Income Computation and Disclosure Standardviews-exchange.org/downloads/bg_materials/ICDS Session...1...

Income Computation and Disclosure Standard

21 November 2015

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In e

ffec

t

Companies Act 2013

Indian Accounting Standards converged with IFRS (Ind AS)

Income Computation andDisclosure Standards (ICDS)

Internal Financial controls(Reporting by Board and Auditors)

Largely effective from 1 April 2014

Mandatory from 2016-17 for certain categories of companies

Mandatory from 2015-2016

Guidance note issued by ICAI in September 2015

On

th

e an

vil

Goods and Services Tax (GST)

Companies Act 2013 –remaining sections

Expected to be implemented from 1July/1 October 2016

Expected to be implemented in the coming months

Requires implementation and transition efforts over many years

A period of significant regulatory change

2

ICDS implementation in India – Story so far

1996

December 2010

October 2012

July 2014

January 2015

The CBDT constituted AS Committee to suggest the following : AS to be notified under the Act Amendments to the Act Method to determine book profit for

MAT purposes on transition to Ind AS

The Central Government notified two accounting standards under section 145(2) of the Income Tax Act, 1961 (the IT Act).

Final report of the Committee and 14 ICDS published Comments invited from public

on the Draft ICDS

CBDT issued draft of 12 ICDS, after incorporating suggestions by stakeholders and providing transitional provisions for these ICDS The draft ICDS were

open for comments and suggestions till 8 February 2015

Finance Bill 2014 amended section 145(2) of the IT Act. ICDS applicable from FY 1 April 2015 Compliance

required in 2015 1st quarter

All legal entities in India would be required to comply with ICDS from 1 April 2015

10 Final ICDS notified on 31 March 2015 ICDS on Leases

and Intangibles not notified Applicable from

FY 2015-16

March 2015

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Highlights of the ICDS – A step in the right direction

Many industry specific differences could arise

A significant impediment to adoption of Ind

AS. Uniform basis of taxable income

computation

One set of books of account with

adjustments for ICDS

Income Tax Act ~ ICDS ~ Subordinate

legislations /Judicial pronouncementsTo address issues subject to litigation and

diversity

Areas of differences with current set of

Accounting Standards/PoliciesImpact on MAT on adoption of Ind AS

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List of ICDS

# Refers to

ICDS 1 Disclosure of Accounting Policies

ICDS 2 Valuation of Inventories

ICDS 3 Construction Contracts

ICDS 4 Revenue Recognition

ICDS 5 Accounting for Tangible Fixed Assets

ICDS 6 The Effects of Changes in Foreign Exchange Rates

ICDS 7 Government Grants

ICDS 8 Securities

ICDS 9 Borrowing Costs

ICDS 10 Provisions, Contingent Liabilities and Contingent Assets

Based on existing Indian GAAP

No ICDS on standards related to disclosures and standards with sufficienttax clarity

ICDS on additional topics to be issued

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Significant impact areas (1/10)

ICDS 1 on Accounting policies eliminates the concept of ‘Prudence’

Disallows recognition of expected losses or mark to market losses

unless specifically permitted by any other ICDS

ICDS is silent on the treatment of mark to market gains

Result in higher taxable income as mark to market losses and

losses on onerous contracts are disallowed

Elimination of Concept of Prudence and materiality

Taxation impact

Mark to market loss unless specifically covered in other ICDS allowed only on settlement

Transitional provision

All contracts or transactions existing on the 1st day of April, 2015 or entered into on or after the 1st day of April, 2015 shall be dealt with in accordance with the provisions of ICDS 1

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ICDS on revenues and construction contracts does not permit

accounting under completed contract method and requires

percentage of completion to be mandatorily followed

Unlike AS-7 on construction contracts, ICDS prohibits the

deferral of recognition of margins if the stage of completion

exceeds twenty five percent

ICDS on revenue recognition and construction contracts does

not permit recognition of losses on onerous contracts

Treatment of Retention Money

Interest income

Early taxation of Revenues

Taxation impact

• Deduction for future / anticipated / estimated losses (including onerous contract) not allowed unless actually incurred

• Taxability of service contracts on percentage completion method

Transitional provision:

Cumulative catch up of revenue after the date of transition for all open contracts

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Unlike AS-16 on borrowing cost, the ICDS on borrowing cost

does not provide any minimum period criteria for classification

as a qualifying asset except for Inventories

Could result in significant difference between AS and ICDS

Capitalization of borrowing cost under ICDS would increase as

larger number of assets would now come under the ambit of a

qualifying asset

Current year charge to the profit and loss would reduce as

borrowing costs would get capitalized

Classification of a Qualifying Asset


Taxation impact

Tax impact in line with provisions of the Income Tax Act


Prospective from date of transition after taking into account the borrowing cost capitalised earlier

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Higher capitalisation of Borrowing cost

ICDS 9 on borrowing cost requires commencement of

capitalisation of borrowing cost to be earlier as compared to the

AS

ICDS requires capitalisation even if active deployment of the

qualifying asset is interrupted

Unlike AS-16, Under ICDS, capitalisation of borrowing cost would

cease only when the asset is put to use resulting in higher

capitalisation of borrowing cost

Specific borrowing From the date of borrowing

General borrowing Date of utilization of funds


Taxation impact

Tax impact in line with provisions of the Income Tax Act


Prospective from date of transition after taking into account the borrowing cost capitalised earlier

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Capitalisation of exchange differences

Under existing AS, foreign exchange differences can be

capitalized along with the underlying asset under certain

circumstances. Under ICDS, capitalisation of exchange

differences relating to fixed assets shall be in accordance with

section 43A and other similar provisions of the act.

Capital vs Revenue exchange gains and losses

No Integral operations - FCTR

Taxation impact

Mostly in line with the current provisions of the Income-tax Act, 1961


Prospective from date of transition

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ICDS on Effects of changes in foreign exchange rates requires

premium , discount or exchange differences on Forward contracts

for trading , speculation or hedging purposes to be recognized

only at the time of settlement

Significant difference from current practice under AS where,

recognition of gains or losses are done on mark to market basis

Accounting for foreign currency option contracts and other similar

contracts to be similar to forward exchange contracts

Accounting for Forward contracts


Taxation impact

• Currently discount / premium is recorded in Profit and Loss Account and offered / claimed in tax return

• Losses / gains to be deferred in case of contracts overlapping two years



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Derivatives

Forward Exchange Contracts – For trading/

speculation

Forward Exchange Contracts– To hedge the foreign currency risk of a

firm commitment or a highly probable forecast

transaction

Other Forward Exchange Contracts Other Derivative contracts

Covered in ICDS on Changes in Foreign exchange rates

Premium or discount arising at inception shall be amortized over the life of the contract


Premium or discount on contracts shall be recognized at the time of settlement


Premium or discount on contracts shall be recognized at the time of settlement

Covered in ICDS on Accounting policies

MTM shall not be recognized unless permitted by other ICDS. MTM deferred till settlement

“Forward exchange contract” means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another

financial instrument of a similar nature;

Treatment of derivatives


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Initial recognition of government grants cannot be postponed

beyond the date of actual receipt

ICDS does not permit capital approach for recording of

government grants

Grants to be either reduced from the cost of assets or recognized

as income either immediately or over a period of time

Recognition of Government grants

Taxation impact

To understand whether purpose test - capital vs. revenue, held by judicial precedents would continue to apply



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ICDS on provisions , contingent liabilities and contingent assets

requires recognition of provision only if the outflow of

economic benefit is ‘reasonably certain’.

Result in significant difference from AS, where provisions are

recognized when they are probable

Unlike AS, under ICDS, recognition of contingent assets and therelated income is done when the inflow of economic benefit isreasonably certain arise

Changes brought in presumably with the intention to bring inconsistency to the tax treatment of losses and gains

Changes in accounting for provisions and contingent assets

Taxation impact

Intention appears to bring tax treatment of losses and gains on par



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Dispensation of standard cost method

Distribution costs excluded

Cost of services

Inventories

Tangible fixed assets

Capitalization of exchange differences relating to

fixed assets shall be in accordance with Section

43A and other similar provisions of the Act, which

could be materially different from AS

Covers only securities held as stock–in-trade (Also

Covers only securities held as stock–in-trade

Comparison of cost and net realisable value for

securities held as stock-in-trade to be assessed

category wise and not for each individual security

Unquoted / irregularly quoted securities carried at

cost

Securities

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Technology Sector

• Foreign exchange gains/losses on derivatives

• Losses on onerous contracts

• Prohibition of Completed contract

Realty Sector

• Formula for computation of POC not in sync with Guidance note

• Prohibition of Completed contract

• Losses on onerous contracts

Manufacturing Sector

• Capitalisation of Exchange difference for fixed assets

• Borrowing cost capitalisation

• Government grants of capital nature (land)

Retail Sector

• Accounting for Provisions

• Borrowing cost capitalisation

Industry Specific Issues

Industry Specific Issues

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Application Issues (1/5)

1) Absence of Materiality Threshold

Current Accounting Practice

Financial statements should disclose all “material” items, i.e. items the knowledge of which mightinfluence the decisions of the user of the financial statements

All income and expenditure having a material bearing on the financial statements are recognisedon accrual basis

ICDS ProvisionAs per ICDS 1 relating to accounting policies, the fundamental assumptions include • Going Concern• Consistency• Accrual

ICDS 1 does not include as art of its fundamental assumptions the concept of materiality.

Impact• Any unadjusted audit differences (considered immaterial) may have to be considered in the

computation of taxable income• Capitalisation of Items which are immaterial and have been charged to profit and loss in Books of

Accounts

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2) Treatment of Contingent Asset


An enterprise should not recognise a contingent asset in its books of accounts.

Contingent assets are assessed continually and if it has become virtually certain that an inflow ofeconomic benefits will arise, the asset and the related income are recognised in the financialstatements of the period in which the change occurs

ICDS Provision A person shall not recognize a contingent asset Contingent assets are assessed continually and when it becomes reasonably certain that inflow

of economic benefit will arise, the asset and related income are recognised in the previous year in which the change occurs

Impact• ICDS has a lower threshold as compared to AS. Contingent assets would be recognised earlier

under ICDS. • Interest income on refund of payments made under protest - Cash basis or Accrual basis?• All contingent assets would need to be analysed closely to see if it meets the reasonably certain

criteria.

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3) Exchange fluctuation on translation of a non integral operation


AS-11 provides that exchange differences arising on translation of the financial statements of non integral foreign operations should be accumulated in a foreign currency translation reserve in the balance sheet until the disposal of the net investment.

These exchange differences are not taken into Profit and loss account as these merely represent notional values

ICDS Provision

• Para 9 (1) (c) of ICDS requires all exchange differences on account of translation of a non integral operation should be recognized in Profit and Loss account.

Impact

• Result in taxing of notional income and expenses and recognizing such notional translation differences may result in additional tax outgo.

• Similar impact on exchange differences arising on monetary items that in substance forms part of enterprise’s net investment in the foreign operation

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4) Recognition of Government Grants


AS-12 requires that an appropriate amount in respect of the government grant be recognized on a prudent basis and is credited to income for the year even though the actual amount may be settled and received much later

ICDS Provision

• As per ICDS, recognition of government grant shall not be postponed beyond the date of atualreceipt

Impact

• May result in early taxation of government grant income as ICDS does not consider the probability of the grant conditions not being met.

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5) Recognition of Marked to Market losses


Marked to market losses on forward contracts or other derivatives is recognized in the statement of profit and loss

ICDS Provision

• ICDS has discarded the concept of prudence• ICDS requires mark to market losses to be deferred and allows a deduction only at the time of

settlement.

Impact

• MTM on Forward exchange contracts for firm commitments or highly probable transactions would be recognized only on settlement basis.

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What you need to consider ?

Applicability to all for PGBP and IOS

Taxable income now visibly delinked from AccountingIncome

Some judicial pronouncements may no longer beoperative

ICDS on various topics to be issued

Modifications to be made to Form 3CD and Income Taxreturns to facilitate changes brought in by ICDS

Considering the differences between ICDS and AS maywarrant the need to maintain additional set of records

Transitional provisions

Differences from Ind AS

MAT

Trainings

Thank You

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