Income

Computation
and
Disclosure
Standards
(ICDS)
Notified ICDS
Below are the notified 10 ICDS

Effects of changes in
Foreign Exchange
Accounting Policies Government
Rates
Grants

Borrowing costs Revenue Recognition Inventories

Tangible Fixed Assets

Construction Contracts Securities

Provisions, Contingent Liabilities and Contingent Assets

ICDS II – Valuation of
Inventories
ICDS II – Valuation of Inventories
Overview

 Deals with valuation of inventory

 Inventories defined as assets

 Held for sale in ordinary course of business
 In process of production for such sale
 In forms of materials or supplies to be consumed in production process or rendering of services

 Inventories shall be valued at cost or NRV, whichever is lower

 FIFO, specific identification, weighted average, standard costing method or retail method –
permitted methods for cost measurement

 Exclusions
 WIP under construction contract / other ICDS
 Shares, debentures and Financial instrument held as stock-in-trade
 Producer’s Inventories of livestock, agriculture, etc. to the extent measured at NRV
 Machinery spares which can be used in connection with Tangible Assets – irregular in use

Primarily in line with AS-2 except that AS-2 specifically exclude WIP for service providers
ICDS II – Cost of Inventories
Cost of Purchases
Cost of Purchases
Purchase price + duties / taxes + freight
inwards + other expenses directly attributable
to the acquisition – trade discounts / rebates

Cost of Services
Cost of labour + other personnel cost (directly
Cost of Services engaged in providing the service) + attributable
overheads

Cost of conversion
• Directly attributable cost + allocation of
fixed and variable overheads
• Unallocated overheads to be recognized as
expense
Cost of Conversion and • Cost of by products, scrap or waste - to be
Other costs reduced from main product at NRV

The amended ICDS removes requirement of service inventory for service providers.
Cost of services not specifically provided under AS-2 – whether required??
ICDS II – Valuation of Inventories
Areas Current Accounting practice – Indian
GAAP
Cost of • Cost of purchase, inter-alia, consists of
Purchase the purchase price including duties and
taxes (other than those subsequently
recoverable by the enterprise from the
taxing authorities)
Distribution • Distribution costs excluded
costs
ICDS
• Does not specifically exclude duties
and taxes subsequently recoverable –
In line with provisions of Section
145A. So there should be no impact
• Not specifically excluded – Companies
do not include distribution costs in
valuation of inventory. So there should
be no impact.
ICDS II – Valuation of Inventories
Areas Current Accounting practice – ICDS
Indian GAAP
Change in • Change in accounting policy should • Does not permit change in method of
method of be made only if - valuation without ‘reasonable cause’ -
valuation  Required by statue However, ‘Reasonable cause’ not defined
 Required by another Accounting
Standard
• Following could be the illustrative
 Results in more appropriate
examples of reasonable cause (as per
presentation of financial statements
judicial precedents):
 To represent true and fair view
 To meet statutory requirement
 More appropriate preparation and
presentation of financial statements
 Reasonable person considers just and
acceptable under normal circumstances
 Commercial or business need which will
result into appropriate and fair presentation
of transaction
ICDS II – Change in method of
Valuation – Impact on Opening Stock
Other Key Points
ICDS II – Change in method of
Valuation – Case Study
FIFO Method Weighted Average Cost Method

Year 1
Particulars Amount Particulars Amount
In Year 2, the Method of Valuation is changed
from FIFO to weighted average cost.
Opening 100 Sales 500
Stock Lets say, following the weighted average cost
Expenses 400 Closing 200 method results in increase in the valuation of
Stock closing stock by 10%.

Profit 200
Total 700 Total 700
Year 2 Year 2
Particulars Amount Particulars Amount Particulars Amount Particulars Amount

Opening 200 Sales 800 Opening 220 Sales 800

Stock Stock
Expenses 600 Closing 300 Expenses 600 Closing 330
Stock Stock
Profit 300 Profit 310
Total 1,100 Total 1,100 Total 1,130 Total 1,130
ICDS II – Change in method of
Valuation – Case Study
Opening Stock – Not Adjusted Opening Stock - Adjusted

Year 2 Year 2
Particulars Amount Particulars Amount Particulars Amount Particulars Amount

Opening 200 Sales 800 Opening 220 Sales 800

Stock Stock
Expenses 600 Closing 330 Expenses 600 Closing 330
Stock Stock
Profit 330 Profit 310
Total 1,130 Total 1,130 Total 1,130 Total 1,130

Impact Impact

Closing Stock 30 Closing Stock 30

Opening Stock - Opening Stock 20

Profit 30 Profit 10
ICDS II – Ind AS vs. ICDS
Purchase of inventories on deferred settlement terms

•Purchase inventories on deferred settlement terms effectively contains a financing element

Under Ind AS - The financing element, i.e. difference between the purchase price for normal credit
terms and the amount paid, have to be recognized as interest expense over the period of the financing

Under ICDS / Act – there is no such specific provision

•Therefore any difference arising on account of recording of expenses vis-à-vis Ind AS, will require
adjustment
ICDS V – Tangible Fixed
Assets
ICDS V – Overview
 Deals with treatment of tangible fixed assets

 Tangible fixed asset defined as

 Asset being land, building, machinery, plant or furniture;
 Held with the intention of using for producing / providing goods or services; and
 Not held for sale in the normal course of business

 Depreciation is as per the provisions of the Act

 Income arising on transfer of tangible fixed asset shall be computed as per the provisions of the Act
ICDS V – Tangible Fixed Assets
• Components of cost align largely with definition of actual cost in Section 43(1) of ITA
 Cost of fixed asset to include - Purchase prices, duties and taxes, expenses incurred to make the asset
ready for intended use. Administration and general overheads not specifically attributable to be
excluded – In line with AS-10

• Costs to be capitalized – In line with AS-10

 Expenditure incurred on start up and commissioning of the project
 Expenditure incurred on test runs and experimental production
 Expenditure that increases future benefits from existing asset beyond its previously assessed standard of
performance (repairs and maintenance)

• Machinery spares to be charged to revenue as and when consumed

 Exception: Spares used only with tangible fixed asset, with irregular usage of spares – to be
capitalized

No significant deviation on costs to be capitalised as per AS-10

• Capitalization of exchange differences relating to fixed assets shall be in accordance with

Section 43A and other similar provisions of the Act – Para 5 and 6 of ICDS VI
 Can exchange difference arising on External Commercial Borrowings be claimed as an allowance,
if used for acquiring domestic assets?
ICDS V – Tangible Fixed Assets
• Several assets purchased for consolidated price - consideration to be apportioned on fair basis (for e.g.
slump sale)
 ‘Fair basis’ not defined – As per AS 10, fair basis as per competent valuer
 In absence of valuation for assets purchased for consolidated price, AO may allocate more cost to
non-depreciable assets – valuation report is essential

• Fixed asset acquired in exchange of another asset or shares:

Particulars
Fixed asset acquired in
exchange for another asset
Fixed asset acquired in
exchange for shares or other
securities
AS 10 ICDS
Recorded either at Recorded at fair value of the
FMV of asset given up or tangible fixed asset so
asset acquired if this is more acquired
clearly evident, adjusted for
any balancing receipt or
payment of cash or other
consideration
Recorded at FMV of Recorded at fair value of the
the assets acquired, or the tangible fixed asset so
FMV of the securities issued, acquired
whichever is more clearly
evident
ICDS V – Capitalization of cost post
Trial run

Capitalize Revenue expense

AS-10

ICDS
Capitalize Revenue expense
Capitalize or
Revenue expense
?

Asset ready for use – Depreciation can be claimed?

 ICDS V – Capitalization of Borrowing
cost to Qualifying Tangible assets

Capitalization AS-16
Period
ICDS -General
Borrowing

ICDS -Specific
Borrowing

AS-16 and ICDS – Doesn’t cover capitalization of borrowing cost for non-qualifying assets
Under the Act – As per Section 36(1)(iii), interest is required to be capitalised till the date asset is put
to use even for non-qualifying asset – would override ICDS?
ICDS V – Tangible Fixed Assets
Case Study 1A – Capitalization of
borrowing cost (Specific Borrowing) Date Particulars Amount
1 April Borrows funds 1,000,000
Loan on 1 April from bank @
ABC Limited Bank Exchange of12%
assets
p.a.
1 July Full payment 1,000,000
made to the
vendor
Payment on 1 July
1 August The machinery is -
supplied by
vendor to the
factory
31 August The machinery is -
Supply on installed and put
1 August
to use
P&M Vendor
31 Loan repaid 1,000,000
December
Installation on 31
August

Asset is not a Qualifying Asset as per AS 16 and ICDS

ICDS V – Tangible Fixed Assets
Case Study 1A – Capitalization of
borrowing cost (Specific Borrowing)
Particulars Treatment under Tax Treatment as per Act
AS 16
ICDS 36(1)(iii)
(doesn’t cover)

Amount capitalized to - 50,000

fixed asset (1,000,000*12%*5/12)
Period of capitalization - 1 April to 31 August
Not applicable
(5 months)
Interest expense charged 90,000 40,000
to P&L a/c (1,000,000*12%*9/12) (90,000-50,000)

Whether any capitalization required in case of general borrowing since non-qualifying assets are
not covered under ICDS - ambiguity under Section 36(1)(iii)
ICDS V – Tangible Fixed Assets
Case Study 1B – Capitalization of
borrowing cost (Specific Borrowing)
Year Date Particulars Amount
FY 15-16 1 May 15 Borrows funds from bank @ 15% p.a. 1,000,000
Exchange of assets
1 Aug 15 Construction of assets starts and borrowed 1,000,000
funds are utilized

FY 16-17 1 Sept 16 Asset acquired and put to use -

31 Dec 16 Loan repaid 1,000,000

Asset is a Qualifying Asset as per AS 16 and ICDS

ICDS V – Tangible Fixed Assets
Case Study 1B – Capitalization of
borrowing cost (Specific Borrowing)
Particulars Treatment under Treatment as per Act read with
AS 16 ICDS

Period of capitalization 1 Aug 15 to 1 Sept 16 1 May 15 to 1 Sept 16

(13 months) (16 months)
Total amount capitalized to 162,500 200,000
fixed asset
(1,000,000*15%*13/12) (1,000,000*15%*16/12)

Total interest expense 87,500 50,000

charged to P&L a/c (1,000,000*15%*7/12) (1,000,000*15%*4/12)
1 May 15 to 31 July 15 (3 months)
1 Sept 16 to 31 Dec 16 (4 months) 1 Sept 16 to 31 Dec 16
(total 7 months) (4 months)
Q&A
Thank You
Rohit Khandelwal