Computation of Income in

light of icds

[ Income computation & disclosure

standards ]

Organised by:

BHILWARA BRANCH OF CIRC OF ICAI

Speaker:
CA. Rajesh Mehta, Indore
98270-36956

CHAIRMAN VICE CHAIRMAN SECRETARY

CA. SUNIL SOMANI CA. ARUN KUMAR KABRA CA. ALOK PALOD

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 CA. RAJESH MEHTA
FCA, DISA (ICAI),
203 MANAS BHAWAN EXTENSION,
11, RNT MARG, NEAR HOTEL SHREEMAYA,
INDORE (M.P.)
9827036956, 9424818719
rajeshmehta_indore@yahoo.com
Date 20th May, 2017

INCOME COMPUTATION AND DISCLOSURE STANDARDS

Section 145(2) of the Income Tax Act allows Central Government to notify
accounting standards to be followed by any class of assessees or any class of
income. Upto A.Y. 2016-17 accounting standard relating to (i) disclosure of
accounting policies, and (ii) disclosure of prior period and extraordinary items
and changes in accounting policies, have been notified since 1996.

ICAI has issued 32 accounting standards (out of which AS-8 accounting for
research and development has been withdrawn in consequence of issuance of,
AS-26 intangible assets, thus effectively 31 AS are there), only 29 AS are
mandatory. Out of this only AS-1 and AS-2 (old) were made applicable under
Income Tax Act.

Ministry of Corporate Affairs specified Ind-AS [Companies (Ind-AS) Rules, 2015)]

to be followed in preparation and audit of financial statements, voluntarily from
1-4-2015 and mandatory from 1-4-2016 for companies listed or not listed having
net worth of 500 crores or more and mandatory from 1-4-2017 for companies
listed having net worth of less than 500 crores and for unlisted companies having

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net worth of 250 crores or more but less than 500 crores, all other companies will
follow Accounting Standards (rules 2006) .

Now since Ind-AS are applicable and profit reflected in these financial statement
shall not serve the purpose of correct computation of income for the purpose of
income tax, in supersession of aforesaid AS-1 & 2 which were applicable under
Income Tax, w.e.f. financial year starting from 1-4-2016 i.e. Assessment Year
2017-18, Ten ICDS-Income Computation and Disclosure Standards, have been
notified.

All these 10 ICDS are :- to be followed by all assesses (other than an individual or
HUF who is not required to get his accounts of the previous year audited under
provisions of Section 44AB of the Act) even following presumptive scheme of
taxation u/s 44AB, 44AE, following mercantile system of accounting, for the
purposes of computation of income chargeable to income tax under the head
“Profit and gains of business or profession” or “Income from other sources”.

In case of conflict between provisions of Income Tax Act and ICDS, the provisions
of the Act shall prevail to that extent.

If these ICDS are not followed by the assessee, then as per Sec. 145(3) the
Assessing Officer may make best judgment assessment U/s 144 of the act.

The brief overview of these ICDS is as follows :-

ICDS- I RELATING TO ACCOUNTING POLICIES

 Fundamental accounting assumption :-

(a) Going Concern:- Continuing business or profession

(b) Consistency:- Accounting policies are consistent

(c) Accrual :- Revenues and costs are accrued and recorded in P.Y. to which
they relate.

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  Accounting Policies :- means specific accounting principles and the methods
of applying those principles adopted by a person.

 Considerations in the Selection and Change of Accounting Policies :-

Accounting policies shall be such so as to represent a true and fair view of
the state of affairs and income of business or profession or vocation. For
this purpose :-

(i) The treatment and presentation of transactions and events shall be

governed by their substance and not merely by the legal form, in case
of conflict between “substance” and “form” of a transaction, the
substance of transaction will prevail over its form (“substance” relates
to content of a transaction whereas “form” relates to its presentation,
in assessments assessing authority always go by substance and not by
mere presentation, so that revenue is not at loss), and

(ii) 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 ICDS. MTM gain or expected profit shall also not be
recognized in the same way.

 An accounting policy shall not be changed without reasonable cause.

 All significant accounting policies adopted by a person shall be disclosed.

 Any change which has material effect and its monetary effect / effect due to
change, shall be disclosed.

 If fundamental accounting assumption is not followed, the fact shall be

disclosed, if followed then no need to disclose its compliance i.e. if not
disclosed it will be assumed that fundamental accounting assumption has
been followed in preparation of financial statement.

 ICDS-I (relating to accounting policies) takes into consideration substance

over form and doesn’t recognize marked to market loss or expected loss
whereas AS-1 (disclosure of accounting policies) takes into consideration

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 Prudence, Substance over form and materiality and recognize marked to
market loss or an expected loss.

 The said ICDS-I shall be applicable to all contract or transactions pending on

1-4-2016 or entered into on or after 1-4-2016 after taking into account all
income, expenses or losses recognized on or before 31-3-2016.

ICDS-II VALUATION OF INVENTORIES

This ICDS shall be applied for valuation of inventories, except :-

(a) WIP for construction contract, because separate ICDS for it;

(b) WIP dealt by other ICDS;

(c) Shares, debenture and other financial instruments held as stock in

trade because dealt by ICDS on securities;

(d) Producer’s inventories of livestock, agriculture and forest products,

mineral oils, ores and gases to the extent that they are measured at net
realizable value;

(e) Machinery spares for tangible fixed assets, if its use is irregular, will
be dealt by ICDS on tangible fixed assets.

 AS-2 (Valuation of Inventories) does not apply to WIP arising in ordinary

course of business for service providers i.e. Incomplete consultancy
services, Medical services in progress, whereas ICDS-II relating to
valuation of inventories does not exclude it.

 Inventories are (i) held for sale in the ordinary course of business, (ii) in the
process of production for such sale, (iii) material or supplies to be consumed
in the production process or in the rendering of services.

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  Net Realisable Value:- estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.

 Inventories shall be valued at cost, or net realisable value, whichever is

lower.

 Cost of inventories :- comprise of all costs of purchase, costs of services,

costs of conversion and other costs incurred in bringing the inventories to
their present location and condition.

 Cost of Purchase :- includes duties and taxes, freight inwards and other
expenditure directly attributable to the acquisition. Trade discounts, rebates
and other similar items shall be deducted in determining the costs of
purchase.

 Cost of services :- consist of labour and other costs of personnel directly

engaged in providing the service including supervisory personnel and
attributable overheads.

 Costs of conversion of inventories :- include costs directly related to the

units of production and a systematic allocation of fixed and variable
production overheads that are incurred in converting material into finished
goods. Fixed production overheads :- those indirect costs of production that
remain relatively constant regardless of the volume of production.
Variable production overheads :- those indirect cost of production that vary
directly or nearly directly with the volume of production.

 Allocation of fixed production overheads :- based on normal capacity of the

production facilities. Normal capacity shall be the production expected to be
achieved on an average over a number of periods or seasons under normal
circumstances, taking into account the loss of capacity resulting from
planned maintenance. The actual level of production shall be used when it
approximates to normal capacity. The amount of fixed production
overheads allocated to each unit of production shall not be increased as a
consequence of low production or idle plant. Unallocated overhead shall be

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 recognised as an expense in the period in which they are incurred. If there is
abnormally high production, the amount of fixed production overheads
allocated to each unit of production is decreased so that inventories are not
measured above cost. Variable production overheads shall be assigned to
each unit of production on the basis of the actual use of the production
overheads.

 More than one product :- produced simultaneously and the costs of

conversion of each product are not separately identifiable, the costs shall be
allocated between the products on a rational and consistent basis. Where
by-products, scrap or waste material are immaterial, they shall be
measured at net realisable value and this value shall be reduced from the
cost of the product.

 Other costs :- included in cost of inventory if they are incurred in bringing

the inventory to their present location and condition.

 Interest and other borrowing costs :- shall not be included in cost of

inventories, unless they are as component of cost specified in ICDS on
borrowing costs.

 Exclusion from cost of inventory:- (a) abnormal amount of wasted

materials, labour or other production costs, (b) storage costs, unless those
costs are necessary in the production process prior to a further production
stage, (d) administrative overheads that do not contribute to bringing the
inventories to their present location and condition, (d) selling costs.

 Cost formulae :- Cost of inventories of items that are not ordinarily

interchangeable, and goods or services produced and segregated for
specific projects shall be assigned by specific identification of their
costs.

 Specific identification of cost :- means specific costs are attributed to

identified items of inventory, where there are large numbers of
items of inventory which are ordinarily interchangeable, specific
identification of costs shall not be made.

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  FIFO and weighted average cost formula :- cost of inventory, other than
inventory dealt with in just preceding 2 paras (Cost formulae, Specific
identification of cost ), shall be assigned by using the FIFO or weighted
average cost formula. The formula used shall reflect the fairest
possible approximation to the cost incurred in bringing the items of
inventory to their present location and condition. The weighted
average cost shall be calculated on a periodic basis, or as each
additional shipment is received, depending upon the circumstances.

 Techniques for the measurement of cost :- (1) Standard cost method or the
retail method, may be used for convenience if the results approximates the
actual cost. It takes into account normal levels of consumption of materials
and supplies, labour, efficiency and capacity utilization. (2) Retail method :-
where it is impracticable to use the FIFO or weighted average or
standard costing methods, retail method can be used for large
number of rapidly changing items that have similar margins. Reduce
from sale value of inventory, appropriate percentage of gross
margin. An average % for each retail department is to be used.

 Net Realisable Value :- Inventories shall be written down to net

realisable value on an item by item basis. Events occurring after
the end of previous year shall also be considered. AS-2 provides
that comparison between cost and net realizable value should be
made item by item or by group of items.

 Materials and other supplies :- for use in the production of inventories

shall not be written down below the cost, where the finished
products in which they shall be incorporated are expected to be sold
at or above the cost.

 Value of opening inventory :- (i) cost of inventory available, if any, on

the day of the commencement of the business when the business has
commenced during the previous year, and (ii) in any other case, the
value of the inventory as on the close of the immediately preceding
previous year.

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  Change :- Method of valuation of inventories once adopted by a
person shall not be changed without reasonable cause.

 Valuation in case of dissolution :- in case of dissolution of partnership Firm,

AOP or BOI, whether business is discontinued or not inventory shall be
valued at net realisable value. AS-2 is silent on this issue. Supreme Court in
the case of Sakthi Trading Co. V. CIT, Madras 250 ITR 871 held that in case
of reconstituted partnership where business is not discontinued inventory
shall be valued at cost or market value whichever is lower. Now this
judgement is negatived due to this ICDS.

 Section 39 of Partnership Act : Dissolution of a firm.—The dissolution of

partnership between all the partners of a firm is called the ‘dissolution of
the firm’.

 Sec 187 of Income Tax Act Change in constitution of a firm.

(1) Where at the time of making an assessment under section 143 or section 144 it is
found that a change has occurred in the constitution of a firm, the assessment shall be
made on the firm as constituted at the time of making the assessment.
(2) For the purposes of this section, there is a change in the constitution of the firm—
(a) if one or more of the partners cease to be partners or one or more new partners
are admitted, in such circumstances that one or more of the persons who were
partners of the firm before the change continue as partner or partners after the
change ; or
(b) where all the partners continue with a change in their respective shares or in the
shares of some of them :
Provided that nothing contained in clause (a) shall apply to a case where the firm is
dissolved on the death of any of its partners.”
Change in constitution doesn’t mean dissolution and if the partnership deed contains a
clause that death of any of the partners will not be treated as dissolution of firm but
the firm will be continued to be carry on by the surviving partners with or without
taking any of the heirs of the deceased partner, as mutually decided, then also firm
will not be treated as dissolved.

 Transitional provisions :- Interest and other borrowing cost which were not
to be included as per ICDS, but included before 1-4-2016, then for

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 determining cost of such inventory, such cost shall continue to remain part
of such inventory.

 Disclosure :- 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, shall be disclosed.
Where standard costing has been used as a measurement of cost, details of
such inventories and a confirmation that such cost approximates actual cost.
AS-2 states that classification should be :- like finished goods, WIP, raw
material, spare parts and its carrying amount.

ICDS- III CONSTRUCTION CONTRACTS

 Applicable in determination of income for a construction contract of a

contractor.
 Definition :- (a) Construction contract :- contract specifically negotiated for
the construction of an asset or combination of assets, contract for rendering
services – project managers and architects, contract for destruction or
restoration of assets/environment following demolition of assets. (b) Fixed
price contract :- fixed contract price or a fixed rate per unit, subject to cost
escalation clauses. (c) Cost plus contract :- contractor is reimbursed for
allowable or otherwise costs, plus a mark up on these costs or a fixed fee.
(d) Retentions :- progress billing which are not paid until the satisfaction of
conditions or till defects are rectified. (e) Progress billing :- amount billed for
work performed (f) Advances :- amount received before work is performed.

 Type of contracts :- (i) Fixed price contracts and (ii) Cost plus contracts.

 Contract Revenue :- Contract revenue shall be recognized when there is

reasonable certainty of its ultimate collection. It shall comprise of initial
amount of revenue agreed in the contract, including retentions. This ICDS

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 has negatived the judgement of Guj High Court in the case of Amarshiv
Construction P. Ltd. V. DCIT (2014) (3) TMI 940 which held that retention
money even if released on the basis of bank guarantee money cannot be
liable to income tax until it is released unconditionally. In the case of CIT V.
Kerala State Drug & Pharma Ltd. (1991) 192 ITR 1 Kerala HC held that
even under the mercantile system of accounting only accrual of real income
and not hypothetical income was chargeable to tax. In CIT V. Excel
Industries Ltd. (2013) 358 ITR 295 Hon’ble Supreme Court also held that
real income to be taxed.

 Uncollectible contract revenue :- Contract revenue recognized as income

subsequently written off as uncollectible shall be an expense and not as
adjustment of the amount of contract revenue.

 Contract cost :- comprise of : (a) costs that relate directly to the specific
contract; (b) costs attributable to contract; (c) costs specifically chargeable
to customer under terms of contract; (d) allocated borrowing costs as per
ICDS on borrowing cost. These costs shall be reduced by incidental income
(As per AS-2 sale of surplus/scrap material, disposal of plant and
equipment at the end of contract), not being in the nature of interest,
dividend or capital gains.

 Recognition of contract revenue and expenses :-

(i) Percentage completion method – under this method contract revenue

is matched with the contract costs incurred in reaching the stage of
completion (proportion of work completed) on reporting date. The
stage of completion of a contract shall be determined with reference
to; (a) proportion of contract cost incurred for work performed upto
the reporting date to 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 are not
determinative of the stage of completion of a contract. Payment to
subcontractors in advance of work performed is excluded from
contract cost. In view of percentage completion method, it does not

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 become necessary to offer income even if TDS is deducted on advance
payment, the same view has been held in the case of DCIT 4(1), New
Delhi Vs. Lloyd Insulation India Ltd. ITA No. 2400/ Del/11/ A.Y. 2008-
09. Section 199 of the Income Tax Act and rule 37BA also support the
view that TDS credit shall be taken in the year in which income is
offered for taxation and not in the year in which TDS deducted only
and no work done.

ITAT Delhi bench in case of DCIT 7(1), New Delhi vs Sub Infra Ltd.
ITA No. 4572/Del/2009 & 2813/ Del/2010 A.Y. 06-07 & 07-08 held
that in case of real estate developers AS-9 is applicable and not AS-7,
& project completion method is acceptable.

(ii) Early stage of a contract :- where the outcome of a contract cannot be

estimated reliably contract revenue is recognized only to the extent of
costs incurred. The early stage of a contract shall not exceed beyond
25% of the stage of completion. Such specific % is not there in AS-7
(Revised).

 Transitional Provision :- Contract revenue and contract cost associated

with the construction contract, which commenced on or after 1st day of
April, 2016 shall be recognized in accordance with this ICDS. Contracts
started on or before 31-3-2016 shall follow method of accounting regularly
followed prior to 1-4-2016 and not this ICDS.

 Disclosure :- Disclose – amount of contract revenue recognized as revenue

in the period, and the methods used to determine the stage of completion
of contracts in progress. For contracts in progress disclose amount of costs
incurred and recognized profits less recognized losses, amount of advance
received and retentions.

ICDS –IV REVENUE RECOGNITION

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  Scope :- This ICDS deals with sale of goods, rendering of services, the use by
others of the person’s resources yielding interest, royalties or dividends. If
aspects of revenue recognition are dealt by other ICDS then it will not be
dealt by this ICDS.

 Revenue :- 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 agency
relationship, the revenue is the amount of commission and not the gross
inflow of cash, receivables or other consideration.

 Sale of goods :- Revenue shall be recognized 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 goods. If transfer of
property in goods does not coincide with transfer of significant risks and
rewards of ownership, revenue in such a situation shall be recognized at
the time of transfer of significant risks and rewards.

 As per guidance note on Accounting for real estate transactions(Revised

2012). Principles of AS-9 in respect of sale of goods also applies to a real
estate project. Accordingly the point of time at which all significant risk and
reward of ownership can be considered as transferred is required to be
determined on the basis of terms and conditions of sale. The percentage
method should be applied in the accounting of all real estate
transactions/activities in the situations where the economic substance is
similar to construction contracts. In case of real estate sales, the seller
usually enters into an agreement for sale with the buyer at initial stages of
construction. This agreement for sale is also considered to have the effect
of transferring all significant risk and rewards of ownership to the buyer
provided the agreement is legally enforceable and subject to the

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 satisfaction of conditions which signify transferring of significant risk and
rewards even though the legal title is not transferred or the possession of
the real estate is not given to the buyer. Once the seller has transferred all
the significant risks and rewards to the buyer, any acts on the real estate
performed by the seller are, in substance, performed on behalf of the buyer
in a manner similar to a contractor. Accordingly, revenue in such cases is
recognized by applying the percentage of completion method on the basis
of the methodology explained in AS 7, Construction Contracts.

 Revenue :- In case of sale of goods revenue shall be recognized where there

is reasonable certainty of its ultimate collection otherwise revenue shall be
postponed to the extent of uncertainty involved. Such relaxation of
uncertainty in interest/royalty or dividend is not there in this ICDS.
Whereas AS-9 allows postponement of recognition of revenue in case of
reasonable uncertainty regarding collection of interest also.

 Services :- Revenue from service transactions shall be recognized by the

percentage of completion method. The ICDS on construction contract shall
mutatis mutandis apply to the recognition of revenue and the associated
expenses for a service transaction. However, when service are provided by
an indeterminate number of acts over a specific period of time, revenue
may be recognized on a straight line basis over the specific period. Revenue
from service contracts with duration of not more than 90 days may be
recognized with the rendering of services under that contract is completed
or substantially completed. As per AS 9 (Revenue Recognition) there are two
methods for recognizing revenue from service transactions :- (i) Completed
service contract method, (ii) Proportionate completion method

 Interest, royalty or dividend :- Interest shall accrue on the time basis.

Royalties shall accrue as per agreement or some other systematic and
rational basis. Dividends are recognized in accordance with provisions of the
act. Interest on refund of any tax, duty or cess shall be deemed to be the
income of the previous year in which such interest is received.

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  Transitional provisions :- For service transactions entered into on or before
31-3-2016 but not completed, transitional provisions of construction
contract shall apply. For other transactions undertaken on or before 31-3-
2016 but not completed, shall be recognized in accordance with the
provisions of this standard for and from 1-4-2016. The amount of revenue if
any recognized for the said transaction for any previous year commencing
on or before 1-4-2016 shall be taken into account for recognizing revenue
for the said transaction for previous year commencing on 1-4-2016.

 Disclosure :- In a transaction involving sale of good, disclose total amount

not recognized as revenue during the previous year due to lack of certainty,
disclose amount of revenue from service transactions recognized as revenue
during the previous year, disclose the method used to determine stage of
completion of service transaction in progress.

ICDS- V TANGIBLE FIXED ASSETS

 Tangible fixed asset :- 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.

 Fair value :- amount for which the asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction.

 Stand by equipment and spares :- Stand by equipment and servicing

equipment are to be capitalized. Machinery spares shall be charged to
revenue as and when consumed. Spares for tangible fixed asset to be
capitalized.

 Components of actual cost :- Purchase price +import duties+ other taxes -

subsequently recoverable duties and taxes + directly attributable
expenditure on making asset ready for use – trade discount-rebates.

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  Capitalise :- expenses incurred on start-up and commissioning of the
project, exp. Incurred on test runs and experimental production. Expenses
incurred thereafter will be treated as revenue exp. In case of self
constructed asset internal profits shall be eliminated.

 Exchange of asset :- When a tangible fixed asset is acquired in exchange for

another asset, the fair value of the tangible fixed asset so acquired shall be
its actual cost. If tangible fixed asset is acquired in exchange for shares or
other securities, fair value of tangible fixed asset so acquired shall be its
actual cost.

 Addition to assets :- An expenditure (improvement and repairs) that

increases the future benefits from the existing asset beyond its previously
assessed standard of performance is added to the actual cost. Any addition
or extension, which has a separate identity and is capable of being used
after existing tangible fixed asset is disposed of, shall be treated as separate
asset.

 Valuation of Joint Assets :- The proportion in the actual cost,

accumulated depreciation and wdv is grouped together with
similar fully owned tangible fixed assets. Details of such jointly
owned tangible fixed assets shall be indicated separately in the
tangible fixed assets register.

 Valuation in case of consolidated purchase :- Where several

assets are purchased for a consolidate price, the consideration
shall be apportioned to the various assets on a fair basis.

 Disclosure :- (a) description of asset or block of assets, (b) rate of

depreciation, (c) actual cost or wdv, as the case may be, (d) addition or
deduction during the year with dates, in the case of any addition to asset,
date put to use, (e) depreciation allowable (f) wdv at the end of year. This

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 draft ICDS suggested for fixed asset register but the final ICDS has dispensed
with that requirement.

ICDS –VI EFFECTS OF CHANGES IN

FOREIGN EXCHANGE RATES

 Scope :- applicable to transactions in foreign currencies, translating financial

statement of foreign operation, treatment of transaction in foreign
currency in nature of forward exchange contract.

 Recording of foreign currency transactions :- A foreign currency transaction

shall be recorded, in reporting currency, by applying to the foreign currency
amount the exchange rate at the date of transaction. An average rate for a
week or a month that approximates the actual rate at the date of
transaction may be used for all transaction in each foreign currency
occurring during that period. If exchange rate fluctuates significantly, the
actual rate at the date of the transaction shall be used. For conversion of
monetary items apply closing rate at last day of each previous year. For
non-monetary items use exchange rate at the date of transaction. Initial
recognition, conversion shall be subject to Sec. 43A of the Income Tax Act.

 Exchange differences :-

(i) Monetary items :- exchange differences arising on settlement or

conversion at the last day of the previous year shall be recognized as
income or expense in that previous year,

(ii) Non-monetary items :- exchange difference at the last day of previous

year shall not be recognized as an income or expense.

 Forward exchange contracts :- Any premium or discount arising at the

inception of a forward exchange contract shall be amortised as expense or

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 income over the life of the contract, if the contract is not intended for
trading or speculation purposes.

 Premium, discount or exchange difference on contracts for trading or

speculation purposes, or to hedge the foreign currency risk of a firm
commitment of a highly probable forecast transaction shall be recognized at
the time of settlement.

ICDS VII GOVERNMENT GRANTS

 Government grants :- similar names : subsidies, cash incentives, duty
drawbacks, waiver, concessions, reimbursements, etc. Assistance by Govt. in
cash or kind for past or future compliance with certain conditions.

 Government means :- Central Govt., State Govt., agencies and similar

bodies.

 Recognition of grant :- Govt. grant shall not be recognized until there is

reasonable assurance that the person shall comply with the conditions
attached to them and the grant shall be received. Recognition of
government grant shall not be postponed beyond the date of actual
receipt, this condition is not there in AS-12.

 Deduct grant from actual cost of asset :- (i) If govt. grant relates to
depreciable fixed asset or assets of a person the grant shall be deducted
from the actual cost of the asset or from WDV. (ii) If govt. grant relates to
non-depreciable asset or assets of a person requiring fulfillment of certain
obligations, the grant shall be recognized as income over the same period
over which the cost of meeting such obligations is charged to income. (iii) If
govt. grant cannot be directly related to asset acquired, then proportionate
grant out of total grant in proportion of specific assets to all the assets, shall
be deducted from cost of asset or reduced from WDV of relevant block.
Compensation for previous financial year or for immediate financial support
shall be recognized as income of the period in which receivable. Govt. grant

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 in the form of non-monetary assets, given at a concessional rate shall be
accounted from on basis of their acquisition cost. As per AS-12 : Grants
related to non-depreciable fixed assets :- (i) Grant is shown as
deduction from gross value of fixed assets, or (ii) if the conditions
attached to grants are fulfilled (i.e. grants received after
fulfillment of the conditions attached to grants), grants are
credited to capital reserve account, (iii) if condition are yet to be
fulfilled :- grants are credited to income over the same period
over which the cost of meeting such conditions is charged to
income, unapportioned deferred income is disclosed in the
balance sheet as “deferred Govt. Grants”.
 Refund of Govt. grant :- first applied against any unamortized deferred
credit remaining in respect of government grant, any excess shall be
charged to profit & loss. In respect of depreciable fixed asset or asset shall
be recorded by increasing the actual cost or WDV.

 Disclosure :- Disclose nature and extent of govt. grant recognized by

deducting from cost of asset or WDV during previous year, nature and
extent of govt. grant recognized during previous year, govt. grant not
recognized by deducting from cost or WDV, govt. grant not recognized
during previous year as income and reasons thereof.

ICDS- VIII SECURITIES

 Scope :- deals with securities held as stock in trade. There is separate
procedure in ICDS for securities held by a scheduled bank or public financial
institution.

 Fair value :- is the amount for which an asset could be exchanged between
a knowledgeable, willing buyer and a knowledgeable, willing buyer in an
arm’s length transaction.

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  Securities means :- as per Sec. 2(h) of Securities Contract (regulation) act
1956, other than derivatives.

 Recognition :- a security on acquisition shall be recognized at actual cost

(purchase price + brokerage +fees +tax +duty or cess), where a security is
acquired in exchange for other securities, the fair value of the security so
acquired shall be actual cost, whereas AS-13 (Accounting for investments)
states that if investment is acquired by issue of shares or other securities
then purchase price of investment is the fair value of the securities issued,
and if investment is acquired in exchange for another asset then
acquisition cost of investment is fair value of the asset given up or fair
value of the investment received if it is more clearly evident. If unpaid
interest included in price- pre-acquisition portion of the interest is deducted
from the actual cost.

 Valuation at year end :- Securities held as stock in trade shall be valued at

actual cost or net realizable value at the year end, whichever is lower.
Comparison shall be done category wise and not for each individual security.
Categories shall be :- (a) shares, (b) debt securities, (c) convertible securities,
and (d) any other securities. AS-13 states that carrying amount of each
current investment is the lower of cost and realizable value. Any reduction
in realizable value is debited in profit & loss A/c; however if realizable
value of investment is increased subsequently, the increase in value of
current investment to the level of the cost is credited to profit & loss A/c.

 Valuation at beginning :- securities held as stock in trade on the beginning

of the previous year shall be the cost of securities available, if any, on the
commencement of the business when the business has commenced during
the previous year, and in any other case- value of securities of

 the business as on the close of the immediately preceding previous year.

Securities not listed or not quoted shall be valued at actual cost. If cost
cannot be ascertained by reference to specific identification, then FIFO
method shall be used.

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 ICDS IX BORROWING COSTS
 Borrowing costs :- are interest and other costs incurred by a person in
connection with the borrowing of funds and include commitment charges
on borrowings, amortised amount of discount or premium (AS-16 uses word
“provisions”) relating to borrowings, amortised amount of ancillary costs
incurred in connection with agreement of borrowings, finance charges in
respect of asset acquired under finance leases or similar arrangements.

 Qualifying asset :- means (i) land, building, machinery, plant or furniture,

being tangible assets; (ii) know-how, patents, copyrights, trade marks,
licenses, franchises or any other business or commercial rights of similar
nature, being intangible assets; (iii) inventories that require a period of
twelve months or more (AS-16 doesn’t quantify duration but states “more
than one accounting period”) to bring them to a saleable condition.

 Recognition :- Borrowing costs that are directly attributable to the

acquisition, construction or production of a qualifying asset shall be
capitalized as part of the cost of that asset. Amount of borrowing costs
eligible for capitalization shall be determined in accordance with this ICDS.
Other borrowing costs shall be recognized in accordance with the provisions
of the act.

 Capitalisation :- funds specifically borrowed for acquisition, construction or

production of a qualifying asset, amount of borrowing costs to be
capitalized on that asset shall be the actual borrowing cost incurred during
the period on the funds so borrowed. Whereas AS-16 specifies that actual
borrowing cost incurred during the period less any income on the
temporary investment of borrowed amount.

 Proportionate borrowing cost :- funds borrowed generally and untilised for

qualifying asset, borrowing cost shall be worked out by following formula :-

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 A × ----
C
Where

A = borrowing cost incurred during previous year except on borrowing directly

relatable to specific purposes;

B=
(i) the average of cost of qualifying asset in balance sheet on first day
and last day of the previous year.

(ii) If qualifying asset does not appear in balance sheet on first or last or
both day of previous year, half of the cost of qualifying asset;

(iii) In case qualifying asset does not appear in balance sheet on the last
day of the previous year, the average of the cost of qualifying asset as
appearing in balance sheet on first day of the previous year and on the
date put to use or completion, other than qualifying asset which are
directly funded out of specific borrowing, or
C = average of total asset on first day and last day of previous year, other than
those assets directly funded out of specific borrowings.

 Commencement of capitalization :- In case of specific borrowing from date

on which funds were borrowed, in case of funds borrowed generally from
the date on which funds were utilized.

 Cessation of capitalization :- in case of qualifying asset other than

inventory- when such asset is first put to use, in case of inventory when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

 Disclosure :- accounting policy adopted in borrowing costs, and amount of

borrowing costs capitalized during previous year.

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 ICDS –X PROVISIONS, CONTINGENT
LIABILITIES AND CONTINGENT ASSETS

 Scope :- This ICDS deals with provisions, contingent liabilities and contingent
assets, except those : (a) resulting from financial instruments, (b) resulting
from executor contracts (c) arising in insurance business from contracts with
policyholders and (d) covered by another ICDS.

 Definition :- (a) Provision – is a liability which can be measured by using a

substantial degree of estimation, (b) Liability – present obligation from past
events, (c) Contingent Liability – present obligation that arises from past
event and existence of which will be confirmed only by occurrence or non-
occurrence of one or more uncertain future event. (d) Contingent Asset :-
possible asset that arises from past events the existence of which will be
confirmed only by occurrence or non-occurrence of one or more uncertain
future events. (f) executory contracts :- neither party has performed any of
its obligation or both parties partially performed their obligation.

(g) present obligation :- obligation based on evidence available.

 Recognition of provisions :- A provision shall 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 amount
of obligation. If these conditions are not met no provision shall be
recognized. No provision shall be made for costs that need to be incurred to
operate in the future. Where details of a proposed new law have yet to be
finalized, an obligation arises only when the legislation is enacted.

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  Recognition of contingent liabilities :- A person shall not recognize a
contingent liability.

 Recognition of contingent assets :- A person shall not recognize a

contingent asset. Contingent assets are assessed continually and when it
becomes reasonably certain that outflow of economic benefit will arise, the
asset and related income are recognized in the previous year in which the
change occurs.

 Best estimate :- The amount recognized as a provision shall be the best

estimate of the expenditure required to settle the present obligation at the
end of the previous year. The amount of a provision/contingent asset shall
not be discounted to its present value.

 Reimbursements :- reimbursement shall be recognized when it is

reasonably certain that reimbursement will be received if the person settles
that obligation. The amount recognized for reimbursement shall not exceed
the amount of the provision. Where a person is not liable for payment of
costs in case the third party fails to pay, no provision shall be made for those
costs.

 Review :- provisions shall be reviewed at the end of each previous year and
adjusted to reflect the current best estimate. If no reasonable certainty of
outflow/inflow, provision/contingent asset/related income should be
reversed.

 Disclosure in respect of provisions :- (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, i.e. incurred
and charged against the provisions, 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
recognized for that expected reimbursement.

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  Disclosure in respect of contingent assets :- (a) a brief disclosure in respect
of contingent 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 recognized during the year, including increases to assets
and related income already recognized, and (d) amount of asset and related
income reversed during the previous year.

Conclusion of ICDS

The aforesaid write up is a brief description of notified ICDS. But it is certain

that these are compulsorily to be followed while computing income from
business or profession and income from other sources by all the persons
whether corporate, non-corporate- (except individual or HUF not liable to
audit u/s 44AB) etc., without any turnover criteria. From Assessment Year
2017-18 requirements as to gains or losses arising due to ICDS are to be
made in income tax return forms and since information in income tax
return forms are kept very brief hence detailed information may have to be
given during the course of assessment proceedings, if any, and also
information has to be given in tax audit report in form No. 3CD U/s 44AB to
incorporate gains/losses arising due to ICDS.

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