Income Computation & Disclosure Standards
The Income Computation & Disclosure Standards (ICDS) have been notified by the Central Board of Direct Tax (CBDT) under Section 145(2) of the Act dealing with method of accounting to be followed by taxpayers.
ICDS were issued with the aim of bringing uniformity in accounting policies governing computation of income in accordance with tax related provisions, and also reducing the irregularities amongst them. The ICDS were developed using Generally Accepted Accounting Principles (GAAPs) with assistance from the Institute of Chartered Accountants of India.
Applicability –
Shall apply to all entities except the following :
>> Individual
>> HUF
>> Those not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the said act
10 ICDS Notified by the Government of India on 31/3/2015
ICDS 1 – Accounting policies -The following three fundamental accounting assumptions are recognized by ICDS 1 relating to accounting policies: • Going concern • Consistency • Accrual
ICDS 2 – Valuation of inventories – The following are the three methods of valuation of inventory recognized by ICDS 2: • First-in first-out • Weighted average cost • Retail method
ICDS 3 – Construction contract – Revenue and costs from construction contracts are to be recognized by reference to the stage of completion of contract activity on the reporting date. This is referred to as “percentage of completion” method. Under this method, revenue, expenses and profit are reported based on the proportion of work completed.
ICDS 4 – Revenue recognition – In the case of sale of goods, revenue is to be recognized when the property in the goods is transferred to the purchaser for a price or all significant risks and rewards of 6 ownership are transferred to the purchaser and no effective control (associated with ownership) of the goods is retained by the seller. Revenue should be recognized when there is a reasonable certainty of its ultimate collection.
ICDS 5 – Tangible fixed assets – Fixed asset are to be recorded at actual cost including purchase price, duties, taxes (excluding those that are recoverable) and other directly attributable expenditure for making such asset ready for its intended use.
For which head ICDS is applicable:
>> Profit & loss of business and profession
>> Income from other sources
ICDS 6 – Effects of changes in foreign exchange rates – A foreign currency transaction is to be recorded on initial recognition in the reporting currency by applying to the foreign currency amount, the exchange rate (between reporting currency and foreign currency) on the transaction date or weekly/ monthly average rate (if such rates do not fluctuate significantly from actuals).
ICDS 7 – Government grants – Government grants are to be recognized when there is reasonable certainty that related conditions would be complied with and it is reasonably certain that the grants would be received. Government grant should not be postponed beyond actual receipt date.
ICDS 8 – Securities – Securities held as stock-in-trade are required to be valued at actual cost initially recognized or net realizable value at the end of that year, whichever is lower. Unlisted securities or unquoted securities are to be valued at actual cost initially recognized.
ICDS 9 – Borrowing costs – Borrowing costs are interest and other costs incurred in connection with the borrowing of funds which include the following: • Commitment charges • Amortized discount or premium • Amortized ancillary costs in connection with arrangement of borrowings • Finance charges for assets taken on finance lease.
ICDS 10 –Provisions, Contingent Liabilities and Contingent Assets – Taxpayer can recognize a provision in the following situations: • Taxpayer has a present obligation as a result of a past event • It is reasonably certain that an outflow of resources embodying economic benefits would be required to settle such obligation and • A reliable estimate can be made of this obligation amount. A provision should not be recognized for costs that need to be incurred to operate in the future.
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