The notified ICDSs have to be followed by all assessees (other than an individual or an undivided Hindu family who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB) following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profits and gains of business or profession” or “Income from other sources”, from A.Y.2017-18.
The ten notified ICDSs are:
| 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 |
(1) Applicability: All the notified ICDSs are applicable for the computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts. This is stated in the Preamble at the beginning of each ICDS.
(2) Position in case of conflict with the Income-tax Act, 1961: In the case of conflict between the provisions of the Income‐tax Act, 1961, and the notified ICDSs, the provisions of the Act shall prevail to that extent. This is also stated in the Preamble at the beginning of each ICDS.
(3) Scope Paragraph: Each of the ten notified ICDSs has a scope paragraph explaining what exactly the ICDS deals with. In some standards, the scope paragraph also specifies what the ICDS does not deal with.
(4) Transitional Provisions: All ICDSs (except ICDS VIII on Securities) contain transitional provisions to facilitate first-time adoption and prevent any tax leakage or double taxation.
(5) (5) Disclosure Requirements: All ICDSs (except ICDS VI on Effects of changes in foreign exchange rates and ICDS VIII on Securities) contain specific disclosure requirements. The last paragraph(s) of these ICDSs is on disclosure.
ICDS I: Accounting Policies
► This ICDS deals with significant accounting policies.
► While it recognizes the fundamental accounting assumptions of going concern, consistency, and accrual, it does not recognize the concepts of “materiality” and “prudence” in the selection of accounting policies.
► Treatment and presentation of transactions have to be governed by their substance and not merely by the legal form.
► Marked to market loss or an expected loss is not to be recognized unless recognition of such loss is in accordance with the provisions of any other ICDS.
ICDS II: Valuation of Inventories
► “Inventories” has been defined to mean assets held for –
o sale in the ordinary course of business.
o in the process of production for such sale.
o in the form of materials or supplies to be consumed in the production process or in the rendering of services.
► This ICDS requires inventory to be valued at cost or net realizable value, whichever is lower.
► This ICDS requires disclosure of 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.
ICDS III: Construction Contracts
► This ICDS is required to be applied in the determination of income for a construction contract of a contractor.
► It recognizes the percentage of completion method (POCM) for recognizing contract revenue and contract costs associated with a construction contract.
► However, contract revenue and contract costs associated with the construction contract, which commenced on or before 31.3.2016 but was not completed by the said date, can be recognized based on the method regularly followed by the person prior to the previous year 2016-17.
► This ICDS also contains certain disclosure requirements, like the amount of contract revenue recognized as revenue in the period, the methods used to determine the stage of completion of contracts in progress, etc.
ICDS IV: Revenue Recognition
► This ICDS deals with the bases for recognition of revenue arising in the course of the ordinary activities of a person from –
o the sale of goods.
o the rendering of services.
o the use by others of the person’s resources yielding interest, royalties, or dividends.
► It does not, however, deal with the aspects of revenue recognition that are dealt with by other ICDSs.
► “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 dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables, or other consideration.
► This ICDS also contains a provision wherein the revenue from the sale of goods could be recognized when there is reasonable certainty of its ultimate collection.
► Revenue from service transactions is required to be recognized on the basis of the percentage completion method. However, revenue can be recognized on a straight-line basis over a specific period of time, when services are provided by an indeterminate number of acts over such period.
► Revenue from service contracts with a duration of not more than 90 days to be recognized when the rendering of services under that contract is completed or substantially completed.
► This ICDS contains certain disclosure requirements, like the amount of revenue from service transactions recognized as revenue during the previous year, the method used to determine the stage of completion of service transactions in progress, information relating to service transactions in progress at the end of the previous year, etc.
ICDS V: Tangible Fixed Assets
► This ICDS deals with the treatment of tangible fixed assets.
► “Tangible fixed asset” is an asset being land, building, machinery, plant, or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.
► This ICDS provides the components of actual cost of such assets and valuation of such assets in special cases.
► The fair value of a tangible fixed asset acquired in exchange for shares or other securities or another asset shall be its actual cost.
► The ICDS also provides that depreciation on such assets and income arising on transfer of such assets shall be computed in accordance with the provisions of the Income-tax Act, 1961.
► The ICDS also contains disclosure requirements in respect of such assets, like the 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, depreciation allowable and written down value at the end of the year.
ICDS VI: The Effects of changes in foreign exchange rates
► This ICDS deals with treatment of transactions in foreign currencies, translating the financial statements of foreign operations and treatment of foreign currency transactions in the nature of forward exchange contracts.
► This ICDS requires exchange differences arising on settlement of monetary items or conversion thereof at last day of the previous year to be recognized as income or as expense in that previous year.
► In respect of non-monetary items, exchange differences arising on conversion thereof as at the last day of the previous year shall not be recognized as income or as expense in that previous year.
► At the last day of each previous year, foreign currency monetary items shall be converted into reporting currency by applying the closing rate.
► Non-monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction.
► Non-monetary item being inventory which is carried at net realisable value denominated in a foreign currency shall be reported using the exchange rate that existed when such value was determined.
► The ICDS contains provisions for initial recognition, conversion at the last date of the previous year and recognition of exchange differences. These provisions shall be subject to the provisions of section 43A of the Income-tax Act, 1961 and Rule 115 of the Income-tax Rules, 1962.
ICDS VII: Government Grants
► This ICDS deals with the treatment of government grants. It recognizes that government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks etc.
► Subsequently, at the end of any previous year, securities held as stock-in-trade have to be valued at actual cost initially recognized or net realizable value at the end of that previous year, whichever is lower.
► It goes on to provide that such comparison of actual cost initially recognized and net realizable value has to be done category-wise and not for each individual security.
► Where actual cost initially recognized cannot be ascertained by reference to specific identification, use of “First in First Out” method or “Weighted Average Cost” formula is permitted for subsequent measurement of securities held as stock-in-trade (other than unlisted or unquoted securities) referred to in Part A.
► Securities referred to in Part B to be classified, recognised and measured in accordance with the extant guidelines issued by the RBI in this regard. Any claim for deduction in excess of the said guidelines will not be taken into account. To this extent, the provisions of ICDS VI on the effect of changes in foreign exchange rates relating to forward exchange contracts would not apply.
ICDS IX: Borrowing Costs
► This ICDS deals with the treatment of borrowing costs. It does not deal with the actual or imputed cost of owners’ equity and preference share capital.
► It requires borrowing costs which are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalized as part of the cost of that asset. Other borrowing costs have to be recognized in accordance with the provisions of the Act.
► Qualifying asset has been defined to mean –
► land, building, machinery, plant or furniture, being tangible assets;
► know‐how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets;
► inventories that require a period of twelve months or more to bring them to a saleable condition.
► This ICDS requires capitalization of specific borrowing costs and general borrowing costs.
► This ICDS provides the formula for capitalization of borrowing costs when funds are borrowed generally and used for the purpose of acquisition, construction or production of a qualifying asset.
► For the purpose of computing the amount of borrowing costs to be capitalized, in a case where the funds are not borrowed specifically for the purposes of acquisition,
► construction or production of a qualifying asset, a qualifying asset would be such asset that necessarily require a period of 12 months or more for its acquisition, construction or production.
► It also provides as to when capitalization of borrowing costs would commence and cease.
► It requires disclosure of the accounting policy adopted for borrowing costs and the amount of borrowing costs capitalized during the year.
ICDS X: Provisions, Contingent Liabilities and Contingent Assets
► This ICDS deals with Provisions, Contingent Liabilities and Contingent Assets. However, it does not deal with provisions, contingent liabilities and contingent assets –
o resulting from financial instruments,
o resulting from executory contracts,
o arising in the insurance business from contracts with policyholders and
o covered by another ICDS.
It also does not deal with the recognition of revenue dealt with by ICDS on Revenue Recognition.
► The ICDS specifies the conditions for recognition of a provision, namely, the existence of a present obligation as a result of a past event, reasonable certainty that outflow of resources embodying economic benefits will be required to settle the obligation, and making a reliable estimate of the amount of the obligation.
► It provides that a person shall not recognize a contingent liability or a contingent asset. However, it requires contingent assets to be assessed continually. When it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income have to be recognized in the previous year in which the change occurs.
► It contains provisions for measurement and review of a provision and asset and related income.
► It also provides that a provision shall be used only for expenditures for which the provision was originally recognized.
► The ICDS also contains specific disclosure requirements in respect of each class of provision, asset, and related income recognized.