You are on page 1of 36

Tax Audit

Reporting issues under ICDS

Presentation for
Accounting and Auditing Committee of the
Chamber of Tax Consultants
Presenter – FCA Jayant Gokhale

16-8-17 - 1

Coverage / Menu
Tax Audit - Reporting Issues - ICDS

 Basic Relevant Information & Framework

 Applicability
 Responsibility
 Implementation Issues
 Which is the main area of Coverage Today
 Documentation & Record

16-8-17 - 2

Basic Relevant Info & Background
 Notification No. 87/2016 dated 29th September, 2016
- 10 New ICDS came into force w.e.f. 1st April, 2017, shall
accordingly apply to A.Y. 2017-18 and subsequent
assessment years.
 Earlier ICDS rescinded.
 Notification No 88/2016, of the same date inserted Cl
13(d), (e) and (f) in F3CD.
 In July 17, ICAI has issued a Technical Guide on Income
Computation and Disclosure Standards
 CBDT Circular No. 10/2017 Dt 23 March 2017 -
containing 25 FAQs to clarify issues for proper
implementation of ICDS - 3
16-8-17 3
Applicability & Responsibility
 Applicability
 Tax Audit Applicability not dealt with here.
 ICDS – Applicable to persons having Income from Business or
Profession or Income from Other Sources who
 Are maintaining Accounts on Mercantile Basis
 Are not Individuals or HUFs to whom 44AB provisions apply
 Responsibility
 CA – Responsibility is as an Auditor
 Auditee to furnish information – not bound by report of the

16-8-17 - 4

Implementation - requirements
Form 3CD – Cl 13 …..
“(d) Whether any adjustment is required to be made to
the profits or loss for complying with the provisions
of income computation and disclosure standards
notified u/s 145(2)?
(e) If answer to (d) above is in the affirmative, give
details of such adjustments:
Report Increase / Decrease & Net Effect on Profit for
each standard individually
(f) Disclosure as per ICDS (space of 400 characters is provided) - 5
16-8-17 5
Preliminary & Preamble
 Common preamble
 Not for maintenance of books
 In case of conflict with the act the act shall prevail –
 What if conflict between 2 ICDS – Accrual
 ICDS 1 omits prudence as a concept to be followed
 Is Prudence & Materiality Relevant under ICDS
 What if certain sources are on cash basis.
 Section 145(3) – Deviation from ICDS can result in best
judgement assessment
16-8-17 - 6
ICDS I – Significant Accounting Policies (Acc.Policies)
 Scope – to deal with significant accounting policies
 Fundamental accounting assumptions:

(1) Going Concern (2) Consistency (3) Accrual

 Acc. Policies refer to specific accounting principles and methods of

applying them
Considerations in Selection & Change of Acc. Policies
 Should be chosen to represent true & fair view of state of affairs
& of income. Further mandated that:
 Substance over legal form to be followed
 Mark-to-market or expected loss not to be recognised unless provided by other ICDS
 Change in Acc. Policy only if there is reasonable cause to do so
 More liberal than AS
16-8-17 - 7
ICDS I – Significant Accounting Policies
 All significant policies adopted by a person to be disclosed
 Where to Disclose ?
 Will not apply to computations done without maintenance of
books ?
 Computation to be as per ‘method regularly followed’
 Can separate computation policies be adopted for
different sources of income.
 Would each of such separate policies have to be disclosed
separately for each source of income?
 Is matching principle relevant under ICDS ?
“the process of matching costs with revenues under the accrual assumption are not dealt with in
this Statement.”

16-8-17 - 8

ICDS II – Valuation of Inventories
 Inventories are assets:
 Held for sale in ordinary course of business
 In process of production for such sale
 In form of materials or supplies to be consumed in the production process or in the
rendering of services
 Exclusion from inventories - WIP under construction contract,
shares, debentures, livestock, machinery spares
 Valuation to be at lower of cost or net realizable value
 Cost of Inventories – Includes purchase cost (inclusive of taxes,
freight inwards), cost of services, costs of conversion and other cost
incurred to bring the inventories to their present location
 Exclusions from Cost : Distribution costs not excluded.
 Biscuits manufactured in Mumbai – Shipped to Assam – costs –debited to P/L a/c –
will get nullified since distribution costs to be included ? #12(d) ICDS 2.

16-8-17 - 9

ICDS II – Valuation of Inventories
 Cost Formulae –
 Weighted Average Cost
 Specific Identification of Cost & Retail Method
 Is Standard Costing unacceptable under ICDS though Co Act 2013
permits it?
 # 16 - “The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items
of inventory to their present location and condition”. - IMPLICATIONS
 Valuation of opening inventory - Transition
 To be the same as closing inventory in preceding year – #22(ii) -
irrespective of change in method of valuation of closing inventory
 Taxation of illusory profits ? – ref Mahalaxmi Glass
 In case of newly commenced business, cost of inventory on day of commencement of
business shall be opening inventory
 contrary to section 45(2) ? – Act shall prevail.
 Thus Mahalaxmi Glass (re Stock Valuation) & Sakthi Trading Co. v CIT
[2001] 250 ITR 871 (SC) – re Dissolution - are effectively superceded
16-8-17 - 10
ICDS 4 –Revenue Recognition- Terms Used
 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
 In an agency relationship, the revenue is the amount of
commission and not the gross inflow of cash,
receivables or other consideration.
 For Commission – positive implications for TDS - clearly
only on net income
16-8-17 - 11
ICDS 4 – Terms Used
 Sale of Goods - revenue shall be recognised when 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.
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.
 Eg. Where goods are identified & earmarked but not shipped

16-8-17 - 12

ICDS 4 - Revenue Recognition - Issues
 Requirement for being able to reliably measure the
revenue is also omitted
 4#4 - reasonable certainty of ultimate collection
retained – Circular 10 Ans 13 re Accrual of Interest on
time basis – debateable.
 'claim for escalation, export incentive revenue
recognition .. shall be postponed to the extent of
uncertainty involved‘ 4#5
 interest would have the meaning as assigned in the IT
16-8-17 - 13
ICDS 4 – Terms Used
 Services - Revenue from service transactions
shall be recognised by the percentage
completion method.
 Mandatory –
 Revenue is matched to 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

16-8-17 - 14

Other Contentious Areas
 Sale and repurchase agreements
 Lease – Operating & Finacial Leases & applicability of Substance over
form - being dealt with under Ind AS
 Subscriptions to publications and similar items - When the items involved
are of similar value in each time period, revenue is recognised on a straight-
line basis
 Servicing fees included in the price of the product. – Free warrany –
inclusion of item in revenue.
 Origination fee & Commissions in Financial Asset acquisition –Ind AS
 In a service transaction – fee is the revenue element – not the entire
 Goods on Approval & Stores policy of return within certain time.

16-8-17 - 15

12. Disclosures to be made in respect of revenue recognition
 In a transaction involving sale of good, the total amount not
recognised as revenue due to lack of reasonable certainty of ultimate
 Amount of revenue recognised from service transactions
 Method used to determine the stage of completion of service
transactions in progress
 Amount of revenue recognised for service transactions in progress
 Amount of costs incurred and recognised profits (less recognised
losses) upto end of previous year;
 Amount of retentions and advances received

16-8-17 - 16

- Construction Contracts
 Applicability
 At present there is no specific ICDS notified for real estate developers, BOT projects
and leases. Therefore, relevant provisions of the Act and ICDS shall apply to these
transactions as may be applicable. – Ans 12 FAQ
Contract Revenue
9. Contract revenue shall be recognised when there is reasonable
certainty of its ultimate collection.
11.Where contract revenue already recognised as income is subsequenly
written off in books of accounts as uncollectible, the same shall
be recognised as an expense and not as an adjustment of the
amount of contract revenue.

16-8-17 - 17

Salient Provisions - ICDS 3
 Contract Costs -Recognition of Contract Revenue and Expenses
 recognised when there is reasonable certainty of its ultimate
collection BUT
 Requirement to ‘reliably measure the outcome of a contract’ is
 Refer Tech Guide – Para 6.5 - provisions of S. 5 prevail over ICDS
 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 stage of completion of a contract.
16-8-17 - 18
 Requires the recognition of revenue on this basis.
 The requirements of that Standard shall mutatis mutandis
apply to the recognition of revenue and the associated
expenses for a service transaction.
 Combining & Segmenting Contracts – practical importance &
methodology – Paras 6 & 7
 Prior Planning is critical
 Need to keep in mind provisions of RERA
 Early stage of Contract not to extend beyond 25 % of stage of
completion - role of retention money in computation.
 Role of Escalation claims in estimating % completion.

16-8-17 - 19

ICDS V – Tangible Fixed Assets
 Deals with tangible fixed assets
(no ICDS to correspond with AS 26)
 Stand-by & servicing equipment to be capitalised
 Machinery spares – to be charged to revenue
 Condition of Economic ownership not prescribed
 Fair value of tangible fixed asset acquired in exchange
constitutes cost of asset received- unlike AS -adopting fair
value of asset given up not allowed.
 Cut off for capitalisation is clearly – COMMERCIAL
PRODUCTION.- See Ans 15 in FAQ.
16-8-17 - 20
ICDS V – Tangible Fixed Assets
 Actual Cost has been spelt out in # 5 & subsequent
adjustments I #6
 Ind AS concepts of Costs of major inspections –
provisions for restoration, decommissioning & similar
liabilities recognized as part of the cost of PPE
 This too is at a discounted NPV of the liability
 Component Approach is not recognised; Nor is Impairment
 Rather Depreciation & Income arising on transfer of FA –
per IT Act

16-8-17 - 21

ICDS VI – Effects of changes in foreign exchange rates
Scope – Always subject to S. 43A
 Treatment of transactions denominated in foreign currency
 Translating financial statements of foreign operations
 Treatment of forward exchange contracts

Forex Differences
 Monetary Items - Gain or Loss allowed on MTM Basis as in AS 11
 Other items – adjusted as in AS – not taken as income or loss
Foreign Operations
 Integral Foreign Operations (LO, warehouse) – as if own operations
Translate as described above- Monetary / Non-Monetary (latter at rate on Transaction date)
 Non Integral Foreign Operations (Branch) – fully recognised as Inc/ Exp
Classification of Foreign Operations
 What constitutes Integral & Non integral – same as in AS

Forward Exchange Contracts

 ICDS allows loss / gain on MTM basis
 Premium / discount to be amortised over life (same as AS 29)

16-8-17 - 22

 Scope –Treatment of Government grants – synonymous with
subsidy, cash incentives, duty drawbacks, waiver, concessions,
reimbursements etc.

 Government Grants – assistance by Govt. – in cash or kind to a

person for past or future compliance

 Government Grants not to be recognised until there is reasonable

assurance that
 person shall comply with the conditions attached, and
 Grants shall be received
 Recognition not be postponed beyond the date of actual receipt

16-8-17 - 23

 Treatment of Grants:

16-8-17 - 24

**Amendment to Finance Bill 2015 to “align ITA with ICDS”:
Definition of ‘income’ in section 2(24)amended by insertion of
clause (xviii) to include ‘assistance’ in form of subsidy, grant, cash
incentive, duty drawback, waiver, concession or reimbursement
from government/ authority/ body/ agency in cash or kind,
other than that considered for reduction from actual cost as per
explanation 10 to section43(1).

 Conditions for reduction from actual cost:

 Received from Government, Central or State, Authority, Agency etc
 Cost of asset has been met, directly or indirectly
 Cost is relatable to subsidy, grant or reimbursement

 All other grants to partake the character of income

16-8-17 - 25

 Grants relatable to non-depreciable assets
 If the grant requires grantee to fulfill obligations – to be
recognised as income over the period that cost to fulfill
obligations is charged to Profit and Loss statement

 Grants in the form of non-monetary assets given at concessional

rate to be accounted for on the basis of cost of acquisition.

16-8-17 - 26

 Refund of Government Grants:
 In case of fixed assets – actual cost or WDV to be increased
 Depreciation on revised value to be provided prospectively
 If refund is in respect of grants relatable to non-depreciable assets or
grants in respect of expenses or losses , first to be adjusted against
deferred credit and in the absence of any deferred credit to be charged
to the profit and loss statement

 Impact on Block of Assets:

 If grant is received / receivable in a year subsequent to year of
 If the block of asset has ceased to exist on account of the operation of
section 50 in an earlier year?
 If the refund of grant is to be made in a year when the block ceased to

16-8-17 - 27

 The Government Grants - the “purpose test” for treating as
capital receipt is made redundant?
 Ponni Sugar Mills 306 ITR 392 (SC) and Sahaney Steel & Press Works
Ltd. 228 ITR 253 – it is object for which subsidy / assistance is given
which determines nature of incentive subsidy

 ICDS does not contain anything specific on grants in the nature of

promoters’ contribution. However it has a residuary category to
charge such grants based on matching cost principle.
 The various judicial decisions characterising such grants as capital
receipts stand overruled?

16-8-17 - 28

 Grants in the nature of promoters’ contribution or relating to non-
depreciable assets (which do not require fulfilment of any
obligations) – treated differently for the financials as per AS, i.e.,
capital reserve

 A Grant given as an incentive for set up of new industries -

merely because computed with reference to the value of
investment in assets will considered as a grant related to the
 Reliance Industries 339ITR632 (Bom) – The object of the subsidy was
to set up a new unit in a backward area to generate employment and
hence capital in nature, not taxable
 Details to be disclosed

16-8-17 - 29

 Deals only with securities held as stock in trade, not
investments - Securities –includes shares of closely held Cos.
 AS 13 deals only with investments - which can be MTM
 so in FS – AS 2 applies to the stock in trade (covered by
ICDS VIII) – no MTM - cost or NRV followed.
 4 bucket Approach followed

 ICDS VIII – Part B deals with securities held by Banks & Public
financial institutions
 Applicability to Insurance Cos, MFs, VCs, NBFCs, FIIs?
 Securities acquired in exchange of another security /
asset, actual cost will be the FV of security / asset
16-8-17 - 30
 Securities - recognised at actual cost
 i.e. purchase price, brokerage, fees, tax, duty, cess. STT included in
actual cost – section 40(a)(ib) omitted wef 1.4.2005.
 Pre-acquisition period interest
 ICDS allows broken period interest for pre-acquisition
period to be reduced from actual cost, only balance
interest received taxable -American Express International
Banking Corporation 258 ITR 601 accepted. Vijaya Bank 187 ITR 541
(SC) – not applied in case of Interest on Securities.
 Revenue recognition standard applies
 No such adjustment provided for sales proceeds

16-8-17 - 31

 At year end, securities to be valued at lower of actual cost or NRV
 Bucket approach for valuation of securities – not scrip wise
 classified into 4 buckets – shares, debt securities, convertible securities, any other
 One bucket for equity and preference shares
 All mutual funds and other securities in one bucket
 Value of securities held as stock in trade as on beginning of the
 If business commenced during the year - Cost on day of commencement
 Other cases - Value as on the close of immediately preceding previous year
 Unlisted Securities and thinly traded securities to be valued at cost
 Not quoted with regularity – meaning of regularity?
 Where actual cost cannot be determined using specific
identification – FIFO to be applied
16-8-17 - 32
ICDS IX – Borrowing Cost
 The words ‘for extension of existing business or profession’ omitted
from 36(1)(iii) in order to harmonise IT Act & ICDS. - Amendment
to IT Act by Fin Act 2015
 to align AS & ICDS – capitalisable ‘Borrowing Costs’ are limited to
those relating to ‘qualifying assets’;
 Meaning of Qualifying Asset changed from AS - certain assets
automatically included such as (land, building, machinery etc.)-
 So any cost of financing purchase of even computer systems would have to be
 Specific borrowings – capitalised to respective asset - from the date on
which funds are borrowed –
 Capitalisation based on purpose rather than on utilisation.
 SC decision in Core Health Care Limited 298 ITR 194 negated.
 No provisions for reduction of interest income from temporary
deployment of unutilised funds
16-8-17 - 33
ICDS IX – Borrowing Cost (Contd.)
 General borrowings – Pro rata formula - not necessarily in
favour of Dept. Could lead to unrealistic results & litigation
similar to S. 14A
 Project loan availed of - project stalled, but cheaper funds utilised
for business –may have to be capitalised.
 Provision re: Commencement & cessation of Capitalisation are
 Forex differences arising on borrowings to acquire assets
outside India – governed by S.43 A
 Whether such Forex loss for assets purchased in India (&
which is not covered by S.43 A) would be considered a capital
loss & not allowed u/s 37 remains to be seen

16-8-17 - 34

ICDS X – Provisions, Contingent Liabilities and Contingent Assets

 Per AS 29 – provision to be made when outflow ‘probable’ - Per

ICDS ‘reasonably certain’ is the benchmark
 Reimbursement to be recognised when it is ‘reasonably certain’ that
reimbursement will be received. (Not when virtually certain per AS29 #46)
 Impact on provision for warranty? SC decision - Rotork Controls P.
Ltd. 314 ITR 62 – para 6 & 7 if ICDS 10 – do not seem to permit
this. “No provision to be recognised for costs to be incurred to operate in future”
 Related accounting issue in Ind AS.

16-8-17 - 35


Thank You
(This is just a background material to facilitate discussion)

Jayant Gokhale
FCA Mumbai
Accounting and Auditing Committee of
The Chamber of Tax Consultants
************ - 36
16-8-17 36