Income Computation and Disclosure Standards (ICDS)

1. Income Computation and Disclosure Standards (ICDS)

2. Notified ICDS Below are the notified 10 ICDS Effects of changes in Foreign Exchange Rates Accounting Policies Government Grants Borrowing costs Inventories Revenue Recognition Tangible Fixed Assets Securities Construction Contracts Provisions, Contingent Liabilities and Contingent Assets

3. ICDS II – Valuation of Inventories

4. ICDS II – Valuation of Inventories Overview • Deals with valuation of inventory • Inventories defined as assets • Held for sale in ordinary course of business • In process of production for such sale • In forms of materials or supplies to be consumed in production process or rendering of services • Inventories shall be valued at cost or NRV, whichever is lower • FIFO, specific identification, weighted average, standard costing methodor retail method – permitted methods for cost measurement • Exclusions • WIP under construction contract / other ICDS • Shares, debentures and Financial instrument held as stock-in-trade • Producer’s Inventories of livestock, agriculture, etc. to the extent measured at NRV • Machinery spares which can be used in connection with Tangible Assets – irregular in use Primarily in line with AS-2 except that AS-2 specifically exclude WIP for service providers

5. ICDS II – Cost of Inventories Cost of Purchases Cost of Purchases Purchase price + duties / taxes + freight inwards + other expenses directly attributable to the acquisition – trade discounts / rebates Cost of Services Cost of labour + other personnel cost (directly engaged in providing the service) + attributable overheads Cost of Services Cost of conversion • Directly attributable cost + allocation of fixed and variable overheads • Unallocated overheads to be recognized as expense • Cost of by products, scrap or waste - to be reduced from main product at NRV Cost of Conversion and Other costs The amended ICDS removes requirement of service inventory for service providers. Cost of services not specifically provided under AS-2 – whether required??

6. ICDS II – Valuation of Inventories

7. ICDS II – Valuation of Inventories

8. ICDS II – Change in method of Valuation – Impact on Opening Stock Other Key Points • Tax impact in the year of change of inventory valuation- Value of opening stock to be same as the value of closing stock of the immediate preceding year • Contrary judgements exist: • CIT v. MahavirAluminum Ltd. [Delhi HC] – Adjust opening inventory • Melmould Corporation v. CIT [Bombay HC] – Do not adjust opening inventory • DCIT v. Daman Ganga Paper Limited [Mumbai Tribunal] – Adjust opening inventory • Refer illustration in the next slide

9. ICDS II – Change in method of Valuation – Case Study In Year 2, the Method of Valuation is changed from FIFO to weighted average cost. Lets say, following the weighted average cost method results in increase in the valuation of closing stock by 10%.

10. ICDS II – Change in method of Valuation – Case Study

11. ICDS II – Ind AS vs. ICDS • Purchase of inventories on deferred settlement terms • Purchase inventories on deferred settlement terms effectively contains a financing element • Under Ind AS - The financing element, i.e. difference between the purchase price for normal credit terms and the amount paid, have to be recognized as interest expense over the period of the financing • Under ICDS / Act – there is no such specific provision • Therefore any difference arising on account of recording of expenses vis-à-vis Ind AS, will require adjustment

12. ICDS V – Tangible Fixed Assets

13. ICDS V – Overview • Deals with treatment of tangible fixed assets • Tangible fixed asset defined as • Asset being land, building, machinery, plant or furniture; • Held with the intention of using for producing / providing goods or services; and • Not held for sale in the normal course of business • Depreciation is as per the provisions of the Act • Income arising on transfer of tangible fixed asset shall be computed as per the provisions of the Act

14. ICDS V – Tangible Fixed Assets • Components of cost align largely with definition of actual cost in Section 43(1) of ITA • Cost of fixed asset to include - Purchase prices, duties and taxes, expenses incurred to make the asset ready for intended use. Administration and general overheads not specifically attributable to be excluded – In line with AS-10 • Costs to be capitalized– In line with AS-10 • Expenditure incurred on start up and commissioning of the project • Expenditure incurred on test runs and experimental production • Expenditure that increases future benefits from existing asset beyond its previously assessed standard of performance (repairs and maintenance) • Machinery spares to be charged to revenue as and when consumed • Exception: Spares used only with tangible fixed asset, with irregular usage of spares – to be capitalized • Capitalization of exchange differences relating to fixed assets shall be in accordance with Section 43A and other similar provisions of the Act – Para 5 and 6 of ICDS VI • Can exchange difference arising on External Commercial Borrowings be claimed as an allowance, if used for acquiring domestic assets? No significant deviation on costs to be capitalised as per AS-10

15. ICDS V – Tangible Fixed Assets • Several assets purchased for consolidated price - consideration to be apportioned on fair basis (for e.g. slump sale) • ‘Fair basis’ not defined – As per AS 10, fair basis as per competent valuer • In absence of valuation for assets purchased for consolidated price, AO may allocate more cost to non-depreciable assets – valuation report is essential • Fixed asset acquired in exchange of another asset or shares:

16. ICDS V – Capitalization of cost post Trial run Capitalize Revenue expense AS-10 Capitalize Revenue expense ICDS Capitalize or Revenue expense ? Asset ready for use – Depreciation can be claimed?

17. Capitalization Period ICDS V – Capitalization of Borrowing cost to Qualifying Tangible assets AS-16 ICDS -General Borrowing ICDS -Specific Borrowing AS-16 and ICDS – Doesn’t cover capitalization of borrowing cost for non-qualifying assets Under the Act – As per Section 36(1)(iii), interest is required to be capitalised till the date asset is put to use even for non-qualifying asset – would override ICDS?

18. ICDS V – Tangible Fixed AssetsCase Study 1A – Capitalization of borrowing cost (Specific Borrowing) ABC Limited Bank Loan on 1 April Exchange of assets Payment on 1 July Supply on 1 August P&M Vendor Installation on 31 August Asset is not a Qualifying Asset as per AS 16 and ICDS

19. ICDS V – Tangible Fixed AssetsCase Study 1A – Capitalization of borrowing cost (Specific Borrowing) Whether any capitalization required in case of general borrowing since non-qualifying assets are not covered under ICDS - ambiguity under Section 36(1)(iii)

20. ICDS V – Tangible Fixed AssetsCase Study 1B – Capitalization of borrowing cost (Specific Borrowing) Exchange of assets Asset is a Qualifying Asset as per AS 16 and ICDS

21. ICDS V – Tangible Fixed AssetsCase Study 1B – Capitalization of borrowing cost (Specific Borrowing)

22. Q & A

23. Thank YouRohit Khandelwal