Income
Computation And
Disclosure
Standards (ICDS)
RAO & KUMAR
Chartered Accountants.
Contents
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14)
Background
General principles
Key Areas of Impact
Hierarchy of Act, ICDSs and ASs
ICDS I: Accounting Policies
ICDS II: Valuation of Inventories
ICDS III: Construction Contracts
ICDS IV: Revenue Recognition
ICDS V: Tangible Fixed Assets
ICDS VI: The effects of changes in foreign exchange rates
ICDS VII: Government Grants
ICDS VIII: Securities
ICDS IX: Borrowing Costs
ICDS X: Provisions, Contingent liabilities and Contingent assets
Background of ICDS…
 Section 145(1) of the Income-tax Act, 1961 (Act) stipulates that the method of
accounting for computation of income under the heads “Profits and gains of business
or profession” and “Income from other sources” can either be cash or mercantile
system of accounting.
 Section 145(2) of the Act states that the Central Government may notify the
accounting standards to be followed by any class of assesses or in respect of any class
of income.
 Accordingly, two tax accounting standards had been notified until now:
1. Disclosure of accounting policies
2. Disclosure of prior period and extraordinary items and changes in accounting
policies
Background of ICDS…
 Finance Act, 2014 amended section 145(2) of the Act to substitute “accounting
standards” with “income computation and disclosure standards” (ICDS).
 The CBDT has vide notification no: 32/2015 [F.No. 134/48/2010 – TPL/SO 892(E)
notified 10 ICDS effective from 01.04.2015 and shall accordingly apply to the A.Y.
2016-17 and for estimating Advance tax Liability due during F.Y. 2015-16 and all
subsequent years.
 Non-Compliance of ICDS may result in Best Judgement Assessment by tax
authorities and may lead to protracted Litigation.
General principles
 Applicable to all tax payers (Corporate and Non-corporate) following mercantile
system of accounting including non-resident tax payers.
 ICDS applies to income computed under the head “profits and gains of business
or profession” and “income from other sources” and not for maintaining books of
accounts.
 In case of conflict between the provisions of the Act and ICDS, the provisions of
the Act shall prevail to that extent.
 No impact on computation of book profits for the purpose of MAT. The Provisions
of sec-115 JB(1) shall continue to apply.
Key Areas of Impact…
 Expected Losses/Mark to Market losses will not be recognized unless
permitted by specific ICDS. Not Clarity w.r.t. MTM Gains.
 New formula for capitalization of Borrowing Costs is introduced.
 Applicable for all open Construction Contracts as at 31.03.2015.
 All Service contracts shall be valued at POC for Revenue Recognition.
Hierarchy of Act, ICDSs and ASs
 Income Tax Act, 1961
 Income Tax Rules, 1962
 Income Computation and Disclosure Standards – (Ultra-vires
Sec-145)
 Accounting Standards
Accounting Policies
• No concept of materiality in ICDS unlike, AS-1.
• No likely significant tax impact
• In absence of materiality concept, considerable time and cost will be involved
making trivial adjustments in net profit as per books of accounts to arrive at
PGBP since authorities may insist on strict application of ICDS even on small
value items.
Materiality
• Based upon the concept of ‘prudence’, AS-1 precludes recognition of
anticipated profits and requires recognition of expected losses.
• However, ICDS provides that expected losses or mark to market losses shall
not be recognized unless permitted by any other ICDS to avoid differential
treatment for recognition of income and losses.
• However, ICDS is silent on MTM gain.
Prudence
• In the absence of prudence as a fundamental assumption, there could be
several situations which could result in earlier recognition of income or gains
or later recognition of expenses as compared to that under AS. E.g. provision
for warranty expenses on sales made.
• An ambiguity would arise on deductibility of losses which are not covered in
any specific ICDS. E.g. Currently no specific proposed ICDS dealing with MTM
loss on derivatives.
Prudence
Valuation of Inventories
• Value of opening inventory should be same as preceding year’s closing
inventory.
• In case of a newly commenced business, the value of the opening inventory
shall be the cost of the inventory.
• Cases of conversion of capital asset into stock-in-trade with intent to
commence business may remain unaffected due to overriding provisions of
Section 45(2) of the Act.
• If business is commenced with acquisition of running business on slump sale,
price paid will be ‘cost’ of opening inventory.
Value of opening inventory
• ICDS does not permit standard cost method for the purpose of inventory
valuation.
• The same will have an impact on taxpayers following standard cost method
for valuation of inventory for accounting purpose, who will need to adopt
FIFO or weighted average cost formula for tax purposes.
• Further, as per ICDS, method of valuation once adopted shall not be changed
without reasonable cause. It would not have a significant impact since
bonafide change may constitute reasonable cause
Method of Valuation
AS- 2
• AS-2 does not include work in progress
(WIP) arising in the ordinary course of
business of service providers.
ICDS
• Specifies that it does not apply to WIP
which is dealt with by other ICDS.
• Valuation of service inventory to be the lower of cost or NRV.
• Cost to include labor and other costs of personnel directly engaged in providing services
including supervisory personnel and attributable overheads.
• Difficulty would arise in case of services whose chargeability depends on the success of
the service.
Valuation of inventories in case of
service providers
Construction Contract
Construction Contracts
AS - 7
ICDS III
 Contract Cost
Contract Cost includes:
The scope of the Contract Cost has been
- Direct cost
widened to include “Allocated Borrowing Cost”
- Cost allocated to the contract
in accordance with ICDS on Borrowing Cost.
- Cost specially charged to the customer
under the terms of the contract
Construction Contracts
AS - 7
ICDS III
 Recognition of Contract Revenue
Contract revenue to be recognized if it is The criteria “if it is possible to reliably measure the
possible to reliably estimate the
outcome of a contract” has been omitted.
outcome of a contract.
Contract revenue to be recognized when there is
reasonable certainty of its ultimate collection.
Impact: The recognition of contract revenue may be preponed under ICDS.
 It lays down the conditions to  ICDS is silent on the same
estimate
the
outcome
of
construction contract in case of :- Fixed Price Contract
- Cost plus Contract
Construction Contract
AS-7
ICDS III
 Situation when outcome of contract cannot be reliably estimated
Contract revenue and contract costs to be recognized
as revenue or expenses by reference to the POCM if
the outcome of the contract can be estimated reliably;
else, revenue should be recognized only to the extent
of contract costs incurred.
ICDS provides that early stage of a
contract shall not exceed 25% of the stage
of completion.
In other words, upto 25% of the stage of
completion, if the outcome of
No quantitative threshold laid down for determining construction contract cannot be reliably
the stage of completion, until when, the outcome of a measured, contract revenue is recognized
contract cannot be reliably measured.
only to the extent of cost incurred.
Impact: Under ICDS, profit recognition has to start compulsorily once 25% stage is completed but
the same is not the case currently under AS – 7.
Construction Contract
AS-7
ICDS III
 Retention Money
Contract revenue shall comprise:
The initial amount of revenue agreed in the contract
Contract revenue shall comprise:
The initial amount of revenue agreed in the contract,
including retentions.
Impact Analysis: There are various judicial precedents like Angelique International Ltd. vs Department of
Income Tax [ITA No.4085/DEL/2011] which does not recognize retention money as income for tax purpose if
there is no enforceable debt. ICDS leads to deviation from the settled judicial position.
 Incidental Income
Any incidental income, not included in the contract Contract cost shall be reduced by any incidental
revenue, shall be deducted while computing income, not being in the nature of interest, dividends
construction cost.
or capital gains, that is not included in the contract
revenue. Therefore, those interest income, dividend
income and capital gains shall be taxed as income in
accordance with the applicable provisions of the Act.
Construction Contract
AS-7
ICDS III
 Recognition of foreseeable losses
It permits to recognise immediately the ICDS does not permit recognition of the
foreseeable losses on a contract regardless of foreseeable/expected losses on a contract.
commencement or stage of completion of
contract.
ICDS on accounting policies also does not
permit recognition of foreseeable loss.
Impact: ICDS deviates from the present legal settled position in the case of CIT V/s. Triveni
Engineering & Industries Ltd (49 DTR 253) (Del) & CIT v. Advance Construction Co. (P) Ltd (275 ITR
30) (Guj)) in which foreseeable losses on construction contracts were allowed as a deduction for
tax purpose.
Construction Contract
AS-7
ICDS III
 Recognition of incentive payments
Incentive payment to be recognised only when (i)
probability exists that specified performance
standards would be met or exceeded (Guidance para
in ICAI AS, links probability to contract progress upto
sufficiently advanced stage); (ii) incentive is reliably
measurable.
 Recognition of claims
Claims against customers to be recognised when (i)
probability exists that the customer will accept the
claim (Guidance para in ICAI AS, links probability to
negotiation progress upto advanced stage); (ii)
amount is reliably measurable.
Requires recognition under POCM if incentive reliably
measurable and it is probable that it will result in
revenue. In absence of further guidance, ambiguity
may arise if the requirement of “sufficiently advanced
stage of contract” is deleted/diluted.
Requires recognition under POCM if claims are
reliably measurable and it is probable that it will
result in revenue. In absence of further guidance,
ambiguity may arise if the requirement of “advanced
stage of negotiation” is deleted/diluted.
Revenue Recognition
AS - 9
ICDS
 It does not apply to companies ICDS is silent on same.
engaged in insurance business.
Revenue from service transactions ICDS provides only for percentage
are recognised as percentage
completion method for recognition
completion method or by the
of service transactions.
completed
service
contract
method.
Impact: May have minimal impact since service sector largely follows
POCM or Cost plus method.
ICDS requires application of ICDS on construction contracts for recognition
of revenue on mutatis mutandis basis.
• Threshold of 25% stage of completion for recognition of income
• No recognition of the foreseeable losses on a contract. However, AS-7
permits immediate recognition of the foreseeable losses on a contract
regardless of commencement or stage of completion of contract.
• Stage of completion can be determined with reference to (a) total
estimated costs v/s. cost incurred till balance sheet date; or (b) survey
of work performed; or (c) completion of physical proportion of work
Tangible Fixed Assets
AS- 10
ICDS
 It applies to tangible fixed assets as well  It applies to only tangible fixed assets.
as goodwill
 Cost of fixed asset comprises its purchase  It has similar definition to AS 10 but the
price, non refundable taxes and any
words used are actual cost as compared to
directly attributable cost of bringing the
cost in AS -10.
asset to its working condition for its
intended use.
Impact:
The Act provides for the definition of the term ‘actual cost’ and it is again repeated in the
ICDS but it does not modify the concept of actual cost. However when there is conflict in
interpreting the abovementioned term under ICDS and Act, the Act will prevail over ICDS.
Such a narrow definition in ICDS might encourage the taxpayer to contend that expenditure
on acquisition which is not part of actual cost should be deductible as revenue instead of
capitalising.
AS- 10
ICDS
 AS 10 read with guidance note on  It provides that machinery spares
Machinery for Spares provides for
which can be used only in connection
charge to P/L, however spares to
with an item of tangible fixed asset
specific asset should be capitalised
and their use is expected to be
and shall form part of that Asset .
irregular, shall be capitalized.
Impact:
ICDS specifies that machinery spares dedicated to a tangible fixed asset should be
capitalized, it does not provide any further guidance on subsequent treatment that
whether it will form part of the block of the asset. However, in absence of such
clarification spares would form part of the block and once the principal asset is put to
use, the spares shall qualify for the depreciation at the same rate.
Assets acquired against non-monetary consideration
AS- 10
ICDS
 When a fixed asset is acquired in exchange  When a tangible fixed asset is
or in part exchange for another asset, the cost
acquired in exchange for other asset,
of acquired asset should be recorded either at
the fair value of the tangible fixed
FMV or NBV of asset given up, adjusted for
asset so acquired shall be its actual
any balancing payment or receipt of cash or
cost
other consideration.
 Fixed asset acquired in exchange for shares  When a tangible fixed asset is
or other securities in the enterprise should be
acquired in exchange for shares or
recorded at its FMV, or the FMV of the
other securities, the fair value of the
securities issued, whichever is more clearly
tangible fixed asset so acquired shall
evident.
be its actual cost.
Usual Practice: Concept of cost should normally relate to what is given up.
Assets acquired for a consolidated price
AS- 10
ICDS
 Para 15.3 says that when several assets are  When several assets are purchased for
purchased for consolidated price, the
a
consolidated
price,
the
consideration is apportioned on fair basis as
consideration shall be apportioned to
the various assets on a fair basis.
determined by competent valuers.
Impact: In absence of determination by registered valuers in ICDS words “fair basis”
becomes subjective and might be prone to litigation.
Misc.
 Depreciation on a tangible fixed asset and income arising on transfer of a tangible fixed
asset shall be computed in accordance with the provisions of the Act.
 The requirement of maintenance of ICDS specific tangible fixed asset register as
proposed earlier has been done away with.
The Effects of Changes in Foreign
Exchange Rates
Revenue monetary items (like trade receivables, payables,
bank balance, etc.)
AS- 11
ICDS
 Reported using the closing rate
 Exchange difference recognised in P&L A/c
 Allowed under the Act also.
 Converted into reporting currency by
applying the closing rate
 Recognised as income or expense
subject to provisions of Rule 115
Impact: No change in tax position
Capital monetary items – Relating to Imported assets
AS- 11
ICDS
 Requires recognition in P&L A/c.
 Requires recognition in
 Option of capitalization u/s 211(3C) of companies Act,
P&L A/c subject to
1956 as per which (Para 46 & 46A) exchange
provisions of Section 43A.
differences arising in case of long-term foreign  No Para 46 & 46A exists.
currency monetary items shall be either adjusted to
capital asset or accumulated in FCMITDA.
Impact:
 Presently, Section 43A permits capitalization on payment basis of exchange differences
relating to asset acquired from a country outside India.
 Hence, there would be no change in the tax position.
Capital monetary items – Not relating to Imported assets
AS- 11
ICDS
 Requires recognition in P&L A/c.
 Requires recognition in
 Option of capitalization u/s 211(3C) of companies Act,
P&L A/c subject to
1956 as per which (Para 46 & 46A) exchange
provisions of Section 43A.
differences arising in case of long-term foreign  No Para 46 & 46A exists.
currency monetary items shall be either adjusted to
capital asset or accumulated in FCMITDA.
Impact:
 Section 43A does not apply since it applies only if it relates to the imported assets.
 Presently, such FE differences are not recognized for tax purposes i.e. gain is not
taxable, loss is not deductible/ allowable.
Capital monetary items – Not relating to Imported assets
Conclusion
 Since ICDS requires recognition in P&L A/c subject to provisions of Section 43A
and Section 43A applies only if it relates to imported assets, a controversy may
arise, whether such exchange fluctuation gain or loss on capital monetary items
(not relating to imported assets) would be allowable as an income or expense
as per ICDS or not.
 May be considered as non-cognizable for tax purposes based on its Capital
nature.
 It is also arguable that judicial settled position would remain unchanged as the
Act shall prevail in case of conflicts with ICDS.
Foreign operations
AS - 11
ICDS
 Foreign Operation is a subsidiary,  “Foreign operations of a person” is a
associate, joint venture or branch of
branch, by whatever name called, of
the reporting enterprise, the activities
that person, the activities of which are
of which are based or conducted in a
based or conducted in a country other
country other than the country of the
than India.
reporting enterprise.
Impact: The definition of foreign operations given under ICDS does not include a
subsidiary, associate or joint venture of the reporting enterprise. Hence, the tax
positions will remain the same in the case of foreign operations being a subsidiary,
associate or joint venture of the person
 Integral operations – No change in tax positions
Non-integral foreign operations
AS - 11
ICDS
 Exchange Differences arising on translating  Exchange Differences arising on translating of
monetary items of non-integral foreign
assets and liabilities both monetary and non
operations shall be transferred to “Foreign
monetary of non integral foreign operations
Currency Translation Reserve”(FCTR).
shall be recognised as “income or expense” in
that previous year.
Impact:
 FE differences arising from the translation of the financials on MTM basis will have to be
considered in Computation of Income Statement.
 Capital and revenue items are not distinguished in ICDS. MTM to be recognised even on tangible
fixed assets.
 Recognition of the amount lying in the FCTR on 31st March, 2015.
 In case of change of foreign operations from integral to non-integral and vice-versa, no adjustment
is required for the foreign exchange difference, since unlike AS, no FCTR is maintained under
ICDS.
DTL or DTA will be created as the case may be due to the above difference.
E.g. Suppose Exchange Differences arising on translating financial statements of nonintegral foreign operations results into FE income.
This will result into creation of DTA subject to condition of AS 22 i.e. consideration of
prudence and virtual certainty as to sufficiency of future taxable income in case of
unabsorbed depreciation or carry forward of losses under tax laws.
On disposal of Net Investment in Non Integral Operation, according to AS 11 the balance in
FCTR will be recognized as income which will result into reversal of DTA.
AS 11
ICDS
Foreign Currency Translation Reserve (FCTR)
Treated as income for tax purpose
AS 22 Applicability
Forex derivatives – Forward exchange contracts
Purpose
Others (i.e.
trading,
speculation,
firm
commitment,
highly probable
forecast)
AS - 11
ICDS
Marked to market at each balance Premium, discount or exchange
sheet date and the gain or loss be difference
on
contracts
be
recognised in the P&L a/c.
recognised at the time of settlement
only.
No amortization of premium/
discount.
Impact:
SB ruling in Bank of Bahrain & Kuwait (41 SOT 290) which relied on SC ruling in
Woodward Governor’s case supports MTM recognition. Contradiction would arise
between the ICDS and settled position under the Act.
Forex derivatives – Other
 Other forex derivatives like, futures, interest rate swaps, etc. are not covered by ICDS
VI.
 ICDS I on accounting policies provides that marked to market loss or an expected loss
shall not be recognized unless the recognition of such loss is in accordance with the
provisions of any other Income Computation and Disclosure Standard. .
 Hence, in case of forex derivatives not covered by ICDS VI, ICDS I would apply.
 Forward exchange contract includes foreign currency option contract also.
Government Grants
Government Grants
AS- 12
ICDS VII
 Recognition of grant
• On reasonable assurance of compliance of
• On reasonable assurance of compliance of
attached conditions and reasonable certainty
attached conditions and reasonable certainty
of ultimate collection
of ultimate collection
• Mere receipt is not sufficient
• Recognition cannot be postponed beyond
date of actual receipt
Impact: If the grant is recognized on receipt basis, it would create DTA/DTL and MAT mismatch
also. Further, an issue may arise whether grants received in earlier years but not recognized
pending fulfillment of conditions will require recognition on receipt basis as per ICDS in year of
transition.
 Grants other than those covered by specific provisions
• Revenue grant to be credited as income or
• Same as AS-12 but no clarification that it is
reduced from related expense.
restricted only to revenue grants.
Government Grants
AS- 12
ICDS VII
 Relatable to depreciable fixed assets
• Requires reduction from the cost of fixed
asset or recognition as deferred revenue by
systematic credit to P&L A/c.
• Consistent with Explanation 10 to Section
43(1), requires reduction from the cost of
fixed asset.
 Relatable to non depreciable fixed assets
• To be credited as capital reserve, if no
conditions attached to the grant.
To be treated as income –
• on an upfront basis, if there are no conditions
• To be credited to P&L A/c over period of
attached to grant.
incurring cost of meeting conditions of grant. • over period over which cost of meeting
conditions is incurred.
Government Grants
AS- 12
ICDS VII
 Grant in the nature of promoter’s contribution
• To be credited to capital reserve and to be
treated as shareholders funds.
• No such clarity for grants in the nature of
promoter’s contribution. Therefore, by
implication, requires recognition as income.
 Compensation for expenses / loss incurred or for giving immediate financial support
• To be recognised in P&L A/c in the year in
• Same as AS-12
which it is receivable
 Disclosure requirement
• No disclosure of unrecognized grants
• Disclosure of unrecognized grants
Securities
Securities
AS- 13
ICDS VIII
 Applicability
This Standard deals with accounting for
investments in the financial statements of
enterprises.
This ICDS deals with securities held as stock-intrade.
Assets held as stock-in-trade are not
‘investments’*
*However, as per AS 13, the manner in which they are accounted for and disclosed in the financial
statements is quite similar to that applicable in respect of current investments. Accordingly, the
provision of AS 13 in respect of current investments are applicable to securities held as stock-intrade.
Securities
AS- 13
ICDS VIII
 Carrying amount
Current investments are
valued at lower of cost
and fair value.
Securities held as Stock-in-trade shall be valued at actual cost or NRV, whichever is
lower. (where the actual cost cannot be ascertained by reference to specific
identification, the cost shall be determined on the basis of FIFO.)
Individual Scrip wise
Valuation
Category wise Valuation Classification into four categories namely, (a) shares; (b) debt securities; (c)
convertible securities; and (d) any other securities not covered above.
Valuation of unlisted/ thinly traded securities at cost - At the end of any previous
year, securities not listed on a recognized stock exchange; or listed but not quoted
on a recognized stock exchange with regularity from time to time, shall be valued
at actual cost initially recognized.
Securities
AS- 13
If an investment is acquired by the issue of shares or
assets, the acquisition cost should be the fair value of
the securities issued/fair value of the asset given
up. Alternatively, the acquisition cost of the
investment may be determined with reference to the
fair value of the investment acquired if it is more
clearly evident.
ICDS VIII
Where a security is acquired in
exchange for other securities or
asset, the fair value of the
security so acquired shall be its
actual cost.
Usual Practice: Concept of cost should normally relate to what is given up.
Borrowing Cost
Borrowing Costs
AS - 16
ICDS
Borrowing costs include exchange differences Borrowing costs do not include exchange differences.
arising from foreign currency borrowings to
the extent they are an adjustment to interest
costs.
• Qualifying Asset is an asset that takes • Qualifying Assets mean:
substantial period of time to get ready
o Tangible Assets – land, plant, etc.
for its intended use or sale.
o Intangible Assets – patents, licenses, etc.
o Inventories – that require 12 months or more
to bring them to saleable condition.
• ICDS includes ‘land’ also in the definition of qualifying assets, unlike AS-16. As per ICDS, the
borrowing cost in respect of land shall be capitalized. The depreciation shall not be allowed on
the same since the land is a non-depreciable asset. However, the capitalized cost shall form
part of a cost of asset while calculating Income from Capital Gain in respect of that land.
Borrowing Costs
AS - 16
ICDS
• Commencement of Capitalisation:
The date of fulfilment of three
conditions viz. incurrence of capex,
incurrence of borrowing costs and
preparatory activities are in progress.
a) Specific borrowings – Date on
which funds were borrowed
b)General borrowings – Date on
which funds were utilised.
Impact: The capitalisation period starts early under the ICDS as compared to
AS-16.
Borrowing Costs
AS - 16
ICDS
• Method of Capitalisation:
 Specific Borrowings:
 Specific Borrowings:
Actual borrowing costs incurred on the
Actual borrowing costs
borrowing during the period less any income
incurred during the period
from temporary investment of those borrowings.
on the funds borrowed.
Impact: AS-16 requires income from temporary deployment of unutilised funds to be
reduced from borrowing cost. However, ICDS does not provide for the same. The income
from temporary deployment of unutilised funds from specific loans shall be taxable as
Income from other sources under the ICDS.
Borrowing Costs
AS - 16
ICDS
 General Borrowings:
 General Borrowings:
Costs determined by applying capitalisation
Costs
determined
rate to the expenditure incurred on the asset.
following formula;
The rate is weighted average of borrowing
A* B
costs applicable to the borrowings during the
C
period other than specific borrowings.
by
Borrowing Costs
In the formula given in ICDS for capitalisation of general borrowing costs A, B and C stands
for:
A = Borrowing costs incurred during previous year except on specific borrowings
B =a)Average cost of QA appearing in balance sheet on first and last day of the previous
year
b)Half of the cost of QA, if it does not appear in balance sheet on the first day or both
first and last day of the previous year
c)Average cost of QA as on first day of previous year and date of completion, if it does
not appear in balance sheet on the last day of the previous year
C = Average of total assets, other than those funded by specific borrowings, as appearing
in balance sheet as on first and last day of previous year
* QA = Qualifying Assets other than those funded by specific borrowings.
Borrowing Costs
AS - 16
•
ICDS
Suspension of Capitalisation:
During extended periods in which active No provision regarding suspension of capitalisation
development of the asset is interrupted.
of borrowing cost.
Impact: Borrowing cost incurred during the periods in which active development of the asset is
interrupted can also be capitalised under the ICDS.
•
Cessation of Capitalisation:
When substantially all activities necessary
to prepare the qualifying asset for its
intended use or sale are complete.
a) Qualifying Asset – when such asset is first put to use.
b) Inventory – when substantially all activities necessary
to prepare it for its intended sale are complete.
Date of
borrowing
Asset ready
to use
Asset
purchased
Capitalization
period
Asset put to
use
ICDS:
Specific borrowings
General borrowings
AS-16
Provisions, Contingent Liabilities
and Contingent Assets
Recognition of provisions
AS - 29
ICDS
 Provisions shall be recognised if it is  Provisions shall be recognised if it is
probable that outflow of economic
reasonably certain that outflow of
resources will be required.
economic resources will be required.
 Provision is not discounted to NPV
 Provision is not discounted to NPV
Impact:
 The criteria for recognition of provisions on the basis of the test of ‘probable’ (i.e.
more likely than not criteria) replaced with the requirement of ‘reasonably certain’.
 In the absence of definition and scope of ‘reasonably certain’ criteria, an ambiguity
would arise on assessment of ‘reasonably certain’ criteria.
 In the Act, there is no specific provision for recognition of provisions. However,
provisions are allowed based on accrued liabilities as per ordinary principles of
commercial accounting.
Recognition of provisions
Impact:
 Provision for Warranty is allowed as an expenditure upholding the test of
‘probable’ warranty obligation in the following judgments.
o Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) (extract on next
slide)
o Himalaya Machinery (P) Limited v DCIT 334 ITR 64
o CIT vs. Luk India P. Ltd. 52 DTR 117.
o Siemens Public communication Networks Limited v CIT
o CIT v Indian Transformer Limited. 270 ITR 259
Meaning of obligation
AS 29
ICDS
 Clarifies that obligations may be legally enforceable and  No specific
may also arise from normal business practice, custom
guidance on
and a desire to maintain good business relations or act in
meaning of
an equitable manner.
‘obligation’
Impact:
 Provisions made on obligations recognized out of customary business practices or
voluntary obligations may not be allowed. (e.g. informal refunds policy to
dissatisfied customers, employee welfare, etc.)
Onerous executory contracts
AS - 29
ICDS
 AS-29 is not applicable to “executory  It is not applicable to “executory
contracts” except where contract is
contracts”.
onerous.
 However, here “onerous contracts” are
 Since
“onerous
contracts”
are
not
specifically
excluded
from
excluded from executory contracts,
executory contracts.
AS is applicable to onerous contracts.
 Requires upfront recognition of
liabilities under onerous contracts
Impact:
Deduction for the accrued liabilities on onerous contracts in books will be allowed in
a year in which liability to pay arises.
Contingent assets & reimbursement claims
AS - 29
ICDS
 Contingent assets/ reimbursement  Contingent assets/ reimbursement
claims are recognized if inflow of
claims to be recognized if inflow of
economic benefits/
economic benefits/
reimbursement is “virtually
reimbursements is “reasonably
certain”.
certain”.
Impact:
 Revenue authorities may contend that ‘reasonably certain’ is a lower
threshold than ‘virtually certain’.
 It is not made clear whether transitional provision requires recognition of
all past accumulated contingent assets in F.Y. 2015-16.
Conclusion
 Certain Essential Definitions missing – Like – Reasonable Cause, Reasonable
Certainty.
 Where to make the disclosures required by the ICDS.
 The ICDS seem to be based on the current AS issued by ICAI. However, listed
companies are required to adopt IND AS from 1st April, 2016. Thus, the accounting
policies for these companies under IND AS could be significantly different from
ICDS.
Thus, providing clarity on the tax position in ICDS in alignment with the IND AS is
also essential.