Lakshit Desai

Income Computation and

Disclosure Standards (ICDS)

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]

Dec CBDT constituted Accounting Standards Committee to suggest harmonization of

2010 ICAI AS with provisions of the Act and suggest AS to be notified under the Act

Oct - Final report of Committee and 14 draft AS published

2012 - Comments were invited from public on Draft AS

Jul - Finance Bill (No 2) 2014 amended section 145 (2) and (3)
2014 - ICDS substituted for AS

Jan - CBDT issued drafts of 12 ICDS

2015 - Draft ICDS kept open for comments and suggestions

CBDT vide Notification No: 32/2015 dated 31 March 2015 notified 10

4 ICDS w. e. f. 1 April 2015
4
ICDS - Objectives and principles

Terms of reference of the Accounting Standard Committee

To study the harmonization of Accounting Standards issued by ICAI with the
direct tax laws in India, and suggest Accounting Standards which need to be
adopted under section 145(2) along with the relevant modifications;
To suggest method for determination of tax base (book profit) for the purpose
of Minimum Alternate Tax (MAT) in case of companies migrating to IFRS in
the initial year of adoption and thereafter; and
To suggest appropriate amendments to the Act in view of transition to Ind-AS
regime
Principles adhered to by the Accounting Standard Committee
Reduction of litigation;
Minimization of alternatives; and
Certainty to issues.

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

To supersede the existing tax AS

Tax AS I relating to disclosure of accounting policies
Tax AS II relating to disclosure of prior period and extraordinary items and
changes in accounting policies
Applicable to all taxpayers following accrual system of accounting
Applicable only for computation of income under the heads of
profits and gains of business / profession; and
income from other sources
Not for the purpose of maintenance of books of accounts
Conflict between provisions of the Act and ICDS Provisions of the Act to
prevail

8
Some key questions (1)

Applicability and operation

Assessee vs. Person

Income Computation and Disclosure Standard Where is
the disclosure required?
Income tax return
Form 3CD
Any other manner of disclosure
No ICDS notified for A.Y. 2015-16 (Notified ICDS to apply
from A.Y. 2016-17). Impact thereof?
Computation under MAT provisions

9
Some key questions (2)

Impact on the Act

Preamble in case of conflict, Act prevails

ICDS intended to be in harmony with the provisions of the
Act
Conflict with judicial decisions. Impact?

Force of ICDS as a notification

Whether binding on the taxpayer?

10
Some key questions (3)

Is ICDS mandatory?

If not followed income can be recomputed u/s 145(3)

Section 145(3) - Three limbs to trigger best judgment
assessment:
AO not satisfied about the correctness or completeness of
accounts; or
Method of accounting (cash or mercantile) not regularly
followed; or
Income not computed in accordance with ICDS

Is best judgment assessment mandatory if only one standard

not followed?
Is best judgment assessment only to the extent of ICDS or all
the aspects?

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

Any change in an accounting policy which has a material effect along

with the amount by which any item is affected

Where such amount is not ascertainable, wholly or in part, the fact shall
be indicated

Change in accounting policies having no material effect for the current

year but is reasonably expected to have a material effect in later years,
the fact of such shall be appropriately disclosed in the year of change
and the year in which it has material effect

If any fundamental accounting assumption is not followed, the fact shall

be disclosed

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

Existing tax AS in line with ICAI AS

16
ICDS I Accounting Policies
Impact on MTM losses

MTM / expected losses recognised MTM losses NOT permitted?

in other ICDS
Derivatives futures
Inventory
Interest swap
Securities held as stock-in-trade
Local commodity
Foreign exchange differences hedges / derivatives
Creation of provisions based on
reasonable certainty

Recognition of loss at a later point in time as compared to accounts

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

The total carrying amount of inventories and its classification

appropriate to a person

20
ICDS II Valuation of Inventories
Key departures from ICAI AS
Issue
Specific exclusions
Cost of inventory
Techniques for
measurement of cost
Value of opening inventory
Valuation in case of certain
dissolutions
ICAI AS
Does not apply to WIP arising in the ordinary
course of business of service providers
Does not include :
costs of services
duties and taxes subsequently recoverable
from tax authorities
Interest / other borrowing costs
Recognises standard costing as a technique
for measurement of cost
AS is silent
As is silent
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

ICDS IX Borrowing costs

to be applied to determine
allocable borrowing costs
on qualifying inventories

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

Borrowing cost to be capitalised for inventories if required as per ICDS-

IX on borrowing costs

Valuation of inventory at NRV in case of certain dissolutions

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;

The methods used to determine the stage of completion of contracts in

progress; and

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

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)

Year 2 Books ICDS

Revenue 100 x 70% 70 70
Less: Cost incurred during the year (60) (90)
Net profit 10 (20)

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.

Recognition of taxable income at an earlier point in time as compared to book profits

29
ICDS III Construction Contracts
Key potential impact on tax computation
Summary
Contract revenue and cost to be recognized on percentage completion
method irrespective of the method followed for accounting (subject to
relaxation given in ICDS)

Applicable to contracts commenced before 1 April 2015 as well

Inclusion of retention in contract revenue

Adjustment for expected loss recognised for accounting purposes

Adjustment to contract cost to include borrowing cost as determined as

per ICDS IX

Interest, dividends or capital gains adjusted against contract costs in

books - to be considered as income

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

Discount / premium on debt securities

As per ICDS, discount / premium is recognized over the maturity

period rather than receipt
CBDT clarification on deep discount bonds still valid? Circular
provides-
Annual increase in market value taxable as interest / business
income
Difference on redemption - also taxable as interest
Profit on transfer of bonds before maturity short term capital gains

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;

The amount of revenue from service transactions recognised as

revenue during the previous year;

The method used to determine the stage of completion of service

transactions in progress; and

For service transactions in progress at the end of previous year:

a) amount of costs incurred and recognised profits (less recognised

losses) upto end of previous year;
b) the amount of advances received; and
c) the amount of retentions
33
ICDS IV Revenue Recognition
Key departures from ICAI AS
Issue ICAI AS
Exclusions from Hire purchase / lease agreements specifically
applicability excluded
Revenue from services Recognises both percentage completion and
completed contract methods

34
ICDS IV Revenue Recognition
Interplay between ICDSs

Not applicable to:

ICDS III Construction contracts
ICDS VII Government grants

ICDS III Construction

contracts provisions to be
applied for recognition of
revenue from services

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

Adjustment where revenue for services rendered is recognised on

completed service contract method for accounting purposes

Discount or premium on debt securities to be recognised as accruing

over the period to maturity

Royalty agreement vs. substance of the transaction

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;

Actual cost or written down value, as the case may be;

Additions or deductions during the year with dates; in the case of any
addition of an asset, date put to use; including adjustments on account
of
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;

Depreciation allowable; and

Written down value at the end of year.

39
ICDS V Tangible Fixed Assets
Key issue

Illustration: Expenses between trial run and commercial production

Construction / acquisition of Commercial

asset production

Trial run
ready to use

Capitalize Capitalize or Revenue expense

as per ICDS revenue as per ICDS
expense?

Whether start-up and commissioning of a project means ready-to-use stage or

commercial production stage?

40
ICDS V Tangible Fixed Assets
Key departures from ICAI AS
Issue
Applicability
Materiality
If commercial production is
prolonged
Cost of asset purchased for
non-cash consideration
Purchase of several assets
for a consolidated price
ICAI AS
Applies to all fixed assets
Allows non-material items to be expensed out
Expenses incurred between the date the
project is ready to commence commercial
production and the date of actual
commencement of commercial production are
charged to P&L Account
FMV of asset purchased or given up whichever
is more clearly evident
Fair basis for apportionment of consideration to
be determined by competent valuer
41
ICDS V Tangible Fixed Assets
Interplay between ICDSs

NA

ICDSs to be applied for

determining the actual cost:
i. ICDS VI Change in foreign
exchange rates
ii. ICDS VII Government grants
iii. ICDS IX - Borrowing Costs

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

Assets expensed out in books under materiality concept to be

capitalized

Assets acquired for non-monetary consideration to be recorded at their

fair value

Apportionment of consideration on fair basis for assets purchased at

consolidated price

Actual cost for tangible assets to be determined as per the provisions of

ICDS

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

ICDS as well ICDS as well

AS 11 ICDS
as AS 11 as AS 11

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

Same as under ITA ICDS

Foreign exchange differences

- Section 43A not

applicable ITA
- Capital or revenue?
Local assets
To be recognized as ICDS
income or expense?

To be recognized as ITA
income or expense
Others

Same as ITA ICDS

47
ICDS VI Effects of Changes in Foreign
Exchange Rates
Foreign operations

Integral Non-integral

- Assets / Liabilities Closing Rate

- Forex difference Recognized as
income / expense
ICDS treatment same as discussed in
earlier slides - Subject to provisions of section 43A

(AS-11 Difference to be transferred to

FCTR A/c)

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 AS-11 Same as above Not recognized AS does not apply

separately
Gain / Loss on
exchange difference

As per ICDS Allowed on MTM Allowed at the time Allowed at the time
basis of settlement of settlement

As per AS-11 Same as above Allowed on MTM AS does not apply

basis
49
ICDS VI Foreign Exchange
Key potential impact on tax computation
Summary
Adjustment to net profit /loss to be in compliance with the provisions of
section 43A and Rule 115

Adjustment in relation to conversion of non-monetary items carried at

fair value in books

Adjustment in relation to exchange difference in translating the financial

statement of Non-integral operations

MTM adjustment on trading or speculations transaction to be disallowed

50
ICDS VII Government grants
Highlights
Nature of grant
Grants relating to depreciable
asset
Grants for compensation of
expense / loss or for giving
immediate financial support with
no further related costs
Grants relating to non-
depreciable assets and other
grants
Grants in the form of non-
monetary assets given at a
concessional rate
Recognition / treatment
To be reduced from actual cost or written
down value
Grants received for a group of assets will
be apportioned
To be recognized as income in year in
which it is receivable
To be recognized as income over the
period over which related cost is charged
to income
To be accounted for on the basis of their
acquisition cost
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;

Nature and extent of Government grants recognised during the

previous year as income;

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

Nature and extent of Government grants not recognised during the

previous year as income and reasons thereof

53
ICDS VII Government grants
Amendment to definition of income

Amendment to definition of income u/s 2(24) of Act as per Finance Act

2015 assistance in the form of a subsidy or grant or cash incentive or duty
drawback or waiver or concession or reimbursement (by whatever name called)
by the Central Government or a State Government or any authority or body or
agency in cash or kind to the assessee other than subsidy or grant or
reimbursement which is taken into account for determination of the actual cost
of asset in accordance with Explanation 10 to Section 43(1)

Grants are widely defined under the Act

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

Recognition on At actual cost

acquisition Actual cost to comprise of purchase price and include
acquisition charges viz. brokerage, fees, tax duty or cess
Pre-acquisition interest to be reduced
Actual cost of a security to be its fair value if acquired for
non-monetary consideration

Valuation at the year Lower of actual cost or net realizable value

end Comparison to be done category-wise (shares, debt
securities, convertible securities and others)
Securities not listed or not quoted regularly to be valued at
actual cost
Cost of non-identifiable securities to be determined on FIFO
basis

56
ICDS VIII Securities
Illustration
Valuation of securities : Individual vs. Category

Security Cost NRV at year Valuation as Valuation as

end per books per ICDS
1 50 40 40 N.A.
2 70 60 60 N.A.
3 30 10 10 N.A.
4 60 90 60 N.A.
Total 210 200 170 200
Itemised Category-
valuation wise valuation

Category wise valuation of securities could lead to early taxation

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

The amount of borrowing costs capitalised during the previous year.

61
ICDS IX Borrowing costs
Manner of capitalisation
Particulars Specific borrowing General borrowing

Amount to be capitalized Actual To be computed as per

specified formula

Commencement of From the date on which From the date on which

capitalization funds are borrowed funds were utilized

Cessation of When the asset is first put to use

capitalization
(In case of inventorywhen substantially all the
activities necessary to prepare it for its intended sale
are complete)

ICDS in line with amended section 36(1)(iii) of the Act

62
ICDS IX Borrowing costs
Capitalization of general borrowings
Amount to be capitalized = A x B / C
A = Borrowing costs incurred during the year except on borrowings directly
relatable to specific purposes
B = the average of the costs of qualifying asset (not directly funded out of specific
borrowings) as appearing in the balance sheet on the first day and the last day of
the year*
C = the average of the amount of total assets (not directly funded out of specific
borrowings) as appearing in the balance sheet on the first day and the last day of
the year
* The formula also provides the amount to be considered where the qualifying asset does not
appear on the first and / or the last day of the year

63
ICDS IX Borrowing costs
Illustration
Calculation of interest expense in respect of general borrowings (refer formula on next slide)

Amount Particulars ICDS AS 16

Particulars
(Rs.)
Total assets appearing in Capitalization = 22.73 = 45 (450 X 10%)
1,000 of general
balance sheet as on 31.3.16*
borrowing
Total qualifying assets acquired
700 cost Working: Working:
during year 2015-2016
General borrowings 500 50 X [(700 - 200) / 2] Weighted average
[(300+1000-200) / 2] borrowing cost is
Interest on general borrowings 50 10% i.e. (50/500)
Specific borrowings 200
Interest on specific borrowings 20
Cost of qualifying assets
* Does not consist of under-construction assets at beginning or
acquired using general 450 end of the year
borrowings
Cost of qualifying assets
acquired using specific 200
borrowings

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

Treatment of exchange difference in respect of borrowing for assets purchased

in India?

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

Exchange differences capitalized as borrowing cost for accounting

purposes to be ignored To be capitalized as per section 43A of the Act

Impact of different date of commencement of capitalisation as per AS

and ICDS

Income on temporary investment to be ignored while calculating

specific borrowing cost to be capitalized

To apply the formula prescribed by ICDS for capitalisation of general

borrowing cost

Additional capitalization in case of assets other than inventory due to

different cessation points under ICAI AS and ICDS
67
ICDS X Provisions, contingent liabilities and
contingent assets
Highlights
A provision should be recognized when -
A person has a present obligation as a result of a past event;
It is reasonably certain that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
A reliable estimate can be made of the obligation amount.
As per AS-29, provision is recognized when outflow of resources is probable
and not when it is reasonably certain
Contingent asset to be assessed continually and if it becomes reasonably
certain that inflow of economic benefit will arise, the asset and the income are
recognized in the year of change
As per AS-29, contingent asset is recognized when inflow of resources is
virtually certain and not when it is reasonably certain

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;

c) Additional provisions made during the previous year, including

increases to existing provisions;

d) Amounts used, that is incurred and charged against the provision,

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 recognised for that expected reimbursement.
69
ICDS X Provisions, contingent liabilities and
contingent assets
Disclosures (2/2)
Particulars
Following disclosure shall be made in respect of each class of contingent
asset and related income recognised, 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) 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

Year 2 book profits Year 2 taxable income (ICDS)

Revenue 200 Revenue 200
Less: Cost incurred and NIL Less: Cost incurred as per (40)
adjusted against provision provision
Net profit 200 Net profit 160

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