Issued in accordance of Section 145 (2) of the Income-tax ...€¢Method of Accounting •For PGBP &...
Transcript of Issued in accordance of Section 145 (2) of the Income-tax ...€¢Method of Accounting •For PGBP &...
Issued in accordance of
Section 145 (2)
of the
Income-tax Act,1961
Category Relevant AS to be followed for Accounting Purpose
Relevant AS to be followed for Income Computation
Proprietorship AS issued by ICAI ICDS
Partnership Firm AS issued by ICAI ICDS
Company AS issued under Companies(Accounting Standards) Rules
ICDS
Company havingHigher Net Worth
Ind – AS issued under Companies (Accounting Standards) Rules, 2015
ICDS
• Method of Accounting
• For PGBP & IOS
• Cash Basis or Mercantile Basis
Sub- Section
1
• Central Government may Notify
• Income Computation and Disclosure
Standards
Sub- Section
2
• If Sub-Section 1 and 2 not followed
• Assessment u/s 144 (Self Assessment Section)
Sub- Section
3
•Not for Accounts
•Only for Computation
of PGBP & IOS incomes
Income
Computation
• Form 3 CDDisclosure
Standards
Act
ICDS
Issued on 29.09.2016 vide Notification No. 87/2016
Applicable from 01.04.2016
Applicable from Asst. Year 2017-18
Will first be applied in Advance Tax Calculation for the First Quarter
Corresponding Accounting Standard – 1 on Disclosure of Accounting Policies
Fundamental Accounting
Assumption
Going
ConcernConsistency Accrual
Factors Governing Selection of Accounting Policy
1. Substance over Form
2. Prudence (Mark to Market loss not to be recorded unless permitted)
3. True and Fair
ICDS – I :: Accounting Policies
Marked to market loss or an expected loss shall not be recognised
unless
the recognition of such loss is permitted by any other ICDS
ICDS – I :: Accounting Policies
No Change in Accounting Policy without
REASONABLE CAUSE(Reasonable Clause not defined)
ICDS – I :: Accounting Policies
Question 9:
ICDS – 1 provides that an accounting policy shall not be changed without reasonable cause. The term reasonable cause is not defined. What shall constitute ‘reasonable cause’?
Answer:
Under the Act, ‘reasonable cause’ is an existing concept and evolved well over a period of time conferring desired flexibility to the tax payer in deserving cases.
All contracts or transactions existing on the1st April, 2016 or entered after the dateshall follow the ICDS after taking note of theadjustments already made earlier, if any.
Disclosure of Accounting Policies
All significant accounting policies must be disclosed.
Any significant change in accounting policy must be disclosed. (Two times)
Disclosure of accounting policies cannot remedy a wrong treatment.
ICDS – I :: Accounting Policies
Valuation Principal similar to AS – 2
Lower of Cost or NRV
Corresponding Accounting Standard – 2 on Valuation of Inventories
Cost shall include:
All costs incurred to bring the goods to its present location and condition
Cost of manufacturing will include all costs including systematic allocation of Fixed Cost.
All duties and taxes paid
ICDS – II :: Valuation of Inventories
Cost shall NOT include:
Storage Cost
Administrative Costs
Selling Costs
Abnormal Loss
Trade Discount
(i.e. Valuation at Purchase less Trade Discount)
ICDS – II :: Valuation of Inventories
•Valued at Respective Purchase Price lot to
which the Inventories belong to
When Specific
Identification of
Inventories is Possible
viz – a – viz its Purchase
Lot
•Either valued at FIFO Basis
•or valued at Weighted Average Basis
•Or Valued under Retail Price Method (Only
applicable for retail traders)
•Standard Cost
When Inventories
present cannot be
identified with the
respective Purchase
Invoice
Cost Formula
ICDS – II :: Valuation of Inventories
Raw Material Valuation
Primarily at Cost
(If Finished Goods are sold at Profit)
ICDS – II :: Valuation of Inventories
Dissolution of Partnership Firm, whether business is continued or not
Valuation of Inventory to be done compulsorily
at
Net Realisable Value.
ICDS – II :: Valuation of Inventories
For a continuing Firm
Closing Stock of Preceding Year
For a New Firm
Cost of Inventory available on the day of commencement of business
Accounting Policies adopted in measuring inventories including cost formula used.
Details of Inventories for which Standard Costing has been used (A confirmation of the fact that Standard Cost approximates the actual cost)
Total Carrying Amount of Inventories
Scope:
Applicable for the computation of Income of Contractor of Construction Contract
Provisions of this ICDS shall be applied to each Construction Contract Separately.
Corresponding Accounting Standard – 7 on Accounting of Construction Contracts
Revenue and Cost Recognition
Percentage of Completion Method
(POCM)
ICDS – III :: Construction Contracts
Percentage of Completion is assessed under either of three ways:
Cost Incurred till date to Total Estimated Cost
Physical Completion Method
Survey Method
Progress payments and advances received from customers are
not determinative of the stage of completion of a contract.
ICDS – III :: Construction Contracts
Profit & Loss Account
To Contract Cost XXXXX By Contract Revenue XXXXXX
(Total Est. Cost * % of Completion)
(Total Est. Revenue * % of Completion)
To Profit XXXXX
Note: Contract Revenue should be recognised when there is reasonable certainty of its ultimate collection.
ICDS – III :: Construction Contracts
When Percentage of Completion is below 25%
Contract Revenue = Contract Cost
(i.e. Contract Revenue is not recognised as per POCM)
No Profit and No Loss
ICDS – III :: Construction Contracts
Major Deviation from Existing AS – 7
AS -
7
100% Loss to be
provided in P&L at
the moment it is
realised that the
loss will be suffered
whether or not
Project has begun. ICD
S -
3
Recognize Loss on
the Basis of
Percentage of
Completion Method.
(This is illogical and
against the concept
of Provision for
Onerous Contract
which is globally
Accepted)
ICDS – III :: Construction Contracts
Question 11:
Whether the recognition of retention money, receipt of which is contingent on the satisfaction of certain performance is yet to be recognised as revenue on billing?
Answer:
Yes, subject to reasonable certainty of its ultimate collection.
Amount of Contract Revenue recognised as Revenue
Method used to determine stage of completion
Costs + Recognised Profit – Recognised losses
Advances Received
Retentions
Disclosure
Revenue on sale of Goods to be recognisedwhen
Transfer of Property takes place or
Transfer of Risks and Rewards of ownership takes place
And, Reasonable certainty of its ultimate realization exists.
Corresponding Accounting Standard – 9 on Revenue Recognition
Revenue on sale of services to be recognised
On
Percentage of Completion Basis.
(The provisions of ICDS on Construction Contracts shall apply Mutatis Mutandis for sales of services.)
Duration of Service Contract is 90 days or less
Service comprise of number of acts to be performed; then revenue may be recognised on SLM basis
•On Time Basis
•Premium or Discount to be amortised over the
period of maturityInterest
•As per Agreement
•On some systematic and rational basisRoyality
•As per provisions of ActDividend
Treatment of Other Revenue Items
Total amount of sale not recognised due to lack of reasonable certainty of its collection
Amount of revenue from Service Transaction recognised as revenue
Method used to determine Percentage of Completion
For Service Transaction in progress at end
- Costs + Recognised Profits – Losses
- Amount of Advance Received
- Amount of Retentions
Tangible Fixed Assets : Cost Includes
Purchase Price
Duties & Taxes (Excluding those which are recoverable)
Other Directly Attributable Expenses
Price Adjustment
Start up and Commissioning Expenses
Test Run Expenses (Till Commercial Production)
Corresponding Accounting Standard – 10 & 6 on Fixed Assets & Depreciation
Tangible Fixed Assets: Cost excludes/ is deducted
Trade Discount & Rebates
Price Adjustment
General Overheads
Accounting for Improvements and repairs are similar to normal accounting norms.
Depreciation as per provisions of Act
Income from sale / transfer of Tangible Fixed Assets as per the provisions of Act
Description of Asset or block of Assets
Rate of Depreciation
Actual cost or WDV
Additions and deductions with dates
Depreciation Allowable
Closing WDV
(Generally mentioned in Clause 18 of Form 3 CD)
Initial Recognition of a Transaction made in Foreign Currency is recorded at the rate existing on the date of transaction.
Monthly /weekly average exchange rates can be taken for all
transactions of the month / weeek if these rates are approximately similar to the actual rates on the transaction date.
Corresponding Accounting Standard – 11 on Foreign Exchange Rates
Conversion on Closing Dates
• At the Closing Rate
• Difference is treated as income or
expense
Monetary Items
(Cash, Debtors etc)
• Continued at the rate of date of
transaction
• Inventory valued at NRV; date of
determination of NRV
Non-Monetary Items
(Stock, Plant &
Machine etc)
Subject to Section 43A of the Act
It requires recognition of Government Grants only when there is a reasonable assurance that the person shall:
- Comply with the conditions attached to them;
- Receive the Grant.
Condition of receipt of Grant are not to be seen once the Grant is received.
Corresponding Accounting Standard – 12 on Accounting of Government Grants
Grant Related to
Dep Fixed Assets
• Deducted from
the Fixed Assets
Grant Related to
Expenses
• Recognised as
Income in the
matching period
of Incurred
Expenses
Misc. Other Grant
• Treated as
Income
• (Deviation from Supreme
Court Judgement of Ponni
Sugal Mills (2008)
Treatment of Government Grant
Recorded at the price atwhich it has been recevied(i.e. Concessional Price)
Nature & Extent of Government Grants recognised by way of Deduction from Actual Cost
Nature & Extent of Government Grants recognised as Income
Nature & Extent of Government Grants not recognised as Income and reason thereof
It deals with Securities held as Stock in Trade only.
Corresponding Accounting Standard – 13 on Investments
Valuation of Securities
Lower of Cost or Net Realisable Value
Comparison of Cost or NRV is to be done on the basis of
Category Wise not Individual basis.
(Deviation from Supreme Court Judgment in case of UCO Bank Limited (240 ITR 355)
Corresponding Accounting Standard – 16 on Borrowing Costs
Borrowing Cost includes:
Commitment Charges on Borrowing
Amortised amount of Discount & premium
Amortised amount of ancillary cost
Finance Charge under Finance Lease
Qualifying Assets
Land, building, machinery, plant or furniture being tangible assets
Know how, patent, copyrights etc being intangible assets
Inventories that require more than one year in its coming into saleable condition
Borrowing Cost
incurred on Qualifying
Asset acquisition
• Capitalised till put to
Use
• Section 36 (1) iii
amended
Other Borrowing Cost
• Charged to revenue
Treatment of Borrowing Cost
Accounting Policy adopted for borrowing cost
Amount capitalised during the year
A Provision is recognised when:
There is present obligation
Arising out of Past Event
Of which reliable estimate can be made
Reasonable certainty (Not Probable) of outflow of resources
Corresponding Accounting Standard – 29
Contingent Liability and Contingent Assets are not to be recognised.