Income Computation and Disclosure Standards (ICDS)
Income Computation and Disclosure Standards (ICDS)
Income Computation and Disclosure Standards (ICDS) were framed by the Government of India with the objective of inculcating uniformity in accounting policies governing computation of income in accordance with the pertinent tax provisions. ICDS has been framed using Generally Accepted Accounting Principles (GAAP’s ) with the assistance of the Institute of Chartered Accountants of India (ICAI). It has been in existence from the financial year of 2015-16. In this article, we look at the various provisions of ICDS in detail.
ICDS is applicable to the taxpayers who are recipients of income under the head “Profits and gains of business or profession” or “Income from other sources”, irrespective of the accounting standards followed by a company. The provisions of ICDS will also be applicable to the persons computing income under the relevant presumptive taxation scheme.
The standards specified in ICDS is applicable to revenues which are liable to tax on gross basis such as internet, royalty and fees for technical services for non-residents u/s 11A of the Act.
Provisions of ICDS are generally applicable to all taxpayers irrespective of their turnover or quantum of income, except for individuals or Hindu Undivided Family as they are not covered under the provisions of Tax Audit. ICDS will not be considered for the computation of Minimum Alternate Tax (MAT).
Features of ICDS
The following are the salient features of the Government implemented ICDS:
- ICDS is not meant for maintenance of books of account, but for the computation of income.
- Non-compliance to the standards may place the authority in a position of assessing the income on ‘best judgment’ basis.
- ICDS doesn’t have any criterion of income or turnover.
- Every ICDS, except on securities, provide for transitional provisions to facilitate first time adoption and consideration of the resultant impact.
- In the event of a conflict between the provisions of the Act and ICDS, the provisions of the Act will be given preference ahead of the latter.
- ICDS do not have prudence as a fundamental assumption except if it is specifically stated so in the respective ICDS. It may lead to an earlier recognition of income or gains or later recognition of expenses in comparison with the Accounts formulated under the existing Accounting Standards (AS).
- The Income Tax Act allows the Assessing Officer to conduct an assessment in accordance with Section 144 on the event of a failure to compute income according to ICDS.
- Form 3CD has been revised for making mandatory disclosures in compliance with ICDS.
Income Computation and Disclosure Standards
A copy of the ICDS – Income Computation and Disclosure Standards is reproduced below for reference:Income Computation and Disclosure Standards
ICDS 1 is inclusive of standards for accounting policies. THE ICDS, in contrast to Accounting Standards (AS) does not consider the aspects of prudence and materiality in selection and application of accounting policies.
ICDS only permits change in accounting policies on the existence of solid grounds for the same. If there is a change in accounting policy which doesn’t have any material implications for the current previous year but which is expected to have a reasonable impact in the years to come, ICDS requires disclosures of such change in the previous year in which the change is adopted, as well as in the previous year in which such change have resulted in material implications for the first time.
ICDS 2 contains provisions pertaining to valuation of inventories. With respect to ICDS on valuation of securities, the allocation of fixed production overheads for the purpose of their inclusion in the cost of conversion is based on the normal capacity of the production facilities.
ICDS states that the value of the opening inventory will be the value of the inventory as it was on the close of the immediately preceding year.
In the event of dissolution of a partnership firm or association of body of individuals, the inventory shall be valued at the net realizable value, whether or not the business is discontinued.
ICDS does not permit any changes in the method of valuating inventory without reasonable grounds for the same.
ICDS 3 deals with construction contracts. It is applicable for the determination of income for a construction contract of a contractor. It uses the percentage completion method for determining the contract revenue and contact costs of a construction project.
ICDS prohibits adjustment of incidental income in the nature of interest, dividends or capital gains from contract cost or recognition of foreseeable or expected loss as contract cost until such costs are actually incurred.
ICDS 4 is connected with the recognition of revenue. IDSS, in this case, deals with the basis for recognition of revenue which results from the sale of goods, royalties, dividend, etc.
According to ICDS, revenue will be recognized as specified below:
- Revenue from sale of goods is recognized if there is a reasonable certainty of its collection.
- Revenue from providing services is recognized in accordance with the principles laid down in ICDS 3 on Construction Contract. “Completed contract method” is not recognized.
- Interest income shall accrue on time basis determined by the amount outstanding and the rate applicable. Discount or premium on debt securities is recognized over the period to maturity.
- Income on royalties will accrue as per the terms of the pertinent agreement.
- Dividend income is recognized as per the provisions of the Act.
ICDS 5 is associated with the specified tangible fixed assets such as land, building, machinery, etc. An item is considered as tangible fixed asset if it is held for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.
Exchange of assets will incur the equal fair market value of the acquired asset. If several assets are purchased for a consolidated price, the total consideration remitted shall be ascertained to various assets in a fair manner.
ICDS 6 is connected with:
- Treatment of transactions in foreign currencies.
- Translating the financial statements of foreign operation.
- Treatment of foreign currency transactions in the nature of forward exchange contracts.
ICDS 7 deals with Government Grants. It contains provisions with respect to subsidies, cash incentives, duty drawbacks, waiver, concessions, and reimbursements.
ICDS 8 specifically deals with securities held as stock-in-trade. It is recognized as follows:
- A security on acquisition is recognized at actual cost which consists of purchase price and acquisition charges.
- With respect to security acquired in exchange for other security or another asset, the cost of acquisition is the fair value of the security or asset acquired.
- In case of cum-interest securities, the accrued interest is deducted from the actual cost of securities.
ICDS 9 deals with the concept of borrowed costs. ICDS considers all assets as qualifying assets. Borrowing costs are attributable to the acquisition, construction or production of qualifying asset. ICDS has specified the formula for capitalization of borrowing costs which involves allocating the total general borrowing cost incurred in the ratio of average cost of qualifying assets on the first day and last day of the previous year.
As stated by ICDS, capitalization of borrowing costs should begin with the date of borrowing (If it is a specific borrowing), and the date of utilization of funds (if it is a general borrowing). It should conclude when all the requisite activities to prepare the inventory for its intended sale are complete (in case of inventories), and when the asset is first put to use (in case of other assets).
ICDS 10 is connected with provisions, contingent liabilities and contingent assets; other than the ones:
- Arising out of financial instruments, whether the same is carried at fair value or not.
- Arising out of executory contracts.
- Arising in insurance business from contracts with policy holders.
- Covered by other ICDS.