of the borrowing costs applicable
borrowings to the general borrowings that are outstanding during
the period
Cessation of When substantially all the activities necessary to
capitalization prepare the qualifying asset for its intended use or
sale are complete
65
ICDS IX Borrowing costs
Key questions
Definition of qualifying asset inventory for captive use?
Income from temporary investments revenue income?
Capitalisation of general borrowing costs
Allocation of capitalised borrowing cost to assets
Conflict between the formula and the rule for commencement of capitalization
66
ICDS IX Borrowing costs
Key potential impact on tax computation
Summary
Borrowing cost on assets (other than inventory) to be capitalized even if
it takes less than 12 months to get ready
68
ICDS X Provisions, contingent liabilities and
contingent assets
Disclosures (1/2)
Particulars
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;
(b) the carrying amount of asset at the beginning and end of the previous
year;
(c) additional amount of asset and related income recognised during the
year, including increases to assets and related income already
recognised; and
(d) amount of asset and related income reversed during the previous year
70
ICDS X Provisions, contingent liabilities and
contingent assets
Impact
Illustration: provisions as per books and ICDS
Year 1 book profits Year 1 taxable income (ICDS)
Revenue 100 Revenue 100
Less: Provision based on (40) Less: Provision based on NIL
probability reasonable certainty
Net profit 60 Net profit 100
Mismatch of profits in books and income-tax could lead to double taxation in case book
profits are taxed as per minimum alternate tax (MAT) provisions in year 2
71
International tax
Impact of ICDS
Computation of income attributable to Permanent Establishment
Income subject to presumptive taxation
Interplay with DTAA
? 72
Questions
73
Thank You